1
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
STUDENT ADVANTAGE, INC.,
ORION ACQUISITION CORP.,
OCM ENTERPRISES, INC.
AND ITS STOCKHOLDERS
June 25, 2001
2
TABLE OF CONTENTS
Page
ARTICLE I THE MERGER ......................................................... 1
1.1 The Merger .......................................................... 1
1.2 The Closing ......................................................... 1
1.3 Actions at the Closing .............................................. 2
1.4 Additional Action ................................................... 2
1.5 Conversion of Shares ................................................ 2
1.6 Fractional Shares ................................................... 4
1.7 Options ............................................................. 4
1.8 Escrow .............................................................. 5
1.9 Contingent Payment .................................................. 5
1.10 Certificate of Incorporation; By-laws; Directors and Officers ....... 10
1.11 No Further Rights ................................................... 11
1.12 Closing of Transfer Books ........................................... 11
1.13 Tax Treatment ....................................................... 11
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY ..................... 11
2.1 Organization, Qualification and Corporate Power ..................... 11
2.2 Capitalization ...................................................... 12
2.3 Authorization of Transaction ........................................ 13
2.4 Noncontravention .................................................... 13
2.5 Subsidiaries and Predecessors ....................................... 14
2.6 Financial Statements ................................................ 15
2.7 Absence of Certain Changes .......................................... 15
2.8 Undisclosed Liabilities ............................................. 16
2.9 Tax Matters ......................................................... 16
2.10 Assets .............................................................. 19
2.11 Owned Real Property ................................................. 19
2.12 Real Property Leases ................................................ 19
2.13 Intellectual Property ............................................... 20
2.14 Inventory ........................................................... 22
2.15 Contracts ........................................................... 22
2.16 Accounts Receivable ................................................. 24
2.17 Powers of Attorney .................................................. 24
2.18 Insurance ........................................................... 24
2.19 Litigation .......................................................... 25
2.20 Warranties .......................................................... 25
2.21 Employees ........................................................... 25
2.22 Employee Benefits ................................................... 26
2.23 Environmental Matters ............................................... 28
2.24 Legal Compliance .................................................... 29
2.25 Customers and Suppliers ............................................. 29
2.26 Permits ............................................................. 29
2.27 Certain Business Relationships With Affiliates ...................... 29
3
Table of Contents
(continued)
Page
2.28 FDA Matters ......................................................... 29
2.29 Brokers' Fees ....................................................... 30
2.30 Books and Records ................................................... 30
2.31 Disclosure .......................................................... 30
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER ...................... 30
3.1 Organization, Qualification and Corporate Power ..................... 30
3.2 Capitalization ...................................................... 31
3.3 Authorization of Transaction ........................................ 31
3.4 Noncontravention .................................................... 32
3.5 Reports and Financial Statements .................................... 32
3.6 Absence of Material Adverse Change .................................. 33
3.7 Litigation .......................................................... 33
3.8 Interim Operations of Acquisition Subsidiary ........................ 33
3.9 Brokers' Fees ....................................................... 33
3.10 Tax Matters ......................................................... 33
3.11 Disclosure .......................................................... 34
ARTICLE IV COVENANTS ......................................................... 34
4.1 Closing Efforts ..................................................... 34
4.2 Governmental and Third-Party Notices and Consents ................... 34
4.3 Stockholder Approval ................................................ 35
4.4 Operation of Business ............................................... 35
4.5 Access to Information ............................................... 36
4.6 Exclusivity ......................................................... 37
4.7 Tax Matters ......................................................... 37
4.8 Employee Matters .................................................... 40
4.9 Expenses ............................................................ 41
4.10 Actions by the Stockholders ......................................... 41
4.11 Release by Stockholders ............................................. 41
4.12 Collegiate Carpets, Inc. ............................................ 41
4.13 Tax Adjustment ...................................................... 41
ARTICLE V CONDITIONS TO CONSUMMATION OF MERGER ............................... 42
5.1 Conditions to Obligations of the Buyer and the Acquisition
Subsidiary......................................................... 42
5.2 Conditions to Obligations of the Company and the Stockholders ....... 44
ARTICLE VI INDEMNIFICATION ................................................... 45
6.1 Indemnification by the Stockholders ................................. 45
6.2 Indemnification Claims .............................................. 46
6.3 Survival of Representations, Warranties and Covenants ............... 49
6.4 Limitations ......................................................... 49
6.5 Appointment of Indemnification Representative ....................... 50
6.6 Indemnification by the Buyer ........................................ 51
ARTICLE VII TERMINATION ...................................................... 51
-ii-
4
Table of Contents
(continued)
Page
7.1 Termination of Agreement ............................................ 51
7.2 Effect of Termination ............................................... 52
ARTICLE VIII DEFINITIONS ..................................................... 52
ARTICLE IX MISCELLANEOUS ..................................................... 55
9.1 Press Releases and Announcements .................................... 55
9.2 No Third Party Beneficiaries ........................................ 55
9.3 Entire Agreement .................................................... 55
9.4 Succession and Assignment ........................................... 55
9.5 Counterparts and Facsimile Signature ................................ 56
9.6 Headings ............................................................ 56
9.7 Notices ............................................................. 56
9.8 Governing Law ....................................................... 56
9.9 Amendments and Waivers .............................................. 57
9.10 Severability ........................................................ 57
9.11 Submission to Jurisdiction .......................................... 57
9.12 Setoff .............................................................. 57
9.13 Remedies ............................................................ 57
9.14 Construction ........................................................ 58
Exhibits
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Investment Representation Letter
Exhibit C - Form of Lock-Up Agreement
Exhibit D - Form of Registration Rights Agreement
Exhibit E-1 - Form of Opinion of Counsel to the Company
Exhibit E-2 - Form of Opinion of Counsel to the Company
Exhibit F - Form of Resignation
Exhibit G - Form of Opinion of Counsel to the Buyer and Acquisition Subsidiary
Schedules
Schedule 1.5 - Election of Merger Consideration
Schedule 5.1(a) - Required Consents
-iii-
5
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into as
of June 25, 2001 by and among Student Advantage, Inc., a Delaware corporation
(the "Buyer"), Orion Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Buyer (the "Acquisition Subsidiary"), OCM
Enterprises, Inc., a Maryland corporation (the "Company"), and Devin A. Schain,
Michael S. Schoen, Paul D. Bogart, Howard S. Dumhart, Jr. and Steven L. Matejka,
the stockholders of the Company. The Buyer, the Acquisition Subsidiary, the
Company and Messrs. Schain, Schoen, Bogart, Dumhart and Matejka are referred to
collectively herein as the "Parties."
WHEREAS, this Agreement contemplates a merger of the Company with and
into the Acquisition Subsidiary, in which the stockholders of the Company will
receive common stock of the Buyer and cash in exchange for their shares of the
Company's capital stock;
WHEREAS, the Parties intend that the Merger (as defined below) will
qualify as a reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"), and the rules and regulations promulgated
thereunder, and intend that this Agreement will constitute a plan of
reorganization.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants herein contained, 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 the Delaware General Corporation Law (the
"Delaware Law") and the Maryland General Corporation Law (the "Maryland Law"),
the Company shall merge with and into the Acquisition Subsidiary (with such
merger referred to herein as the "Merger") at the Effective Time (as defined
below). From and after the Effective Time, the separate corporate existence of
the Company shall cease and the Acquisition Subsidiary shall continue as the
surviving corporation in the Merger (the "Surviving Corporation"). Subject to
the terms of this Agreement, the Buyer, the Acquisition Subsidiary and the
Company shall cause the Merger to be consummated by filing (i) a certificate of
merger or other appropriate documents (the "Certificate of Merger") prepared and
executed in accordance with Section 252(c) of the Delaware Law with the
Secretary of State of the State of Delaware and (ii) articles of merger or other
appropriate documents (the "Articles of Merger") prepared and executed in
accordance with Section 3-109 of the Maryland Law with the State Department of
Assessments and Taxation of Maryland (the "Department"). The Merger shall become
effective at such time as the Certificate of Merger is duly filed with the
Secretary of State of the State of Delaware and upon acceptance for record of
the Articles of Merger by the Department (the "Effective Time"). The Merger
shall have the effects set forth in the Delaware Law and the Maryland Law.
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 the date
hereof (the "Closing Date").
6
1.3 Actions at the Closing. At the Closing:
(a) the Company shall deliver to the Buyer and the
Acquisition Subsidiary the various certificates, instruments and documents
referred to in Section 5.1;
(b) the Buyer and the Acquisition Subsidiary shall
deliver to the Company the various certificates, instruments and documents
referred to in Section 5.2;
(c) the Surviving Corporation shall file the Certificate
of Merger with the Secretary of State of the State of Delaware and the Articles
of Merger with the Department;
(d) each of the stockholders of record of the Company
immediately prior to the Effective Time (the "Stockholders") shall deliver to
the Buyer the certificate(s) representing his Common Shares (as defined below);
(e) the Buyer shall pay to each Stockholder by wire
transfer to the account designated in writing by such Stockholder the cash into
which his Common Shares are converted pursuant to Section 1.5, and the Buyer
shall instruct the transfer agent for the Buyer's common stock, $.01 par value
per share ("Buyer Common Stock"), to deliver certificates for the Initial Shares
(as defined below) to each Stockholder in accordance with Section 1.5 at the
Closing; and
(f) the Buyer, Devin A. Schain, in his capacity as
indemnification representative for the Stockholders (the "Indemnification
Representative"), and United States Trust Company (the "Escrow Agent") shall
execute and deliver an Escrow Agreement in the form attached hereto as Exhibit A
(the "Escrow Agreement"), the Stockholders shall deliver to the Escrow Agent the
Escrow LC (as defined below) and blank stock powers (as described in Section
1.8), and the Buyer shall instruct the transfer agent for the Buyer Common Stock
to deliver to the Escrow Agent a certificate for the Escrow Shares (as defined
below) being placed in escrow on the Closing Date pursuant to Section 1.8.
1.4 Additional Action. The Surviving Corporation may, at any time
after the Effective Time, take any action, including executing and delivering
any document, in the name and on behalf of either the Company or the Acquisition
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
1.5 Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of any Party or the holder of any of
the following securities:
(a) Each share of common stock, $0.001 par value per
share, of the Company ("Common Shares") issued and outstanding immediately prior
to the Effective Time (other than Common Shares owned beneficially by the Buyer
or the Acquisition Subsidiary and Common Shares held in the Company's treasury,
all of which shall be cancelled and retired without any payment of any
consideration therefor in accordance with Section 1.5(e) below), shall be
converted into and represent the right to receive (i) either (A) an amount in
cash equal to the Option A Cash Amount (as defined below), without any interest
thereon, and such number of shares of Buyer Common Stock as is equal to the
Option A Conversion Ratio (as defined below) (collectively, the "Option A
Amount"), (B) an amount in cash equal to the Option B Cash Amount (as defined
below), without any interest thereon, and such number of shares of Buyer
-2-
7
Common Stock as is equal to the Option B Conversion Ratio (as defined below)
(collectively, the "Option B Amount"), (C) an amount in cash equal to the Option
C Cash Amount (as defined below), without any interest thereon, and such number
of shares of Buyer Common Stock as is equal to the Option C Conversion Ratio (as
defined below) (collectively, the "Option C Amount") or (D) an amount in cash
equal to the Option D Cash Amount (as defined below), without any interest
thereon, and such number of shares of Buyer Common Stock as is equal to the
Option D Conversion Ratio (as defined below) (collectively, the "Option D
Amount"), (ii) the right to receive the Deferred Consideration (as defined
below) not later than the first anniversary of the Closing Date, provided that
the Buyer shall have the right in its sole discretion to pay the Deferred
Consideration at any time on or prior to such first anniversary, and (iii)
subject to the provisions of Section 1.9, the Contingent Consideration (as
defined below) (collectively, the "Merger Consideration"); provided, however,
that the aggregate cash to be paid by the Buyer to the Stockholders pursuant to
clause (i) above shall not exceed $8,000,000 and the aggregate number of shares
of Buyer Common Stock to be issued to the Stockholders pursuant to clause (i)
above shall not exceed 2,433,333 (subject to equitable adjustment in the event
of any stock split, stock dividend, reverse stock split or similar event
affecting the Buyer Common Stock between the date hereof and the Effective
Time). The "Option A Cash Amount" shall be the result obtained by dividing
$6,740,839 by the number of outstanding Common Shares immediately prior to the
Effective Time. The "Option A Conversion Ratio" shall be the result obtained by
dividing 2,955,806 by the number of outstanding Common Shares immediately prior
to the Effective Time. The "Option B Cash Amount" shall be the result obtained
by dividing $8,847,944 by the number of outstanding Common Shares immediately
prior to the Effective Time. The "Option B Conversion Ratio" shall be the result
obtained by dividing 2,081,489 by the number of outstanding Common Shares
immediately prior to the Effective Time. The "Option C Cash Amount" shall be the
result obtained by dividing $4,031,692 by the number of outstanding Common
Shares immediately prior to the Effective Time. The "Option C Conversion Ratio"
shall be the result obtained by dividing 4,079,934 by the number of outstanding
Common Shares immediately prior to the Effective Time. The "Option D Cash
Amount" shall be the result obtained by dividing $10,000,640 by the number of
outstanding Common Shares immediately prior to the Effective Time. The "Option D
Conversion Ratio" shall be the result obtained by dividing 1,603,192 by the
number of outstanding Common Shares immediately prior to the Effective Time.
Each of the Option A Conversion Ratio, the Option B Conversion Ratio, Option C
Conversion Ratio and Option D Conversion Ratio shall be subject to equitable
adjustment in the event of any stock split, stock dividend, reverse stock split
or similar event affecting the Buyer Common Stock between the date hereof and
the Effective Time. The "Deferred Consideration" shall mean such number of
shares of Buyer Common Stock as is equal to the result obtained by dividing the
Deferred Stock Amount (as defined below) by the number of outstanding Common
Shares immediately prior to the Effective Time. The "Deferred Stock Amount"
shall be an amount equal to the result obtained by dividing $1,250,000 by the
greater of (i) the average of the last reported sale prices per share of the
Buyer Common Stock on The Nasdaq National Market ("Nasdaq") for the ten (10)
consecutive trading days ending on the trading day that is three (3) trading
days prior to the date of issuance of the Deferred Consideration or $6.00,
whichever is less, and (ii) $1.00.
(b) The Stockholders electing the Option A Amount, Option
B Amount, Option C Amount and Option D Amount shall be entitled to receive at
the Closing 86.98%, 81.84%, 85.49% and 74.82%, respectively, of the shares of
Buyer Common Stock into which
-3-
8
their Common Shares were converted pursuant to clause (i) of Section 1.5(a) (the
"Initial Shares"); the remaining 13.02%, 18.16%, 14.51% and 25.18%,
respectively, of the shares of Buyer Common Stock into which their Common Shares
were converted pursuant to clause (i) of Section 1.5(a), rounded to the nearest
whole number (the "Escrow Shares"), shall be deposited in escrow pursuant to
Section 1.8 and shall be held and disposed of in accordance with the terms of
the Escrow Agreement; provided that the aggregate number of Escrow Shares so
deposited shall not be less than 403,612. The Initial Shares and the Escrow
Shares shall together be referred to herein as the "Merger Shares."
(c) Subject to the allocation requirements set forth in
this Section 1.5, each Stockholder immediately prior to the execution hereof
irrevocably elected to receive either the Option A Amount, the Option B Amount,
the Option C Amount or the Option D Amount. All such elections are set forth on
Schedule 1.5 attached hereto.
(d) Each of the numbers of shares of Buyer Common Stock
and amounts in cash set forth in Section 1.5(a), and each of the percentages set
forth in Section 1.5(b) shall be subject to appropriate adjustment by mutual
agreement of the Buyer and the Indemnification Representative in the event that
the total number of Common Shares outstanding is not equal to 8,334,000.
(e) Each Common Share held in the Company's treasury
immediately prior to the Effective Time and each Common Share owned beneficially
by the Buyer or the Acquisition Subsidiary shall be canceled and retired without
payment of any consideration therefor.
(f) Each share of common stock, $0.01 par value per
share, of the Acquisition Subsidiary issued and outstanding immediately prior to
the Effective Time shall be converted into and thereafter evidence one share of
common stock, $0.01 par value per share, of the Surviving Corporation.
1.6 Fractional Shares. No certificates or scrip representing
fractional shares of Buyer Common Stock shall be issued to former Stockholders
upon the surrender for exchange of certificates that, immediately prior to the
Effective Time, represented Common Shares converted into Merger Shares pursuant
to Section 1.5 ("Certificates"), and such former Stockholders shall not be
entitled to any voting rights, rights to receive any dividends or distributions
or other rights as a stockholder of the Buyer with respect to any fractional
shares that would have otherwise been issued to such former Stockholders. In
lieu of any fractional shares that would have otherwise been issued, each former
Stockholder that would have been entitled to receive a fractional share shall,
upon proper surrender of such person's Certificates, receive a cash payment
equal to $2.256, multiplied by the fraction of a share that such Company
Stockholder would otherwise be entitled to receive.
1.7 Options. As of immediately prior to the Effective Time, each
outstanding option to acquire Common Shares issued under the Company's 2000
Stock Option Plan (the "Plan") or otherwise (collectively, the "Options"), shall
be terminated and canceled without payment of any consideration therefor. The
Buyer shall not assume any Options nor substitute an equivalent option or right
therefor. The Company shall terminate the Plan and all other stock option plans
-4-
9
and other stock or equity-related plans of the Company prior to the Effective
Time, and neither the Buyer nor the Surviving Corporation shall have any
liability or obligation thereunder.
1.8 Escrow. The Stockholders shall arrange for an irrevocable
standby letter of credit to be issued in a form acceptable to the Buyer in favor
of the Buyer in the original face amount of $1,112,892 (the "Escrow LC"). At the
Closing, the Buyer shall deliver to the Escrow Agent certificates (issued in the
name of each Stockholder) representing the Escrow Shares attributable to each
Stockholder (together with five blank stock powers in a form approved by the
Buyer), as described in Section 1.5, and the Stockholders shall deliver to the
Escrow Agent the Escrow LC, in each case, for the purpose of securing the
indemnification obligations of the Stockholders set forth in this Agreement. The
Escrow LC and the Escrow Shares shall be held by the Escrow Agent under the
Escrow Agreement pursuant to the terms thereof. The Escrow LC and the Escrow
Shares 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. Each Stockholder shall, as of the
Effective Time, be the lawful owner, subject to the terms and conditions of this
Agreement and Escrow Agreement, of the Escrow Shares into which such
Stockholder's Common Shares were converted in the Merger.
1.9 Contingent Payment.
(a) If the Business (as defined below) (i) enters into at
least seventy-five (75), but less than one hundred twenty-five (125), Qualifying
Discount Card Agreements (as defined below) during the twelve (12) month period
ending June 30, 2002 (the "Earn-Out Period"), provided that at least 75 of such
Qualifying Discount Card Agreements meet the Minimum Freshman Average Standard
(as defined below), and (ii) does not recognize Revenues (as defined below) at
least equal to the Target Revenue (as defined below), the "Contingent
Consideration" shall mean, at the election of the Buyer, either (A) such number
of shares of Buyer Common Stock as is equal to the Level 1 Contingent Share
Conversion Ratio (as defined below) or (B) subject to Section 1.9(k), a
combination of an amount in cash (not to exceed sixty percent (60%) of the Level
1 Cash Amount (as defined below)), without any interest thereon, and a number of
shares of Buyer Common Stock such that the sum of (x) such amount of cash and
(y) the result obtained by multiplying such number of shares of Buyer Common
Stock by the Average Price, is equal to the Level 1 Cash Amount.
(b) If the Business (i) (A) enters into less than
seventy-five (75) Qualifying Discount Card Agreements during the Earn-Out Period
and (B) recognizes Revenues at least equal to the Target Revenue, or (ii) (A)
enters into at least one hundred twenty-five (125) Qualifying Discount Card
Agreements during the Earn-Out Period, provided that at least 125 of such
Qualifying Discount Card Agreements meet the Minimum Freshman Average Standard
and (B) does not recognize Revenues at least equal to the Target Revenue, the
"Contingent Consideration" shall mean, at the election of the Buyer, either (1)
such number of shares of Buyer Common Stock as is equal to the Level 2
Contingent Share Conversion Ratio (as defined below) or (2) subject to Section
1.9(k), a combination of an amount in cash (not to exceed sixty percent (60%) of
the Level 2 Cash Amount (as defined below)), without any interest thereon, and a
number of shares of Buyer Common Stock such that the sum of (x) such amount of
cash and
-5-
10
(y) the result obtained by multiplying such number of shares of Buyer Common
Stock by the Average Price, is equal to the Level 2 Cash Amount.
(c) If the Business (i) enters into at least seventy-five
(75), but less than one hundred twenty-five (125), Qualifying Discount Card
Agreements during the Earn-Out Period, provided that at least 75 of such
Qualifying Discount Card Agreements meet the Minimum Freshman Average Standard
and (ii) recognizes Revenues at least equal to the Target Revenue, the
"Contingent Consideration" shall mean, at the election of the Buyer, either (A)
such number of shares of Buyer Common Stock as is equal to the Level 3
Contingent Share Conversion Ratio (as defined below) or (B) subject to Section
1.9(k), a combination of an amount in cash (not to exceed sixty percent (60%) of
the Level 3 Cash Amount (as defined below)), without any interest thereon, and a
number of shares of Buyer Common Stock such that the sum of (x) such amount of
cash and (y) the result obtained by multiplying such number of shares of Buyer
Common Stock by the Average Price, is equal to the Level 3 Cash Amount.
(d) If the Business (i) enters into one hundred
twenty-five (125) or more Qualifying Discount Card Agreements during the
Earn-Out Period, provided that at least 125 of such Qualifying Discount Card
Agreements meet the Minimum Freshman Average Standard and (ii) recognizes
Revenues at least equal to the Target Revenue, the "Contingent Consideration"
shall mean, at the election of the Buyer, either (A) such number of shares of
Buyer Common Stock as is equal to the Level 4 Contingent Share Conversion Ratio
(as defined below) or (B) subject to Section 1.9(k), a combination of an amount
in cash (not to exceed sixty percent (60%) of the Level 4 Cash Amount (as
defined below)), without any interest thereon, and a number of shares of Buyer
Common Stock such that the sum of (x) such amount of cash and (y) the result
obtained by multiplying such number of shares of Buyer Common Stock by the
Average Price, is equal to the Level 4 Cash Amount.
(e) The Business shall be deemed not to have recognized
Revenues at least equal to the Target Revenues if the Adjusted Gross Margin is
less than 36.73% of Revenues (without giving effect to any revenues generated as
a result of the sale of any Membership Cards) for the Earn-Out Period.
(f) Notwithstanding anything to the contrary contained
herein, if the Business (i) does not enter into Qualifying Discount Card
Agreements during the Earn-Out Period with at least seventy-five (75) colleges
or universities and (ii) does not recognize Revenues at least equal to the
Target Revenue, the Buyer's obligation to pay the Contingent Consideration shall
terminate and the Buyer shall not have any further obligation to pay any
Contingent Consideration.
(g) For purposes of this Section 1.9, the following terms
have the following meanings:
(i) "Adjusted Gross Margin" means the Revenues
of the Business (as defined below) less returns and
allowances, cost of goods sold, cost of school commissions
paid to sponsoring organizations, printing and mailing of
direct marketing materials, and delivery charges (freight out)
determined in accordance with GAAP (as defined below)
consistently applied; provided that the revenues
-6-
11
from the sale of Membership Cards, if any, shall not be
included in the Revenues of the Business for purposes of
determining "Adjusted Gross Margin."
(ii) "Average Price" means the greater of (A) the
average last reported sales price per share of the Buyer
Common Stock on the Nasdaq for the ten (10) consecutive
trading days ending on the trading day that is three (3)
trading days prior to the applicable date of issuance of the
Contingent Shares and (B) $1.00.
(iii) "Business" means the business of marketing,
warehousing, and distribution of (A) dormitory bed linens and
related accessories, care packages, diploma frames and carpet
remnants to students and parents of students by means of
relationships with colleges and universities or sponsoring
organizations of such colleges and universities, (B) executive
framing and (C) any other products which generated at least
$50,000 in revenues for the Company during the year ended
December 31, 2000, in each case, as operated by the Company
immediately prior to the Effective Time.
(iv) "Contingent Shares" means the shares of
Buyer Common Stock, if any, issued pursuant to paragraphs (a),
(b), (c) or (d) of this Section 1.9.
(v) "Level 1 Cash Amount" means the result
obtained by dividing (i) $375,000 by (ii) the number of
outstanding Common Shares immediately prior to the Effective
Time.
(vi) "Level 1 Contingent Share Conversion Ratio"
means the result obtained by dividing (i) the number equal to
$375,000 divided by the Average Price by (ii) the number of
Common Shares outstanding immediately prior to the Effective
Time.
(vii) "Level 2 Cash Amount" means the result
obtained by dividing (i) $750,000 by (ii) the number of
outstanding Common Shares immediately prior to the Effective
Time.
(viii) "Level 2 Contingent Share Conversion Ratio"
means the result obtained by dividing (i) the number equal to
$750,000 divided by the Average Price by (ii) the number of
outstanding Common Shares immediately prior to the Effective
Time.
(ix) "Level 3 Cash Amount" means the result
obtained by dividing (i) $1,125,000 by (ii) the number of
outstanding Common Shares immediately prior to the Effective
Time.
(x) "Level 3 Contingent Share Conversion Ratio"
means the result obtained by dividing (i) the number equal to
$1,125,000 divided by the Average Price by (ii) the number of
outstanding Common Shares immediately prior to the Effective
Time.
-7-
12
(xi) "Level 4 Cash Amount" means the result
obtained by dividing (i) $1,500,000 by (ii) the number of
outstanding Common Shares immediately prior to the Effective
Time.
(xii) "Level 4 Contingent Share Conversion Ratio"
means the result obtained by dividing (i) the number equal to
$1,500,000 divided by the Average Price by (ii) the number of
outstanding Common Shares immediately prior to the Effective
Time.
(xiii) "Membership Card" means the Buyer's discount
affinity product, currently titled "Student Advantage
Membership Program", subject to modification from time to
time.
(xiv) "Minimum Freshman Average Standard" means,
with respect to any number of Qualifying Discount Card
Agreements, the average number per agreement of freshman
students to which the Buyer receives the mailing rights for
such Qualifying Discount Card Agreements is not less than
1,500.
(xv) "Qualifying Discount Card Agreements" means
a written agreement, in a form and on terms approved in
advance by the Buyer, between the Buyer and a college or
university, or any officially recognized sponsored
organization of any college or university, pursuant to which
the Buyer receives the rights to the home mailing lists for at
least 750 freshman students currently enrolled in such
college's or university's undergraduate degree program for the
purpose of selling and marketing the Buyer's Membership Card.
(xvi) "Prevailing Share Price" means on any
specified date, the average of the reported high and low sale
prices per share of the Buyer Common Stock on Nasdaq.
(xvii) "Revenues" means gross revenues for the
Business recognized in accordance with United States generally
accepted accounting principles ("GAAP") during the Earn-Out
Period; provided, however, that during the Earn-Out Period (i)
each of the Membership Cards sold by the Business and/or sold
by the Buyer directly pursuant to a Qualifying Discount Card
Agreement shall be deemed to represent $4.00 of gross
revenues, (ii) the actual amount of revenue generated as a
result of sales of such Membership Cards shall not be included
in the determination of "Revenues" and (iii) any proceeds from
the disposition of assets other than in the Ordinary Course of
Business shall not be included in the determination of
"Revenues."
(xviii) "Target Revenue" means Thirty-Two Million
Two Hundred and Eighteen Thousand Two Hundred and Twenty-Two
dollars ($32,218,222).
(h) For purposes of this Section 1.9, within forty-five
(45) business days after the end of the Earn-Out Period (the "Determination
Date"), the Buyer shall determine (i) the Revenues and corresponding Adjusted
Gross Margin of the Business for the Earn-Out Period, (ii) the number of the
Buyer's Membership Cards sold by the Business during the Earn-Out Period,
-8-
13
and (iii) the number of Qualifying Discount Card Agreements entered into by the
Business during the Earn-Out Period. Not later than the Determination Date, the
Buyer shall provide the Indemnification Representative with a written notice
setting forth in reasonable detail the determinations described in the preceding
sentence and, if applicable, (x) its election to pay the Contingent
Consideration in shares of Buyer Common Stock or a combination of cash and
shares of Buyer Common Stock, provided that the Buyer may change its election by
written notice to the Indemnification Representative at any time prior to the
payment of the Contingent Consideration, and (y) a reasonably detailed
calculation of the cash amount that is payable or the number of Contingent
Shares that will be issued, as the case may be, by the Buyer to the Stockholders
as payment of the Contingent Consideration. The Indemnification Representative
shall have a period of fifteen (15) days after delivery of such written notice
to review such calculations and provide the Buyer with written notice of any
objection thereto, which objections shall be in reasonable detail (the
"Objection Notice"). In the event that the Buyer does not receive the Objection
Notice within such 15-day period that objects to the calculation of the
Contingent Shares to be issued and, if applicable, the cash amount to be paid by
the Buyer, the Stockholders shall be deemed to have irrevocably accepted such
calculations and determinations. In the event that the Buyer receives the
Objection Notice during such 15-day period, the Indemnification Representative
and the Buyer shall enter into good faith negotiations to resolve any
objections. In the event that the Indemnification Representative and the Buyer
cannot reach agreement on the calculation of the Contingent Shares to be issued
and, if applicable, the cash amount to be paid within thirty (30) days after the
Determination Date, the Indemnification Representative and the Buyer shall refer
the matter to a mutually satisfactory independent "Big Five" accounting firm
(the "Disputes Auditor") for a decision, which shall be final and binding on all
Parties. The Buyer and the Indemnification Representative agree that they will
request the Disputes Auditor to render its decision within thirty (30) days
after referral of the dispute to the Disputes Auditor for decision pursuant
hereto. Before referring a matter to the Disputes Auditor, the Buyer and the
Indemnification Representative shall agree on procedures to be followed by the
Disputes Auditor (including procedures for presentation of evidence). If the
Buyer and the Indemnification Representative are unable to agree upon procedures
before the end of thirty (30) days after receipt of notice of any objections
pursuant to this Section 1.9, the Disputes Auditor shall establish procedures
giving due regard to the intention of the parties to resolve disputes as
quickly, efficiently and inexpensively as possible. The Disputes Auditor's
procedures may be, but need not be, those proposed by either party. The Buyer
and the Indemnification Representative shall, as promptly as practicable, submit
evidence in accordance with the procedures agreed upon or established by the
Disputes Auditor, and the Disputes Auditor shall decide the dispute in
accordance therewith as promptly as practicable. The fees and expenses of the
Disputes Auditor for, and relating to, the making of any such decision shall be
paid by the Stockholders; provided, however, that in the event the Disputes
Auditor determines that the Contingent Consideration to which the Stockholders
are entitled is greater than that proposed by the Buyer, the Buyer shall pay
such fees and expenses of the Disputes Auditor. The determination of the
Disputes Auditor as to the resolution of any dispute shall be in writing and
shall be binding and conclusive upon all Parties.
(i) In any event, from and after the delivery of an
Objection Notice by the Indemnification Representative, the Buyer's obligation
to issue any Contingent Shares and, if applicable, make any cash payment shall
be suspended until such time as there has been a final
-9-
14
determination pursuant to these procedures as to the cash amount which must be
paid or the Contingent Shares which must be issued, as the case may be, by the
Buyer to the Stockholders.
(j) Notwithstanding the foregoing, the Buyer shall have
the right in its sole discretion to pay all or any portion of the Contingent
Consideration at any time prior to the Determination Date. If the Buyer
exercises such right, the Contingent Consideration so paid to the Stockholders
shall be deemed to have been due and owing pursuant to this Section 1.9 and
shall not be subject to refund or disgorgement, nor shall any other amount
payable by the Buyer or any of its Affiliates to any Stockholder be subject to
offset by such Contingent Consideration (other than additional Contingent
Consideration paid after the Determination Date, which shall be subject to
offset as calculated pursuant to the next sentence), whether or not the
conditions for payment of the Contingent Consideration are otherwise satisfied
in accordance with this Section 1.9. The aggregate value of the Contingent
Consideration paid pursuant to this Section 1.9(j) shall be deducted from the
Contingent Consideration otherwise due and payable to the Stockholders after the
Earn-Out Period in accordance with the provisions of Section 1.9, provided that
for purposes of calculating the amount to be deducted from the Contingent
Consideration otherwise due and payable to the Stockholders after the Earn-Out
Period, the value of each Contingent Share issued prior to the Determination
Date shall equal the greater of (A) the average last reported sales price per
share of the Buyer Common Stock on the Nasdaq for the ten (10) consecutive
trading days ending on the trading day that is three (3) trading days prior to
the date of issuance of such Contingent Share and (B) $1.00.
(k) In the event that the Buyer elects to pay the
Contingent Consideration by delivering a combination of cash and Buyer Common
Stock and the Prevailing Share Price of Buyer Common Stock is less than $1.00 on
the date of such delivery, then, after calculating the aggregate number of
shares of Buyer Common Stock ("Combination Shares") and the aggregate amount of
cash ("Combination Cash") that would otherwise be payable pursuant to Sections
1.9(a), 1.9(b), 1.9(c) or 1.9(d), as applicable (without regard to this Section
1.9(k)), such number of Combination Shares shall be increased, and such amount
of Combination Cash shall be reduced, such that the following two conditions are
satisfied: (i) the aggregate value of the Combination Shares as so increased
(calculated based on the Prevailing Share Price) shall not be less than forty
percent (40%) of the aggregate fair market value of the Contingent Consideration
to be delivered hereunder (after satisfying both of these conditions and valuing
such Combination Shares at the Prevailing Share Price on the date of such
delivery) and (ii) the Combination Cash shall be reduced by $2.00 for each
additional share of Buyer Common Stock to be delivered as a result of this
Section 1.9(k).
1.10 Certificate of Incorporation; By-laws; Directors and Officers.
(a) The Certificate of Incorporation of the Surviving
Corporation immediately following the Effective Time shall be the same as the
Certificate of Incorporation of the Acquisition Subsidiary immediately prior to
the Effective Time, except that (1) the name of the corporation set forth
therein shall be changed to "OCM Direct, Inc." 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 Acquisition
Subsidiary immediately prior
-10-
15
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 directors of the Acquisition Subsidiary
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-laws of the Surviving Corporation. The officers of the
Acquisition Subsidiary immediately prior to the Effective Time shall be the
initial officers of the Surviving Corporation, each to hold office in accordance
with the By-laws of the Surviving Corporation.
1.11 No Further Rights. From and after the Effective Time, no
Common Shares shall be deemed to be outstanding, and holders of Certificates
shall cease to have any rights with respect thereto, except as provided herein
or by law.
1.12 Closing of Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of Common Shares
shall thereafter be made. If, after the Effective Time, Certificates are
presented to the Buyer or the Surviving Corporation, they shall be canceled and
exchanged for the Merger Consideration in accordance with Section 1.5.
1.13 Tax Treatment. It is expected that the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the statements
contained in this Article II are true and correct, except as set forth in the
disclosure schedule provided by the Company to the Buyer on the date hereof and
accepted in writing by the Buyer (the "Disclosure Schedule"). The Disclosure
Schedule shall be arranged in numbered and lettered sections corresponding to
the numbered and lettered section contained in this Article II, and the
disclosure in a section of the Disclosure Schedule shall qualify (i) the
corresponding section in this Article II and (ii) each other section in this
Article II to the extent it is clear from a reading of the disclosure that such
disclosure is applicable to each such section, provided that the mere listing or
identification of an agreement or document in such section of the Disclosure
Schedule shall not qualify any other section in this Article II. For purposes of
this Article II, the phrase "to the knowledge of the Company" or any phrase of
similar import shall be deemed to refer to the actual knowledge of the
Stockholders, as well as any other knowledge which such Stockholders would have
possessed had they made reasonable inquiry of appropriate employees and agents
of the Company with respect to the matter in question.
2.1 Organization, Qualification and Corporate Power. The Company
is a corporation duly organized, validly existing and in corporate good standing
under the laws of the State of Maryland. The Company is duly qualified to
conduct business and is in corporate good standing under the laws of each
jurisdiction in which the nature of its businesses or the ownership or leasing
of its properties requires such qualification, except where the failure to be so
qualified or in good standing, individually or in the aggregate, has not had and
would not reasonably be expected to have a Company Material Adverse Effect (as
defined below). The Company has all
-11-
16
requisite corporate power and authority to carry on the businesses in which it
is engaged and to own and use the properties owned and used by it. The Company
has furnished to the Buyer complete and accurate copies of its Articles of
Incorporation and By-laws. The Company is not in default under or in violation
of any provision of its Articles of Incorporation or By-laws. For purposes of
this Agreement, "Company Material Adverse Effect" means a material adverse
effect on the assets, business, condition (financial or otherwise), results of
operations or future prospects of the Company and the Subsidiaries (as defined
below), taken as a whole; provided that in no event shall a material adverse
effect that results from changes affecting the Company's industry generally or
changes affecting the United States economy generally constitute a Company
Material Adverse Effect.
2.2 Capitalization.
(a) The authorized capital stock of the Company consists
of 30,000,000 Common Shares, of which, as of the date of this Agreement and as
of immediately prior to the Effective Time, 8,334,000 shares are issued and
outstanding and no shares are held in the treasury of the Company. Section
2.2(a) of the Disclosure Schedule sets forth a complete and accurate list of all
stockholders of the Company, indicating the number of Common Shares held by each
stockholder. The Stockholders constitute the holders of record of all of the
outstanding shares of capital stock of Company. All of the issued and
outstanding Common Shares are, and all Common Shares that may be issued upon
exercise of options will be (upon issuance in accordance with their terms), duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. No entity or person (including the Company) has any right to repurchase
any Common Shares.
(b) Section 2.2(b) of the Disclosure Schedule sets forth
a complete and accurate list of all outstanding options issued under the Plan,
indicating (i) the holder thereof, (ii) the number of Common Shares subject to
each option, (iii) the exercise price, date of grant, vesting schedule and
expiration date for each option, and (iv) any terms regarding the acceleration
of vesting. Other than the Plan, the Company has no stock option plans and other
stock or equity-related plans. Other than as disclosed in Section 2.2(b) of the
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 stock. There are no outstanding or authorized stock appreciation,
phantom stock or similar rights with respect to the Company. All Options,
including without limitation, those set forth in Section 2.2(b) of the
Disclosure Schedule, shall terminate at or prior to the Effective Time in
accordance with their terms without consideration, no holder of an Option shall
be entitled to receive any consideration in the Merger and neither the Buyer nor
the Surviving Corporation has any liability or obligation with respect to any
such Option. In accordance with the Plan, at least ten (10) days prior to the
Closing Date, the Administrator (as defined in the Plan) notified each
Participant (as defined in the Plan) in writing, by registered or certified mail
or by hand delivery, to such Participant personally or to such Participant's
address as it appears on the records of the Company, that all unexercised
Options shall terminate at the Effective Time. The Plan and all other stock
option plans and stock or equity-related plans of the Company terminate at or
prior to the Effective Time, and neither the Buyer nor the Surviving Corporation
has any liability or obligation with respect thereto.
-12-
17
(c) Except as set forth in Section 2.2(c) of the
Disclosure Schedule, 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 ("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 Common Shares were issued in
compliance with applicable federal and state securities laws. Each of the
Stockholders is an "accredited investor," as such term is defined in Rule 501 of
Regulation D under the Securities Act.
2.3 Authorization of Transaction. The Company has all requisite
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 and thereby have been duly and validly authorized by all necessary
corporate action on the part of the Company and all necessary action on the part
of the Stockholders. Without limiting the generality of the foregoing, (a) the
Board of Directors of the Company, by unanimous written consent executed by all
of the directors of the Company in accordance with the applicable provisions of
the Maryland Law, (i) determined that the Merger is advisable and in the best
interests of the Company and its stockholders, and (ii) adopted this Agreement
in accordance with the provisions of the Maryland Law, and (iii) directed that
this Agreement and the Merger be submitted to the stockholders of the Company
for their adoption and approval and recommended that the stockholders of the
Company vote in favor of the adoption of this Agreement and the approval of the
Merger and (b) this Agreement has been adopted and the Merger has been approved
by all of the holders of outstanding capital stock of the Company entitled to
vote on this Agreement in accordance with the applicable provisions of the
Maryland Law. No other corporate act or proceeding on the part of the Company or
its stockholders is necessary to authorize the Merger, this Agreement or the
consummation of the transactions contemplated by this Agreement. None of the
Stockholders has any right to demand and receive fair value for his shares of
capital stock of the Company under the Maryland Law. This Agreement has been
duly and validly executed and delivered by the Company and the Stockholders and
constitutes a valid and binding obligation of the Company and the Stockholders,
enforceable against each of the Company and the Stockholders in accordance with
its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditor's rights generally and (ii) as limited by general
principles of equity and laws relating to the availability of specific
performance, injunctive relief or other equitable remedies.
2.4 Noncontravention. Subject to the filing of the Certificate of
Merger as required by the Delaware Law and the Articles of Merger as required by
the Maryland Law, neither the execution and delivery by the Company of this
Agreement, nor the consummation by the Company of the transactions contemplated
hereby and thereby, will (a) conflict with or violate any provision of the
Articles of Incorporation or By-laws of the Company or the charter, by-laws or
other organizational document of any Subsidiary (as defined below), (b) require
on the part of
-13-
18
the Company or any Subsidiary 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) except as set forth in Section 2.4(c) of the
Disclosure Schedule, 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 contract
or instrument to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary is bound or to which any of their assets is subject,
except for (i) any conflict, breach, default, acceleration, termination,
modification or cancellation which would not have nor reasonably be expected to
have a Company Material Adverse Effect and would not adversely affect the
consummation of the transactions contemplated hereby or (ii) any notice, consent
or waiver the absence of which would not have nor reasonably be expected to have
a Company Material Adverse Effect and would not adversely affect the
consummation of the transactions contemplated hereby, (d) result in the
imposition of any Security Interest (as defined below) upon any assets of the
Company or any Subsidiary or (e) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Company, any Subsidiary or any of
their 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) mechanic's,
materialmen's, and similar liens, (ii) liens arising under worker's
compensation, unemployment insurance, social security, retirement, and similar
legislation, (iii) liens on goods in transit incurred pursuant to documentary
letters of credit, and (iv) liens for Taxes, assessments, or similar charges
that are not yet due and payable or are being contested in good faith, in each
case arising in the Ordinary Course of Business (as defined below) of the
Company 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 Subsidiaries and Predecessors.
(a) Section 2.5 of the Disclosure Schedule sets forth:
(i) the name of each corporation, partnership, joint venture or other entity in
which the Company has, directly or indirectly, an equity interest representing
fifty percent (50%) or more of the capital stock thereof or other equity
interests therein (individually, a "Subsidiary" and, collectively, the
"Subsidiaries"); (ii) the number and type of outstanding equity securities of
each Subsidiary and a list of the holders thereof; (iii) the jurisdiction of
organization of each Subsidiary; (iv) the names of the officers and directors of
each Subsidiary; and (v) the jurisdictions in which each Subsidiary is qualified
or holds licenses to do business as a foreign corporation.
(b) Each Subsidiary is a corporation duly organized,
validly existing and in corporate good standing under the laws of the
jurisdiction of its incorporation. Each Subsidiary is duly qualified to conduct
business and is in corporate good standing under the laws of each jurisdiction
in which the nature of its businesses or the ownership or leasing of its
properties requires such qualification, except where the failure to be so
qualified or in good standing, individually or in the aggregate, has not had and
would not reasonably be expected to have a Company Material Adverse Effect. Each
Subsidiary has all requisite power and authority to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it. The
Company has delivered to the Buyer complete and accurate copies of the charter,
by-
-14-
19
laws or other organizational documents of each Subsidiary. No Subsidiary is in
default under or in violation of any provision of its charter, by-laws or other
organizational documents. All of the issued and outstanding shares of capital
stock of each Subsidiary are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights and held of record and owned
beneficially by the Company. All shares of each Subsidiary are held or owned by
the Company free and clear of any restrictions on transfer (other than
restrictions under the Securities Act and state securities laws), claims,
Security Interests, options, warrants, rights, contracts, calls, commitments,
equities and demands. There are no outstanding or authorized options, warrants,
rights, agreements or commitments to which the Company or any Subsidiary is a
party or which are binding on any of them providing for the issuance,
disposition or acquisition of any capital stock of any Subsidiary. There are no
outstanding stock appreciation, phantom stock or similar rights with respect to
any Subsidiary. There are no voting trusts, proxies or other agreements or
understandings with respect to the voting of any capital stock of any
Subsidiary.
(c) The Company does not control directly or indirectly
or have any direct or indirect equity participation or similar interest in any
corporation, partnership, limited liability company, joint venture, trust or
other business association which is not a Subsidiary.
(d) On Campus Marketing, Inc., a Georgia corporation, was
dissolved in accordance with Georgia law on July 23, 1995, and neither the
Company nor any Subsidiary has any liability or obligation arising out of or
relating to such dissolution or the prior existence of such corporation.
Residence Hall Linens, Inc., a Maryland corporation, was merged into the Company
in accordance with Maryland Law on December 31, 1999. Campus Fund Raisers, Inc.,
a New Jersey corporation, was merged into the Company in accordance with the
laws of the state of New Jersey and Maryland Law on April 10, 2000. Collegiate
Carpets, Inc., a Maryland corporation, was acquired by the Company in accordance
with Maryland Law on December 31, 1999.
2.6 Financial Statements. Set forth in Section 2.6 of the
Disclosure Schedule are true and correct copies of (a) the audited consolidated
balance sheet and statements of income, changes in stockholders' equity and cash
flows of the Company as of and for the fiscal year ending December 31, 2000 and
(b) the unaudited consolidated balance sheet (the "Most Recent Balance Sheet")
and statements of income, changes in stockholders' equity and cash flows as of
and for the three months ended as of March 31, 2001 (the "Most Recent Balance
Sheet Date"). Such financial statements (collectively, the "Financial
Statements") have been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby, fairly present the consolidated
financial condition, results of operations and cash flows of the Company and the
Subsidiaries as of the respective dates thereof and for the periods referred to
therein and are consistent with the books and records of the Company and the
Subsidiaries; provided, however, that the Financial Statements referred to in
clause (b) above are subject to normal recurring year-end adjustments (which
will not be material) and do not include footnotes.
2.7 Absence of Certain Changes. Since the Most Recent Balance
Sheet Date, (a) except as set forth in Section 2.7(a) of the Disclosure
Schedule, there has occurred no event or development which has had, or could
reasonably be expected to have in the future, a Company Material Adverse Effect,
and (b) except as set forth in Section 2.7(b) of the Disclosure Schedule,
-15-
20
neither the Company nor any Subsidiary has taken any of the actions set forth in
paragraphs (a) through (n) of Section 4.4.
2.8 Undisclosed Liabilities. None of the Company and its
Subsidiaries has any liabilities (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 which are similar in nature and amount to the liabilities which
arose during the comparable period of time in the immediately preceding fiscal
period, (c) contractual and other liabilities incurred in the Ordinary Course of
Business to be performed within one year after the Closing, which have an
aggregate value of less than $50,000 and which are not required by GAAP to be
reflected on a balance sheet, (d) liabilities the incurrence of which is remote
(as the term "remote" is defined in Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies), (e) liabilities which are of the nature
described in the representations and warranties contained in the other sections
of this Article II and (f) liabilities set forth in Section 2.8(e) of the
Disclosure Schedule.
2.9 Tax Matters.
(a) For purposes of this Agreement, the following terms
shall have the following meanings:
(i) "Tax" or "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 and any amendment thereof.
(iii) "Affiliated Group" means a group of
corporations with which the Company or any Subsidiary has filed (or was required
to file) consolidated, combined, unitary or similar Tax Returns.
(iv) "Affiliated Group Tax Return" means any Tax
Return in which the Company or any Subsidiary has joined (or is required to
join) with any other corporation.
(v) "Affiliated Period" means any taxable period
for which an Affiliated Group Tax Return was or is required to have been or be
filed.
-16-
21
(b) The Company and the Subsidiaries have filed on a
timely basis all Tax Returns (including Affiliated Group Tax Returns) that are
required to have been filed with respect to any of them, and all such Tax
Returns were complete and accurate in all material respects. Neither the Company
nor any Subsidiary has joined or is required to have joined in any Affiliated
Group Tax Return in which any corporation other than the Company and the
Subsidiaries are or were members with respect to any Affiliated Period. The
Company and the Subsidiaries have paid on a timely basis all Taxes that were due
and payable and each member of an Affiliated Group has paid all Taxes that were
due and payable with respect to all Affiliated Periods. The unpaid Taxes of the
Company and the Subsidiaries for tax periods 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. Neither
the Company nor any Subsidiary has any actual or potential liability for any Tax
obligation of any taxpayer other than the Company, the Subsidiaries and
predecessors identified in Section 2.5(d). All Taxes that the Company or any
Subsidiary is or was required by law to have withheld or collected have been
duly withheld or collected and, to the extent required, have been paid to the
proper Governmental Entity.
(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 or any
Subsidiary requested in writing by the Buyer. The Company has delivered or made
available to the Buyer complete and accurate copies of all other Tax Returns of
the Company and the Subsidiaries, together with all related examination reports
and statements of deficiency for all periods requested in writing by the Buyer.
The Company has delivered or made available to Buyer complete and accurate
copies of all other Tax Returns of the Company and the Subsidiaries, together
with all related examination reports and statements of deficiency for all
periods requested in writing by the Buyer and complete and accurate copies of
the portion of all other Tax Returns, examination reports and statements of
deficiency assessed against or agreed to with respect to any member of an
Affiliated Group relating to the activities of the Company or a Subsidiary for
all Affiliated Periods requested in writing by the Buyer. To the knowledge of
the Company, no examination or audit of any Tax Return of the Company or any
Subsidiary or Affiliated Group Tax Return by any Governmental Entity is
currently in progress or threatened or contemplated. Neither the Company nor any
Subsidiary has been informed by any jurisdiction that such jurisdiction believes
that the Company or any Subsidiary was required to file any Tax Return that was
not filed which was not thereafter filed. Neither the Company nor any Subsidiary
has waived any statute of limitations with respect to Taxes or agreed to an
extension of time with respect to a Tax assessment or deficiency, which has
continuing effect.
(d) Neither the Company nor any Subsidiary: (i) is a
"consenting corporation" within the meaning of Section 341(f) of the Code, and
none of the assets of the Company or the Subsidiaries are subject to an election
under Section 341(f) of the Code; (ii) has 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 made any payments, is obligated to make any payments, or is a party to any
agreement that could obligate it to make any payments that would be treated as
an "excess parachute payment" under Section 280G of the Code (without regard to
Section 280G(b)(4) of the Code) in connection with
-17-
22
the Merger and transactions contemplated hereunder; (iv) has any actual or
potential liability for any Taxes of any person (other than the Company and its
Subsidiaries and the predecessors identified in Section 2.5(d) of this
Agreement) under Treasury Regulation Section 1.1502-6 (or any similar provision
of federal, state, local, or foreign law), or as a transferee or successor, by
contract, or otherwise; (v) is or has been required to make a basis reduction
pursuant to Treasury Regulation Section 1.1502-20(b) or Treasury Regulation
Section 1.337(d)-2(b); or (vi) is a party to, bound by, or obligated under any
Tax allocation, Tax sharing or Tax indemnity agreement (other than this
Agreement).
(e) None of the assets of the Company or any Subsidiary:
(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) There are no adjustments under Section 481 of the
Code (or any similar adjustments or any provision of the Code or the
corresponding federal, state or local Tax laws) that are required to be taken
into account by the Company or any Subsidiary in any period ending after the
Closing Date by reason of a change in method of accounting in any taxable period
ending on or before the Closing Date (other than any change that may be required
pursuant to Section 381(c)(4) of the Code and regulations thereunder as a result
of the Merger).
(g) Except as set forth in Section 2.9(g) of the
Disclosure Schedule, at all times since its incorporation, for federal income
tax purposes, each of the Company and any entity acquired, by merger or
otherwise, by 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 of all states in which it
would have been subject to income taxation (but for such status). Except as set
forth in Section 2.9(g) of the Disclosure Schedule, at all times since its
incorporation or acquisition by the Company, for federal income tax purposes,
each Subsidiary has validly been treated as a "qualified subchapter S
subsidiary" within the meaning of Section 1361(b)(3) of the Code and has validly
been treated in a similar manner for purposes of the income tax laws of all
states in which it would have been subject to income taxation (but for such
status). Except as set forth in Section 2.9(g) of the Disclosure Schedule,
neither the Company, nor any Subsidiary, nor any entity acquired, by merger or
otherwise, by the Company or any Subsidiary has 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 and the Subsidiaries were disposed of
as of the end of the day immediately preceding the Closing Date at their
respective fair market values.
(h) Neither the Company nor any Subsidiary has ever
participated in an international boycott as defined in Section 999 of the Code.
(i) To the knowledge of the Company, there are no
proposed or actual assessments, audits, examinations or disputes as to Taxes of
any nature relating to the Company or any Subsidiary that have not been finally
resolved with all amounts due with respect thereto fully paid.
-18-
23
(j) There are no liens or other encumbrances with respect
to Taxes upon any of the assets or properties of the Company or any Subsidiary,
other than with respect to Taxes not yet due and payable.
(k) None of the Stockholders holds any Common Shares that
are non-transferable and subject to a substantial risk of forfeiture within the
meaning of Section 83 of the Code with respect to which the Company has not been
advised that a valid election under Section 83(b) of the Code has not been made.
(l) There is no limitation on the utilization by either
the Company or any Subsidiary of its net operating losses, built-in losses, Tax
credits, or similar items under Sections 382, 383, or 384 of the Code or
comparable provisions of state law (other than any such limitation arising as a
result of the consummation of the transactions contemplated by this Agreement).
(m) Neither the Company nor any Subsidiary has
distributed to its stockholders or security holders stock or securities of a
controlled corporation, nor has stock or securities of the Company or any
Subsidiary been distributed, in a transaction to which Section 355 of the Code
applies (i) in the two years prior to the date of this Agreement or (ii) in a
distribution that could otherwise constitute part of a "plan" or "series of
related transactions" (within the meaning of Section 355(e) of the Code) that
includes the transactions contemplated by this Agreement.
(n) Neither the Company nor any Subsidiary is a passive
foreign investment company within the meaning of Sections 1291-1297 of the Code.
(o) Neither the Company nor any Subsidiary has incurred
(or been allocated) an "overall foreign loss" as defined in Section 904(f)(2) of
the Code that has not been previously recaptured in full as provided in Sections
904(f)(1) and/or 904(f)(3) of the Code.
2.10 Assets. Each of the Company and the Subsidiaries 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. Except as set forth in Section
2.10 of the Disclosure Schedule, no asset of the Company or any Subsidiary
(tangible or intangible) is subject to any Security Interest. All of the
tangible assets of the Company and the Subsidiaries are located at the
facilities of the Company in Bethesda, Maryland, Chambersberg, Pennsylvania,
Trenton, New Jersey and Dalton, Georgia.
2.11 Owned Real Property. Neither the Company nor any Subsidiary
owns any real property.
2.12 Real Property Leases. Section 2.12 of the Disclosure Schedule
lists all real property leased or subleased to or by the Company or any
Subsidiary and lists the base term of such lease and the base rent payable
thereunder. The Company has delivered to the Buyer complete and accurate copies
of the leases and subleases (each as amended to date) listed in
-19-
24
Section 2.12 of the Disclosure Schedule. With respect to each lease and sublease
listed in Section 2.12 of the Disclosure Schedule: (a) each such lease or
sublease with an Affiliate of the Company and, to the Company's knowledge, each
other lease or sublease is legal, valid, binding, enforceable and in full force
and effect; (b) except as set forth in Section 2.12(b) of the Disclosure
Schedule, each such lease or sublease with an Affiliate of the Company and, to
the Company's knowledge, each other 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) except as set forth in Section 2.12(c) of the Disclosure
Schedule, neither the Company nor any Stockholder nor any Subsidiary 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 of
notice, with lapse of time, or otherwise, would constitute a breach or default
by the Company, any Stockholder or any Subsidiary or, to the knowledge of the
Company, any other party under such lease or sublease; (d) neither the Company
nor any Subsidiary has 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 subject to such lease, except for
recorded easements, covenants and other restrictions which do not materially
impair the current uses or the occupancy by the Company or a Subsidiary of the
property subject thereto.
2.13 Intellectual Property.
(a) Each of the Company and the Subsidiaries owns or has
the right to use all Intellectual Property (as defined below) necessary (i) to
use, manufacture, market and distribute the products developed, manufactured,
marketed, sold or licensed, and to provide the services provided, by the Company
or a Subsidiary to other parties (together, the "Customer Deliverables") or (ii)
to operate the internal systems, including, without limitation, computer
hardware systems, software applications and embedded systems (the "Internal
Systems"), of the Company and the Subsidiaries that are material to the business
or operations of the Company and the Subsidiaries (the Intellectual Property
owned by or licensed to the Company and incorporated in or underlying the
Customer Deliverables or the Internal Systems is referred to herein as the
"Company Intellectual Property"). Each of the Company and the Subsidiaries has
taken all reasonable measures to protect the proprietary nature of each item of
Company Intellectual Property, and to maintain in confidence all trade secrets
and confidential information that it owns or uses. Except as set forth in
Section 2.13(a)(i) of the Disclosure Schedule, each item of Company Intellectual
Property will be owned or available for use by the Buyer immediately following
the Closing on substantially identical terms and conditions as it was
immediately prior to the Closing. To the knowledge of the Company, (a) no other
person or entity has any rights to any of the Company Intellectual Property
owned by (and not licensed to) the Company or any Subsidiary (except pursuant to
agreements or licenses specified in Section 2.13(c) of the Disclosure Schedule),
and (b) no other person or entity is infringing, violating or misappropriating
any of the Company Intellectual Property that is owned by (and not licensed to)
the Company or any Subsidiary. For purposes of this Agreement, "Intellectual
Property" means all (i) patents and patent applications, (ii) copyrights and
registrations thereof, (iii) mask works and registrations and applications for
registration thereof, (iv) computer software, data and documentation, (v) trade
secrets and confidential business information, whether patentable or
unpatentable and whether or not reduced to practice, know-how,
-20-
25
manufacturing and production processes and techniques, research and development
information, copyrightable works, financial, marketing and business data,
pricing and cost information, business and marketing plans and customer and
supplier lists and information, (vi) trademarks, service marks, trade names,
domain names and applications and registrations therefor and (vii) other
proprietary rights relating to any of the foregoing. Section 2.13(a)(ii) of the
Disclosure Schedule lists each patent, patent application, copyright
registration or application therefor, mask work registration or application
therefor, and trademark, service mark and domain name registration or
application therefor of the Company or any Subsidiary.
(b) None of the Customer Deliverables (other than third
party materials incorporated in or bundled with the Customer Deliverables), or
the marketing, distribution, provision, use or, to the Company's knowledge, the
development thereof, infringes or violates, or constitutes a misappropriation
of, any Intellectual Property rights of any person or entity. To the Company's
knowledge, none of the third party materials incorporated in or bundled with the
Customer Deliverables, or the marketing, distribution, provision or use thereof,
infringes or violates, or constitutes a misappropriation of, any Intellectual
Property rights of any person or entity. To the Company's knowledge, none of the
Internal Systems, or the use thereof, infringes or violates, or constitutes a
misappropriation of, any Intellectual Property rights of any person or entity.
Section 2.13(b) of the Disclosure Schedule lists any complaint, claim or notice,
or written threat thereof, received by the Company or any Subsidiary alleging
any such infringement, violation or misappropriation; and the Company has
provided to the Buyer complete and accurate copies of all written documentation
in the possession of the Company or any Subsidiary relating to any such
complaint, claim, notice or threat. The Company has provided to Buyer complete
and accurate copies of all written documentation in the possession of the
Company or any Subsidiary relating to claims or disputes known to the Company
concerning any Company Intellectual Property.
(c) Section 2.13(c) of the Disclosure Schedule identifies
each license or other agreement (or type of license or other agreement) pursuant
to which the Company or a Subsidiary has licensed, distributed or otherwise
granted any rights to any third party with respect to, any Customer Deliverable
or Company Intellectual Property. The execution and delivery of this Agreement
and the consummation by the Company of the transactions contemplated hereby do
not 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 such license or other
agreement.
(d) Section 2.13(d) of the Disclosure Schedule identifies
each item of Company Intellectual Property that is owned by a party other than
the Company or a Subsidiary, and the license or agreement pursuant to which the
Company or a Subsidiary uses it (excluding off-the-shelf software programs
licensed by the Company or a Subsidiary pursuant to "shrink wrap" licenses or
other widely used commercially available software that is not material to the
business of the Company and its Subsidiaries).
(e) Neither the Company nor any Subsidiary has disclosed
the source code for any of the software owned by the Company or a Subsidiary
(the "Software") or other confidential information constituting, embodied in or
pertaining to the Software to any person or
-21-
26
entity, except pursuant to the agreements listed in Section 2.13(e) of the
Disclosure Schedule, and the Company and each Subsidiary has taken reasonable
measures to prevent disclosure of such source code.
(f) All of the copyrightable materials (including
Software) (other than third party materials) incorporated in or bundled with the
Customer Deliverables have been created by employees of the Company or a
Subsidiary within the scope of their employment by the Company or a Subsidiary
or by independent contractors of the Company or a Subsidiary who have executed
agreements expressly assigning all right, title and interest in such
copyrightable materials to the Company or a Subsidiary. The Company or a
Subsidiary has the right to distribute all third party copyrighted materials
incorporated in or bundled with the Customer Deliverables. No portion of such
copyrightable materials was jointly developed with any third party.
(g) To the knowledge of the Company, the Customer
Deliverables and the Internal Systems are free from significant defects or
programming errors and conform in all material respects to the written
documentation and specifications therefor.
(h) Section 2.13(h) of the Disclosure Schedule sets forth
the Company's Internet privacy policy.
2.14 Inventory.
(a) Section 2.14 of the Disclosure Schedule lists all
inventory of the Company and the Subsidiaries as of June 5, 2001. All inventory
of the Company and the Subsidiaries, 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 value on a first-in,
first-out basis.
(b) 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 and the Subsidiaries (it being understood that for
purposes of this Section 2.14(b), any inventory of the Company with a value as
of the date hereof in excess of $150,000 not sold within one year after the
Closing Date shall be deemed to be excessive).
2.15 Contracts.
(a) Section 2.15 of the Disclosure Schedule lists the
following agreements (written or oral) to which the Company or any Subsidiary 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 $50,000 per annum or having a
remaining term longer than twelve (12) months;
-22-
27
(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) involves
the payment to or by the Company or any Subsidiary in excess of $50,000, (C) to
which any college, university, educational institution or organization
affiliated therewith is a party, or (D) in which the Company had granted "most
favored nation" pricing or other provisions or marketing or distribution rights
relating to any products or territory or has agreed to purchase a minimum
quantity of goods or 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 for borrowed money, under which it has
created, incurred, assumed or guaranteed (or may create, incur, assume or
guarantee) capitalized lease obligations or under which it has imposed (or may
impose) a Security Interest on any of the Company's or any Subsidiary's assets,
tangible or intangible;
(v) any agreement concerning confidentiality or
noncompetition;
(vi) any employment agreement or consulting agreement;
(vii) any agreement involving any 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 (the "Exchange
Act"), thereof;
(viii) any agreement (or group of related agreements) under
which any Affiliate has created, incurred, assumed or guaranteed (or may create,
incur, assume or guarantee) indebtedness for borrowed money of the Company or
any Subsidiary, under which it has created, incurred, assumed or guaranteed (or
may create, incur, assume or guarantee) capitalized lease obligations of the
Company or any Subsidiary or under which any Affiliate has imposed (or may
impose) a Security Interest on any of the Company's or any Subsidiary's assets,
tangible or intangible;
(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 which contains any provisions requiring the
Company or any Subsidiary to indemnify any other party thereto other than with
respect to a misrepresentation or breach of warranty or breach of a covenant
contained therein (provided such representation, warranty or covenant does not
relate to intellectual property matters); and
(xi) any other agreement (or group of related agreements)
either involving the payment to or by the Company or any Subsidiary in excess of
$50,000 or not entered into in the Ordinary Course of Business.
(b) Section 2.15 of the Disclosure Schedule also sets forth a list of
each agreement to which the Company or any predecessor has been a party in the
past three (3) years
- 23 -
28
pursuant to which (i) the Company acquired any corporation, limited liability
company or other entity (whether by purchase of all or substantially all of the
assets, purchase of stock, merger, consolidation or otherwise) or (ii) the
Company disposed of any assets not in the Ordinary Course of Business (whether
by sale of all or substantially all of the assets, sale of stock, merger,
consolidation or otherwise). Each such agreement, and the transactions
contemplated thereby, were duly authorized by the parties thereto and the
stockholders thereof, including without limitation, the Agreement and Plan of
Merger, dated as of April 10, 2000, among the Company, Campus Fundraisers, Inc.
and each of their respective stockholders.
(c) The Company has delivered to the Buyer a complete and accurate copy
of each agreement (as amended to date) listed in Sections 2.13 and 2.15 of the
Disclosure Schedule. With respect to each agreement so listed: (i) the agreement
is legal, valid, binding and enforceable and in full force and effect; (ii)
except as set forth in Section 2.15(c)(ii) of the Disclosure Schedule, to the
Company's knowledge, 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) except as set forth in Section 2.15(c)(iii) of the Disclosure
Schedule, neither the Company nor any Subsidiary nor, to the knowledge of the
Company, any other party, is in material breach or violation of, or default
under, any such agreement, and to the knowledge of the Company, no event has
occurred, is pending or is threatened, which, after the giving of notice, with
lapse of time, or otherwise, would constitute a material breach or default by
the Company or any Subsidiary or any other party under such contract.
(d) Section 2.15(d) of the Disclosure Schedule lists each agreement to
which the Company or a Subsidiary is a party relating to the sale of linens and
the rate of commission to be paid by the Company thereunder.
2.16 Accounts Receivable. All accounts receivable of the Company and the
Subsidiaries reflected on the Most Recent Balance Sheet are valid receivables
subject to no setoffs or counterclaims and are current and collectible (within
120 days after the date on which it first became due and payable). All 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 120 days
after the date on which it first became due and payable).
2.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Company or any Subsidiary.
2.18 Insurance. Section 2.18 of the 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 or any Subsidiary is a party. 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 and neither the Company nor any Subsidiary is liable for
retroactive premiums or similar payments, and the Company and the Subsidiaries
are otherwise in compliance in all material
- 24 -
29
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.
2.19 Litigation. Except as set forth in Section 2.19 of the Disclosure
Schedule, there is no action, suit, proceeding, claim, arbitration or, to the
Company's knowledge, investigation, before any Governmental Entity or before any
arbitrator (a "Legal Proceeding") which is pending or, to the Company's
knowledge, has been threatened against the Company or any Subsidiary.
2.20 Warranties. No product or service developed, manufactured, sold,
leased, licensed or delivered by the Company or any Subsidiary is subject to any
guaranty, warranty, right of return, right of credit or other indemnity other
than (i) as set forth in the agreements listed in Section 2.15 of the Disclosure
Schedule and (ii) manufacturers' warranties for which neither the Company nor
any Subsidiary has any liability. Section 2.20 of the Disclosure Schedule sets
forth the aggregate expenses incurred by the Company and the Subsidiaries in
fulfilling their obligations under their guaranty, warranty, right of return and
indemnity provisions during each of the fiscal years and the interim period
covered by the Financial Statements; and the Company does not know of any reason
why such expenses as a percentage of sales should significantly increase during
the twelve months following the Closing.
2.21 Employees.
(a) Section 2.21(a)(i) of the Disclosure Schedule contains a list of
all employees of the Company and each Subsidiary as of the date of this
Agreement, along with the position and the bi-weekly rate of compensation of
each such person. Each such employee has entered into a non-disclosure and
confidentiality agreement with the Company or a Subsidiary, a copy of which has
previously been delivered to the Buyer. Section 2.21(a)(ii) of the Disclosure
Schedule contains a list of all employees of the Company or any Subsidiary who
are a party to a non-competition agreement with the Company or any Subsidiary;
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 or any Subsidiary.
(b) Section 2.21(b) of the Disclosure Schedule sets forth a list of all
employees of the Company and each Subsidiary who hold a temporary work
authorization, including without limitation H-1B, F-1 or J-1 visas or work
authorizations (the "Work Permits"), setting forth the name of the employees,
the type of Work Permit and the length of time remaining on such Work Permit.
With respect to each Work Permit, all of the information that the Company
provided to the Department of Labor and the Immigration and Naturalization
Service (the "INS") in the application for such Work Permit was true and
complete in all material respects at the time of filing and as of the date
hereof, and the Company and each Subsidiary complied in all material respects
with all applicable laws and regulations, including without limitation the laws
and regulations of the Department of Labor and the INS with respect to obtaining
the Work Permits. The Company and each Subsidiary has received the appropriate
notice of approval from the INS with respect to each such Work Permit. Neither
the Company nor any Subsidiary has received any notice from the INS or any other
governmental authority
- 25 -
30
that any Work Permit has been revoked. There is no action pending or, to the
knowledge of the Company, threatened, to revoke or adversely modify the terms of
any of the Work Permits.
(c) Neither the Company nor any Subsidiary is a party to or bound by
any collective bargaining agreement, nor has any of them 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 or any
Subsidiary. No employee or former employee of the Company or any Subsidiary has
commenced, or, to the knowledge of the Company, threatened to commence, (i) a
Legal Proceeding against the Company or any Subsidiary or (ii) a claim alleging
harassment or discrimination under applicable state or federal laws or
regulations by the Company or any Subsidiary or any Stockholder or employee of
the Company or any Subsidiary.
(d) No key employee, and no former key employee set forth in Section
2.21(d) of the Disclosure Schedule, has been or is currently a consultant to, an
investor in or employed by, and, to the knowledge of the Company, has no
intention to seek employment with, any competitor of the Company.
2.22 Employee Benefits.
(a) Section 2.22(a) of the Disclosure Schedule contains a complete and
accurate list of all Employee Benefit Plans (as defined below) maintained, or
contributed to, by the Company or any Subsidiary. Complete and accurate copies
of all Employee Benefit Plans have been delivered to the Buyer. Except as set
forth in Section 2.22(a)(i) of the Disclosure Schedule, neither the Company nor
any Subsidiary has any monetary liability under any Employee Benefit Plan,
except for those set forth on the Most Recent Balance Sheet or those that have
arisen since the Most Recent Balance Sheet Date in the Ordinary Course of
Business. For purposes of this Agreement, "Employee Benefit Plan" means any
"employee pension benefit plan" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("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.
(b) 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 revocation has not been
threatened, and, except as set forth in Section 2.22(b) of the Disclosure
Schedule, no such Employee Benefit Plan has been amended or operated since the
date of its most recent determination letter or application therefor in any
respect, and, except to the extent an amendment of such plan is required to
comply with the "GUST" rules, no act or omission has occurred, that would
adversely affect its qualification or materially increase its cost. Each
- 26 -
31
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.
(c) Except as set forth in Section 2.22(c) of the Disclosure Schedule,
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.
(d) Except as set forth in Section 2.22(d) of the Disclosure Schedule,
each Employee Benefit Plan is amendable and terminable unilaterally by the
Company or any Subsidiary at any time without liability to the Company or any
Subsidiary as a result thereof and no Employee Benefit Plan, or related plan
documentation or agreement, summary plan description or other written
communication distributed generally to employees by its terms prohibits the
Company or any Subsidiary from amending or terminating any such Employee Benefit
Plan.
(e) Section 2.22(e) of the Disclosure Schedule discloses each: (i)
agreement with any stockholder, consultant, director, officer or other employee
of the Company or any Subsidiary (A) the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of a transaction
involving the Company or any Subsidiary 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 consultant, director, officer or
employee; and (ii) agreement or plan binding the Company or any Subsidiary,
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. As of the Closing, there exists no agreement,
plan or arrangement under which any person may receive payments from the Company
or any Subsidiary 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) of the Code) in
connection with the Merger and the transactions contemplated hereunder.
(f) Section 2.22(f) of the 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 January 1, 2001.
(g) Except as set forth in Section 2.22(g) of the Disclosure Schedule,
the termination of the Campus Fund Raisers, Inc. Pension Plan and Trust (the
"Pension Plan") has been completed in compliance with all applicable provisions
of ERISA and the Code. Except as
- 27 -
32
set forth in Section 2.22(g) of the Disclosure Schedule, no act or omission has
occurred and no condition exists which could result in any liability to the
Company or any Subsidiary for benefits accrued under the Pension Plan or any
liability arising out of or relating to the operation, maintenance or
termination of the Pension Plan.
(h) The Company has taken all actions necessary to terminate the
Company's 401(k) plan (the "401(k) Plan") one day prior to the Closing. The
Company's Board of Directors has adopted resolutions that all contributions to
the 401(k) Plan shall cease, and that the 401(k) Plan shall terminate as of one
day prior to the Closing Date. Such resolutions provide (to the extent required
under Section 411 of the Code) that all participants shall be fully vested in
their account balances under the 401(k) Plan. Such resolutions also authorize
distributions of 401(k) Plan balances to participants (to the extent permitted
under Section 401(k)(10) of the Code) as soon as practicable following the
Closing Date and if so determined by the Buyer, following the Company's receipt
from the Internal Revenue Service of a favorable determination letter regarding
the tax-qualified status of the 401(k) Plan following its termination.
(i) The Company and each Subsidiary has complied in all material
respects, in the administration and operation of each Employee Benefit Plan,
with the terms of any such plans and the requirements of applicable law
(including without limitation ERISA and the Code and the regulations
thereunder).
2.23 Environmental Matters. Except as set forth in Section 2.23 of the
Disclosure Schedule, each of the Company and the Subsidiaries has complied with
all applicable Environmental Laws (as defined below), except for violations of
Environmental Laws that, individually or in the aggregate, have not had and
would not reasonably be expected to have a Company Material Adverse Effect.
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 to which the Company or any Subsidiary
is a party. 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"). Neither the Company nor any
Subsidiary has
- 28 -
33
any liability or remediation obligation under any federal, state or local law,
rule or regulation or the common law relating to the clean-up of the
environment.
2.24 Legal Compliance. Each of the Company and the Subsidiaries, and the
conduct and operations of their respective businesses, are in compliance with
each applicable law (including rules and regulations thereunder) of any federal,
state, local or foreign government, or any Governmental Entity, including
without limitation, each applicable law, rule and regulation relating to
occupational safety and health, except for any violations or defaults that,
individually or in the aggregate, have not had and would not reasonably be
expected to have a Company Material Adverse Effect.
2.25 Customers and Suppliers. Section 2.25 of the Disclosure Schedule sets
forth a list of (a) the largest ten (10) customers of the Company and the
Subsidiaries during the fiscal year ending December 31, 2000 and the amount of
revenues accounted for by each such customer during such period and (b) each
supplier that is the supplier of 50% or more of any significant product to the
Company or any Subsidiary. No such customer or supplier has advised the Company
or any Subsidiary in writing within the past year that it will stop, or decrease
the rate of, buying products or supplying products, as applicable, to the
Company or any Subsidiary.
2.26 Permits. Section 2.26 of the Disclosure Schedule sets forth a list of
all 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 or any Subsidiary.
Such listed Permits are the only Permits that are required for the Company or
any Subsidiary to conduct its business as presently conducted, except for those
the absence of which, individually or in the aggregate, have not had and would
not reasonably be expected to have a Company Material Adverse Effect and, to the
Company's knowledge, such listed Permits are the only Permits that are required
for the Company or any Subsidiary to conduct its business as proposed by the
Company prior to the Closing to be conducted. Each such Permit is in full force
and effect and, to the knowledge of the Company, no suspension or cancellation
of such Permit is threatened.
2.27 Certain Business Relationships With Affiliates. No Affiliate of the
Company or any Subsidiary (a) owns any property or right, tangible or
intangible, which is used in the business of the Company or any Subsidiary, (b)
has any claim or cause of action against the Company or any Subsidiary, or (c)
owes any money to, or is owed any money by, the Company or any Subsidiary.
Section 2.27 of the Disclosure Schedule describes any transactions or
relationships between the Company or a Subsidiary and any Affiliate thereof
which have occurred or existed since January 1, 1998.
2.28 FDA Matters. Each of the Company and the Subsidiaries is, and the
products sold by each of the Company and the Subsidiaries are, in compliance
with each applicable law (including rules and regulations thereunder), standard,
guide or order administered or issued by the United States Food and Drug
Administration or any other federal, state, local or foreign agency or other
Governmental Entity having regulatory authority over the products of the Company
and the Subsidiaries (a "Regulatory Agency"), including without limitation, the
Federal Food, Drug, and Cosmetic Act and equivalent statutes, regulations and
guidances. The
- 29 -
34
Company and its Subsidiaries have submitted all necessary reports and filings to
each Regulatory Agency. The Company, its Subsidiaries and their respective
agents (in their capacities as such agents) have registered with the each
Regulatory Agency all facilities required to be registered and have listed all
products required to be listed with each Regulatory Agency.
2.29 Brokers' Fees. Neither the Company nor any Subsidiary has any
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
2.30 Books and Records. The minute books and other similar records of the
Company and each Subsidiary contain complete and accurate records in all
material respects of all actions taken at any meetings of the Company's or such
Subsidiary'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 and each Subsidiary accurately reflect in all
material respects the assets, liabilities, business, financial condition and
results of operations of the Company or such Subsidiary's and have been
maintained in accordance with good business and bookkeeping practices.
2.31 Disclosure. No representation or warranty by the Company contained in
this Agreement or the Exhibits hereto, and no statement contained in the
Disclosure Schedule or any certificate delivered or to be delivered by or on
behalf of the Company 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.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE ACQUISITION SUBSIDIARY
Each of the Buyer and the Acquisition Subsidiary represents and warrants to
the Company that the statements contained in this Article III are true and
correct, except as set forth in the disclosure schedule provided by the Buyer to
the Company on the date hereof and accepted in writing by the Company (the
"Buyer Disclosure Schedule"). The Buyer Disclosure Schedule shall be arranged in
numbered and lettered sections corresponding to the numbered and lettered
section contained in this Article III, and the disclosure in a section of the
Buyer Disclosure Schedule shall qualify (i) the corresponding section in this
Article III and (ii) each other section in this Article III to the extent it is
clear from a reading of the disclosure that such disclosure is applicable to
each such section, provided that the mere listing or identification of an
agreement or document in such section of the Disclosure Schedule shall not
qualify any other section in this Article III. For purposes of this Article III,
the phrase "to the knowledge of the Buyer" or any phrase of similar import shall
be deemed to refer to the actual knowledge of the executive officers of the
Buyer, as well as any other knowledge which such executive officers would have
possessed had they made reasonable inquiry of appropriate employees and agents
of the Buyer with respect to the matter in question.
3.1 Organization, Qualification and Corporate Power. Each of the Buyer and
the Acquisition Subsidiary is a corporation duly organized, validly existing and
in corporate good
- 30 -
35
standing under the laws of the state of its incorporation. The Buyer is duly
qualified to conduct business and is in corporate good standing under the laws
of each jurisdiction in which the nature of its businesses or the ownership or
leasing of its properties requires such qualification, except where the failure
to be so qualified or in good standing, individually or in the aggregate, would
not have a Buyer Material Adverse Effect (as defined below). The Buyer has all
requisite corporate power and authority to carry on the businesses in which it
is engaged and to own and use the properties owned and used by it. The Buyer has
furnished or made available to the Company complete and accurate copies of its
Certificate of Incorporation and By-laws. Neither the Buyer nor the Acquisition
Subsidiary are in default under or in violation of any provision of their
Certificate of Incorporation or By-laws. For purposes of this Agreement, "Buyer
Material Adverse Effect" means a material adverse effect on the assets,
business, condition (financial or otherwise), results of operations or future
prospects of the Buyer and its subsidiaries, taken as a whole; provided,
however, that in no event shall (A) a decrease in the market price for the Buyer
Common Stock or the failure to meet or exceed Wall Street research analysts or
the Buyer's internal earnings or other estimates or projections in and of itself
constitute a Buyer Material Adverse Effect or (B) a material adverse effect that
results from (x) changes affecting the Buyer's industry generally or (y) changes
affecting the United States economy generally, constitute a Buyer Material
Adverse Effect.
3.2 Capitalization. The authorized capital stock of the Buyer consists of
(a) 150,000,000 shares of Buyer Common Stock, of which 44,794,261 shares were
issued and outstanding as of the close of business on June 7, 2001, and no
shares are held in the Buyer's treasury and (b) 5,000,000 shares of Preferred
Stock, $.01 par value per share, of which no shares are issued or outstanding as
of the date of this Agreement. All of the issued and outstanding shares of Buyer
Common Stock are duly authorized, validly issued, fully paid, nonassessable and
free of all preemptive rights. The Merger Shares will be, when issued in
accordance with this Agreement, duly authorized, validly issued, fully paid,
nonassessable and free of all preemptive rights. The shares of Buyer Common
Stock issued as Deferred Consideration and the Contingent Shares, if any, will
be, when issued in accordance with this Agreement, duly authorized, validly
issued, fully paid, nonassessable and free of all preemptive rights.
3.3 Authorization of Transaction. Each of the Buyer and the Acquisition
Subsidiary has all requisite power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution and delivery
by the Buyer and the Acquisition Subsidiary of this Agreement and the
consummation by the Buyer and the Acquisition Subsidiary of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of the Buyer and the Acquisition Subsidiary.
Without limiting the generality of the foregoing, (a) the Board of Directors of
the Acquisition Subsidiary, by unanimous written consent executed by all of the
directors of the Acquisition Subsidiary in accordance with the applicable
provisions of the Delaware Law, (i) determined that the Merger is advisable and
in the best interests of the Acquisition Subsidiary and its stockholder, and
(ii) adopted this Agreement in accordance with the provisions of the Delaware
Law, and (iii) directed that this Agreement and the Merger be submitted to the
stockholder of the Acquisition Subsidiary for its adoption and approval and
recommended that the stockholder of the Acquisition Subsidiary vote in favor of
the adoption of this Agreement and the approval of the Merger and (b) this
Agreement has been adopted and the Merger has been approved by all of
- 31 -
36
the holders of outstanding capital stock of the Acquisition Subsidiary entitled
to vote on this Agreement in accordance with the applicable provisions of the
Delaware Law. The Board of Directors of the Buyer has unanimously approved the
Merger and this Agreement. No other corporate act or proceeding on the part of
the Buyer or the Acquisition Subsidiary or their respective stockholders is
necessary to authorize the Merger, this Agreement or the consummation of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Buyer and the Acquisition Subsidiary and
constitutes a valid and binding obligation of the Buyer and the Acquisition
Subsidiary, enforceable against them in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditor's rights
generally and (ii) as limited by general principles of equity and laws relating
to the availability of specific performance, injunctive relief or other
equitable remedies.
3.4 Noncontravention. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities laws, the
Exchange Act and the filing of the Certificate of Merger as required by the
Delaware Law and the Articles of Merger as required by the Maryland Law, neither
the execution and delivery by the Buyer or the Acquisition Subsidiary of this
Agreement, nor the consummation by the Buyer or the Acquisition Subsidiary of
the transactions contemplated hereby or thereby will (a) conflict with or
violate any provision of the charter or by-laws of the Buyer or the Acquisition
Subsidiary, (b) require on the part of the Buyer or the Acquisition Subsidiary
any filing with, or permit, authorization, consent or approval of, any
Governmental Entity, (c) conflict with, result in 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 any right to terminate,
modify or cancel, or require any notice, consent or waiver under, any contract
or instrument to which the Buyer or the Acquisition Subsidiary is a party or by
which either is bound or to which any of their assets are subject, except for
(i) any conflict, breach, default, acceleration, termination, modification or
cancellation which would not adversely affect the consummation of the
transactions contemplated hereby or (ii) any notice, consent or waiver the
absence of which would not adversely affect the consummation of the transactions
contemplated hereby, (d) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to the Buyer or the Acquisition Subsidiary or any
of their properties or assets, or (e) result in the imposition of any Security
Interest upon any of the Merger Consideration (including, without limitation,
any of the Escrow Shares).
3.5 Reports and Financial Statements. The Buyer has previously furnished or
made available to the Company complete and accurate copies, as amended or
supplemented, of its (a) Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, as filed with the Securities and Exchange Commission, and (b)
all other reports filed by Buyer under Section 13 or subsections (a) or (c) of
Section 14 of the Exchange Act with the Securities and Exchange Commission
("SEC") between December 31, 2000 and the date of this Agreement (such reports
are collectively referred to herein as the "Buyer Reports"). The Buyer Reports
constitute all of the documents required to be filed by Buyer under Section 13
or subsections (a) or (c) of Section 14 of the Exchange Act with the SEC from
December 31, 2000 through the date of this Agreement. The Buyer Reports complied
in all material respects with the requirements of the Exchange Act and the rules
and regulations thereunder when filed. As of their respective dates, the Buyer
Reports did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of
- 32 -
37
the circumstances under which they were made, not misleading. The audited
financial statements and unaudited interim financial statements of the Buyer
included in the Buyer Reports (i) complied as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto when filed, (ii) were prepared in accordance
with GAAP applied on a consistent basis throughout the periods covered thereby
(except as may be indicated therein or in the notes thereto, and in the case of
quarterly financial statements, as permitted by Form 10-Q under the Exchange
Act), (iii) fairly present the consolidated financial condition, results of
operations and cash flows of the Buyer as of the respective dates thereof and
for the periods referred to therein, and (iv) are consistent with the books and
records of the Buyer.
3.6 Absence of Material Adverse Change. Except as disclosed in the Buyer
Reports, since December 31, 2000, there has occurred no event or development
which has had, or could reasonably be expected to have in the future, a Buyer
Material Adverse Effect.
3.7 Litigation. Except as disclosed in the Buyer Reports, as of the date of
this Agreement, there is no Legal Proceeding which is pending or, to the Buyer's
knowledge, threatened against the Buyer or any subsidiary of the Buyer which, if
determined adversely to the Buyer or such subsidiary, could have a Buyer
Material Adverse Effect or which in any manner challenges or seeks to prevent,
enjoin, alter or delay the transactions contemplated by this Agreement.
3.8 Interim Operations of Acquisition Subsidiary. The Acquisition
Subsidiary was formed solely for the purpose of engaging in the transactions
contemplated by this Agreement and has engaged in no business activities other
than as contemplated by this Agreement.
3.9 Brokers' Fees. Neither the Buyer nor the Acquisition Subsidiary has
any liability or obligation to pay any fees or commissions to any broker, finder
or agent with respect to the transactions contemplated by this Agreement.
3.10 Tax Matters.
(a) Except as set forth in Section 3.10 of the Buyer Disclosure
Schedule, neither the Buyer nor any person under its control (a "Buyer Party")
has a present plan or intention (i) to cause the Surviving Corporation or any
permitted transferee therefrom to sell or dispose of any of the assets or
properties of the Company acquired in the Merger except for dispositions in the
ordinary course of business or transfers permitted by Section 368(a)(2)(C) or
Treasury Regulation Section 1.368-2(k)(1), (ii) to liquidate the Surviving
Corporation, (iii) to merge the Surviving Corporation with or into another
corporation or corporations, (iv) to sell or otherwise dispose of the stock of
the Surviving Corporation except for transfers of stock to a corporation
"controlled" (within the meaning of section 368 of the Code) by Buyer as
permitted by Section 368(a)(2)(C), or (v) to cause the Surviving Corporation to
issue additional shares of stock that would result in the Buyer losing "control"
(within the meaning of Section 368 of the Code) of the Surviving Corporation.
(b) The Buyer presently intends to cause the Surviving Corporation to
continue a historic business of the Company or use a significant portion of the
Company's
- 33 -
38
historic business assets in a business within the meaning of Treasury Regulation
Section 1.368-1(d).
(c) The Buyer presently does not have a plan or intention
to reacquire any of the Buyer Common Stock issued in the Merger, and no person
related to the Buyer within the meaning of Treasury Regulation Section
1.368-1(e)(3), and no person acting as an intermediary for the Buyer or such a
related person has a plan or intention to acquire any of the Buyer Common Stock
issued in the Merger.
(d) Immediately prior to the Merger, the Buyer will own all of the
outstanding stock of the Acquisition Subsidiary.
(e) Neither the Buyer nor any Buyer Party has taken any action that
would cause the Merger to fail to so qualify as a reorganization within the
meaning of Section 368(a) of the Code, and it is not independently aware of any
circumstances which would cause the Merger to fail to so qualify.
3.11 Disclosure. No representation or warranty by the Buyer contained in
this Agreement or the Exhibits hereto, and no statement contained in any
certificate delivered or to be delivered by or on behalf of the Buyer 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.
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 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 listed in Schedule 5.1(a) attached
hereto.
- 34 -
39
4.3 Stockholder Approval.
(a) This Agreement shall be submitted to the stockholders of the
Company whether or not the Board of Directors of the Company determines at any
time subsequent to declaring its advisability that the Agreement is no longer
advisable and recommends that the stockholders reject it.
(b) Each of the Stockholders agrees (i) to vote all Common Shares that
are beneficially owned by him in favor of the adoption of this Agreement and the
approval of the Merger, (ii) not to vote any Common Shares in favor of any other
acquisition (whether by way of merger, consolidation, share exchange, stock
purchase or asset purchase) of all or a majority of the outstanding capital
stock or assets of the Company, (iii) not to rescind any action, vote or consent
of the Stockholders taken prior to the date of this Agreement, including without
limitation, approval of this Agreement and the Merger, and (iv) otherwise to use
his Reasonable Best Efforts to consummate the transactions contemplated by this
Agreement.
4.4 Operation of Business. Except as contemplated by this Agreement, during
the period from the date of this Agreement to the Effective Time, the Company
shall (and shall cause each Subsidiary to) conduct its operations in the
Ordinary Course of Business and in compliance with all applicable laws and
regulations and, to the extent consistent therewith, use its Reasonable Best
Efforts to preserve intact its current business organization, keep its physical
assets in good working condition, keep available the services of its current
officers and employees and preserve its relationships with customers, suppliers
and others having business dealings with it to the end that its goodwill and
ongoing business shall not be impaired in any material respect. Without limiting
the generality of the foregoing, prior to the Effective Time, the Company shall
not (and shall cause each Subsidiary not to), without the written consent of the
Buyer:
(a) issue or sell, or redeem or repurchase, any stock or other
securities of the Company or any rights, warrants or options to acquire any such
stock or other securities, or amend any of the terms of (including without
limitation the vesting of) any such convertible securities;
(b) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
(c) create, incur or assume any indebtedness for borrowed money;
create, incur or assume any obligations in respect of capital leases; assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person or entity; or
make any loans, advances or capital contributions to, or investments in, any
other person or entity;
(d) enter into, adopt or amend any Employee Benefit Plan or any
employment or severance agreement or arrangement of the type described in
Section 2.22 of this Agreement or increase in any manner the compensation or
fringe benefits of, or modify the employment terms of, its directors, officers
or employees, generally or individually, or pay any bonus or other
- 35 -
40
benefit to its directors, officers or employees (except for existing payment
obligations listed in Section 2.22 of the Disclosure Schedule);
(e) acquire, sell, lease, license or dispose of any assets or property
(including without limitation any shares or other equity interests in or
securities of any Subsidiary or any corporation, partnership, association or
other business organization or division thereof), other than purchases and sales
of assets in the Ordinary Course of Business;
(f) mortgage or pledge any of its property or assets or subject any
such property or assets to any Security Interest;
(g) discharge or satisfy any Security Interest or pay any obligation or
liability other than in the Ordinary Course of Business;
(h) amend its charter, by-laws or other organizational documents;
(i) change in any material respect its accounting methods, principles
or practices, except insofar as may be required by a generally applicable change
in GAAP;
(j) enter into, amend, terminate, take or omit to take any action that
would constitute a violation of or default under, or waive any rights under, any
material contract or agreement;
(k) make or commit to make any capital expenditure in excess of $25,000
per item or $50,000 in the aggregate;
(l) institute or settle any Legal Proceeding;
(m) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action would
result in (i) any of the representations and warranties of the Company set forth
in this Agreement becoming untrue or (ii) any of the conditions to the Merger
set forth in Article V not being satisfied; or
(n) agree in writing or otherwise to take any of the foregoing actions.
4.5 Access to Information.
(a) The Company shall (and shall cause each Subsidiary to) permit
representatives of the Buyer to have full access (at all reasonable times, and
in a manner so as not to interfere with the normal business operations of the
Company and the Subsidiaries) to all premises, properties, financial and
accounting records, contracts, other records and documents, and personnel, of or
pertaining to the Company and each Subsidiary. The Buyer shall (and shall cause
each of its subsidiaries to) permit representatives of the Company to have full
access (at all reasonable times, and in a manner so as not to interfere with the
normal business operations of the Buyer and its subsidiaries) to all premises,
properties, financial and accounting records, contracts, other records and
documents, and personnel, of or pertaining to the Buyer and each of its
subsidiaries.
- 36 -
41
(b) Within fifteen (15) days after the end of each month ending after
the date hereof and until the Closing, the Company shall furnish to the Buyer an
unaudited income statement for such month and a balance sheet as of the end of
such month, prepared on a basis consistent with the Financial Statements. Such
financial statements shall present fairly the financial condition and results of
operations of the Company and the Subsidiaries on a consolidated basis as of the
dates thereof and for the periods covered thereby, and shall be consistent with
the books and records of the Company and the Subsidiaries.
4.6 Exclusivity.
(a) The Company shall not, and the Company shall require each of its
officers, directors, employees, representatives and agents not to, directly or
indirectly, (i) initiate, solicit, encourage or otherwise facilitate any
inquiry, proposal, offer or discussion with any party (other than the Buyer)
concerning any merger, reorganization, consolidation, recapitalization, business
combination, liquidation, dissolution, share exchange, sale of stock, sale of
material assets or similar business transaction involving the Company, any
Subsidiary or any division of the Company or any Subsidiary, (ii) furnish any
non-public information concerning the business, properties or assets of the
Company, any Subsidiary or any division of the Company to any party (other than
the Buyer) or (iii) engage in discussions or negotiations with any party (other
than the Buyer) concerning any such transaction.
(b) The Company shall immediately notify any party with which
discussions or negotiations of the nature described in paragraph (a) above were
pending that the Company is terminating such discussions or negotiations. If the
Company receives any inquiry, proposal or offer of the nature described in
paragraph (a) above, the Company shall, within one business day after such
receipt, notify the Buyer of such inquiry, proposal or offer, including the
identity of the other party and the terms of such inquiry, proposal or offer.
4.7 Tax Matters.
(a) The Parties agree to report the Merger on their respective federal
income Tax Returns as a reorganization (within the meaning of Section 368(a) of
the Code) and will not take any position inconsistent therewith in any Tax
Return, refund claim, litigation or otherwise unless required to do so by any
governmental authority.
(b) The Parties agree that if the Buyer does not receive either the
notices or certifications described in Section 5.1(f) on or before the Closing
Date, the Buyer shall be permitted to withhold from the Merger Consideration any
required withholding tax under Section 1445 of the Code.
(c) The Buyer agrees that it will not cause or permit the Surviving
Corporation, until the first anniversary of the Closing Date, to effect any of
the following transactions:
(i) except as set forth in Section 3.10 of the Buyer
Disclosure Schedule, a transaction in which the Surviving Corporation
or any permitted transferee therefrom sells or disposes of any of the
assets or properties of the Company acquired in the Merger except for
dispositions in the ordinary course of
- 37 -
42
business or transfers permitted by Section 368(a)(2)(C) or Treasury
Regulation Section 1.368-2(k)(1);
(ii) a liquidation of the Surviving Corporation;
(iii) a merger of the Surviving Corporation with or into
another corporation or corporations;
(iv) a sale or other disposition of the stock of the Surviving
Corporation except for transfers permitted by Section 368(a)(2)(C); or
(v) a transaction in which the Surviving Corporation issues
additional shares of its stock that would result in the Buyer losing
"control" (within the meaning of Section 368 of the Code) of the
Surviving Corporation.
(d) Within the times and in the manner prescribed by law, the
Indemnification Representative (the "Stockholders' Tax Representative") shall
properly and accurately prepare (or cause to be prepared) and file, at their own
expense, all income Tax Returns of the Company and the Subsidiaries (the
"Acquired Corporations") for any taxable year beginning before the Closing Date
and ending on or before the Closing Date (each a "Pre-Closing Return" and
collectively the "Pre-Closing Returns"). The Pre-Closing Returns shall be
prepared in a manner consistent with prior practice of the relevant Acquired
Corporation, provided that the Pre-Closing Returns shall in all events be
prepared in accordance with applicable law. No later than 15 days prior to
filing any Pre-Closing Return that is to be filed after the Closing Date (or, if
the Pre-Closing Return is due prior to such time, prior to filing and as soon as
possible following the Closing Date), the Stockholders' Tax Representative shall
provide Buyer a copy of such Pre-Closing Return and Buyer shall be given an
opportunity to review and comment on such Pre-Closing Return. Buyer shall
provide the Stockholders' Tax Representative with such authorization as may be
required in order to permit Pre-Closing Returns described in this Section 4.7(d)
to be properly filed on behalf of the Acquired Corporations.
(e) Within the times and in the manner prescribed by law, the Buyer
shall properly and accurately prepare (or cause to be prepared) all Tax Returns
("Straddle Returns") of or with respect to the Acquired Corporations for taxable
periods beginning before and ending after the Closing Date (a "Straddle
Period"). The Straddle Returns shall be prepared in a manner consistent with
prior practice of the relevant Acquired Corporation, provided that the Straddle
Returns shall in all events be prepared in accordance with applicable law. No
later than 15 days prior to filing any Straddle Return, Buyer shall provide the
Shareholder's Tax Representative with a copy of such Straddle Return for review
and comment on such Straddle Return.
(f) The Buyer shall prepare all other Tax Returns with respect to the
Acquired Corporations.
(g) Notwithstanding anything to the contrary in this Agreement, the
Company may pay on or before the Closing Date any Tax incurred by any of the
Acquired Corporations in the ordinary course of business, to the extent that
payment of such Tax is consistent with the historic practice of the Acquired
Corporations. Taxes reported on a Pre-Closing Return or a Straddle Period Return
that are payable after the Closing Date shall be paid by Buyer on behalf of the
Company, provided that, to the extent required under Section 6.1 of this
Agreement, the Stockholders shall reimburse to Buyer within fifteen (15) days
after the date on which Taxes of
- 38 -
43
the Company are paid after the Closing Date with respect to a Pre-Closing Return
or, in the case of a Straddle Period Return, the portion of the Straddle Period
ending at the close of business on the Closing Date (the "Pre-Closing Straddle
Period").
(h) For purposes of this Section, for any Taxes that are imposed on a
periodic basis and are payable for a taxable period that includes (but does not
end on) the Closing Date, the portion of such Tax which are attributable to the
Pre-Closing Straddle Period shall (i) in the case of any Taxes other than Taxes
based upon or related to income or receipts, to the extent feasible be
determined on a specific identification basis, according to the event or
transaction giving rise to the Tax, and otherwise shall be deemed to be the
amount of such Tax for the entire taxable period multiplied by a fraction the
numerator of which is the number of days in the taxable period ending on the
Closing Date and the denominator of which is the number of days in the entire
taxable period, and (ii) in the case of any Tax based upon or related to income
or receipts be deemed equal to the amount which would be payable if the relevant
taxable period ended on the Closing Date. Any credits relating to a taxable
period that begins before and ends after the Closing Date shall be taken into
account as though the relevant taxable period ended on the Closing Date. All
determinations necessary to give effect to the foregoing allocations shall be
made in a manner consistent with prior practices of the relevant Acquired
Corporation.
(i) No Party may amend a Tax Return filed by either Party with respect
to the Acquired Corporations for a taxable period beginning before the Closing
Date without the consent of the other Parties, not to be unreasonably withheld.
(j) If there is a disagreement among the parties as to the computations
of Tax liabilities to be shown in Tax Returns or a disagreement otherwise
affecting payments required to be made among the parties pursuant to or under
this Agreement relating to Taxes, the parties shall attempt to resolve their
differences. If they cannot reach complete agreement within fifteen (15) days,
each party shall select a Tax expert from their outside accounting firm or law
firm knowledgeable in the area of the dispute, and such experts shall attempt to
resolve the differences. Each party shall be responsible for the costs and fees
of its expert. If the experts are unable to reach an agreement, the matter shall
be treated as a Dispute subject to the resolution procedures of Section 6.2(d).
(k) Except as provided in this Section 4.7, Article VI shall govern the
manner in which Tax audit or administrative or judicial proceedings are
resolved.
(l) The Stockholders and the Buyer shall cooperate as and to the extent
reasonably requested by any other party hereto, in connection with (i) the
filing of Tax Returns pursuant to this Section and any audit, litigation or
other proceeding with respect to Taxes, and (ii) complying with Section 6043 of
the Code and all Treasury Department Regulations promulgated thereunder. Such
cooperation shall include the retention and (upon another party's request) the
provision of records and information which are reasonably relevant to any such
Tax Return, audit, litigation or other proceeding and making employees available
on a mutually convenient basis to provide additional information and explanation
of any material provided hereunder.
- 39 -
44
(m) The Stockholders' Tax Representative and the Buyer agree (i) to
retain all books and records with respect to Tax matters pertinent to the
Acquired Corporations relating to any taxable period beginning before the
Closing Date until the expiration of the statute of limitations of the
respective taxable periods, and (ii) to give any other party reasonable written
notice prior to transferring, destroying or discarding any such books and
records and, if the other party so requests, the Buyer or the Stockholders' Tax
Representative, as the case may be, shall allow the other party to take
possession of such books and records.
(n) In the case of any claim for indemnity under this Agreement based
on Taxes determined to be payable by the Acquired Corporations or a successor
thereto, the indemnity obligations under this Agreement shall be considered to
be a purchase price adjustment.
(o) Prior to the Closing, the Company, on the one hand, and the Buyer
and the Acquisition Subsidiary, on the other hand, shall deliver to Shaw Pittman
(or such other counsel as the Company shall designate) standard and customary
representation letters in support of the tax opinions described in Sections
5.1(l) and 5.2(g) of this Agreement.
4.8 Employee Matters.
(a) Effective as of the Closing, the Buyer shall cause the Surviving
Corporation to continue the employment of each employee of the Company
(terminable at the will of the Surviving Corporation). The employees of the
Company who are offered continued employment by the Surviving Corporation shall
be entitled to participate in the generally available employee benefit plans and
programs of the Buyer, to the extent his/her position, salary and other
qualifications makes him/her eligible to participate, and shall be given service
credit for the purposes of such plans and policies for the length of time and
position in which such employee was employed by the Company.
(b) To the extent permitted by Buyer's 401(k) plan, Buyer shall (i)
cause a tax-qualified defined contribution plan maintained by Buyer or a
subsidiary of Buyer (the "Buyer 401(k) Plan") to accept rollovers (including
direct rollovers) from the 401(k) Plan in respect of distributions made on
account of the transactions contemplated by this Agreement and (ii) allow loan
balances of participants who have borrowed from the 401(k) Plan, if any, to be
rolled over without requiring that the participant first repay the loan. In the
event that the Buyer 401(k) Plan does not permit such loans, the Buyer shall use
commercially reasonable efforts to amend such plan to permit rollovers of such
loans in a direct transfer from the 401(k) Plan.
(c) Not later than twenty (20) days after the Closing Date, the Buyer
shall issue to the employees of the Company designated in writing by the Company
to the Buyer prior to the Closing Date who continue in the employment of the
Company after the Effective Time options to acquire in the aggregate 133,334
shares of Buyer Common Stock at the exercise price equal to the last reported
sale price per share of the Buyer Common Stock on Nasdaq on the trading day
immediately preceding the date of grant of such options pursuant to the Buyer's
1998 Stock Incentive Plan, which options shall vest with respect to fifty
percent (50%) of the shares covered thereby on the date which is six (6) months
after the Closing Date and with respect to the remaining shares covered thereby
on the first anniversary of the Closing Date.
- 40 -
45
4.9 Expenses. Except as set forth in Article VI and the Escrow Agreement,
each of the Parties shall bear its own costs and expenses (including legal fees
and expenses) incurred in connection with this Agreement and the transactions
contemplated hereby; provided, however, that all costs and expenses incurred by
the Company in connection with the transactions contemplated herein, including
without limitation, the broker, accounting and legal fees and expenses of the
Company and the Stockholders, shall be borne by the Stockholders.
Notwithstanding the foregoing, the Buyer shall bear all accounting costs and
expenses incurred after the Closing in connection with the preparation of the
financial statements required to be included in the Current Report on Form 8-K
to be filed by the Buyer relating to the Merger.
4.10 Actions by the Stockholders. The Stockholders shall cause the Company
to fulfill all of its obligations under this Agreement. Each of the Stockholders
agrees not to sell, assign, transfer or otherwise dispose of any of the Merger
Consideration other than in accordance with (i) applicable federal and state
securities laws or an exemption therefrom and (ii) the Lock-Up Agreement between
such Stockholder and the Buyer.
4.11 Release by Stockholders. Each of the Stockholders hereby releases,
holds harmless and forever discharges the Company and each Subsidiary, and each
of their respective successors, assigns, agents, servants, employees,
principals, administrators, shareholders, directors, officers, affiliates,
subsidiaries and related companies of and from any and all actions, causes of
action, claims, demands, costs, liabilities, losses, expenses and compensation,
past, present and future, known or unknown, which such Stockholder ever had, now
has or may have against the Company or a Subsidiary, other than (a) claims on
account of or arising out of actions of the Company or a Subsidiary after the
Closing Date, (b) claims relating to the unpaid salary and unused paid time off
set forth in Section 4.11(b) of the Disclosure Schedule and (c) claims related
to loans set forth in Section 4.11(c) of the Disclosure Schedule. Nothing
contained in this Section 4.11 shall affect the rights of any of the
Stockholders under this Agreement or any of the other agreements entered into
between the Buyer and the Stockholders in connection herewith. This release is
binding on each Stockholder's executors, heirs, assigns and personal
representatives.
4.12 Collegiate Carpets, Inc. The Buyer agrees that, prior to September 30,
2001, without the prior written consent of the Indemnification Representative,
it will not (and will not cause or permit the Surviving Corporation or its
indirect subsidiary Collegiate Carpets, Inc. to) (a) cause or permit Collegiate
Carpets, Inc., a wholly owned subsidiary of the Company, to merge with or into
another entity (other than the Surviving Corporation), or sell all or
substantially all of its assets (other than to the Surviving Corporation and
other than inventory in the ordinary course of business) and (b) sell any of the
outstanding shares of capital stock of Collegiate Carpets, Inc.
4.13 Tax Adjustment. In the event that (a) the Deferred Consideration has
not yet been paid to the Stockholders in accordance with Section 1.5 hereof, the
Contingent Consideration has not yet been paid to the Stockholders in accordance
with Section 1.9 hereof, or any Escrow Shares are then held by the Escrow Agent
pursuant to the terms of the Escrow Agreement, and (b) the Buyer enters into a
definitive agreement for a Sale of the Buyer (as defined below) or the board of
directors of the Buyer or its stockholders approve a liquidation of the Buyer,
then, prior to or upon the consummation of such Sale of the Buyer, the Buyer's
obligations to make
- 41 -
46
payment of the Deferred Consideration and the Contingent Consideration, and the
terms of the Escrow Agreement shall be modified, to the extent necessary, as
reasonably determined by the Buyer in good faith (after consultation with Hale
and Dorr LLP or other tax counsel mutually acceptable to the Buyer and the
Indemnification Representative) so that it is more likely than not that the
Deferred Consideration, Contingent Consideration and Escrow Shares will be
treated as a continuing proprietary interest in Buyer for purposes of Treasury
Regulation Section 1.368-1(e) to the same extent such Deferred Consideration,
Contingent Consideration and Escrow Shares would have been so treated absent
such Sale of the Buyer. Additionally, in the event that the Buyer is a party to
a transaction pursuant to which a majority of the Buyer's then outstanding
Common Stock would be converted into cash, securities or other property, and
such transaction would itself permit deferral of taxable income to the then
holders of Buyer Common Stock, the Buyer shall enter into the necessary
contractual arrangements to assure or preserve the opportunity for the
Stockholders to participate in such transaction or a similar transaction on an
equivalent economic basis with respect to the portion of the Deferred
Consideration and the Contingent Consideration otherwise payable in Buyer Common
Stock and the Escrow Shares. For purposes of this Section 4.13, "Sale of the
Buyer" means any liquidation of the Buyer, and any merger, consolidation or
similar transaction involving the Buyer in which the Buyer is not the surviving
or resulting corporation.
ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER
5.1 Conditions to Obligations of the Buyer and the Acquisition Subsidiary.
The obligation of each of the Buyer and the Acquisition Subsidiary to consummate
the Merger is subject to the satisfaction (or waiver by the Buyer) of the
following conditions:
(a) the Company, the Subsidiaries and the Stockholders shall have
obtained (and shall have provided copies thereof to the Buyer) all of the
waivers, permits, consents, approvals or other authorizations, and effected all
of the registrations, filings and notices, listed in Schedule 5.1(a) attached
hereto;
(b) the representations and warranties of the Company set forth in
Section 2.1, Section 2.2 and Section 2.3 and any representations and warranties
of the Company set forth in this Agreement that are qualified as to materiality
shall be true and correct in all respects, and all other representations and
warranties of the Company set forth in this Agreement shall be true and correct
in all material respects, in each case as of the date of this Agreement and as
of the Effective Time as though made as of the Effective Time, except to the
extent such representations and warranties are specifically made as of a
particular date or as of the date of this Agreement (in which case such
representations and warranties shall be true and correct as of such date);
(c) each of the Company and the Stockholders shall have performed or
complied with its agreements and covenants required to be performed or complied
with under this Agreement as of or prior to the Effective Time;
- 42 -
47
(d) 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, (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation or (iii) have a Company Material Adverse Effect, and no
such judgment, order, decree, stipulation or injunction shall be in effect;
(e) the number of outstanding Common Shares shall be 8,334,000, and all
of the outstanding Common Shares shall be held by each of the Stockholders
listed on the signature page hereto;
(f) the Company shall have delivered to the Buyer either (i) notices
from the Company, also delivered to the Internal Revenue Service, that the
Common Shares are not a "U.S. real property interest" in accordance with the
Treasury Regulations under Sections 897 and 1445 of the Code, or (ii)
certifications from the Stockholders that they are not foreign persons in
accordance with the Treasury Regulations under Section 1445 of the Code;
(g) each of the Stockholders shall have executed and delivered to the
Buyer an Investment Representation Letter in the form attached hereto as Exhibit
B and the Buyer shall have no reason to believe that the statements set forth
therein are not true and shall be reasonably satisfied that the issuance and
sale of the Merger Consideration is exempt from the registration requirements of
the Securities Act;
(h) each of the Stockholders shall have executed and delivered to the
Buyer a Lock-Up Agreement in the form attached hereto as Exhibit C;
(i) each of the Stockholders shall have executed and delivered to the
Buyer a Registration Rights Agreement in the form attached hereto as Exhibit D;
(j) the Buyer shall have received from Shaw Pittman, counsel to the
Company, an opinion in the form attached hereto as Exhibit E-1, and from
Shulman, Rogers, Gandal, Pordy & Ecker, P.A., counsel to the Company, an opinion
in the form attached hereto as Exhibit E-2, in each case, addressed to the Buyer
and dated as of the Closing Date;
(k) each Stockholder, director and officer of the Company and each
Subsidiary shall have executed and delivered to the Buyer a resignation in the
form attached hereto as Exhibit F;
(l) the Stockholders shall have received an opinion from Shaw Pittman
(or such other counsel as the Company shall designate), in a form reasonably
satisfactory to the Stockholders, dated the Closing Date, to the effect that the
Merger will more likely than not constitute a reorganization for federal income
tax purposes within the meaning of Section 368(a) of the Code and which is
supported by substantial authority; and
(m) the Buyer shall have received such other certificates and
instruments (including without limitation certificates of good standing of the
Company and the Subsidiaries in their jurisdiction of organization and the
various foreign jurisdictions in which they are
- 43 -
48
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.
5.2 Conditions to Obligations of the Company and the Stockholders. The
obligation of the Company and the Stockholders to consummate the Merger is
subject to the satisfaction (or waiver by the Company) of the following
conditions:
(a) the representations and warranties of the Buyer and the Acquisition
Subsidiary set forth in Section 3.1 and Section 3.3 and any representations and
warranties of the Buyer and the Acquisition Subsidiary set forth in this
Agreement that are qualified as to materiality shall be true and correct in all
respects, and all other representations and warranties of the Buyer and the
Acquisition Subsidiary set forth in this Agreement shall be true and correct in
all material respects, in each case as of the date of this Agreement and as of
the Effective Time as though made as of the Effective Time, except to the extent
such representations and warranties are specifically made as of a particular
date or as of the date of this Agreement (in which case such representations and
warranties shall be true and correct as of such date);
(b) each of the Buyer and the Acquisition Subsidiary shall have
performed or complied 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 wherein an unfavorable
judgment, order, decree, stipulation or injunction would (i) prevent
consummation of any of the transactions contemplated by this Agreement, (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation or (iii) have a Buyer Material Adverse Effect, and no
such judgment, order, decree, stipulation or injunction shall be in effect;
(d) the Company shall have received from counsel to the Buyer and the
Acquisition Subsidiary an opinion in the form attached hereto as Exhibit G,
addressed to the Company and dated as of the Closing Date;
(e) the Buyer shall have executed and delivered to each of the
Stockholders a Lock-Up Agreement, in the form attached hereto as Exhibit C;
(f) the Buyer shall have executed and delivered to each of the
Stockholders a Registration Rights Agreement in the form attached hereto as
Exhibit D;
(g) the Stockholders shall have received an opinion from Shaw Pittman
(or such other counsel as the Company shall designate), in a form reasonably
satisfactory to the Stockholders, dated the Closing Date, to the effect that the
Merger will more likely than not constitute a reorganization for federal income
tax purposes within the meaning of Section 368(a) of the Code and which is
supported by substantial authority; and
(h) the Company shall have received such other certificates and
instruments (including without limitation certificates of good standing of the
Buyer and the Acquisition 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.
- 44 -
49
ARTICLE VI
INDEMNIFICATION
6.1 Indemnification by the Stockholders. Each of the Stockholders shall
jointly and severally 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, at any time prior
to or after the Effective Time, resulting from, relating to or constituting:
(a) any misrepresentation, breach of warranty or failure to perform any
covenant or agreement of the Company or any Stockholder contained in this
Agreement;
(b) any failure of a Stockholder to have good, valid and marketable
title to the issued and outstanding Common Shares issued in the name of such
Stockholder, free and clear of all Security Interests;
(c) any claim by a stockholder or former stockholder of the Company or
a Subsidiary, 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 or a
Subsidiary; (ii) any rights of a stockholder (other than the right to receive
the Merger Consideration pursuant to this Agreement or rights to fair value
under the applicable provisions of the Maryland Law), including any option,
preemptive rights or rights to notice or to vote; (iii) any rights under the
charter or bylaws of the Company or a Subsidiary; (iv) any claim that his or her
shares were wrongfully repurchased by the Company; or (v) any Option;
(d) any and all Taxes (other than sales Taxes) incurred by the Company,
the Subsidiaries or the Surviving Corporation as a result of the transactions
contemplated by this Agreement failing to qualify as a reorganization under
Section 368 of the Code, other than as a result of any misrepresentation or
breach of warranty of the Buyer contained in Section 3.10 of this Agreement or
any failure to perform any covenant or agreement of the Buyer contained in
Section 4.7(a) or Section 4.7(c) of this Agreement;
(e) any and all Taxes (other than sales Taxes) required to be shown on
a Pre-Closing Return or attributable to a Pre-Closing Straddle Period, except to
the extent such Taxes were incurred as a result of any misrepresentation or
breach of warranty of the Buyer contained in Section 3.10 of this Agreement or
any failure to perform any covenant or agreement of the Buyer contained in
Section 4.7(a) or Section 4.7(c) of this Agreement;
(f) subject to Section 6.4(b) of this Agreement, any and all sales
Taxes due and payable by the Company, the Subsidiaries, the Surviving
Corporation or the Stockholders for any taxable period that ends on or before
the Closing Date and any and all sales Taxes attributable to the operations of
the Company on or before the Closing Date;
- 45 -
50
(g) the maintenance or termination of the Pension Plan; or
(h) any costs and expenses (including accounting, financial advisor,
legal or finder fees and expenses) incurred by the Company or the Stockholders
in connection with this Agreement and the transactions contemplated hereby
(other than accounting costs and expenses incurred after the Closing in
connection with the preparation of the financial statements required to be
included in the Current Report on Form 8-K to be filed by the Buyer relating to
the Merger).
6.2 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 twenty (20) business days after receipt by
the Indemnified Party of notice of such suit or proceeding, and shall describe
(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
or arising out of such delay. Within twenty (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; provided that (i) the
Indemnifying Party may only assume control of such defense if (A) it
acknowledges in writing to the Indemnified Party that any damages, fines, costs
or other liabilities that may be assessed against the Indemnified Party in
connection with such suit or proceeding constitute Damages for which the
Indemnified Party shall be indemnified pursuant to this Article VI and (B) the
ad damnum is less than or equal to the amount of Damages for which the
Indemnifying Party is liable under this Article VI and (ii) the Indemnifying
Party may not assume control of the defense of a suit or proceeding involving
criminal liability, a suit or proceeding involving Taxes (other than, at the
election of Devin A. Schain, a suit or proceeding involving sales Taxes that is
commenced prior to the second anniversary of the Closing Date) or a suit or
proceeding in which equitable relief is sought against 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 Indemnifying Party assumes control of such defense
and 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 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
- 46 -
51
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 subsection (c) below) in the amount of such Damages. If the
Indemnified Party is the Buyer and is seeking to enforce such claim pursuant to
the Escrow Agreement, the Indemnifying Party shall deliver a copy of the Claim
Notice to the Escrow Agent.
(c) Within twenty (20) days after delivery of a Claim Notice, the
Indemnifying Party shall deliver to the Indemnified Party 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;
provided that if the Indemnified Party is the Buyer and is seeking to enforce
such claim pursuant to the Escrow Agreement, the Indemnifying Party and the
Indemnified Party shall deliver to the Escrow Agent, within three days following
the delivery of the Response, a written notice executed by both parties
instructing the Escrow Agent to distribute to the Buyer (A) such number of
Escrow Shares as have an aggregate Value equal to forty-five percent (45%) of
the Claimed Amount and (B) proceeds of the Escrow LC in an amount equal to
fifty-five percent (55%) of the Claimed Amount), (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 Party of the Agreed Amount, by
check or by wire transfer; provided that if the Indemnified Party is the Buyer
and is seeking to enforce such claim pursuant to the Escrow Agreement, the
Indemnifying Party and the Indemnified Party shall deliver to the Escrow Agent,
within three days following the delivery of the Response, a written notice
executed by both parties instructing the Escrow Agent to distribute to the Buyer
(A) such number of Escrow Shares as have an aggregate Value equal to forty-five
percent (45%) of the Agreed Amount and (B) proceeds of the Escrow LC in an
amount equal to fifty-five percent (55%) of the Agreed Amount), or (iii) dispute
that the Indemnified Party is entitled to receive any of the Claimed Amount. If
the Indemnifying Party in the Response disputes its liability for all or part of
the Claimed Amount, the Indemnifying Party and the Indemnified Party shall
follow the procedures set forth in Section 6.2(d) for the resolution of such
dispute (a "Dispute"). For purposes of this Article VI, the "Value" of any
Escrow Shares
- 47 -
52
delivered in satisfaction of an indemnity claim shall be $2.256 (subject to
equitable adjustment in the event of any stock split, stock dividend, reverse
stock split or similar event affecting the Buyer Common Stock after the Closing
Date), multiplied by the number of such Escrow Shares.
(d) During the 60-day period following the delivery of a Response that
reflects a Dispute, the Indemnifying Party and the Indemnified Party shall use
good faith efforts to resolve the Dispute. If the Dispute is not resolved within
such 60-day period, the Indemnifying Party and the Indemnified Party shall
discuss in good faith the submission of the Dispute to a mutually acceptable
alternative dispute resolution procedure (which may be non-binding or binding
upon the parties, as they agree in advance) (the "ADR Procedure"). In the event
the Indemnifying Party and the Indemnified Party agree upon an ADR Procedure,
such parties shall, in consultation with the chosen dispute resolution service
(the "ADR Service"), promptly agree upon a format and timetable for the ADR
Procedure, agree upon the rules applicable to the ADR Procedure, and promptly
undertake the ADR Procedure. The provisions of this Section 6.2(d) shall not
obligate the Indemnifying Party and the Indemnified Party to pursue an ADR
Procedure or prevent either such party from pursuing the Dispute in a court of
competent jurisdiction; provided that, if the Indemnifying Party and the
Indemnified Party agree to pursue an ADR Procedure, neither the Indemnifying
Party nor the Indemnified Party may commence litigation or seek other remedies
with respect to the Dispute prior to the completion of such ADR Procedure. Any
ADR Procedure undertaken by the Indemnifying Party and the Indemnified Party
shall be considered a compromise negotiation for purposes of federal and state
rules of evidence, and all statements, offers, opinions and disclosures (whether
written or oral) made in the course of the ADR Procedure by or on behalf of the
Indemnifying Party, the Indemnified Party or the ADR Service shall be treated as
confidential and, where appropriate, as privileged work product. Such
statements, offers, opinions and disclosures shall not be discoverable or
admissible for any purposes in any litigation or other proceeding relating to
the Dispute (provided that this sentence shall not be construed to exclude from
discovery or admission any matter that is otherwise discoverable or admissible).
The fees and expenses of any ADR Service used by the Indemnifying Party and the
Indemnified Party shall be shared equally by the Indemnifying Party and the
Indemnified Party. If the Indemnified Party is the Buyer and is seeking to
enforce the claim that is the subject of the Dispute pursuant to the Escrow
Agreement, the Indemnifying Party and the Indemnified Party shall deliver to the
Escrow Agent, promptly following the resolution of the Dispute (whether by
mutual agreement, pursuant to an ADR Procedure, as a result of a judicial
decision or otherwise), a written notice executed by both parties instructing
the Escrow Agent as to what (if any) portion of the Escrow Shares and the
proceeds of the Escrow LC shall be distributed to the Buyer and/or the
Stockholders (which notice shall be consistent with the terms of the resolution
of the Dispute).
(e) For purposes of this Section 6.2 and the last two sentences of
Section 6.3(a), (i) if the Stockholders comprise the Indemnifying Party, any
references to the Indemnifying Party (except provisions relating to an
obligation to make or a right to receive any payments provided for in Section
6.2 or Section 6.3(a)) shall be deemed to refer to the Indemnification
Representative, and (ii) if the Stockholders comprise the Indemnified Party, any
references to the Indemnified Party (except provisions relating to an obligation
to make or a right to receive any payments provided for in Section 6.2 or
Section 6.3(a)) shall be deemed to refer to the Indemnification Representative.
- 48 -
53
6.3 Survival of Representations, Warranties and Covenants.
(a) All representations and warranties of the Company 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 one (1)
year following the Closing Date, except that (i) the representations and
warranties set forth in Sections 2.1, 2.2 and 2.3 shall survive the Closing
without limitation and (ii) the representations and warranties set forth in
Section 2.9 shall survive until thirty (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 as a result of a breach of such representation or
warranty (an "Expected Claim Notice"), then such 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; and if the Indemnified Party has delivered a
copy of the Expected Claim Notice to the Escrow Agent and Escrow Shares and the
Escrow LC have been retained in escrow after the Termination Date (as defined in
the Escrow Agreement) with respect to such Expected Claim Notice, the
Indemnifying Party and the Indemnified Party shall promptly deliver to the
Escrow Agent a written notice executed by both parties instructing the Escrow
Agent to distribute such retained Escrow Shares and the Escrow LC to the
Stockholders in accordance with the terms of the Escrow Agreement.
(b) All representations and warranties of the Buyer and the Acquisition
Subsidiary contained in this Agreement shall terminate at the Closing; provided,
however, (i) the Buyer and the Acquisition Subsidiary acknowledge that each of
the Stockholders has reasonably relied on the truth and accuracy of the
representations and warranties contained in Article III of this Agreement for
purposes of entering into the transactions contemplated by this Agreement and
his investment decision with respect to the acquisition of Buyer Common Stock
hereunder, (ii) each of the Stockholders shall have the right to make federal
securities law claims and claims based on fraud with respect to any of the
representations and warranties contained in Article III of this Agreement and
(iii) the rights of the Stockholders under the immediately preceding clause (ii)
shall be the exclusive remedy of the Stockholders with respect to claims arising
out of, resulting from or relating to any misrepresentation or breach of
warranty contained in this Agreement.
(c) The covenants and agreements of the Parties set forth in Sections
4.1, 4.2, 4.3, 4.4, 4.5 and 4.6 shall terminate at the Closing. Each covenant
and agreement of the Parties contained herein which by its terms contemplates
performance after the Effective Time shall survive the Closing.
6.4 Limitations.
(a) Notwithstanding anything to the contrary herein, (i) the aggregate
liability of the Stockholders for Damages under this Article VI (other than
Damages with respect to a
- 49 -
54
claim under Section 6.1(a) arising out of or related to any misrepresentation or
breach of warranty contained in Sections 2.1, 2.2, 2.3 or 2.9 or with respect to
a claim under Section 6.1(b), (c), (d), (e), (f), (g) or (h) of this Agreement,
for which there shall be no limit) shall not exceed $4,421,880, and (ii) the
Stockholders shall not be liable under this Article VI unless and until the
aggregate Damages for which they would otherwise be liable exceed $250,000 (at
which point the Stockholders shall become liable for the aggregate Damages, and
not just amounts in excess of $250,000), provided that the limitation set forth
in this clause (ii) shall not apply to a claim under Section 6.1(a) arising out
of or related to any misrepresentation or breach of warranty contained in
Sections 2.1, 2.2, 2.3 or 2.9 or a claim under Section 6.1(b), (c), (d), (e),
(f), (g) or (h) of this Agreement. For purposes solely of this Article VI, all
representations and warranties of the Company in Article II (other than Section
2.31) 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, the Stockholders
shall not be liable for Damages with respect to a claim under Section 6.1(f) (i)
unless and until the aggregate Damages with respect to claims under Section
6.1(f) for which they would otherwise be liable exceed $200,000 (at which point
the Stockholders shall become liable for eighty percent (80%) of such aggregate
Damages in excess of $200,000) and (ii) made after the fifth anniversary of the
Closing Date.
(c) The Escrow Agreement is intended to secure the indemnification
obligations of the Stockholders under this Agreement. However, the rights of the
Buyer under this Article VI shall not be limited to the Escrow Shares nor shall
the Escrow Agreement be the exclusive means for the Buyer to enforce such
rights.
(d) Except with respect to claims based on fraud, after the Closing,
the rights of the Buyer and any Affiliate thereof under this Article VI and the
Escrow Agreement shall be their exclusive remedy with respect to claims
resulting from or relating to any misrepresentation or breach of warranty
contained in this Agreement.
(e) No Stockholder shall have any right of contribution against the
Company, any Subsidiary or the Surviving Corporation with respect to any breach
by the Company of any of its representations or warranties.
(f) Notwithstanding any other provision of this Agreement to the
contrary, in no event shall Damages include a party's incidental, consequential
or punitive damages, regardless of the theory of recovery. The amount of Damages
recoverable by an Indemnified Party under this Article VI with respect to an
indemnity claim shall be reduced by any proceeds actually received by such
Indemnified Party, with respect to the Damages to which such indemnity claim
relates, from an insurance carrier.
6.5 Appointment of Indemnification Representative.
(a) The Indemnification Representative shall have full power and
authority on behalf of each Stockholder to take any and all actions on behalf
of, execute any and all instruments on behalf of, and execute or waive any and
all rights of, the Stockholders under this
- 50 -
55
Article VI. The Indemnification Representative shall have no liability to any
Stockholder for any action taken or omitted on behalf of the Stockholders
pursuant to this Article VI without gross negligence or willful misconduct on
the part of the Indemnification Representative.
(b) The adoption of this Agreement and the approval of the Merger by
the Stockholders shall constitute approval of the Escrow Agreement and of all of
the arrangements relating thereto, including without limitation the placement of
the Escrow Shares in escrow and the appointment of the Indemnification
Representative as agent and attorney-in-fact for each Stockholder, for and on
behalf of Stockholders, to give and receive notices and communications,
authorize in his discretion the delivery to the Buyer of shares of Buyer Common
Stock from the Escrow Shares in satisfaction of claims by the Buyer, object to
such deliveries, agree to negotiate, enter into settlements and compromises of,
and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and take all actions necessary or
appropriate in the judgment of Indemnification Representative for the
accomplishment of the foregoing and with respect to any other matter arising
under this Agreement. Notices or communications to or from the Indemnification
Representative shall constitute notice to or from each of the Stockholders.
6.6 Indemnification by the Buyer. The Buyer shall indemnify the
Stockholders in respect of, and hold them harmless against any Damages incurred
or suffered by the Stockholders resulting from a breach by the Buyer of any of
the covenants contained in Section 4.7(a) or Section 4.7(c) of this Agreement.
ARTICLE VII
TERMINATION
7.1 Termination of Agreement. The Parties may terminate this Agreement
prior to the Effective Time, as provided below:
(a) the Parties may terminate this Agreement by mutual written consent;
(b) the Buyer may terminate this Agreement by giving written notice to
the Company in the event the Company or a Stockholder 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 5.1 not to be
satisfied and (ii) is not cured within ten (10) days following delivery by the
Buyer to the Company of written notice of such breach;
(c) the Company may terminate this Agreement by giving written notice
to the Buyer in the event the Buyer or the Acquisition 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 5.2 not to
be satisfied and (ii) is not cured within ten (10) days following delivery by
the Company to the Buyer of written notice of such breach;
(d) the Buyer may terminate this Agreement by giving written notice to
the Company if the Closing shall not have occurred before June 26, 2001 by
reason of the failure of any condition precedent under Section 5.1 hereof
(unless the failure results primarily from a
- 51 -
56
breach by the Buyer or the Acquisition Subsidiary of any representation,
warranty or covenant contained in this Agreement); or
(e) the Company may terminate this Agreement by giving written notice
to the Buyer and the Acquisition Subsidiary if the Closing shall not have
occurred before June 26, 2001 by reason of the failure of any condition
precedent under Section 5.2 hereof (unless the failure results primarily from a
breach by the Company or a Stockholder of any representation, warranty or
covenant contained in this Agreement).
(f) either the Buyer or the Company may terminate this Agreement by
giving written notice to other party if the Closing shall not have occurred
before June 26, 2001.
7.2 Effect of Termination. If any Party terminates this Agreement pursuant
to Section 7.1, all obligations of the Parties hereunder shall terminate without
any liability of any Party to any other Party.
ARTICLE VIII
DEFINITIONS
For purposes of this Agreement, each of the following defined terms is
defined in the Section of this Agreement indicated below:
Defined Term Section
------------ -------
Acquisition Subsidiary Introduction
Acquired Corporations 4.7(d)
Adjusted Gross Margin 1.9(g)
ADR Procedure 6.2(d)
ADR Service 6.2(d)
Affiliate 2.15(a)(vii)
Affiliated Group 2.9(a)(iii)
Affiliated Group Tax Return 2.9(a)(iv)
Affiliated Period 2.9(a)(v)
Agreed Amount 6.2(c)
Agreement Introduction
Articles of Merger 1.1
Average Price 1.9(g)
Business 1.9(g)
Buyer Introduction
Buyer Common Stock 1.3(e)
Buyer Disclosure Schedule Article III
Buyer Material Adverse Effect 3.1
Buyer Party 3.10(a)
Buyer Reports 3.5
Buyer 401(k) Plan 4.8(b)
CERCLA 2.23
Certificate of Merger 1.1
Certificates 1.6
- 52 -
57
Claim Notice 6.2(b)
Claimed Amount 6.2(b)
Closing 1.2
Closing Date 1.2
Code Introduction
Combination Cash 1.9(k)
Combination Shares 1.9(k)
Common Shares 1.5(a)
Company Introduction
Company Intellectual Property 2.13(a)
Company Material Adverse Effect 2.1
Controlling Party 6.2(a)
Contingent Consideration 1.9
Contingent Shares 1.9(g)
Controlling Party 6.2(a)
Customer Deliverables 2.13(a)
Damages 6.1
Deferred Consideration 1.5(a)
Deferred Stock Amount 1.5(a)
Delaware Law 1.1
Department 1.1
Determination Date 1.9(h)
Disclosure Schedule Article II
Dispute 6.2(c)
Disputes Auditor 1.9(h)
Earn-Out Period 1.9(a)
Effective Time 1.1
Employee Benefit Plan 2.22(a)
Environmental Law 2.23
ERISA 2.22(a)
Escrow Agent 1.3(f)
Escrow Agreement 1.3(f)
Escrow LC 1.5(b)
Escrow Shares 1.8
Exchange Act 2.15(a)(vii)
Expected Claim Notice 6.3
Financial Statements 2.6
GAAP 1.9(g)
Governmental Entity 2.4
Indemnification Representative 1.3(f)
Indemnified Party 6.2(a)
Indemnifying Party 6.2(a)
Initial Shares 1.5(b)
INS 2.21(b)
Intellectual Property 2.13(a)
Internal Systems 2.13(a)
- 53 -
58
Legal Proceeding 2.19
Level 1 Cash Amount 1.9(g)
Level 2 Cash Amount 1.9(g)
Level 3 Cash Amount 1.9(g)
Level 4 Cash Amount 1.9(g)
Level 1 Contingent Share Conversion Ratio 1.9(g)
Level 2 Contingent Share Conversion Ratio 1.9(g)
Level 3 Contingent Share Conversion Ratio 1.9(g)
Level 4 Contingent Share Conversion Ratio 1.9(g)
Maryland Law 1.1
Membership Card 1.9(g)
Merger 1.1
Merger Consideration 1.5(a)
Merger Shares 1.5(b)
Minimum Freshman Average Standard 1.9(g)
Most Recent Balance Sheet 2.6
Most Recent Balance Sheet Date 2.6
Nasdaq 1.5(a)
Non-controlling Party 6.2(a)
Objection Notice 1.9(h)
Option A Amount 1.5(a)
Option A Cash Amount 1.5(a)
Option A Conversion Ratio 1.5(a)
Option B Amount 1.5(a)
Option B Cash Amount 1.5(a)
Option B Conversion Ratio 1.5(a)
Option C Amount 1.5(a)
Option C Cash Amount 1.5(a)
Option C Conversion Ratio 1.5(a)
Option D Amount 1.5(a)
Option D Cash Amount 1.5(a)
Option D Conversion Ratio 1.5(a)
Options 1.7
Ordinary Course of Business 2.4
Parties Introduction
Pension Plan 2.22(g)
Permits 2.26
Plan 1.7
Pre-Closing Return 4.7(d)
Pre-Closing Straddle Period 4.7(g)
Prevailing Share Price 1.9(g)
Qualifying Discount Card Agreements 1.9(g)
Reasonable Best Efforts 4.1
Regulatory Agency 2.28
Response 6.2(c)
Revenues 1.9(g)
- 54 -
59
Sale of Buyer 4.13
SEC 3.5
Securities Act 2.2(c)
Security Interest 2.4
Software 2.13(e)
Stockholder 1.3(d)
Stockholders' Tax Representative 4.7(d)
Straddle Period 4.7(e)
Straddle Return 4.7(e)
Subsidiary or Subsidiaries 2.5(a)
Surviving Corporation 1.1
Target Revenue 1.9(g)
Tax Returns 2.9(a)(ii)
Tax or Taxes 2.9(a)(i)
Value 6.2(c)
Working Permits 2.21(b)
401(k) Plan 2.22(h)
ARTICLE IX
MISCELLANEOUS
9.1 Press Releases and Announcements. Neither the Buyer nor the Acquisition
Subsidiary shall issue any press release or public announcement relating to the
subject matter of this Agreement without the prior written approval of the
Company; provided, however, that 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). Neither the Company nor any Subsidiary nor any Stockholder shall
issue any press release or public announcement relating to the subject matter of
this Agreement without the prior written approval of the Buyer.
9.2 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.
9.3 Entire Agreement. This Agreement (including the documents referred to
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; provided that the
Mutual Non-Disclosure Agreement dated September 19, 2000, between Buyer and the
Company shall remain in effect in accordance with its terms.
9.4 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 Buyer may assign this Agreement, together
with its rights, interests and obligations hereunder, with the prior written
approval of the Indemnification Representative.
- 55 -
60
9.5 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 constitute one and the same instrument. This Agreement
may be executed by facsimile signature.
9.6 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.
9.7 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 or the Stockholders: Copy to:
------------------------------------- -------
OCM Enterprises, Inc. Shaw Pittman
4630 Montgomery Avenue 1650 Tysons Boulevard, 14th Floor
Bethesda, MD 20814 McLean, VA 22102
Attn: Devin A. Schain Attn: Lawrence T. Yanowitch
Facsimile No.: (301) 652-1480 Facsimile No.: (703) 770-7901
If to the Buyer or the Acquisition Subsidiary: Copy to:
--------------------------------------------- -------
Student Advantage, Inc. Hale and Dorr LLP
280 Summer Street, Suite 300 60 State Street
Boston, MA 02210 Boston, MA 02109
Attn: Chief Financial Officer and Attn: Mark G. Borden, Esq.
General Counsel Facsimile No.: (617) 526-5000
Facsimile No.: (617) 912-2028
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.
9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Delaware or any other jurisdiction) that would cause the application of laws of
any jurisdictions other than those of the State of Delaware, except insofar as
Maryland Law shall be mandatorily applicable to the Merger and the rights of the
Stockholders in connection therewith.
- 56 -
61
9.9 Amendments and Waivers. The Parties may mutually amend any provision of
this Agreement subject to any restrictions contained in the Maryland Law and in
the Delaware Law relating to amendments to this Agreement after obtaining
approval of the Stockholders. 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.
9.10 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.
9.11 Submission to Jurisdiction. Each of the Parties (a) submits to the
jurisdiction of any state or federal court sitting in Boston, Massachusetts or
Baltimore, Maryland in any action or proceeding arising out of or relating to
this Agreement, (b) agrees that all claims in respect of such action or
proceeding may be heard and determined in any such court and (c) agrees not to
bring any action or proceeding arising out of or relating to this Agreement in
any other court. Each of the Parties waives any defense of inconvenient forum to
the maintenance of any action or proceeding so brought and waives any bond,
surety or other security that might be required of any other Party with respect
thereto. Any Party may make service on another Party by sending or delivering a
copy of the process to the Party to be served at the address and in the manner
provided for the giving of notices in Section 9.7. Nothing in this Section 9.11,
however, shall affect the right of any Party to serve legal process in any other
manner permitted by law.
9.12 Setoff. Notwithstanding anything to the contrary contained herein, the
Buyer shall have the right to setoff against payment of all or a portion of the
amounts due and owing by the Buyer to the Stockholders under this Agreement
other than the Deferred Consideration for any amounts due and owing by the
Stockholders to the Buyer under this Agreement. The Buyer shall not have the
right to setoff against payment of any of the Deferred Consideration for amounts
due and owing by the Stockholders to the Buyer under this Agreement.
9.13 Remedies. The Parties agree that irreparable damage would occur and no
adequate remedy at law would be available in the event that any of the
provisions of Section 1.3 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 Section 1.3 of this Agreement and to enforce specifically the terms
and
- 57 -
62
provisions of Section 1.3 of this Agreement, this being in addition to any other
remedy to which the parties are entitled at law or in equity.
9.14 Construction.
(a) The language used in this Agreement shall be deemed to be the
language chosen by the Parties to express their mutual intent, and no rule of
strict construction shall be applied against any Party.
(b) 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.
[Remainder of Page Intentionally Left Blank]
- 58 -
63
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
STUDENT ADVANTAGE, INC.
By:/s/ Raymond V. Sozzi, Jr.
--------------------------------------------
Name: Raymond V. Sozzi, Jr.
Title: President and Chief Executive Officer
ORION ACQUISITION CORP.
By:/s/ Raymond V. Sozzi, Jr.
--------------------------------------------
Name: Raymond V. Sozzi, Jr.
Title: President
OCM ENTERPRISES, INC.
By: /s/ Devin A. Schain
--------------------------------------------
Name: Devin A. Schain
Title: Chief Executive Officer
STOCKHOLDERS:
/s/ Devin A. Schain
--------------------------------------------
Devin A. Schain
/s/ Michael S. Schoen
--------------------------------------------
Michael S. Schoen
/s/ Paul D. Bogart
--------------------------------------------
Paul D. Bogart
/s/ Howard S. Dumhart, Jr.
--------------------------------------------
Howard S. Dumhart, Jr.
/s/ Steven L. Matejka
--------------------------------------------
Steven L. Matejka
- 59 -
64
The undersigned, being the duly elected Secretary of the Acquisition
Subsidiary, hereby certifies that this Agreement has been adopted by a majority
of the votes represented by the outstanding shares of capital stock of the
Acquisition Subsidiary entitled to vote on this Agreement.
/s/ Kenneth S. Goldman
---------------------------------------
Kenneth S.Goldman
Secretary
The undersigned, being the duly elected Secretary of the Company,
hereby certifies that this Agreement has been adopted by two-thirds of all of
the votes represented by the outstanding Common Shares entitled to vote on this
Agreement.
/s/ Michael S. Schoen
---------------------------------------
Michael S. Schoen
Secretary
[The following schedules and exhibits to this Agreement and Plan of Merger have
been omitted and will be provided to the Commission upon request to the Company:
Exhibits
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Investment Representation Letter
Exhibit C - Form of Lock-Up Agreement
Exhibit D - Form of Registration Rights Agreement
Exhibit E-1 - Form of Opinion of Counsel to the Company
Exhibit E-2 - Form of Opinion of Counsel to the Company
Exhibit F - Form of Resignation
Exhibit G - Form of Opinion of Counsel to the Buyer and
Acquisition Subsidiary
Schedules
Schedule 1.5 - Election of Merger Consideration
Schedule 5.1(a) - Required Consents]
- 60 -