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EXHIBIT 10.23
AGREEMENT AND PLAN OF MERGER
by and among
Tekgraf, Inc., a Delaware corporation,
Tekgraf Sub II, Inc., a Georgia corporation,
and
Martec, Inc.
a California corporation, and its shareholders
Dated as of March 23, 1998
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TABLE OF CONTENTS
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 Purchase Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.5 Dissenting Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.6 Certain Tax Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE II REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1 Representations and Warranties of the Company and the
Company Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2 Representations and Warranties of Acquisition Sub
and Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.3 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.4 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.5 Investment Representation of Company Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE III COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.1 Covenants Against Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.3 Interim Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.4 Completion of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.5 On and After Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.6 Continuity of Business Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.7 Non-Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.8 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.9 Company Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
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ARTICLE IV CONDITIONS PRECEDENT TO OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.1 Conditions to Obligations of Acquisition Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.2 Conditions to Obligations of the Company and the Company Shareholders . . . . . . . . . . . . . . . 39
ARTICLE V INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.1 Survival of Representations, Warranties, Covenants and Agreements . . . . . . . . . . . . . . . . . 40
5.2 Indemnification of Acquisition Sub and Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.3 Indemnification of the Company Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.4 Procedure for Indemnification with Respect to Third-Party Claims . . . . . . . . . . . . . . . . . 41
5.5 Procedure For Indemnification with Respect to Non-Third Party Claims. . . . . . . . . . . . . . . . 42
5.6 Escrowed Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE VI TERMINATION AND CONDITIONS SUBSEQUENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE VII MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.1 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.2 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.3 Binding Effect: Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.4 Expenses of Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.5 Waiver; Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.8 Remedies of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.10 Arbitration; Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.11 Cooperation and Records Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of March ___, 1998, is
made and entered into by and among TEKGRAF, INC., a Delaware corporation
("Purchaser"), TEKGRAF SUB II, a Georgia corporation ("Acquisition Sub"),
MARTEC, INC., a California corporation doing business as Media Graphics
Distribution and as MGD (the "Company"), and the shareholders set forth on the
signature page of this Agreement (the "Company Shareholders"). Acquisition Sub
and the Company are hereinafter sometimes referred to as the "Constituent
Corporations" and Acquisition Sub as the "Surviving Corporation".
WHEREAS, Purchaser, Acquisition Sub, and the Company desire that the
Company merge with and into Acquisition Sub (the "Merger"), upon the terms and
conditions set forth herein and in accordance with the Georgia Business
Corporation Code and the California General Corporation Law, with the result
that Acquisition Sub shall continue as the surviving corporation and the
separate existence of the Company (except as it may be continued by operation
of law) shall cease;
WHEREAS, Purchaser, Acquisition Sub, and the Company desire that, upon
the Merger, at the Effective Time (as hereinafter defined), all outstanding
shares of common [and preferred] stock of the Company be converted into shares
of common stock of Purchaser and cash as provided herein;
WHEREAS, the respective Boards of Directors of Purchaser, Acquisition
Sub, and the Company have approved the Merger; and
WHEREAS, the parties intend for the Merger to be accomplished under
Section 368(a)(2)(D) under the Internal Revenue Code of 1986, as amended;
NOW, THEREFORE, for and in consideration of the mutual
representations, warranties, covenants, agreements and conditions contained
herein, and in order to set forth the terms and conditions of the Merger and
the mode of carrying the same into effect, the parties hereto hereby agree as
follows:
DEFINITIONS
"Accounts Receivable" has the meaning set forth in Section 2.1(kk).
"Accredited Investor" has the meaning set forth in Regulation D
promulgated under the Securities Act of 1933.
"Acquisition Sub" means Tekgraf Sub II, Inc., a Georgia corporation.
"Acquisition Sub Common Stock" means the common stock of Tekgraf Sub
II, Inc., par value $.001 per share.
"Acquisition Sub Indemnifiable Claims" has the meaning set forth in
Section 5.3.
"Acquisition Sub Share" means a share of Acquisition Sub Common Stock.
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"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934.
"Affiliated Group" means any affiliated group within the meaning of
Code Section 1504(a).
"Articles of Merger" means the Articles of Merger respecting the
Merger as filed by the Parties with the Secretary of State of the State of
California.
"Audited Balance Sheet" has the meaning set forth in Section 2.1(e).
"Business" shall mean, collectively, the businesses conducted by the
Company including, among other things, the business of computer integration and
wholesale distribution of computer products.
"Capital Stock" has the meaning set forth in Section 2.1(b).
"Cash Consideration" has the meaning set forth in Section 1.2(e).
"Certificate of Merger" means the Certificate of Merger respecting the
Merger filed by the Parties with the Secretary of State of the State of
Georgia.
"Claim" has the meaning set forth in Section 2.1(bb).
"Closing" has the meaning set forth in Section 1.4 below.
"Closing Date" has the meaning set forth in Section 1.4 below.
"Code" has the meaning set forth in Section 2.1(k).
"Company" means Martec, Inc., a California corporation doing business
as Media Graphics Distribution and MGD.
"Company Indemnifiable Claims" has the meaning set forth in Section
5.2.
"Company Share" means a share of common stock of the Company, no par
value.
"Company Shareholder(s)" means any shareholder(s) of the Company.
"Company State" means the state of incorporation of the Company.
"Confidential Material" has the meaning set forth in Section 3.1(a).
"Contracts" has the meaning set forth in Section 2.1(r).
"Customers" has the meaning set forth in Section 2.1(dd).
"Damages" has the meaning set forth in Section 5.2.
"Dissenting Share" means any Company Share which any shareholder who
or which has exercised his or its appraisal rights under the California
Corporate Code holds of record.
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"Effective Time" has the meaning set forth in Section 1.2(a) below.
"Employees" has the meaning set forth in Section 2.1(z).
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Resource Conservation and Recovery
Act of 1976, and the Occupational Safety and Health Act of 1970, each as
amended, together with all other laws (including rules, regulations, codes,
plans, injunctions, judgments, orders, decrees, rulings, and charges
thereunder) of federal, state, local, and foreign governments (and all agencies
thereof) concerning pollution or protection of the environment, public health
and safety, or employee health and safety, including laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or wastes
into ambient air, surface water, ground water, or lands or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or wastes.
"Equity Consideration" has the meaning set forth in Section 1.2(e).
"ERISA" has the meaning set forth in Section 2.1(hh).
"Financial Statements" has the meaning set forth in Section 2.1(e).
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Act" means the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust
Improvements Act of 1976, as amended.
"Hazardous Substance Issues" has the meaning set forth in Section
2.1(bb).
"Indemnifiable Claims" has the meaning set forth in Section 5.4(a).
"Indemnified Party" has the meaning set forth in Section 5.4(a).
"Indemnifying Party" has the meaning set forth in Section 5.4(a).
"Intellectual Property" means (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures, together
with all reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof, (b) all trademarks, service marks,
trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including all applications, registrations, and renewals in connection
therewith), (f) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing, the production process and techniques, technical data, designs,
drawings, specifications, customer and supplier lists, pricing and cost
information, and
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business and marketing plans and proposals), (g) all computer software
(including data and related documentation), (h) all other proprietary rights,
and (i) all copies and tangible embodiments thereof (in whatever form or
medium).
"Inventory" has the meaning set forth in Section 2.1(j).
"IRS" means the Internal Revenue Service.
"Knowledge" means the actual knowledge of all officers, directors and
shareholders of the Company, after reasonable investigation and due inquiry.
"Leased Properties" has the meaning set forth in Section 2.1(gg).
"Liens" has the meaning set forth in Section 2.1(i).
"Managing Shareholder" shall mean ▇▇▇▇ ▇▇▇▇▇, the current president of
Martec, Inc.
"Materials" has the meaning set forth in Section 2.1(r).
"Merger" has the meaning set forth in the recitals above and in
Section 1.1 below.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" means a party to this Agreement and the Merger.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Plan" has the meaning set forth in Section 2.1(hh).
"Purchaser Common Stock" shall mean the Class A Common Stock of
Purchaser, par value $.001 per share.
"Purchaser Shares" means shares of Purchaser Common Stock.
"Qualified Plans" has the meaning set forth in Section 2.1(hh).
"Related Agreements" shall mean any and all escrow agreements and
employment agreements required to be executed in connection with this
Agreement.
"Related Property" has the meaning set forth in Section 2.1(t).
"Representatives" has the meaning set forth in Section 2.1(aa).
"Returns" has the meaning set forth in Section 2.1(k).
"SEC" means the Securities and Exchange Commission.
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"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended.
directors.
"Suppliers" has the meaning set forth in Section 2.1(r).
"Surviving Corporation" has the meaning set forth in Section 1.1
below.
"State" shall have the meaning set forth in Section 2.1(a).
"Taxes" has the meaning set forth in Section 2.1(k).
"Territory" has the meaning set forth in Section 3.5(a).
"Unaudited Annual Financial Statements" has the meaning set forth in
Section 2.1(e).
"Unaudited Financial Statements" has the meaning set forth in Section
2.1(e).
"Unaudited Interim Financial Statements" has the meaning set forth in
Section 2.1(e).
ARTICLE I
THE MERGER
Section 1.1 The Merger. On and subject to the terms and
conditions of this Agreement, the Company will merge with and into Acquisition
Sub (the "Merger") at the Effective Time. From and after the Effective Time,
the separate corporate existence of the Company shall cease, and Acquisition
Sub shall continue as the corporation surviving the Merger (the "Surviving
Corporation"). Immediately after the Effective Time, the Surviving Corporation
shall change its name to "Media Graphics Distribution, Inc." and shall file
with the Secretary of State of the State of California its qualification to do
business as a foreign corporation. The parties shall cause the Certificate of
Merger to be filed with the Secretary of State of the State of Georgia and the
Secretary of State of the State of California promptly following the Closing.
Section 1.2 Effect of Merger.
(a) General. The Merger shall become effective at the time (the
"Effective Time") when the Articles of Merger filed with the Secretary of State
of the State of California and the Certificate of Merger filed with the
Secretary of State of the State of Georgia have become effective in accordance
with their terms and in accordance with the laws of each State. The Merger
shall have the effect set forth in Chapter 11 of the California General
Corporation Law and Section 14-2-1106 of the Georgia Business Corporation Code.
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 the Surviving Corporation in order to carry out and effectuate the
transactions contemplated by this Agreement. Further, the Surviving
Corporation shall possess all of the rights, privileges, powers and franchises,
and be subject to all the restrictions, disabilities and duties, of each of the
Constituent
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Corporations; and the rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property of and all debts due to any of the
Constituent Corporations on whatever account, shall be vested in the Surviving
Corporation; and all property, rights, privileges, powers and franchises, and
all and every other interest shall be thereafter as effectually the property of
the Surviving Corporation as they were of the Constituent Corporations, and the
title to any real estate vested by deed or otherwise in any of the Constituent
Corporations shall not revert or be in any way impaired by reason of the
Merger, but all rights of creditors and all liens upon any property of any of
the Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the Constituent Corporations shall attach to the
Surviving Corporation and may be enforced against it to the same extent as if
said debts, liabilities and duties had been incurred or contracted by it.
(b) Articles of Incorporation. The Articles of Incorporation of
Acquisition Sub in effect at and as of the Effective Time will remain the
Articles of Incorporation of the Surviving Corporation without any modification
or amendment, other than the change of the name of the Surviving Corporation,
in the Merger.
(c) Bylaws. The Bylaws of Acquisition Sub in effect at and as of
the Effective Time will remain the Bylaws of the Surviving Corporation without
any modification or amendment, other than the change of the name of the
Surviving Corporation, in the Merger.
(d) Directors and Officers. The initial directors of the
Surviving Corporation at and as of the Effective Time shall be comprised of the
current Acquisition Sub directors, and those persons listed on Exhibit D. The
principal officers of the Surviving Corporation at and as of the Effective Time
shall be as set forth in Exhibit D.
(e) Conversion of Shares. At and as of the Effective Time, in
consideration for the Capital Stock and in full payment therefor, each Company
Share shall be converted into the right to receive its pro rata share of (i)
Five Hundred Thousand Dollars ($500,000.00) (the "Cash Consideration") and (ii)
an aggregate of 300,000 shares of Purchaser Common Stock (the "Equity
Consideration," together with the Cash Consideration, hereinafter referred to
collectively as the "Purchase Price"), subject to the adjustments to the
Purchase Price set out in Section 1.3. All shares of Purchaser Common Stock
issued as herein described shall have identical rights as to dividends, voting
and all other matters. Except as expressly provided in this Agreement, there
shall be no other consideration paid to or for the account of the Company
Shareholders in connection with or relating to the transactions contemplated
hereby. However, the Equity Consideration shall be subject to equitable
adjustment in the event of a stock split, stock dividend, reverse stock split,
or other change in the number of Purchaser Shares outstanding. Each
Dissenting Share shall be converted into the right to receive payment from the
Surviving Corporation with respect thereto in accordance with the provisions
set forth in Section 1.5. No Company Share shall be deemed to be outstanding
or to have any rights other than those set forth above in this Section 1.2(e)
after the Effective Time. No fractional Purchaser Shares shall be issued, and,
to the extent that any shareholder would be entitled to receive fractional
shares of Purchaser Common Stock pursuant this Section, the number of Purchaser
Shares that such Company Shareholder is entitled to receive shall be rounded
down to the next lower whole number. Any such fractional share interests will
not entitle the holder thereof to vote or to any rights of a shareholder of
Purchaser.
(f) All shares of Capital Stock held by the Company as treasury
stock shall be retired and canceled and no shares of Purchaser Common Stock or
other consideration shall be delivered or paid in exchange therefor.
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(g) Each Purchaser Share issued and outstanding at and as of the
Effective Time will remain issued and outstanding thereafter.
Section 1.3 Purchase Price Adjustment.
(a) As used in this Section 1.3, the following capitalized terms
shall have the meanings set forth below:
"Actual Pre-Tax Profit" shall mean the pre-tax profit of the Surviving
Corporation, determined in accordance with generally accepted accounting
principles consistently applied ("GAAP"), for the Year. Except as otherwise
stated herein, the accounting principles employed shall be the same as those
applied by the Company on a consistent basis in prior years. Depreciation for
all plant and equipment shall be computed as follows: (i) items with a useful
life of three years or less when placed in service shall be depreciated using
the straight-line method of depreciation; (ii) items with a useful life of
greater than three years when placed in service shall be depreciated using the
declining- declining-balance method of depreciation; (iii) items with a value
of less than $400.00 when purchased shall be expensed and written off
immediately; (iv) prior period adjustments and extraordinary items, as
defined in APB Opinion 9, APB Opinion 20 and FASB Statement 15 will be excluded
from the definition of "Actual Pre-Tax Profit;" and, (v) inventories will be
accounted for on a cost basis consistent with prior years, determined on a
first-in, first-out basis and providing for a write down to market value in
those instances where the cost exceeds the market value as of the date of the
balance sheet. The "Actual Pre-Tax Profit" shall be adjusted on a pro forma
basis, as and if required, to reflect profit or losses normally attributable to
the Company/Surviving Corporation due to the manufacturers' co-op, advertising,
market development or discount programs, if such profit or losses are not
received by or charged to Acquisition Sub.
"Actual Tangible Net Asset Value" shall mean the aggregate amount of
the Current Assets less Liabilities on the Closing Date.
"Alternative Actual Pre-Tax Profit" shall mean the pre-tax profit of
the Surviving Corporation, determined in accordance with generally accepted
accounting principles consistently applied ("GAAP"), for the Alternative Year.
Other than the period for which it is calculated, it shall be computed in the
same manner as the Actual Pre-Tax Profit.
"Alternative Warranted Pre-Tax Profit" shall mean $500,000.
"Alternative Year" means the twelve month period beginning on the date
which is three months after the day after the Closing Date and ending on the
date which is fifteen months after the Closing Date.
"Current Assets" shall be used in all respects in accordance with GAAP
and comprises the aggregate of all cash, cash equivalents, receivables and
inventory, but specifically excludes all other fixed or current assets as
determined in accordance with GAAP and any deferred assets, including without
limitation deferred tax and deferred income, and valued in accordance with
GAAP, and on a basis in all material respects consistent with that adopted for
the purposes of the last audited financial statements of the Company and the
value of all receivables and inventory has been written down to realizable
market value and adequate provision has been made therefor.
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"Fixed Assets" shall be used in all respects in accordance with GAAP
and shall mean fixed assets at the values at which they were included in the
latest audited financial statements (or if acquired after the balance sheet
date, their cost), less depreciation calculated in accordance with the method
adopted in the financial statements. Fixed Assets shall specifically exclude,
and no value shall be attributable to, any intangible assets (including without
limitation goodwill, trademarks, service marks, formulas, franchise rights and
patents), and no asset shall be written up or revalued above its original cost
less applicable depreciation.
"Liabilities" shall be used in all respects in accordance with GAAP
and shall mean all liabilities, whether long-term or current, including without
limitation Taxes, all actual liabilities of the Company on the Closing Date,
with proper provision in accordance with GAAP, having been made therein for all
other liabilities of the Company then outstanding whether contingent,
quantified, disputed or not, that are known or reasonably should have been
known, including without limitation the cost of any work or material for which
payment has been received or credit taken, any future loss which may arise in
connection with uncompleted contracts and any claims against the Company in
respect of completed contracts.
"Net Asset Value Shortfall" means the excess, if any, of the Warranted
Tangible Net Asset Value over the Actual Tangible Net Asset Value on the
Closing Date, subject to the limitations set forth in this Section 1.3.
"Net Asset Value Surplus" means the excess, if any, of the Actual
Tangible Net Asset Value over the Warranted Tangible Net Asset Value on the
Closing Date, subject to the limitations set forth in this Section 1.3.
"Profit Shortfall" means the excess, if any, of the Warranted Pre-Tax
Profit over the Actual Pre-Tax Profit, subject to the limitations set forth in
this Section 1.3.
"Profit Surplus" means the excess, if any, of the Actual Pre-Tax
Profit over $500,000, subject to the limitations set forth in this Section 1.3.
"Warranted Pre-Tax Profit" shall mean $450,000.
"Warranted Tangible Net Asset Value" shall mean $260,000.
"Year" means the twelve month period beginning on the day after the
Closing Date and ending on the first anniversary of the Closing Date.
(b) Each Company Shareholder agrees that the Warranted Pre-Tax
Profit and the Warranted Tangible Net Asset Value of the Company shall be not
less than the amounts set forth above. To the extent that any of the
conditions set forth below are met, the corresponding adjustments to the
Purchase Price payable to the Company Shareholders or the Purchaser, as the
case may be, shall be made:
(i) In the event that there is a Net Asset Value Surplus,
the Purchase Price shall be increased by the amount of the Net Asset
Value Surplus. Such amount will be paid by the Purchaser, in cash, to
the Company Shareholders within ninety (90) days after the
determination of Actual Tangible Net Asset Value.
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(ii) In the event that there is a Net Asset Value
Shortfall, the Purchase Price shall be reduced by the amount of the
Net Asset Value Shortfall. Such amount will be paid, in cash, by the
Company Shareholders to Purchaser within thirty (30) days after the
determination of the Actual Tangible Net Asset Value.
(iii) In addition to any adjustments made pursuant to
subsections (i) and (ii) above, if the Actual Pre-Tax Profit for the
Year (or for the Alternative Year, if applicable) exceeds $500,000,
the Purchase Price shall be increased by the number of Purchaser
Shares determined by the following formula (the "Profit Surplus
Adjustment"):
(Actual Pre-Tax Profit/$500,000 x 400,000) - 400,000
In no event, however, shall the Purchase Price be increased by
more than 40,000 Purchaser Shares pursuant to this Profit Surplus
Adjustment (the "Adjustment Ceiling").
(iv) The number of Purchaser Shares required for the
Profit Surplus Adjustment shall be transferred to Company Shareholders
within three business days after the final determination of the amount
of such Profit Surplus Adjustment. Also in addition to any
adjustments made pursuant to subsections (i) and (ii) above, in the
event that the Warranted Pre-Tax Profit exceeds the Actual Pre-Tax
Profit for the Year (or the for Alternative Year, if applicable), the
Purchase Price shall be reduced by the number of Purchaser Shares
determined by the following formula (the "Profit Shortfall
Adjustment"):
400,000 - (Actual Pre-Tax Profit/$500,000 x 400,000)
The number of Purchaser Shares required for the Shortfall
Surplus Adjustment shall be transferred to Purchaser within three
business days after the receipt of notice from Purchaser of the amount
of such Profit Shortfall Adjustment. In no event, however, shall the
Purchase Price be reduced by more than 75,000 Purchaser Shares
pursuant to this Profit Shortfall Adjustment (the "Adjustment
Floor").
(v) In the event that there is a stock split, stock
dividend, reverse stock split or other change in the number of
Purchaser Shares outstanding, the formulae set forth in subsections
(iii) and (iv) above, the Adjustment Ceiling and the Adjustment Floor
shall be proportionately adjusted to reflect such a change in the
number of Purchaser Shares.
(c) Any receivable of the Company existing as of the Closing Date
that remains uncollected by the Surviving Corporation or its successor 90 days
after the Closing Date, or such later date as determined by the Extension
Option below (the "Measurement Date"), or, as of such date, has been collected
at less than its full value as shown in Current Assets on the Closing Date
shall be considered a "Collection Shortfall." The Company Shareholders shall
have the option to extend the Measurement Date to a date that is 120 days after
the Closing Date by giving notice of such extension to Purchaser and Surviving
Corporation no later than the date which is 60 days after the Closing Date (the
"Extension Option"). In the event that there is a Collection Shortfall, (i)
the Surviving Corporation shall have the option of assigning such receivable to
the Company Shareholders, without representation or warranty, not more than 30
days after the Measurement Date, and demanding the amount of the Collection
Shortfall, and upon such assignment, such Company Shareholders shall pay to the
Surviving Corporation such amount, in cash, within ten (10) days after demand;
provided that Surviving Corporation shall have exercised all reasonable efforts
at collecting such receivable at such full value;
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and (ii) the Company Shareholders shall have the option of causing the
Surviving Corporation to sell such receivable to the Company Shareholders,
without representation or warranty, not more than 120 days after the Closing
Date, and paying the amount of the Collection Shortfall, and upon such
assignment, the Company Shareholders shall pay Surviving Corporation such
amount, in cash, within ten (10) days after demand. The Company Shareholders
shall thereafter be free to pursue such collection measures as they in their
sole discretion shall deem necessary or appropriate. To the extent, if any,
that the Collection Shortfall remains unpaid after such ten (10) day period,
Surviving Corporation shall adjust the Purchase Price, effective as of the
Closing Date, in accordance with the provisions set forth in Section 1.3(b)(ii)
above, adding Collection Shortfall to the Net Asset Value Shortfall.
(d) Any items of the Company's inventory existing as of the
Closing Date that remain unsold by the Surviving Corporation or its successor
90 days thereafter, or such later date as chosen by the Company Shareholders
upon exercise of the Extension Option, set forth in Section 1.3(c) above, or
which have been sold at less than full value as shown in Current Assets on the
Closing Date shall be considered "Inventory Shortfall." Not more than thirty
(30) days after the Measurement Date, Surviving Corporation shall deliver and
transfer such unsold inventory to the Company Shareholders without
representation or warranty and shall demand the amount of the Inventory
Shortfall, and upon such transfer and delivery, the Company Shareholders shall
pay the Surviving Corporation such amount, in cash, within ten (10) days of
demand; provided that Surviving Corporation shall have exercised all reasonable
efforts at selling such inventory at such full value. Such Company
Shareholders shall, at any time after Surviving Corporation's demand of the
Inventory Shortfall, be free to sell such inventory as they in their sole
discretion shall deem necessary or appropriate. To the extent, if any, that
the Inventory Shortfall remains unpaid after such ten (10) day period,
Surviving Corporation shall adjust the Purchase Price, effective as of the
Closing Date, in accordance with the provisions set forth in Section 1.3(b)(ii)
above, adding Inventory Shortfall to the Net Asset Value Shortfall.
(e) Each Company Shareholder shall escrow twenty percent (20%) of
the Equity Consideration (the "Escrowed Shares") and the Company Shareholders
shall collectively escrow $150,000 of the Cash Consideration (the "Escrowed
Cash"), to be subject to redistribution by Purchaser and Acquisition Sub in the
circumstances described in this Section 1.3. The terms of the escrow shall be
substantially as set forth in the form of Escrow Agreement attached as Exhibit
1.3(e) hereto. Any Escrowed Cash not subject to redistribution for purposes of
this Section shall be released to the Company Shareholders after final
determination of the Actual Tangible Net Asset Value. The Escrowed Cash
released to the Company Shareholders shall include interest earned on such
released Escrowed Cash, to the extent that the Company Shareholders provide the
escrow agent with the appropriate paperwork required to invest such funds on a
timely basis. Upon determination of either a Profit Surplus Adjustment or a
Profit Shortfall Adjustment pursuant to the terms of Section 1.3(b), the number
of Escrowed Shares to be used to satisfy such Adjustment shall be calculated by
dividing the amount of the Adjustment by the twenty-day average trading price
of Purchaser Common Stock as quoted on the Nasdaq National Market System for
the twenty-day period ending on the date that the Adjustment is determined. Any
Escrowed Shares not subject to redistribution for the purposes of this Section
shall be released to the Company Shareholders as follows: one-half within
thirty (30) days after the determination of the application of this Section
1.3 pursuant to the provisions of subsection (b), (c) or (d) above, as the case
may be, and one-half on the first anniversary of the Closing Date, or, in the
event that the Company Shareholders elect to exercise the Alternative Year
provisions set forth in Section 1.3(g), at the end of the Alternative Year. In
the event that the Purchase Price Adjustment described in this Section 1.3
exceeds the number of Escrowed Shares and the amount of Escrowed Cash
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available, Purchaser's recovery of shares or cash pursuant to the Purchase
Price Adjustment shall not be limited to the number of available Escrowed
Shares or the amount of Escrowed Cash. In the event that Purchaser elects,
pursuant to Section 1.3(h), to waive the Profit Surplus Adjustment of Section
1.3(b)(iii) and the Profit Shortfall Adjustment of Section 1.3(b)(iv), the
Escrowed Shares shall be transferred to the escrow account established under
Section 5.6 hereof, and such shares shall become subject to all of the terms
and conditions under Section 5.6, except that such shares shall be released to
the Company Shareholders pursuant to the provisions of that certain Pledge,
Security and Escrow Agreement executed in connection with Section 5.6 hereof.
(f) As an example of the application of subsections (b) and (c)
above, in the event that the Actual Tangible Net Asset Value shall be $240,000
on the Closing Date rather than the Warranted Tangible Net Asset Value of
$260,000, being a $20,000 shortfall in Warranted Tangible Net Asset Value, and
an additional shortfall is determined under subsection (c) above in the amount
of $10,000 and such amount remains unpaid, and in the event that the Actual
Pre-Tax Profit shall be $430,000, rather than the Warranted Pre-Tax Profit of
$450,000, being a $20,000 shortfall in Warranted Pre-Tax Profit, then the
amount of Cash Consideration shall be reduced by $30,000 and the number of
Purchaser Shares to be distributed to the Company Shareholders shall be reduced
by 56,000 shares, computed as follows:
400,000 - ($430,000 / $500,000 x 400,000) = 56,000 Shares
(g) For purposes of calculating the Purchase Price Adjustment
under this Section 1.3, the Company Shareholders shall have the option, at the
end of the Year, to calculate the Profit Surplus Adjustment, as set forth in
Section 1.3(b)(iii), and the Profit Shortfall Adjustment, as set forth in
Section 1.3(b)(iv), based on the Alternative Year rather than the Year. If the
Company Shareholders elect to exercise this option, the following substitutions
shall be made to the provisions of Sections 1.3(b)(iii) and (iv): the
Alternative Actual Pre-Tax Profit shall be substituted for the Actual Pre-Tax
Profit and the Alternative Warranted Pre-Tax Profit shall be substituted for
the Warranted Pre-Tax Profit. Once the Company Shareholders elect to exercise
this option, the decision shall be final, and the Company Shareholders shall
not be entitled to calculate the Purchase Price Adjustment based on the Actual
Pre-Tax Profit and the Warranted Pre-Tax Profit.
(h) Purchaser shall have the exclusive option to waive the Profit
Surplus Adjustment set forth in Section 1.3(b)(iii) and the Profit Shortfall
Adjustment set forth in Section 1.3(b)(iv) by giving notice of its election to
exercise such option within 120 days after the Closing Date. In the event that
Purchaser makes such an election, there shall be no adjustments whatsoever
pursuant to Sections 1.3(b)(iii) and (iv).
(i) Until the end of the Year (or the end of the Alternative Year,
if the Shareholders elect to calculate the Purchase Price Adjustment on that
basis), the Purchaser covenants and agrees as follows:
(i) The business and assets of the Company, to which the
Surviving Corporation will succeed in the Merger, will be maintained
intact as a business unit, under the management and control of the
Managing Shareholder, and operating in substantially the same manner
as prior to the Merger, with substantially the same managerial and
support staff, working capital, and other business resources, as prior
to the Merger, so the Company Shareholders will not be disadvantaged,
in their attempt to achieve the maximum Actual or Alternative Pre-Tax
Profit, by factors such as the combination of the Company's business
and assets with other businesses,
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or the diversion of managers, employees, working capital and other
resources to other activities of Purchaser or its affiliates. In this
connection, all dealings and transactions between the Surviving
Corporation and the Purchaser and Purchaser's affiliates will be
conducted on an arm's length basis, except as set forth below, and on
terms at least as favorable to the Company as it could obtain from an
unrelated third party.
(ii) The Surviving Corporation shall be entitled to "Most
Favored Distributor" status, in that it shall be entitled to deal with
Purchaser and its affiliates on terms at least as favorable as any
other person or entity acting as a distributor, representative or in a
similar capacity for the Purchaser or any affiliate, and without
limitation, will be given the reasonable opportunity to become a
distributor, representative or seller of each of the products and
product lines offered now or in the future by Purchaser or its
affiliates, except to the extent that such products are licensed
directly to Purchaser or one or more affiliates of Purchaser by a
third party.
(a) Specific service requests by Purchaser to
Surviving Corporation and vice versa for technical
aid, special services, advertising, and similar
services will be charged on a basis of cost.
Operating capital advanced to Acquisition Sub.,
Surviving Corporation or their successor by Purchaser
will bear interest at the Prime Rate charged by
NationsBank N.A. of Delaware, or at the rate
Purchaser pays for the funds.
(b) General services such as auditing, tax,
legal, etc. provided or paid for by Purchaser for the
Surviving Corporation in lieu of obtaining such
services from other sources will be charged to the
Surviving Corporation at cost on a basis consistent
with Purchaser's current practice. However, charges
for such services shall be limited to services
provided and shall not exceed costs at which
Surviving Corporation could reasonably expect to
obtain similar services from other sources.
Arbitrary charges by Purchaser for management or
administrative services which are neither
controllable by Surviving Corporation nor properly
chargeable against Surviving Corporations operations
will be excluded from any determination of Company's
Actual or Alternative Pre-Tax Profit.
(iii) The Surviving Corporation shall receive credit, in
the calculation of Actual or Alternative Pre-Tax Profit, for all
credits from its vendors and manufacturers for items such as
advertising, rebates, market development funds, and the like that are
properly attributable to Surviving Corporation.
(iv) The Surviving Corporation will be given credit for
all available anticipation, prepay or early pay discounts on
vendor/manufacturer charges and invoices that are properly
attributable to Surviving Corporation.
(j) In the event that a "Change of Control," as defined below,
occurs prior to the end of the Year (or the Alternative Year, if Shareholders
elect to calculate the Purchase Price Adjustment on that basis), then, at
Shareholder's option, the Purchase Price Adjustment shall be waived, no such
adjustment shall occur and the Escrows provided under Section 1.3(e) shall be
released. For purposes hereof, a "change of Control" shall mean any
transaction in which: (a) individuals who were directors of the Purchaser,
immediately prior to a Control Transaction shall cease, within one year of any
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Control Transaction, to constitute a majority of the Purchaser's Board of
Directors (or of the Board of Directors of any successor to Purchaser or to all
or substantially all of its assets), or (b) any entity, person or group which
is not currently a shareholder of the Purchaser acquires shares of the
Purchaser in a transaction or series of transactions that result in such
entity, person or group directly or indirectly owning beneficially 51% or more
of the outstanding shares. Notwithstanding the foregoing, an issuance of
shares by the Purchaser to more than one party in connection with a
capital-raising transaction shall not constitute a Change in Control. "Control
Transaction" shall mean (aa) any tender offer for or acquisition of capital
stock of Purchaser, (bb) any merger, consolidation, or sale of all or
substantially all of the assets of Purchaser which has been approved by the
shareholders, (cc) any contested election of directors of Purchaser which
results in a change in the majority of the Board of Directors of Purchaser, or
(dd) any combination of the foregoing which results in a change in voting power
sufficient to elect a majority of the Board of Directors of Purchaser.
Section 1.4 The Closing. Subject to termination of this
Agreement as provided in Article VI below, the closing and consummation of the
transactions contemplated by this Agreement shall take place in the offices of
Purchaser's attorneys on such date that the conditions of closing set forth in
Article IV hereof have been satisfied or waived, or such other date as the
parties hereto may mutually select (the "Closing Date"), which in no event
shall be after April 1, 1998, unless extended as provided herein. Purchaser
and Acquisition Sub on the one hand, and Company and Company Shareholders on
the other hand, shall each have the unilateral option to extend the Closing
Date to a date which is not more than 30 days after April 1, 1998, provided
that the party electing to exercise such option shall give written notice of
its election to do so not later than three (3) business days prior to April 1,
1998. Thereafter, the parties may extend the Closing Date by mutual consent.
The "Closing" shall mean the deliveries to be made by the parties hereto on the
Closing Date in accordance with this Agreement, as follows: (i) Company will
deliver to Acquisition Sub and Purchaser the various certificates, instruments
and documents referred to in Section 4.1 below; (ii) Acquisition Sub and
Purchaser will deliver to Company the various certificates, instruments and
documents referred to in Section 4.2 below; (iii) each Company Shareholder
shall deliver to Acquisition Sub and Purchaser for cancellation the
certificates representing his shares of Capital Stock; (iv) Acquisition Sub and
Purchaser will deliver the consideration specified in Section 1.2 above,
subject to any adjustments made pursuant to Section 1.3; and (v) the Parties
will file a Certificate of Merger with the Secretary of State of the State of
Georgia in substantially the form attached hereto as Exhibit A and will file
Articles of Merger with the Secretary of State of the State of California in
substantially the form attached hereto as Exhibit B. The Merger shall be
deemed to have become effective as of 12:01 a.m. Atlanta, Georgia Time on the
Closing Date.
Section 1.5 Dissenting Shareholders. In the event that any
holder of Company Shares elects to exercise its dissenters rights pursuant to
the applicable provisions of the California General Corporation Law, and in the
event that Purchaser or Acquisition Sub have not otherwise terminated this
Agreement pursuant to Section 6.1, Purchaser and Acquisition Sub shall have the
right to terminate this Agreement on account of such shareholder's election.
If Purchaser and Acquisition Sub do not elect to terminate this Agreement, any
holder of Company Shares who perfects his or her dissenters' rights of
appraisal in accordance with and as contemplated by the applicable provisions
of the California General Corporation Law shall be entitled to receive the
value of such shares in cash as determined pursuant to such provision of the
California General Corporation Law, provided that no such payment shall be made
to any dissenting shareholder unless and until such dissenting shareholder has
complied with the applicable provisions of the California General Corporation
Law and surrendered to the Company the certificate or certificates
representing the shares for which payment is being made. In the event that
after the Effective Time a dissenting shareholder fails to perfect or
effectively withdraws or loses his or
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her right to appraisal and of payment for his or her shares, Surviving
Corporation shall issue and deliver the consideration to which such holder of
shares is entitled under this Article I (without interest) upon surrender by
such holder of the certificate or certificates representing the shares held by
him or her.
Section 1.6 Certain Tax Agreements. The Parties intend to adopt
this Agreement and Merger as a tax-free reorganization under Section
368(a)(2)(D) of the Internal Revenue Code of 1986, as amended. The parties
shall not take a position on any tax return or engage in any activities
inconsistent with this Section 1.6. The adoption of this Agreement and the
approval of the Merger by the Company Shareholders shall constitute the
agreement by each Company Shareholder that, without limiting the foregoing:
(a) Such Company Shareholder has not sold, exchanged, transferred
or disposed of Company Shares in contemplation of the Merger except as
disclosed on Schedule 1.6 attached hereto, and such Company Shareholder has no
present intent to and will not sell, exchange, transfer, dispose of or receive
any such stock in contemplation of the Merger, nor has such Company Shareholder
entered into any discussions or negotiations with regard to the possible sale,
exchange, transfer or other disposition of such stock.
(b) Such Company Shareholder is not subject to any obligation to
sell, exchange, transfer or otherwise dispose of all or any Purchaser Shares to
be received by such Company Shareholder in the Merger. Such Company
Shareholder has not entered into any discussion or negotiations with regard to
the possible sale, exchange, transfer or other disposition of all or any of the
Purchaser Shares. Such Company Shareholder has no plan or intent to engage in
any transaction or arrangement that would reduce such Company Shareholder's
risk of ownership in any way, including, without limitation, a short sale,
hedging transaction or otherwise, with respect to any or all of such Purchaser
Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties of the Company and the
Company Shareholders. All representations and warranties of the Company and
the Company Shareholders are accurate and material and are being made in order
to induce Purchaser and Acquisition Sub to enter into this Agreement. The
Company and each of the Company Shareholders hereby jointly and severally
represent and warrant to Purchaser and Acquisition Sub that:
(a) Organization. The Company is a corporation duly organized and
validly existing under the laws of the State of California (the "State"), and
has all requisite power and authority to lease, own, and operate its properties
and carry on the Business and operations and to directly own, lease, and
operate its assets. The Company is duly qualified or licensed to do business as
a corporation, and is in good standing in the State. The Company has
delivered to Purchaser and Acquisition Sub complete and accurate copies of its
Articles of Incorporation and Bylaws and all amendments thereto, and all
minutes and actions of its Board of Directors and shareholders. To the best of
Company's and Company Shareholders' Knowledge, neither the Company nor any of
the Company Shareholders is in violation of any of the provisions of the
Articles of Incorporation or the Bylaws.
(b) Capitalization and Ownership. The authorized and outstanding
capital stock of the Company (including without limitation all voting
securities) (the "Capital Stock") and its par value per
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share, if any, is as set forth on Schedule 2.1(b) hereto. Each person listed on
Schedule 2.1(b) is the lawful owner of that number of the issued and
outstanding shares of capital stock of the Company set forth opposite such
person's name, free and clear of any restrictions upon transfer except as
indicated in Schedule 2.1(b), all of which restrictions shall be removed no
later than the Closing Date. The shares of Capital Stock (the "Company
Shares") set forth on Schedule 2.1(b) constitute all of the shares of capital
stock of the Company and all such shares have been duly authorized and are
validly issued, fully paid and nonassessable, and to the best of the Knowledge
and belief of the Company and the Company Shareholders, have been issued in
compliance with all applicable federal and state securities laws. There are no
outstanding subscriptions, warrants, calls, options, conversion rights, rights
of exchange or other commitments, plans, agreements, or arrangements of any
nature under which the Company or the Company Shareholder may be obligated to
issue, assign, exchange, purchase, redeem or transfer any shares of capital
stock of the Company, and there are no shareholders' agreements to which the
Company or the Company Shareholders is a party, or proxies, voting trust
agreements or similar agreements or options executed by the Company or the
Company Shareholders or to which the Company Shares are subject. There are no
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of the Company obligating the
Company or the Company Shareholders to grant, extend or enter into any
subscription, option, warrant, right, convertible security or other similar
agreement or commitment. The Company has satisfied all of its obligations to
all current and past shareholders, and none of such current or past
shareholders has any claims, or any basis therefor, against the Company arising
out of or relating to obligations of the Company to such current or past
shareholders. None of the shares of the Company's Capital Stock was issued
pursuant to awards, grants, or bonuses.
(c) Subsidiaries. Except as set forth in Schedule 2.1(c), the
Company does not own, directly or indirectly, any capital stock or other equity
or ownership or proprietary interest in any corporation, partnership,
association, limited liability company, trust, joint venture or other entity.
(d) Authorization. The Company and each of the Company
Shareholders have full power and authority to enter into this Agreement, to
perform their respective obligations hereunder and to consummate the
transactions contemplated hereby. Each corporate Company Shareholder is duly
organized and existing under the laws of the jurisdiction of its incorporation.
The Company and/or each of the Company Shareholders, as appropriate, have taken
all necessary and appropriate corporate action with respect to the execution
and delivery of this Agreement. This Agreement constitutes a valid and binding
obligation of the Company and the Company Shareholders (to the extent to which
each is a party), enforceable in accordance with its terms; except as limited
by applicable bankruptcy, insolvency, moratorium, reorganization or other laws
affecting contracts, creditors' rights and other laws and remedies generally.
(e) Financial Information. The Company will deliver its unaudited
consolidated balance sheets and related statements of operations and cash flows
at and for the fiscal years ended 1995, 1996 and 1997 (the "Unaudited Annual
Financial Statements") and will deliver the unaudited statements of operations
and cash flows at and for the period from the end of the Company's 1997 fiscal
year through February 28, 1998 (the "Unaudited Interim Financial Statements,"
together with the Unaudited Annual Financial Statements, collectively referred
to herein as the "Unaudited Financial Statements") within seven (7) days after
the execution of this Agreement. Within thirty (30) days after the Closing
Date the Company will also deliver an unaudited balance sheet as of the Closing
Date (the "Unaudited Balance Sheet," together with the Unaudited Financial
Statements, collectively referred to herein as the "Financial Statements"). To
the best of the Knowledge and belief of the Company and the Company
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Shareholders, the Financial Statements will be prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") on a consistent basis
throughout the periods indicated and with each other and will present
accurately the financial condition of the Company as of the respective dates
thereof and the results of operations for the periods then ended. All of the
Company's general ledgers, books, and records are located at the Company's
principal place of business in the State or at the offices of its accountant.
Purchaser or Acquisition Sub may, at their option, elect to engage, at their
own cost and expense, an accounting firm selected by them and reasonably
acceptable to the Company to audit the Unaudited Financial Statements as of the
Closing Date.
(f) Deposit Accounts; Powers of Attorney. Schedule 2.1(f) hereto
lists:
(i) the name of each financial institution in which the
Company has accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account; and
(iv) the name of each person authorized to draw thereon or
have access thereto.
There are no persons, corporations, firms or other entities holding a
general or special power of attorney from the Company.
(g) Liabilities and Obligations. Other than as set forth in the
Unaudited Financial Statements, Schedule 2.1(g) sets forth an accurate list at
the date of this Agreement of all liabilities of the Company, and any
significant liabilities incurred thereafter in the ordinary course of business
or liabilities which are not reflected in the balance sheet of any kind,
character, or description, whether accrued, absolute, secured or unsecured,
contingent or otherwise, together with, in the case of those liabilities which
are not fixed, an estimate of the maximum amount which may be payable. For each
such liability for which the amount is not fixed or is contested, whether in
litigation or otherwise, the Company shall provide the following information:
(i) a summary description of the liability together with
the following:
(a) copies of all material relevant documentation
relating thereto;
(b) amounts claimed and any other action or
relief sought; and
(c) name of claimant and all other parties to the
claim, suit, or proceeding.
(ii) the name of each court or agency before which such
claim, suit, or proceeding is pending;
(iii) the date such claim, suit, or proceeding was
instituted;
(iv) a reasonable estimate by the Company of the maximum
amount, if any, which is likely to become payable with respect to each
such liability. If no estimate is provided, the Company's best
estimate shall for purposes of this Agreement be deemed to be zero.
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(h) Product and Service Warranties and Reserves. To the best of
Company's and Company Shareholders' Knowledge, except as set forth in Schedule
2.1(h), there are no product warranty claims relating to sales of the Company's
products occurring on or prior to the date of this Agreement. To the best of
Company's and Company Shareholders' Knowledge, the only express warranties,
written or oral, with respect to the products or services sold by the Company
are set forth in Schedule 2.1(h).
(i) Absence of Certain Changes and Events. Except as set forth in
Schedule 2.1(i) hereto, to the best of the Knowledge and belief of the Company
and the Company Shareholders, since the date of the Unaudited Annual Financial
Statements there has not been:
(i) Any material adverse change in the financial
condition, results of operation, assets, liabilities or prospects of
the Company or the Business, or any occurrence, circumstance, or
combination thereof which reasonably could be expected to result in
any such material adverse change;
(ii) Any transaction relating to or involving the Company,
the Business, the assets of the Company or the Company Shareholders
which was entered into or carried out by the Company or the Company
Shareholders other than for fair consideration in the Ordinary Course
of Business;
(iii) Any change by the Company in its accounting or tax
practices or procedures;
(iv) Any incurrence of any liability, other than
liabilities incurred in the Ordinary Course of Business consistent
with past practices;
(v) Any sale, lease, or disposition of, or any agreement
to sell, lease, or dispose of any of its properties (whether leased or
owned), or the assets of the Company, other than sales, leases, or
dispositions of goods, materials, or equipment in the Ordinary Course
of Business or as contemplated by this Agreement;
(vi) Any event permitting any of the assets or the
properties of the Company (whether leased or owned) to be subjected to
any pledge, encumbrance, security interest, lien, charge, or claim of
any kind whatsoever (direct or indirect) (collectively, "Liens");
(vii) Any increase in compensation or any adoption of, or
increase in, any bonus, incentive compensation, pension, profit
sharing, retirement, insurance, medical reimbursement or other
employee benefit plan, payment or arrangement to, for, or with any
employee of the Company, other than certain bonuses paid to the
Company Shareholders and disclosed in writing to the Acquisition Sub
and Purchaser;
(viii) Any payment or distribution of any bonus to, or
cancellation of indebtedness owing from, or incurring of any liability
relating to any employees, consultants, directors, officers, or
agents, or any persons related thereto, other than certain bonuses
paid to the Company Shareholders and to two (2) key employees of the
Company;
(ix) Any notice (written or unwritten) from any employee
of the Company that such employee has terminated, or intends to
terminate, such employee's employment with the Company;
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21
(x) Any adverse relationship or condition with Suppliers
(as defined in Section 2.1 (q)(i) hereof), vendors, or Customers (as
defined in Section 2.1(ee) hereof) that may have an adverse effect on
the Company, the Business, or the assets of the Company;
(xi) Any event, including, without limitation, shortage of
materials or supplies, fire, explosion, accident, requisition or
taking of property by any governmental agency, flood, drought,
earthquake, or other natural event, riot, act of God or a public
enemy, or damage, destruction, or other casualty, whether covered by
insurance or not, which has had an adverse effect on the Company, the
properties (whether leased or owned), the Business, or the assets of
the Company or any such event which could be expected to have an
adverse effect on the Company, the properties (whether leased or
owned), the Business, or the assets of the Company;
(xii) Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with
respect to, any term, condition, or provision of any contract,
agreement, license, or other instrument to which the Company or a
Company Shareholder is a party and relating to or affecting the
Business or the assets of the Company other than any satisfaction by
performance in accordance with the terms thereof in the Ordinary
Course of Business;
(xiii) Any discharge or satisfaction of any Lien or payment
of any liabilities, other than in the Ordinary Course of Business;
(xiv) Any waiver of any rights of substantial value by the
Company, other than waivers having no material adverse effect on the
Company;
(xv) Any issuance of equity securities of the Company or
any issuance of warrants, calls, options or other rights calling for
the issuance, sale, or delivery of the Company's equity securities;
(xvi) Any declaration of any dividend or any distribution
of any shares of its capital stock, or redemption, purchase, or other
acquisition of any shares of its capital stock or any grant of an
option, warrant, or other right to purchase or acquire any such
shares;
(xvii) Any amendment, or agreement to amend, the Company's
Articles of Incorporation or Bylaws, or any merger or consolidation
with, or any agreement to merge or consolidate with, any other
corporation, partnership, limited liability company or any other
entity;
(xviii) Any reduction, or agreement to reduce, the cash or
short-term investments of the Company, other than to meet cash needs
arising in the Ordinary Course of Business;
(xix) Any work interruptions, labor grievances or claims
filed, proposed law or regulation or any event of any character,
materially adversely affecting the Business or future prospects of the
Company;
(xx) Any revaluation by the Company of any of its assets;
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22
(xxi) Any loan by the Company to any person or entity, or
any guaranty by the Company of any loan; or
(xxii) To the best Knowledge of the Company and the Company
Shareholders, any other event or condition of any character which
materially adversely affects, or reasonably may be expected to so
affect, the assets of the Company, the Business, or the properties
(whether leased or owned) of the Company.
(j) Inventory. Schedule 2.1(j) sets forth the reasonable value of
the Company's inventory. All inventory is owned by the Company, including all
goods customarily sold and/or rented by the Company in connection with the
Business (whether located on the premises of the Company, in transit to or from
such premises, in other storage facilities, or otherwise) (collectively, the
"Inventory"), and the Company maintains appropriate records of such inventory.
The Company has continued to replenish the Inventory in a normal and customary
manner consistent with past practices. To the Knowledge of the Company and the
Company Shareholders, the Company has not received written or oral notice that
the Company will experience in the future any difficulty in obtaining, in the
desired quantity and quality and upon reasonable terms and conditions, the
vehicles, materials, supplies, or equipment required for the Business.
(k) Taxes.
(i) Definitions. For purposes of this Agreement:
(a) the term "Taxes" means (A) all federal,
state, local, foreign and other net income, gross
income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease,
service, service use, withholding, payroll,
employment, excise, severance, stamp, occupation,
premium, property, windfall profits, customs, duties
or other taxes, fees, assessments or charges of any
kind whatever, together with any interest and any
penalties, additions to tax or additional amounts
with respect thereto, (B) any liability for payment
of amounts described in clause (A) whether as a
result of transferee liability, of being a member of
an affiliated, consolidated, combined or unitary
group for any period, or otherwise through operation
of law, and (C) any liability for the payment of
amounts described in clauses (A) or (B) as a result
of any tax sharing, tax indemnity or tax allocation
agreement or any other express or implied agreement
to indemnify any other person; and the term "Tax"
means any one of the foregoing Taxes; and
(b) the term "Returns" means all returns,
declarations, reports, statements, claims for refund
and other documents required to be filed in respect
of Taxes, and the term "Return" means any one of the
foregoing Returns.
(ii) To the best of the Knowledge and belief of the
Company and the Company Shareholders, the Company has properly
completed and filed on a timely basis (including extensions) and in
correct form all Returns required to be filed on or prior to the
Closing Date. As of the time of filing, the foregoing Returns
correctly reflected the facts regarding the income, business, assets,
operations, activities, status or other matters of the Company or any
other information required to be shown thereon. In particular, to the
best of the Knowledge of the Company and the Company Shareholders, the
foregoing Returns are not subject to unpaid
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penalties under Section 6662 of the Internal Revenue Code of 1986, as
amended (the "Code"), relating to accuracy-related penalties (or any
corresponding provision of state, local or foreign Tax law) or any
other unpaid penalties.
(iii) To the best of the Knowledge and belief of the
Company and the Company Shareholders, with respect to all amounts in
respect of Taxes imposed upon the Company, or for which the Company is
liable, whether to taxing authorities (as, for example, under law) or
to other persons or entities (as, for example, under tax allocation
agreements), with respect to all taxable periods ending on or before
the Closing Date and portions of periods commencing before the Closing
Date and ending after the Closing Date, all applicable tax laws and
agreements have been fully complied with, and all such amounts
required to be paid by the Company to taxing authorities or others on
or before the Closing Date have been paid, and all such amounts
required to be paid by the Company to taxing authorities or others
after the Closing which have not been paid are reflected on the
Financial Statements of the Company.
(iv) No notices raising tax issues have been received by
the Company from any taxing authority in connection with any of the
Returns. No extensions or waivers of statutes of limitations with
respect to the Returns have been given by or requested from the
Company. Schedule 2.1(l)(iv) sets forth taxable years for which
examinations have been completed, those years for which examinations
are presently being conducted, and those years for which required
Returns have not yet been filed. Except to the extent indicated in
Schedule 2.1(l)(iv), all deficiencies asserted or assessments made as
a result of any examinations have been fully paid, or are fully
reflected as a liability in the Financial Statements of the Company,
or are being contested and an adequate reserve therefor has been
established and is fully reflected in the Financial Statements of the
Company.
(v) There are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Company.
(vi) The Company is not a party to or bound by (nor will
the Company become a party to or become bound by) any tax indemnity,
tax sharing or tax allocation agreement.
(vii) The Company has never been a member of an affiliated
group of corporations within the meaning of Section 1504 of the Code.
(viii) The Company has not filed a consent pursuant to the
collapsible corporation provisions of Section 341(f) of the Code (or
any corresponding provision of state, local or foreign income Tax law)
or agreed to have Section 341(f)(2) of the Code (or any corresponding
provision of state, local or foreign income Tax law) apply to any
disposition of any asset owned by it.
(ix) None of the assets of the Company directly or
indirectly secures any debt the interest on which is tax exempt under
Section 103(a) of the Code.
(x) None of the assets of the Company is "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
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(xi) The Company has not made and will not make a deemed
dividend election under Treas. Reg. ss.1.1502-32(f)(2) or a consent
dividend election under Section 565 of the Code.
(xii) The Company has not agreed to make, nor is it
required to make, any adjustment under Sections 481(a) or 263A of the
Code or any comparable provision of state or foreign tax laws by
reason of a change in accounting method or otherwise.
(xiii) None of the Company Shareholders is other than a
United States person within the meaning of the Code.
(xiv) The Company is not party to any joint venture,
partnership, or other arrangement or contract which could be treated
as a partnership for federal income tax purposes.
(xv) The Company's tax basis of each of its assets is
reflected in its Unaudited Financial Statements.
(xvi) All elections with respect to Taxes made during the
fiscal years ended December 31, 1995, December 31, 1996 and December
31, 1997 are reflected on the Returns for such periods, copies of
which have been provided to Purchaser.
(l) Employee Payments.
(i) The hours worked by and payments made to the
Company's employees have not been in violation in any respect of the
Fair Labor Standards Act or any other applicable federal, foreign,
state or local laws dealing with such matters.
(ii) All payments due from the Company on account of
employee health and welfare insurance have been paid or accrued.
(iii) All severance, sick, or vacation payments by the
Company, which are or were due under the terms of any agreement or
otherwise have been paid or are described in Schedule 2.1(l)(iii).
(m) Compliance With Law. The Company has complied and is in
compliance with all applicable zoning decisions and, to the best of the
Knowledge of the Company and the Company Shareholders, has complied and is in
compliance with all applicable federal, state, and local laws, statutes,
licensing requirements, rules, and regulations, and judicial or administrative
decisions. To the best of the Knowledge and belief of the Company and the
Company Shareholders, the Company has been granted all licenses, permits
(temporary and otherwise), authorizations, and approvals from federal, state,
and local government regulatory or zoning bodies necessary to carry on the
Business and maintain the assets of the Company, all of which are currently
valid and in full force and effect. All such licenses, permits, authorizations
and approvals shall be valid and in full force and effect upon the consummation
of the transactions contemplated by this Agreement to the same extent as if the
Company prior to the Closing Date were continuing the Business and operations of
the Company. To the best of the Knowledge and belief of the Company and the
Company Shareholders, there is no order issued, or proceeding pending or
threatened, or notice served with respect to any violation of any law,
ordinance, order, writ, decree, rule, or regulation issued by any federal state,
local, or foreign court or
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governmental agency or instrumentality applicable to the Company. The Company
has valid business licenses to carry on its operations.
(n) No Disclosure Items. Except as otherwise indicated in
Schedule 2.1(n), there is no adverse information with respect to the Company,
the Company Shareholder(s) or any officer, director or employee of the Company
which information would require disclosure in connection with a filing by the
Company under the federal securities acts. Neither the Company nor any Company
Shareholder has failed to disclose any material fact which would be required to
be disclosed for purposes of a proxy statement or other communication involved
in a public offering in accordance with the provisions of Rule 10b-5 or Rule
14a-9(a) of the U.S. Securities and Exchange Commission.
(o) Governmental Consents. To the best of the Knowledge of the
Company and the Company Shareholders, no consent, approval, order, or
authorization of, or registration, qualification, designation, declaration, or
filing with, any federal, state, local, or provincial governmental authority on
the part of the Company or the Company Shareholders is required in connection
with the consummation of the transactions contemplated hereunder.
(p) Intellectual Property.
(i) The Company and its subsidiaries own or have the
right to use pursuant to license, sublicense, agreement, or permission
all Intellectual Property necessary or desirable for the operation of
the business of the Company and its subsidiaries as presently
conducted and as presently proposed to be conducted by the Managing
Shareholder. Each item of Intellectual Property owned or used by any
of the Company and its subsidiaries immediately prior to the closing
hereunder will be owned or available for use by the Company, its
subsidiaries, Surviving Corporation or its subsidiaries on identical
terms and conditions immediately subsequent to the closing hereunder.
Each of the Company and its subsidiaries has taken all necessary and
desirable action to maintain and protect each item of Intellectual
Property that it owns or uses.
(ii) None of the Company and its subsidiaries has
interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any Intellectual Property rights of third parties,
and none of the Company Shareholders and the directors and officers
(and employees with responsibility for Intellectual Property matters)
of the Company and its subsidiaries has ever received any charge,
complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that
any of the company and its subsidiaries must license or refrain from
using any Intellectual Property rights of any third party). To the
Knowledge of any of the Company Shareholders and the directors and
officers (and employees with responsibility for Intellectual Property
matters) of the Company and its subsidiaries, no third party has
interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any Intellectual Property rights of any of the
Company and its subsidiaries.
(iii) Schedule 2.1(p)(iii) identifies each patent or
registration which has been issued to any of the Company and its
subsidiaries with respect to any of its Intellectual Property,
identifies each pending patent application or application for
registration which any of the Company and its subsidiaries has made
with respect to any of its Intellectual Property, and identifies each
license, agreement, or other permission which any of the Company and
its subsidiaries has granted to any third party with respect to any of
its Intellectual Property
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(together with any exceptions). The Company has delivered to the
Acquisition Sub correct and complete copies of all such patents,
registrations, applications, licenses, agreements, and permission (as
amended to date) and has made available to the Acquisition Sub correct
and complete copies of all other written documentation evidencing
ownership and prosecution (if applicable) of each such item. Schedule
2.1(p)(iii) also identifies each trade name or unregistered trademark
used by any of the Company and its subsidiaries in connection with any
of its businesses. With respect to each item of Intellectual Property
required to be identified in Schedule 2.1(p)(iii):
(a) the Company and its subsidiaries possess all
right, title, and interest in and to the item, free
and clear of any security interest, license, or other
restriction;
(b) the item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or
charge;
(c) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is
pending or, to the Knowledge of any of the Company
Shareholders and the directors and officers (and
employees with responsibility for Intellectual
Property matters) of the Company and its
subsidiaries, is threatened which challenges the
legality, validity, enforceability, use, or ownership
of the item; and
(d) none of the Company and its subsidiaries has
ever agreed to indemnify any Person for or against
any interference, infringement, misappropriation, or
other conflict with respect to the item.
(iv) Schedule 2.1(p)(iv) identifies each item of
Intellectual Property that any third party owns and that any of the
Company and its subsidiaries uses pursuant to license, sublicense,
agreement, or permission. The Company has delivered to Purchaser and
Acquisition Sub correct and complete copies of all such licenses,
sublicenses, agreements, and permission (as amended to date). With
respect to each item of Intellectual Property required to be
identified in Schedule 2.1(p)(iv):
(a) the license, sublicense, agreement, or
permission covering the item is legal valid, binding,
enforceable, and in full force and effect.
(b) the license, sublicense, agreement, or
permission will continue to be legal, valid, binding,
enforceable, and in full force and effect on
identical terms following the consummation of the
transactions contemplated hereby (including the
assignments and assumptions referred to above);
(c) no party to the license, sublicense,
agreement, or permission is in breach or default, and
no event has occurred which with notice or lapse of
time would constitute a breach of default or permit
termination, modification, or acceleration
thereunder;
(d) no party to the license, sublicense,
agreement, or permission has repudiated any provision
thereof;
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(e) with respect to each sublicense, the
representations and warranties set forth in
subsections (A) through (D) above are true and
correct with respect to the underlying license;
(f) the underlying item of Intellectual Property
is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(g) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is
pending or, to the Knowledge of any of the Company
Shareholders and the directors and officers (and
employees with responsibility for Intellectual
Property matters) of the Company and its
subsidiaries, is threatened which challenges the
legality, validity, or enforceability of the
underlying item of Intellectual Property; and
(h) none of the Company and its subsidiaries has
granted any sublicense or similar right with respect
to the license, sublicense, agreement, or permission.
(v) None of the Company Shareholders and the directors
and officers (and employees with responsibility for Intellectual
Property matters) of the company and its subsidiaries has any
Knowledge of any new products, inventions, procedures, or methods of
manufacturing or processing that any competitors or other third
parties have developed which reasonably could be expected to supersede
or make obsolete any product or process of any of the Company and its
subsidiaries.
(q) Restrictive Documents or Orders. To the best of the Knowledge
of the Company and the Company Shareholders, the Company is not a party to nor
bound under any agreement, contract, order, judgment, or decree, or any similar
restriction which adversely affects, or reasonably could be expected to
adversely affect (i) the continued operation by Surviving Corporation of the
Business and operations of the Company on and after the Closing Date on
substantially the same basis as said business was theretofore operated or (ii)
the consummation of the transactions contemplated by this Agreement.
(r) Contracts and Commitments.
(i) Schedule 2.1(r)(i) hereto sets forth a list of all
material written agreements and contracts, contract rights, licenses,
and other executory commitments (written or unwritten if known or if
the Company or the Company Shareholders reasonably should have known)
other than purchase and sale orders and quotations (collectively, the
"Contracts") including, without limitation, those contracts with
insurance companies, credit companies, governmental agencies, rental
agencies, and all others under which the Company is supplied with
materials, supplies, or equipment ("Materials") (such suppliers shall
be referred to herein as "Suppliers") to which the Company is a party
or to which any of the assets of the Company are subject. To the best
of the Knowledge and belief of the Company and the Company
Shareholders, there are no oral agreements or commitments that would
have a material adverse effect on the Company.
(ii) The Company Shareholders and the Company have
performed all of their obligations under the terms of each Contract,
and are not in default thereunder, except as described in Schedule
2.1(r)(ii). No event or omission has occurred which but for the giving
of
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notice or lapse of time or both would constitute a default by any
party thereto under any such Contract. Each such Contract is valid
and binding on all parties thereto and in full force and effect, and
each Contract will continue to be valid and binding on identical terms
following the consummation of the transaction contemplated hereby.
The Company has received no written or unwritten notice of default,
cancellation, or termination in connection with any such Contract. The
Company is not now and has never been a party to any governmental
contracts subject to price redetermination or renegotiation.
(iii) There has not been any notice (written or unwritten)
from any Supplier that any such Supplier will not continue to supply
the current level and type of Materials currently being provided by
such Supplier upon the same terms and conditions.
(s) Debt. Schedule 2.1(s) sets forth a list of all agreements for
the incurring of indebtedness for borrowed money and all agreements relating to
industrial development bonds to which the Company is a party or guarantor.
None of the obligations pursuant to such agreements are subject to acceleration
by reason of the consummation of the transactions contemplated hereby, nor
would the execution of this Agreement or the consummation of the transactions
contemplated hereby result in any default under such agreements. The Company
has furnished Purchaser and Acquisition Sub with true and correct copies of
each such agreement listed in Schedule 2.1(s). The Company is not in default
under any of the agreements listed thereon, nor is the Company aware of any
event that, with the passage of time, or notice, or both, would result in an
event of default thereunder.
(t) Related Property. Schedule 2.1(t)(i) hereto lists all of the
Company's ownership interests (except for leasehold interests set forth in
Schedule 2.1(gg)) in real property, machinery, equipment, tooling, furniture,
fixtures, motor vehicles, supplies, spare parts, computer equipment, printers,
copiers, software, telecommunications equipment, miscellaneous supplies, tools,
repair and maintenance parts, chemicals, and fixed assets related to the
Business and operations of the Company (the "Related Property"). To the best
Knowledge of the Company and the Company Shareholders, all of the Related
Property is in good operating condition, normal wear and tear excepted, and is
adequate and suitable for the purposes for which it is presently being used.
Schedule 2.1(t)(ii) hereto lists certain property that belongs solely to and
shall be retained by the Company Shareholders.
(u) Assets. The assets of the Company include all the assets
necessary to operate the Business in the same manner as the Business was
operated by the Company immediately prior to the Closing Date, and none of the
Company Shareholders, nor any family member or entity affiliated with the
Company Shareholders or any such family member, owns, or has any interest in,
any asset used in the operation of the Company.
(v) Title to the Property. The Company has good and marketable
title to the assets of the Company (including, but not limited to the Related
Property) and a valid and subsisting leasehold interest in all leased property.
Except as described in Schedule 2.1(v), the Company owns all of its assets and
property free and clear of any lien.
(w) Litigation. Except as described in Schedule 2.1(w), none of
the Company, the Company Shareholders nor any of the Company's officers or
directors is engaged in, or has received any threat of, any litigation,
arbitration, investigation, or other proceeding relating to the Company, any of
the Company Shareholders, or the Company's officers, directors, employees,
benefit plans, properties, Proprietary Rights, the Business, or the assets,
licenses, permits, or goodwill of the Company; or against or affecting this
Agreement, the Related Agreements or the actions taken or
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contemplated in connection herewith and therewith, nor, to the best of each's
Knowledge, is there any reasonable basis therefor. There is no action, suit,
proceeding, or (to the best Knowledge of the Company and the Company
Shareholders) investigation pending or threatened against the Company, or any
of the Company Shareholders, or the officers or directors of the Company, that
questions the validity of this Agreement, the Related Agreements, or the right
of the Company or the Company Shareholders to enter into this Agreement, the
Related Agreements, any documents to be delivered in connection with the
Closing, or to consummate the transactions contemplated hereby or thereby, or
which might result in any adverse change in the assets of the Company, the
Business, conditions, or properties of the Company, or the financial condition
of the Company or the Company Shareholders. There is no action, suit,
proceeding, or investigation by the Company or the Company Shareholders
currently pending or which any of them currently intends to initiate. None of
the Company, the Company Shareholders, nor any of the Company's officers or
directors is bound by any judgment, decree, injunction, ruling or order of any
court, governmental, regulatory or administrative department, commission,
agency or instrumentality, arbitrator or any other person which would or could
have a material adverse effect on the Business or the assets of the Company.
(x) No Conflict or Default. To the best of the Knowledge and
belief of the Company and the Company Shareholders, neither the execution and
delivery of this Agreement or the Related Agreements, nor compliance with the
terms and provisions hereof and thereof including, without limitation, the
consummation of the transactions contemplated hereby and thereby, will violate
any statute, regulation, or ordinance of any governmental or administrative
authority, or conflict with or result in the breach of any term, condition, or
provision of the Company's Articles of Incorporation or Bylaws, as presently in
effect, or of any agreement, deed, contract, mortgage, indenture, writ, order,
decree, legal obligation, or instrument to which the Company or the Company
Shareholders is a party or by which it or he or any of the assets of the
Company are or may be bound, or constitute a default (or an event which, with
the lapse of time or the giving of notice, or both, would constitute a default)
thereunder.
(y) Consents. To the best of the Knowledge and belief of the
Company and the Company Shareholders, no consent, approval, or authorization of
any person, agency or third party or on the part of the Company or the Company
Shareholders is required in connection with the consummation of the
transactions contemplated hereunder.
(z) Labor Relations.
(i) To the best of the Knowledge and belief of the
Company and the Company Shareholders, with respect to the Business and
operation of the Company, the Company has not failed to comply in any
respect with Title VII of the Civil Rights Act of 1964, as amended,
the Fair Labor Standards Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, all applicable federal, state, and
local laws, rules, and regulations relating to employment, and all
applicable laws, rules and regulations governing payment of minimum
wages and overtime rates, and the withholding and payment of taxes
from compensation of employees.
(ii) There are no labor controversies pending or, to the
Knowledge of the Company or the Company Shareholders, threatened
between the Company and any of its employees (the "Employees") or any
labor union or other collective bargaining unit representing any of
the Employees.
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(iii) The Company has never entered into a collective
bargaining agreement or other labor union contract relating to the
Business and applicable to the Employees.
(iv) Except as set forth in Schedule 2.1(z), there are no
written employment or separation agreements, or oral employment or
separation agreements other than (1) those establishing an "at will"
employment relationship between the Company and any of the Employees
and which do not provide for any advance notice requirements to
terminate an Employee's employment or any severance or salary or
benefits continuation obligations on the part of the Company and (2)
any unknown future claims for wrongful termination based upon a theory
of implied agreements arising out of course of conduct.
(aa) Brokers' and Finders' Fees/Contractual Limitations. Neither
the Company Shareholders nor the Company is obligated to pay any other fees or
expenses of any broker or finder in connection with the origin, negotiation, or
execution of this Agreement, the Related Agreements, or in connection with any
transactions contemplated hereby and thereby. None of the Company Shareholders,
the Company, or any officer, director, employee, agent, or representative of
the Company (collectively, the "Representatives") is or has been subject to any
agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts the Company, the Company Shareholders or the
Representatives from negotiating, entering into, and consummating this
Agreement, the Related Agreements, and the transactions contemplated hereby and
thereby.
(bb) Environmental and Safety Matters.
(i) To the best of the Knowledge and belief of the
Company and the Company Shareholders, the Company has all permits,
licenses, approvals and registrations required to be issued under
applicable Environmental Laws including federal, state and local laws,
statutes and regulations relating to the protection of human health,
safety, the environment and natural resources and, to the best of the
Knowledge of the Company and the Company Shareholders, is in
compliance with the terms and conditions thereunder. To the best of
the Knowledge and belief of the Company and the Company Shareholders,
the Company is in compliance with and there are no past or present
conditions, activities, actions, or plans which may prevent compliance
with, any current or past law related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or
handling, or the release, emission, or discharge of any hazardous
substance or hazardous waste ("Hazardous Substance Issues") or any
regulations, plans, judgments, injunctions, or notices promulgated or
approved thereunder: (1) which are applicable to the operations of the
Company, or the Company Shareholders, or the property owned or leased
by the Company or the Company Shareholders, or the assets of the
Company, or the Business or operations of the Company, or (2) which
may give rise to any liability of the Company, or the Company
Shareholders or otherwise form the basis of any ongoing or threatened
claims, actions, demands, suits, proceedings, hearings, studies, or
investigations against or relating to the Company, the property owned
or leased by the Company or the Company Shareholders, or the Business,
or the assets of the Company, that are based on or related to any
Hazardous Substance Issues.
(ii) To the best of the Knowledge of the Company and the
Company Shareholders, no release of a hazardous substance has come to
be located on or beneath and remain located on or beneath any of the
real property upon which the Business is conducted or upon which any
of the property owned or leased currently or in the past by the
Company or the Company
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Shareholders or any predecessor which relates to the Business or
operations of the Company are held or maintained.
(iii) Schedule 2.1(bb) sets forth all reports, studies, and
evaluations conducted by the Company or the Company Shareholders, or
received by the Company or the Company Shareholders with respect to
such matters.
(iv) Neither the Company nor any of the Company
Shareholders has any Knowledge of the possible or actual presence,
disposal, release or threatened release of any hazardous substance or
hazardous waste on or under any adjacent properties.
(v) To the best of the Knowledge of the Company and the
Company Shareholders, the Company has not been alleged to be in
violation of, or been subject to any administrative, judicial, or
regulatory proceeding pursuant to, any applicable Environmental Laws
either now or any time during the past. No Claims (as hereinafter
defined) have been or are currently asserted against the Company based
on the Company's or any of the Company Shareholders' acts or failures
to act prior to the Closing Date with respect to hazardous substances
or hazardous wastes. As used herein, "Claim" shall mean any and all
claims, demands, orders, causes of action, suits, proceedings,
administrative proceedings, losses, judgments, decrees, debts,
damages, liabilities, court costs, attorneys' fees, and any other
expenses incurred, assessed or sustained by or against the Company or
the Company Shareholders.
(vi) To the best of the Knowledge of the Company and the
Company Shareholders, none of the properties owned, leased, or
operated by the Company or any predecessor thereof are now, or were in
the past, listed on the National Priorities List of Superfund Sites,
the Comprehensive Environmental Response, Compensation and Liability
Information System, or any other state or local environmental
database.
(cc) Certain Payments. To the best of the Company's and Company
Shareholders' Knowledge, the Company has not, and no person directly or
indirectly on behalf of the Company has, made or received any payment that was
not legal to make or receive.
(dd) Customers. To the best of the Knowledge and belief of the
Company and the Company Shareholders, Schedule 2.1(dd) hereto lists all of the
customers of the Company for the year 1997 to date (such customers referred to
herein individually as a "Customer"). No single Customer of the Company
accounted for more than ten percent (10%) of the net sales or rentals of the
Company (calculated on a unit basis) during 1997 except as set forth in
Schedule 2.1(dd). The Company has furnished Purchaser and Acquisition Sub with
complete and accurate copies or descriptions of all current agreements (written
or unwritten) with such Customers. Neither the Company nor any of the Company
Shareholders is aware of any event, happening, or fact which would lead it or
him to believe that any of such Customers will not continue its current level
of purchases and/or rentals after the Closing Date.
(ee) Books and Records. The books and records of the Company to
which Purchaser and Acquisition Sub and their accountants and attorneys have
been given access are the true books and records of the Company and truly and
fairly reflect the underlying facts and transactions in all respects.
(ff) Complete Disclosure. To the best of the Knowledge and belief
of the Company and the Company Shareholders, no representation or warranty by
the Company or the Company Shareholders
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in this Agreement, and no exhibit, schedule, statement, certificate, or other
writing furnished to Purchaser and Acquisition Sub pursuant to this Agreement
or the Related Agreements or in connection with the transactions contemplated
hereby and thereby, contains or will contain any untrue statement or omits or
will omit to state any fact necessary to make the statements contained herein
and therein not materially misleading. If the Company or any of the Company
Shareholders becomes aware of any fact or circumstance which would change a
representation or warranty of the Company or the Shareholders, the Company and
the Shareholders shall immediately give notice of such fact or circumstance to
Purchaser and Acquisition Sub. However, such notification shall not relieve
either the Company or the Shareholders of their respective obligations under
this Agreement.
(gg) Leased Properties. The Financial Statements and Schedule
2.1(gg) hereto together list all personal property (including equipment leases)
and real property leased by the Company or by the Company Shareholders in
connection with the Business (the "Leased Properties") and the aggregate annual
rent or other fees payable under all such leases. The Company has a valid
leasehold or ownership interest in all of the Leased Properties, free and clear
of any liens. The negotiation and consummation of this Agreement and the
transactions contemplated hereby will not result in any penalties, the
acceleration of payments or the termination of any lease of Leased Properties.
(hh) Employees and Employee Benefit Plans.
(i) Other than as set forth in Schedule 2.1(hh) hereto,
the Company is not a party to any pension, profit sharing, savings,
retirement or other deferred compensation plan, or any bonus (whether
payable in cash or stock) or incentive program, or any group health
plan (whether insured or self-funded), or any disability or group life
insurance plan or other employee welfare benefit plan, or to any
collective bargaining agreement or other agreement, written or oral,
with any trade or labor union, employees' association or similar
organization. The Company is not a party to, nor has made any
contribution to or otherwise incurred any obligation under, any
"multi-employer plan" as defined in Section 3(37) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
(ii) With respect to each such plan set forth in Schedule
2.1(hh) (a "Plan"), the Company has furnished to Purchaser,
Acquisition Sub or their counsel complete and accurate copies of the
Plan documents (including trust documents, insurance policies or
contracts, employee booklets, summary plan descriptions and other
authorizing documents, and any material employee communications). With
respect to each Plan subject to ERISA as either an employee pension
benefit plan within the meaning of Section 3(2) of ERISA or an
employee welfare benefit plan within the meaning of Section 3(1) of
ERISA, the Company has prepared in good faith and timely filed all
requisite governmental reports and, to the best of Company's and
Company Shareholders' Knowledge, has properly and timely posted, or
distributed all notices and reports to employees required to be filed,
posted, or distributed with respect to each Plan. Each Plan has at all
times been properly and completely funded by the Company and has been
operated and administered in all respects in accordance with its terms
and all applicable laws, including, but not limited to, ERISA and the
Code.
(iii) All Plans that are intended to qualify (the
"Qualified Plans") under Section 401(a) of the Code have been
determined by the Internal Revenue Service to be so qualified, and
copies of such determination letters are included as part of Schedule
2.1(hh) hereof. Except as disclosed on Schedule 2.1(hh), all reports
and other documents required to be filed with any governmental agency
or distributed to plan participants or beneficiaries have been
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timely filed and distributed, and copies thereof are included as part
of Schedule 2.1(hh) hereof. The Company further represents that:
(a) there have been no terminations, partial
terminations, or discontinuance of contributions to
any such Qualified Plan intended to qualify under
Section 401(a) of the Code without notice to and
approval by the Internal Revenue Service;
(b) no such plan listed in Schedule 2.1(hh)
subject to the provisions of Title IV of ERISA has
been terminated;
(c) there have been no "reportable events" (as
that phrase is defined in Section 4043 of ERISA) with
respect to any such plan listed in Schedule 2.1(hh);
and
(d) The Company has not incurred any liability
under Section 4062 of ERISA.
(iv) Neither the Company nor any of the Company
Shareholders has made any oral or written communications to its
current or former employees that guarantee current or former employees
continuation of employer-provided benefits or retirement coverage
under the Company's welfare benefit plans or which would have any
effect on the Surviving Corporation's ability to terminate retiree or
any other benefits to all current or former employees.
(v) To the best of the Knowledge of the Company and the
Company Shareholders, the Company has not violated any of the health
care continuation coverage requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985 applicable to its Employees prior to
the Closing Date or any prior actions of or transactions entered into
by the Company or the Company Shareholders.
(ii) Compensation. The Company has delivered to Purchaser and
Acquisition Sub an accurate schedule, attached to this Agreement as Schedule
2.1 (ii), showing all officers, directors, and key employees of the Company and
the rate of compensation (and the portions thereof attributable to salary,
bonus, and other compensation, respectively) of the directors, officers, and
key employees.
(jj) Insurance. The Company maintains policies of insurance
covering the assets of the Company, properties, and Business in types and
amounts as set forth in Schedule 2.1(jj). To the best of the Knowledge and
belief of the Company and the Company Shareholders, the Company is in
compliance with each of such policies such that none of the coverage provided
under such policies has been invalidated and the Company has not received any
written notice of cancellation of any such policies. Schedule 2.1(jj) lists
and describes all the Company insurance policies in effect immediately prior to
the time of Closing. To the Knowledge of the Company and the Company
Shareholders, such policies are with reputable insurers and are in amounts
sufficient for the prudent protection of the properties and the Business of the
Company.
(kk) Accounts and Notes Receivable. Schedule 2.1(kk) hereto sets
forth all accounts and notes receivable of the Company ("Accounts Receivable").
Schedule 2.1(kk) shows the aging of Accounts Receivable in amounts due in
thirty-day aging categories. Except for the accounts receivable
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incurred by Martec Marketing, Inc., all Accounts Receivable represent sales or
rentals actually made or services actually performed in the ordinary and usual
course of the Company's business.
(ll) Representations and Warranties on the Closing Date. The
Company's and the Company Shareholders' representations and warranties
contained in this Article II shall be true on and as of the Closing Date with
the same force and effect as though such representations and warranties had
been made on such date, except to the extent any such representations and
warranties were made as of a specified date, in which case such representations
and warranties shall continue on the Closing Date to have been true in all
material respects as of such specified date.
Section 2.2 Representations and Warranties of Acquisition Sub and
Purchaser. Acquisition Sub and Purchaser hereby represent and warrant to the
Company and the Company Shareholders that immediately prior to the time of
Closing:
(a) Organization and Standing. Acquisition Sub is a corporation
duly organized and validly existing under the laws of the State of Georgia, and
has all requisite power and authority to lease, own, and operate its properties
and carry on its business and operations and to directly own, lease, and
operate its assets. Acquisition Sub has delivered to the Company complete and
accurate copies of its Certificate of Incorporation and Bylaws and all
amendments thereto, and all minutes and actions of its Boards of Directors and
shareholders. Acquisition Sub is not in violation of any of the provisions of
its Certificates of Incorporation or Bylaws.
(b) Capitalization and Ownership. The authorized and outstanding
capital stock of Purchaser and its par value per share are as set forth on
Purchaser's Registration Statement on Form S-1, as updated and amended by
reports filed with the SEC pursuant to the requirements of the Securities Act
of 1933 and the Securities Exchange Act of 1934. The shares of Purchaser
Common Stock set forth in such Registration Statement and subsequent reports
and filings made with the SEC constitute all of the shares of capital stock of
the Purchaser issued and outstanding and have been duly authorized and validly
issued, fully paid and nonassessable, and to the best of the Knowledge and
belief of Purchaser, issued in compliance with all applicable federal and state
securities laws. Except as provided in such Registration Statement and
subsequent reports and filings made with the SEC, there are no outstanding
subscriptions, warrants, calls, options, conversion rights, rights of exchange
or other commitments, plans, agreements, or arrangements of any nature under
which the Purchaser may be obligated to issue, assign, exchange, purchase,
redeem or transfer any shares of its capital stock, and there are no
shareholders' agreements to which the Purchaser or its shareholders is a party,
or proxies, voting trust agreements or similar agreements or options executed
by Purchaser or to which the Purchaser Common Stock is subject. Except as
provided in such Registration Statement and subsequent reports and filings made
with the SEC, there are no outstanding subscriptions, options, warrants,
rights, convertible securities or other agreements or commitments of any
character relating to the issued or unissued capital stock or other securities
of the Purchaser obligating Purchaser or, to the best Knowledge of Purchaser,
its shareholders to grant, extend or enter into any subscription, option,
warrant, right, convertible security or other similar agreement or commitment.
Upon issuance of shares of Purchaser Common Stock, as set forth herein, the
Company Shareholders shall acquire good and marketable title to the shares of
Purchaser Common Stock, free and clear of any liens, pledges, encumbrances,
security interests, charges, equities or restrictions of any nature imposed by
Purchaser, except as set forth in this Agreement. All of the issued and
outstanding capital stock of Acquisition Sub is owned by Purchaser. All of the
issued and outstanding capital stock of Acquisition Sub has been duly
authorized and validly issued, is fully paid and nonassessable, was offered,
issued, sold and delivered by Acquisition Sub in compliance with all applicable
state and federal laws concerning the
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issuance of securities, and was not issued in violation of the preemptive
rights of any past or present shareholder. No capital stock of Acquisition Sub
will be conveyed to the Company Shareholders in the Merger. Within a
reasonable time prior to Closing, Purchaser will provide to Company
Shareholders copies of its Registration Statement on Form S-1 and copies of all
subsequent Forms 10-K and 10-Q, to the extent that such copies are reasonably
available to Purchaser.
(c) Authorization. Acquisition Sub and Purchaser have full
corporate power and authority to enter into this Agreement, the Related
Agreements, to perform their obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby, including, without
limitation, the execution and delivery of this Agreement and the Related
Agreements. Acquisition Sub and Purchaser have taken all necessary and
appropriate corporate action with respect to the execution and delivery of this
Agreement and the Related Agreements. This Agreement and the Related Agreements
constitute valid and binding obligations of Acquisition Sub, enforceable in
accordance with their respective terms; except as limited by applicable
bankruptcy, insolvency, moratorium, reorganization, or other laws affecting
creditors' rights and remedies generally, and other laws and remedies.
(d) Brokers' and Finders' Fees/Contractual Limitations. Neither
Purchaser nor Acquisition Sub is obligated to pay any fees or expenses of any
broker or finder in connection with the origin, negotiation, or execution of
this Agreement, the Related Agreements, or in connection with any transactions
contemplated hereby. Neither Purchaser, Acquisition Sub nor any officer,
director, employee, agent, or representative of Purchaser or Acquisition Sub
(collectively, the "Acquisition Sub Representatives") is or has been subject to
any agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts Purchaser, Acquisition Sub or the Acquisition Sub
Representatives from negotiating, entering into, and consummating this
Agreement, the Related Agreements, and the transactions contemplated hereby and
thereby.
(e) Governmental Consents. To the best of the Knowledge of
Purchaser and Acquisition Sub, no consent, approval, order, or authorization
of, or registration, qualification, designation, declaration, or filing with,
any federal, state, local, or provincial governmental authority on the part of
Acquisition Sub or Purchaser is required in connection with the consummation of
the transactions contemplated hereunder.
(f) Complete Disclosure. To the best of the Knowledge and belief
of Purchaser and Acquisition Sub, no representation or warranty by Purchaser or
Acquisition Sub in this Agreement, and no exhibit, schedule, statement,
certificate, or other writing furnished to Company and Company Shareholders
pursuant to this Agreement or the Related Agreements or in connection with the
transactions contemplated hereby and thereby, contains or will contain any
untrue statement or omits or will omit to state any fact necessary to make the
statements contained herein and therein not materially misleading. If
Purchaser or Acquisition Sub becomes aware of any fact or circumstance which
would change a representation or warranty of Purchaser or Acquisition Sub,
Purchaser and Acquisition Sub shall immediately give notice of such fact or
circumstance to Company and Company Shareholders. However, such notification
shall not relieve either Purchaser or Acquisition Sub of their respective
obligations under this Agreement.
Section 2.3 Disclosure. Disclosure of any item on any schedule
hereto shall be deemed adequate disclosure of such item on all other schedules,
provided a specific cross-reference is set forth in each such other schedule.
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Section 2.4 Investment Representation of Company Shareholders.
Each Company Shareholder (i) understands that the shares of Purchaser Common
Stock have not been, and will not be, registered under the Securities Act of
1933, or under any state securities laws, and are being offered and sold in
reliance upon federal and state exemptions for transactions not involving any
public offering, (ii) is acquiring the shares of Purchaser Common Stock solely
for his or its own account for investment purposes, and not with a view of the
distribution thereof, (iii) is a sophisticated investor with knowledge and
experience in business and financial matters, (iv) has received certain
information concerning Purchaser and has had the opportunity to obtain
additional information as desired in order to evaluate the merits and the risks
inherent in holding the Purchaser Common Stock, (v) is able to bear the
economic risk and lack of liquidity inherent in holding the Purchaser Common
Stock, and (vi) is an Accredited Investor for the reasons set forth in the
annexed subscription documents and investment letter.
ARTICLE III
COVENANTS
Section 3.1 Covenants Against Disclosure.
(a) The terms and provisions of this Agreement, and any
information heretofore disclosed or to be disclosed in the future in connection
herewith by any party hereto to any other party, other than information which
is in the public domain or which the disclosing party authorizes the receiving
party in writing to disclose (such terms, provisions and information herein
called the "Confidential Material") shall be treated confidentially by the
parties; provided that any party may disclose Confidential Material of another
party to the receiving party's employees, accountants, attorneys and advisors,
including personal financial planners and advisors, who need to know the same
(it being understood that they shall be informed by the receiving party of the
confidential nature of the Confidential Material, and that the receiving party
shall cause them to treat the same confidentially), and otherwise to the extent
required by law; and provided further that any party may disclose the terms and
provisions of this Agreement after the later of six months after the Closing
Date or December 31, 1998. Furthermore, the parties may disclose the terms of
this Agreement to the managing shareholder and company shareholders of Computer
Graphics Technology, Inc., a South Carolina corporation, and to the managing
shareholder and company shareholders of New England Computer Graphics, Inc., a
Massachusetts corporation, and their attorneys and accountants for the purpose
of arriving at an agreement acceptable to all parties. The parties acknowledge
that remedies at law would be inadequate to enforce the covenants contained in
this Section 3.1 and therefore agree that a party aggrieved hereunder may
enforce such covenants through the remedy of specific performance or other
equitable relief. Should an aggrieved party have cause to seek such relief, no
bond shall be required, and the breaching party shall pay all attorney's fees
and court costs which the aggrieved party may incur in enforcing the provisions
of this Section.
(b) The parties shall, by mutual agreement, draft a press release
for public dissemination. No party shall disseminate (except to the parties to
this Agreement) any press release or announcement concerning the transactions
contemplated by this Agreement or the Related Agreements or the parties hereto
or thereto without the prior written consent of the Company, Purchaser and
Acquisition Sub, except as required by law.
Section 3.2 Access to Information. Through April 1, 1998 (or
such later Closing Date as may be established), the Company will give
Purchaser, Acquisition Sub and their accountants, legal
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counsel, and other representatives reasonable access, during normal business
hours, at times mutually agreeable among the parties, to all of the properties,
books, contracts, commitments, and records relating to the Business and the
Company and to all officers and managers of the Company, and the Company will
furnish to Purchaser and Acquisition Sub, their accountants, legal counsel and
other representatives, at the Company's expense (which expense shall not
include the costs and fees of Acquisition Sub's or Purchaser's accountants,
legal counsel, and other representatives), all such information that Company
and the Company Shareholders are reasonably able to produce concerning the
Business or the Company as Acquisition Sub and Purchaser may request.
Acquisition Sub and Purchaser agree to indemnify and hold the Company harmless
from and against loss or damage the Company may incur as a result of
Purchaser's or Acquisition Sub's activities or the activities of their agents,
representatives or designees upon property owned or occupied by the Company and
against any and all claims for death or injury to persons or properties arising
out of or connected with Purchaser's or Acquisition Sub's (or their agents',
representatives' or designees') going upon such property pursuant to the
provisions of this Agreement. Such indemnification shall be provided in
accordance with the provisions of Article V hereof.
Section 3.3 Interim Period.
(a) During the period commencing on the date of this Agreement and
ending with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, the Company agrees that it will, except
as set forth on Schedule 3.3(a):
(i) carry on its respective businesses in substantially
the same manner as it has heretofore and not introduce any material
new method of management, operation or accounting;
(ii) maintain its respective properties and facilities,
including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(iii) perform all of its respective obligations under
agreements relating to or affecting its respective assets, properties,
or rights;
(iv) keep in full force and effect present insurance
policies or other comparable insurance coverage;
(v) use its best efforts to maintain and preserve its
business organization intact, retain its respective present key
employees, and maintain its respective relationships with suppliers,
customers, and others having business relations with it;
(vi) maintain compliance with all permits laws, rules and
regulations, consent orders, and all other orders of applicable
courts, regulatory agencies, and similar governmental authorities;
(vii) maintain present debt and lease instruments and not
enter into new or amended debt or lease instruments; and
(viii) maintain present salaries and commission levels for
all officers, directors, employees and agents.
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(b) During the period commencing on the date of this Agreement and
ending with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, the Company agrees that it will not,
except as set forth on Schedule 3.3(b):
(i) make any change in its Certificate or Articles of
Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls,
conversion rights or commitments relating to its securities of any
kind;
(iii) declare or pay any dividend, or make any distribution
in respect of its stock whether now or hereafter outstanding, or
purchase, redeem or otherwise acquire or retire for value any shares
of its stock or declare any dividends or make any distributions (other
than S Corporation distributions), nor pay out any extraordinary
bonuses in excess of pro rata bonuses customarily paid, or fees, or
commissions to the Shareholders, directors, management or other
personnel;
(iv) sell, assign, lease, or otherwise transfer or dispose
of any property or equipment except in the normal course of business;
(v) negotiate for the acquisition of any business or the
start-up of any new business;
(vi) merge or consolidate or agree to merge or consolidate
with or into any other corporation;
(vii) waive any material rights or claims;
(viii) commit a material breach of or amend or terminate any
material agreement or Permit;
(ix) enter into any other transaction outside the ordinary
course of its business consistent with past business practice or
prohibited hereunder; or
(x) change its accounts receivable collection practice or
factor its accounts receivable in any way.
Section 3.4 Completion of Schedules. The parties acknowledge
that all of the Schedules hereto may not be completed as of the date of
execution of this Agreement. All missing or incomplete schedules shall be
compiled and agreed upon within 15 days after execution of this Agreement.
Section 3.5 On and After Closing.
(a) On and after the Closing Date, none of the shares of stock of
Purchaser which are subject to the escrow provisions of this Agreement shall be
transferred or pledged except pursuant to the provisions of this Agreement. The
voting rights with respect to such shares shall be exercisable by the owners of
such shares. Dividends, if any, declared on the Purchaser Common Stock during
the effectiveness of such escrow provisions shall be paid to and reinvested by
the escrow agent as the parties shall agree.
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(b) After the Closing Date, the Managing Shareholder and Surviving
Corporation agree that they will not without the consent of Purchaser, which
consent shall not be unreasonably withheld:
(i) enter into any contract or commitment or incur, or
agree to incur, any liability or make any capital expenditures, except
in the normal course of business consistent with past practice
involving amounts less than $5,000;
(ii) create, assume, or permit to exist mortgage, pledge,
or other lien or encumbrance upon any assets or properties whether now
owned or hereafter acquired, except (1) with respect to purchase money
liens incurred in connection with the acquisition of equipment with an
aggregate cost not in excess of $10,000 necessary or desirable for the
conduct of the businesses of the Company, (2) liens for taxes either
not yet due or being contested in good faith and by appropriate
proceedings (and for which contested taxes adequate reserves have been
established and are being maintained) or materialmen's, mechanics',
workers', repairmen's, employees', or other like liens arising in the
ordinary course of business (the liens set forth in clause (2) being
referred to herein as "Statutory Liens"), or (3) liens set forth on
Schedule 2.1(v) hereto;
Section 3.6 Continuity of Business Enterprise. Surviving Company
will continue a historic business of the Company, or use or cause to be used, a
significant portion of the Company's business, in a manner which satisfies the
continuity of business enterprise requirement at Treas. Reg. Section
1.365-1(d).
Section 3.7 Non-Solicitation.
(a) Except as set forth on Exhibit 3.7(a) hereto, commencing as of
the Closing Date and continuing for three (3) years thereafter, each of the
Company Shareholders agrees that it/he shall not engage (except in its/his
respective capacity as an employee of Surviving Corporation, Purchaser, or a
subsidiary of either Surviving Corporation or Purchaser, if applicable),
directly or indirectly, whether on its/his own account or as a shareholder
(other than as a less than 1 % shareholder of a publicly-held company),
partner, joint venturer, employee, consultant, advisor, and/or agent, of any
person, firm, corporation, or other entity, in any or all of the following
activities:
(i) Solicit or attempt to solicit customers, suppliers,
or business patronage of the Company, Surviving Corporation, the
Business of either Surviving Corporation or Purchaser, or any of
their affiliates for the purpose of inducing him, her or it to
purchase or receive products or services competitive with those
offered by Surviving Corporation or Purchaser (provided, however, that
this restriction shall apply only to customers with whom such Company
Shareholder had material contact in connection with services provided
by the Company Shareholder for or on behalf of the Company within the
three years prior to the date of this Agreement); or,
(ii) Encourage or solicit any Employees of or service
providers to Surviving Corporation, Purchaser, the Business of either
Surviving Corporation or Purchaser, or any of their affiliates to
leave the employment of or terminate their service relationship with
Surviving Corporation, Purchaser or any of their affiliates for any
reason.
(b) All proprietary and confidential data or information (whether
in tangible form or held as personal knowledge) of the Company pertaining to
its business, other than Trade Secrets (as defined
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below), which is not generally known to the public, including, without
limitation, information regarding the Company's customers or prospective
customers (such as lists containing the names, addresses, and telephone numbers
and/or account information of customers and prospective customers), marketing
plans and methods, short-term and long-term business plans, research and
development, manufacturing costs and processes, pricing, cost or profit
factors, quality programs, contracts and bids, or personnel gained by a Company
Shareholder as a result of his, her or its relationship with the Company shall
be considered "Company Confidential Information". The Company Shareholders
shall regard and treat each item constituting Company Confidential Information
as strictly confidential and wholly-owned by Surviving Corporation and
Purchaser until the third anniversary of the Closing Date, and the Company
Shareholders shall not, for any reason in any fashion, either directly or
indirectly, use, sell, lend, lease, distribute, license, give, transfer,
assign, show, disclose, disseminate, reproduce, copy, appropriate or otherwise
communicate any such item or information to any entity for any purpose other
than strictly in accordance with the express terms of this Agreement.
(c) All information constituting "trade secrets" of the Company as
generally recognized under applicable law shall be considered "Company Trade
Secrets". The Company Shareholders, at all times during which such item
continues to constitute a Company Trade Secret, shall regard and treat each
item constituting a Company Trade Secret as strictly confidential and
wholly-owned by Surviving Corporation and Purchaser, and the Company
Shareholders shall not, for any reason in any fashion, either directly or
indirectly, use, sell, lend, lease, distribute, license, give, transfer,
assign, show, disclose, disseminate, reproduce, copy, appropriate or otherwise
communicate any such item or information to any entity for any purpose other
than strictly in accordance with the express terms of this Agreement.
(d) The parties agree that due to the unique nature of the
services and capabilities of the Company and the Company Shareholders, there
can be no adequate remedy at law for any breach of their respective obligations
under this Article III, that any such breach may allow the Company Shareholders
and/or third parties to unfairly compete with Surviving Corporation, Purchaser
or their affiliates resulting in irreparable harm to Surviving Corporation,
Purchaser or their affiliates, and therefore, that upon any such breach or any
threat thereof, Surviving Corporation, Purchaser or their affiliates shall be
entitled to appropriate equitable relief in addition to whatever remedies it
might have at law.
(e) Each of the Company Shareholders acknowledges, represents and
warrants to Acquisition Sub and Purchaser that the covenants of each in this
Section 3.7 are reasonably necessary for the protection of Acquisition Sub's
and Purchaser's interests under this Agreement and are not unduly restrictive
upon him.
Section 3.8 Registration Statement. Purchaser shall use its best
efforts, when it next files with the SEC a registration statement, to prepare
and file at its costs and expense such amendment to such registration statement
to cover the shares of Purchaser Common Stock issuable to the Company
Shareholders, and to keep same effective for a period of at least ninety(90)
days so as to permit Company or the Company Shareholders, as the case may be,
to resell such shares during such period of not less than ninety (90) days.
Purchaser shall further use its best efforts to list the shares on the Nasdaq
National Market System subject to official notice of issuance under the
Securities Exchange Act of 1934.
Section 3.9 Company Indebtedness. Acquisition Sub and Purchaser
will use their best efforts to arrange with Company's banks and/or lending
institutions to assign Company's line of credit
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or other indebtedness to Acquisition Sub and will coordinate with Company
Shareholder to effect a release of Company Shareholder's personal guarantees.
In the event that such attempts are unsuccessful at Closing, Purchaser shall
loan to Acquisition Sub an amount sufficient to discharge such indebtedness and
release such guarantees. Such loan shall bear interest at the rate being
charged by the bank or lending institution whose loan is being discharged.
Section 3.10 Further Assurances. On or after the Closing Date,
each party shall prepare, execute, and deliver, at the preparer's expense, such
further instruments, and shall take or cause to be taken such other or further
action, as any party shall reasonably request of any other party at any time or
from time to time in order to consummate, in any other manner, the terms and
provisions of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT TO OBLIGATIONS
Section 4.1 Conditions to Obligations of Purchaser and
Acquisition Sub. Each and every obligation of Purchaser and Acquisition Sub to
be performed on the Closing Date shall be subject to the satisfaction on or
before the Closing Date of the following conditions (unless waived in writing
by Purchaser or Acquisition Sub), and the Company and the Company Shareholders
shall exercise all reasonable efforts in good faith to satisfy such conditions:
(a) Representations and Warranties. The representations and
warranties of each of the Company Shareholders and the Company set forth in
Section 2.1 of this Agreement shall have been true and correct when made and
shall be true and correct at and as of the Closing Date as if such
representations and warranties were made as of such date and time.
(b) Performance of Agreement. All covenants, conditions, and
other obligations under this Agreement and the Related Agreements which are to
be performed or complied with by the Company or each of the Company
Shareholders, as the case may be, including Boards of Directors approval and
delivery of the Balance Sheet, shall have been fully performed and complied
with at or prior to the Closing Date.
(c) No Material Adverse Change. Since the date of the Unaudited
Annual Financial Statements, there shall have occurred no material adverse
change in the financial condition, the business, the assets of the Company, or
properties of the Company which adversely affects the conduct of the Business
as presently being conducted, the assets of the Company, or the financial
condition or properties of the Company.
(d) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Closing Date and any applicable waiting period
under any applicable federal law shall have expired.
(e) Due Diligence Review. Purchaser and Acquisition Sub shall
have completed to its reasonable satisfaction their due diligence review of the
Company and its operations, the Business, the assets and financial condition of
the Company, and Purchaser and Acquisition Sub shall have received favorable
reviews from its advisors of the results of their due diligence review of the
Business.
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(f) Certificate of President and Shareholders. The Company shall
have delivered to Purchaser and Acquisition Sub a certificate executed by its
President and the Company Shareholders, dated the date of the Closing Date, to
the effect that the conditions set forth in subsections (a)-(d) of this Section
4.1 have been satisfied with respect to the Company and the Company
Shareholders.
(g) Approval of Documents. The form and substance of all
certificates, instruments, opinions, and other documents delivered or to be
delivered to Purchaser and Acquisition Sub under this Agreement shall be
reasonably satisfactory to Purchaser and Acquisition Sub and their counsel.
(h) Execution of Related Agreements. Purchaser and Acquisition
Sub shall have received fully executed copies of the Related Agreements.
(i) Licenses. Acquisition Sub shall have received all licenses
from all appropriate governmental agencies to operate the Business in the same
manner as the Company operated the Business prior to the Closing Date and shall
have received a certificate, dated as of no earlier than ten (10) days prior to
the Closing Date, duly issued by the appropriate governmental authority in the
Company's State of Incorporation and in each state in which the Company is
authorized to do business, showing that the Company is in good standing and
authorized to do business and that all state franchise and/or income tax
returns and taxes for the Company for all periods prior to the Closing have
been filed and paid. This condition shall be deemed satisfied in the event
that the Acquisition Sub fails to use reasonable diligence in applying for and
pursuing such licenses.
(j) Consents. Purchaser and Acquisition Sub shall have received
each and every consent, approval and waiver (if any) required for the execution
of this Agreement and the consummation of the transactions contemplated hereby.
(k) Resignations. The officers and directors of the Company shall
have delivered their resignations, effective upon delivery.
(l) Delivery of Share Certificates. The Company Shareholders
shall have delivered for cancellation their certificates representing all of
the outstanding Company Shares owned by each of them.
Section 4.2 Conditions to Obligations of the Company and the
Company Shareholders. Each and every obligation of the Company and the Company
Shareholders to be performed on the Closing Date shall be subject to the
satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by the Company Shareholders or the Company), and
Purchaser and Acquisition Sub shall exercise all reasonable efforts in good
faith to satisfy such conditions:
(a) Representations and Warranties. The representations and
warranties of Acquisition Sub and Purchaser set forth in Section 2.2 of this
Agreement shall have been true and correct when made and shall be true and
correct on and as of the Closing Date as if such representations and warranties
were made as of such date and time.
(b) Performance of Agreement. All covenants, conditions, and
other obligations under this Agreement and the Related Agreements which are to
be performed or complied with by Acquisition Sub, as the case may be, including
Board of Directors and shareholder approval, as applicable, shall have been
fully performed and complied with at or prior to the Closing Date.
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(c) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Closing Date and any applicable waiting period
under any applicable federal law shall have expired.
(d) Certificate of Officers. Acquisition Sub shall have delivered
to the Company a certificate executed by its authorized officer, dated the date
of the Closing Date, to the effect that the conditions set forth in subsections
(a)-(c) of this Section 4.2 have been satisfied.
(e) Execution of Related Agreements. The Company shall have
received fully executed copies of the Related Agreements (and all other
documents required hereunder).
(f) Approval of Documents. The form and substance of all
certificates, instruments, opinions, and other documents delivered or to be
delivered to the Company Shareholders under this Agreement shall be reasonably
satisfactory to each of the Company Shareholders and their counsel.
ARTICLE V
INDEMNIFICATION
Section 5.1 Survival of Representations, Warranties, Covenants and
Agreements.
(a) All representations, warranties, covenants, and agreements of
the Company, the Company Shareholders, Purchaser and Acquisition Sub shall
survive the execution, delivery, and performance of this Agreement for two
years from the Closing Date. All representations and warranties of the Company,
the Company Shareholders, Purchaser and Acquisition Sub set forth in this
Agreement shall be deemed to have been made again by the Company, the Company
Shareholders, Purchaser and Acquisition Sub on and as of the Closing Date.
(b) As used in this Article V, except as otherwise indicated in
this Article V, any reference to a representation, warranty, agreement, or
covenant contained in any section of this Agreement shall include the schedule
relating to such section.
Section 5.2 Indemnification of Acquisition Sub and Purchaser.
Each of the Company Shareholders hereby agrees to indemnify and hold harmless
Acquisition Sub and Purchaser and their affiliates, the Company and the other
Company Shareholders (collectively the "Indemnified Parties") against any and
all losses, liabilities, damages, demands, claims, suits, actions, judgments,
causes of action, assessments, costs, and expenses, including, without
limitation, interest, penalties, attorneys' fees, any and all expenses incurred
in investigating, preparing, and defending against any litigation, commenced or
threatened, and any claim whatsoever, and any and all amounts paid in
settlement of any claim or litigation (collectively, "Damages"), asserted
against, reasonably resulting from, imposed upon, or incurred or suffered by
the Indemnified Parties, directly or indirectly, as a result of or arising from
any inaccuracy in or breach or nonfulfillment of any of the representations,
warranties, covenants, or agreements made by the Company or the Company
Shareholders in this Agreement or the Related Agreements or any facts or
circumstances constituting such an inaccuracy, breach, or nonfulfillment (all
of which shall be referred to as "Company Indemnifiable Claims").
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Section 5.3 Indemnification of the Company Shareholders.
Acquisition Sub hereby agrees to indemnify and hold harmless each of the
Company Shareholders against any and all Damages(as defined in Section 5.2
above) asserted against, reasonably resulting from, imposed upon, or incurred
or suffered by such Company Shareholders, directly or indirectly, as a result
of or arising from any inaccuracy in or breach or nonfulfillment of any of the
representations, warranties, covenants, or agreements made by Acquisition Sub
in this Agreement or the Related Agreements or any facts or circumstances
constituting such an inaccuracy, breach, or nonfulfillment or any claim against
the Company which is attributable to occurrences on or after the Closing Date
(all of which shall be referred to as "Acquisition Sub Indemnifiable Claims").
Section 5.4 Procedure for Indemnification with Respect to
Third-Party Claims.
(a) If any party hereto determines to seek indemnification (the
party seeking such indemnification hereinafter referred to as the "Indemnified
Party" and the party against whom such indemnification is sought is hereinafter
referred to as the "Indemnifying Party") under this Article V with respect to
Company Indemnifiable Claims where the Indemnified Party is Acquisition Sub or
any of its affiliates or Acquisition Sub Indemnifiable Claims where the
Indemnified Party is any of the Company Shareholders (such Claims shall be
referred to herein as "Indemnifiable Claims") resulting from the assertion of
liability by third parties, the Indemnified Party shall give notice to the
Indemnifying Parties within 60 days of the Indemnified Party becoming aware of
any such Indemnifiable Claim or of facts upon which any such Indemnifiable
Claim will be based; the notice shall set forth such material information with
respect thereto as is then reasonably available to the Indemnified Party. In
case any such liability is asserted against the Indemnified Party or its
affiliates, and the Indemnified Party notifies the Indemnifying Parties
thereof, the Indemnifying Parties will be entitled, if such Indemnifying
Parties so elect by written notice delivered to the Indemnified Party within 20
days after receiving the Indemnified Party's notice, to assume the defense
thereof with competent and experienced counsel subject to the written consent
of the Indemnified Party, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, (i) the Indemnified Party or its affiliates
shall also have the right to employ its own counsel in any such case, but the
fees and expenses of such counsel shall be at the expense of the Indemnified
Party unless the Indemnified Party or its affiliates shall reasonably determine
that there is a conflict of interest between or among the Indemnified Party or
its affiliates and any Indemnifying Party with respect to such Indemnifiable
Claim, in which case the Indemnified Party shall select another attorney,
subject to the consent of Indemnifying Party, which consent shall not be
unreasonably withheld, and the fees and expenses of such counsel will be borne
by such Indemnifying Parties, (ii) the Indemnified Party shall have no
obligation to give any notice of any assertion of liability by a third party
unless such assertion is in writing, and (iii) the rights of the Indemnified
Party or its affiliates to be indemnified hereunder in respect of Indemnifiable
Claims resulting from the assertion of liability by third parties shall not be
adversely affected by their failure to give notice pursuant to the foregoing
unless, and, if so, only to the extent that, such Indemnifying Parties are
materially prejudiced thereby; provided, however, the Indemnifying Party shall
not be liable for attorneys fees and expenses incurred by the Indemnified Party
prior to the Indemnified Party's giving notice to the Indemnifying Party of an
Indemnifiable Claim. With respect to any assertion of liability by a third
party that results in an Indemnifiable Claim, the parties hereto shall make
available to each other all relevant information in their possession material
to any such assertion.
(b) In the event that such Indemnifying Parties, within 20 days
after receipt of the aforesaid notice of an Indemnifiable Claim fail to assume
the defense of the Indemnified Party or its affiliates against such
Indemnifiable Claim, the Indemnified Party or its affiliates shall have the
right to
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undertake the defense, compromise, or settlement of such action on behalf of
and for the account, expense, and risk of such Indemnifying Parties.
(c) Notwithstanding anything in this Article V to the contrary,
(i) if there is a reasonable probability that an Indemnifiable Claim may
materially adversely affect the Indemnified Party or its affiliates, the
Indemnified Party or its affiliates shall have the right to participate in such
defense, compromise, or settlement and such Indemnifying Parties shall not,
without the Indemnified Party's written consent (which consent shall not be
unreasonably withheld), settle or compromise any Indemnifiable Claim or consent
to entry of any judgment in respect thereof unless such settlement, compromise,
or consent includes as an unconditional term thereof the giving by the claimant
or the plaintiff to the Indemnified Party a release from all liability in
respect of such Indemnifiable Claim.
Section 5.5 Procedure For Indemnification with Respect to
Non-Third Party Claims. In the event that the Indemnified Party asserts the
existence of a claim giving rise to Damages (but excluding claims resulting
from the assertion of liability by third parties), it shall give written notice
to the Indemnifying Parties. Such written notice shall state that it is being
given pursuant to this Section 5.5, specify the nature and amount of the claim
asserted and indicate the date on which such assertion shall be deemed accepted
and the amount of the claim deemed a valid claim (such date to be established
in accordance with the next sentence). If such Indemnifying Parties, within 30
days after the receipt of notice by the Indemnified Party, shall not give
written notice to the Indemnified Party announcing their intent to contest such
assertion of the Indemnified Party, such assertion shall be deemed accepted and
the amount of claim shall be deemed a valid claim. In the event, however, that
such Indemnifying Parties contest the assertion of a claim by giving such
written notice to the Indemnified Party within said period, then the parties
shall act in good faith to reach agreement regarding such claim. If the parties
hereto, acting in good faith, cannot reach agreement with respect to such claim
within ten (10) days after notice thereof, such claim will be submitted to and
settled by arbitration pursuant to Section 7.10 hereof.
Section 5.6 Escrowed Shares. Each Company Shareholder shall
escrow twenty percent (20%) of the Purchaser Common Stock to be issued to such
Company Shareholder to be available for distribution to Purchaser in the event
of an Indemnified Claim not paid in cash by the Indemnifying Party. The number
of Purchaser Shares to be delivered to Purchaser in the event that there is an
Indemnifiable Claim for which Purchaser Shares are to be distributed to satisfy
such an Indemnifiable Claim pursuant to this Section 5.6 shall be calculated
by dividing the amount of the award for the Indemnifiable Claim by the
twenty-day average trading price of Purchaser Common Stock as quoted on the
Nasdaq National Market System for the twenty-day period ending on the date that
the Indemnifiable Claim is made. Such escrow shall expire on the date not less
than eighteen (18) months after the Date of Closing, when there shall be no
pending Indemnification Claim for which notice has been given under Section
5.4, and upon such expiration the share certificates shall be delivered to the
Company Shareholders. Not later than the Closing Date the parties shall enter
into a Pledge, Security and Escrow Agreement in substantially the form and
substance attached hereto as Exhibit 5.6(a). In the event that Purchaser elects
to waive the Profit Surplus Adjustment and the Profit Shortfall Adjustment
pursuant to Section 1.3(h) hereof, the amount of Purchaser Common Stock placed
in escrow pursuant to this Section 5.6 shall be increased by the amount of
Purchaser Common Stock then in the escrow account established by Section 1.3(e)
that is transferred to the escrow account established by this Section 5.6.
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ARTICLE VI
TERMINATION AND CONDITIONS SUBSEQUENT
Section 6.1 Termination.
(a) At any time prior to the time of Closing, this Agreement may
be terminated by express written consent of Purchaser, Acquisition Sub, the
Company and each of the Company Shareholders.
(b) Purchaser or Acquisition Sub may terminate this Agreement in
the event the conditions set forth in Section 4.1 of this Agreement have not
been satisfied or waived prior to the time of Closing.
(c) Each of the Company and the Company Shareholders may terminate
this Agreement in the event the conditions set forth in Section 4.2 of this
Agreement have not been satisfied or waived prior to the time of Closing.
(d) If the failure of such conditions to be fulfilled arises from
the fault or intentional act of a party hereto, such party shall be liable to
the other parties up to the amount of the documented out-of-pocket expense
incurred by such parties in negotiating, structuring and documenting the
transaction contemplated by this Agreement. No party shall be responsible for
indirect, special or expectancy damages for such nonfulfillment of conditions.
Section 6.2 Effect of Termination. In the event of termination
as provided in Section 6.1 above, Sections 3.1, 7.4 and 7.11 shall survive such
termination and continue in full force and effect.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Notice. All notices and other communications
required or permitted under this Agreement shall be delivered to the parties at
the address set forth below their respective signature blocks, or at such other
address that they designate by notice to all other parties in accordance with
this Section 7.1. Any party delivering notice to Purchaser or Acquisition Sub
shall deliver a copy to: ▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇▇▇,
L.L.P., First Union Plaza, Suite 1400, ▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇., ▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇ ▇▇▇▇▇. Any party delivering notice to Company or Company Shareholder
shall deliver a copy to ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Law Offices of ▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇. All notices and
communications shall be deemed to have been received unless otherwise set forth
herein: (i) in the case of personal delivery, on the date of such delivery;
(ii) in the case of telex or facsimile transmission, on the date on which the
sender receives confirmation by telex or facsimile transmission that such
notice was received by the addressee, provided that a copy of such transmission
is additionally sent by mail as set forth in (iv) below; (iii) in the case of
recognized, nationwide overnight air courier, on the second business day
following the day sent, with receipt confirmed by the overnight courier; and
(iv) in the case of mailing by first class certified or registered mail,
postage prepaid, return receipt requested, on the fifth business day following
such mailing.
Section 7.2 Entire Agreement. This Agreement, the exhibits and
schedules hereto, and the documents referred to herein embody the entire
agreement and understanding of the parties hereto with
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respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings, oral or written, relative to
said subject matter.
Section 7.3 Binding Effect: Assignment. This Agreement and the
various rights and obligations arising hereunder shall inure to the benefit of
and be binding upon the Company and the Company Shareholders, their respective
successors and permitted assigns, and Purchaser, Acquisition Sub and their
successors and permitted assigns. Neither this Agreement nor any of the
rights, interests, or obligations in this Agreement shall be transferred or
assigned (by operation of law or otherwise) by the Company or the Company
Shareholders without the prior written consent of Acquisition Sub or Purchaser
or their assignees. Acquisition Sub and Purchaser may assign their rights,
interests or obligations hereunder without the prior written consent of the
Company or the Company Shareholders.
Section 7.4 Expenses of Transaction. Each party shall pay its
professional fees and expenses incurred in connection with the negotiation and
closing of this Agreement and the Related Agreements. The expenses of the
preparation of the Financial Statements shall be borne by Company except for
the 1997 Audited Financial Statements, which shall be paid by Acquisition Sub.
Company and/or Company Shareholders, as the case may be, shall pay all
applicable sales, income, use, excise, transfer, documentary, and any other
taxes arising out of the transactions contemplated in this Agreement.
Section 7.5 Waiver; Consent. This Agreement may not be changed,
amended, terminated, augmented, rescinded, or discharged (other than by
performance), in whole or in part, except by a writing executed by the parties
hereto, and no waiver of any of the provisions or conditions of this Agreement
or any of the rights of a party hereto shall be effective or binding unless
such waiver shall be in writing and signed by the party claimed to have given
or consented thereto. Except to the extent that a party hereto may have
otherwise agreed in writing, no waiver by that party of any condition of this
Agreement or breach by the other party of any of its obligations or
representations hereunder or thereunder shall be deemed to be a waiver of any
other condition or subsequent or prior breach of the same or any other
obligation or representation by the other party, nor shall any forbearance by
the first party to seek a remedy for any noncompliance or breach by the other
party be deemed to be a waiver by the first party of its rights and remedies
with respect to such noncompliance or breach.
Section 7.6 Counterparts. This Agreement may be executed
simultaneously in multiple counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
Section 7.7 Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable statute, regulation or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform to such
statute, regulation or rule of law, and the remainder of this Agreement and the
application of any such invalid or unenforceable provision to parties,
jurisdictions or circumstances other than to whom or to which it is held
invalid or unenforceable shall not be affected thereby nor shall the same
affect the validity or enforceability of any other provision of this Agreement.
Section 7.8 Remedies of the Parties. The Company and the Company
Shareholders acknowledge that, in addition to all other remedies to which
Purchaser and Acquisition Sub are entitled, Purchaser and Acquisition Sub shall
have the right to enforce the terms of this Agreement by a decree of specific
performance, provided Purchaser or Acquisition Sub is not in material default
hereunder. The parties also agree that the rights and remedies of each party to
this Agreement set forth in this
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Agreement and in all of the exhibits and schedules attached hereto and
documents referred to herein shall be cumulative and share inure to the benefit
of each such party.
Section 7.9 Governing Law. This Agreement shall in all respects
be construed in accordance with and governed by the laws of the State of
Georgia.
Section 7.10 Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any
dispute arising out of this Agreement, but should a dispute remain unresolved
ten (10) days following notice of the dispute to the other party (but in no
event prior to said ten (10) days, except as specifically provided otherwise
herein), such dispute shall be finally settled by binding arbitration in
Atlanta, Georgia in accordance with the then current Commercial Arbitration
Rules of the American Arbitration Association (the "AAA") or such other
mediation or arbitration service as shall be mutually agreeable to the parties,
and judgment upon the award rendered by the arbitrator shall be final and
binding on the parties and may be entered in any court having jurisdiction
thereof; provided, however, that any party shall be entitled to appeal a
question of law or determination of law to a court of competent jurisdiction;
and provided, further, however, that the parties may first seek appropriate
injunctive relief prior to, and/or in addition to pursuing negotiation or
arbitration. Such arbitration shall be conducted by an arbitrator chosen by
mutual agreement of the parties, or failing such agreement, an arbitrator
appointed by the AAA. There shall be limited discovery prior to the arbitration
hearing as follows: (a) exchange of witness lists and copies of documentary
evidence and documents related to or arising out of the issues to be
arbitrated, (b) depositions of all party witnesses, and (c) such other
depositions as may be allowed by the arbitrator upon a showing of good cause.
Depositions shall be conducted in accordance with the Georgia Code of Civil
Procedure and questions of evidence in any hearings shall be resolved in
accordance with the Federal Rules of Evidence. The arbitrator shall be
required to provide in writing to the parties the basis for the award or order
of such arbitrator, and a court reporter shall record all hearings (unless
otherwise agreed to by the parties), with such record constituting the official
transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement or the Related Agreements,
the prevailing party will be entitled to receive from the other party all
costs, damages and expenses, including reasonable attorney's fees, incurred by
the prevailing party in connection with that action or proceeding whether or
not the controversy is reduced to judgment or award. The prevailing party will
be that party who may be fairly said by the arbitrator(s) or the court to have
prevailed on the major disputed issues.
Section 7.11 Cooperation and Records Retention. Each of the
Company Shareholders and Acquisition Sub shall (i) provide the other with
access to such records, original or copies, or assistance as may reasonably be
requested by them in connection with the preparation of any Tax Return, in
connection with any audit or other examination by any Taxing authority or any
judicial or administrative proceedings relating to liability for Taxes, or
financial reporting obligations, (ii) each retain and provide the other, with
any records or other information which may be relevant to any such Tax Return,
audit or examination, proceeding or determination, or financial reporting
obligations, and (iii) each provide the other with any final determination of
any such audit or examination, proceeding or determination that affects any
amount required to be shown on any Tax Return of the other for any period. All
Tax Returns, supporting work schedules and other records or information which
may be relevant to such Tax Returns for all tax periods or portions thereof
ending before or including the
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Closing Date shall remain with Acquisition Sub or the Company and shall be made
available for inspection and copying by the parties hereto during normal
business hours.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
"Purchaser"
TEKGRAF, INC.
By: /s/ ▇▇▇ ▇▇▇▇▇▇
---------------------------------------
▇▇▇ ▇▇▇▇▇▇
President
Address: ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
By: /s/ ▇▇▇ ▇▇▇▇▇▇
---------------------------------------
Name: ▇▇▇ ▇▇▇▇▇▇
----------------------------------
Secretary
"Acquisition Sub"
TEKGRAF SUB II, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
---------------------------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
President
Address: ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
By: /s/ ▇▇▇ ▇▇▇▇▇▇
---------------------------------------
Name: ▇▇▇ ▇▇▇▇▇▇
----------------------------------
Secretary
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"Company"
MARTEC, INC.
By: /s/ ▇▇▇▇ ▇▇▇▇▇
---------------------------------------
▇▇▇▇ ▇▇▇▇▇, [President]
Address:
By: /s/ ▇▇▇▇ ▇▇▇▇▇
---------------------------------------
Name: ▇▇▇▇ ▇▇▇▇▇
----------------------------------
Secretary
"Company Shareholders"
By: /s/ ▇▇▇▇ ▇▇▇▇▇
---------------------------------------
▇▇▇▇ ▇▇▇▇▇
Address:
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[Georgia] EXHIBIT A
CERTIFICATE OF MERGER
MERGING
MARTEC, INC.
(a California corporation)
WITH AND INTO
TEKGRAF SUB II, INC.
(a Georgia corporation)
The undersigned corporation, organized and existing under the laws of the
State of Georgia, DOES HEREBY CERTIFY:
1. That the name and state of incorporation of each of the constituent
corporations (the "Constituent Corporations") of the merger is as follows:
Name State of Incorporation
Martec, Inc. California
Tekgraf Sub II, Inc. Georgia
2. That the surviving corporation of the merger shall be Tekgraf Sub II,
Inc.
3. That the Certificate of Incorporation of Tekgraf Sub II, Inc. shall be
the Certificate of Incorporation of the surviving corporation.
4. That the executed Agreement and Plan of Merger among the Constituent
Corporations and Tekgraf, Inc., a Delaware corporation, is on the file at the
principal place of business of the surviving corporation. The address of the
principal place of business of the surviving corporation is ________________.
5. That a copy of the Agreement and Plan of Merger will be furnished by
the surviving corporation, on request and without cost, to any shareholder of
any of the Constituent Corporations.
6. That the Agreement and Plan of Merger has been duly approved by the
shareholders of each of the Constituent Corporations in accordance with the
provisions of applicable law.
52
IN WITNESS WHEREOF, the undersigned corporation has caused this
Certificate to be signed by its duly authorized officer, this ______ day of
_______________, 1998.
TEKGRAF SUB II, INC.
By:
---------------------------
Name:
------------------------
Title:
------------------------
53
EXHIBIT B
CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER
(MARTEC, INC.)
In accordance with Section 1103 of the California General Corporation Law,
▇▇▇▇ ▇▇▇▇▇ and ________________________ hereby certify that:
1. They are the president and the secretary, respectively, of
MARTEC, INC., a California corporation (the "Corporation").
2. The Agreement of Merger in the form attached hereto was duly
approved by the Board of Directors and shareholders of the
Corporation.
3. The principal terms of the Agreement of Merger attached
hereto were approved by the Corporation by a vote of the number of
shares of each class which equalled or exceeded the vote required.
4. There is one class of common stock of the Corporation
outstanding, and the number of shares outstanding for such voting
class is ____.
5. The percentage vote required of holders of the class entitled
to vote is a vote greater than [50%].
[6. The merger shall become effective at 10:00 a.m. eastern time
on _____________, 1998.]
54
On the date set forth below, in the City of _________________ in the State
of California, each of the undersigned does hereby declare, under penalty of
perjury under the laws of the State of California, that the matters set forth
in this Certificate are true and correct.
Dated this _______ day of _________________, 1998.
------------------------------
Name:
President
------------------------------
Name:
Secretary
55
EXHIBIT D
DIRECTORS
1. ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
2. ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
3. ▇▇▇▇ ▇▇▇▇▇
56
Exhibit 1.3(e)
ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is entered into as of
______________, 1998, by and among TEKGRAF, INC., a Georgia corporation (the
"Purchaser"), TEKGRAF SUB __, INC. ("Acquisition Sub"), _________, a _________
corporation (the "Company"), __________ (the "Company Shareholders"), and
__________ (the "Shareholder Representative") and _________________________ (the
"Escrow Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholders, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that escrow accounts will be
established to secure the Company Shareholders' guaranty with respect to the
Warranted Pre-Tax Profit and the Warranted Tangible Net Asset Value of the
Company (each as defined in the Merger Agreement) on the terms and conditions
set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow accounts will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive cash and shares of Purchaser Common Stock
pursuant to the Merger Agreement have, without any further act of any Company
Shareholder, consented to: (a) the establishment of this escrow to secure the
Company Shareholders' guaranty with respect to the Warranted Pre-Tax Profit and
the Warranted Tangible Net Asset Value of the Company in the manner set forth
herein and in the Merger Agreement, (b) the appointment of the Shareholder
Representatives as their representatives for purposes of this Agreement and as
attorneys-in-fact and agents for and on behalf of each Company Shareholder, and
the taking by the Shareholder Representatives of any and all actions and the
making of any decisions required or permitted to be taken or made by them under
this Agreement, and (c) all of the other terms, conditions and limitations in
this Agreement and the Merger Agreement.
57
3. Escrow and Warranty.
(a) Escrow of Cash. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent $150,000 of the Cash Consideration. The Escrowed Cash
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
hereto. The Escrow Agent agrees to accept delivery of the Escrowed Cash and to
hold the Escrowed Cash in an interest-bearing escrow account (the "Cash Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Escrow of Shares. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent a certificate for the number of Escrowed Shares specified
in Section 1.3(e) of the Merger Agreement, issued in the name of the Escrow
Agent or its nominee. The Escrowed 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 hereto. The Escrow Agent agrees to
accept delivery of the Escrowed Shares and to hold the Escrowed Shares in an
escrow account (the "Share Escrow Account"), subject to the terms and conditions
of this Agreement.
(c) Warranty. The Company Shareholders have agreed in Article I of the
Merger Agreement that the Warranted Pre-Tax Profit and the Warranted Tangible
Net Asset Value of the Company shall not be less than the amounts set forth in
Section 1.3(a) of the Merger Agreement. The Escrowed Shares shall be security
for such warranty obligation of the Company Shareholders, subject to the
limitations, and in the manner provided, in this Agreement.
(d) Dividends, Etc. Any securities distributable to the Company
Shareholders in respect of or in exchange for any of the Escrowed Shares,
whether by way of stock dividends, stock splits or otherwise, shall be delivered
to the Escrow Agent, who shall hold such securities in the Share Escrow Account.
Such securities shall be issued in the name of the Escrow Agent or its nominee
and shall be considered Escrowed Shares for purposes hereof. Any cash dividends
distributable to the Company Shareholders in respect of the Escrowed Shares
shall be distributed to the Company Shareholders.
(e) Voting of Shares. The Shareholder Representatives shall have the
right, in their sole discretion, on behalf of the Company Shareholders, to
direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrowed Shares, and the Escrow Agent shall comply with any
such written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrowed Shares.
(f) Transferability. The respective interests of the Company
Shareholders in the Escrowed Shares shall not be assignable or transferable,
other than by operation of law. Notice of any such assignment or transfer by
operation of law shall be given to the Escrow Agent and the Purchaser, and no
such assignment or transfer shall be valid until such notice is given.
2
58
(g) Transfer of Shares Upon Waiver of Warranty. In the event the
Purchaser elects, pursuant to the provisions of Section 1.3(h) of the Merger
Agreement, to waive the Profit Shortfall Adjustment and the Profit Surplus
Adjustment, the Escrowed Shares shall be transferred, upon receipt of notice by
Escrow Agent from Purchaser of such waiver, into the escrow account created
pursuant to that certain Pledge, Security and Escrow Agreement dated as of even
date herewith, to be treated in all respects as escrow shares thereunder and the
Escrowed Shares in such case shall be distributed to the Company Shareholders
pursuant to the terms thereof.
4. Administration of Cash Escrow Account. The Escrow Agent shall
administer the Cash Escrow Account as follows:
(a) In the event that there is a Net Asset Value Shortfall (including
any Collection Shortfall or Inventory Shortfall that remains unpaid ten (10)
days after demand for payment thereof by Purchaser or Acquisition Sub to the
Company Shareholders), the Purchase Price shall be reduced by the amount of such
Net Asset Value Shortfall. Purchaser or Acquisition Sub shall provide to the
Escrow Agent and the Shareholder Representatives written notice of the amount of
such Net Asset Value Shortfall, and such amount, including any interest accrued
thereon (or such lesser amount as is then held in the Cash Escrow Account),
shall be paid to Purchaser by Escrow Agent within three (3) business days after
receipt of such notice.
(b) Any cash remaining in the Cash Escrow Account after payment of the
Net Asset Value Shortfall amount as set forth in subsection (a) above, shall be
distributed to the Company Shareholders pursuant to Section 6(a) hereof.
(c) In the event that the Net Asset Value Shortfall exceeds the amount
of Escrowed Cash available, Purchaser's recovery of cash pursuant to Section 1.3
of the Merger Agreement shall not be limited to the amount of Escrowed Cash
available.
5. Administration of Share Escrow Account. The Escrow Agent shall
administer the Share Escrow Account as follows:
(a) In the event that the Warranted Pre-Tax Profit exceeds the Actual
Pre-Tax Profit for the Year (or the Alternative Year, if applicable), the
Purchase Price shall be reduced by the number of Purchaser Shares equal to the
Profit Shortfall Adjustment, subject to the Adjustment Floor. In such event,
Purchaser or Acquisition Sub and the Shareholder Representatives shall provide
written notice to the Escrow Agent of the amount of the Profit Shortfall
Adjustment, and the Escrow Agent shall transfer, deliver and assign to Purchaser
such number of Escrowed Shares held in the Share Escrow Account which have a
Fair Market Value equal to the Profit Shortfall Adjustment (or such lesser
number of Purchaser Shares as is then held in the Share Escrow Account). The
Fair Market Value of the Escrowed Shares to be distributed shall be determined
in accordance with Section 7 hereof.
3
59
(b) On the first anniversary of the Closing Date (or if the Alternative
Year is elected, at the end of the Alternative Year), the Escrow Agent shall
distribute to the Company Shareholders, in accordance with Sections 6(a) and (b)
below, one half of the Escrowed Shares remaining in the Share Escrow Account not
required for redistribution pursuant to Section 5(a) hereof. Any Escrowed Shares
remaining in the Share Escrow Account after payment of the Profit Shortfall
Adjustment amount as set forth in subsection (a) above, shall be distributed to
the Company Shareholders pursuant to Sections 6(a) and (b) hereof.
(c) In the event that the Profit Shortfall Adjustment exceeds the
number of Escrowed Shares available, Purchaser's recovery of Purchaser Shares
pursuant to Section 1.3 of the Merger Agreement shall not be limited to the
amount of Escrowed Shares available.
6. Release of Escrowed Cash and Escrowed Shares.
(a) Any distribution of all or a portion of the Escrowed Cash or the
Escrowed Shares to the Company Shareholders shall be made in accordance with the
percentages set forth opposite such holders' respective names on Exhibit B
attached hereto; provided, however, that the Escrow Agent shall withhold the
distribution of the portion of the Escrowed Cash or the Escrowed Shares
otherwise distributable to Company Shareholders who have not, according to
written notice provided by the Purchaser to the Escrow Agent, prior to such
distribution, surrendered their respective Certificates pursuant to the terms
and conditions of the Merger Agreement. Any such withheld cash or shares shall
be delivered to the Purchaser promptly after the Termination Date, and shall be
delivered by the Purchaser to the Company Shareholders to whom such shares would
have otherwise been distributed upon surrender of their respective Certificates.
Distributions of Escrowed Shares to the Company Shareholders shall be made by
mailing stock certificates to such holders at their respective addresses shown
on Exhibit B (or such other address as may be provided in writing to the Escrow
Agent by any such holder).
(b) No fractional Escrowed Shares shall be distributed to Purchaser or
Company Shareholders pursuant to this Agreement. Instead, the number of shares
that Purchaser or each Company Shareholder shall receive shall be rounded down
to the nearest whole number; and the Escrow Agent shall sell such number of
Escrowed Shares as is equal to the aggregate of the fractional shares that would
otherwise be distributed to the Purchaser or the Company Shareholders, as the
case may be, and shall distribute the proceeds of such sale to the Purchaser or
the Company Shareholders otherwise entitled to a fractional Escrowed Share based
upon the fraction of an Escrowed Share to which Purchaser or each such Company
Shareholder is otherwise entitled, as the case may be.
7. Valuation of Escrowed Shares. For purposes of this Agreement, the
Fair Market Value of the Escrowed Shares to be released from the Share Escrow
Account after a final determination of the Profit Shortfall Adjustment shall be
determined based upon the average closing prices of the Purchaser's Common Stock
on the Nasdaq National Market System for the twenty trading days immediately
preceding the date of such final determination.
4
60
8. Fees and Expenses of Escrow Agent. The Purchaser, on the one hand,
and the Company Shareholders, on the other hand, shall each pay one-half of the
fees of the Escrow Agent for the services to be rendered by the Escrow Agent
hereunder.
9. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any
action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or gross negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Agreement. In all questions arising under
the Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and
for anything done, omitted or suffered in good faith by the Escrow Agent based
on such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
(b) The Purchaser and the Company Shareholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. The Purchaser, on the one hand,
and the Company Shareholders, on the other hand, shall each be liable for
one-half of such amounts.
10. Liability and Authority of Shareholder Representatives; Successors
and Assignees.
(a) The Shareholder Representatives shall incur no liability to the
Company Shareholders with respect to any action taken or suffered by them in
reliance upon any note, direction, instruction, consent, statement or other
documents believed by them to be genuinely and duly authorized, nor for other
action or inaction except their own willful misconduct or gross negligence. The
Shareholder Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Shareholder Representatives based on such advice,
the Shareholder Representatives shall not be liable to the Company Shareholders.
(b) In the event of the death or permanent disability of either
Shareholder Representative, or his resignation as a Shareholder Representative,
a successor Shareholder Representative shall be appointed by the other
Shareholder Representative or, absent its appointment, a successor Shareholder
Representative shall be elected by a majority vote of the Company Shareholders,
with each such Company Shareholder (or his or her successors or assigns) to be
given a vote equal to the number of votes represented by the Company Shares held
by such Company Shareholder immediately prior to the Effective Time. Each
successor
5
61
Shareholder Representative shall have all of the power, authority, rights and
privileges conferred by this Agreement upon the original Shareholder
Representatives, and the term "Shareholder Representatives" as used herein shall
be deemed to include successor Shareholder Representatives.
(c) The Shareholder Representatives, acting jointly but not singly,
shall have full power and authority to represent the Company Shareholders, and
their successors, with respect to all matters arising under this Agreement and
all actions taken by any Shareholder Representative hereunder shall be binding
upon the Company Shareholders, and their successors, as if expressly confirmed
and ratified in writing by each of them. Without limiting the generality of the
foregoing, the Shareholder Representatives, acting jointly but not singly, shall
have full power and authority to interpret all of the terms and provisions of
this Agreement, to compromise any claims asserted hereunder and to authorize
payments to be made with respect thereto, on behalf of the Company Shareholders
and their successors. All actions to be taken by the Shareholder Representatives
hereunder shall be evidenced by, and taken upon, the written direction of a
majority thereof.
11. Amounts Payable by Company Shareholders. The amounts payable by
the Company Shareholders under this Agreement (i.e., the fees and expenses of
arbitrators payable pursuant to Section 16, the fees of the Escrow Agent payable
pursuant to Section 8 and the indemnification obligations pursuant to Sections
9(b)) shall be payable solely as follows. The Shareholder Representatives shall
notify the Escrow Agent of any such amount payable by the Company Shareholders
as soon as they become aware that any such amount is payable, with a copy of
such notice to the Purchaser. On the sixth business day after the delivery of
such notice, the Escrow Agent shall sell such number of Escrowed Shares (up to
the number of Escrowed Shares then available in the Escrow Account), subject to
compliance with all applicable securities laws, as is necessary to raise such
amount, and shall disburse such proceeds to the party to whom such amount is
owed in accordance with the instructions of the Shareholder Representatives;
provided that if the Purchaser delivers to the Escrow Agent (with a copy to the
Shareholder Representatives), within five business days after delivery of such
notice by the Shareholder Representatives, a written notice contesting the
legitimacy or reasonableness of such amount, then the Escrow Agent shall not
sell Escrowed Shares to raise the disputed portion of such claimed amount, and
such dispute shall be resolved by the Purchaser and the Shareholder
Representatives in accordance with the procedures set forth in Section 16.
12. Termination. This Agreement shall terminate upon the distribution
by the Escrow Agent of all of the Escrowed Cash and all of the Escrowed Shares
in accordance with this Agreement; provided that the provisions of Sections 9
and 10 shall survive such termination.
13. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid,
6
62
or (ii) via a reputable nationwide overnight courier service, in each case to
the address set forth below. Any such notice, instruction or communication shall
be deemed to have been delivered two business days after it is sent by
registered or certified mail, return receipt requested, postage prepaid, or one
business day after it is sent via a reputable nationwide overnight courier
service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
If to the Company:
----------------------------------
----------------------------------
----------------------------------
If to the Shareholder Representative:
----------------------------------
----------------------------------
----------------------------------
If to the Escrow Agent:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 13.
14. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days' prior to the date when such resignation shall take effect. The
Purchaser and the Shareholder Representatives shall appoint a successor
7
63
Escrow Agent and neither party shall unreasonably withhold approval of such
successor Escrow Agent. If, within such notice period, the Purchaser provides to
the Escrow Agent written instructions with respect to the appointment of a
successor Escrow Agent and directions for the transfer of any Escrowed Shares
then held by the Escrow Agent to such successor, the Escrow Agent shall act in
accordance with such instructions and promptly transfer such Escrowed Shares to
such designated successor.
15. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Georgia without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) Counterparts. 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.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Shareholder Representatives.
16. Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any dispute
arising out of this Agreement, but should a dispute remain unresolved ten (10)
days following notice of the dispute to the other party (but in no event prior
to said ten (10) days, except as specifically provided otherwise herein), such
dispute shall be finally settled by binding arbitration in Atlanta, Georgia in
accordance with the then current Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") or such other mediation or arbitration
service as shall be mutually agreeable to the parties, and judgment upon the
award rendered by the arbitrator shall be final and binding on the parties and
may be entered in any court having jurisdiction thereof; provided, however, that
any party shall be entitled to appeal a question of
8
64
law or determination of law to a court of competent jurisdiction; and provided,
further, however, that the parties may first seek appropriate injunctive relief
prior to, and/or in addition to pursuing negotiation or arbitration. Such
arbitration shall be conducted by an arbitrator chosen by mutual agreement of
the parties, or failing such agreement, an arbitrator appointed by the AAA.
There shall be limited discovery prior to the arbitration hearing as follows:
(a) exchange of witness lists and copies of documentary evidence and documents
related to or arising out of the issues to be arbitrated, (b) depositions of all
party witnesses, and (c) such other depositions as may be allowed by the
arbitrator upon a showing of good cause. Depositions shall be conducted in
accordance with the Georgia Code of Civil Procedure and questions of evidence in
all hearings shall be resolved in accordance with the Federal Rules of Evidence.
The arbitrator shall be required to provide in writing to the parties the basis
for the award or order of such arbitrator, and a court reporter shall record all
hearings (unless otherwise agreed to by the parties), with such record
constituting the official transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted
between the parties with respect to this Agreement, the prevailing party will be
entitled to receive from the other party all costs, damages and expenses,
including reasonable attorney's fees, incurred by the prevailing party in
connection with that action or proceeding whether or not the controversy is
reduced to judgment or award. The prevailing party will be that party who may be
fairly said by the arbitrator(s) or the court to have prevailed on the major
disputed issues.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER:
TEKGRAF, INC.
By:
------------------------------------
▇▇▇ ▇. ▇▇▇▇▇▇, President
ACQUISITION SUB:
TEKGRAF SUB __, INC.
By:
------------------------------------
_________________, President
9
65
SHAREHOLDER REPRESENTATIVE:
(SEAL)
-----------------------------------
ESCROW AGENT:
-----------------------------------------
By: -------------------------------------
Name:
--------------------------------
Title:
-------------------------------
COMPANY:
---------------------------------
By:
--------------------------------------
, President
COMPANY SHAREHOLDERS:
(SEAL)
----------------------------------
(SEAL)
----------------------------------
(SEAL)
----------------------------------
10
66
EXHIBIT B
Company Shareholder Percentage
------------------- ----------
11
67
EXHIBIT 3.7(a)
NON-SOLICITATION
NONE
68
Exhibit 5.6(a)
PLEDGE, SECURITY AND ESCROW AGREEMENT
This Pledge, Security and Escrow Agreement (this "Agreement") is
entered into as of ______________, 1998, by and among TEKGRAF, INC., a Georgia
corporation (the "Purchaser"), TEKGRAF SUB ___, INC. ("Acquisition Sub"),
[_________________ _______________________________], INC., a ____________
corporation (the "Company"), [_________________________________] (the "Company
Shareholders"), and ________ _________________ (the "Indemnification
Representatives") and [________________________________________] (the "Escrow
Agent").
WHEREAS, the Purchaser and the Company have entered into an Agreement
and Plan of Merger (the "Merger Agreement") by and among the Company, the
Company Shareholders, Acquisition Sub and the Purchaser.
WHEREAS, the Merger Agreement provides that an escrow account will be
established to secure the Company's and the Company Shareholders'
indemnification obligations to the Indemnified Parties under the Merger
Agreement on the terms and conditions set forth herein.
WHEREAS, the parties hereto desire to establish the terms and
conditions pursuant to which such escrow account will be established and
maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Shareholders. By virtue of the Company
Shareholders' approval of the Merger Agreement, the Company Shareholders who may
indirectly or directly receive shares of Purchaser Common Stock pursuant to the
Merger Agreement (the "Indemnifying Shareholders") have, without any further act
of any Company Stockholder, consented to: (a) the establishment of this escrow
to secure the Company Shareholders' indemnification obligations under Article V
of the Merger Agreement in the manner set forth herein and therein, (b) the
appointment of the Indemnification Representatives as their representatives for
purposes of this Agreement and as attorneys-in-fact and agents for and on behalf
of each Indemnifying Shareholder, and the taking by the Indemnification
Representatives of any and all actions and the making of any decisions required
or permitted to be taken or made by them under this Agreement, and (c) all of
the other terms, conditions and limitations in this Agreement and the Merger
Agreement.
69
3. Escrow and Indemnification.
(a) Escrow of Shares. On the Closing Date, the Purchaser shall deposit
with the Escrow Agent a certificate for the number of Purchaser Shares specified
in Section 5.6 of the Merger Agreement (the "Escrow Shares"), issued in the name
of the Escrow Agent or its nominee. In addition, in the event the Purchaser
elects, pursuant to the provisions of Section 1.3(h) of the Merger Agreement, to
waive the Profit Shortfall Adjustment and the Profit Surplus Adjustment, the
shares of Purchaser common stock held in the escrow account established by
Section 1.3(e) of the Merger Agreement shall be transferred into the escrow
account created pursuant to this Escrow Agreement (the "Transferred Shares"), to
be treated in all respects as Escrow Shares hereunder and the Transferred Shares
shall be distributed to the Company Shareholders pursuant to Section 5(a)
hereof. 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 hereto. The Escrow Agent agrees to accept delivery of the
Escrow Shares and to hold the Escrow Shares in an escrow account (the "Escrow
Account"), subject to the terms and conditions of this Agreement.
(b) Indemnification. The Indemnifying Shareholders have agreed in
Article V of the Merger Agreement to indemnify and hold harmless the Indemnified
Parties from and against specified Damages. The Escrow Shares shall be security
for such indemnity obligation of the Indemnifying Shareholders, subject to the
limitations, and in the manner provided, in this Agreement.
(c) Dividends, Etc. Any securities distributable to the Indemnifying
Shareholders in respect of or in exchange for any of the Escrow Shares, whether
by way of stock dividends, stock splits or otherwise, shall be delivered to the
Escrow Agent, who shall hold such securities in the Escrow Account. Such
securities shall be issued in the name of the Escrow Agent or its nominee and
shall be considered Escrow Shares for purposes hereof. Any cash dividends
distributable to the Indemnifying Shareholders in respect of the Escrow Shares
shall be distributed to the Indemnifying Shareholders.
(d) Voting of Shares. The Indemnification Representatives shall have
the right, in their sole discretion, on behalf of the Indemnifying Shareholders,
to direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrow Shares, and the Escrow Agent shall comply with any such
written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrow Shares.
(e) Transferability. The respective interests of the Indemnifying
Shareholders in the Escrow Shares shall not be assignable or transferable, other
than by operation of law. Notice of any such assignment or transfer by operation
of law shall be given to the Escrow Agent and the Purchaser, and no such
assignment or transfer shall be valid until such notice is given.
4. Administration of Escrow Account. The Escrow Agent shall administer
the Escrow Account as follows:
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(a) If an Indemnified Party has incurred or suffered Damages for which
it is entitled to indemnification under Article V of the Merger Agreement, the
Indemnified Party shall, on or before the date of the expiration of the
representation, warranty, covenant or agreement to which such claim relates,
give written notice of such claim (a "Claim Notice") to the Indemnification
Representatives and the Escrow Agent. Each Claim Notice shall state the amount
of claimed Damages (the "Claimed Amount") and the basis for such claim. The date
which is eighteen (18) months after the Date of Closing.
(b) Within 20 days after delivery of a Claim Notice, the
Indemnification Representatives shall provide to the Indemnified Party, with a
copy to the Escrow Agent, a written response (the "Response Notice") in which
the Indemnification Representatives shall: (i) agree that Escrow Shares having a
Fair Market Value (as computed pursuant to Section 6) equal to the full Claimed
Amount may be released from the Escrow Account to the Indemnified Party, (ii)
agree that Escrow Shares having a Fair Market Value equal to part, but not all,
of the Claimed Amount (the "Agreed Amount") may be released from the Escrow
Account to the Indemnified Party or (iii) contest that any of the Escrow Shares
may be released from the Escrow Account to the Indemnified Party. The
Indemnification Representatives may contest the release of Escrow Shares having
a Fair Market Value equal to all or a portion of the Claimed Amount only based
upon a good faith belief that all or such portion of the Claimed Amount does not
constitute Damages for which the Indemnified Party is entitled to
indemnification under Article V of the Merger Agreement. If no Response Notice
is delivered by the Indemnification Representatives within such 20-day period,
the Indemnification Representatives shall be deemed to have agreed that Escrow
Shares having a Fair Market Value equal to all of the Claimed Amount may be
released to the Indemnified Party from the Escrow Account.
(c) If the Indemnification Representatives in the Response Notice agree
(or are deemed to have agreed) that Escrow Shares having a Fair Market Value
equal to all of the Claimed Amount may be released from the Escrow Account to
the Indemnified Party, the Escrow Agent shall, promptly following the earlier of
the required delivery date for the Response Notice or the delivery of the
Response Notice, transfer, deliver and assign to the Indemnified Party such
number of Escrow Shares held in the Escrow Account which have a Fair Market
Value equal to the Claimed Amount (or such lesser number of Escrow Shares as is
then held in the Escrow Account).
(d) If the Indemnification Representatives in the Response Notice agree
that Escrow Shares having a Fair Market Value equal to part, but not all, of the
Claimed Amount may be released from the Escrow Account to the Indemnified Party,
the Escrow Agent shall promptly following the delivery of the Response Notice
transfer, deliver and assign to the Indemnified Party such number of Escrow
Shares held in the Escrow Account which have a Fair Market Value equal to the
Agreed Amount (or such lesser number of Escrow Shares as is then held in the
Escrow Account). A determination with respect to the remainder of the Claimed
Amount shall be made in accordance with subsection 4(e) below.
(e) If the Indemnification Representatives in the Response Notice
contest the release of Escrow Shares having a Fair Market Value equal to all or
part of the Claimed Amount (the
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"Contested Amount"), the matter shall be settled by binding arbitration in
Atlanta, Georgia. All claims shall be settled by three arbitrators in accordance
with the Commercial Arbitration Rules then in effect of the American Arbitration
Association (the "AAA Rules"). The Indemnification Representatives and the
Indemnified Party shall each designate one arbitrator within 15 days of the
delivery of the Indemnification Representatives' Response Notice contesting the
Claimed Amount. The Indemnification Representatives and the Indemnified Party
shall cause such designated arbitrators mutually to agree upon and designate a
third arbitrator; provided, however, that (i) failing such agreement within 45
days of delivery of the Indemnification Representatives' Response Notice, the
third arbitrator shall be appointed in accordance with the AAA Rules and (ii) if
either the Indemnification Representatives or the Indemnified Party fail to
timely designate an arbitrator, the dispute shall be resolved by the one
arbitrator timely designated. The Indemnifying Shareholders and the Indemnified
Party shall pay the fees and expenses of their respectively designated
arbitrators and shall bear equally the fees and expenses of the third
arbitrator. The Indemnification Representatives and the Indemnified Party shall
cause the arbitrators to decide the matter to be arbitrated pursuant hereto
within 60 days after the appointment of the last arbitrator. The arbitrators'
decision shall relate solely to whether the Indemnified Party is entitled to
receive the Contested Amount (or a portion thereof) pursuant to the applicable
terms of the Merger Agreement and this Agreement. The final decision of the
majority of the arbitrators shall be furnished to the Indemnification
Representatives, the Indemnified Party and the Escrow Agent in writing and shall
constitute a conclusive determination of the issue in question, binding upon the
Indemnification Representatives, the Indemnifying Shareholders, the Indemnified
Party and the Escrow Agent, and shall not be contested by any of them. Such
decision may be used in a court of law only for the purpose of seeking
enforcement of the arbitrators' award. After delivery of a Response Notice that
the Claimed Amount is contested by the Indemnification Representatives, the
Escrow Agent shall continue to hold in the Escrow Account a number of Escrow
Shares having a Fair Market Value sufficient to cover the Contested Amount (up
to the number of Escrow Shares then available in the Escrow Account),
notwithstanding the occurrence of the Termination Date, until (i) delivery of a
copy of a settlement agreement executed by the Indemnified Party and the
Indemnification Representatives setting forth instructions to the Escrow Agent
as to the release of Escrow Shares, if any, that shall be made with respect to
the Contested Amount or (ii) delivery of a copy of the final award of the
majority of the arbitrators setting forth instructions to the Escrow Agent as to
the release of Escrow Shares, if any, that shall be made with respect to the
Contested Amount. The Escrow Agent shall thereupon release Escrow Shares from
the Escrow Account (to the extent Escrow Shares are then held in the Escrow
Account) in accordance with such agreement or instructions; provided, however,
if the claim related to a third party claim the amount of which is contested and
the subject of litigation, the Escrow Agent shall not release the Escrow Shares
being held in connection with the Contested Amount of such third party claim
until a final order or other final resolution or settlement has been entered or
reached in the underlying litigation determining the amount of such claim,
whereupon the Escrow Agent shall release Escrow Shares from the Escrow Account
(to the extent Escrow Shares are then held in the Escrow Account) in accordance
with such final order or final resolution or settlement.
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5. Release of Escrow Shares.
(a) In the event that Purchaser elects, pursuant to the provisions of
Section 1.3(h) of the Merger Agreement, to waive the Profit Shortfall Adjustment
and the Profit Surplus Adjustment, one half of the Transferred Shares shall be
distributed to the Indemnifying Shareholders on the first anniversary of the
Closing Date. Promptly after the Termination Date, the Escrow Agent shall
distribute to the Indemnifying Shareholders all of the Escrow Shares (including
any remaining Transferred Shares) then held in escrow. Notwithstanding the
foregoing, if an Indemnified Party has previously given a Claim Notice which has
not then been resolved in accordance with Section 4, the Escrow Agent shall
retain in the Escrow Account after the Termination Date a number of Escrow
Shares (including Transferred Shares if necessary) having a Fair Market Value
equal to the Claimed Amount covered by any Claim Notice which has not then been
resolved. Any funds so retained in escrow shall be disbursed in accordance with
the terms of the resolution of such claims.
(b) Any distribution of all or a portion of the Escrow Shares to the
Indemnifying Shareholders shall be made in accordance with the percentages set
forth opposite such holders' respective names on Exhibit B attached hereto;
provided, however, that the Escrow Agent shall withhold the distribution of the
portion of the Escrow Shares otherwise distributable to Indemnifying
Shareholders who have not, according to written notice provided by the Purchaser
to the Escrow Agent, prior to such distribution, surrendered their respective
Certificates pursuant to the terms and conditions of the Merger Agreement. Any
such withheld shares shall be delivered to the Purchaser promptly after the
Termination Date, and shall be delivered by the Purchaser to the Indemnifying
Shareholders to whom such shares would have otherwise been distributed upon
surrender of their respective Certificates. Distributions to the Indemnifying
Shareholders shall be made by mailing stock certificates to such holders at
their respective addresses shown on Exhibit B (or such other address as may be
provided in writing to the Escrow Agent by any such holder). No fractional
Escrow Shares shall be distributed to Indemnifying Shareholders pursuant to this
Agreement. Instead, the number of shares that each Indemnifying Shareholder
shall receive shall be rounded down to the nearest whole number; and the Escrow
Agent shall sell such number of Escrow Shares as is equal to the aggregate of
the fractional shares that would otherwise be distributed to the Indemnifying
Shareholders and shall distribute the proceeds of such sale to the Indemnifying
Shareholders other-wise entitled to a fractional Escrow Share pro rata based
upon the fraction of an Escrow Shares to which each such Indemnifying
Shareholder is otherwise entitled.
6. Valuation of Escrow Shares. For purposes of this Agreement, the
Fair Market Value of the Escrow Shares to be retained in the Escrow Account
pending a final resolution of a claim shall be determined based upon the average
of the closing prices of the Purchaser Common Stock on the Nasdaq National
Market System for the twenty trading days immediately preceding the date on
which the claim is made. The Fair Market Value of the Escrow Shares to be
released from the Escrow Account after a final determination/resolution of a
claim shall be determined based upon the average closing prices of the
Purchaser's Common Stock on the Nasdaq National Market System for the twenty
trading days immediately preceding the date of such final
determination/resolution.
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7. Fees and Expenses of Escrow Agent. The Purchaser, on the one hand,
and the Indemnifying Shareholders, on the other hand, shall each pay one-half of
the fees of the Escrow Agent for the services to be rendered by the Escrow Agent
hereunder.
8. Limitation of Escrow Agent's Liability.
(a) The Escrow Agent shall incur no liability with respect to any
action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other documents believed by it to be genuine
and duly authorized, nor for other action or inaction except its own willful
misconduct or gross negligence. The Escrow Agent shall not be responsible for
the validity or sufficiency of this Agreement. In all questions arising under
the Escrow Agreement, the Escrow Agent may rely on the advice of counsel, and
for anything done, omitted or suffered in good faith by the Escrow Agent based
on such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent
shall not be required to take any action hereunder involving any expense unless
the payment of such expense is made or provided for in a manner reasonably
satisfactory to it.
(b) The Purchaser and the Indemnifying Shareholders hereby, jointly and
severally, agree to indemnify the Escrow Agent for, and hold it harmless
against, any loss, liability or expense incurred without gross negligence or
willful misconduct on the part of Escrow Agent, arising out of or in connection
with its carrying out of its duties hereunder. The Purchaser, on the one hand,
and the Indemnifying Shareholders, on the other hand, shall each be liable for
one-half of such amounts.
9. Liability and Authority of Indemnification Representatives;
Successors and Assignees.
(a) The Indemnification Representatives shall incur no liability to the
Indemnifying Shareholders with respect to any action taken or suffered by them
in reliance upon any note, direction, instruction, consent, statement or other
documents believed by them to be genuinely and duly authorized, nor for other
action or inaction except their own willful misconduct or gross negligence. The
Indemnification Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Indemnification Representatives based on such
advice, the Indemnification Representatives shall not be liable to the
Indemnifying Shareholders.
(b) In the event of the death or permanent disability of either
Indemnification Representative, or his resignation as an Indemnification
Representative, a successor Indemnification Representative shall be appointed by
the other Indemnification Representative or, absent its appointment, a successor
Indemnification Representative shall be elected by a majority vote of the
Indemnifying Shareholders, with each such Indemnifying Shareholder (or his or
her successors or assigns) to be given a vote equal to the number of votes
represented by the Company Shares held by such Indemnifying Shareholder
immediately prior to the Effective Time. Each successor Indemnification
Representative shall have all of the power, authority, rights and privileges
conferred by this Agreement upon the original Indemnification
74
Representatives, and the term "Indemnification Representatives" as used herein
shall be deemed to include successor Indemnification Representatives.
(c) The Indemnification Representatives, acting jointly but not singly,
shall have full power and authority to represent the Indemnifying Shareholders,
and their successors, with respect to all matters arising under this Agreement
and all actions taken by any Indemnification Representative hereunder shall be
binding upon the Indemnifying Shareholders, and their successors, as if
expressly confirmed and ratified in writing by each of them. Without limiting
the generality of the foregoing, the Indemnification Representatives, acting
jointly but not singly, shall have full power and authority to interpret all of
the terms and provisions of this Agreement, to compromise any claims asserted
hereunder and to authorize payments to be made with respect thereto, on behalf
of the Indemnifying Shareholders and their successors. All actions to be taken
by the Indemnification Representatives hereunder shall be evidenced by, and
taken upon, the written direction of a majority thereof.
10. Amounts Payable by Indemnifying Shareholders. The amounts payable
by the Indemnifying Shareholders under this Agreement (i.e., the fees and
expenses of arbitrators payable pursuant to Section 4(e), the fees of the Escrow
Agent payable pursuant to Section 7 and the indemnification obligations pursuant
to Sections 8(b)) shall be payable solely as follows. The Indemnification
Representatives shall notify the Escrow Agent of any such amount payable by the
Indemnifying Shareholders as soon as they become aware that any such amount is
payable, with a copy of such notice to the Purchaser. On the sixth business day
after the delivery of such notice, the Escrow Agent shall sell such number of
Escrow Shares (up to the number of Escrow Shares then available in the Escrow
Account), subject to compliance with all applicable securities laws, as is
necessary to raise such amount, and shall disburse such proceeds to the party to
whom such amount is owed in accordance with the instructions of the
Indemnification Representatives; provided that if the Purchaser delivers to the
Escrow Agent (with a copy to the Indemnification Representatives), within five
business days after delivery of such notice by the Indemnification
Representatives, a written notice contesting the legitimacy or reasonableness of
such amount, then the Escrow Agent shall not sell Escrow Shares to raise the
disputed portion of such claimed amount, and such dispute shall be resolved by
the Purchaser and the Indemnification Representatives in accordance with the
procedures set forth in Section 4(e).
11. Termination. This Agreement shall terminate upon the later of the
Termination Date or the distribution by the Escrow Agent of all of the Escrow
Shares in accordance with this Agreement; provided that the provisions of
Sections 8 and 9 shall survive such termination.
12. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested,
75
postage prepaid, or (ii) via a reputable nationwide overnight courier service,
in each case to the address set forth below. Any such notice, instruction or
communication shall be deemed to have been delivered two business days after it
is sent by registered or certified mail, return receipt requested, postage
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service.
If to the Purchaser and/or the Acquisition Sub:
Tekgraf, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
If to the Company:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
If to the Indemnification Representatives:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
If to the Escrow Agent:
----------------------------------
----------------------------------
----------------------------------
----------------------------------
Any party may give any notice, instruction or communication in
connection with this Agreement using any other means (including personal
delivery, telecopy or ordinary mail), but no such notice, instruction or
communication shall be deemed to have been delivered unless and until it is
actually received by the party to whom it was sent. Any party may change the
address to which notices, instructions or communications are to be delivered by
giving the other parties to this Agreement notice thereof in the manner set
forth in this Section 12.
13. Successor Escrow Agent. In the event the Escrow Agent becomes
unavailable or unwilling to continue in its capacity herewith, the Escrow Agent
may resign and be discharged from its duties or obligations hereunder by
delivering a resignation to the parties to this Escrow Agreement, not less than
60 days' prior to the date when such resignation shall take effect. The
Purchaser and the Indemnification Representatives shall appoint a successor
Escrow Agent and neither party shall unreasonably withhold approval of such
successor Escrow Agent. If, within such notice period, the Purchaser provides to
the Escrow Agent written instructions with respect to the appointment of a
successor Escrow Agent and directions
76
for the transfer of any Escrow Shares then held by the Escrow Agent to such
successor, the Escrow Agent shall act in accordance with such instructions and
promptly transfer such Escrow Shares to such designated successor.
14. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Georgia without
regard to conflict-of-law principles and shall be binding upon, and inure to the
benefit of, the parties hereto and their respective successors and assigns.
(b) Counterparts. 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.
(c) Entire Agreement. Except for those provisions of the Merger
Agreement referenced herein, this Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(e) Amendment. This Agreement may be amended only with the written
consent of the Purchaser, the Escrow Agent and the Indemnification
Representatives.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
PURCHASER
TEKGRAF, INC.
By:
-----------------------------------------
▇▇▇ ▇. ▇▇▇▇▇▇
President
ACQUISITION SUB:
TEKGRAF SUB ___, INC.
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ESCROW AGENT
-----------------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
78
[INDEMNIFICATION REPRESENTATIVE]
(SEAL)
--------------------------------------
Name:
---------------------------------------
COMPANY:
------------------------------------------
By:
-----------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
COMPANY SHAREHOLDERS:
(SEAL)
--------------------------------------
Name:
---------------------------------------
(SEAL)
--------------------------------------
Name:
---------------------------------------
(SEAL)
--------------------------------------
Name:
---------------------------------------
79
EXHIBIT B
Indemnifying Shareholder Percentage