EXHIBIT 10.51
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
by and among
PC Connection, Inc.,
Boca Acquisition Corp.,
MoreDirect, Inc.
and
the Stockholders of MoreDirect, Inc. set forth on Schedule I
Dated as of March 25, 2002
ARTICLE I THE MERGER.....................................................1
1.1 The Merger.....................................................1
1.2 The Closing....................................................1
1.3 Actions at the Closing.........................................2
1.4 Intentionally Omitted..........................................2
1.5 Stockholders Representative....................................2
1.6 Consideration..................................................4
1.7 Contingent Payments............................................5
1.8 Stock Options and Warrants.....................................9
1.9 Closing of the Company's Transfer Books.......................10
1.10 Appraisal Rights..............................................10
1.11 Tax Consequences..............................................10
1.12 Accounting Treatment..........................................10
1.13 Further Action................................................10
1.14 Escrow........................................................10
1.15 Articles of Incorporation, By-laws and Officers and
Directors.....................................................11
1.16 Taxes.........................................................11
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................11
2.1 Organization, Standing and Power; Subsidiaries................11
2.2 Capitalization................................................12
2.3 Authorization of Transaction..................................13
2.4 Noncontravention..............................................13
2.5 Financial Statements..........................................14
2.6 Absence of Certain Changes....................................14
2.7 Undisclosed Liabilities.......................................16
2.8 Tax Matters...................................................16
2.9 Assets........................................................18
2.10 Owned Real Property...........................................18
2.11 Real Property Leases..........................................18
2.12 Intellectual Property.........................................19
2.13 Company Software..............................................20
2.14 Inventory.....................................................21
2.15 Contracts.....................................................21
2.16 Accounts Receivable; Accounts Payable.........................23
2.17 Powers of Attorney............................................24
2.18 Insurance.....................................................24
2.19 Litigation....................................................24
2.20 Warranties; Customer Complaints...............................24
2.21 Employees.....................................................25
2.22 Employee Benefits.............................................25
2.23 Environmental Matters.........................................28
2.24 Legal Compliance..............................................29
2.25 Customers and Suppliers.......................................29
2.26 Authorized Representative.....................................29
2.27 Prepayments, Prebilled Invoices and Deposits..................29
2.28 Government Contracts..........................................30
2.29 Permits.......................................................30
2.30 Competing Interests...........................................30
2.31 Interests of Company Insiders.................................31
2.32 Brokers' Fees.................................................31
2.33 No Existing Discussions.......................................31
2.34 Books and Records.............................................31
2.35 Disclosure....................................................31
2.36 Business Plan for 2002........................................31
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE
TRANSITORY SUBSIDIARY.........................................32
3.1 Organization, Standing and Power..............................32
3.2 Authority; No Conflict; Required Filings and Consents.........32
3.3 Operations of the Transitory Subsidiary.......................33
3.4 Litigation....................................................33
3.5 Brokers' Fees.................................................33
ARTICLE IV COVENANTS.....................................................33
4.1 Closing Efforts...............................................33
4.2 Operation of the Business.....................................33
4.3 Governmental and Third-Party Notices and Consents.............36
4.4 Expenses......................................................36
4.5 Transfer Taxes................................................36
4.6 S Corporation Status..........................................36
4.7 Section 338(h)(10) Election...................................36
4.8 Director and Officer Indemnification..........................37
4.9 Access to Information; Confidentiality........................37
4.10 Notification of Certain Matters...............................38
ARTICLE V CONDITIONS TO CONSUMMATION OF MERGER..........................38
5.1 Intentionally Omitted.........................................38
5.2 Conditions to Obligations of the Buyer and the Transitory
Subsidiary....................................................38
5.3 Conditions to Obligations of the Company......................40
ARTICLE VI INDEMNIFICATION...............................................41
6.1 Indemnification by Russell L. Madris..........................41
6.2 Indemnification by the Buyer..................................42
6.3 Indemnification Claims........................................42
6.4 Survival of Representations, Warranties, Covenants and Other
Agreements....................................................45
6.5 Limitations...................................................45
ARTICLE VII TERMINATION...................................................46
7.1 Termination of Agreement......................................46
7.2 Effect of Termination.........................................47
ARTICLE VIII MISCELLANEOUS.................................................47
8.1 Press Releases and Announcements..............................47
8.2 No Third Party Beneficiaries..................................47
8.3 Entire Agreement..............................................47
8.4 Succession and Assignment.....................................47
8.5 Counterparts and Facsimile Signature..........................47
8.6 Headings......................................................48
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8.7 Notices.......................................................48
8.8 Arbitration of Disputes. .....................................49
8.9 Governing Law.................................................50
8.10 Submission to Jurisdiction....................................50
8.11 Amendments and Waivers........................................50
8.12 Severability..................................................51
8.13 Interpretation................................................51
8.14 Remedies......................................................51
8.15 WAIVER OF JURY TRIAL..........................................51
Exhibit A Articles of Merger
Exhibit B Form of Escrow Agreement
Exhibit C Form of Contingent Promissory Note
Exhibit D Form of Buyer Guaranty
Exhibit E Employment Agreement for Russell Madris
Exhibit E-1 Employment Agreements for Scott J. Modist, James R. Garrity and
Michael Diamant
Exhibit F Form of Proprietary Information, Inventions and Confidentiality
Agreement
Exhibit G Form of Company Legal Opinion
Exhibit H Form of Buyer Legal Opinion
Schedule I Company Stockholders
Schedule A Earnout Consideration
Company Disclosure Schedule
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TABLE OF DEFINED TERMS
Reference in
Terms Agreement
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AAA Section 8.8(a)
Adjusted Company Share Amount Section 1.6(b)
Affiliate Section 2.15(viii)
Agreed Amount Section 6.3(c)
Agreement Preamble
Annualized Run Rate Section 1.7(c)
Arbitrators Section 8.8(a)
Articles of Merger Preamble
Bugs Section 2.13(d)
Business Vendors Section 2.25(b)
Buy-Out Amount Section 1.7(c)
Buyer Preamble
Buyer Certificate Section 5.3(d)
Buyer Disclosure Schedule Article III
Buyer Guaranty 1.3(f)
Buyer's Election Notice Section 1.7(c)
CERCLA Section 2.23(a)
Claim Notice Section 6.3(b)
Claimed Amount Section 6.3(b)
Closing Section 1.2
Closing Date Section 1.2
Code Section 2.8(a)(iii)
Company Preamble
Company Capital Stock Section 1.6(a)
Company Certificate Section 5.2(e)
Company Disclosure Schedule Article II
Company Insider Section 2.31
Company Intellectual Property Section 2.12(a)
Company Material Adverse Effect Section 2.6
Company Obligations Section 2.20(a)
Company Option Section 1.8
Company Securities Section 1.6(b)
Company Stockholders Preamble
Company Warrant Section 1.8
Contingent Note 1.3(f)
Controlling Party Section 6.3(a)
Damages Section 6.1
Dissenting Shares Section 1.10(a)
Earnout Consideration Section 1.7(b)
EBIT Section 1.7(a)(i)
Effective Time Section 1.1
Elapsed Months Section 1.7(c)
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Reference in
Terms Agreement
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Employee Benefit Plan Section 2.22(a)(i)
Environmental Law Section 2.23(a)
ERISA Section 2.22(a)(ii)
ERISA Affiliate Section 2.22(a)(iii)
Escrow Agent Section 1.3(e)
Escrow Agreement Section 1.3(e)
Escrow Amount Section 1.3(e)
Escrow Period Section 1.7(a)(ii)
Escrowed Consideration Section 1.7(a)
Expected Claim Notice Section 6.4
FBCA Preamble
Financial Statements Section 2.5
Fiscal Year Section 1.7
GAAP Section 2.5
Government Contracts Section 2.28
Governmental Entity Section 2.4
Indemnified Party. Section 6.3(a)
Indemnifying Party Section 6.3(a)
Initial Merger Consideration Section 1.6
Initial Per Share Merger Consideration Section 1.6(a)
Intellectual Property Section 2.12(a)
Legal Proceeding Section 2.19
Licensed Software Section 2.13(a)
Materials of Environmental Concern Section 2.23(b)
Merger Preamble
Merger Consideration Section 1.6
Most Recent Balance Sheet Section 2.5
Most Recent Balance Sheet Date Section 2.5
Neutral Accountant Section 1.7(f)
Non-Controlling Party Section 6.3(a)
Notice Event Section 4.10
Ordinary Course of Business Section 2.4
Outside Date Section 7.1(b)
Owned Software Section 2.13(a)
Parties Preamble
Permits Section 2.29
Reasonable Best Efforts Section 4.1
Response Section 6.3(c)
Requisite Stockholder Approval Section 2.3
Second Fiscal Year Date Section 6.5(a)
Section 338(h)(10) Election Section 4.6
Securities Act Section 2.2(c)
Security Interest Section 2.4
Software Section 2.13(a)
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Reference in
Terms Agreement
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Standard Terms Section 2.20(a)
Stockholders Representative Section 1.5(a)
Surviving Corporation Section 1.1
Tax Returns Section 2.8(a)(ii)
Taxes Section 2.8(a)(i)
Transitory Subsidiary Preamble
Vendor Relationships Section 2.26
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of March
25, 2002, is entered into by and among PC Connection, Inc., a Delaware
corporation (the "Buyer"), Boca Acquisition Corp., a Florida corporation and a
wholly owned subsidiary of the Buyer (the "Transitory Subsidiary"), Russell L.
Madris, as sole stockholder of the Company and the other persons set forth on
Schedule I attached hereto who shall become stockholders of the Company prior to
the Effective Time (as defined below) (Mr. Madris and such other persons are
collectively referred to as the "Company Stockholders") and MoreDirect, Inc., a
Florida Corporation (the "Company", together with the Buyer, the Transitory
Subsidiary and the Company Stockholders, the "Parties").
WHEREAS, the boards of directors of the Buyer and the Company deem it
advisable and in the best interests of each corporation and their respective
shareholders that the Buyer acquire the Company in order to advance the
long-term business interests of the Buyer and the Company; and
WHEREAS, the acquisition of the Company shall be effected through a merger
(the "Merger") of the Transitory Subsidiary with and into the Company in
accordance with the terms of this Agreement and the laws of the State of Florida
including the Articles of Merger attached hereto as Exhibit A (the "Articles of
Merger"), and the Florida Business Corporation Act (the "FBCA"), as a result of
which the Company shall become a wholly owned subsidiary of the Buyer;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
Parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of this
Agreement and in accordance with Section 607.1101 of the FBCA, the Transitory
Subsidiary shall merge with and into the Company at the Effective Time (as
defined below). From and after the Effective Time, the separate corporate
existence of the Transitory Subsidiary shall cease and the Company shall
continue as the surviving corporation in the Merger (the "Surviving
Corporation"). The "Effective Time" shall be the time at which the Company and
the Transitory Subsidiary file the Articles of Merger in accordance with Section
607.1105 of the FBCA with the Department of State of the State of Florida (or
such later time as the Company and the Transitory Subsidiary shall specify in
the Articles of Merger). The Merger shall have the effects set forth in Section
607.1106 of the FBCA.
1.2 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Hale and Dorr LLP
in Boston, Massachusetts, commencing at 9:00 a.m. local time on such mutually
agreeable date as soon as practicable (and in any event not later than three
business days) after the satisfaction or waiver of all conditions
(excluding the delivery of any documents to be delivered at the Closing by any
of the Parties) set forth in Article V hereof (the "Closing Date").
1.3 Actions at the Closing. At the Closing:
(a) the Company shall deliver to the Buyer and the Transitory
Subsidiary the various certificates, instruments and documents referred to in
Section 5.2;
(b) the Buyer and the Transitory Subsidiary shall deliver to the
Company the various certificates, instruments and documents referred to in
Section 5.3;
(c) the Company and the Transitory Subsidiary shall file with the
Department of State of the State of Florida the Articles of Merger;
(d) the Company Stockholders shall deliver to the Buyer the
certificate(s) representing their respective Company Capital Stock (as defined
below) and all forms necessary for a Section 338(h)(10) Election (as defined in
Section 4.7) forms;
(e) the Buyer, the Company Stockholders and State Street Bank and
Trust Company (the "Escrow Agent") shall execute and deliver the Escrow
Agreement attached hereto as Exhibit B (the "Escrow Agreement") and the Buyer
shall deliver to the Escrow Agent $10,000,000 (the "Escrow Amount") being placed
in escrow on the Closing Date pursuant to Section 1.14;
(f) the Buyer shall pay to the Company Stockholders the Initial
Merger Consideration (as defined in Section 1.6 below); and
(g) The Surviving Corporation shall deliver to the Stockholders
Representative, as nominee for the Company Stockholders, a contingent note in
the form attached hereto as Exhibit C (the "Contingent Note") representing the
right to receive the Earnout Consideration (as defined below) and the Buyer
shall deliver to the Stockholders Representative, as nominee for the Company
Stockholders, a guaranty of the Contingent Note in the form attached hereto as
Exhibit D (the "Buyer Guaranty").
1.4 Intentionally Omitted.
1.5 Stockholders Representative.
(a) In order to efficiently administer or effect the waiver of any
condition to the obligations of the Company Stockholders to consummate the
transactions contemplated hereby, and any amendment to this Agreement, the
Company Stockholders hereby designate Russell Madris as their representative and
agent under this Agreement (the "Stockholders Representative").
(b) The Company Stockholders, solely in their capacity as
stockholders of the Company, hereby authorize the Stockholders Representative
(i) to take all action necessary in connection with the waiver of any condition
to the obligations of the Company Stockholders to consummate the transactions
contemplated hereby, (ii) to give and receive all notices required to
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be given under the Agreement, (iii) settle any and all disputes between the
Company Stockholders and the Buyer or the Surviving Corporation which may arise
from time to time as a result of the transactions contemplated hereby, (iv) to
execute any and all government and other forms relating to Taxes (as defined in
Section 2.8(a)(i)) and (v) to take any and all additional action as is
contemplated to be taken by or on behalf of the Company Stockholders by the
terms of this Agreement, including, without limitation, Article VI hereof. Each
of the Company Stockholders agrees to individually perform any of the above
obligations if requested by the Buyer.
(c) In the event that the Stockholders Representative dies, becomes
unable to perform his responsibilities hereunder or resigns from such position,
Company Stockholders (or their successors in the case of any Company Stockholder
that dies) holding, prior to the Closing, a majority of the Common Shares as set
forth on Schedule I attached hereto shall select another representative to fill
such vacancy and such substituted representative shall be deemed to be the
Stockholders Representative for all purposes of this Agreement.
(d) All decisions and actions by the Stockholders Representative
hereunder shall be binding upon all of the Company Stockholders, and no Company
Stockholder shall have the right to object, dissent, protest or otherwise
contest the same.
(e) By their adoption of this Agreement and the approval of the
Merger, the Company Stockholders agree that:
(i) the Surviving Corporation shall be able to rely
conclusively on the instructions and decisions of the Stockholders
Representative as to any actions required to be taken by the
Stockholders Representative hereunder, and no Party shall have any
cause of action against the Surviving Corporation for any action
taken by the Surviving Corporation in reliance upon the instructions
or decisions of the Stockholders Representative;
(ii) all actions, decisions and instructions of the
Stockholders Representative shall be conclusive and binding upon all
of the Company Stockholders and no Company Stockholder shall have
any cause of action against the Stockholders Representative for any
action taken or omitted, decision made or instruction given by the
Stockholders Representative arising out of or in connection with the
acceptance or administration of his duties hereunder, except for
fraud or willful breach of this Agreement by the Stockholders
Representative;
(iii) the provisions of this Section 1.5 are independent and
severable, are irrevocable and coupled with an interest and shall be
enforceable notwithstanding any rights or remedies that any Company
Stockholder may have in connection with the transactions
contemplated by this Agreement;
(iv) remedies available at law for any breach of the
provisions of this Section 1.5 are inadequate; therefore, the
Surviving Corporation and the Company shall be entitled to temporary
and permanent injunctive relief without the
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necessity of proving damages if either the Surviving Corporation or
the Company brings an action to enforce the provisions of this
Section 1.5; and
(v) the provisions of this Section 1.5 shall be binding upon
the executors, heirs, legal representatives and successors of each
Company Stockholder, and any references in this Agreement to a
Company Stockholder or the Company Stockholders shall mean and
include the successors to the Company Stockholders' rights
hereunder, whether pursuant to testamentary disposition, the laws of
descent and distribution or otherwise.
(f) All fees and expenses incurred by the Stockholder Representative
after the Closing shall be the responsibility of the Company Stockholders on a
pro rata basis and the Stockholders Representative shall have the right to
reimbursement of such fees and expenses from any amounts to be distributed to
the Company Stockholders.
(g) The Company Stockholders shall severally indemnify on a pro rata
basis the Stockholders Representative and hold him harmless against any loss,
liability or expense incurred without fraud or willful breach of this Agreement
on the part of the Stockholders Representative and arising out of or in
connection with the acceptance or administration of his duties hereunder. Any
amounts payable to the Stockholders Representative hereunder shall be the
responsibility of the Company Stockholders on a pro rata basis.
1.6 Consideration. As consideration for the Company Capital Stock and the
covenants, promises and obligations contained in this Agreement, the Buyer shall
pay to the Company Stockholders an aggregate amount equal to the Merger
Consideration (as defined below). For purposes of this Agreement, the "Merger
Consideration" shall equal the sum of (i) $30,000,000 less an amount equal to
the aggregate distributions of any cash or property to the Company Stockholders
between January 1, 2002 and the Effective Time made other than pursuant to
clauses (A)(i) or (A)(ii) of Section 4.2(a) of this Agreement (such amount, the
"Initial Merger Consideration"), (ii) the Escrowed Consideration (as defined
below) and (iii) the Earnout Consideration (as defined below).
(a) At the Effective Time, each then outstanding share of common
stock of the Company (collectively, the "Company Capital Stock") (other than
shares of Company Capital Stock to be cancelled pursuant to Section 1.6(c) and
Dissenting Shares) shall cease to be an existing and issued share and shall
become and be converted into, by virtue of the Merger and without any action on
the part of the Parties or the holder thereof, the right to receive (i) an
amount equal to (x) the Initial Merger Consideration divided by (y) the Adjusted
Company Share Amount (as defined in Section 1.6(b)) (the "Initial Per Share
Merger Consideration") and (ii) the Escrowed Consideration and the Earnout
Consideration on the terms and subject to the conditions set forth in Section
1.7
(b) The "Adjusted Company Share Amount" shall be the sum of the
aggregate number of shares of Company Capital Stock outstanding immediately
prior to the Effective Time and no shares underlying outstanding Company Options
(as defined below) and Company Warrants (as defined below). The Company Capital
Stock, the Company Options and the Company Warrants were sometimes referred to
herein as the "Company Securities".
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(c) Each share of Company Capital Stock issued and outstanding
immediately prior to the Effective time owned by Company (or held in Company's
Treasury) shall automatically be cancelled at the Effective Time and no
conversion shall be made in respect thereof.
1.7 Contingent Payments.
(a) In addition to the Initial Per Share Merger Consideration paid
at the Closing, the Escrow Agent (pursuant to the Escrow Agreement) shall
distribute to the Company Stockholders the "Escrowed Consideration" (as
determined pursuant to this Section 1.7(a)) plus accrued interest on the
Escrowed Consideration less fees due to the Escrow Agent at the times, in the
manner, and to the extent the Escrowed Consideration is earned pursuant to the
following terms:
(i) an amount equal to $5.0 million, if the Surviving
Corporation maintains earnings before income tax (determined in
accordance with GAAP (as defined in Section 2.5) applied on a basis
consistent with GAAP as in effect and as applied by the Company
immediately prior to the Closing) ("EBIT") of at least $11.0 million
for Surviving Corporation's 2002 Fiscal Year. For purposes of this
Section 1.7, the Surviving Corporation's "Fiscal Year" shall mean
the period commencing on January 1 and ending on December 31 of the
relevant year.
(ii) an amount equal to the Escrow Amount if, for the two year
period comprising the Surviving Corporation's 2002 Fiscal Year and
2003 Fiscal Year (the "Escrow Period"), the Surviving Corporation
maintains an EBIT of at least $22.0 million in the aggregate.
(iii) if no payment is made pursuant to the foregoing clause
(ii), and if during the Escrow Period the Surviving Corporation (x)
maintains an EBIT of at least $19.8 million in the aggregate and (y)
the Surviving Corporation's EBIT for the 2003 Fiscal Year is greater
than the EBIT for the 2002 Fiscal Year, then an amount equal to the
product of (A) the Escrow Amount and (B) a fraction, the numerator
of which is the EBIT in the aggregate for the Escrow Period and the
denominator of which is $22.0 million.
Any payments made pursuant to the foregoing clause (i) shall be credited against
any payments required to be made pursuant to clause (ii) or (iii) above. Any
payments made pursuant to the foregoing clauses (i), (ii) and (iii) shall be
made at the times and in the manner set forth in the Escrow Agreement, subject
to the indemnification provisions of Article VI hereof. The determination of
EBIT for each Fiscal Year shall be made in accordance with Section 1.7(e) below.
Each holder of Company Securities shall be entitled to receive, with respect to
each share of Company Capital Stock, an amount equal to (x) the Escrowed
Consideration divided by (y) the Adjusted Company Share Amount.
(b) In addition to the Per Share Merger Consideration paid at the
Closing and the Escrowed Consideration described in Section 1.7(a) above, the
Buyer (or any successor by
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operation of law or otherwise) shall distribute to the Company Stockholders the
"Earnout Consideration" (as determined pursuant to this Section 1.7(b)) at the
times, in the manner, and to the extent the Earnout Consideration is earned
pursuant to the following terms:
(i) an amount equal to that set forth on Schedule A if, for
the Surviving Corporation's 2002 Fiscal Year, the Surviving
Corporation maintains EBIT levels as set forth on Exhibit A.
(ii) an amount equal to that set forth on Schedule A if, for
the Surviving Corporation's 2003 Fiscal Year, the Surviving
Corporation maintains EBIT levels as set forth on Exhibit A.
(iii) an amount equal to that set forth on Schedule A if, for
the Surviving Corporation's 2004 Fiscal Year, the Surviving
Corporation maintains EBIT levels as set forth on Exhibit A.
Within five business days after the determination of the Surviving Corporation's
EBIT for each Fiscal Year through December 31, 2004 (pursuant to the provisions
of Section 1.7(e) below), the Buyer shall make payments of the Earnout
Consideration payable pursuant to the foregoing clauses (i), (ii) and (iii) to
the Company Stockholders by check or wire transfer. Such payments shall be made
pursuant to instructions delivered by the Stockholders Representative at least
two business days before the required payment date. Each Company Stockholder
shall be entitled to receive, with respect to each share of Company Capital
Stock, an amount equal to (x) the Earnout Consideration so payable divided by
(y) the Adjusted Company Share Amount. All payments of Earnout Consideration are
subject to the indemnification provisions of Article VI hereof.
Schedule A attached to this Agreement sets forth examples of Earnout
Consideration payments.
To the extent that there is a difference between (x) the Escrow Amount and (y)
the Escrowed Consideration, such difference shall be available to satisfy any
Earnout Consideration payable hereunder on or before the Termination Date of the
Escrow Agreement (as such term is defined in the Escrow Agreement).
(c) At any time after the date hereof, the Buyer may elect to
satisfy its obligations in full concerning the Earnout Consideration described
in Section 1.7(b) above by paying the Company Stockholders the lump sum payment
as set forth below (the "Buy-Out Amount"). The Buyer shall provide the
Stockholders Representative notice (the "Buyer's Election Notice") of its
election under this Section 1.7(c) and shall distribute the respective Buy-Out
Amount within 60 days of providing such notice to the Stockholders
Representative. In the instance where the Buyer elects to pay the respective
Buy-Out Amount to the Company Stockholders pursuant to this Section 1.7(c),
neither the Buyer nor the Surviving Corporation shall be obligated to make any
additional payments to the Company Stockholders pursuant to Section 1.7(b) above
for the Fiscal Year in which the Buy-Out Amount was paid or for any remaining
Fiscal Years thereafter.
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(i) If the Buyer's Election Notice is delivered on or after
the date of this Agreement but prior to July 1, 2002, the Buy-Out
Amount shall equal $15,446,000.
(ii) If the Buyer's Election Notice is delivered on or after
July 1, 2002 but prior to January 1, 2003, the Buy-Out Amount shall
equal the sum of (x) the lesser of (A) the Earnout Consideration for
Fiscal Year 2002 set forth on Schedule A attached hereto payable
based on the EBIT Annualized Run Rate (as defined below) and (B)
$9,488,000 and (y) $10,259,000.
(iii) If the Buyer's Election Notice is delivered on or after
January 1, 2003 but prior to July 1, 2003, the Buy-Out Amount shall
equal $11,451,000.
(iv) If the Buyer's Election Notice is delivered on or after
July 1, 2003 but prior to January 1, 2004, the Buy-Out Amount shall
equal the sum of (x) the lesser of (A) the Earnout Consideration for
Fiscal Year 2003 set forth on Schedule A attached hereto payable
based on the EBIT Annualized Run Rate and (B) $10,911,000 and (y)
$5,487,000.
(v) If the Buyer's Election Notice is delivered on or after
January 1, 2004 but prior to July 1, 2004, the Buy-Out Amount shall
equal $6,859,000.
(vi) If the Buyer's Election Notice is delivered on or after
July 1, 2004 but prior to January 1, 2005, the Buy-Out Amount shall
equal the lesser of (A) the Earnout Consideration for Fiscal Year
2004 set forth on Schedule A attached hereto payable based on the
EBIT Annualized Run Rate and (B) $12,547,000.
For purposes of this Section 1.7(c), the "EBIT Annualized Run Rate" shall mean
an amount determined by multiplying (x) the EBIT for the number of full calendar
months prior to the date of the Buyer's Election Notice that have elapsed since
the beginning of the Fiscal Year in which such Buyer's Election Notice is given
(the "Elapsed Months") by (y) a fraction, the numerator of which is 12 and the
denominator of which is the number of Elapsed Months by (z) 90%.
(d) In the event the Buyer or the Surviving Corporation does not
make timely payments to the Company Stockholders of the Earnout Consideration
pursuant to Section 1.7(b) above, in the absence of any dispute pursuant to
Section 1.7(e) below, the Stockholders Representative shall have the right first
to make a claim against the Escrow Amount for all amounts of the Earnout
Consideration due the Company Stockholders as set forth in the last paragraph of
Section 1.7(b) above and in Section 3(d) of the Escrow Agreement and, to the
extent and only to the extent the Escrow Amount is insufficient to satisfy in
full all amounts of the Earnout Consideration due the Company Stockholders, to
demand payment pursuant to that certain contingent note in the form attached
hereto as Exhibit C.
(e) The Buyer agrees to prepare or have prepared calculations of the
Surviving Corporation's EBIT for each Fiscal Year through December 31, 2004 and
to deliver such EBIT calculations to the Stockholders Representative on or
before the first business day in March of the following year. The Stockholders
Representative shall deliver to the Buyer, within
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20 days after delivery of such calculations by the Buyer to the Stockholders
Representative, either a notice indicating that the Stockholders Representative
accepts such EBIT calculations or a statement describing the Stockholders
Representative's objections to such EBIT calculations, which statement of
objections shall describe in detail the specific nature and amount of each
objection and shall state in detail all bases upon which the Stockholders
Representative believes such EBIT calculations are not in conformity with the
requirements set forth in subsection 1.7(a)(i). If the Stockholders
Representative (x) delivers to the Buyer a notice accepting such EBIT
calculation or (y) fails to deliver a statement of objections within such 20-day
period, then, effective as of either the date of delivery of such notice of
acceptance or as of the close of business on such 20th day, such EBIT
calculation shall be deemed to be accepted by the Stockholders Representative.
If the Stockholder Representative timely objects to such EBIT calculation, such
objection shall be resolved as follows:
(i) The Buyer and the Stockholders Representative shall first
use reasonable efforts to resolve such objections.
(ii) If the Buyer and the Stockholders Representative are able
to resolve such objections within 20 days after delivery to the
Stockholders Representative of such statement of objections, the
Buyer and the Stockholders Representative shall, within 30 days
after delivery of such statement of objections, jointly prepare and
sign a statement setting forth the EBIT for such Fiscal Year, which
amount shall reflect the resolution of objections agreed to by the
Buyer and the Stockholders Representative. The Buyer and the
Stockholders Representative may then submit, if necessary, such
jointly prepared and signed statement to the Escrow Agent
authorizing the Escrow Agent to make pro rata payments to the
Company Stockholders.
(iii) If the Buyer and the Stockholders Representative do not
reach a resolution of all objections set forth on the Stockholders
Representative's statement of objections within 20 days after
delivery of such statement of objections, the Buyer and the
Stockholders Representative shall, within 30 days after the
expiration of such 20-day period, (A) jointly prepare and sign a
statement setting forth (1) those objections (if any) that the Buyer
and the Stockholders Representative have resolved and the resolution
of such objections and (2) those objections that the Buyer and the
Stockholders Representative did not resolve (the "Unresolved
Objections") and (B) engage an accounting firm of national standing
which has not previously provided professional services to either
the Buyer or the Company (the "Neutral Accountant") to resolve the
Unresolved Objections.
(iv) The Buyer and the Stockholders Representative shall
jointly submit to the Neutral Accountant, within 10 days after the
date of the engagement of the Neutral Accountant (as evidenced by
the date of the engagement agreement), a copy of the EBIT
calculations prepared by the Buyer, a copy of the statement of
objections delivered by the Stockholders Representative to the
Buyer, and the joint statement referred to in clause (iii)(A) above.
Each of the Buyer and the Stockholders Representative shall submit
to the Neutral Accountant (with a copy delivered to the other on the
same day), within 30 days after the date
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of the engagement of the Neutral Accountant, a memorandum (which may
include supporting exhibits) setting forth their respective
positions on the Unresolved Objections. Each of the Buyer and the
Stockholders Representative may (but shall not be required to)
submit to the Neutral Accountant (with a copy delivered to the other
on the same day), within 60 days after the date of the engagement of
the Neutral Accountant, a memorandum responding to the initial
memorandum submitted to the Neutral Accountant by the other. Unless
requested by the Neutral Accountant in writing, neither the Buyer
nor the Stockholders Representative may present any additional
information or arguments to the Neutral Accountant, either orally or
in writing.
(v) The Buyer and the Stockholders Representative shall
instruct the Neutral Accountant that (A) the scope of its review and
authority shall be limited to resolving the Unresolved Objections,
(B) in resolving the Unresolved Objections, the Neutral Accountant
shall accept each of the values set forth on the EBIT calculations
prepared by the Buyer unless the Stockholders Representative
demonstrates that such value is contrary to the requirements of the
determination of EBIT set forth in Section 1.7(a)(i) (in which case
its resolution of each Unresolved Objection shall consist of the
determination of an appropriate value for each item that is the
subject of an Unresolved Objection, which value shall be equal to
one of, or between, the values proposed by the EBIT calculation
prepared by the Buyer and EBIT for the relevant Fiscal Year in its
statement of objections from the Stockholders Representative), and
(C) issue a ruling which sets forth the resolution of each
Unresolved Objection and includes a statement setting forth the EBIT
for the Fiscal Year, reflecting the Neutral Accountant's resolution
of the Unresolved Objections.
(vi) The resolution by the Neutral Accountant of the
Unresolved Objections shall be conclusive and binding upon the Buyer
and the Stockholders Representative. The Buyer and the Stockholders
Representative agree that the procedure set forth in this Section
1.7(e) for resolving disputes with respect to the EBIT calculations
shall be the sole and exclusive method for resolving any such
disputes; provided that this provision shall not prohibit any party
from instituting litigation to enforce the ruling of the Neutral
Accountant. The Neutral Accountant may then submit, if necessary, a
statement setting forth the EBIT calculation for the relevant Fiscal
Year to the Escrow Agent.
(vii) The Buyer and the Stockholders Representative shall
share equally the fees and expenses of the Neutral Accountant for
its services under this Section 1.7(e).
1.8 Stock Options and Warrants. Company shall cause each stock option that
is then outstanding under the stock option plans and agreements of the Company,
(individually, a "Company Option" and collectively, the "Company Options"), and
the warrant that is then outstanding (the "Company Warrant") to be terminated
immediately prior to the Effective Time.
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1.9 Closing of the Company's Transfer Books. At the Effective time,
holders of certificates or instruments representing Company Securities that were
outstanding immediately prior to the Effective Time shall cease to have any
rights as stockholders or securityholders of the Company, and the stock transfer
books of the Company shall be closed with respect to all such securities
outstanding immediately prior to the Effective Time. No further transfer of any
such securities shall be made on such stock transfer books after the Effective
Time.
1.10 Appraisal Rights.
(a) Notwithstanding any provision of this Agreement to the contrary,
the shares of any holder of Company Capital Stock who has demanded and perfected
appraisal rights for such shares in accordance with the FBCA and who, as of the
Effective Time, has not effectively withdrawn or forfeited such appraisal rights
("Dissenting Shares"), shall not be converted into or represent a right to
receive the Merger Consideration pursuant to Section 1.6, but the holder thereof
shall only be entitled to such rights as are granted by the FBCA.
(b) Nothwithstanding the foregoing, if any holder of Company Capital
Stock who demands appraisal of such shares under the FBCA shall effectively
withdraw or forfeit the right to appraisal, then, as of the later of the
Effective Time and the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive the
Merger Consideration, without interest thereon.
(c) The Company shall give Buyer (i) prompt notice of any written
demands for appraisal of any Company Capital Stock, withdrawals of such demands,
and any other instruments served pursuant to the FBCA and received by the
Company which related to any such demand and for appraisal and (ii) the
opportunity to participate in all negotiations and proceedings which take place
prior to the Effective Time with respect to demands for appraisal under the
FBCA. The Company shall not, except with the prior written consent of the Buyer
or as may be required by applicable law, voluntarily make any payment with
respect to any demands for appraisal of Company Capital Stock or offer to settle
or settle any such demands or approve any withdrawal of such demands.
1.11 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a taxable transaction.
1.12 Accounting Treatment. The Parties intend that the Merger will be
treated as a purchase for accounting purposes.
1.13 Further Action. If, at any time after the Effective Time, any further
action is determined by the Buyer to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation or the Buyer
with full right, title and possession of and to all rights and property of the
Transitory Subsidiary and the Company, the officers and directors of the
Surviving Corporation and the Buyer shall be fully authorized (in the name of
the Transitory Subsidiary or in the name of the Company) to take such action.
1.14 Escrow. On the Closing Date, the Buyer shall deliver to the Escrow
Agent the Escrow Amount. The Escrow Amount shall be available to satisfy the
obligations to pay the Escrowed Consideration upon the terms set forth in
Section 1.7 and to satisfy any indemnity
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obligations under Article VI hereof and shall be held by the Escrow Agent under
the Escrow Agreement pursuant to the terms of Section 1.7(a) hereof and the
terms thereof. The Escrow Amount shall be held as a trust fund and shall not be
subject to any lien, attachment, trustee process or any other judicial process
of any creditor of any Party, and shall be held and disbursed solely for the
purposes and in accordance with the terms of the Escrow Agreement.
1.15 Articles of Incorporation, By-laws and Officers and Directors.
(a) The Articles of Incorporation of the Surviving Corporation
immediately following the Effective Time shall be the same as the Articles of
Incorporation of the Transitory Subsidiary immediately prior to the Effective
Time, except that (1) the name of the corporation set forth therein shall be
changed to the name of the Company and (2) the identity of the incorporator
shall be deleted.
(b) The By-laws of the Surviving Corporation immediately following
the Effective Time shall be the same as the By-laws of the Transitory Subsidiary
immediately prior to the Effective Time, except that the name of the corporation
set forth therein shall be changed to the name of the Company.
(c) The officers of the Surviving Corporation immediately following
the Effective Time shall be the same as the officers of the Company immediately
prior to the Effective Time. The directors of the Surviving Corporation
immediately following the Effective Time shall be the same as the directors of
the Transitory Subsidiary immediately prior to the Effective Time, except that
Russell Madris shall be elected to serve as a director of the Surviving
Corporation after the Effective Time.
1.16 Taxes. Notwithstanding any other provision in this Agreement, the
Buyer or the Surviving Corporation, as applicable, shall have the right to
withhold or to cause the Escrow Agent to withhold Taxes (as defined below) from
any payments to be made hereunder (including any payments to be made under the
Escrow Agreement) if such withholding is required by law and to collect any
necessary Tax forms from the Company Stockholders and employees.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer and the Transitory
Subsidiary that the statements contained in this Article II are true and correct
as of the date hereof and will be true and correct as of the Closing Date,
except as expressly set forth herein or in the disclosure schedule delivered by
the Company to the Buyer and the Transitory Subsidiary on or before the date of
this Agreement (the "Company Disclosure Schedule"). The Company Disclosure
Schedule shall be arranged in sections and paragraphs corresponding to the
numbered and lettered sections and paragraphs contained in this Article II.
2.1 Organization, Standing and Power; Subsidiaries.
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation,
has all requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its
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business as now being conducted, and is duly qualified to do business and is in
good standing as a foreign corporation in each jurisdiction where the character
of its properties owned, operated or leased or the nature of its activities
makes such qualification necessary, except for such failures to be so qualified
that would not, individually or in the aggregate, have a Company Material
Adverse Effect (as defined in Section 2.6).
(b) The Company does not now own, and has not in the past owned,
directly or indirectly, any equity, membership, partnership or similar interest
in, or any interest convertible into or exchangeable or exercisable for any
equity, membership, partnership or similar interest in, any corporation,
partnership, joint venture, limited liability company or other business
association or entity, whether incorporated or unincorporated. The Company has
not, at any time, been a general partner or managing member of any general
partnership, limited partnership or other entity.
(c) The Company has made available to the Buyer complete and
accurate copies of the Articles of Incorporation and Bylaws of the Company.
(d) The Company has no subsidiaries.
2.2 Capitalization.
(a) The authorized capital stock of the Company consists of (i)
80,000,000 common shares, $0.01 par value per share, of which, as of the date of
this Agreement, 10,000,000 shares were issued and outstanding and 0 shares were
held in the treasury of the Company, and (ii) 20,000,000 preferred shares, $0.01
par value per share, of which, as of the date of this Agreement, no shares were
issued and outstanding or held in the treasury of the Company.
(b) Section 2.2(b) of the Company Disclosure Schedule sets forth a
complete and accurate list of (i) all stockholders of the Company, indicating
the number and class or series of Company Capital Stock held by each stockholder
and (for shares other than common shares) the number of common shares (if any)
into which such Company Capital Stock are convertible, (ii) all outstanding
Company Options and Company Warrants, indicating (A) the holder thereof, (B) the
number and class or series of Company Capital Stock subject to each Company
Option and Company Warrant and (for Company Capital Stock other than common
shares) the number of common shares (if any) into which such Company Capital
Stock are convertible, (C) the exercise price, date of grant, vesting schedule
and expiration date for each Company Option or Company Warrant, and (D) any
terms regarding the acceleration of vesting, and (iii) all stock option plans
and other stock or equity-related plans of the Company. All of the issued and
outstanding shares of Company Capital Stock are, and all common shares that may
be issued upon exercise of Company Options or Company Warrants will be (upon
issuance in accordance with their terms), duly authorized, validly issued, fully
paid, nonassessable and free of all preemptive rights. Other than the Company
Options and Company Warrants listed in Section 2.2(b) of the Company Disclosure
Schedule, there are no outstanding or authorized options, warrants, rights,
agreements or commitments to which the Company is a party or which are binding
upon the Company providing for the issuance or redemption of any of its capital
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stock. There are no outstanding or authorized stock appreciation, phantom stock
or similar rights with respect to the Company.
(c) There are no agreements to which the Company is a party or by
which it is bound with respect to the voting (including without limitation
voting trusts or proxies), registration under the Securities Act of 1933, as
amended (the "Securities Act"), or sale or transfer (including without
limitation agreements relating to preemptive rights, rights of first refusal,
co-sale rights or "drag-along" rights) of any securities of the Company. To the
knowledge of the Company, there are no agreements among other parties, to which
the Company is not a party and by which it is not bound, with respect to the
voting (including without limitation voting trusts or proxies) or sale or
transfer (including without limitation agreements relating to rights of first
refusal, co-sale rights or "drag-along" rights) of any securities of the
Company. All of the issued and outstanding Company Capital Stock were issued in
compliance with applicable federal and state securities laws.
(d) No consent of the holders of Company Options and/or Company
Warrants is required in connection with actions contemplated by this Agreement.
2.3 Authorization of Transaction. The Company has all requisite corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution and delivery by the Company of this
Agreement and the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of the Company, including the approval of the Merger by a majority
of the votes represented by the outstanding Company Capital Stock entitled to
vote on this Agreement and the Merger (the "Requisite Stockholder Approval").
This Agreement has been duly and validly executed and delivered by the Company
and constitutes a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to general
equity principles.
2.4 Noncontravention. Subject to the filing of the Articles of Merger as
required by the FCBA, neither the execution and delivery by the Company of this
Agreement, nor the consummation by the Company of the transactions contemplated
hereby, will (a) conflict with or violate any provision of the Articles of
Incorporation or By-laws of the Company, (b) require on the part of the Company
any filing with, or any permit, authorization, consent or approval of, any
court, arbitrational tribunal, administrative agency or commission or other
governmental or regulatory authority or agency (a "Governmental Entity"), (c)
conflict with, result in a breach of, constitute (with or without due notice or
lapse of time or both) a default under, result in the acceleration of
obligations under, create in any party the right to terminate, modify or cancel,
or require any notice, consent or waiver under, any material contract or
instrument to which the Company is a party or by which the Company is bound or
to which any of their assets is subject, (d) result in the imposition of any
Security Interest (as defined below) upon any assets of the Company or (e)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or any of its properties or assets. For purposes of
this Agreement: "Security Interest" means any mortgage, pledge, security
interest, encumbrance, charge or other lien (whether arising by contract or by
operation of law), other than: (i) landlord's, mechanic's,
-13-
materialmen's, and similar liens; (ii) liens arising under worker's
compensation, unemployment insurance, social security, retirement, and similar
legislation; (iii) liens for non-delinquent taxes and non-delinquent statutory
liens arising other than by reason of default; and (iv) liens on goods in
transit incurred pursuant to documentary letters of credit, in each case arising
in the Ordinary Course of Business (as defined below) and not material to the
Company; and "Ordinary Course of Business" means the ordinary course of the
Company's business, consistent with past custom and practice (including with
respect to frequency and amount).
2.5 Financial Statements. The Company has provided to the Buyer (a) the
audited balance sheets and statements of income, changes in stockholders' equity
and cash flows of the Company as of and for each of the three fiscal years in
the period ended December 31, 2001; and (b) the unaudited balance sheet (the
"Most Recent Balance Sheet") and statements of income, changes in stockholders'
equity and cash flows as of and for the one month ended as of January 31, 2002
(the "Most Recent Balance Sheet Date"). Such financial statements (collectively,
the "Financial Statements") have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods covered thereby (except as may be set forth in the notes
thereto), fairly present in all material respects the financial condition,
results of operations and cash flows of the Company as of the respective dates
thereof and for the respective periods referred to therein and are consistent
with the books and records of the Company; provided, however, that the Financial
Statements referred to in clause (b) above do not include footnotes and are
subject to normal recurring adjustments. The audits of the Company have been
conducted in all material respects in accordance with generally accepted
auditing standards. The Financial Statements have been prepared from the books
and records of the Company and the books and records of the Company have been,
and are being, maintained in all material respects in accordance with applicable
legal and accounting requirements.
2.6 Absence of Certain Changes. Except as contemplated by this Agreement,
since January 1, 2002, there has not occurred:
(a) any damage, destruction or loss with respect to any material
property or asset of the Company;
(b) any change by the Company in its accounting methods, principles
or practices, other than changes required by applicable law or GAAP or
regulatory accounting as concurred in by the Company's independent accounts;
(c) any revaluation by the Company of any asset, including, without
limitation, any writing down of the value of inventory or writing off of notes
or accounts receivable, other than in the Ordinary Course of Business;
(d) any entry by the Company into any contract or commitment of more
than $25,000, excluding contracts or commitments with respect to the sale of
goods in the Ordinary Course of Business that contain any Company Obligations
(as defined below) no less favorable to the Company than Standard Terms (as
defined below);
-14-
(e) any declaration, setting aside or payment of any dividend or
distribution in respect of any equity interest of the Company or any redemption,
purchase or other acquisition of any of its securities;
(f) any increase in or establishment of any insurance, severance,
retention, deferred compensation, pension, retirement, profit sharing, stock
option (including, without limitation, the granting of stock options, stock
appreciation rights, performance awards, or restricted stock awards), stock
purchase or other employee benefit plan, or the taking of any other material
action not required under any employment agreements in effect as of the Most
Recent Balance Sheet Date previously provided to Buyer or in the Ordinary Course
of Business with respect to the compensation or employment of directors,
officers or employees of the Company;
(g) any strike, work stoppage, slowdown or other labor disturbance;
(h) any material election made by the Company for federal or state
income tax purposes;
(i) any material liability or obligation of any nature (whether
accrued, absolute, contingent or otherwise and whether due or to become due),
including without limiting the generality of the foregoing, liabilities as
guarantor under any guarantees or liabilities for taxes, other than in the
Ordinary Course of Business;
(j) any forgiveness or cancellation of any material indebtedness or
material contractual obligation;
(k) any mortgage, pledge, lien or lease of any assets, tangible or
intangible, of the Company with a value in excess of $25,000 in the aggregate;
(l) any acquisition or disposition of any assets or properties (not
including inventory acquired or disposed of in the Ordinary Course of Business)
having a value in excess of $25,000, or any contract for any such acquisition or
disposition entered into;
(m) any lease of real or personal property entered into, other than
in the Ordinary Course of Business; or
(n) any other event or development which, individually or in the
aggregate, has had, or could reasonably be expected to have in the future, a
Company Material Adverse Effect.
For purposes of this Agreement, the term "Company Material Adverse Effect"
means, when used in connection with the Company, any change, event,
circumstance, development or effect that is or is reasonably likely to have a
material adverse effect on (i) the business, assets, liabilities, properties,
prospects, condition (financial or otherwise), or results of operations of the
Company (excluding economic factors affecting the national economy or generally
affecting the specific industry in which the Company competes), (ii) the ability
of the Company to consummate the transactions contemplated by this Agreement or
(iii) the ability of the Buyer to operate the business of the Company as
currently being conducted immediately after the Closing. For the
-15-
avoidance of doubt, the parties agree that the terms "material," "materially" or
"materiality" as used in this Agreement with an initial lower case "m" shall
have their respective customary and ordinary meanings, without regard to the
meaning ascribed to Company Material Adverse Effect or Buyer Material Adverse
Effect (as defined in Section 3.1 hereof), as the case may be.
2.7 Undisclosed Liabilities. The Company does not have any liability
(whether known or unknown, whether absolute or contingent, whether liquidated or
unliquidated and whether due or to become due), except for (a) liabilities shown
on the Most Recent Balance Sheet, (b) liabilities which have arisen since the
Most Recent Balance Sheet Date in the Ordinary Course of Business and (c)
contractual liabilities incurred in the Ordinary Course of Business which are
not required by GAAP to be reflected on a balance sheet. Except as disclosed on
Section 2.7 of the Company Disclosure Schedule, the Company does not and will
not have any obligations for warranty repair or replacement, or otherwise in
connection with the sale of materials, products, services or supplies.
2.8 Tax Matters.
(a) For purposes of this Agreement, the following terms shall have
the following meanings:
(i) "Taxes" means all taxes, charges, fees, levies or other
similar assessments or liabilities, including without limitation
income, gross receipts, ad valorem, premium, value-added, excise,
real property, personal property, sales, use, transfer, withholding,
employment, unemployment, insurance, social security, business
license, business organization, environmental, workers compensation,
payroll, profits, license, lease, service, service use, severance,
stamp, occupation, windfall profits, customs, duties, franchise and
other taxes imposed by the United States of America or any state,
local or foreign government, or any agency thereof, or other
political subdivision of the United States or any such government,
and any interest, fines, penalties, assessments or additions to tax
resulting from, attributable to or incurred in connection with any
tax or any contest or dispute thereof.
(ii) "Tax Returns" means all reports, returns, declarations,
statements or other information required to be supplied to a taxing
authority in connection with Taxes.
(iii) "Code" means the Internal Revenue Code of 1986, as
amended.
(b) The Company has filed on a timely basis all Tax Returns that it
was required to file prior to the date hereof (except for Tax Returns for which
the Company has presently effective extensions), and all such Tax Returns were
complete and accurate in all material respects. The Company is not and has never
been a member of a group of corporations with which it has filed (or been
required to file) consolidated, combined or unitary Tax Returns. The Company has
paid on a timely basis all Taxes that were due and payable, except for those the
Company has contested in good faith and for which the Company has established a
proper reserve in the Most Recent Balance Sheet. The unpaid Taxes of the Company
for tax periods
-16-
through the Most Recent Balance Sheet Date do not exceed the accruals and
reserves for Taxes (excluding accruals and reserves for deferred Taxes
established to reflect timing differences between book and Tax income) set forth
on the Most Recent Balance Sheet. The Company has no actual or potential
liability for any Tax obligation of any taxpayer (including without limitation
any affiliated group of corporations or other entities that included the Company
during a prior period) other than the Company. All Taxes that the Company is or
was required by law to withhold or collect have been duly withheld or collected
and, to the extent required, have been paid to the proper Governmental Entity,
except for those the Company has contested in good faith and for which the
Company has established a proper reserve in the Most Recent Balance Sheet. The
Company has complied with all information reporting and backup withholding
requirements including maintenance of the required records with respect thereto,
in connection with amounts paid to any employee, independent contractor,
creditor, or other third party.
(c) The Company has delivered to the Buyer complete and accurate
copies of all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company since January 1, 1998.
Except as set forth in Section 2.8(c) of the Company Disclosure Schedule, the
federal income Tax Returns of the Company are closed by the applicable statute
of limitations for all taxable years. The Company has delivered or made
available to the Buyer complete and accurate copies of all other Tax Returns of
the Company together with all related examination reports and statements of
deficiency for all periods from and after January 1, 1998. No examination or
audit of any Tax Return of the Company by any Governmental Entity is currently
in progress or, to the knowledge of the Company, threatened or contemplated. The
Company has never been informed by any jurisdiction that the jurisdiction
believes that the Company was required to file any Tax Return that was not
filed. The Company has never waived any statute of limitations with respect to
Taxes or agreed to an extension of time with respect to a Tax assessment or
deficiency.
(d) The Company: (i) is not a "consenting corporation" within the
meaning of Section 341(f) of the Code, and none of the assets of the Company are
subject to an election under Section 341(f) of the Code; (ii) has never been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(l)(A)(ii) of the Code; (iii) has no actual or potential liability for any
Taxes of any person (other than the Company), or as a transferee or successor,
by contract, or otherwise.
(e) None of the assets of the Company: (i) is property that is
required to be treated as being owned by any other person pursuant to the
provisions of former Section 168(f)(8) of the Code; (ii) is "tax-exempt use
property" within the meaning of Section 168(h) of the Code; or (iii) directly or
indirectly secures any debt the interest on which is tax exempt under Section
103(a) of the Code.
(f) The Company has not undergone a change in its method of
accounting resulting in an adjustment to its taxable income pursuant to Section
481 of the Code.
(g) At all times since its inception, for federal income tax
purposes, the Company has validly been treated as an "S corporation" within the
meaning of Section 1361(a) of the Code and has validly been treated in a similar
manner for purposes of the income tax laws
-17-
of all states in which it has been subject to taxation. The Company at no time
has had any "net unrealized built-in gain" within the meaning of Section 1374(d)
of the Code that would give rise to taxation pursuant to Section 1374 of the
Code (or comparable provisions of state law) if all of the assets of the Company
were disposed of as of the end of the day immediately preceding the Closing Date
at their respective fair market values.
(h) To the Company's knowledge, there is no basis for the assertion
of any claim relating or attributable to Taxes, which, if adversely determined,
would result in any Security Interest on the assets of the Company that could
reasonably be expected to have a Company Material Adverse Effect.
(i) The Company has not participated in or cooperated with, nor will
it, prior to the Closing Date, participate in or cooperate with, an
international boycott within the meaning of Section 999 of the Code.
(j) The Company reports its income taxes on the accrual method of
accounting.
2.9 Assets. The Company owns or leases all tangible assets necessary for
the conduct of its businesses as presently conducted. Each such tangible asset
is free from material defects, has been maintained in accordance with normal
industry practice, is in good operating condition and repair (subject to normal
wear and tear) and is suitable for the purposes for which it presently is used.
The Company is not, and the Buyer will not be, restricted from carrying out its
business as currently conducted or any part thereof by any agreement,
instrument, indenture or court of arbitrational decree to which the Company is a
party or to which the Company or its assets are subject. The Company has good
and marketable title to all of the assets it purports to own and no such asset
of the Company (tangible or intangible) is subject to any Security Interest.
2.10 Owned Real Property. The Company owns no real property.
2.11 Real Property Leases. Section 2.11 of the Company Disclosure Schedule
lists all real property leased or subleased to or by the Company and lists the
term of such lease, any extension and expansion options, and the rent payable
thereunder. The Company has delivered to the Buyer complete and accurate copies
of the leases and subleases listed in Section 2.11 of the Company Disclosure
Schedule. With respect to each lease and sublease listed in Section 2.11 of the
Company Disclosure Schedule:
(a) the lease or sublease is legal, valid, binding, enforceable and
in full force and effect;
(b) the lease or sublease will continue to be legal, valid, binding,
enforceable and in full force and effect immediately following the Closing in
accordance with the terms thereof as in effect immediately prior to the Closing;
(c) neither the Company nor, to the knowledge of the Company, any
other party, is in breach or violation of, or default under, any such lease or
sublease, and no event has occurred, is pending or, to the knowledge of the
Company, is threatened, which, after the giving
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of notice, with lapse of time, or otherwise, would constitute a breach or
default by the Company or, to the knowledge of the Company, any other party
under such lease or sublease;
(d) the Company has not assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the leasehold or subleasehold; and
(e) the Company is not aware of any Security Interest, easement,
covenant or other restriction applicable to the real property that materially
impairs the current uses or the occupancy by the Company of the property subject
thereto.
2.12 Intellectual Property.
(a) Other than with respect to software programs that are
commercially available on a general basis, the Company exclusively owns, or
licenses on an exclusive basis or otherwise possesses legally enforceable rights
to use on an exclusive basis, without any obligation to make any fixed or
contingent payments, including any royalty payments, all Intellectual Property
that is material to the conduct of the business of the Company as currently
conducted, including without limitation rights to make, exclude others from
using, reproduce, modify, adapt, create derivative works of, translate,
distribute (directly or indirectly), transmit, display, perform, license, rent,
lease and, with respect to Intellectual Property owned by the Company, assign
and sell such Intellectual Property (the "Company Intellectual Property"). For
purposes of this Agreement, the term "Intellectual Property" means (i) patents,
trademarks, service marks, trade names, domain names, copyrights, designs and
trade secrets, (ii) brand names and logos, (iii) artwork, photographs, editorial
copy and materials, formats and designs, (iv) customer, partner, prospect and
marketing lists, market research data, sales data and traffic and user data, (v)
any applications for and registrations of such patents, trademarks, service
marks, trade names, domain names, copyrights and designs, (vi) processes,
formulae, methods, schematics, technology, know-how, computer software programs
and applications and (vii) other tangible or intangible proprietary or
confidential information and material.
(b) Section 2.12(b)(i) of the Company Disclosure Schedule sets forth
a complete and accurate list of the Company Intellectual Property (other than
unregistered copyrights, trade secrets and confidential information and Owned
Software (as defined below) set forth on Section 2.13(a) of the Company
Disclosure Schedule) owned by the Company and material to the conduct of its
business as presently conducted, and Section 2.12(b)(ii) sets forth a complete
and accurate list of the Company Intellectual Property licensed by the Company
from a third party (other than Licensed Software (as defined below) set forth on
Section 2.13(c) of the Company Disclosure Schedule) and material to the conduct
of its business as presently conducted.
(c) All material patents and registrations and applications for
registered trademarks, service marks and copyrights which are held by the
Company are valid and subsisting. To the knowledge of the Company, no other
person or entity is infringing, violating or misappropriating, in any material
respect, any of the Company Intellectual Property.
(d) None of the (i) Company Intellectual Property or (ii) business
or activities previously or currently conducted by the Company infringes,
violates or constitutes a
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misappropriation of any Intellectual Property of any third party. The Company
has not received any complaint, claim or notice alleging any such infringement,
violation or misappropriation.
(e) The Company has taken all commercially reasonable measures and
precautions to protect and maintain the confidentiality, secrecy and value of
all Company Intellectual Property. Without limiting the generality of the
foregoing, at the Closing all current programmers, developers and members of
management of the Company who are or were involved in, or who have contributed
to, the creation or development of any Company Intellectual Property will have
executed and delivered to the Company an agreement (containing no exceptions to
or exclusions from the scope of its coverage with respect to the assignment of
Intellectual Property other than inventions conceived of or reduced to practice
prior to such person's employment with the Company) that is similar in scope to
the form of the Company's Proprietary Information and Inventions Agreement
attached hereto as Exhibit F-1. To the knowledge of the Company, no current or
former employee, officer, director, shareholder, consultant or independent
contractor has any right, claim or interest in or with respect to any Company
Intellectual Property. All of the Company's Proprietary Information and
Inventions Agreements to be signed by current programmers, developers and
members of management of the Company shall remain in full force and effect
unless terminated or expired pursuant to the express terms thereof.
2.13 Company Software.
(a) Set forth on Section 2.13(a) of the Company Disclosure Schedule
is a complete and true list of all material software programs, systems and
applications (A) designed or developed or under development by employees of the
Company or by consultants on the Company's behalf including all documentation
("Owned Software") or (B) licensed by the Company from any third party or
constituting "off the shelf" software ("Licensed Software"), in each case that
is used or manufactured by the Company in the operation of its business as
currently conducted (collectively, the "Software"). The execution and delivery
of this Agreement and consummation of the Merger will not result in the breach
of, or create on behalf of any third party the right to terminate or modify, any
material license, sublicense or other agreement relating to any Company
Intellectual Property or any Software.
(b) All of the Owned Software are original works of authorship and
are protected by the copyright laws of the United States. The Company owns all
right, title and interest in and to the Owned Software and all copyrights
thereto, free and clear of all liens, claims, encumbrances, charges, pledges,
restrictions or rights of third parties of any kind whatsoever and has not sold,
assigned, licensed, distributed or in any other way disposed of or subjected the
Owned Software to any lien, claim, encumbrance, charge, pledge, or restriction.
None of the Owned Software incorporates, is based on or is a derivative work of
any third party code that is subject to the terms of a public source license or
otherwise imposes conditions on the terms and conditions under which the Owned
Software may be used or distributed. No claim has been asserted against the
Company to the effect that the use of any Owned Software by the Company
infringes the rights of any person.
(c) The Licensed Software is validly held and used by the Company
and may be used by the Company pursuant to the applicable license agreement with
respect thereto as set
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forth on Schedule 2.13(c) of the Company Disclosure Schedule without the consent
of, notice to, or payment of any royalty or other fee to any third party and is
fully and freely usable by the Surviving Corporation without the consent of,
notice to or payment of any royalty to any third party, All of the Company's
computer hardware has validly licensed software installed therein and the
Company's use thereof does not conflict with or violate any such license. No
claim has been asserted against the Company, and the Company has no knowledge of
any basis for an assertion against the Company, to the effect that the use of
any Licensed Software by the Company infringes the rights of any third party.
(d) To the knowledge of the Company, the Owned Software is free from
any significant software defect, is free from any programming, documentation
error or virus (collectively, "Bugs") not consistent with commercially
reasonable industry standards acceptable for such Bugs, operates and runs in a
reasonable and efficient business manner, conforms in all material respects to
all specifications thereof, and, with respect to the Owned Software, the
applications can be reasonably compiled from their associated source code.
(e) The Company has made available to the Buyer all documentation in
its possession relating to the use, maintenance and operation of the Software,
all of which is true and accurate in all material respects.
2.14 Inventory. All inventory of the Company, whether or not reflected on
the Most Recent Balance Sheet, consists of a quality and quantity usable and
saleable in the Ordinary Course of Business, except for obsolete items and items
of below-standard quality, all of which have been written-off or written-down to
net realizable value on the Most Recent Balance Sheet. All inventories not
written-off have been priced at the lower of cost or market on a first-in,
first-out basis. The quantities of each type of inventory, whether raw
materials, work-in-process or finished goods, are not excessive in the present
circumstances of the Company.
2.15 Contracts.
(a) Section 2.15 of the Company Disclosure Schedule lists the
following agreements (written or oral) to which the Company is a party as of the
date of this Agreement:
(i) any agreement (or group of related agreements) for the
lease of personal property from or to third parties providing for
lease payments in excess of $25,000 per annum or having a remaining
term longer than 12 months;
(ii) any agreement (or group of related agreements) for the
purchase or sale of products or for the furnishing or receipt of
services (A) which calls for performance over a period of more than
one year, (B) which involves more than the sum of $25,000 (excluding
agreements for the sale of goods in the Ordinary Course of Business
that contain any Company Obligations (as defined below) no less
favorable to the Company than the Standard Terms (as defined
below)), or (C) in which the Company has granted manufacturing
rights, "most favored nation" pricing provisions or marketing or
distribution rights relating to any products or territory or has
agreed to purchase a minimum quantity of goods or
-21-
services or has agreed to purchase goods or services exclusively
from a certain party;
(iii) any agreement establishing a partnership or joint
venture;
(iv) any agreement (or group of related agreements) under
which it has created, incurred, assumed or guaranteed (or may
create, incur, assume or guarantee) indebtedness (including
capitalized lease obligations) involving more than $25,000 or under
which it has imposed (or may impose) a Security Interest on any of
its assets, tangible or intangible;
(v) any agreement concerning confidentiality or
noncompetition;
(vi) any agreement for personal services or employment with
any of the Company's employees not terminable by the Company before
or after the Merger upon not more than 10 days' notice without
penalty or any other liability;
(vii) any bonus, deferred compensation, pension, severance,
profit-sharing, stock option, employee stock purchase or retirement
plan, contract or arrangement or other employee benefit plan or
other arrangement covering the Company's employees not terminable by
the Company before or after the Merger upon not more than 10 days'
notice without penalty or any other liability;
(viii) any agreement involving any current or former officer,
director or stockholder of the Company or any affiliate (an
"Affiliate"), as defined in Rule 12b-2 under the Securities Exchange
Act of 1934, as amended, thereof;
(ix) any agreement under which the consequences of a default
or termination would reasonably be expected to have a Company
Material Adverse Effect;
(x) any agreement (A) which contains any provisions requiring
the Company to indemnify any other party thereto (excluding
indemnities contained in agreements for the purchase, sale or
license of products entered into in the Ordinary Course of Business
on terms no less favorable to the Company than the Standard Terms
(as defined below)) or (B) relating to the extension of credit by
the Company or guaranteeing by the Company of any obligation of any
third party;
(xi) any contract or agreement that provides any discount
other than pursuant to the Company's standard discount terms;
(xii) any contract providing for the payment of a commission
or other fee calculated as or by reference to the volume of web
traffic or a percentage of the profits or revenues of the Company or
of any business segment of the Company;
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(xiii) any contract or agreement not described above that is
material to the business, operations, assets, financial condition,
results of operations, properties or prospects of the Company,
including without limitation, agreements relating to web site
development and operations; marketing, promotion, affiliate and
advertising, including search engine referrals and Internet private
labeling; fulfillment operations; and telephone, credit card and
freight carrier services; and
(xiv) any other agreement (or group of related agreements)
either involving more than $25,000 or not entered into in the
Ordinary Course of Business.
(b) The Company has delivered to the Buyer a complete and accurate
copy of each written agreement listed in Section 2.12 or Section 2.15 of the
Company Disclosure Schedule and such Sections of the Company Disclosure Schedule
contains an accurate summary of each oral agreement so listed. With respect to
each agreement so listed: (i) the agreement is legal, valid, binding and
enforceable and in full force and effect; (ii) the agreement will continue to be
legal, valid, binding and enforceable and in full force and effect immediately
following the Closing in accordance with the terms thereof as in effect
immediately prior to the Closing; and (iii) neither the Company nor, to the
knowledge of the Company, any other party, is in breach or violation of, or
default under, any such agreement, and no event has occurred, is pending or, to
the knowledge of the Company, is threatened, which, after the giving of notice,
with lapse of time, or otherwise, would constitute a breach or default by the
Company or, to the knowledge of the Company, any other party under such
agreement. No notice has been received by the Company with respect to the
possible termination or modification of any material contract, and the Company
has no reason to believe that any business or financial relationship with any
party to a material contract is likely to be adversely affected by consummation
of the Merger.
2.16 Accounts Receivable; Accounts Payable.
(a) Set forth on Section 2.16(a) of the Company Disclosure Schedule
is a true, correct and complete list, including aging information, of all of the
Company's accounts receivable as of the Most Recent Balance Sheet Date. All
accounts receivable and vendor accounts receivable of the Company reflected on
the Most Recent Balance Sheet are valid receivables subject to no setoffs or
counterclaims and are current and collectible (within 90 days after the date on
which it first became due and payable), net of the applicable reserve for bad
debts on the Most Recent Balance Sheet. All accounts receivable and vendor
accounts receivable reflected in the financial or accounting records of the
Company that have arisen since the Most Recent Balance Sheet Date are valid
receivables subject to no setoffs or counterclaims and are collectible (within
90 days after the date on which it first became due and payable), net of a
reserve for bad debts in an amount proportionate to the reserve shown on the
Most Recent Balance Sheet.
(b) Set forth on Section 2.16(b) of the Company Disclosure Schedule
is a true, correct and complete list, including aging information, of all of the
Company's accounts payable as of the Most Recent Balance Sheet Date.
-23-
2.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Company.
2.18 Insurance. Section 2.18 of the Company Disclosure Schedule lists each
insurance policy (including fire, theft, casualty, general liability, workers
compensation, business interruption, environmental, product liability and
automobile insurance policies and bond and surety arrangements) to which the
Company is a party. Such insurance policies are of the type and in amounts
customarily carried by organizations conducting businesses or owning assets
similar to those of the Company. There is no material claim pending under any
such policy as to which coverage has been questioned, denied or disputed by the
underwriter of such policy. All premiums due and payable under all such policies
have been paid, the Company has no reason to believe that it will be liable for
retroactive premiums or similar payments, and the Company is otherwise in
compliance in all material respects with the terms of such policies. The Company
has no knowledge of any threatened termination of, or material premium increase
with respect to, any such policy. Each such policy will continue to be
enforceable and in full force and effect immediately following the Closing in
accordance with the terms thereof as in effect immediately prior to the Closing.
2.19 Litigation. There is no action, suit, proceeding, claim, arbitration
or investigation before any Governmental Entity or before any arbitrator (a
"Legal Proceeding") which is pending or has been threatened in writing against
the Company which (a) seeks either damages in excess of $25,000 or equitable
relief or (b) in any manner challenges or seeks to prevent, enjoin, alter or
delay the transactions contemplated by this Agreement. Neither the Company nor
any property or asset of the Company is subject to any order, writ, judgment,
injunction, decree, determination or award which restricts the Company's ability
to conduct business in any area in which it presently does business or which has
or could reasonably be expected to have, either individually or in the
aggregate, a Company Material Adverse Effect.
2.20 Warranties; Customer Complaints.
(a) No product or service manufactured, sold, leased, licensed or
delivered by the Company is subject to any guaranty, warranty, right of return,
right of credit or other indemnity of the Company (collectively, the "Company
Obligations") other than (i) the applicable standard terms and conditions of
sale or lease of the Company, which are set forth in Section 2.20 of the Company
Disclosure Schedule and (ii) manufacturers' warranties for which the Company has
no liability (collectively, the "Standard Terms").
(b) Neither the Company nor any officer or director of the Company
is or has been a defendant in any product liability litigation relating to any
product sold by the Company, and no such litigation is pending or, to the
knowledge of the Company, has been threatened.
(c) Set forth on Section 2.20 of the Company Disclosure Schedule is
a description of all customer complaints received by the Company over the past
year, other than one-time, non-systemic complaints received in the Ordinary
Course of Business.
-24-
2.21 Employees.
(a) Section 2.21 of the Company Disclosure Schedule lists each
employee or consultant of the Company as of the date hereof, as well as each
employee's and consultant's date of hire, title, department, leave status,
current salary, rate of compensation, current bonus eligibility, date of last
review and salary/bonus increase, accrued vacation, retention or severance
eligibility and accrued sick time and for 2001 each employee's or consultant's
salary, bonus, commissions and total compensation paid.
(b) At the Closing, each current programmer, developer and member of
management of the Company will have entered into a confidentiality agreement
with Company substantially in the form attached hereto as Exhibit F. Section
2.21 of the Company Disclosure Schedule contains a list of all employees of the
Company who are a party to a non-competition agreement with the Company; copies
of such agreements have previously been delivered to the Buyer. To the knowledge
of the Company, no key employee or group of employees has any plans to terminate
employment with the Company.
(c) The Company is not a party to or bound by any collective
bargaining agreement, nor has it experienced any strikes, grievances, claims of
unfair labor practices or other collective bargaining disputes. The Company has
no knowledge of any organizational effort made or threatened, either currently
or within the past two years, by or on behalf of any labor union with respect to
employees of the Company.
(d) Each of the Company and the ERISA Affiliates (as defined below)
is in material compliance with all laws, rules and regulations regarding the
regulation of labor, hiring, employment standards, workplace human rights, pay
equity, employment equity, health and safety. No independent contractor,
consultant, freelancer or other person working or providing work or services for
or with respect to the Company or any ERISA Affiliate is, or is likely to be
held to be, an employee of the Company or any ERISA Affiliate.
2.22 Employee Benefits.
(a) For purposes of this Agreement, the following terms shall have
the following meanings:
(i) "Employee Benefit Plan" means any "employee pension
benefit plan" (as defined in Section 3(2) of ERISA), any "employee
welfare benefit plan" (as defined in Section 3(1) of ERISA), and any
other written or oral plan, agreement or arrangement involving
direct or indirect compensation, including without limitation
insurance coverage, severance benefits, disability benefits,
deferred compensation, bonuses, stock options, stock purchase,
phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement compensation.
(ii) "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
- 25 -
(iii) "ERISA Affiliate" means any entity which is, or at any
applicable time was, a member of (1) a controlled group of
corporations (as defined in Section 414(b) of the Code), (2) a group
of trades or businesses under common control (as defined in Section
414(c) of the Code), or (3) an affiliated service group (as defined
under Section 414(m) of the Code or the regulations under Section
414(o) of the Code), any of which includes or included the Company.
(b) Section 2.22(b) of the Company Disclosure Schedule contains a
complete and accurate list of all Employee Benefit Plans maintained, or
contributed to, by the Company or any ERISA Affiliate or with respect to which
the Company or any ERISA Affiliate may have any material liability. Complete and
accurate copies of (i) all Employee Benefit Plans which have been reduced to
writing, (ii) written summaries of all unwritten Employee Benefit Plans, (iii)
all related trust agreements, insurance contracts and summary plan descriptions,
and (iv) all annual reports filed on IRS Form 5500, 5500C or 5500R and (for all
funded plans) all plan financial statements for the last five plan years for
each Employee Benefit Plan, have been delivered to the Buyer. Each Employee
Benefit Plan has been administered in all material respects in accordance with
its terms and each of the Company and the ERISA Affiliates has in all material
respects met its obligations with respect to such Employee Benefit Plan and has
made all required contributions thereto. The Company, each ERISA Affiliate and
each Employee Benefit Plan are in compliance in all material respects with the
currently applicable provisions of ERISA and the Code and the regulations
thereunder (including without limitation Section 4980 B of the Code, Subtitle K,
Chapter 100 of the Code and Sections 601 through 608 and Section 701 et seq. of
ERISA). All filings and reports as to each Employee Benefit Plan required to
have been submitted to the Internal Revenue Service or to the United States
Department of Labor have been duly submitted.
(c) There are no Legal Proceedings (except claims for benefits
payable in the normal operation of the Employee Benefit Plans and proceedings
with respect to qualified domestic relations orders) against or involving any
Employee Benefit Plan or asserting any rights or claims to benefits under any
Employee Benefit Plan that could give rise to any material liability.
(d) All the Employee Benefit Plans that are intended to be qualified
under Section 401(a) of the Code have received determination letters from the
Internal Revenue Service to the effect that such Employee Benefit Plans are
qualified and the plans and the trusts related thereto are exempt from federal
income taxes under Sections 401(a) and 501(a), respectively, of the Code, no
such determination letter has been revoked and, to the knowledge of the Company,
revocation has not been threatened, and no such Employee Benefit Plan has been
amended since the date of its most recent determination letter or application
therefor in any respect, and no act or omission has occurred, that would
adversely affect its qualification or materially increase its cost. Each
Employee Benefit Plan which is required to satisfy Section 401(k)(3) or Section
401(m)(2) of the Code has been tested for compliance with, and satisfies the
requirements of, Section 401(k)(3) and Section 401(m)(2) of the Code for each
plan year ending prior to the Closing Date.
(e) Neither the Company nor any ERISA Affiliate has ever maintained
an Employee Benefit Plan subject to Section 412 of the Code or Title IV of
ERISA.
-26-
(f) At no time has the Company or any ERISA Affiliate been obligated
to contribute to any "multiemployer plan" (as defined in Section 4001(a)(3) of
ERISA).
(g) There are no unfunded obligations under any Employee Benefit
Plan providing benefits after termination of employment to any employee of the
Company (or to any beneficiary of any such employee), including but not limited
to retiree health coverage and deferred compensation, but excluding continuation
of health coverage required to be continued under Section 4980B of the Code or
other applicable law and insurance conversion privileges under state law. The
assets of each Employee Benefit Plan which is funded are reported at their fair
market value on the books and records of such Employee Benefit Plan. No Employee
Plan includes in its assets securities issued by the Company or any ERISA
Affiliate.
(h) No act or omission has occurred and no condition exists with
respect to any Employee Benefit Plan maintained by the Company or any ERISA
Affiliate that would subject the Company or any ERISA Affiliate to (i) any
material fine, penalty, tax or liability of any kind imposed under ERISA or the
Code or (ii) any contractual indemnification or contribution obligation
protecting any fiduciary, insurer or service provider with respect to any
Employee Benefit Plan.
(i) No Employee Benefit Plan is funded by, associated with or
related to a "voluntary employee's beneficiary association" within the meaning
of Section 501(c)(9) of the Code.
(j) Each Employee Benefit Plan is amendable and terminable
unilaterally by the Company at any time without liability (including, without
limitation, surrender charges, sales charges or similar expenses) to the Company
as a result thereof and no Employee Benefit Plan, plan documentation or
agreement, summary plan description or other written communication distributed
generally to employees by its terms prohibits the Company from amending or
terminating any such Employee Benefit Plan.
(k) Section 2.22(k) of the Company Disclosure Schedule discloses
each: (i) agreement with any stockholder, director, executive officer or other
key employee of the Company (A) the benefits of which are contingent, or the
terms of which are materially altered, upon the occurrence of a transaction
involving the Company of the nature of any of the transactions contemplated by
this Agreement, (B) providing any term of employment or compensation guarantee
or (C) providing severance benefits or other benefits after the termination of
employment of such director, executive officer or key employee; (ii) agreement,
plan or arrangement under which any person may receive payments from the Company
that may be subject to the tax imposed by Section 4999 of the Code or included
in the determination of such person's "parachute payment" under Section 280G of
the Code (without regard to Section 280G(b)(4) thereof); and (iii) agreement or
plan binding the Company, including without limitation any stock option plan,
stock appreciation right plan, restricted stock plan, stock purchase plan,
severance benefit plan or Employee Benefit Plan, any of the benefits of which
will be increased, or the vesting of the benefits of which will be accelerated,
by the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement.
-27-
(l) Section 2.22(l) of the Company Disclosure Schedule sets forth
the policy of the Company with respect to accrued vacation, accrued sick time
and earned time-off and the amount of such liabilities as of the Most Recent
Balance Sheet Date.
2.23 Environmental Matters.
(a) The Company has complied with all applicable Environmental Laws
(as defined below). There is no pending or, to the knowledge of the Company,
threatened civil or criminal litigation, written notice of violation, formal
administrative proceeding, or investigation, inquiry or information request by
any Governmental Entity, relating to any Environmental Law involving the
Company. For purposes of this Agreement, "Environmental Law" means any federal,
state or local law, statute, rule or regulation or the common law relating to
the environment or occupational health and safety, including without limitation
any statute, regulation, administrative decision or order pertaining to (i)
treatment, storage, disposal, generation and transportation of industrial, toxic
or hazardous materials or substances or solid or hazardous waste; (ii) air,
water and noise pollution; (iii) groundwater and soil contamination; (iv) the
release or threatened release into the environment of industrial, toxic or
hazardous materials or substances, or solid or hazardous waste, including
without limitation emissions, discharges, injections, spills, escapes or dumping
of pollutants, contaminants or chemicals; (v) the protection of wild life,
marine life and wetlands, including without limitation all endangered and
threatened species; (vi) storage tanks, vessels, containers, abandoned or
discarded barrels, and other closed receptacles; (vii) health and safety of
employees and other persons; and (viii) manufacturing, processing, using,
distributing, treating, storing, disposing, transporting or handling of
materials regulated under any law as pollutants, contaminants, toxic or
hazardous materials or substances or oil or petroleum products or solid or
hazardous waste. As used above, the terms "release" and "environment" shall have
the meaning set forth in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA").
(b) There have been no releases of any Materials of Environmental
Concern (as defined below) into the environment at any parcel of real property
or any facility formerly or currently owned, operated or controlled by the
Company. With respect to any such releases of Materials of Environmental Concern
by the Company, the Company has given all required notices to Governmental
Entities (copies of which have been provided to the Buyer). The Company is not
aware of any releases of Materials of Environmental Concern at parcels of real
property or facilities other than those owned, operated or controlled by the
Company that could reasonably be expected to have an impact on the real property
or facilities owned, operated or controlled by the Company. For purposes of this
Agreement, "Materials of Environmental Concern" means any chemicals, pollutants
or contaminants, hazardous substances (as such term is defined under CERCLA),
solid wastes and hazardous wastes (as such terms are defined under the Resource
Conservation and Recovery Act), toxic materials, oil or petroleum and petroleum
products or any other material subject to regulation under any Environmental
Law.
(c) Set forth in Section 2.23(c) of the Company Disclosure Schedule
is a list of all documents (whether in hard copy or electronic form) that
contain any environmental reports, investigations and audits relating to
premises currently or previously owned or leased by the Company (whether
conducted by or on behalf of the Company or a third party, and whether
-28-
done at the initiative of the Company or directed by a Governmental Entity or
other third party) which the Company has possession of or access to. A complete
and accurate copy of each such document has been provided to the Buyer.
(d) The Company is not aware of any material environmental liability
of any solid or hazardous waste transporter or treatment, storage or disposal
facility that has been used by the Company.
2.24 Legal Compliance. Except for matters relating to environmental
matters (which are subject to Section 2.23 above), the Company, and the conduct
and operations of its business, are in compliance with each applicable law
(including rules and regulations thereunder) of any federal, state, local or
foreign government, or any Governmental Entity, and the Company has not received
notice of any material violations of any of the above.
2.25 Customers and Suppliers.
(a) Section 2.25(a) of the Company Disclosure Schedule sets forth a
list of the Company's largest 25 customers during the last full fiscal year and
the amount of revenues accounted for by each such customer during each such
period. Except as set forth in Section 2.25(a) of the Company Disclosure
Schedule, to the Company's knowledge, none of the Company's top 25 customers in
the fiscal year ended December 31, 2001 has indicated that it will stop, or
materially decrease the rate of, buying products from the Company.
(b) The Company believes that its business relationship with
vendors, manufacturers, and resellers ("Business Vendors") with whom it has
business dealings are generally satisfactory. Section 2.25(b) of the Company
Disclosure Schedule sets forth a list of the twenty-five (25) largest Business
Vendors that accounted for approximately ninety-five percent (95%) of the
Company's purchases during the last full fiscal year. The Company does not now
have a material dispute with any such listed Business Vendor. During the past
fiscal year the Company has not received any written notice that indicates
dissatisfaction with the Company's performance of its obligations to such listed
Business Vendors. No written notice has been received by the Company with
respect to the possible termination or modification of any relationship with any
such listed Business Vendor, including but not limited to modifications in co-op
funds, rebates or marketing funds (other than industry-wide notices not specific
to the Company), and the Company has no reason to believe that any business or
financial relationship with a Business Vendor is likely to be adversely affected
by consummation of the Merger.
2.26 Authorized Representative. Set forth on Section 2.26 of the Company
Disclosure Schedule is a complete list and description of the vendors and
manufacturers for which the Company is an authorized representative ("Vendor
Relationships"). Except as disclosed in Schedule 2.26 of the Company Disclosure
Schedule, no written notice has been received with respect to the possible
termination or modification of any Vendor Relationship and the Company has no
reason to believe that any Vendor Relationship will be adversely affected by
consummation of the Merger.
2.27 Prepayments, Prebilled Invoices and Deposits. Section 2.27 of the
Company Disclosure Schedule sets forth (a) all prepayments, prebilled invoices
and deposits in amounts,
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on a per customer basis, greater than $25,000 that have been received by the
Company as of the date of this Agreement from customers for products to be
shipped, or services to be performed, after the Closing Date, and (b) with
respect to each such prepayment, prebilled invoice or deposit, (i) the party and
contract credited, (ii) the date received or invoiced, (iii) the products and/or
services to be delivered and (iv) the conditions for the return of such
prepayment, prebilled invoice or deposit. All prepayments, prebilled invoices
and deposits are properly accrued for on the Most Recent Balance Sheet in
accordance with GAAP applied on a consistent basis with the past practice of the
Company.
2.28 Government Contracts. The Company has not been suspended or debarred
from bidding on contracts or subcontracts with any Governmental Entity
("Government Contracts"); no such suspension or debarment has been initiated or,
to the knowledge of the Company, threatened; and the consummation of the
transactions contemplated by this Agreement will not result in any such
suspension or debarment. The Company has not been audited or, to the knowledge
of the Company, investigated, nor is it now being audited or, to the knowledge
of the Company, investigated by the U.S. Government Accounting Office, the U.S.
Department of Defense or any of its agencies, the Defense Contract Audit Agency,
the U.S. Department of Justice, the Inspector General of any U.S. Governmental
Entity, any similar agencies or instrumentalities of any state or foreign
Governmental Entity, or any prime contractor with a Governmental Entity nor, to
the knowledge of the Company, has any such audit or investigation been
threatened. To the knowledge of the Company, there is no valid basis for (a) the
suspension or debarment of the Company from bidding on any Government Contracts,
or (b) any claim pursuant to an audit or investigation by any of the entities
named in the foregoing sentence. The Company has no agreements, contracts or
commitments which require it to obtain or maintain a security clearance with any
Governmental Entity.
2.29 Permits. Section 2.29 of the Company Disclosure Schedule sets forth a
list of all material permits, licenses, registrations, certificates, orders or
approvals from any Governmental Entity (including without limitation those
issued or required under Environmental Laws and those relating to the occupancy
or use of owned or leased real property) ("Permits") issued to or held by the
Company. Such listed Permits are the only Permits that are required for the
Company to conduct its business as presently conducted. Each such Permit is in
full force and effect and, to the knowledge of the Company, no suspension or
cancellation of such Permit has been threatened in writing and there is no basis
for believing that such Permit will not be renewable upon expiration. Each such
Permit will continue in full force and effect immediately following the Closing.
2.30 Competing Interests. None of the Company or any director or officer
of the Company, or, to the knowledge of the Company, any agent or employee of
the Company, or any Affiliate or family member of any of the foregoing (a) owns,
directly or indirectly, an interest in any entity that is a competitor, customer
or supplier of the Company or that otherwise has material business dealings with
the Company (other than ownership through a mutual fund or similar investment
vehicle) or (b) is a party to, or otherwise has any direct or indirect interest
opposed to the Company under, any material agreement or other business
relationship or arrangement material to the Company, provided that the foregoing
clause (a) and (b) will not apply to any investment in publicly traded
securities constituting less than 3% of the outstanding securities in such
class. Neither the Company, nor any director or officer of the Company, nor,
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to the knowledge of the Company, any agent or employee of the Company, is a
party to any non-competition, non-solicitation, exclusivity or other similar
agreement that would in any way restrict or adversely affect the business or
activities of the Company or Buyer.
2.31 Interests of Company Insiders. No director, officer or employee of
the Company, or any Affiliate or immediate family member (each, a "Company
Insider") of any of the foregoing, (a) has any interest in any property, real or
personal, tangible or intangible, including Company Intellectual Property used
in or pertaining to the business of the Company, except for the normal rights of
a shareholder, and except for rights under existing employee benefit plans or
(b) is owed any money by the Company, except salary and other benefits payable
in the Ordinary Course of Business or as is apparent on the face of an agreement
listed in the Section 2.22 of the Company Disclosure Schedule.
2.32 Brokers' Fees. The Company has no liability or obligation to pay any
fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement, except under the existing agreement
between the Company and Martin Wolf Securities LLC an accurate and complete copy
of which has been provided to the Buyer and which, pursuant to Section 4.4, the
Company Stockholders shall be obligated to pay.
2.33 No Existing Discussions. As of the date of this Agreement, the
Company is not engaged, directly or indirectly, in any discussions or
negotiations with any party other than the Buyer with respect to a liquidation,
dissolution, sale of all or substantially all of the assets of the Company,
merger or consolidation involving the Company.
2.34 Books and Records. The minute books and other similar records of the
Company as provided to the Buyer contain complete and accurate records of all
material actions taken at any meetings of the Company's stockholders, Board of
Directors or any committee thereof and of all written consents executed in lieu
of the holding of any such meeting. The books and records of the Company
accurately reflect in all material respects the assets, liabilities, business,
financial condition and results of operations of the Company and have been
maintained in accordance with good business and bookkeeping practices.
2.35 Disclosure. No representation or warranty by the Company contained in
this Agreement, and no statement contained in the Company Disclosure Schedule or
any certificate delivered or to be delivered by the Company at the Closing
pursuant to this Agreement, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact necessary, in
light of the circumstances under which it was or will be made, in order to make
the statements herein or therein not misleading.
2.36 Business Plan for 2002. The business plan projections for the year
ending December 31, 2002 in the aggregate and as provided by the Company to the
Buyer on March 15, 2002 were prepared by the Company in good faith using the
best information available to management of the Company and represent company
management's good faith estimates of the future performance of the Company for
the year ending December 31, 2002.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE
TRANSITORY SUBSIDIARY
The Buyer and the Transitory Subsidiary hereby jointly and severally
represent and warrant to the Company that the statements contained in this
Article III are true and correct as of the date hereof and will be true and
correct as of the Closing Date, except as expressly set forth herein or in the
disclosure schedule delivered by the Buyer and the Transitory Subsidiary to the
Company on or before the date of this Agreement (the "Buyer Disclosure
Schedule"). The Buyer Disclosure Schedule shall be arranged in sections and
paragraphs corresponding to the numbered and lettered sections and paragraphs
contained in this Article III.
3.1 Organization, Standing and Power. Each of the Buyer and the Transitory
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has all
requisite corporate power and authority to own, lease and operate its properties
and assets and to carry on its business as now being conducted, and is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction where the character of its properties owned, operated or
leased or the nature of its activities makes such qualification necessary,
except for such failures to be so qualified that would not, individually or in
the aggregate, have a Buyer Material Adverse Effect. For purposes of this
Agreement, the term "Buyer Material Adverse Effect" means, when used in
connection with the Buyer and Transitory Subsidiary, any change, event,
circumstance, development or effect that is or is reasonably expected to have a
material adverse effect on (i) the business, assets, liabilities, properties,
prospects, condition (financial or otherwise), or results of operations of the
Buyer or Transitory Subsidiary (excluding economic factors affecting the
national economy or generally affecting the specific industry in which the Buyer
and Transitory Subsidiary compete), or (ii) the ability of the Buyer or
Transitory Subsidiary to consummate the transactions contemplated by this
Agreement.
3.2 Authority; No Conflict; Required Filings and Consents.
(a) Each of the Buyer and the Transitory Subsidiary has all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement by the Buyer and the Transitory Subsidiary have been duly
authorized by all necessary corporate action on the part of each of the Buyer
and the Transitory Subsidiary. This Agreement has been duly executed and
delivered by each of the Buyer and the Transitory Subsidiary and constitutes the
valid and binding obligation of each of the Buyer and the Transitory Subsidiary,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
(b) Subject to the filing of the Articles of Merger as required by
the FBCA, neither the execution and delivery by the Buyer or the Transitory
Subsidiary of this Agreement, nor the consummation by the Buyer or the
Transitory Subsidiary of the transactions contemplated hereby, will (a) conflict
with or violate any provision of the Certificate of
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Incorporation or By-laws of the Buyer or the Articles of Incorporation or
By-Laws of the Transitory Subsidiary, (b) require on the part of the Buyer or
the Transitory Subsidiary any filing with, or any permit, authorization, consent
or approval of a Governmental Entity, (c) conflict with, result in a breach of,
constitute (with or without due notice or lapse of time or both) a default
under, result in the acceleration of obligations under, create in any party the
right to terminate, modify or cancel, or require any notice, consent or waiver
under, any material contract or instrument to which the Buyer or the Transitory
Subsidiary is a party or by which the Buyer or the Transitory Subsidiary is
bound or to which any of their assets is subject, (d) result in the imposition
of any Security Interest upon any assets of the Buyer or the Transitory
Subsidiary or (e) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Buyer, the Transitory Subsidiary or any of their
properties or assets.
3.3 Operations of the Transitory Subsidiary. The Transitory Subsidiary was
formed solely for the purpose of engaging in the transactions contemplated by
this Agreement, has engaged in no other business activities (other than those
incident to its organization and the execution and delivery of this Agreement)
and has conducted its operations only as contemplated by this Agreement, and has
no liabilities of any kind (actual or otherwise).
3.4 Litigation. There is no Legal Proceeding which is pending or has been
threatened in writing against the Buyer or the Transitory Subsidiary which in
any manner challenges or seeks to prevent, enjoin, alter or delay the
transactions contemplated by this Agreement. Neither the Buyer, the Transitory
Subsidiary nor any property or asset of the Buyer or Transitory Subsidiary is
subject to any order, writ, judgment, injunction, decree, determination or award
which restricts the Buyer's or Transitory Subsidiary's ability to conduct
business in any area in which it presently does business.
3.5 Brokers' Fees. Neither the Buyer nor the Transitory Subsidiary has
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
ARTICLE IV
COVENANTS
4.1 Closing Efforts. Each of the Parties shall use its best efforts, to
the extent commercially reasonable ("Reasonable Best Efforts"), to take all
actions and to do all things necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, including without limitation using
its Reasonable Best Efforts to ensure that (i) its representations and
warranties remain true and correct in all material respects through the Closing
Date and (ii) the conditions to the obligations of the other Parties to
consummate the Merger are satisfied.
4.2 Operation of the Business. Except as consented to in writing by the
Buyer, from and after the date of this Agreement until the earlier of the
termination of this Agreement in accordance with its terms or the Effective
Time, the Company shall act and carry on its business in the usual, regular and
ordinary course in substantially the same manner as previously conducted, pay
its debts and Taxes and perform its other obligations when due (subject to good
faith disputes over such debts, Taxes or obligations), comply with all
applicable laws, rules and
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regulations, and use best efforts, consistent with past practices, to maintain
and preserve its business organization, assets and properties, keep available
the services of its present officers and employees and preserve its advantageous
business relationships with customers, strategic partners, suppliers,
distributors and others having business dealings with it to the end that its
goodwill and ongoing business shall be unimpaired at the Effective Time. Without
limiting the generality of the foregoing, from and after the date of this
Agreement until the earlier of the termination of this Agreement in accordance
with its terms or the Effective Time, the Company shall not, directly or
indirectly, do any of the following without the prior written consent of the
Buyer except as set forth in Section 4.2 of the Company Disclosure Schedule:
(a) (A) except (i) for the distribution by the Company of cash to
the Company Stockholders in amounts equal to (x) the Taxes with respect to any
Tax year or portion thereof ending after the date hereof but on or before the
Closing Date payable by the Company Stockholders as a result of the Company's
status as an S corporation for federal and state Tax purposes (other than any
Tax liability arising out of any Section 338(h)(10) Election made pursuant to
Section 4.6 of this Agreement (the "S Corporation Stockholder Tax Liability")),
as estimated in good faith by the Company and the Buyer within three business
days prior to the Closing Date and (y) an amount equal to the excess of the
Taxes with respect to the Tax year ended December 31, 2001 payable by the
Company Stockholders (other than the S Corporation Stockholder Tax Liability)
over the estimated Taxes for the same Tax year paid by the Company Stockholders
as a result of the Company's status as an S corporation for federal and state
Tax purposes (other than the S Corporation Stockholder Tax Liability), (ii) for
the distribution by the Company of up to $3,000,000 in cash to the Company
Stockholders prior to the Effective Time as a distribution of previously taxed
but undistributed earnings and profits, or (iii) as set forth in Section 4.2(a)
of the Company Disclosure Schedule (which will permit the distribution, by a
note, of previously taxed but undistributed earnings and profits, remaining
after the $3,000,000 cash distribution paid pursuant to clauses (A)(i) and (ii)
above), declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, securities or other property) in respect of, any
of its capital stock; (B) split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock or any of its other
securities; or (C) purchase, redeem or otherwise acquire any shares of its
capital stock or any other of its securities or any rights, warrants or options
to acquire any such shares or other securities;
(b) issue, deliver, sell, grant, pledge or otherwise dispose of or
encumber any shares of its capital stock, any other voting securities or any
securities convertible into or exchangeable for, or any rights, warrants or
options to acquire, any such shares, voting securities or convertible or
exchangeable securities (other than the issuance of shares of Company Capital
Stock upon the exercise of Company Options or Company Warrants outstanding on
the date of this Agreement in accordance with their present terms);
(c) amend its articles of incorporation, by-laws or other comparable
charter or organizational documents, except as expressly provided by this
Agreement;
(d) acquire (A) by merging or consolidating with, or by purchasing
all or a substantial portion of the assets or any stock of, or by any other
manner, any business or any corporation, partnership, joint venture, limited
liability company, association or other business
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organization or division thereof or (B) any assets that are material, in the
aggregate, to the Company, except purchases of inventory and components in the
Ordinary Course of Business;
(e) whether or not in the Ordinary Course of Business, sell, dispose
of or otherwise transfer any assets material to the Company, taken as a whole
(including any accounts, leases, contracts or intellectual property, but
excluding the sale of products in the Ordinary Course of Business pursuant to
agreements containing Company Obligations no less favorable to the Company than
the Standard Terms);
(f) enter into an agreement with respect to any merger,
consolidation, liquidation or business combination, or any acquisition or
disposition of all or substantially all of the assets or securities of the
Company;
(g) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, (B) issue, sell or amend any debt
securities or warrants or other rights to acquire any debt securities of the
Company or any of its Subsidiaries, guarantee any debt securities of another
person, enter into any "keep well" or other agreement to maintain any financial
statement condition of another person or enter into any arrangement having the
economic effect of any of the foregoing, (C) make any loans, advances or capital
contributions to, or investment in, any other person, or (D) enter into any
hedging agreement or other financial agreement or arrangement designed to
protect the Company against fluctuations in commodities prices or exchange
rates;
(h) make any changes in accounting methods, principles or practices,
except insofar as may have been required by a change in GAAP or, except as so
required, change any assumption underlying, or method of calculating, any bad
debt, contingency or other reserve;
(i) modify, amend or terminate any material contract or agreement to
which the Company is party, or knowingly waive, release or assign any material
rights or claims (including any write-off or other compromise of any accounts
receivable of the Company);
(j) (A) enter into any material contract or agreement relating to
the rendering of services or the distribution, sale or marketing by third
parties of the products, of, or products licensed by, the Company or (B) license
any material intellectual property rights to or from any third party;
(k) except as required to comply with applicable law or agreements,
plans or arrangements existing on the date hereof, (A) take any action with
respect to, adopt, enter into, terminate or amend any employment, severance or
similar agreement or benefit plan for the benefit or welfare of any current or
former director, officer, employee or consultant or any collective bargaining
agreement, (B) increase in any material respect the compensation or fringe
benefits of, or pay any bonus to, any director, officer, employee or consultant,
(C) amend or accelerate the payment, right to payment or vesting of any
compensation or benefits, including any outstanding options or restricted stock
awards, (D) pay any material benefit not provided for as of the date of this
Agreement under any benefit plan, (E) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or benefit
plan, including the grant of stock options, stock appreciation rights, stock
based or stock related awards,
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performance units or restricted stock, or the removal of existing restrictions
in any benefit plans or agreements or awards made thereunder, or (F) take any
action other than in the Ordinary Course of Business to fund or in any other way
secure the payment of compensation or benefits under any employee plan,
agreement, contract or arrangement or benefit plan;
(l) make or rescind any Tax election, settle or compromise any Tax
liability or amend any Tax return; or
(m) initiate, compromise or settle any material litigation or
arbitration proceeding.
4.3 Governmental and Third-Party Notices and Consents.
(a) Each Party shall use its Reasonable Best Efforts to obtain, at
its expense, all waivers, permits, consents, approvals or other authorizations
from Governmental Entities, and to effect all registrations, filings and notices
with or to Governmental Entities, as may be required for such Party to
consummate the transactions contemplated by this Agreement and to otherwise
comply with all applicable laws and regulations in connection with the
consummation of the transactions contemplated by this Agreement.
(b) The Company shall use its Reasonable Best Efforts to obtain, at
its expense, all such waivers, consents or approvals from third parties, and to
give all such notices to third parties, as are required to be listed in Section
2.4 of the Company Disclosure Schedule.
4.4 Expenses. The Buyer shall bear its own costs and expenses (including
legal and broker fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby. The Company Stockholders shall bear
the Company's costs and expenses (including legal and broker fees and expenses)
incurred in connection with this Agreement and the transactions contemplated
hereby. Notwithstanding the foregoing, if either the Buyer or the Company shall
have updated the Buyer Disclosure Schedule or the Company Disclosure Schedule,
respectively, pursuant to Section 4.10 and the Party receiving the update elects
to terminate this Agreement pursuant to Section 7.1(e), the Party providing such
notice shall reimburse the other Party for all legal fees and expenses incurred
by such other Party in connection with this Agreement or the transactions
contemplated hereby.
4.5 Transfer Taxes. The Company Stockholders shall timely pay all
transfer, documentary, sales, use, stamp, registration and other Taxes and fees
arising out of or relating to the transactions contemplated by this Agreement,
and the Company Stockholders shall, at their own expense, file all necessary Tax
Returns and other documentation with respect to all such transfer, documentary,
sales, use, stamp, registration and other taxes and fees.
4.6 S Corporation Status. The Company shall, up to and including the
Closing Date, maintain its status as an S corporation for federal and state
income Tax purposes.
4.7 Section 338(h)(10) Election. At the election of the Buyer, the Company
and the Company Stockholders will each join with the Buyer in making an election
under Code Section 338(h)(10) (and any corresponding election under state,
local, and foreign tax law) with respect to the purchase and sale of the stock
of the Company hereunder (the "Section 338(h)(10)
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Election"). In particular, and not by way of limitation, in order to effect such
Section 338(h)(10) Election, on or prior to the Closing Date, the Company
Stockholders shall execute and deliver to the Buyer necessary copies of Internal
Revenue Service Form 8023 and all other attachments and any other forms or
documents required to be filed by the Buyer with the Internal Revenue Service.
The Buyer and the Company Stockholders agree to report the transaction for tax
purposes in a manner consistent with the making of such elections, if such Form
8023 is filed by the Buyer with the Internal Revenue Service. The obligations of
the parties under this Section 4.7 shall survive the Closing. The Company
Stockholders will include any income, gain, loss, deduction or other Tax item
resulting from the Section 338(h)(10) election on their Tax Returns to the
extent required by applicable law. The Company and the Company Stockholders
agree that the Merger Consideration and liabilities of the Company (plus other
relevant items) will be allocated to the assets of the Company for all purposes
(including tax and financial accounting) as shown on the Allocation Schedule
attached hereto. The Buyer, the Company and the Company Stockholders will file
all Tax Returns (including amended returns and claims for refund) and
information reports in a manner consistent with such allocation.
4.8 Director and Officer Indemnification.
(a) The Buyer hereby confirms that the indemnification obligations
of the Company to its directors and officers set forth in the Company's Articles
of Incorporation and By-Laws and as provided by Florida law, in each case as in
effect on the date of this Agreement, will not be extinguished by virtue of the
Merger. All such obligations shall be subject to the provisions of Section
6.5(d) hereof.
(b) This Section 4.8 shall be construed as an agreement as to which
the directors and officers of the Company are intended to be third party
beneficiaries and shall be enforceable by such persons and their heirs and
representatives.
4.9 Access to Information; Confidentiality.
(a) Subject to the existing confidentiality agreement dated as of
December 3, 2001 (the "Confidentiality Agreement"), between the Company and the
Buyer, upon reasonable notice, the Company shall afford to the Buyer and to the
officers, employees, accountants, counsel, financial advisors and other
representatives of the Buyer, reasonable access during normal business hours
during the period prior to the Effective Time to all its respective properties,
books, contracts, commitments, personnel and records and, during such period,
the Company shall furnish promptly to the Buyer a copy of all information
concerning its business, properties and personnel as the Buyer may reasonably
request. The Company shall not be required to provide access to or disclose
information where such access or disclosure would contravene any applicable law,
rule, regulation, order or decree or would, with respect to any pending matter,
result in a waiver of the attorney-client privilege or the protection afforded
attorney work-product provided that this shall not relieve the Company of any
obligations under Article II or Article VI of this Agreement. The Company shall
use reasonable efforts to obtain from third parties any consents or waivers of
confidentiality restrictions with respect to any such information being provided
by it. The Buyer will hold, and will cause its respective officers, employees,
accountants, counsel, financial advisors and other affiliates and
representatives to hold, any nonpublic information in accordance with the terms
of the Confidentiality Agreement.
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(b) By the execution of this Agreement, the terms of the
Confidentiality Agreement shall be extended and shall remain in full force and
effect until the second anniversary of the date of termination of this Agreement
pursuant to Section 7.1
4.10 Notification of Certain Matters. The Buyer shall give prompt notice
to the Company, and the Company shall give prompt notice to the Buyer, of the
occurrence, or failure to occur, of any event, which occurrence or failure to
occur would be reasonably likely to cause (a) (i) any representation or warranty
of such party contained in this Agreement that is qualified as to materiality to
be untrue or inaccurate in any respect or (ii) any other representation or
warranty of such party contained in this Agreement to be untrue or inaccurate in
any material respect, in each case at any time from and after the date of this
Agreement until the Effective Time (individually, a "Noticed Event" and
collectively, the "Noticed Events"), or (b) any material failure of the Buyer
and the Transitory Subsidiary or the Company, as the case may be, or of any
officer, director, employee or agent thereof, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement. Notwithstanding the above, the delivery of any notice pursuant
to this Section will not limit or otherwise affect the remedies available
hereunder to the party receiving such notice or the conditions to such party's
obligation to consummate the Merger except as specifically set forth hereafter.
If either the Buyer or the Company is required to give notice hereunder it may,
solely with respect to the occurrence, or failure to occur, of any such Noticed
Event after the date hereof and prior to the Closing Date, update the Buyer
Disclosure Schedule or the Company Disclosure Schedule, respectively, to reflect
such Noticed Event and any such permitted update shall be deemed a part of the
Buyer Disclosure Schedule or the Company Disclosure Schedule, as the case may
be, for all purposes of this Agreement.
ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER
5.1 Intentionally Omitted.
5.2 Conditions to Obligations of the Buyer and the Transitory Subsidiary.
The obligation of each of the Buyer and the Transitory Subsidiary to consummate
the Merger is subject to the satisfaction (or waiver by the Buyer) on or prior
to the Closing Date of the following additional conditions:
(a) the Company shall have obtained (and shall have provided copies
thereof to the Buyer) all of the waivers, permits, consents, approvals or other
authorizations as set forth in Section 2.4 of the Company Disclosure Schedule,
and effected all of the registrations, filings and notices which are required on
the part of the Company, including the release of any Security Interest on any
property owned by the Company;
(b) the representations and warranties of the Company set forth in
this Agreement shall be true and correct in all respects, except to the extent
such representations and warranties are specifically made as of a particular
date (in which case such representations and warranties shall be true and
correct as of such date);
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(c) the Company shall have performed or complied in all material
respects with its agreements and covenants required to be performed or complied
with under this Agreement as of or prior to the Effective Time;
(d) the Company shall have received the Requisite Stockholder
Approval;
(e) no Legal Proceeding shall be pending or threatened wherein an
unfavorable judgment, order, decree, stipulation or injunction would (i) prevent
consummation of any of the transactions contemplated by this Agreement or (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation, and no such judgment, order, decree, stipulation or
injunction shall be in effect;
(f) the Company shall have delivered to the Buyer and the Transitory
Subsidiary a certificate (the "Company Certificate") to the effect that each of
the conditions specified in clauses (a) through (e) (insofar as clause (e)
relates to Legal Proceedings involving the Company) of this Section 5.2 is
satisfied in all material respects;
(g) the Buyer shall have received copies of the resignations,
effective as of the Effective Time, of each director of the Company (other than
any such resignations which the Buyer designates, by written notice to the
Company, as unnecessary);
(h) the Buyer shall have received from the Company and the
Stockholders' Representative an executed Escrow Agreement in the form attached
hereto as Exhibit B;
(i) the Buyer shall have received from Russell L. Madris an executed
Employment Agreement in the form attached hereto as Exhibit E and shall have
received evidence reasonably satisfactory to the Buyer that the life of Mr.
Madris is insurable at "select" or better ratings from reputable insurers;
(j) the Buyer shall have received from each of Scott J. Modist,
James R. Garrity and Michael Diamant an executed Employment Agreements in the
form attached hereto as Exhibit E-1 and shall have received evidence reasonably
satisfactory to the Buyer that the life of each of Scott J. Modist, James R.
Garrity and Michael Diamant is insurable at "select" or better ratings from
reputable insurers;
(k) the Buyer shall have received from each programmer, developer
and members of management of the Company executed copies of the Proprietary
Information, Inventions and Confidentiality Agreement in the form attached
hereto as Exhibit F;
(l) the Buyer shall have received from the Company copies of
releases executed by and between the Company and each holder of Company
Securities who receives the Initial Merger Consideration;
(m) the Buyer shall have received from counsel to the Company an
opinion with respect to the matters set forth in Exhibit G attached hereto,
addressed to the Buyer dated as of the Closing Date;
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(n) the Company shall not have delivered any update to the Company
Disclosure Schedule pursuant to Section 4.10 hereof and shall have delivered a
certificate, executed by its President, to such effect;
(o) the Company shall cancel all Company Options and Company
Warrants, it being understood by the parties that each Company Stockholder shall
be an "accredited investor" as defined in Rule 502 promulgated under the
Securities Act and each such holder shall be a party to this Agreement; and
(p) the Buyer shall have received such other certificates and
instruments (including without limitation certificates of good standing of the
Company in their jurisdiction of organization and the various foreign
jurisdictions in which they are qualified, certified charter documents,
certificates as to the incumbency of officers and the adoption of authorizing
resolutions) as it shall reasonably request in connection with the Closing.
5.3 Conditions to Obligations of the Company. The obligation of the
Company to consummate the Merger is subject to the satisfaction on or prior to
the Closing of the following additional conditions:
(a) the representations and warranties of the Buyer and the
Transitory Subsidiary set forth in this Agreement shall be true and correct in
all respects, except to the extent such representations and warranties are
specifically made as of a particular date (in which case such representations
and warranties shall be true and correct as of such date);
(b) each of the Buyer and the Transitory Subsidiary shall have
performed or complied in all material respects with its agreements and covenants
required to be performed or complied with under this Agreement as of or prior to
the Effective Time;
(c) no Legal Proceeding shall be pending or threatened wherein an
unfavorable judgment, order, decree, stipulation or injunction would (i) prevent
consummation of any of the transactions contemplated by this Agreement or (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation, and no such judgment, order, decree, stipulation or
injunction shall be in effect;
(d) the Buyer shall have delivered to the Company a certificate (the
"Buyer Certificate") to the effect that each of the conditions specified in
clauses (a) through (c) (insofar as clause (c) relates to Legal Proceedings
involving the Buyer or the Transitory Subsidiary) of this Section 5.3 is
satisfied in all material respects;
(e) the Buyer shall have delivered to the Company Stockholders the
Initial Merger Consideration;
(f) the Company shall have received from the Buyer an executed
Escrow Agreement in the form attached hereto as Exhibit B;
(g) the Buyer shall have deposited with the Escrow Agent the Escrow
Amount;
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(h) the Buyer shall have delivered to the Stockholders'
Representative the Contingent Note in the form attached hereto as Exhibit C and
the Buyer Guaranty in the form attached hereto as Exhibit D;
(i) the Buyer shall have delivered to the Company and Russell L.
Madris an executed Employment Agreement in the form attached hereto as Exhibit
E;
(j) the Company shall have received from counsel to the Buyer and
the Transitory Subsidiary an opinion with respect to the matters set forth in
Exhibit H attached hereto, addressed to the Company and dated as of the Closing
Date;
(k) the Buyer shall not have delivered any update to the Buyer
Disclosure Schedule pursuant to Section 4.10 hereof and shall have delivered a
certificate, executed by its President, to such effect; and
(l) the Company shall have received such other certificates and
instruments (including without limitation certificates of good standing of the
Buyer and the Transitory Subsidiary in their jurisdiction of organization,
certified charter documents, certificates as to the incumbency of officers and
the adoption of authorizing resolutions) as it shall reasonably request in
connection with the Closing.
ARTICLE VI
INDEMNIFICATION
6.1 Indemnification by Russell L. Madris. The Company prior to the Closing
and Russell L. Madris on and after the Closing shall indemnify the Buyer in
respect of, and hold it harmless against, any and all debts, obligations and
other liabilities (whether absolute, accrued, contingent, fixed or otherwise, or
whether known or unknown, or due or to become due or otherwise), monetary
damages, fines, fees, penalties, interest obligations, deficiencies, losses and
expenses (including without limitation amounts paid in settlement, interest,
court costs, costs of investigators, fees and expenses of attorneys,
accountants, financial advisors and other experts, and other expenses of
litigation) ("Damages") incurred or suffered by the Surviving Corporation or the
Buyer or any Affiliate thereof resulting from, relating to or constituting:
(a) any breach of any representation or warranty of the Company
contained in this Agreement;
(b) any failure to perform any covenant or agreement of the Company
contained in this Agreement;
(c) any failure of the Company Stockholders to have good, valid and
marketable title to the issued and outstanding Company Capital Stock issued in
the name of the Company Stockholders, free and clear of all Security Interests;
(d) any claim by a stockholder or former stockholder, optionholder
or former optionholder, warrantholder or former warrantholder, of the Company,
or any other person or entity, seeking to assert, or based upon: (i) ownership
or rights to ownership of any shares of stock of the Company; (ii) any rights of
a stockholder (including the right to receive the Per
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Share Merger Consideration pursuant to this Agreement or appraisal rights under
the applicable provisions of the FBCA), including any option, preemptive rights
or rights to notice or to vote; (iii) any rights under the Articles of
Incorporation or By-laws of the Company; or (iv) any claim that his, her or its
shares were wrongfully repurchased by the Company;
(e) any Taxes of the Company with respect to any Tax year or portion
thereof ending on or ended before the Closing Date including, without
limitation, any Tax liability arising out of the failure of the Company to
qualify as an S corporation including the loss of tax benefits arising out of
the inability of the Buyer to make an effective Section 338(h)(10) election
pursuant to Section 4.7 of this Agreement, but excluding any Tax liability
payable by the Company (and not the Company Stockholders) arising out of any
Section 338(h)(10) Election (the Company Stockholders acknowledge that the Buyer
has been induced to enter into this Agreement and has agreed to the Merger
Consideration on the basis of representations of the Company and the Company
Stockholders, including, without limitation, a representation that the Company
is qualified as a Subchapter S corporation under the Code); or
(f) any distribution made pursuant to Section 4.2(a)(A)(ii) to the
extent such distribution exceeds the actual amount of Taxes (other than the S
Corporation Stockholder Tax Liability) payable by the Company Stockholders for
the periods referred to in Section 4.2(a)(A)(i) and any distribution to the
extent it exceeds the distributions permitted under Section 4.2(a).
6.2 Indemnification by the Buyer.
(a) The Buyer shall indemnify the Company prior to the Closing and
the Company Stockholders on or after the Closing in respect of, and hold them
harmless against, any and all Damages incurred or suffered by the Company
Stockholders resulting from, relating to or constituting any misrepresentation,
breach of a representation or warranty or failure to perform any covenant or
agreement of the Buyer or the Transitory Subsidiary contained in this Agreement
or the Buyer Certificate; or
(b) The Buyer shall indemnify, or cause the Company to indemnify,
the Company Stockholders to the extent the distribution made pursuant to Section
4.2(a)(A)(ii) is less than the amount of the actual S Corporation Stockholder
Tax Liability.
6.3 Indemnification Claims.
(a) A party entitled, or seeking to assert rights, to
indemnification under this Article VI (an "Indemnified Party") shall give
written notification to the party from whom indemnification is sought (an
"Indemnifying Party") of the commencement of any suit or proceeding relating to
a third party claim for which indemnification pursuant to this Article VI may be
sought. Such notification shall be given within 20 business days after receipt
by the Indemnified Party of notice of such suit or proceeding, and shall
describe in reasonable detail (to the extent known by the Indemnified Party) the
facts constituting the basis for such suit or proceeding and the amount of the
claimed damages; provided, however, that no delay on the part of the Indemnified
Party in notifying the Indemnifying Party shall relieve the Indemnifying Party
of any liability or obligation hereunder except to the extent of any damage or
liability caused by
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or arising out of such failure. Within 20 days after delivery of such
notification, the Indemnifying Party may, upon written notice thereof to the
Indemnified Party, assume control of the defense of such suit or proceeding with
counsel reasonably satisfactory to the Indemnified Party. If the Indemnifying
Party does not so assume control of such defense, the Indemnified Party shall
control such defense. The party not controlling such defense (the
"Non-controlling Party") may participate therein at its own expense; provided
that if the Indemnified Party reasonably concludes that the Indemnifying Party
and the Indemnified Party have conflicting interests or different defenses
available with respect to such suit or proceeding, the Indemnifying Party shall
not have the right to assume control of such defense and the reasonable fees and
expenses of counsel to the Indemnified Party shall be considered "Damages" for
purposes of this Agreement. The party controlling such defense (the "Controlling
Party") shall keep the Non-controlling Party advised of the status of such suit
or proceeding and the defense thereof and shall consider in good faith
recommendations made by the Non-controlling Party with respect thereto. The
Non-controlling Party shall furnish the Controlling Party with such information
as it may have with respect to such suit or proceeding (including copies of any
summons, complaint or other pleading which may have been served on such party
and any written claim, demand, invoice, billing or other document evidencing or
asserting the same) and shall otherwise cooperate with and assist the
Controlling Party in the defense of such suit or proceeding. The Indemnifying
Party shall not agree to any settlement of, or the entry of any judgment arising
from, any such suit or proceeding without the prior written consent of the
Indemnified Party, which shall not be unreasonably withheld or delayed; provided
that the consent of the Indemnified Party shall not be required if the
Indemnifying Party agrees in writing to pay any amounts payable pursuant to such
settlement or judgment and such settlement or judgment includes a complete
release of the Indemnified Party from further liability and has no other adverse
effect on the Indemnified Party. The Indemnified Party shall not agree to any
settlement of, or the entry of any judgment arising from, any such suit or
proceeding without the prior written consent of the Indemnifying Party, which
shall not be unreasonably withheld or delayed.
(b) In order to seek indemnification under this Article VI, an
Indemnified Party shall give written notification (a "Claim Notice") to the
Indemnifying Party which contains (i) a description and the amount (the "Claimed
Amount") of any Damages incurred or reasonably expected to be incurred by the
Indemnified Party, (ii) a statement that the Indemnified Party is entitled to
indemnification under this Article VI for such Damages and a reasonable
explanation of the basis therefor, and (iii) a demand for payment (in the manner
provided in paragraph (c) below) in the amount of such Damages.
(c) Within 20 days after delivery of a Claim Notice, the
Indemnifying Party shall deliver to the Indemnified Party and, if the
Indemnifying Party is the Company Stockholders and the Escrow Agreement has not
terminated pursuant to its terms, to the Escrow Agent a written response (the
"Response") in which the Indemnifying Party shall: (i) agree that the
Indemnified Party is entitled to receive all of the Claimed Amount (in which
case the Response shall be accompanied by a payment by the Indemnifying Party to
the Indemnified Party of the Claimed Amount, by check or by wire transfer, or
the Response shall include written instructions directing the Escrow Agent to
deliver the Claimed Amount to the Buyer from the Escrow Fund (or some
combination thereof); (ii) agree that the Indemnified Party is entitled to
receive part, but not all, of the Claimed Amount (the "Agreed Amount") (in which
case the Response shall be accompanied by a payment by the Indemnifying Party to
the Indemnified
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Party of the Agreed Amount, by check or by wire transfer, or the Response shall
include written instructions directing the Escrow Agent to deliver the Agreed
Amount to the Buyer from the Escrow Fund (or some combination thereof) or (iii)
dispute that the Indemnified Party is entitled to receive any of the Claimed
Amount. If no Response is delivered within 20 days after delivery of a Claim
Notice, the Indemnifying Party shall be deemed to have agreed that the
Indemnified Party is entitled to receive all of the Claimed Amount. If the
Indemnifying Party shall not have agreed or be deemed to agree that the
Indemnified Party is entitled to receive all of the Claimed Amount, such dispute
shall be resolved pursuant to the procedures in Section 8.8 hereof. If the
Indemnified Party is the Buyer, it shall seek to satisfy any Claimed Amount and
any Agreed Amount by first applying amounts held pursuant to the Escrow
Agreement or offsetting against amounts due under the (x) Escrowed Consideration
as provided in Section 1.7(a) or (y)Earnout Consideration as set forth on
Schedule A for the Fiscal Year in which such Claim Notice is made; provided,
however, that any such application of amounts held pursuant to the Escrow
Agreement or offset against amounts due under the Earnout Consideration for such
Fiscal Year shall only satisfy any Claimed Amount or Agreed Amount to the extent
such amounts held pursuant to the Escrow Agreement or due under the Earnout
Consideration for such Fiscal Year would have been payable to the Company
Stockholders pursuant to Section 1.7 hereof in the absence of an indemnification
claim under this Article VI and if such amounts would not otherwise be so
payable, the Indemnifying Party shall repay Merger Consideration previously paid
in an amount sufficient to satisfy such Claimed Amount and/or Agreed Amount
determined pursuant to this Article VI to be due that has not otherwise been
paid (or deemed paid, after the application of this proviso). Notwithstanding
any other provision in this Article VI, to the extent the Claimed Amount or
Agreed Amount (together with any other unpaid Claimed Amounts or Agreed Amounts)
determined pursuant to this Article VI to be due exceeds the amounts then held
pursuant to the Escrow Agreement and the maximum amount of Earnout Consideration
set forth on Schedule A that may be payable for the Fiscal Year in which such
Claim Notice is made, the Buyer shall be entitled to obtain such amount directly
from the Company Stockholders. In applying amounts held pursuant to the Escrow
Agreement, in addition to following the procedures of this Article VI, the Buyer
shall follow the procedures set forth in Section 3 of the Escrow Agreement.
(d) Notwithstanding the other provisions of this Section 6.3, if a
third party asserts (other than by means of a lawsuit) that an Indemnified Party
is liable to such third party for a monetary or other obligation which may
constitute or result in Damages for which such Indemnified Party may be entitled
to indemnification pursuant to this Article VI, and such Indemnified Party
reasonably determines that it has a valid business reason to fulfill such
obligation, then (i) such Indemnified Party shall be entitled to satisfy such
obligation, without prior notice to or consent from the Indemnifying Party, (ii)
such Indemnified Party may subsequently make a claim for indemnification in
accordance with the provisions of this Article VI, and (iii) such Indemnified
Party shall be reimbursed, in accordance with the provisions of this Article VI,
for any such Damages for which it is entitled to indemnification pursuant to
this Article VI (subject to the right of the Indemnifying Party to dispute the
Indemnified Party's entitlement to indemnification, or the amount for which it
is entitled to indemnification, under the terms of this Article VI).
(e) Any amounts paid pursuant to this Article VI shall be treated
for tax purposes as an adjustment to the Merger Consideration.
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6.4 Survival of Representations, Warranties, Covenants and Other
Agreements. All representations and warranties, covenants and other agreements
contained in this Agreement shall (a) survive the Closing and any investigation
at any time made by or on behalf of an Indemnified Party and (b) shall expire on
the date the Buyer files or should have filed after giving effect to any
extensions granted by the appropriate governmental agency its financial
statements for its fiscal year ending December 31, 2004 with the Securities and
Exchange Commission, except that (i) the representations and warranties set
forth in Sections 2.1, 2.2, 2.3, 3.1 and 3.2 and the covenants and other
agreements shall survive the Closing without limitation and (ii) the
representations and warranties set forth in Sections 2.8, 2.22 and 2.23 shall
survive until 30 days following expiration of all statutes of limitation
applicable to the matters referred to therein. If an Indemnified Party delivers
to an Indemnifying Party, before expiration of a representation or warranty,
either a Claim Notice based upon a breach of such representation or warranty, or
a notice that, as a result a legal proceeding instituted by or claim made by a
third party, the Indemnified Party reasonably expects to incur Damages (an
"Expected Claim Notice"), then the applicable representation or warranty shall
survive until, but only for purposes of, the resolution of the matter covered by
such notice. If the legal proceeding or written claim with respect to which an
Expected Claim Notice has been given is definitively withdrawn or resolved in
favor of the Indemnified Party, the Indemnified Party shall promptly so notify
the Indemnifying Party.
6.5 Limitations.
(a) Notwithstanding anything to the contrary herein, (i) the
aggregate liability of Russell L. Madris for Damages under Section 6.1(a), (A)
if resulting from any claim by a person or entity other than the Buyer made
prior to the date the Buyer files or should have filed after giving effect to
any extensions granted by the appropriate governmental agency its financial
statements for its fiscal year ending December 31, 2003 with the Securities and
Exchange Commission (the "Second Fiscal Year Date"), shall not exceed the Merger
Consideration less $10,000,000 of the Initial Merger Consideration, (B) if
resulting from any other claim by the Buyer from the Closing Date through the
Second Fiscal Year Date, shall not exceed the Merger Consideration less
$20,000,000 of the Initial Merger Consideration and (C) if claimed after the
Second Fiscal Year Date shall not exceed the aggregate of the Escrowed
Consideration and the Earnout Consideration whether or not previously paid, and
(ii) Russell L. Madris shall be liable under Section 6.1(a) for only that
portion of the aggregate Damages for which he would otherwise be liable which
exceeds $250,000; provided that the limitation set forth in this sentence shall
not apply to a claim pursuant to Section 6.1(a) relating to a breach of the
representations and warranties set forth in Sections 2.1, 2.2 or 2.3. For
purposes solely of this Article VI, all representations and warranties of the
Company in Article II (other than Section 2.35) shall be construed as if the
term "material" and any reference to "Company Material Adverse Effect" (and
variations thereof) were omitted from such representations and warranties.
(b) Notwithstanding anything to the contrary herein, (i) the
aggregate liability of the Buyer for Damages under Section 6.2 with respect to
any misrepresentation or breach of representation or warranty shall not exceed
the amount of Merger Consideration for which Russell L. Madris would be liable
under Section 6.5(a) above if such claim had been a claim brought by the Buyer,
and (ii) the Buyer shall be liable under Section 6.2 with respect to any
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misrepresentation or breach of representation or warranty for only that portion
of the aggregate Damages for which it would otherwise be liable which exceeds
$250,000; provided that the limitation set forth in this sentence shall not
apply to a claim pursuant to Section 6.2 relating to a misrepresentation, or
breach of the representations and warranties, set forth in Sections 3.1 or 3.2.
For purposes solely of this Article VI, all representations and warranties of
the Buyer in Article III shall be construed as if the term "material" and any
reference to "Buyer Material Adverse Effect" (and variations thereof) were
omitted from such representations and warranties.
(c) Except with respect to claims based on fraud, after the Closing,
the rights of the Indemnified Parties under this Article VI shall be the
exclusive remedy of the Indemnified Parties with respect to claims resulting
from or relating to any misrepresentation, breach of warranty or failure to
perform any covenant or agreement contained in this Agreement.
(d) The Company Stockholders shall not have any right of
contribution against the Company or the Surviving Corporation with respect to
any breach by the Company of any of its representations, warranties, covenants
or agreements whether under any indemnification provisions or otherwise.
ARTICLE VII
TERMINATION
7.1 Termination of Agreement. The Parties may terminate this Agreement
prior to the Effective Time (whether before or after Requisite Stockholder
Approval), as provided below:
(a) by mutual written consent of the Company and the Buyer;
(b) by either the Buyer or the Company if the Merger shall not have
been consummated by May 31, 2002 (the "Outside Date") (provided that the right
to terminate this Agreement under this Section 7.1(b) shall not be available to
any Party whose failure to fulfill any obligation under this Agreement has been
a principal cause of or resulted in the failure of the Merger to occur on or
before the Outside Date);
(c) by the Buyer in the event the Company is in breach of any
representation, warranty or covenant contained in this Agreement, and such
breach, individually or in combination with any other such breach, (i) would
cause the conditions set forth in clauses (b) or (c) of Section 5.2 not to be
satisfied and (ii) is not cured within 20 days following delivery by the Buyer
to the Company of written notice setting forth in reasonable detail the
circumstances giving rise to such breach;
(d) by the Company in the event the Buyer or the Transitory
Subsidiary is in breach of any representation, warranty or covenant contained in
this Agreement, and such breach, individually or in combination with any other
such breach, (i) would cause the conditions set forth in clauses (a) or (b) of
Section 5.3 not to be satisfied and (ii) is not cured within 20 days following
delivery by the Company to the Buyer of written notice setting forth in
reasonable detail the circumstances giving rise to such breach; or
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(e) by the Buyer, if the Company shall have delivered an update to
the Company Disclosure Schedule pursuant to Section 4.10 hereof, or by the
Company, if the Buyer shall have delivered an update to the Buyer Disclosure
Schedule pursuant to Section 4.10 hereof.
7.2 Effect of Termination. Any right of termination hereunder shall be
exercised by written notice of termination given by the terminating Party to the
other Parties in the manner provided in Section 8.7 below. If any Party
terminates this Agreement pursuant to Section 7.1, all obligations of the
Parties (other than those set forth in the Confidentiality Agreement as amended
hereby) hereunder shall terminate without any liability of any Party to any
other Party (except for any liability of any Party for willful breaches of this
Agreement or for payment of expenses pursuant to the last sentence of Section
4.4 hereof).
ARTICLE VIII
MISCELLANEOUS
8.1 Press Releases and Announcements. Neither the Company nor any
representative or agent of the Company shall issue any press release or public
announcement relating to the subject matter of this Agreement without the prior
written approval of the Buyer. The Buyer may make any public disclosure it
believes in good faith is required by applicable law, regulation or stock market
rule (in which case the Buyer shall use reasonable efforts to advise the Company
and provide it with a copy of the proposed disclosure prior to making the
disclosure).
8.2 No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns except as expressly provided for in this
Agreement; provided, however, that (a) the provisions in Article I concerning
payment of the Per Share Merger Consideration and (b) the provisions of Article
VI concerning indemnification are intended for the benefit of the Company
Stockholders.
8.3 Entire Agreement. This Agreement (including the documents referred to
in Article V and elsewhere herein) constitutes the entire agreement among the
Parties and supersedes any prior understandings, agreements or representations
by or among the Parties, written or oral, with respect to the subject matter
hereof, including, without limitation, the Letter, dated December 17, 2001, from
the Buyer to the Company. Notwithstanding the foregoing, the Parties acknowledge
the letter of even date herewith from the Buyer to the Company and acknowledged
by the Company expressing the respective agreement of each concerning operations
of the Surviving Corporation following the Closing.
8.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests or obligations hereunder without the prior written approval of
the other Parties; provided that the Transitory Subsidiary may assign its
rights, interests and obligations hereunder to an Affiliate of the Buyer.
8.5 Counterparts and Facsimile Signature. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original but all
of which together shall
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constitute one and the same instrument. This Agreement may be executed by
facsimile signature.
8.6 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.7 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly delivered four business
days after it is sent by registered or certified mail, return receipt requested,
postage prepaid, or one business day after it is sent for next business day
delivery via a reputable nationwide overnight courier service, in each case to
the intended recipient as set forth below:
If to the Company: Copy to:
MoreDirect, Inc. Greenberg Traurig LLP
7300 N. Federal Highway 1221 Brickell Avenue
Suite 200 Miami, FL 33131
Boca Raton, FL 33487 Attn: Andrew E. Balog, Esq.
Attn: Russell L. Madris, President Telephone: (305) 579-0500
Telephone: (501) 237-3300 Facsimile: (305) 579-0717
Facsimile: (501) 423-5172
If to the Stockholders' Copy to:
Representative:
Greenberg Traurig LLP
Russell L. Madris 1221 Brickell Avenue
c/o MoreDirect, Inc. Miami, FL 33131
7300 N. Federal Highway Attn: Andrew E. Balog, Esq.
Suite 200 Telephone: (305) 579-0500
Boca Raton, FL 33487 Facsimile: (305) 579-0717
Telephone: (501) 237-3300
Facsimile: (501) 423-5172
If to the Buyer or the Transitory Copy to:
Subsidiary:
PC Connection, Inc. Hale and Dorr LLP
Route 101A, 730 Milford Road 60 State Street
Merrimack, NH 03054 Boston, MA 02109
Attn: Chief Financial Officer Attn: Jay E. Bothwick, Esq.
Telephone: (603) 423-2000 Telephone: (617) 526-6000
Facsimile: (603) 423- 2041 Facsimile: (617) 526-5000
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Any Party may give any notice, request, demand, claim or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail or
electronic mail), but no such notice, request, demand, claim or other
communication shall be deemed to have been duly given unless and until it
actually is received by the party for whom it is intended. Any Party may change
the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
8.8 Arbitration of Disputes. Disputes concerning the determination of the
calculation of EBIT for each Fiscal Year shall be settled as provided for in
Section 1.7(e). Disputes concerning the letter of even date herewith from the
Buyer to the Company shall be settled as provided for therein. Any other
controversy or claim arising out of or relating to this Agreement, or a breach
thereof, shall be settled according to the following provisions:
(a) The Buyer and the Stockholders Representative shall first use
reasonable efforts to resolve the dispute.
(b) If the Buyer and the Stockholders Representative are unable to
resolve such dispute within 20 days of the commencement of the dispute, the
dispute shall be submitted to binding arbitration to be conducted in Concord,
New Hampshire before a panel of three arbitrators (the "Arbitrators") in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association (the "AAA") and the procedures set forth herein.
(c) In the event of any conflict between the Commercial Rules in
effect from time to time and the provisions of this Agreement, the provisions of
this Agreement shall prevail and be controlling.
(d) Either the Buyer or the Stockholders Representative may commence
the arbitration by filing a written submission with the Boston, Massachusetts
office of the AAA in accordance with Rule 4 (or any successor provision) of the
Commercial Arbitration Rules and the other shall respond in accordance with said
Rule 4 (or any successor provision). Each of the Buyer and the Stockholders
Representative shall select one Arbitrator from the list provided by the AAA
consistent with Rule 13(a) (or any successor provision) and the two Arbitrators
so chosen (or the AAA) shall jointly select a third in accordance with Rule 15
(or any successor provision).
(e) The Arbitrators' determination shall be governed by and
construed in accordance with the internal laws of the State of New Hampshire.
Any determination rendered by the Arbitrators shall be final, conclusive and
binding upon the parties hereto, and judgment thereon may be entered and
enforced in any court of competent jurisdiction within the State of New
Hampshire, provided that the Arbitrators shall have no power or authority to
grant injunctive relief, specific performance or other equitable relief although
any court enforcing such award shall specifically be authorized to grant such
relief. Either the Buyer or the Stockholders Representative may provide a copy
of the Arbitrators' determination to the Escrow Agent under the Escrow
Agreement.
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(f) The Arbitrators shall have no power or authority, under the
Commercial Rules or otherwise, to (x) modify or disregard any provision of this
Agreement, (y) address or resolve any issue not submitted by the parties, or (z)
award multiple, consequential, punitive or exemplary damages.
(g) In connection with any arbitration proceeding pursuant to this
Agreement, unless the Arbitrators shall determine otherwise, each party shall
bear its own costs and expenses, except that the fees and costs of the AAA and
the Arbitrators, the costs and expenses of obtaining the facility where the
arbitration hearing is held, and such other costs and expenses as the
Arbitrators may determine to be directly related to the conduct of the
arbitration and appropriately borne jointly by the parties.
(h) Notwithstanding the applicability of the AAA's Emergency Interim
Relief Procedures, a party may initiate an action in a court of competent
jurisdiction and may seek interim measures (including without limitation
temporary restraining orders and preliminary injunctions) necessary to protect
the interests of such party pending the arbitration. In such case, the court
shall be free to act on all requests for interim measures from time to time, but
shall otherwise stay the action pending the arbitration (which the court may
compel). If any such action is still pending at the time of the Arbitrators'
award, either party may apply to such court for entry of judgment on, and
enforcement of, the arbitrator's award, including without limitation any
equitable relief awarded by the Arbitrators.
8.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New Hampshire without giving
effect to any choice or conflict of law provision or rule (whether of the State
of New Hampshire or any other jurisdiction) that would cause the application of
laws of any jurisdictions other than those of the State of New Hampshire;
provided that matters related to filings made under the FBCA and the effect of
the Merger shall be governed by Florida law.
8.10 Submission to Jurisdiction. Each of the Parties submits to the
exclusive jurisdiction of all state or federal courts sitting in the State of
New Hampshire in any suit, action or proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby, agrees that all claims
in respect of any suit, action or proceeding may be heard and determined in any
such court and irrevocably and unconditionally agrees not to bring any suit,
action or proceeding arising out of or relating to the this Agreement or the
transactions contemplated hereby in any other court. Service of process,
summons, notice or document by mail to a Party's address set forth above shall
be effective service of process for any suit, action or proceeding brought in
any such court.
8.11 Amendments and Waivers. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time. No amendment of any
provision of this Agreement shall be valid unless the same shall be in writing
and signed by all of the Parties. No waiver of any right or remedy hereunder
shall be valid unless the same shall be in writing and signed by the Party
giving such waiver. No waiver by any Party with respect to any default,
misrepresentation or breach of warranty or covenant hereunder shall be deemed to
extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
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8.12 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to limit the term or
provision, to delete specific words or phrases, or to replace any invalid or
unenforceable term or provision with a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid or
unenforceable term or provision, and this Agreement shall be enforceable as so
modified.
8.13 Interpretation. When reference is made in this Agreement to an
Article or a Section, such reference shall be to an Article or Section of this
Agreement, unless otherwise indicated. The table of contents, table of defined
terms and headings contained in this Agreement are for convenience of reference
only and shall not affect in any way the meaning or interpretation of this
Agreement. The language used in this Agreement shall be deemed to be the
language chosen by the Parties hereto to express their mutual intent, and no
rule of strict construction shall be applied against any Party. Whenever the
context may require, any pronouns used in this Agreement shall include the
corresponding masculine, feminine or neuter forms, and the singular form of
nouns and pronouns shall include the plural, and vice versa. Any reference to
any federal, state, local or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." No summary of this Agreement prepared by any Party shall
affect the meaning or interpretation of this Agreement.
8.14 Remedies. Except as otherwise provided herein, any and all remedies
herein expressly conferred upon a Party shall be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
Party, and the exercise by a Party of any one remedy shall not preclude the
exercise of any other remedy. The Parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the Parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, this being in addition to any other
remedy to which the Parties are entitled at law or in equity.
8.15 WAIVER OF JURY TRIAL. EACH OF THE BUYER, THE TRANSITORY SUBSIDIARY
AND THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THE ACTIONS OF THE BUYER, THE TRANSITORY SUBSIDIARY OR
THE COMPANY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT OF
THIS AGREEMENT.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed by
their respective officers thereunto duly authorized as of the date first written
above.
PC CONNECTION, INC.
/s/ Wayne L. Wilson
-------------------------------
Name:
Title:
BOCA ACQUISITION CORP.
/s/ Wayne L. Wilson
-------------------------------
Name:
Title:
MOREDIRECT, INC.
/s/ Russell Madris
-------------------------------
Name:
Title:
COMPANY STOCKHOLDERS
/s/ Russell Madris
-------------------------------
Russell L. Madris
/s/ Michael Diamant
-------------------------------
Michael Diamant
/s/ James R. Garrity
-------------------------------
James R. Garrity
/s/ Scott J. Modist
-------------------------------
Scott J. Modist
SCHEDULE A
Earnout Consideration under Section 1.7(b) of the Merger Agreement
(amounts set forth in the following tables are in thousands)
------------------------------------------------------ -----------------------------------------------------------
Fiscal Year 2002 Fiscal Year 2003
------------------------------------------------------ -----------------------------------------------------------
% of Earnout % of Earnout
Goal EBIT % of EBIT Consideration Goal EBIT % of EBIT Consideration
------------------------------------------------------ -----------------------------------------------------------
Floor 60% $ 7,590 41% 3,112 60% $ 8,729 41% 3,579
80% 10,120 41% 4,149 80% 11,638 41% 4,772
100% 12,650 41% 5,187 100% 14,548 41% 5,964
120% 15,180 44% 6,679 120% 17,457 44% 7,681
140% 17,710 47% 8,324 140% 20,367 47% 9,572
150% 18,975 50% 9,488 150% 21,821 50% 10,911
160% 20,240 53% 10,727 160% 23,276 53% 12,336
170% 21,505 56% 12,043 170% 24,731 56% 13,849
180% 22,770 59% 13,434 180% 26,186 59% 15,449
190% 24,035 62% 14,902 190% 27,640 62% 17,137
Ceiling 200% 25,300 65% 16,445 200% 29,095 65% 18,912
------------------------------------------------------ -----------------------------------------------------------
--------------------------------------------------------
Fiscal Year 2004
--------------------------------------------------------
% of Earnout
Goal EBIT % of EBIT Consideration
--------------------------------------------------------
Floor 60% $10,038 41% 4,115
80% 13,384 41% 5,487
100% 16,730 41% 6,859
120% 20,076 44% 8,833
140% 23,421 47% 11,008
150% 25,094 50% 12,547
160% 26,767 53% 14,187
170% 28,440 56% 15,927
180% 30,113 59% 17,767
190% 31,786 62% 19,707
Ceiling 200% 33,459 65% 21,749
--------------------------------------------------------
If EBIT in Fiscal 2002, 2003 or 2004 is below the 60% of goal (as set forth in
the above table for the respective Fiscal Year), no EBIT Consideration payment
shall be made for the respective Fiscal Year.
If EBIT in Fiscal 2002, 2003 or 2004 is above 200% of goal (as set forth in the
above table for the respective Fiscal Year), the EBIT Consideration payment
shall not exceed the amount set forth at 200% of goal (as set forth in the above
table for the respective Fiscal Year) regardless of the EBIT achieved for the
respective Fiscal Year.
If EBIT in Fiscal 2002, 2003 or 2004 falls between any percentage of goal (as
set forth in the above table for the respective Fiscal Year), the EBIT
Consideration payment shall be equal to the product of the prior percentage of
EBIT (as set forth in the above table for the respective Fiscal Year) and the
actual EBIT amount earned in the respective Fiscal Year.
For illustrative purposes only,
if EBIT in Fiscal Year 2002 is $6,000,000, then the Earnout Consideration is $0
if EBIT in Fiscal Year 2002 is $16,000,000, then the Earnout Consideration is
$7,040,000(44% * $16,000,000)
if EBIT in Fiscal Year 2002 is $26,000,000, then the Earnout Consideration is
$16,445,000
For illustrative purposes only,
if EBIT in Fiscal Year 2003 is $8,000,000, then the Earnout Consideration is $0
if EBIT in Fiscal Year 2003 is $12,000,000, then the Earnout Consideration is
$4,920,000 (41% * $12,000,000)
if EBIT in Fiscal Year 2003 is $30,000,000, then the Earnout Consideration is
$18,912,000
For illustrative purposes only,
if EBIT in Fiscal Year 2004 is $10,000,000, then the Earnout Consideration is $0
if EBIT in Fiscal Year 2004 is $17,000,000, then the Earnout Consideration is
$6,970,000 (41% * $17,000,000)
if EBIT in Fiscal Year 2004 is $35,000,000, then the Earnout Consideration is
$21,749,000