EXHIBIT 2.6
AGREEMENT AND PLAN OF REORGANIZATION
dated as of February 26, 1999
by and among
HOSPITALITY DESIGN & SUPPLY, INC.,
▇▇▇▇▇▇▇ RESTAURANT EQUIPMENT AND SUPPLY, INC.
and
the STOCKHOLDERS named herein
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1. THE MERGER.................................................................................... 1
1.1 Delivery and Filing of Articles of Merger............................................... 1
1.2 Effective Time of the Merger............................................................ 1
1.3 Certificate of Incorporation, Bylaws and Board of Directors of Surviving Corporation.... 2
1.4 Effect of Merger........................................................................ 2
2. CONVERSION OF STOCK........................................................................... 3
2.1 Manner of Conversion.................................................................... 3
2.2 Other Companies......................................................................... 3
3. DELIVERY OF STOCK............................................................................. 4
3.1 Delivery of HDS Stock................................................................... 4
3.2 Delivery of COMPANY Stock............................................................... 4
4. PRE-CLOSING AND CLOSING....................................................................... 4
4.1 Pre-Closing............................................................................. 4
4.2 Closing................................................................................. 4
4.3 No Assurances........................................................................... 5
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS................................... 5
5.1 Due Organization....................................................................... 6
5.2 Authority and Validity................................................................. 6
5.3 Capital Stock of the COMPANY........................................................... 7
5.4 Transactions in Capital Stock.......................................................... 7
5.5 No Bonus Shares........................................................................ 7
5.6 Subsidiaries........................................................................... 7
5.7 Predecessor Status; etc................................................................ 7
5.8 Spin-off by the COMPANY................................................................ 8
5.9 Financial Statements................................................................... 8
5.10 Liabilities and Obligations............................................................ 8
5.11 Accounts and Notes Receivable.......................................................... 9
5.12 Permits and Intangibles................................................................ 9
5.13 Environmental Matters.................................................................. 10
5.14 Real and Personal Property............................................................. 10
5.15 Significant Customers; Material Contracts and Commitments.............................. 11
5.16 Title to Real Property................................................................. 12
5.17 Insurance.............................................................................. 12
5.18 Compensation; Employment Agreements.................................................... 12
5.19 Employee Plans......................................................................... 13
5.20 Compliance with ERISA.................................................................. 14
5.21 Conformity with Law.................................................................... 16
5.22 Taxes.................................................................................. 16
5.23 No Violations.......................................................................... 19
5.24 Government Contracts................................................................... 20
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5.25 Absence of Changes..................................................................... 20
5.26 Deposit Accounts; Powers of Attorney................................................... 21
5.27 Relations with Governments............................................................. 21
5.28 Authority; Validity; Ownership......................................................... 22
5.29 Preemptive Rights...................................................................... 22
5.30 No HDS Intention to Reacquire Stock.................................................... 22
6. REPRESENTATIONS OF HDS....................................................................... 22
6.1 Due Organization....................................................................... 22
6.2 HDS Stock.............................................................................. 23
6.3 Authority and Validity................................................................. 23
6.4 Capital Stock of HDS................................................................... 23
6.5 No Side Agreements..................................................................... 24
6.6 Subsidiaries........................................................................... 24
6.7 Business; Financial Information........................................................ 24
6.8 Conformity with Law.................................................................... 25
6.9 No Violations.......................................................................... 25
6.10 Taxes.................................................................................. 25
7. COVENANTS PRIOR TO CLOSING................................................................... 26
7.1 Access and Cooperation; Due Diligence.................................................. 26
7.2 Conduct of Business Pending Closing.................................................... 27
7.3 Prohibited Activities.................................................................. 28
7.4 No Shop................................................................................ 29
7.5 Notice to Bargaining Agents............................................................ 29
7.6 Termination of Plans................................................................... 30
7.7 HDS Prohibited Activities.............................................................. 30
7.8 Notification of Certain Matters........................................................ 30
7.9 Amendment of Schedules................................................................. 31
7.10 Cooperation in Preparation of Registration Statement................................... 31
7.11 Examination of Final Financial Statements.............................................. 32
7.12 Maintenance of Liquidity and Limitation of Debt........................................ 32
7.13 Employment Matters..................................................................... 32
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.............................. 32
8.1 Representations and Warranties; Performance of Obligations............................. 33
8.2 Satisfaction........................................................................... 33
8.3 No Litigation.......................................................................... 33
8.4 Stockholders' Release.................................................................. 33
8.5 Opinion of Counsel..................................................................... 34
8.6 Director Indemnification............................................................... 34
8.7 Registration Statement................................................................. 34
8.8 Consents and Approvals................................................................. 34
8.9 Good Standing Certificates............................................................. 34
8.10 No Waivers............................................................................. 34
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8.11 No Material Adverse Change............................................................. 34
8.12 Employment Agreements.................................................................. 35
8.13 Consulting Agreements.................................................................. 35
8.14 Leases................................................................................. 35
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.................................................. 35
9.1 Representations and Warranties; Performance of Obligations............................ 35
9.2 No Litigation......................................................................... 35
9.3 Financial Statements.................................................................. 35
9.4 No Material Adverse Effect............................................................ 36
9.5 STOCKHOLDERS' Release................................................................. 36
9.6 Satisfaction.......................................................................... 36
9.7 Termination of Related Party Agreements............................................... 36
9.8 Opinion of COMPANY Counsel............................................................ 36
9.9 Consents and Approvals................................................................ 36
9.10 Good Standing Certificates............................................................ 37
9.11 Registration Statement................................................................ 37
9.12 Employment Agreements................................................................. 37
9.13 Consulting Agreements................................................................. 37
9.14 Leases................................................................................ 37
9.15 Repayment of Indebtedness............................................................. 37
9.16 FIRPTA Certificate.................................................................... 37
9.17 Insurance............................................................................. 37
9.18 Nondisturbance Agreements............................................................. 37
10. CLOSING COVENANTS AND SPECIAL TAX MATTERS................................................... 37
10.1 Preservation of Tax and Accounting Treatment.......................................... 37
10.2 Disclosure............................................................................ 38
10.3 Cooperation in Tax Return Preparation................................................. 38
10.4 Tax Return Preparation and Filing..................................................... 38
10.5 Reorganization Status Information Reporting........................................... 39
10.6 Special Definitions Related to Tax Matters............................................ 39
10.7 Directors............................................................................. 40
10.8 Release from Guarantees............................................................... 40
10.9 HDS Stock Options..................................................................... 40
10.10 Use of Name........................................................................... 41
11. INDEMNIFICATION............................................................................. 41
11.1 General Indemnification by the STOCKHOLDERS........................................... 41
11.2 Indemnification by HDS................................................................ 42
11.3 Third Person Claims................................................................... 42
11.4 Exclusive Remedy...................................................................... 44
11.5 Limitations on Indemnification........................................................ 44
11.6 Special Tax Indemnity Provisions...................................................... 45
11.7 Special Contest Rights Related to Tax Matters......................................... 47
11.8 Special Notification Requirements Regarding Tax Disputes.............................. 47
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11.9 Refunds............................................................................... 47
11.10 Optional Payment With Shares.......................................................... 47
12. TERMINATION OF AGREEMENT.................................................................... 48
12.1 Termination........................................................................... 48
12.2 Liabilities in Event of Termination................................................... 48
13. NONCOMPETITION.............................................................................. 49
13.1 Prohibited Activities................................................................. 49
13.2 Damages............................................................................... 50
13.3 Reasonable Restraint.................................................................. 50
13.4 Severability; Reformation............................................................. 50
13.5 Independent Covenant.................................................................. 51
13.6 Materiality........................................................................... 51
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION................................................... 51
14.1 STOCKHOLDERS.......................................................................... 51
14.2 HDS................................................................................... 52
14.3 Damages............................................................................... 52
14.4 Survival.............................................................................. 52
15. TRANSFER RESTRICTIONS....................................................................... 52
15.1 Transfer Restrictions................................................................. 52
15.2 Permitted Transferees................................................................. 53
16. FEDERAL SECURITIES ACT REPRESENTATIONS...................................................... 53
16.1 Compliance with Law................................................................... 53
16.2 Accredited Investors; Economic Risk; Sophistication................................... 54
17. REGISTRATION RIGHTS......................................................................... 54
17.1 Piggyback Registration Rights......................................................... 54
17.2 Demand Registration Rights............................................................ 55
17.3 Registration Procedures............................................................... 56
17.4 Underwriting Agreement................................................................ 56
17.5 HDS Stock............................................................................. 56
17.6 Availability of Rule 144.............................................................. 57
17.7 Survival.............................................................................. 57
18. GENERAL..................................................................................... 57
18.1 Cooperation........................................................................... 57
18.2 Successors and Assigns................................................................ 57
18.3 Entire Agreement...................................................................... 57
18.4 Counterparts.......................................................................... 58
18.5 Brokers and Agents.................................................................... 58
18.6 Expenses.............................................................................. 58
18.7 Notices............................................................................... 58
18.8 Governing Law; Forum.................................................................. 59
18.9 Survival of Representations and Warranties............................................ 59
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18.10 Exercise of Rights and Remedies....................................................... 59
18.11 Time.................................................................................. 60
18.12 Reformation and Severability.......................................................... 60
18.13 Remedies Cumulative................................................................... 60
18.14 Construction.......................................................................... 60
18.15 Captions.............................................................................. 60
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SCHEDULES and ANNEXES
Annex I - Consideration to Founding Company Stockholders
Annex II - Stockholders and Stock Ownership of the COMPANY
Annex III - Stockholders and Stock Ownership of HDS
Annex IV - Certificate of Incorporation and Bylaws of HDS
Annex V - Form of Opinion of Howard, Rice, Nemerovski, Canady, ▇▇▇▇
& Rabkin, A Professional Corporation
Annex VI - Form of Opinion of COMPANY Counsel
Annex VII - Form of Director Indemnification Agreement
Annex VIII - Form of Employment Agreement
Annex IX - Form of Consulting Agreement
Annex X - Leases
Annex XI - Stockholder Release
Annex XII - Form of Nondisturbance Agreement
Schedule 5.1 - Qualifications to Do Business
Schedule 5.3 - Capital Stock of the COMPANY
Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to
Acquire Capital Stock
Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses
Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries
Schedule 5.7 - Names of Predecessor Companies
Schedule 5.8 - Sales or Spin-offs of Significant Assets
Schedule 5.9 - Financial Statements
Schedule 5.10 - Significant Liabilities and Obligations
Schedule 5.11 - Accounts and Notes Receivable
Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental
Authorizations
Schedule 5.13 - Environmental Matters
Schedule 5.14 - Real Property, Leases and Significant Personal Property
Schedule 5.15 - Significant Customers and Material Contracts
Schedule 5.17 - Insurance Policies and Claims
Schedule 5.18 - Officers, Directors and Key Employees, Employment
Agreements; Compensation
Schedule 5.19 - Employee Benefit Plans
Schedule 5.20 - Compliance with ERISA
Schedule 5.21 - Violations of Law, Regulations or Orders
Schedule 5.22 - Taxes
Schedule 5.23 - Violations of Charter Documents and Material Defaults
Schedule 5.24 - Governmental Contracts Subject to Price Redetermination
or Renegotiation
Schedule 5.25 - Changes Since Balance Sheet Date
Schedule 5.26 - Bank Accounts; Powers of Attorney
Schedule 5.28 - Encumbrances on the COMPANY Stock
Schedule 6.5 - HDS Side Agreements
Schedule 6.6 - HDS's Subsidiaries
Schedule 6.7 - HDS's Financial Statements
Schedule 6.9 - No Violations
Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course
Between Balance Sheet Date and Closing Date
Schedule 7.3 - Prohibited Activities
Schedule 7.6 - Plans to be Terminated by the Pricing Date
Schedule 7.7 - Exceptions to Restrictions on HDS
Schedule 8.12 - Employment Agreements
Schedule 8.13 - Consulting Agreements
Schedule 8.14 - Leases
Schedule 9.7 - Termination of Related Party Agreements
Schedule 9.18 - Lienholders and Ground Lessors
Schedule 13.1 - Prohibited Activities
Schedule 16.2 - Non-Accredited Investors
Schedule 18.5 - Brokers and Agents
Schedule 18.6 - Fees, Expenses and Disbursements
TABLE OF DEFINITIONS
Defined Term Section
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Accredited investor 16.2
adjusted working capital 7.12
Affiliate 10.6(a)
Agreement Preamble
Articles of Merger 1.1
Attributed Pre-Tax Earnings Annex I
Balance Sheet Date 5.9
Cash Consideration Annex I
Charter Documents 5.1
Closing 4.2
Closing Date 4.2
COBRA 5.20(v)
Code Whereas
COMPANY Preamble
COMPANY Affiliates 5.8
COMPANY Financial Statements 5.9
COMPANY Stock 2.1
Constituent Corporations Whereas
Consulting Agreement 8.13
Controlled group 5.20
December 31, 1998 COMPANY 5.9
Balance Sheet
Defined Benefit Plan 5.19(iv)
Delaware GCL 1.4
Demand Registration 17.2
Effective IPO Price Annex I
Effective Time of the Merger 1.2
Election Period 11.3(i)
Employment Agreement 8.12
Environmental Laws 5.13
ERISA 5.19
Expiration Date 5(A)
Founding Companies Whereas
Founding Stockholders 17.1
Group health plans 5.20(v)
HDS Preamble
HDS Charter Documents 6.1
HDS Material Adverse Effect 6.1
HDS Material Documents 6.9
HDS Stock 2.1
Defined Term Section
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HDS's Subsidiaries 6.1
▇▇▇▇▇▇ ▇▇▇▇ 4.1
Indemnification Threshold 11.5(i)
Indemnified Party 11.3
Indemnifying Party 11.3
Interim Period 10.6(b)
IPO 4.1
Leases 8.14
Line of Credit 7.12
Material Adverse Effect 5.1
Material Contracts 5.15
Material Leases 5.14
Merger Whereas
Minimum IPO Price Annex I
Multi-employer pension plan 5.20
1933 Act 5(A)
1934 Act 5(A)
Nondisturbance Agreements 9.18
Other Agreements Whereas
Other Companies Whereas
PBGC 5.19(x)
Plans 5.19
Post-Closing Period 10.6(d)
Pre-Closing 4.1
Pre-Closing Period 10.6(c)
Pricing Date 4.1
Purchase Price Annex I
Qualified Plans 5.19(iii)
Registration Statement 4.3
Reportable events 5.20(iii)
Reserved Amount Annex I
SEC 8.2
Significant customers 5.15
Stockholder Release 9.5
STOCKHOLDERS Preamble
Surviving Corporation 1.2
Tax 10.6(e)
Tax Data 10.3
Tax Documentation 10.3
Tax Returns 10.6(f)
Taxing Authority 10.6(g)
Territory 13.1(i)
Third Party Claim 11.3(i)
Third Person 11.3
Defined Term Section
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Transfer Taxes 17.6
Underwriters 4.3
Underwriting Agreement 8.7
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of February 26, 1999, by and among HOSPITALITY DESIGN & SUPPLY, INC., a Delaware
corporation ("HDS"), ▇▇▇▇▇▇▇ RESTAURANT EQUIPMENT AND SUPPLY, INC., a California
corporation (the "COMPANY"), and the stockholders of the COMPANY listed on Annex
II (the "STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the
COMPANY.
WHEREAS, the respective Boards of Directors of HDS and the COMPANY
(which together are herein collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that the COMPANY merge with and
into HDS pursuant to this Agreement and the applicable provisions of the laws of
the State of Delaware (such transaction is sometimes herein called the
"Merger");
WHEREAS, HDS is entering into other separate agreements (the "Other
Agreements") substantially similar to this Agreement, each of which is entitled
"Agreement and Plan of Reorganization," with each of the entities other than the
Company listed in Part II of Annex I (collectively, the "Other Companies") in
order to acquire additional companies in the commercial kitchen design and/or
supply industry (the Other Companies, together with the COMPANY, are
collectively referred to herein as the "Founding Companies");
WHEREAS, the Boards of Directors of HDS and the COMPANY have approved
and adopted this Agreement as a reorganization described in Section 368(a)(1)(A)
of the Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. THE MERGER.
1.1 Delivery and Filing of Articles of Merger. The Constituent
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Corporations will cause a Certificate of Merger or Articles of Merger with
respect to the Merger (the "Articles of Merger") to be signed, verified,
delivered to and filed with the Secretary of State of the State of Delaware and,
if required, a similar filing to be made with the relevant authorities in the
jurisdiction in which the COMPANY is organized, on or before the Closing Date
(as defined in Section 4.2).
1.2 Effective Time of the Merger. The "Effective Time of the Merger" shall
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be on the Closing Date, as defined in Section 4.2, and simultaneous with the
closing of the IPO, as defined in Section 4.1. At the Effective Time of the
Merger, the COMPANY
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shall be merged with and into HDS in accordance with the Articles of Merger, and
the separate existence of the COMPANY shall cease. HDS shall be the surviving
party in the Merger and is herein sometimes referred to as the "Surviving
Corporation." The Merger will be effected in a single transaction.
1.3 Certificate of Incorporation, Bylaws and Board of Directors of
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Surviving Corporation. At the Effective Time of the Merger:
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(i) the Certificate of Incorporation of HDS then in effect shall
become the Certificate of Incorporation of the Surviving Corporation; and
subsequent to the Effective Time of the Merger, such Certificate of
Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation until changed as provided by law;
(ii) the Bylaws of HDS then in effect shall become the Bylaws of the
Surviving Corporation; and subsequent to the Effective Time of the Merger, such
Bylaws shall be the Bylaws of the Surviving Corporation until they shall
thereafter be duly amended;
(iii) the Board of Directors of the Surviving Corporation shall
consist of those persons who constituted the Board of Directors of HDS
immediately prior to the Merger, who shall hold office subject to the provisions
of the laws of the State of Delaware and of the Certificate of Incorporation and
Bylaws of the Surviving Corporation until such persons' successors and assigns
are duly elected and qualified; and
(iv) the officers of the Surviving Corporation shall be the persons
who were officers of HDS immediately prior to the Merger, who shall hold office,
subject to the provisions of the Certificate of Incorporation and Bylaws of the
Surviving Corporation and the Employment Agreements (as defined in Section
8.12), until such officers' successors are duly elected and qualified.
1.4 Effect of Merger. At the Effective Time of the Merger, the effect of
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the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL"). Except as herein
specifically set forth, the identity, existence, purposes, powers, objects,
franchises, privileges, rights and immunities of the COMPANY shall continue
unaffected and unimpaired by the Merger and the corporate franchises, existence
and rights of the COMPANY shall be merged with and into HDS, and HDS, as the
Surviving Corporation, shall be fully vested therewith. At the Effective Time
of the Merger, the separate existence of the COMPANY shall cease and, in
accordance with the terms of this Agreement, the Surviving Corporation shall
possess all the rights, privileges, immunities and franchises of a public, as
well as of a private, nature, and all property, real, personal and mixed, and
all debts due on whatever account, including subscriptions to shares, all taxes,
including those due and owing and those accrued, and all other choses in action,
and all and every other interest of or belonging to or due to the COMPANY and
HDS shall be taken and deemed to be transferred to, and vested in, the Surviving
Corporation without further act or deed. Except as otherwise provided herein,
the Surviving Corporation shall
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thenceforth be responsible and liable for all the liabilities and obligations of
the COMPANY and HDS and the Surviving Corporation shall be substituted for the
COMPANY or HDS with respect to any claim existing, or action or proceeding
pending, by or against the COMPANY or HDS. Neither the rights of creditors nor
any liens upon the property of the COMPANY or HDS shall be impaired by the
Merger, and all debts, liabilities and duties of the COMPANY and HDS shall
attach to the Surviving Corporation, and may be enforced against such Surviving
Corporation to the same extent as if said debts, liabilities and duties had been
incurred or contracted by such Surviving Corporation.
2. CONVERSION OF STOCK.
2.1 Manner of Conversion. The manner of converting the outstanding shares
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of capital stock of the COMPANY ("COMPANY Stock") into outstanding shares of
common stock of HDS ("HDS Stock") and cash shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of COMPANY Stock issued and outstanding
immediately prior to the Effective Time of the Merger, by virtue of the Merger
and without any action on the part of the holder thereof, automatically shall be
deemed to represent (1) that number of shares of HDS Stock determined as set
forth in Part I of Annex I hereto and (2) the right to receive the amount of
cash determined as set forth in Part I of Annex I hereto, such shares and cash
to be subject to offsets and distributed to STOCKHOLDERS as provided in Part I
of Annex I hereto; and
(ii) all shares of COMPANY Stock that are held by COMPANY as
treasury stock or owned by any COMPANY Subsidiary shall be cancelled and retired
and no shares of HDS Stock or other consideration shall be delivered or paid in
exchange therefor.
At the Effective Time of the Merger, HDS shall have no class of capital
stock issued and outstanding which, as a class, shall have any rights or
preferences senior to the shares of HDS Stock received by the STOCKHOLDERS,
including, without limitation, any rights or preferences as to dividends or as
to the assets of HDS upon liquidation or dissolution or as to voting rights,
except for any series of Preferred Stock that will be converted into HDS Stock
on the Closing Date (as defined below).
2.2 Other Companies. Part II to Annex I sets forth the aggregate
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consideration into which shares of outstanding stock of each Founding Company
will be converted on the Closing Date, or, if applicable, payable with respect
to such shares of outstanding stock on the Closing Date, before offsets.
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3. DELIVERY OF STOCK.
3.1 Delivery of HDS Stock. At or immediately after the Effective Time of
---------------------
the Merger:
(i) the STOCKHOLDERS, as the holders of all outstanding
certificates representing shares of COMPANY Stock, shall, upon surrender of such
certificates, be entitled to receive the number of shares of HDS Stock and the
amount of cash calculated pursuant to Section 2.1 above; and
(ii) until the certificates representing COMPANY Stock have been
surrendered by the STOCKHOLDERS and replaced by the HDS Stock, the certificates
for COMPANY Stock shall, for all corporate purposes, be deemed to evidence the
ownership of the number of shares of HDS Stock and cash which such STOCKHOLDER
is entitled to receive as a result of the Merger, as set forth in Section 2.1,
notwithstanding the number of shares of COMPANY Stock such certificates
represent.
3.2 Delivery of COMPANY Stock. The STOCKHOLDERS shall deliver to HDS at
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Pre-Closing (as defined below in Section 4.1) the certificates representing
COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by
blank stock powers, and with all necessary transfer tax and other revenue
stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The
STOCKHOLDERS agree promptly to cure any deficiencies with respect to the
endorsement of the certificates or other documents of conveyance with respect to
such COMPANY Stock or with respect to the stock powers accompanying any COMPANY
Stock.
4. PRE-CLOSING AND CLOSING.
4.1 Pre-Closing. On the date (the "Pricing Date") on which the
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public offering price of the shares of HDS Stock in the initial public offering
of HDS Stock (the "IPO") is determined, the parties shall deliver to Howard,
Rice, Nemerovski, Canady, ▇▇▇▇ & ▇▇▇▇▇▇, A Professional Corporation ("▇▇▇▇▇▇
▇▇▇▇") all documents necessary to effect (i) the Merger (including, at HDS's
election, the filing with the appropriate state authorities of the Articles of
Merger and any similar document to become effective on the Closing Date (as
defined below)), (ii) the conversion of shares of COMPANY Stock into shares of
HDS Stock and (iii) the delivery of shares of HDS Stock to STOCKHOLDERS (such
delivery to ▇▇▇▇▇▇, ▇▇▇▇ is herein referred to as the "Pre-Closing"); provided,
that the actual Merger, the conversion of shares of COMPANY Stock into shares of
HDS Stock and the delivery of shares of HDS Stock shall not take place until the
Closing Date as herein provided. The Pre-Closing shall take place at the offices
of ▇▇▇▇▇▇, Rice at Three ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇.
4.2 Closing. On the date when the closing with respect to the IPO
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occurs (the "Closing Date"), the Articles of Merger shall be filed with the
appropriate state authorities, or if already filed shall become effective, and
the conversion of shares of
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COMPANY Stock into shares of HDS Stock, the delivery of shares of HDS Stock, and
the transfer of funds by wire transfer in an amount equal to the cash portion of
the consideration which the STOCKHOLDERS shall be entitled to receive pursuant
to the Merger, shall occur and be deemed to be completed (such consummation and
delivery is herein referred to as the "Closing"). After the Pre-Closing and
until the Closing Date, no party may withdraw, terminate or rescind any delivery
made at the Pre-Closing unless this Agreement is terminated as provided in
Section 12. All documents delivered at the Pre-Closing shall be held by ▇▇▇▇▇▇
▇▇▇▇ for final delivery on the Closing Date as directed by the parties and their
counsel at the Pre-Closing, provided only that the Articles of Merger and any
similar document may be filed to become effective on the Closing Date. Should
the Agreement be terminated as provided in Section 12 prior to the Closing Date,
the parties shall take all steps necessary to rescind any such filings, ▇▇▇▇▇▇
▇▇▇▇ shall return all documents delivered at the Pre-Closing to the parties who
delivered the same, all such deliveries at the Pre-Closing will be rescinded and
a nullity, the Merger shall not become effective, the shares of COMPANY Stock
will not be converted into HDS Stock, and shares of HDS Stock will not be
delivered to STOCKHOLDERS. If HDS proposes to file any Articles of Merger or any
similar document prior to the Closing, the documents delivered at Pre-Closing
shall include documents required to rescind, prior to the Closing, any filing of
the Articles of Merger and any similar document.
4.3 No Assurances. The COMPANY and the STOCKHOLDERS acknowledge and agree
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that (i) there exists no firm commitment, binding agreement, or promise or other
assurance of any kind, whether express or implied, oral or written, that any
Registration Statement filed in connection with the IPO (the "Registration
Statement") will become effective or that the IPO pursuant thereto will occur at
a particular price or within a particular range of prices or will occur at all;
(ii) neither HDS nor any of its officers, directors, agents or representatives
nor any prospective underwriters in the IPO (the "Underwriters") shall have any
liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or
associated with the COMPANY for any failure of the Registration Statement to
become effective, or of the IPO to occur at a particular price or within a
particular range of prices or to occur at all; and (iii) the decision of the
STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to
the proposed Merger, has been made independent of, and without reliance upon,
any statements, opinions or other communications of, or due diligence
investigations which have been or will be made or performed by any prospective
Underwriter, relative to HDS or the prospective IPO. The Underwriters shall have
no obligation to the STOCKHOLDERS with respect to any disclosure contained in
the Registration Statement.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS.
(A) Representations and Warranties of COMPANY and STOCKHOLDERS. The
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COMPANY and each of the STOCKHOLDERS jointly and severally represent and warrant
that all of the following representations and warranties in
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this Section 5(A) are true at the date of this Agreement and, subject to Section
7.9 hereof, shall be true at the time of Pre-Closing and the Closing Date, and
that such representations and warranties shall survive the Closing Date for a
period of two (2) years (the last day of such period is herein called the
"Expiration Date"), except that (i) the warranties and representations set forth
in Sections 5.13, 5.19 and 5.20 hereof shall survive until such date as the
limitations period has run for each act, inaction, fact, event or circumstance
which constitutes a breach thereof, which date shall be deemed to be the
Expiration Date for Sections 5.13, 5.19 and 5.20, (ii) the warranties and
representations set forth in Section 5.22 hereof shall survive until such date
as the limitations period has run for all tax periods ended on or prior to the
Closing Date, which date shall be deemed to be the Expiration Date for Section
5.22, and (iii) solely for purposes of Section 11.1(iv) hereof, all warranties
and representations shall survive until such date as the limitations period has
run under the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and all other
applicable Federal or state securities laws, which date shall be deemed to be
the Expiration Date for purposes of Section 11.1(iv) hereof.
5.1 Due Organization. The COMPANY is a corporation duly organized,
----------------
validly existing and in good standing under the laws of the state of its
incorporation, and is duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on its business in the places and in the manner as now conducted except
(i) as disclosed on Schedule 5.1 or (ii) where the cumulative effect of all
failures to be so authorized or qualified would not have a material adverse
effect on the business, operations, properties, assets or condition (financial
or otherwise), of the COMPANY (a "Material Adverse Effect"). Schedule 5.1
contains a list of all jurisdictions in which the COMPANY is authorized or
qualified to do business. True, complete and correct copies of the Certificate
(or Articles) of Incorporation and Bylaws, as amended, of the COMPANY
(collectively, the "Charter Documents"), certified by the Secretary or Assistant
Secretary of the COMPANY, are all attached hereto as part of Schedule 5.1. A
true, complete and correct copy of the Certificate (or Articles) of
Incorporation, as amended, included in the Charter Documents, certified by the
Secretary of State or other appropriate authority of the state of incorporation
of the COMPANY, as applicable, shall be delivered to HDS at the Pre-Closing.
Except as set forth on Schedule 5.1, the minute books of the COMPANY, as
heretofore made available to HDS, are correct and complete in all material
respects.
5.2 Authority and Validity. The representatives of the COMPANY executing
----------------------
this Agreement have the authority to enter into and bind the COMPANY to the
terms of this Agreement and any other agreements contemplated by this Agreement
to which the COMPANY is or is contemplated to be a party. The COMPANY has the
full legal right, power and authority to enter into this Agreement, any other
agreements contemplated by this Agreement, to which the COMPANY is or is
contemplated to be a party, and the Merger. All corporate action necessary for
the authorization, execution, delivery and performance by the COMPANY of the
Agreement, and also any other agreements contemplated by this Agreement to which
the COMPANY is or is contemplated to be a
-6-
party, has been taken. Assuming due authorization, execution and delivery by
HDS, this Agreement and any other agreements contemplated by this Agreement to
which the COMPANY is or is contemplated to be a party are or will be legal,
valid and binding obligations of the COMPANY, enforceable in accordance with
their respective terms, except as may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights generally.
5.3 Capital Stock of the COMPANY. The authorized capital stock of the
----------------------------
COMPANY is as set forth in Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS and in
the amounts set forth in Annex II and further, except as set forth on Schedule
5.3, are owned free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of the COMPANY have
been duly authorized and validly issued, are fully paid and nonassessable, are
owned of record and beneficially by the STOCKHOLDERS and further, such shares
were offered, issued, sold and delivered by the COMPANY in compliance with all
applicable state and federal laws concerning the issuance of securities.
Further, none of such shares were issued in violation of the preemptive rights
of any past or present stockholder.
5.4 Transactions in Capital Stock. Except as set forth on Schedule 5.4,
-----------------------------
the COMPANY has not acquired any COMPANY Stock since January 1, 1993. Except as
set forth on Schedule 5.4, no option, warrant, call, conversion right or
commitment of any kind exists which obligates the COMPANY to issue any
authorized but unissued capital stock. Except as set forth on Schedule 5.4, the
COMPANY has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof. Except as set
forth on Schedule 5.4, there has been no transaction or action taken with
respect to the equity ownership of the COMPANY, in contemplation of the
transactions described in this Agreement.
5.5 No Bonus Shares. Except as set forth in Schedule 5.5, since January
---------------
1, 1995 none of the shares of COMPANY Stock was issued for less than the fair
market value thereof at the time of issuance or was issued in exchange for
consideration other than cash.
5.6 Subsidiaries. The COMPANY does not presently own, of record or
------------
beneficially, or control, directly or indirectly, any capital stock, securities
convertible into capital stock or any other equity interest in any corporation,
association or business entity nor is the COMPANY, directly or indirectly, a
participant in any joint venture, partnership or other non-corporate entity.
5.7 Predecessor Status; etc. Set forth in Schedule 5.7 is a listing of all
------------------------
names under which the COMPANY has done business during the last five years and
all names of all predecessor companies for the past five years of the COMPANY,
including the names of any entities from whom the COMPANY previously acquired
material assets.
-7-
Except as disclosed in Schedule 5.7, the COMPANY has not been a subsidiary or
division of another corporation or a part of an acquisition which was later
rescinded.
5.8 Spin-off by the COMPANY. Except as set forth on Schedule 5.8, there
-----------------------
has not been any sale, spin-off or split-up of any material assets of the
COMPANY or any other person or entity that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the COMPANY ("COMPANY Affiliates") other than in the ordinary
course of business, within the preceding two years.
5.9 Financial Statements. Attached hereto as Schedule 5.9 to this
--------------------
Agreement are copies of the following financial statements (the "COMPANY
Financial Statements") of the COMPANY: (i) the COMPANY's balance sheet as of
December 31, 1998 and statements of income, cash flows and retained earnings for
the nine month period ended December 31, 1998 (such Balance Sheet as of December
31, 1998 is herein sometimes referred to as the "December 31, 1998 COMPANY
Balance Sheet," and December 31, 1998 is herein sometimes referred to as the
"Balance Sheet Date") and (ii) the COMPANY's balance sheets as of March 31,
1998, 1997, and 1996 and statements of income, cash flows and retained earnings
for each of the years in the three-year period ended March 31, 1998. To the
knowledge of the COMPANY, such Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated (except as noted). Such balance sheets as
of March 31, 1998, 1997, and 1996 present fairly the financial position of the
COMPANY as of the dates indicated thereon, and such Statements of Income, Cash
Flows and Retained Earnings present fairly the results of their respective
operations for the periods indicated thereon.
5.10 Liabilities and Obligations. Schedule 5.10 is an accurate list with
---------------------------
respect to the COMPANY of all liabilities as of a date specified therein, which
date shall not be more than thirty (30) days prior to the date of this
Agreement. Schedule 5.10 shall be amended or supplemented pursuant to Section
7.9 to list (i) all liabilities which were incurred after such date and were
incurred other than in the ordinary course of business or which exceed $10,000
(individually or in the aggregate) if (and only if) such liabilities would
either be accrued on the balance sheet of the COMPANY in accordance with
generally accepted accounting principles consistently applied if such balance
sheet were being prepared immediately prior to Closing or if such liabilities
represent liabilities of the nature described in Section 5.13, Section 5.19,
Section 5.20 and/or Section 5.22 (excluding items that are both not known to the
COMPANY and not covered by any of such sections because of knowledge
qualifications contained in one or more of such sections); and (ii) all
liabilities which were incurred after such date and were incurred other than in
the ordinary course of business or which exceed $100,000 (in the aggregate) and
are not otherwise described in the immediately preceding subclause (i).
Any reference to "all liabilities" in this Section 5.10 shall mean, in
each such instance, all liabilities of the COMPANY of any kind, character or
description, whether accrued, absolute, secured or unsecured, contingent or
otherwise. In the case of those
-8-
liabilities which are contingent, Schedule 5.10 includes, and each amendment or
supplement pursuant to Section 7.9 will include, a reasonable estimate of the
maximum amount which may be payable. For each such contingent liability, the
COMPANY has provided (or in the case of contingent liabilities listed in an
amendment or supplement pursuant to Section 7.9, will provide) to HDS the
following information:
(a) a summary description of the liability together with the
following:
(1) copies of all relevant documentation relating
thereto;
(2) amounts claimed and any other action or relief
sought; and
(3) name of claimant and all other parties to the
claim, suit or proceeding;
(b) the name of each court or agency before which such claim,
suit or proceeding is pending; and
(c) the date such claim, suit or proceeding was instituted.
5.11 Accounts and Notes Receivable. Schedule 5.11 is an accurate list of
-----------------------------
the accounts and notes receivable of the COMPANY as of the Balance Sheet Date,
including any such amounts which are not reflected in the December 31, 1998
COMPANY Balance Sheet, and including receivables from and advances to employees
and the STOCKHOLDERS. Except to the extent to be reflected on Schedule 5.11,
such accounts and notes are collectible in the amount to be shown in the
December 31, 1998 COMPANY Balance Sheet, net of reserves reflected therein.
5.12 Permits and Intangibles. The COMPANY holds all licenses, franchises,
-----------------------
permits and other governmental authorizations including permits, titles
(including motor vehicle titles and current registrations), licenses,
franchises, certificates, trademarks, trade names, patents, patent applications
and copyrights, the absence of which, either singly or in the aggregate, would
have a Material Adverse Effect. Schedule 5.12 is an accurate list and summary
description of all such licenses, franchises, permits and other governmental
authorizations, provided that, with respect to copyrights, Schedule 5.12 may
include only those copyrights which are registered. To the knowledge of the
COMPANY, the licenses, franchises, permits and other governmental authorizations
listed on Schedule 5.12 are valid, and the COMPANY has not received any notice
that any governmental authority intends to cancel, terminate or not renew any
such license, franchise, permit or other governmental authorization. The
COMPANY has conducted and is conducting its business in compliance with the
requirements, standards, criteria and conditions set forth in applicable
permits, licenses, orders, approvals, variances, rules and regulations and is
not in violation of any of the foregoing except where all such non-compliances
and
-9-
violations in the aggregate would not have a Material Adverse Effect. Except as
specifically provided in Schedule 5.12, the transactions contemplated by this
Agreement will not result in a default under or a breach or violation of, or
have a Material Adverse Effect upon the rights and benefits afforded to the
COMPANY by, such licenses, franchises, permits or government authorizations,
either singly or in the aggregate.
5.13 Environmental Matters. Except as set forth on Schedule 5.13, and
---------------------
except to the extent that noncompliance with any Environmental Law (as defined
below), either singly or in the aggregate, does not have a Material Adverse
Effect, (i) the COMPANY has complied with and is in compliance with all federal,
state, local and foreign statutes (civil and criminal), laws, ordinances,
regulations, rules, notices, permits, judgments, orders and decrees applicable
to it or any of its properties, assets, operations and businesses relating to
environmental protection (collectively "Environmental Laws") including, without
limitation, Environmental Laws relating to protection of the air, water or land
or to the generation, storage, use, handling, transportation, treatment or
disposal of Solid Wastes, Hazardous Wastes or Hazardous Substances (as such
terms are defined in any applicable Environmental Law); (ii) the COMPANY has
obtained and complied with all necessary permits and other approvals necessary
to treat, transport, store, dispose of or otherwise handle Solid Wastes,
Hazardous Wastes or Hazardous Substances and has reported, to the extent
required by all Environmental Laws, all past and present sites owned and
operated by the COMPANY where Solid Wastes, Hazardous Wastes or Hazardous
Substances have been treated, stored, used, disposed of or otherwise handled;
(iii) there have been no releases (as defined in Environmental Laws) at, from,
under, in or on any property owned or operated by the COMPANY except as
permitted by Environmental Laws; (iv) to the knowledge of the COMPANY there is
no on-site or off-site location to which the COMPANY has transported or disposed
of Solid Wastes, Hazardous Wastes or Hazardous Substances or arranged for the
transportation of Solid Wastes, Hazardous Wastes or Hazardous Substances, which
site is the subject of any federal, state, local or foreign enforcement action
or any other investigation which could lead to any claim against the COMPANY or
HDS for any clean-up cost, remedial work, damage to natural resources or
personal injury, including, but not limited to, any claim under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended; and (v) the COMPANY has no contingent liability in connection with any
release of any Solid Waste, Hazardous Waste or Hazardous Substance into the
environment. Schedule 5.13 lists all releases of Hazardous Wastes or Hazardous
Substances by the COMPANY.
5.14 Real and Personal Property. Schedule 5.14 hereto contains an accurate
--------------------------
list of (x) all real and personal property included on the December 31, 1998
COMPANY Balance Sheet, (y) all other real and personal property of the COMPANY
with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii)
acquired since the Balance Sheet, and (z) all leases for real and personal
property to which the COMPANY is a party involving real or personal property
having a value in excess of $2,500 ("Material Leases"), including true, complete
and correct copies of all Material Leases, and including an indication as to
which real and personal property is currently owned, or was
-10-
formerly owned, by the STOCKHOLDERS or business or personal affiliates of the
COMPANY or the STOCKHOLDERS. All machinery and equipment of the COMPANY listed
on Schedule 5.14 is in good working order and condition, ordinary wear and tear
excepted, except (i) as disclosed in Schedule 5.14 or (ii) where the cumulative
effect of all failures to be in good working order and condition would not have
a Material Adverse Effect. All Material Leases are in full force and effect and
constitute valid and binding agreements of the COMPANY and to the knowledge of
the COMPANY, constitute valid and binding agreements on the other parties
thereto (and their successors) in accordance with their respective terms. All
fixed assets used by the COMPANY that are material to the operation of their
respective businesses are either owned by the COMPANY or leased under an
agreement set forth on Schedule 5.14. Schedule 5.14 contains true, complete and
correct copies of all title reports received or owned by the COMPANY and title
insurance policies received or owned by the COMPANY with respect to the real
property listed on Schedule 5.14. The COMPANY has also provided in Schedule 5.14
a summary description of all plans or projects that involve the opening of new
operations, expansion of any existing operations or the acquisition of any real
property or existing businesses, with respect to which the COMPANY has made any
expenditure in the two-year period prior to the date of the Agreement in excess
of $10,000, or which if pursued by the COMPANY would require additional
expenditures of capital in excess of $10,000. Except as set forth on Schedule
5.14 and except for liens excepted in Section 7.3(vi)(1) and (3), there are no
liens against the COMPANY's real and personal properties.
5.15 Significant Customers; Material Contracts and Commitments. Schedule
---------------------------------------------------------
5.15 contains an accurate list of (i) all customers representing five percent
(5%) or more of the COMPANY's revenues for the twelve months ended on the
Balance Sheet Date or who have paid to the COMPANY $50,000 or more over any four
consecutive fiscal quarters in the three years ended on the Balance Sheet Date
(collectively, "significant customers") and (ii) all contracts, indentures and
other instruments requiring payment or performance by the COMPANY in an amount
or with a value in excess of $10,000 ("Material Contracts") to which the COMPANY
is a party or by which any of them or any of their respective properties are
bound (including, but not limited to, contracts with significant customers,
joint venture or partnership agreements, contracts with any labor organizations,
loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to
purchase land, leases, liens, pledges or other security agreements) (a) as of
the Balance Sheet Date and (b) entered into since the Balance Sheet Date and in
each case has delivered true, complete and correct copies of such agreements to
HDS, except that leases set forth on Schedule 5.14 need not be set forth on
Schedule 5.15. Except to the extent set forth on Schedule 5.15, (i) none of the
COMPANY's significant customers has cancelled or substantially reduced or, to
the knowledge of the COMPANY, is currently attempting or threatening to cancel
any Material Contract or substantially reduce utilization of the services
provided by the COMPANY, and (ii) no Stockholder or any affiliate of any
Stockholder is a party to any such Material Contract. Except as set forth in
Schedule 5.15, the COMPANY has not been the subject of any election in respect
of union representation of employees and are not bound by or subject to (and
none of its
-11-
respective assets or properties is bound by or subject to) any arrangement with
any labor union. Except as set forth on Schedule 5.15, no employees of the
COMPANY are represented by any labor union or covered by any collective
bargaining agreement and no campaign to establish such representation has ever
occurred or, to the knowledge of the COMPANY, is in progress. There is no
pending or, to the COMPANY's knowledge, threatened labor dispute involving the
COMPANY and any group of its employees, nor has the COMPANY experienced any
labor interruptions over the past three years, and the COMPANY considers its
relationship with its respective employees to be good.
5.16 Title to Real Property. The COMPANY has good and insurable title to
----------------------
the real property owned and used in its business, including those reflected on
Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales
agreement, encumbrance or charge, except for:
(i) liens set forth on Schedules 5.10 and 5.15 securing specified
liabilities (with respect to which no material default exists);
(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title shown of record in the office of the County Clerk in which the properties,
assets and leasehold estates are located which do not adversely affect the
current use of the property.
5.17 Insurance. Schedule 5.17 sets forth an accurate list of all insurance
---------
policies carried by the COMPANY. Except as set forth on Schedule 5.17, the
Company has delivered to HDS an accurate list (attached to Schedule 5.17) of all
insurance loss runs or worker's compensation claims received for the past three
policy years. The Company has provided HDS with true, complete and correct
copies of all policies currently in effect. Such insurance policies are
currently in full force and effect and shall remain in full force and effect
through the Closing Date. No insurance carried by the COMPANY has ever been
cancelled by the insurance company and the COMPANY has never been denied
coverage.
5.18 Compensation; Employment Agreements. Schedule 5.18 sets forth an
-----------------------------------
accurate schedule showing all officers, directors and key employees of the
COMPANY listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided
to HDS true, complete and correct copies of any employment agreements for
persons listed on Schedule 5.18. Since the Balance Sheet Date there have been no
increases in the compensation, bonus, sales commissions or fee arrangements
payable or to become payable by the COMPANY to
-12-
any officer, director, stockholder, employee, consultant or agent, except as
listed on Schedule 5.18.
5.19 Employee Plans. Schedule 5.19 sets forth complete and accurate lists
--------------
of all employee benefit plans, all employee welfare benefit plans, all employee
pension benefit plans, all multi-employer plans and all multi-employer welfare
arrangements (as defined in Sections 3(3), (1), (2), (37) and (40),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or
to which the COMPANY currently contributes, or has an obligation to contribute
in the future (including, without limitation, benefit plans or arrangements that
are not subject to ERISA, such as employment agreements and any other agreements
containing "golden parachute" provisions and deferred compensation agreements),
together with a classification of employees covered thereby (collectively, the
"Plans"). Schedule 5.19 also sets forth all of the Plans that have been
terminated within the past six years. The COMPANY has heretofore delivered to
HDS correct and complete copies of each of the following:
(i) each Plan and all amendments thereto; the trust agreement
and/or insurance contracts, if any, forming a part of such Plan and all
amendments thereto; and the resolutions and agreements, if any by which the
COMPANY adopted such Plan;
(ii) all written, and descriptions of all oral, employment,
termination, and severance agreements, contracts, arrangements and
understandings listed in Schedule 5.19;
(iii) sample benefit distribution forms that pertain to all Plans
that are intended to qualify (the "Qualified Plans") under Section 401(a) of the
Code;
(iv) the most recent actuarial report and the most recent executed
Form PBGC-1 with respect to each Plan that is a defined benefit pension plan as
defined in Section 414(j) of the Code (a "Defined Benefit Plan");
(v) Forms 5500 or, as applicable Forms 5500-C/R, filed with
respect to the three most recent plan years of each Plan, and all schedules
thereto;
(vi) the most recent determination letter issued by the Internal
Revenue Service regarding the qualified status of each Qualified Plan;
(vii) the most recent accountant's report, if any, with respect to
each Plan;
(viii) the most recent summary plan description, and any subsequent
summaries of material modifications, with respect to each Plan;
(ix) the bond required by Section 412 of ERISA, if any; and
-13-
(x) all documents required to be filed with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation (the "PBGC"), or distributed
to participants and beneficiaries in connection with the termination of any
Qualified Plan listed on Schedule 5.19 as terminated.
5.20 Compliance with ERISA. Except for the Plans, the COMPANY does not
---------------------
maintain or sponsor, and is not a contributing employer to, a pension, profit-
sharing, deferred compensation, stock option, employee stock purchase or other
employee benefit plan, employee welfare benefit plan, or any other arrangement
with their respective employees, whether or not subject to ERISA. All Plans are
in compliance in all material respects with all applicable provisions of ERISA
and the regulations issued thereunder, the Code and the regulations issued
thereunder, as well as with all other applicable laws, and have been
administered, operated and managed in all material respects in accordance with
their governing documents, if any. All Qualified Plans are qualified under
Section 401(a) of the Code and have been determined by the Internal Revenue
Service to be so qualified or application for determination letters have been
timely submitted to the Internal Revenue Service and nothing has occurred since
the date of each Qualified Plan's most recent determination letter that would
adversely affect such Qualified Plan's tax-qualified status. To the extent that
any Qualified Plans have not been amended to comply with applicable law, the
remedial amendment period permitting retroactive amendment of such Qualified
Plans has not expired and will not expire within one hundred twenty (120) days
after the Closing Date. All reports and other documents required to be filed
with any governmental agency or distributed to plan participants or
beneficiaries (including, but not limited to, annual reports, summary annual
reports, actuarial reports, PBGC-1 Forms, audits or tax returns) have been
timely filed or distributed. None of: (i) the STOCKHOLDERS; (ii) any Plan; or
(iii) the COMPANY has engaged in any transaction prohibited under the provisions
of Section 4975 of the Code or Section 406 of ERISA. No Plan has incurred an
accumulated funding deficiency, as defined in Section 412(a) of the Code and
Section 302(1) of ERISA; and no circumstances exist pursuant to which the
COMPANY could have any direct or indirect liability whatsoever (including being
subject to any statutory lien to secure payment of any such liability), to the
PBGC under Title IV of ERISA or to the Internal Revenue Service for any excise
tax or penalty with respect to any plan now or hereafter maintained or
contributed to by the COMPANY or any member of a "controlled group" (as defined
in Section 4001(a)(14) of ERISA) that includes the COMPANY; and neither the
COMPANY nor any member of a "controlled group" (as defined above) that includes
the COMPANY currently has (or at the Closing Date will have) any obligation
whatsoever to contribute to any "multi-employer pension plan" (as defined in
ERISA Section 4001(a)(14)), nor has any withdrawal liability whatsoever (whether
or not yet assessed) arising under or capable of assertion under Title IV of
ERISA (including, but not limited to, Sections 4201, 4202, 4203, 4204, or 4205
thereof) been incurred by any Plan. Further, except as set forth in Schedule
5.20:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without a determination by
the
-14-
Internal Revenue Service that such action does not adversely affect the tax-
qualified status of such Qualified Plan;
(ii) no Plan which is subject to the provisions of Title IV of
ERISA has been terminated;
(iii) there have been no "reportable events" (as defined in Section
4043 of ERISA) with respect to any Plan which were not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of the
Closing Date, shall equal or exceed the actuarial present value of all accrued
pension benefits under any such Qualified Plan in accordance with the
assumptions contained in the Regulations of the PBGC governing the funding of
terminated Defined Benefit Plans;
(v) with respect to Plans which qualify as "group health plans"
under Section 4980B of the Internal Revenue Code and Section 607(l) of ERISA and
related regulations (relating to the benefit continuation rights imposed by
"COBRA"), the COMPANY has complied (and on the Closing Date will have complied)
in all respects with all reporting, disclosure, notice, election and other
benefit continuation requirements imposed thereunder as and when applicable to
such plans, and the COMPANY has not incurred (and will not incur) any direct or
indirect liability and is not (and will not be) subject to any loss, assessment,
excise tax penalty, loss of federal income tax deduction or other sanction,
arising on account of or in respect of any direct or indirect failure by the
COMPANY, at any time prior to the Closing Date, to comply with any such federal
or state benefit continuation requirement, which is capable of being assessed or
asserted before or after the Closing Date directly or indirectly against the
COMPANY or the STOCKHOLDERS with respect to such group health plans;
(vi) The COMPANY is not now nor has it been within the past six
years a member of a "controlled group" as defined in ERISA Section 4001(a)(14);
(vii) there is no pending litigation, arbitration, or disputed
claim, settlement or adjudication proceeding, and to the knowledge of the
COMPANY, there is no threatened litigation, arbitration or disputed claim,
settlement or adjudication proceeding, audit or any governmental or other
proceeding, audit or investigation with respect to any Plan, or with respect to
any fiduciary, administrator, or sponsor thereof (in their capacities as such),
or any party in interest thereof;
(viii) the Financial Statements as of the Balance Sheet Date reflect
the approximate total pension, medical and other benefit expense for all Plans,
and no material funding changes or irregularities are reflected thereon which
would cause such Financial Statements to be not representative of prior periods;
(ix) the COMPANY has not incurred liability under Section 4062 of
ERISA;
-15-
(x) each Qualified Plan that is listed as terminated on Schedule
5.19 was terminated in compliance with all applicable requirements of ERISA and
the Code;
(xi) except for any Qualified Plan that is categorized on Schedule
5.19 as having been merged with another Qualified Plan, no Qualified Plan of the
COMPANY has been merged during the six years immediately before the Closing
Date;
(xii) each Qualified Plan that is categorized on Schedule 5.19 as
having been merged was merged in compliance with all applicable requirements of
ERISA and the Code;
(xiii) apart from health benefits provided to former employees under
Section 4980B of the Code and Part 6 of Title I(B) of ERISA, the COMPANY has no
obligation to provide health or medical benefits to anyone other than its active
employees;
(xiv) the COMPANY does not sponsor, contribute to, or have any
obligation to contribute to any voluntary employees beneficiary association, as
described in Section 501(c)(9) of the Code; and
(xv) except as set forth in Schedule 5.19, the consummation of the
transactions contemplated hereby will not result in any obligation to pay any
employee of the COMPANY severance or termination benefits so long as such
employee remains employed by the COMPANY after the Closing.
5.21 Conformity with Law. Except to the extent set forth on Schedule 5.21,
-------------------
the COMPANY is not in violation of any law or regulation or any order of any
court or federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them
which (either singly or in the aggregate) would have a Material Adverse Effect;
and except to the extent set forth in Schedule 5.10, there are no claims,
actions, suits or proceedings pending or, to the knowledge of the COMPANY,
threatened, against or affecting the COMPANY, at law or in equity, or before or
by any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them
which (either singly or in the aggregate) would have a Material Adverse Effect,
and no notice of any such claim, action, suit or proceeding, whether pending or
threatened, has been received by the COMPANY. The COMPANY has conducted and is
conducting its business in compliance with the requirements, standards, criteria
and conditions set forth in applicable federal, state and local statutes,
ordinances, orders, approvals, variances, rules and regulations and is not in
violation of any of the foregoing which (either singly or in the aggregate)
would have a Material Adverse Effect.
5.22 Taxes. Except as set forth in Schedule 5.22,
-----
(i) All Tax Returns (as defined in Section 10.6(f)) required to
have been filed by or with respect to the COMPANY with any Taxing Authority (as
defined in
-16-
Section 10.6(g)) have been duly filed, and each such Tax Return accurately,
correctly and completely reflects the income, franchise or other Tax liability
and all other information, including the tax basis and recovery periods for
assets, required to be reported thereon. The COMPANY has furnished or made
available to HDS complete and accurate copies of all income and franchise tax
returns, and any amendments thereto, filed by the COMPANY for all taxable years
ending on or after December 31, 1995. All Taxes (whether or not shown on any Tax
Return and whether or not assessed) owed by the COMPANY have been paid. No Tax
payment has been made by the COMPANY to any Taxing Authority which is
inconsistent with the prior practice of the COMPANY, and no Tax payment has been
made by the COMPANY which is in excess of that which is in good faith determined
to be due and owing at the time of such payment.
(ii) The COMPANY is not and has not since January 1, 1995 been a
member of any affiliated, combined, consolidated, unitary or similar group.
(iii) The provisions for Taxes due by the COMPANY (as opposed to
any reserve for deferred Taxes established to reflect timing differences between
book and Tax income) in the COMPANY Financial Statements are sufficient for, and
adequate to cover, all unpaid Taxes.
(iv) The COMPANY is not a party to any current agreement extending
the time within which to file any Tax Return. No claim has ever been made by any
Taxing Authority in a jurisdiction in which the COMPANY does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction.
(v) The COMPANY has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
(vi) To the best of its knowledge, the COMPANY does not expect any
Taxing Authority to assess any additional Taxes against or in respect of it for
any past period. There is no dispute or claim concerning any Tax liability
either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to
the COMPANY. No issues have been raised in any examination by any Taxing
Authority with respect to the COMPANY which, by application of similar
principles, reasonably could be expected to result in a proposed deficiency for
any other period not so examined. Schedule 5.22 attached hereto lists all
federal, state, local and foreign income Tax Returns filed by or with respect to
the COMPANY for all taxable periods ended on or after December 31, 1994,
indicates those Tax Returns, if any, that have been audited, and indicates those
Tax Returns that currently are the subject of audit. The COMPANY has delivered
to HDS complete and correct copies of all federal, state, local and foreign
income Tax Returns filed by, and all Tax examination reports and statements of
deficiencies assessed against or agreed to by, the COMPANY since December 31,
1995.
-17-
(vii) The COMPANY has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to any Tax
assessment or deficiency.
(viii) The COMPANY has not made any payments, is not obligated to
make any payments, and is not a party to any agreement that under certain
circumstances could require it to make any payments, that would not be
deductible by reason of the application of Section 280G of the Code.
(ix) The COMPANY is not a party to and has no ongoing liability
under any Tax allocation or sharing agreement.
(x) None of the assets of the COMPANY constitutes tax-exempt bond
financed property or tax-exempt use property, within the meaning of Section 168
of the Code. The COMPANY is not a party to any "safe harbor lease" that is
subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as
in effect prior to the Tax Reform Act of 1986, or to any "long-term contract"
within the meaning of Section 460 of the Code.
(xi) The COMPANY is not a party to any joint venture, partnership
or other arrangement that is treated as a partnership for federal income Tax
purposes.
(xii) There are no accounting method changes of the COMPANY that
could give rise to an adjustment under Section 481 of the Code for periods after
the Closing Date.
(xiii) The COMPANY has not received any written ruling of a Taxing
Authority related to Taxes or entered into any written and legally binding
agreement with a Taxing Authority relating to Taxes.
(xiv) The COMPANY has substantial authority for the treatment of,
or has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on
its federal income Tax Returns, all positions taken on its relevant federal
income Tax Returns that could give rise to a substantial understatement of
federal income Tax within the meaning of Section 6662(d) of the Code.
(xv) The COMPANY does not have any liability for Taxes of any
Person other than the COMPANY (i) under Section 1.1502-6 of the Treasury
regulations (or any similar provision of state, local or foreign law), (ii) as a
transferee or successor, (iii) by contract or (iv) otherwise.
(xvi) No consent has been filed relating to the COMPANY pursuant
to Section 341(f) of the Code, nor has the COMPANY made any tax election that
would materially increase the amount of Taxes payable by the COMPANY, as
compared to the amount of Taxes that would be payable in the absence of such tax
election, in any Post-Closing Period (as defined in Section 10.6(d)).
-18-
(xvii) Intentionally omitted.
(xviii) There is no intercorporate indebtedness existing between HDS
and the COMPANY that was issued, acquired, or will be settled at a discount.
(xix) The COMPANY is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(xx) The fair market value of the assets of the COMPANY acquired
by HDS as a result of the Merger will equal or exceed the sum of the COMPANY's
liabilities assumed by HDS in the Merger, plus the amount of liabilities, if
any, to which the transferred assets of the COMPANY are subject.
(xxi) The liabilities of the COMPANY assumed by HDS and the
liabilities to which the transferred assets of the COMPANY are subject were
incurred by the COMPANY in the ordinary course of its business.
(xxii) The COMPANY is not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
(xxiii) To the knowledge of the COMPANY, none of the compensation
received by any STOCKHOLDER-employees of the COMPANY will be separate
consideration for, or allocable to, any of their shares of the COMPANY; none of
the shares of HDS Stock received by any STOCKHOLDER-employees in the Merger will
be separate consideration for, or allocable to, any employment agreement; and
the compensation paid to any STOCKHOLDER-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
(xxiv) To the knowledge of the COMPANY, the fair market value of
the HDS Stock and other consideration to be received by each STOCKHOLDER
pursuant to the Merger, will be approximately equal to the fair market value of
the COMPANY Stock surrendered in the Merger.
(xxv) The fair market value of the sum of (i) all dividends paid
and distributions made on or after January 1, 1998 and through the Closing Date
in respect of COMPANY Stock and (ii) all consideration paid by the COMPANY on or
after January 1, 1998 and through the Closing Date in connection with all direct
and indirect redemptions, purchases and other acquisitions of COMPANY Stock is
no greater than $0.
Certain of the defined terms used in this Section 5.22 have the
meaning ascribed to them in Section 10.
5.23 No Violations. Except as set forth in Schedule 5.23, neither the
-------------
COMPANY nor, to the knowledge of the COMPANY, any other party thereto is (i) in
violation of any Charter Document or (ii) in default under any Material Lease or
Material Contract; and,
-19-
except as set forth in the schedules and documents attached to this Agreement,
(a) the transactions contemplated hereby will not have a Material Adverse Effect
on the rights and benefits of the COMPANY under the Material Leases and Material
Contracts, either singly or in the aggregate, and (b) except as set forth on
Schedule 5.23, the execution of this Agreement and the performance of the
obligations hereunder and the consummation of the transactions contemplated
hereby will not result in any violation or breach or constitute a default under
any of the terms or provisions of the Charter Documents, Material Leases,
Material Contracts, any judgment, decree, order or award of any court,
governmental body or arbitrator, or any law, rule or regulation applicable to
COMPANY. Except as set forth in Schedule 5.23, none of the Material Leases or
Material Contracts requires notice to, or the consent or approval of, any third
party with respect to any of the transactions contemplated hereby in order to
remain in full force and effect, nor does this Agreement or any of the
transactions contemplated hereby give rise to any right to termination,
cancellation or acceleration or loss of any right or benefit under any Material
Lease or Material Contract.
5.24 Government Contracts. Except as set forth on Schedule 5.24, the
--------------------
COMPANY is not now a party to any governmental contracts subject to price
redetermination or renegotiation.
5.25 Absence of Changes. Since December 31, 1998, except as set forth on
------------------
Schedule 5.25, there has not been with respect to the COMPANY:
(i) any event or circumstance (either singly or in the
aggregate)which would constitute a Material Adverse Effect;
(ii) any change in its authorized capital, or securities
outstanding, or ownership interests or any grant of any options, warrants,
calls, conversion rights or commitments;
(iii) any declaration or payment of any dividend or distribution in
respect of its capital stock or any direct or indirect redemption, purchase or
other acquisition of any of its capital stock;
(iv) any increase of more than five percent (5%) in the
compensation, bonus, sales commissions or fee arrangement payable or to become
payable by it to any of its respective officers, directors, stockholders,
employees, consultants or agents, except for ordinary and customary bonuses and
salary increases for employees (other than the STOCKHOLDERS) in accordance with
past practice;
(v) any work interruptions, labor grievances or claims filed, or
any similar event or condition of any character that would have a Material
Adverse Effect;
(vi) any distribution, sale or transfer, or any agreement to sell or
transfer any material assets, property or rights of its business to any person,
including, without limitation, the STOCKHOLDERS and their affiliates, other than
distributions, sales or
-20-
transfers in the ordinary course of business to persons other than the
STOCKHOLDERS and their affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to it, including without limitation any indebtedness or
obligation of any STOCKHOLDERS or any affiliate thereof, provided that it may
--------
negotiate and adjust bills in the course of good faith disputes with customers
in a manner consistent with past practice, provided, further, that such
-------- -------
adjustments shall not be deemed to be included in Schedule 5.11 unless
specifically listed thereon;
(viii) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property or
rights or requiring consent of any party to the transfer and assignment of any
such assets, property or rights;
(ix) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire any property, rights or assets outside of the
ordinary course of business;
(x) any waiver of any of its material rights or claims;
(xi) any transaction by it outside the ordinary course of its
business; or
(xii) any cancellation or termination of a Material Contract.
5.26 Deposit Accounts; Powers of Attorney. The COMPANY has delivered to
------------------------------------
HDS an accurate schedule (Schedule 5.2 6) as of the date of the Agreement, of:
(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 account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation,
firm or other entity holding a general or special power of attorney from the
COMPANY and a description of the terms of such power.
5.27 Relations with Governments. The COMPANY has not made, offered or
--------------------------
agreed to offer anything of value to any governmental official, political party
or candidate for government office which would cause the COMPANY to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended, or any law
of similar effect.
-21-
(B) Representations and Warranties of STOCKHOLDERS. Each
----------------------------------------------
STOCKHOLDER severally represents and warrants that the representations and
warranties set forth in this Section 5(B) are true as of the date of this
Agreement and, subject to Section 7.9 hereof, shall be true at the time of Pre-
Closing and on the Closing Date, and that such representations and warranties
survive the Closing Date until the Expiration Date.
5.28 Authority; Validity; Ownership. Such STOCKHOLDER has the full legal
------------------------------
right, power and authority to enter into this Agreement and any other agreements
contemplated by this Agreement to which such STOCKHOLDER is or is contemplated
to be a party. Assuming due authorization, execution and delivery by HDS, this
Agreement and any other agreements contemplated by this Agreement to which such
STOCKHOLDER is or is contemplated to be a party are or will be legal, valid and
binding obligations of each STOCKHOLDER, enforceable in accordance with their
respective terms, except as may be limited by applicable bankruptcy, insolvency,
or similar laws affecting creditors' rights generally. Such STOCKHOLDER owns
beneficially and of record all of the shares of the COMPANY Stock identified on
Annex II as being owned by such STOCKHOLDER, and, except as set forth on
Schedule 5.28 hereto, such COMPANY Stock is owned free and clear of all liens,
encumbrances and claims of every kind.
5.29 Preemptive Rights. Such STOCKHOLDER does not have, or hereby waives,
-----------------
any preemptive or other right to acquire shares of COMPANY Stock or HDS Stock
that such STOCKHOLDER has or may have had, other than rights of any STOCKHOLDER
to acquire HDS Stock pursuant to (i) this Agreement or (ii) any option granted
by HDS.
5.30 No HDS Intention to Reacquire Stock. To the best of such STOCKHOLDER's
-----------------------------------
knowledge, there is no plan or intention by HDS or any HDS affiliate to purchase
or reacquire any of the HDS Stock issued in connection with the Merger.
6. REPRESENTATIONS OF HDS.
HDS represents and warrants that (i) all of the following
representations and warranties are true at the date of this Agreement and shall
be true at the time of Pre-Closing and the Closing Date and that such
representations and warranties shall survive the Closing Date until the
Expiration Date and (ii) solely for purposes of Section 11.2(iv) hereof, and
solely to the extent that in connection with the IPO the STOCKHOLDERS actually
incur liability under the 1933 Act, the 1934 Act, or any other federal or state
securities laws, the representations and warranties set forth herein shall
survive until the expiration of any applicable limitations period.
6.1 Due Organization. HDS and each of the subsidiaries of HDS ("HDS's
----------------
Subsidiaries") set forth in Schedule 6.7 is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and is duly authorized and
-22-
qualified under all applicable laws, regulations, ordinances and orders of
public authorities to carry on its business in the places and in the manner as
now conducted except for where the cumulative effect of all failures to be so
authorized or qualified would not have a material adverse effect on the
business, operations, affairs, properties, assets or condition (financial or
otherwise), of HDS and HDS's Subsidiaries, taken as a whole (an "HDS Material
Adverse Effect"). True, complete and correct copies of the Certificate of
Incorporation and the Bylaws, each as amended, of HDS and HDS's Subsidiaries
(collectively, the "HDS Charter Documents"), certified by the Secretary or an
Assistant Secretary of HDS, are attached hereto as Annex IV. A true, complete
and correct copy of the Certificate of Incorporation, each as amended, of HDS
and each of HDS's Subsidiaries, certified by the Secretary of State of the State
of Delaware, shall be delivered at the Pre-Closing.
6.2 HDS Stock. The HDS Stock to be delivered to the STOCKHOLDERS on the
---------
Closing Date shall constitute valid and legally issued shares of HDS, fully paid
and nonassessable, and except as set forth in this Agreement, will be owned free
and clear of all liens, security interests, pledges, charges, voting trusts,
restrictions, encumbrances and claims of every kind created by HDS, and will be
legally equivalent in all respects to the HDS Stock issued and outstanding as of
the date hereof. The shares of HDS Stock to be issued to the STOCKHOLDERS
pursuant to this Agreement will not be registered under the ▇▇▇▇ ▇▇▇.
6.3 Authority and Validity. The representatives of HDS executing this
----------------------
Agreement and any other agreements contemplated by this Agreement have the
corporate authority to enter into and bind HDS to the terms of this Agreement
and any other agreements contemplated by this Agreement to which HDS is or is
contemplated to be a party. HDS has the full legal right, power and authority
to enter into this Agreement, any other agreements contemplated by this
Agreement to which HDS is or is contemplated to be a party, and the Merger. All
corporate action necessary for the authorization, execution, delivery and
performance by HDS of this Agreement, and also any other agreements contemplated
by this Agreement to which HDS is contemplated to be a party, has been taken.
Assuming due authorization, execution and delivery by the COMPANY and the
STOCKHOLDERS, as applicable, this Agreement and any other agreements
contemplated by this Agreement to which HDS is or is contemplated to be a party
are or will be legal, valid and binding obligations of HDS, enforceable against
HDS in accordance with their respective terms, except as may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally.
6.4 Capital Stock of HDS. Immediately prior to the Closing, the authorized
--------------------
capital stock of HDS will be as set forth in Schedule 6.4. All of the issued
and outstanding shares of HDS are owned beneficially and of record by the
persons set forth on Annex III. All issued and outstanding shares of HDS stock
are duly authorized, validly issued, fully paid and nonassessable. There are no
obligations of HDS to repurchase, redeem or otherwise acquire any shares of HDS
stock. Except as described in the Registration Statement, there are no options,
warrants, equity securities, calls, rights, commitments or agreements of any
character to which HDS or any of its
-23-
subsidiaries are a party or by which they are bound obligating HDS or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of HDS or any of its subsidiaries or
obligating HDS or any of its subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, call, right,
commitment or agreement. To the knowledge of HDS, as of the Closing Date, none
of the STOCKHOLDERS set forth on Annex III will be a party to or subject to any
voting trust, proxy or other agreement or understanding with respect to the
shares of capital stock of HDS owned by such STOCKHOLDER. All of the shares of
HDS Stock to be issued to the STOCKHOLDERS in accordance herewith will be duly
authorized, validly issued, fully paid and nonassessable. All of the shares of
HDS Stock issued to persons set forth on Annex III and, based on the
representations of STOCKHOLDERS contained in this Agreement and in the documents
delivered to HDS pursuant hereto, to STOCKHOLDERS pursuant to this Agreement,
were or will be offered, issued, sold and delivered by HDS in compliance with
all applicable state and federal laws concerning the issuance of securities and
none of such shares were or will be issued in violation of the preemptive rights
of any past or present stockholder. On the Closing Date the capitalization of
HDS will be as set forth in the Registration Statement.
6.5 No Side Agreements. Except as set forth in Schedule 6.5, HDS has not
------------------
entered into any material agreement with any of the Founding Companies or any of
the stockholders of the Founding Companies other than the Other Agreements and
the agreements contemplated by each of the Other Agreements, including the
employment agreements referred to therein. HDS has made available to the
COMPANY copies of all material agreements entered into between (i) HDS and its
affiliates and (ii) HDS and the Founding Companies or any stockholders of the
Founding Companies. Further, HDS will make available to the COMPANY copies of
any of the foregoing agreements entered into between the date hereof and the
Closing Date promptly after such agreements are entered into.
6.6 Subsidiaries. Except for those companies set forth on Schedule 6.6,
------------
HDS does not presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity. HDS is
not, directly or indirectly, a participant in any joint venture, partnership or
other non-corporate entity.
6.7 Business; Financial Information. HDS has not conducted any business
-------------------------------
since the date of its inception, except in connection with this Agreement, the
Other Agreements and the contemplated IPO of HDS Stock. HDS was formed in 1998,
and has historical financial statements only for the partial year ended December
31, 1998. Attached hereto as Schedule 6.7 are HDS's financial statements for
such partial year, 1998. Such HDS financial statements have been prepared in
accordance with generally accepted accounting principles and present fairly the
financial position of HDS as of the dates indicated thereon, and such financial
statements present fairly the results of HDS's operations for the periods
indicated thereon. HDS has no material liabilities, accrued or contingent, other
than those incurred in connection with this Agreement, the Other
-24-
Agreements and the agreements contemplated thereby, the agreements to be filed
as exhibits to the Registration Statement, and the contemplated IPO of HDS
Stock.
6.8 Conformity with Law. HDS (including HDS's Subsidiaries) is not in
-------------------
violation of any law or regulation or any order of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them which (either singly or
in the aggregate) would have an HDS Material Adverse Effect. There are no
claims, actions, suits or proceedings, pending or, to the knowledge of HDS
(including HDS's Subsidiaries), threatened, against or affecting HDS (including
HDS's Subsidiaries), at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over any of them and no notice of any claim,
action, suit or proceeding, whether pending or threatened, has been received by
HDS or any of HDS's Subsidiaries. HDS (including HDS's Subsidiaries) has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in applicable Federal, state and
local statutes, ordinances, orders, approvals, variances, rules and regulations
and is not in violation of any of the foregoing which would have an HDS Material
Adverse Effect.
6.9 No Violations. HDS (including HDS's Subsidiaries) is not (i) in
-------------
violation of any HDS Charter Document or (ii) in default under any material
lease, instrument, agreement, license, or permit to which it is a party or by
which its properties are bound (the "HDS Material Documents"); and, except as
set forth in the Registration Statement, (a) the rights and benefits of HDS
(including HDS's Subsidiaries) under the HDS Material Documents will not be
materially and adversely affected by the transactions contemplated hereby and
(b) the execution of this Agreement and the performance of the obligations
hereunder and the consummation of the transactions contemplated hereby will not
result in any violation or breach or constitute a default under any of the terms
or provisions of the HDS Material Documents, the HDS Charter Documents, any
judgment, decree, order or award of any court, governmental body or arbitrator,
or any law, rule or regulation applicable to HDS or any of HDS's Subsidiaries.
Except as set forth in Schedule 6.9, none of the HDS Material Documents requires
notice to, or the consent or approval of, any third party with respect to any of
the transactions contemplated hereby in order to remain in full force and
effect, nor does this Agreement or any of the transactions contemplated hereby
give rise to any right to termination, cancellation or acceleration or loss of
any right or benefit. The minute books of HDS and each of HDS's subsidiaries as
heretofore made available to the COMPANY are true and correct.
6.10 Taxes.
-----
(i) HDS has no plan or intention for either it or any affiliated
party to purchase or reacquire any of the HDS stock issued in connection with
the Merger.
(ii) HDS and, to the knowledge of HDS, the STOCKHOLDERS and the
COMPANY will each pay their respective expenses, if any, incurred in connection
with the Merger.
-25-
(iii) There is no intercorporate indebtedness existing between HDS
and the COMPANY that was issued, acquired, or will be settled at a discount.
(iv) HDS is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(v) HDS presently intends after the Closing Date to continue the
historic business of the COMPANY or to use a significant portion of the
COMPANY's historic business assets in operations.
(vi) HDS has no plan or intention to sell or otherwise dispose of
any of the assets of the COMPANY acquired in the transaction, except for
dispositions made in the ordinary course of business or transfers described in
Section 368(a)(2)(C) of the Internal Revenue Code.
(vii) To the knowledge of HDS, none of the compensation received by
any STOCKHOLDER-employees of the COMPANY after the Merger will be separate
consideration for, or allocable to, any of their shares of the COMPANY; none of
the shares of HDS Stock received by any STOCKHOLDER-employees in the Merger will
be separate consideration for, or allocable to, any employment agreement; and
the compensation paid to any STOCKHOLDER-employees after the Merger pursuant to
arrangements entered into after the Merger will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
(viii) The proposed Merger is being undertaken for reasons germane
to the business of HDS.
(ix) To the knowledge of HDS, the fair market value of HDS Stock
and other consideration received by each STOCKHOLDER will be approximately equal
to the fair market value of COMPANY Stock surrendered in the exchange.
7. COVENANTS PRIOR TO CLOSING.
7.1 Access and Cooperation; Due Diligence.
(i) Between the date of this Agreement and the Closing Date, the
COMPANY will afford to the officers and authorized representatives of HDS access
to all of the COMPANY's key employees, sites, properties, books and records and
will furnish HDS with such additional financial and operating data and other
information as to the business and properties of the COMPANY as HDS may from
time to time reasonably request. The COMPANY will cooperate with HDS, its
representatives, auditors and counsel in the preparation of any documents or
other material which may be required by this Agreement. The COMPANY shall
provide reasonable access to the COMPANY's key employees, books, records and
other financial data to all Other Companies and their representatives, auditors
and counsel; provided that, the COMPANY will not be required
-------- ----
-26-
to disclose competitively-sensitive information to such Other Companies. HDS,
the STOCKHOLDERS and the COMPANY will treat all information obtained in
connection with the negotiation and performance of this Agreement or the due
diligence investigations conducted with respect to the Other Companies as
confidential in accordance with the provisions of Section 14 hereof and will not
use such information for any purpose other than for the evaluation of the
transactions contemplated by this Agreement. In addition, HDS will cause each of
the Other Companies to enter into a provision similar to this Section 7.1
requiring each such Other Company to keep confidential any information obtained
by such Other Company and to not use such information for any purpose other than
for the evaluation of the transactions contemplated by the applicable Other
Agreement. All Other Companies shall be third-party beneficiaries with respect
to the covenant of the COMPANY and the STOCKHOLDERS restricting the use of
information received by the COMPANY and such STOCKHOLDERS, and the COMPANY shall
be a third-party beneficiary with respect to the covenant of the Other Companies
restricting the use of COMPANY information received by such Other Companies.
(ii) Between the date of this Agreement and the Closing Date, HDS
will afford to the officers and authorized representatives of the COMPANY access
to all of HDS's (including HDS's Subsidiaries') sites, properties, books and
records and will furnish the COMPANY with such additional financial and
operating data and other information as to the business and properties of HDS
(including HDS's Subsidiaries) as the COMPANY may from time to time reasonably
request. HDS will cooperate with the COMPANY, its representatives, engineers,
auditors and counsel in the preparation of any documents or other material which
may be required by this Agreement. The COMPANY will cause all information
obtained in connection with the negotiation and performance of this Agreement to
be treated as confidential in accordance with the provisions of Section 14
hereof.
7.2 Conduct of Business Pending Closing. Between the date of this
-----------------------------------
Agreement and the Closing Date, the COMPANY will, except as set forth in
Schedule 7.2:
(i) carry on its business in substantially the same manner as it
has heretofore, maintain inventory at levels substantially equivalent to those
maintained during the 12 months ended December 31, 1998, and not introduce any
material new method of management, operation or accounting;
(ii) maintain its properties, facilities, equipment and other
assets, 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 material obligations under agreements to
which it is a party relating to or affecting its assets, properties or rights;
(iv) subject to Section 7.6, keep in full force and effect present
insurance policies or other comparable insurance coverage;
-27-
(v) use best efforts to maintain and preserve its business
organization intact, retain its present employees and maintain its 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 applicable to the
COMPANY; and
(vii) maintain compliance with all present debt and lease
instruments and not enter into new or amended debt or lease instruments
involving payments by the COMPANY over $50,000 (individually or in the
aggregate), without the knowledge and consent of HDS (which consent shall not be
unreasonably withheld).
7.3 Prohibited Activities. Except as disclosed in Schedule 7.3, between
---------------------
the date of this Agreement and the Closing Date, the COMPANY has not and,
without the prior written consent of HDS, will not:
(i) make any change in its Articles of Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed on Schedule 5.4;
(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;
(iv) enter into any contract (including any contract to provide
services to customers) or commitment or incur or agree to incur any liability or
make any capital expenditures, except if (x) it is in the ordinary course of
business (consistent with past practice) or (y) when aggregated with all other
such contracts, commitments, liabilities and capital expenditures not in the
normal course of business consistent with past practice, it involves an amount
not in excess of $25,000;
(v) increase the compensation payable or to become payable to
any officer, director, STOCKHOLDER, employee or agent, or make any bonus or
management fee payment to any such person, except (x) bonuses to employees
(other than the STOCKHOLDERS or their affiliates) consistent with past practice
and (y) increases in salaries and commission rates payable to employees (other
than to STOCKHOLDERS and their affiliates), provided that neither the salary nor
any commission rate payable to any employee may increase to more than one
hundred five percent (105%) of such employee's current salary or such commission
rate, whichever is applicable;
(vi) create, assume or permit to exist any mortgage, pledge or
other lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired,
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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 business of the COMPANY, or (2)
liens set forth on Schedule 5.14 hereto or (3) liens for taxes either not yet
due or materialmen's, mechanics', workers', repairmen's, employees' or other
like liens arising in the ordinary course of business;
(vii) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the ordinary course of business;
(viii) negotiate for the acquisition of any business or the start-
up of any new business;
(ix) merge or consolidate or agree to merge or consolidate with
or into any other corporation;
(x) waive any material rights or claims of the COMPANY,
provided that the COMPANY may negotiate and adjust bills in the course of good
--------
faith disputes with customers in a manner consistent with past practice,
provided, further, that such adjustments shall not be deemed to be included in
-------- -------
Schedule 5.11 unless specifically listed thereon;
(xi) commit a material breach or amend or terminate any Material
Contract, or material permit, license or other right of the COMPANY, or make or
terminate any election involving Taxes which would in any way adversely affect
the Tax liability of the COMPANY (or HDS following the Merger) in any taxable
period; or
(xii) enter into any other transaction outside the ordinary
course of its business or prohibited hereunder.
7.4 No Shop. None of the STOCKHOLDERS, the COMPANY or any agent, officer,
-------
director or any representative of any of the foregoing will, 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, directly or indirectly: (i) solicit or initiate, either directly or
indirectly, the submission of proposals or offers from any person for, (ii)
participate in any discussions pertaining to or (iii) furnish any information to
any person other than HDS or the Founding Companies relating to, any acquisition
or purchase of all or a material amount of the assets of, or any equity interest
in, the COMPANY or a merger, consolidation or business combination of the
COMPANY.
7.5 Notice to Bargaining Agents. Prior to the Closing Date, the COMPANY
---------------------------
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements, and shall
provide HDS with proof that any required notice has been sent.
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7.6 Termination of Plans. Prior to the Pricing Date, the COMPANY shall
--------------------
terminate all Plans listed on Schedule 7.6.
7.7 HDS Prohibited Activities. Between the date of this Agreement and the
-------------------------
Closing Date, except as set forth on Schedule 7.7, HDS will not:
(i) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind;
(ii) make any changes in its Certificate of Incorporation or Bylaws
other than one or more amendments to the Certificate of Incorporation to
accomplish a split or reverse split of the HDS Stock (provided that in the event
of any such split or reverse split, the number of shares of HDS Stock to be
delivered to the STOCKHOLDERS, and to the stockholders of the Other Companies,
and the Minimum IPO Price, as set forth on Annex I, will be adjusted
accordingly) or to increase the authorized Capital Stock of HDS to an amount not
to exceed 40 million shares of common stock and 5 million shares of preferred
stock;
(iii) hire or appoint any officer or director or increase the
compensation payable or to become payable to any officer or director; or
(iv) acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to HDS and the HDS Subsidiaries.
7.8 Notification of Certain Matters. The STOCKHOLDERS and the COMPANY
-------------------------------
shall give prompt notice to HDS of (i) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would be likely to cause any
representation or warranty of the COMPANY or the STOCKHOLDERS contained herein
to be untrue or inaccurate in any material respect at or prior to the Closing
and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by such person hereunder. HDS shall give prompt notice to the COMPANY of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty of HDS contained
herein to be untrue or inaccurate in any material respect at or prior to the
Closing and (ii) any material failure of HDS to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. The delivery of any notice pursuant to this Section 7.8 shall not be
deemed to (i) modify the representations or warranties hereunder of the party
delivering such notice, which modification may only be made pursuant to Section
7.9, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
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7.9 Amendment of Schedules. Each party hereto agrees that, with respect to
----------------------
the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until the Pre-Closing to
supplement or amend promptly the Schedules hereto with respect to any matter
hereafter arising or discovered which, if existing or known at the date of this
Agreement, would have been required to be set forth or described in the
Schedules, provided however, that supplements and amendments to Schedules 5.10,
-------- -------
5.11 and 5.14 shall only have to be delivered at the Pre-Closing Date, unless
such Schedule is to be amended to reflect an event occurring other than in the
ordinary course of business. In the event that the COMPANY amends or supplements
a Schedule pursuant to this Section 7.9 in any material respect, and HDS does
not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement at or before the Pre-Closing, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof. In the event that HDS amends or supplements a Schedule pursuant
to this Section 7.9 in any material respect and a majority of the Founding
Companies do not consent (which consent shall not be unreasonably withheld) to
the effectiveness of such amendment or supplement at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For all purposes of this Agreement, including without
limitation for purposes of determining whether the conditions set forth in
Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed
to be the Schedules as amended or supplemented pursuant to this Section 7.9. In
the event that one of the Other Companies amends or supplements a Schedule
pursuant to Section 7.9 of one of the Other Agreements in any material respect,
HDS shall give the COMPANY notice promptly after it has knowledge thereof. If
HDS and a majority of the Founding Companies excluding such Other Company do not
consent (which consent shall not be unreasonably withheld) to the effectiveness
of such amendment or supplement, at or before the Pre-Closing, this Agreement
shall be deemed terminated by mutual consent as set forth in Section 12.1(i)
hereof. For purposes of this Section 7.9, HDS shall be deemed to have given its
consent to the effectiveness of any amendment or supplement to a Schedule if HDS
does not notify the COMPANY of its disapproval within 48 hours after HDS is
notified of such amendment or supplement, and the COMPANY and each Other Company
shall be deemed to have given its consent to the effectiveness of any amendment
or supplement to a Schedule if the COMPANY or such Other Company, as applicable,
does not notify HDS of its disapproval within 48 hours after the COMPANY or such
Other Company, as applicable, is notified of such amendment or supplement.
Except as otherwise provided herein, no amendment of or supplement to a Schedule
shall be made after the Pre-Closing.
7.10 Cooperation in Preparation of Registration Statement. The COMPANY and
----------------------------------------------------
STOCKHOLDERS shall furnish or cause to be furnished to HDS and the Underwriters
all of the information concerning the COMPANY or the STOCKHOLDERS reasonably
requested by HDS and the Underwriters, and will cooperate with HDS and the
Underwriters in the preparation of the Registration Statement and the prospectus
included therein (including audited financial statements prepared in accordance
with generally accepted accounting principles). The COMPANY and the
STOCKHOLDERS agree
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promptly to advise HDS if at any time during the period in which a prospectus
relating to the offering is required to be delivered under the 1933 Act, any
information contained in the prospectus concerning the COMPANY or the
STOCKHOLDERS becomes incorrect or incomplete in any material respect, and to
provide the information needed to correct such inaccuracy.
7.11 Examination of Final Financial Statements. To the extent that
-----------------------------------------
financial statements of the COMPANY for any quarter subsequent to the Balance
Sheet Date are required to be included in the Registration Statement, the
COMPANY shall provide, and HDS shall have had sufficient time to review, the
unaudited balance sheet and statements of income, cash flows and retained
earnings of the COMPANY as of the end of such quarter, disclosing no material
adverse change in the financial condition or results of operations of the
COMPANY. Such financial statements, which shall be deemed to be Financial
Statements (as described in Section 5.9), shall have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted therein). To the extent such
Financial Statements shall be included or reflected in the Registration
Statement, any events or circumstances reflected therein which might constitute
a Material Adverse Effect with respect to the COMPANY shall be deemed to have
been waived by HDS and HDS shall have no rights in respect of such Material
Adverse Effect.
7.12 Maintenance of Liquidity and Limitation of Debt. As of the Closing
-----------------------------------------------
Date, the COMPANY will have (i) adjusted working capital (defined for this
purpose as current assets, excluding inventory (but not excluding inventory
designated for use in special purchases or special (contract) jobs), less short-
term liabilities, excluding the short-term portion of long-term debt and amounts
outstanding under the line of credit from National Bank of the Redwoods secured
by inventory (the "Line of Credit")) of no less than negative $319,000, and (ii)
adjusted long-term liabilities (defined for this purpose as long-term
liabilities plus the short-term portion of long-term debt plus amounts
outstanding under the Line of Credit) not exceeding $279,000. As used in the
preceding sentence, the terms "cash," "receivables," "receivables reserves,"
"short-term liabilities," "short-term portion of long-term debt," "long-term
liabilities" and "short-term portion of long-term debt" all will have the same
meaning as in generally accepted accounting principles, as applied in the
preparation of the COMPANY Financial Statements.
7.13 Employment Matters. HDS shall offer to enter into three (3) year
------------------
employment agreements with each of ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, on
terms previously agreed between the COMPANY and HDS.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.
The obligations of STOCKHOLDERS and the COMPANY with respect to
actions to be taken on the Pricing Date are subject to the satisfaction or
waiver on or prior to the Pricing Date of all of the following conditions. The
obligations of the STOCKHOLDERS and the COMPANY with respect to actions to be
taken on the
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Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of the conditions set forth in Sections 8.1, 8.7 and 8.11.
8.1 Representations and Warranties; Performance of Obligations. All
----------------------------------------------------------
representations and warranties of HDS contained in Section 6 shall be true and
correct in all material respects as of the Pricing Date and the Closing Date
with the same effect as though such representations and warranties had been made
as of that date; each and all of the terms, covenants and conditions of this
Agreement to be complied with and performed by HDS on or before the Pricing Date
and the Closing Date shall have been duly complied with and performed in all
material respects; and a certificate to the foregoing effect dated the Pricing
Date and the Closing Date signed by the President or any Vice President of HDS
and certified by the Secretary or Assistant Secretary of HDS shall have been
delivered to the STOCKHOLDERS.
8.2 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be satisfactory to the COMPANY and its counsel. The
STOCKHOLDERS and the COMPANY shall be satisfied that the Registration Statement
and the prospectus forming a part thereof, including any amendments thereof or
supplement thereto, shall not contain any untrue statement of a material fact,
or omit to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that the
--------
condition contained in this sentence shall be deemed satisfied if (i) HDS shall
have made available to the COMPANY copies of the draft (or changed pages of such
draft) of the Registration Statement prior to the initial filing with the
Securities and Exchange Commission (the "SEC"), each amendment thereto prior to
the effectiveness thereof with the SEC and of any amendment or supplement
thereto after the effectiveness thereof (including any prospectus filed pursuant
to Rule 424 under the ▇▇▇▇ ▇▇▇) and (ii) the COMPANY or STOCKHOLDERS shall have
failed to inform HDS in writing prior to the filing or the effectiveness
thereof, as the case may be, of the existence of an untrue statement of a
material fact or the omission of such a statement of a material fact or other
matter with which they are not satisfied; provided however, that for the period
-------- -------
commencing 72 hours prior to any such filing or effectiveness, HDS can make such
draft or changed pages available by facsimile.
8.3 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock pursuant to
the Registration Statement and no governmental agency or body shall have taken
any other action or made any request of the COMPANY as a result of which the
management of the COMPANY deems it inadvisable to proceed with the transactions
hereunder.
8.4 Stockholders' Release. Each stockholder of HDS immediately prior to
---------------------
the Closing Date who is an officer or director of HDS shall have delivered to
the COMPANY an instrument dated the Closing Date releasing HDS from any and all
claims of such stockholder against HDS and obligations of HDS to such
stockholder other than obligations arising in connection with this Agreement,
the Other Agreements, any
-33-
employment agreements between such stockholder and HDS, any options to purchase
HDS Stock granted by HDS to such stockholder and any right to the issuance of
the shares of HDS Stock set forth in Annex III hereto.
8.5 Opinion of Counsel. The COMPANY shall have received an opinion from
------------------
counsel for HDS, dated the Closing Date, in the form annexed hereto as Annex V.
8.6 Director Indemnification. HDS shall have obtained directors and
------------------------
officers liability insurance from a reputable insurance company in type and
amount as is customary for companies similarly situated, and HDS shall have
entered into an indemnification agreement with each STOCKHOLDER, if any, who
will become a director of HDS, such indemnification agreement to be
substantially in the form attached as Annex VII.
8.7 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC and the underwriters named therein shall have
agreed to acquire on a firm commitment basis such shares of HDS Stock, subject
to the conditions set forth in an underwriting agreement (the "Underwriting
Agreement"), on terms such that the Effective IPO Price (as defined in Annex I)
is equal to or greater than the Minimum IPO Price (as defined in Annex I).
8.8 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made, no action or
proceeding shall have been instituted or threatened to restrain or prohibit the
Merger, and no governmental agency or body shall have taken any other action or
made any request of the COMPANY as a result of which the COMPANY deems it
inadvisable to proceed with the transactions hereunder.
8.9 Good Standing Certificates. HDS shall have delivered to the COMPANY a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
Date, duly issued by the Delaware Secretary of State and the Secretary of State
of each state in which HDS is authorized to do business, showing that HDS is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for HDS, for all periods prior to the Closing, have
been filed and paid.
8.10 No Waivers. HDS shall not have waived any closing condition under any
----------
Other Agreement, unless such condition does not constitute a Material Adverse
Effect (as defined in such Other Agreement) on the Other Company party to such
Other Agreement.
8.11 No Material Adverse Change. No event or circumstance shall have
--------------------------
occurred which would constitute an HDS Material Adverse Effect; and the COMPANY
shall have received a certificate signed by HDS dated the Pricing Date and the
Closing Date to such effect.
-34-
8.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an employment agreement with HDS substantially in the
form of Annex VIII (each an "Employment Agreement").
8.13 Consulting Agreements. Each of the persons listed on Schedule 8.13
---------------------
shall have entered into a consulting agreement with HDS substantially in the
form of Annex IX (each a "Consulting Agreement").
8.14 Leases. Each lease listed on Schedule 8.14 and attached as Annex X
------
(collectively, the "Leases") shall have been assumed by HDS.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.
The obligations of HDS with respect to actions to be taken on the
Pricing Date are subject to the satisfaction or waiver on or prior to the
Pricing Date of all of the following conditions. The obligations of HDS with
respect to actions to be taken on the Closing Date are subject to the
satisfaction or waiver on or prior to the Closing Date of the conditions set
forth in Sections 9.1, 9.3, 9.4 and 9.11.
9.1 Representations and Warranties; Performance of Obligations. All the
----------------------------------------------------------
representations and warranties of the STOCKHOLDERS and the COMPANY contained in
this Agreement shall be true and correct in all material respects as of the
Pricing Date and the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date; each and
all of the terms, covenants and conditions of this Agreement to be complied with
or performed by the STOCKHOLDERS and the COMPANY on or before the Pricing Date
or the Closing Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the STOCKHOLDERS shall have
delivered to HDS a certificate dated the Pricing Date and the Closing Date
signed by them and certified by the Secretary or Assistant Secretary of the
COMPANY to such effect.
9.2 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock pursuant to
the Registration Statement, and no governmental agency or body shall have taken
any other action or made any request of HDS as a result of which the management
of HDS deems it inadvisable to proceed with the transactions hereunder.
9.3 Financial Statements. Prior to the Closing Date, HDS shall have had
--------------------
sufficient time to review consolidated balance sheets of the COMPANY for the
fiscal quarters beginning after December 31, 1998, and the unaudited
consolidated statement of income, cash flows and retained earnings of the
COMPANY for the fiscal quarters beginning after December 31, 1998, and the same
shall not disclose any material adverse change in the financial condition of the
COMPANY or the results of its operations from the COMPANY financial statements
as of the Balance Sheet Date.
-35-
9.4 No Material Adverse Effect. No event or circumstance shall have
--------------------------
occurred which would constitute a Material Adverse Effect; and HDS shall have
received a certificate signed by the STOCKHOLDERS dated the Pricing Date to such
effect.
9.5 STOCKHOLDERS' Release. The STOCKHOLDERS shall have delivered to HDS
---------------------
immediately prior to the Pricing Date an instrument substantially in the form of
Annex XI (each a "Stockholder Release") dated the Pricing Date releasing the
COMPANY from any and all claims of the STOCKHOLDERS against the COMPANY and
obligations of the COMPANY to the STOCKHOLDERS, except for (i) items
specifically identified in the Stockholder Release, (ii) continuing obligations
to the STOCKHOLDERS relating to their employment by the Surviving Corporation
and (iii) indemnity and contribution obligations of the COMPANY or its
successors to an officer or director of the COMPANY prior to the Merger.
9.6 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to HDS.
9.7 Termination of Related Party Agreements. All existing agreements
---------------------------------------
between the COMPANY and the STOCKHOLDERS or business or personal affiliates of
the COMPANY or the STOCKHOLDERS, other than those set forth on Schedule 9.7,
shall have been cancelled.
9.8 Opinion of COMPANY Counsel. HDS shall have received an opinion from
--------------------------
counsel to the COMPANY and the STOCKHOLDERS, dated the Pricing Date,
substantially in the form annexed hereto as Annex VI, and the Underwriters shall
have received a copy of the same opinion addressed to them. Such counsel shall
have been approved by HDS, such approval not to be unreasonably withheld.
9.9 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; the COMPANY
shall have obtained and delivered to HDS such additional consents to the Merger
as HDS may reasonably request, including, without limitation, HDS's receipt on
or prior to the Pricing Date of (a) consents of third parties to those Material
Contracts and Material Leases listed on Schedule 5.23 pursuant to the last
sentence of Section 5.23 and (b) those licenses, franchises, permits or
governmental authorizations set forth on Schedule 5.12 pursuant to the last
sentence of Section 5.12, or assurances reasonably acceptable to it that such
consents, licenses, franchises, permits or governmental authorizations will be
received on the Closing Date or that the failure to receive such consents,
licenses, franchises, permits or governmental authorizations on the Closing Date
will not adversely affect its ability to conduct the business of the COMPANY as
conducted prior to the Closing Date; no action or proceeding shall have been
instituted or threatened to restrain or prohibit the Merger; and no governmental
agency or body shall have taken any other action or made any request of HDS as a
result of which HDS deems it inadvisable to proceed with the transactions
hereunder.
-36-
9.10 Good Standing Certificates. The COMPANY shall have delivered to HDS a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
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 the COMPANY is validly existing, and where applicable, in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes due by the COMPANY for all periods prior to the
Pre-Closing have been filed and paid.
9.11 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC.
9.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an Employment Agreement with HDS.
9.13 Consulting Agreements. Each of the STOCKHOLDERS listed on Schedule
---------------------
8.13 shall have entered into a Consulting Agreement with HDS.
9.14 Leases. Each lessor shall have consented to the assumption of the
------
Leases listed in Schedule 8.14.
9.15 Repayment of Indebtedness. Prior to the Closing Date, the
-------------------------
STOCKHOLDERS shall have repaid the COMPANY in full all amounts owing by the
STOCKHOLDERS to the COMPANY.
9.16 FIRPTA Certificate. The COMPANY and each STOCKHOLDER shall have
------------------
delivered to HDS a certificate to the effect that the COMPANY or such
STOCKHOLDER, as applicable, is not a "foreign person" pursuant to
Section 1.1445-2(b) of the Treasury regulations.
9.17 Insurance. HDS shall be designated as an additional named insured on
---------
all of the COMPANY's insurance policies.
9.18 Nondisturbance Agreements. Each of the lienholders and/or ground
-------------------------
lessors listed in Schedule 9.18 shall have entered into nondisturbance
agreements with HDS substantially in the form of Annex XII (collectively the
"Nondisturbance Agreements").
10. CLOSING COVENANTS AND SPECIAL TAX MATTERS.
10.1 Preservation of Tax and Accounting Treatment. After the Closing Date,
--------------------------------------------
none of the parties shall knowingly undertake any act, or knowingly permit any
subsidiary or affiliate to undertake any act, that would jeopardize the status
of the Merger as a reorganization described in Section 368(a)(1)(A) of the Code.
Such prohibited acts shall include, but not be limited to, the following:
(i) the retirement or reacquisition, directly or indirectly, by
HDS of all or part of the HDS Stock issued in connection with the transactions
contemplated hereby;
-37-
(ii) the provision of any financial and/or economic benefits by HDS
to the STOCKHOLDERS in their capacity as such, except as expressly provided in
this Agreement;
(iii) the disposition of any material part of the assets of the
COMPANY within two years following the Closing Date except (x) in the ordinary
course of business, (y) to eliminate duplicate services or excess capacity or
(z) to address financial matters or performance issues which were not reasonably
expected to occur as of the Closing Date; or
(iv) in the absence of compelling financial concerns not otherwise
present on the Closing Date or other changed circumstances not otherwise
anticipated on the Closing Date, the discontinuance of the historic business of
the COMPANY.
10.2 Disclosure. If, subsequent to the Pricing Date and prior to the
----------
25th day after the date of the final prospectus of HDS utilized in connection
with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or
circumstance which would change (or, if after the Closing Date, would have
changed) a representation or warranty of COMPANY or STOCKHOLDERS in this
Agreement or would affect any document delivered pursuant hereto in any material
respect, the COMPANY and the STOCKHOLDERS shall promptly give notice of such
fact or circumstance to HDS.
10.3 Cooperation in Tax Return Preparation. Each party hereto shall at its
-------------------------------------
own expense cooperate with each other and make available to each other such Tax
data and other information as may be reasonably required in connection with (i)
the preparation or filing of any Tax Return, election, consent or certification,
or any claim for refund, (ii) any determinations of liability for Taxes, or
(iii) an audit, examination or other proceeding with respect to Taxes ("Tax
Data"). Such cooperation shall include, without limitation, making their
respective employees and independent auditors reasonably available on a mutually
convenient basis for all reasonable purposes, including, without limitation, to
provide explanations and background information and to permit the copying of
books, records, schedules, workpapers, notices, revenue agent reports,
settlement or closing agreements and other documents containing the Tax Data
("Tax Documentation"). The Tax Data and the Tax Documentation shall be retained
until one year after the expiration of all applicable statutes of limitations
(including extensions thereof); provided, however, that in the event an audit,
-------- -------
examination, investigation or other proceeding has been instituted prior to the
expiration of an applicable statute of limitations, the Tax Data and Tax
Documentation relating thereto shall be retained until there is a final
determination thereof (and the time for any appeal has expired).
10.4 Tax Return Preparation and Filing.
---------------------------------
(i) HDS will be responsible for preparing and filing (or causing
the preparation and filing of) all income Tax Returns with respect to HDS or the
COMPANY for any taxable period beginning after the Closing Date. The parties
hereto acknowledge
-38-
that the Closing Date shall be the last day of a taxable period of the COMPANY
pursuant to Code Section 381 and the regulations promulgated thereunder.
(ii) STOCKHOLDERS will be responsible for preparing and filing (or
causing the preparation and filing of) all income Tax Returns with respect to
the COMPANY for any taxable period ending on or before the Closing Date. HDS and
the STOCKHOLDERS shall (a) with respect to such income Tax Returns, determine
the income, gain, expenses, losses, deductions, and credits of the COMPANY in a
manner consistent with prior practice and in a manner that apportions such
income, gain, expenses, loss, deductions and credits equitably from period to
period and (b) prepare such Tax Returns in a manner consistent with prior years,
in each case as determined in the good faith judgment of the preparer of such
returns; provided, however, that in all events such Tax Returns shall be
prepared in a manner consistent with applicable laws. HDS shall provide the cash
necessary to pay any Taxes shown to be due on such Tax Returns, but without
prejudice to the right of HDS to seek indemnification for such Taxes from the
STOCKHOLDERS pursuant to Section 11.6, if applicable.
(iii) In order to appropriately apportion any Taxes relating to a
taxable period that includes (but that would not, but for this section, close
on) the Closing Date, the parties hereto will, to the extent permitted by
applicable law, elect with the relevant taxing authority to treat for all
purposes the Closing Date as the last day of a taxable period of the COMPANY,
and such taxable period shall be treated as a Pre-Closing Period (as defined in
Section 10.6(c)) for purposes of this Agreement. In any case where applicable
law does not permit the COMPANY to treat the Closing Date as the last day of a
taxable period, then for purposes of this Agreement, the portion of each such
Tax that is attributable to the operations of the COMPANY for such Interim
Period shall be (i) in the case of a Tax that is not based on income or gross
receipts, the total amount of such Tax for the period in question multiplied by
a fraction, the numerator of which is the number of days in the Pre-Closing
Period portion of such Interim Period, and the denominator of which is the total
number of days in such Interim Period, and (ii) in the case of a Tax that is
based on income or gross receipts, the Tax that would be due with respect to the
Interim Period, if such Interim Period constituted an entire taxable period.
10.5 Reorganization Status Information Reporting. Each of the parties
-------------------------------------------
agrees to file whatever information returns may be required to treat the merger
of HDS and the COMPANY pursuant to this Agreement as a reorganization described
in Section 368(a)(1)(A) of the Code, and, in particular, to comply with the tax
reporting requirements of Section 1.368-3 of the Treasury Regulations.
10.6 Special Definitions Related to Tax Matters. For all purposes of this
------------------------------------------
Agreement related to any Tax matters (including Sections 5.22 and 6.10):
(i) "Affiliate" of a person or entity shall mean a person or
entity that directly or indirectly controls, is controlled by or is under common
control with that person or entity.
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(ii) "Interim Period" shall mean any taxable period commencing
prior to the Closing Date and ending after the Closing Date.
(iii) "Pre-Closing Period" shall mean (i) any taxable period that
begins before the Closing Date and ends on or before the Closing Date and (ii)
the portion of any Interim Period through and including the Closing Date.
(iv) "Post-Closing Period" means any taxable period that begins
after the Closing Date, and, with respect to any Interim Period, the portion of
such Interim Period commencing immediately after the Closing Date.
(v) "Tax" means any federal, state, local, or foreign income, gross
receipts, ad valorem, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Section 59A), customs duties, capital stock, net worth, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
workers compensation, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever imposed by any federal, state, local or foreign government
or any agency or political subdivision of any such government, including any
interest, penalty, or addition thereto, without regard to whether such tax is
disputed or not or arose before, on or after the Closing Date.
(vi) "Tax Returns" means all reports, elections, declarations,
claims for refund, estimates, information statements and returns (including any
schedules and attachments thereto) relating to, or required to be filed in
connection with, any Taxes pursuant to the statutes, rules and regulations of
any federal, state, local or foreign government taxing authority.
(vii) "Taxing Authority" means any governmental agency, board,
bureau, body, department or authority of any United States federal, state or
local jurisdiction, having or purporting to have jurisdiction with respect to
any Tax.
10.7 Directors. The persons named in the Registration Statement shall be
---------
appointed as directors of HDS on or before the Closing Date.
10.8 Release from Guarantees. HDS shall use its best efforts to have the
-----------------------
STOCKHOLDERS released from any and all guarantees of any obligations of the
COMPANY that they personally guaranteed for the benefit of the COMPANY with all
such guarantees of indebtedness being assumed by HDS. HDS agrees to indemnify
the STOCKHOLDERS against any and all claims made by lenders under any such
guarantee which arise as a result of HDS's failure to cause such guarantee to be
released on or prior to the Closing.
10.9 HDS Stock Options. HDS shall prior to the Closing Date adopt an
-----------------
employee stock option plan providing for the grant of options to employees of
HDS as described in the Registration Statement. HDS shall grant stock options to
former employees of the
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COMPANY under such plan (i) having an exercise price equal to the Effective IPO
Price and (ii) having an aggregate exercise price equal to $100,000. In granting
options under such plan to former employees of the COMPANY, the Board of
Directors of HDS or the committee administering such plan, as the case may be,
shall receive recommendations from ▇▇▇▇▇ ▇▇▇▇▇▇▇ as to the employees to receive
such options and the relative size of the awards to the respective employees,
and to the extent deemed reasonable by the Board of Directors or committee, such
recommendations shall be accepted.
10.10 Use of Name. Following the Closing Date, STOCKHOLDERS shall be
-----------
permitted to use the name "▇▇▇▇▇▇▇" in connection with any business that is
unrelated to the commercial kitchen design, construction and/or supply business,
or any similar business, if the use of such name will not result in a likelihood
of confusion to actual or potential vendors or customers of the Company.
11. INDEMNIFICATION.
The STOCKHOLDERS and HDS each make the following covenants that are
applicable to them, respectively:
11.1 General Indemnification by the STOCKHOLDERS. The STOCKHOLDERS
-------------------------------------------
covenant and agree that they, jointly and severally (except with respect to
Sections 5.28 through 5.30, which shall be several), will indemnify, defend,
protect and hold harmless HDS and the COMPANY, at all times from and after the
date of this Agreement until the Expiration Date as defined in Section 5 above,
from and against all claims, damages, actions, suits, proceedings, demands,
assessments, adjustments, costs and expenses (including specifically, but
without limitation, reasonable attorneys' fees and expenses of investigation)
incurred by HDS and the COMPANY as a result of or arising from (i) any breach of
the representations and warranties of the STOCKHOLDERS or the COMPANY set forth
herein or on the schedules or certificates delivered in connection herewith
(other than the representations and warranties provided in Section 5.22, for
which Section 11.6 provides special indemnity provisions); (ii) any
nonfulfillment of any agreement on the part of the STOCKHOLDERS or the COMPANY
under this Agreement; (iii) any liability not disclosed to HDS whether known,
unknown, contingent or otherwise at the time of Closing, arising out of any
acts, events, omissions or transactions occurring prior to the date of Closing;
and (iv) any liability under the 1933 Act, the 1934 Act or other Federal or
state law or regulation, at common law or otherwise, (x) arising out of or based
upon any untrue statement of a material fact relating to the COMPANY or the
STOCKHOLDERS that is provided to HDS or its counsel by the COMPANY or the
STOCKHOLDERS and contained in any preliminary prospectus relating to the IPO,
the Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or (y) arising out of or based upon any
omission to state therein a material fact relating to the COMPANY or the
STOCKHOLDERS that is required to be stated therein or necessary to make the
statements therein not misleading, and not provided to HDS or its counsel by the
COMPANY or the STOCKHOLDERS; provided, however, that such indemnity shall not
-------- -------
inure to the benefit of HDS, the
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COMPANY or the Surviving Corporation to the extent that such untrue statement
(or alleged untrue statement) was made in, or omission (or alleged omission)
occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in
writing, corrected information to HDS counsel and to HDS for inclusion in the
final prospectus, and such information was not so included.
11.2 Indemnification by HDS. HDS covenants and agrees that it will
----------------------
indemnify, defend, protect and hold harmless the COMPANY and the STOCKHOLDERS,
at all times from and after the date of this Agreement until the Expiration
Date, from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) incurred by the COMPANY and the STOCKHOLDERS as a result of or
arising from (i) any breach by HDS of its representations and warranties set
forth herein or on the schedules or certificates attached hereto; (ii) any
nonfulfillment of any agreement on the part of HDS under this Agreement; (iii)
any liabilities which the COMPANY or the STOCKHOLDERS may incur due to HDS's
failure to be responsible for the liabilities and obligations of the COMPANY as
provided in Section 1 hereof (except to the extent that HDS has claims against
the STOCKHOLDERS by reason of such liabilities); or (iv) any liability under the
1933 Act, the 1934 Act or other Federal or state law or regulation, at common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact relating to HDS or any of the Founding
Companies other than the COMPANY (with respect to information furnished to HDS
by the COMPANY) contained in any preliminary prospectus, the Registration
Statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact relating to HDS or any of the Founding
Companies other than the COMPANY that is required to be stated therein or
necessary to make the statements therein not misleading.
11.3 Third Person Claims. (i) Promptly after any party hereto (herein the
-------------------
"Indemnified Party") has received notice of or has knowledge of any claim by a
person not a party to this Agreement ("Third Person"), or the commencement of
any action or proceeding by a Third Person (such claim or commencement of such
action or proceeding being a "Third Party Claim") that could give rise to a
right of indemnification under this Agreement, the Indemnified Party shall, as a
condition precedent to a claim with respect thereto being made against any party
obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof
(herein the "Indemnifying Party"), give the Indemnifying Party written notice of
such Third Party Claim describing in reasonable detail the nature of such Third
Party Claim, a copy of all papers served with respect to that Third Party Claim
(if any), an estimate of the amount of damages attributable to the Third Party
Claim to the extent feasible (which estimate shall not be conclusive of the
final amount of such claim) and the basis for the Indemnified Party's request
for indemnification under this Agreement; provided, however, that the failure of
-------- -------
the Indemnified Party to give timely notice hereunder shall relieve the
Indemnifying Party of its indemnification obligations under this Agreement to
the extent, but only to the extent
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that, such failure materially prejudices the Indemnifying Party's ability to
defend such claim. Within fifteen (15) days after receipt of such notice (the
"Election Period"), the Indemnifying Party shall notify the Indemnified Party
(a) whether the Indemnifying Party disputes its potential liability to the
Indemnified Party under this Section 11 with respect to that Third Party Claim
and (b) if the Indemnifying Party does not dispute its potential liability to
the Indemnified Party with respect to that Third Party Claim, whether the
Indemnifying Party desires, at the sole cost and expense of the Indemnifying
Party, to defend the Indemnified Party against that Third Party Claim.
(ii) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim through counsel of its own choosing which is acceptable to the
Indemnified Party, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, that Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 11.3(ii) and the Indemnified
Party will furnish the Indemnifying Party with all information in its possession
with respect to that Third Party Claim and otherwise cooperate with the
Indemnifying Party in the defense of that Third Party Claim; provided, however,
-------- -------
that the Indemnifying Party shall not enter into any settlement with respect to
any Third Party Claim that purports to limit the activities of, or otherwise
restrict in any way, any Indemnified Party or any affiliate of any Indemnified
Party without the prior consent of that Indemnified Party (which consent may be
withheld in the sole discretion of that Indemnified Party). The Indemnified
Party is hereby authorized, at the sole cost and expense of the Indemnifying
Party, to file, during the Election Period, any motion, answer or other
pleadings that the Indemnified Party shall deem necessary or appropriate to
protect its interests or those of the Indemnifying Party. The Indemnified Party
may participate in, but not control, any defense or settlement of any Third
Party Claim controlled by the Indemnifying Party pursuant to this Section
11.3(ii) and will bear its own costs and expenses with respect to that
participation; provided, however, that if the named parties to any such action
-------- -------
(including any impleaded parties) include both the Indemnifying Party and the
Indemnified Party, and the Indemnified Party has been advised by counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the Indemnifying Party, then the Indemnified
Party may employ separate counsel at the expense of the Indemnifying Party, and,
on its written notification of that employment, the Indemnifying Party shall not
have the right to assume or continue the defense of such action on behalf of the
Indemnified Party.
(iii) If the Indemnifying Party (a) within the Election Period (1)
disputes its potential liability to the Indemnified Party under this Section 11,
(2) elects not to defend the Indemnified Party pursuant to Section 11.3(ii) or
(3) fails to notify the Indemnified Party that the Indemnifying Party elects to
defend the Indemnified Party pursuant to Section 11.3(ii) or (b) elects to
defend the Indemnified Party pursuant to Section 11.3(ii) but fails diligently
and promptly to prosecute or settle the Third Party
-43-
Claim, then the Indemnified Party shall have the right to defend, at the sole
cost and expense of the Indemnifying Party (if the Indemnified Party is entitled
to indemnification hereunder), the Third Party Claim by all appropriate
proceedings, which proceedings shall be promptly and vigorously prosecuted by
the Indemnified Party to a final conclusion or settled. The Indemnified Party
shall have full control of such defense and proceedings. Notwithstanding the
foregoing, if the Indemnifying Party has delivered a written notice to the
Indemnified Party to the effect that the Indemnifying Party disputes its
potential liability to the Indemnified Party under this Section 11 and if such
dispute is resolved in favor of the Indemnifying Party, the Indemnifying Party
shall not be required to bear the costs and expenses of the Indemnified Party's
defense pursuant to this Section 11.3 or of the Indemnifying Party's
participation therein at the Indemnified Party's request. The Indemnifying Party
may participate in, but not control, any defense or settlement controlled by the
Indemnified Party pursuant to this Section 11.3(iii), and the Indemnifying Party
shall bear its own costs and expenses with respect to such participation.
(iv) The parties hereto will make appropriate adjustments for any
Tax benefits, Tax detriments or insurance proceeds in determining the amount of
any indemnification obligation under this Section 11, provided that no
--------
Indemnifying Party shall be obligated to seek any payment pursuant to the terms
of any insurance policy. All indemnification payments under this Section 11
shall be deemed adjustments to the Merger consideration provided for herein.
11.4 Exclusive Remedy. The indemnification provided for in this Section
----------------
11 shall be the exclusive remedy in any action seeking damages or any other form
of monetary relief brought by any party to this Agreement against another party,
provided that nothing herein shall be construed to limit the right of a party,
--------
in a proper case, to seek injunctive relief for a breach of this Agreement.
11.5 Limitations on Indemnification.
------------------------------
(i) The first amounts otherwise payable by one or more STOCKHOLDERS
(whether jointly and severally or severally) pursuant to Sections 11.1 and 11.3
to HDS and the COMPANY will be offset and reduced (but not below zero) by the
Indemnification Threshold. The "Indemnification Threshold" is an amount equal to
one and one-half percent (1.5%) of the sum of (a) the aggregate amount of Cash
Consideration (as defined in Annex I) for all STOCKHOLDERS and (b) the aggregate
value of all HDS Stock received by all STOCKHOLDERS on the Closing Date pursuant
to Section 2.1 of this Agreement. All such amounts otherwise payable by one or
more STOCKHOLDERS in excess of the amount so offset and reduced shall be paid
without offset or reduction pursuant to this Section 11.5(i). Notwithstanding
the foregoing, this Section 11.5(i) shall not apply to claims for
indemnification for breach of Section 7.12 or pursuant to Section 11.6. For
purposes of determining the Indemnification Threshold pursuant to this Section
11.5(i), the HDS Stock shall be valued at the Effective IPO Price, as defined in
Annex I. Claims paid directly by the STOCKHOLDERS (or third parties
-44-
on behalf of the STOCKHOLDERS) shall be excluded for purposes of calculating the
Indemnification Threshold.
(ii) The first amounts otherwise payable by HDS pursuant to
Sections 11.2 and 11.3 to STOCKHOLDERS and the COMPANY will be offset and
reduced (but not below zero) by an amount equal to the Indemnification
Threshold. All such amounts otherwise payable by HDS in excess of the amount so
offset and reduced shall be paid without offset or reduction pursuant to this
Section 11.5(ii).
(iii) Notwithstanding any other term of this Agreement, in no event
shall any STOCKHOLDER be liable under this Agreement, including this Section 11,
for an amount which exceeds the sum of (a) the amount of Cash Consideration for
such STOCKHOLDER, (b) the net proceeds to such STOCKHOLDER from the sale of such
STOCKHOLDER's HDS Stock received pursuant to Section 2.1 hereof prior to the
date that the indemnity obligation of such STOCKHOLDER is paid and (c) the value
of the shares of HDS Stock received by such STOCKHOLDER on the Closing Date
pursuant to Section 2.1 that have not been sold by such STOCKHOLDER prior to the
date that the indemnity obligation of such STOCKHOLDER is paid, valued at the
closing price per share on the trading day prior to the date the indemnification
obligation is paid.
11.6 Special Tax Indemnity Provisions.
--------------------------------
(i) From and after the Closing Date, the STOCKHOLDERS, jointly and
severally, shall indemnify and save HDS and the COMPANY harmless from any and
all Taxes (including without limitation any obligation to contribute to the
payment of a Tax determined on a consolidated, combined or unitary basis with
respect to a group of corporations that includes or included the COMPANY) which
are (a) imposed on any member (other than the COMPANY) of the consolidated,
unitary or combined group which includes or included the COMPANY or (b) imposed
on the COMPANY in respect of its income, business, property or operations or for
which the COMPANY may otherwise be liable (1) for any Pre-Closing Period, (2)
resulting by reason of the several liability of the COMPANY pursuant to Treasury
Regulations section 1.1502-6 or any analogous state, local or foreign law or
regulation or by reason of the COMPANY having been a member of any consolidated,
combined or unitary group on or prior to the Closing Date, (3) resulting from
the COMPANY ceasing to be a member of any affiliated group (within the meaning
of Section 1504(a) of the Code), (4) in respect of any Post-Closing Period,
attributable to events, transactions, sales, deposits, services or rentals
occurring, received or performed in a Pre-Closing Period, (5) in respect of any
Post-Closing Period, attributable to any change in accounting method employed by
the COMPANY during any of the four previous taxable years, (6) in respect of any
Post-Closing Period, attributable to any items of income or gain of an entity
treated as a partnership reported by the COMPANY as a partner, to the extent
such items are properly attributable to periods of the "partnership" ending on
or before the Closing Date, or (7) attributable to any discharge of indebtedness
that may result from any capital contributions by STOCKHOLDERS (or an affiliate
of STOCKHOLDERS) to the COMPANY of any intercompany indebtedness owed by the
COMPANY to any STOCKHOLDER (or an
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affiliate of any STOCKHOLDER). Notwithstanding the foregoing, the STOCKHOLDERS
shall not be obligated to make indemnity payments pursuant to this Section
11.6(i) for federal and state corporate income taxes imposed on the Company for
the tax period ending on the Closing Date to the extent that, but only to the
extent, such income taxes are included within the definition of "short-term
liabilities" for purposes of calculating adjusted working capital as set forth
in Section 7.12.
(ii) From and after the Closing Date, STOCKHOLDERS shall, jointly
and severally, indemnify and save HDS and the COMPANY harmless from any
liability imposed on HDS or the COMPANY (or any affiliate of such companies)
attributable to any breach of a warranty or representation made by STOCKHOLDERS
in Section 5.22.
(iii) From and after the Closing Date, and except as expressly
provided otherwise in this Section 11.6, HDS and the COMPANY shall indemnify and
hold harmless STOCKHOLDERS (x) with respect to any Taxes imposed on HDS or the
COMPANY with respect to any Post-Closing Period and (y) from any liability
imposed on STOCKHOLDERS attributable to any breach of a warranty or
representation made by HDS in Section 6.10.
(iv) To the extent any party to this Agreement is entitled to
indemnification from another party under this Section 11.6, such claim for
indemnification shall include the right to recover any losses, damages,
liabilities, expenses and costs related thereto, including, without limitation,
reasonable attorney's and expert witness fees and other costs of investigating
or attempting to avoid the same or oppose the imposition thereof, together with
interest thereon at the reference rate in effect from time to time at Bank of
America, NT&SA, or its successor, compounded quarterly from the date incurred.
(v) Except to the extent expressly provided to the contrary in
this Section 11.6, the general procedures regarding notice and pursuit of
indemnification claims set forth in Sections 11.1 through 11.5 shall apply to
all claims for indemnification made under this Section 11.6. Notwithstanding the
immediately preceding sentence and any provision of Section 11 to the contrary,
if a claim for indemnification involves any matter covered in this Section 11.6,
then the contest provisions of Section 11.7, as applicable, shall control
regarding the defense and handling of any such third-party claim that could give
rise to an indemnification obligation on the part of one party to another. In
addition, and notwithstanding anything else in Section 11 to the contrary, the
party with the right to control a contest has the right to choose counsel of its
choice regarding such contest. Furthermore, there shall be no limit on (a) the
time period during which a claim for indemnification may be made under this
Section 11.6 or (b) the minimum or maximum amount of indemnity payments that may
be recovered pursuant to this Section 11.6 (other than (1) each party's
obligation to make claims for indemnification promptly and without undue delay
and (2) the aggregate limit for all indemnity payments imposed on a STOCKHOLDER
provided in Section 11.5(iii).
46
(vi) All amounts paid pursuant to this Section 11.6 by one party
to another party (other than interest payments) shall be treated by such parties
as an adjustment to the value of the merger consideration provided pursuant to
this Agreement.
11.7 Special Contest Rights Related to Tax Matters.
---------------------------------------------
(i) The STOCKHOLDERS shall have the sole right (but not the
obligation) to control, defend, settle, compromise or prosecute in any manner
any audit, examination, investigation, hearing or other proceeding with respect
to any Tax Return of the COMPANY involving only Pre-Closing Periods.
(ii) Except as expressly provided to the contrary in this Section
11.7, HDS shall have the sole right (but not the obligation) to control, defend,
settle, compromise, or prosecute in any manner an audit, examination,
investigation, hearing or other proceeding with respect to any Tax Return of the
COMPANY; provided, however, that any liability for Taxes or Tax issues related
-------- -------
to an Interim Period may not be settled or compromised without the consent of
the STOCKHOLDERS, which consent shall not be unreasonably withheld or delayed.
In addition, (i) HDS shall keep the STOCKHOLDERS duly informed of any
proceedings in connection with an Interim Period and (ii) the STOCKHOLDERS shall
be entitled to receive copies of all correspondence and documents relating to
such proceedings and may, at their option, observe such proceedings (including
any associated meetings or conferences).
11.8 Special Notification Requirements Regarding Tax Disputes.
--------------------------------------------------------
HDS a COMPANY shall promptly forward to the STOCKHOLDERS all written
notifications and other written communications from any Tax Authority received
by HDS or the COMPANY relating to any Pre-Closing Period of the COMPANY, and HDS
and the COMPANY shall execute or cause to be executed any power of attorney or
other document or take such actions as requested by the STOCKHOLDERS to enable
the STOCKHOLDERS to take any action STOCKHOLDERS deem appropriate with respect
to any proceedings relating thereto.
1.9 Refunds. A party receiving a refund, credit or similar
-------
offset (or the benefit thereof) with respect to a Tax effectively paid by
another party shall immediately pay an amount equal to such refund, credit,
offset or benefit (including any interest thereon) to the party that effectively
paid the Tax with respect to which the refund, credit, offset or benefit
relates. A party entitled to a deduction on account of a Tax effectively paid by
another party shall pay an amount equal to any Taxes saved by reason of such
deduction to the party that effectively bore the economic cost of the Tax with
respect to which such deduction relates, such amount to be paid immediately
after such saving is realized.
11.10 Optional Payment With Shares. Subject to Section 10.1, any
----------------------------
STOCKHOLDER may make any payment to HDS required by this Section 11 by tendering
shares of HDS Stock obtained by such STOCKHOLDER pursuant to Sections 2 and 3 of
this Agreement, with shares so tendered being valued at the closing price per
share on the trading day prior to the date the indemnification obligation is
paid.
47
No STOCKHOLDER will be entitled to make payment with any other shares of
HDS Stock.
12. TERMINATION OF AGREEMENT.
12.1 Termination. This Agreement may be terminated at any time prior to the
-----------
Closing Date solely:
(i) by mutual consent of the boards of directors of HDS and the
COMPANY;
(ii) at or before the Pre-Closing, by STOCKHOLDERS holding a
majority of each class of COMPANY Stock, by the COMPANY, or by HDS, if the Pre-
Closing has not been completed by June 30, 1999, time being of the essence,
unless the failure to complete the Pre-Closing is due to the willful failure of
the party seeking to terminate this Agreement to perform any of its obligations
under this Agreement to the extent required to be performed by it prior to or on
the Pricing Date;
(iii) at or before the Pre-Closing, by STOCKHOLDERS holding a
majority of each class of COMPANY Stock or by the COMPANY if a material breach
or default shall be made by HDS, or by HDS if a material breach or default shall
be made by one or more STOCKHOLDERS or the COMPANY, in the observance or in the
due and timely performance of any of the covenants, agreements or conditions
contained herein, and such default shall not have been cured and shall not
reasonably be expected to be cured on or before the Pricing Date;
(iv) at or before the Pre-Closing pursuant to Section 7.9 hereof;
(v) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Underwriting Agreement is terminated;
(vi) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock if the Minimum
IPO Price (as defined in Annex I) is not attained at the time of the IPO; or
(vii) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Closing Date does not occur within ten (10) days after the
Pricing Date, time being of the essence.
12.2 Liabilities in Event of Termination. In the event of termination of
-----------------------------------
this Agreement as provided in this Section there shall be no liability or
obligation on the part of any party hereto except to the extent that such
liability is based on the breach by a party of any of its representations,
warranties or covenants set forth in this Agreement, provided however, that
there shall be no liability for a breach of representation or
48
warranty if such representation or warranty was made in good faith and with
no reason to know such representation or warranty was not true at the time made.
13. NONCOMPETITION.
13.1 Prohibited Activities. Except as set forth on Schedule 13.1, the
---------------------
STOCKHOLDERS will not, for a period of four (4) years following the Closing Date
(except that (v) below shall apply to the period ending at the Closing Date if
this Agreement is not terminated prior to the Closing Date, and June 30, 1999 if
this Agreement is terminated prior to the Closing Date), for any reason
whatsoever, directly or indirectly, for themselves or on behalf of or in
conjunction with any other person, persons, company, partnership, corporation or
business of whatever nature:
(i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales representative, in
any business selling any products or services in direct competition with HDS or
any of the subsidiaries thereof, within one hundred (100) miles of where the
COMPANY conducted business prior to the effectiveness of the Merger (the
"Territory");
(ii) contact or solicit any person who is, at that time, an
employee of HDS (including the subsidiaries thereof) in a managerial capacity
for the purpose or with the intent of enticing such employee away from or out of
the employ of HDS (including the subsidiaries thereof), provided that any
--------
STOCKHOLDER shall be permitted to solicit and hire any member of his or her
immediate family;
(iii) contact any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of HDS
(including the subsidiaries thereof), or any affiliate of such a person or
entity, for the purpose of soliciting or selling products or services in direct
competition with HDS;
(iv) contact any prospective acquisition candidate, on any
STOCKHOLDER's own behalf or on behalf of any competitor within the Territory in
the commercial kitchen design and/or supply business, which candidate was either
called upon by HDS (including the subsidiaries thereof) or for which HDS (or any
subsidiary thereof) made an acquisition analysis, for the purpose of acquiring
such entity, provided that no STOCKHOLDER shall be charged with a violation of
--------
this Section unless and until such STOCKHOLDER shall have knowledge or notice
that such prospective acquisition candidate was called upon, or that an
acquisition analysis was made, for the purpose of acquiring such entity;
(v) engage, directly or indirectly, through any intermediary or
otherwise, in any conversations or negotiations with any Other Company regarding
a possible business combination between or among them; provided that such
-------------
prohibition shall not preclude the COMPANY from conducting business in the
ordinary course with
49
any Other Company or from having business combination discussions with any other
party subject to the provisions in this Agreement; or
(vi) except in furtherance of HDS's business, disclose customers,
whether in existence or proposed, of the COMPANY to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever
excluding disclosure to HDS or any of HDS's Subsidiaries.
Notwithstanding the above, the foregoing covenant shall not be
deemed to prohibit any STOCKHOLDER from acquiring as an investment not more than
one percent (1%) of the capital stock of any business whose stock is traded on a
national securities exchange or over-the-counter.
13.2 Damages. Because of the difficulty of measuring economic losses
-------
to HDS as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to HDS for which it would
have no other adequate remedy, each STOCKHOLDER agrees that the foregoing
covenant may be enforced by HDS, in the event of breach by such STOCKHOLDER, by
injunctions and restraining orders.
13.3 Reasonable Restraint. It is agreed by the parties hereto that the
--------------------
foregoing covenants in this Section 13 impose a reasonable restraint on the
STOCKHOLDERS in light of the activities and business of HDS (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of HDS; but it is also the intent of HDS and the STOCKHOLDERS that
such covenants be construed and enforced in accordance with the changing
activities and business of HDS (including the subsidiaries thereof) throughout
the term of this covenant.
It is further agreed by the parties hereto that, in the event that
any STOCKHOLDER who has entered into an Employment Agreement shall thereafter
cease to be employed thereunder, and such STOCKHOLDER shall enter into a
business or pursue other activities not in competition with HDS and/or any
subsidiary thereof, or similar activities or business in locations the operation
of which, under such circumstances, does not violate clause (i) of Section 13.1,
and in any event such new business, activities or location are not in violation
of this Section 13 or of such STOCKHOLDER's obligations under this Section 13,
if any, such STOCKHOLDER shall not be chargeable with a violation of this
Section 13 if HDS and/or any subsidiary thereof shall thereafter enter the same,
similar or a competitive (i) business, (ii) course of activities or (iii)
location, as applicable.
13.4 Severability; Reformation. The covenants in this Section 13 are
-------------------------
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the
50
fullest extent which the court deems reasonable, and the Agreement shall thereby
be reformed.
13.5 Independent Covenant. All of the covenants in this Section 13
--------------------
shall be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any STOCKHOLDER
against HDS (including the subsidiaries thereof), whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by HDS
of such covenants. It is specifically agreed that the period of four (4) years
stated at the beginning of this Section 13, during which the agreements and
covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall
be computed by excluding from such computation any time during which such
STOCKHOLDER is in violation of any provision of this Section 13. The covenants
contained in this Section 13 shall not be affected by any breach of any other
provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 Materiality. The COMPANY and the STOCKHOLDERS hereby agree that
----------
the covenants in this Section 13 are a material and substantial part of this
transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that
------------
they had in the past, currently have, and in the future may possibly have,
access to certain confidential information of the COMPANY, the Other Companies
and/or HDS, such as lists of customers, operational policies, and pricing and
cost policies that are valuable, special and unique assets of the COMPANY's, the
Other Companies' and/or HDS's respective businesses. The STOCKHOLDERS agree that
they will not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except (a) to authorized representatives of HDS, (b) following the Closing, as
required in the course of performing their duties for HDS, and (c) to counsel
and other advisers, provided that such advisers (other than counsel) agree to
--------
the confidentiality provisions of this Section 14.1; provided, further, that
-------- -------
confidential information shall not include (i) such information which becomes
known to the public generally through no fault of the STOCKHOLDERS, (ii)
information required to be disclosed by law or the order of any governmental
authority under color of law, provided that prior to disclosing any information
--------
pursuant to this clause (ii), the STOCKHOLDERS shall, if possible, give prior
written notice thereof to HDS and provide HDS with the opportunity to contest
such disclosure, or (iii) the disclosing party reasonably believes that such
disclosure is required in connection with the defense of a lawsuit against the
COMPANY, the Other Companies and/or HDS. In the event of a breach or threatened
breach by any of the STOCKHOLDERS of the provisions of this section, HDS shall
be entitled to an injunction restraining such STOCKHOLDERS from disclosing, in
whole or in part, such confidential information. Nothing herein shall be
construed as prohibiting HDS from pursuing any other available remedy for such
breach or threatened breach, including the recovery of damages.
51
14.2 HDS. HDS recognizes and acknowledges that it had in the past and
---
currently has access to certain confidential information of the COMPANY, such as
lists of customers, operational policies, and pricing and cost policies that are
valuable, special and unique assets of the COMPANY's business. HDS agrees that,
prior to the Closing, it will not disclose such confidential information to any
person, firm, corporation, association or other entity for any purpose or reason
whatsoever, except (a) to authorized representatives of the COMPANY, (b) to
counsel and other advisers, provided that such advisers (other than counsel)
--------
agree to the confidentiality provisions of this Section 14.2 and (c) to the
Other Companies and their representatives pursuant to Section 7.1(i), unless (i)
such information becomes known to the public generally through no fault of HDS
(ii) disclosure is required by law or the order of any governmental authority
under color of law, provided that prior to disclosing any information pursuant
--------
to this clause (ii), HDS shall, if possible, give prior written notice thereof
to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the COMPANY and/or STOCKHOLDERS. In the event of a
breach or threatened breach by HDS of the provisions of this section, the
COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining HDS
from disclosing, in whole or in part, such confidential information. Nothing
herein shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from
pursuing any other available remedy for such breach or threatened breach,
including the recovery of damages.
14.3 Damages. Because of the difficulty of measuring economic losses
-------
as result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may be
enforced against the other parties by injunctions and restraining orders.
14.4 Survival. The obligations of the parties under this Article 14
--------
shall survive the termination of this Agreement.
15. TRANSFER RESTRICTIONS.
---------------------
15.1 Transfer Restrictions. Except for transfers as set forth in
---------------------
Section 15.2 below to persons or entities who agree to be bound by the
restrictions set forth in this Section 15.1, for a period of one year from the
Closing Date, none of the STOCKHOLDERS shall (i) sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint, or otherwise dispose of (a) any
shares of HDS Stock received by the STOCKHOLDERS in the Merger, or (b) any
interest (including, without limitation, an option to buy or sell) in any such
shares of HDS Stock, in whole or in part, and no such attempted transfer shall
be treated as effective for any purpose; or (ii) engage in any transaction,
whether or not with respect to any shares of HDS Stock or any interest therein,
the intent or effect of which is to reduce the risk of owning the shares of HDS
Stock acquired pursuant to Section 2 hereof (including, by way of example and
not limitation, engaging in put, call,
52
short-sale, straddle or similar market transactions). The certificates
evidencing the HDS Stock delivered to the STOCKHOLDERS pursuant to Section 3 of
this Agreement will bear a legend substantially in the form set forth below and
contain such other information as HDS may deem necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION
PRIOR TO THE FIRST ANNIVERSARY OF THE CLOSING DATE. UPON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER
AGENT) AFTER THE DATE SPECIFIED ABOVE.
15.2 Permitted Transferees. Notwithstanding the provisions of Section
---------------------
15.1, a STOCKHOLDER shall have the right to transfer some or all of the shares
of HDS stock to any one or more of the following, provided that the transferee
agrees to be bound (in a form satisfactory to HDS and its counsel) by the terms
and conditions of this Agreement with respect to any further transfer of such
shares: (a) any family member of a STOCKHOLDER (including, without limitation,
any transfer to a custodian under any gift to minors statute), with family
members being defined as any spouse, lineal descendant or ancestor of a
STOCKHOLDER, (b) any trust which is for the benefit of one or more family
members of a STOCKHOLDER and (c) any corporation, partnership, limited liability
company or other entity (x) of which a majority of the interests therein by
value is owned by the STOCKHOLDER and members of the STOCKHOLDER's family, and
(y) which is and continues to be controlled by the STOCKHOLDER and members of
the STOCKHOLDER'S family for the period set forth in Section 15.1.
16. FEDERAL SECURITIES ACT REPRESENTATIONS.
The STOCKHOLDERS acknowledge that the shares of HDS Stock to be
delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will
not be registered under the 1933 Act and therefore may not be resold without
compliance with the 1933 Act. The HDS Stock to be acquired by such STOCKHOLDERS
pursuant to this Agreement is being acquired solely for their own respective
accounts, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution.
16.1 Compliance with Law. The STOCKHOLDERS covenant, warrant and
-------------------
represent that none of the shares of HDS Stock issued to such STOCKHOLDERS will
be
53
offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the rules and regulations of the SEC. All the HDS Stock
shall bear the following legend in addition to the legend required under Section
15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "1933 ACT") AND MAY ONLY BE SOLD OR
OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE 1933 ACT
AND APPLICABLE SECURITIES LAWS.
16.2 Accredited Investors; Economic Risk; Sophistication. Except as
---------------------------------------------------
disclosed in Schedule 16.2, each STOCKHOLDER represents and warrants that such
STOCKHOLDER is an "accredited investor," as that term is defined in Regulation D
promulgated by the SEC under the 1933 Act. The STOCKHOLDERS are able to bear the
economic risk of an investment in the HDS Stock acquired pursuant to this
Agreement and can afford to sustain a total loss of such investment and have
such knowledge and experience in financial and business matters that they are
capable of evaluating the merits and risks of the proposed investment in the HDS
Stock. The STOCKHOLDERS or their respective purchaser representatives have
received all information they deemed material and had an adequate opportunity to
ask questions and receive answers from the officers of HDS concerning any and
all matters relating to the transactions described herein including, without
limitation, the background and experience of the current and proposed officers
and directors of HDS, the plans for the operations of the business of HDS, the
business, operations and financial condition of the Founding Companies other
than the COMPANY, and any plans for additional acquisitions and the like. All
STOCKHOLDERS who are not "accredited investors" have been represented by
qualified purchaser representatives.
17. REGISTRATION RIGHTS.
17.1 Piggyback Registration Rights. At any time following one year
-----------------------------
after the Closing Date, whenever HDS proposes to register any HDS Stock for its
own or others' account under the 1933 Act for a public offering, other than (i)
registrations of shares to be used as consideration for acquisitions of
additional businesses by HDS and (ii) registrations relating to employee benefit
plans, HDS shall give each of the STOCKHOLDERS prompt written notice of its
intent to do so. Upon the written request of any of the STOCKHOLDERS given
within thirty (30) days after receipt of such notice, HDS shall cause to be
included in such registration all of the HDS Stock issued pursuant to this
Agreement which any such STOCKHOLDER requests; provided that HDS shall have the
-------- ----
right to reduce the number of shares included in such registration to the extent
that inclusion of such shares could, in the opinion of tax counsel to HDS or its
independent auditors, jeopardize the status of the transactions contemplated
hereby and by the Registration Statement as a reorganization described in
Section 368(a)(1)(A) of the Code. In addition, if HDS is advised in writing in
good faith by any managing
54
underwriter of an underwritten offering of the securities being offered pursuant
to any registration statement under this Section 17.1 that the number of shares
to be sold by persons other than HDS is greater than the number of such shares
which can be offered without adversely affecting the offering, HDS may reduce
the number of shares offered for the accounts of such persons to a number deemed
satisfactory by such managing underwriter; provided that such reduction shall be
-------- ----
made first by reducing the number of shares to be sold by persons other than
HDS, the stockholders named on Annex III hereto, the stockholders of the
Founding Companies (the "Founding Stockholders"), and any person or persons who
have required such registration pursuant to "demand" registration rights granted
by HDS; thereafter, if a further reduction is required, it shall be made first
by reducing the number of shares to be sold by the stockholders named on Annex
III hereto and the Founding Stockholders, with such further reduction being made
so that to the extent any shares can be sold by stockholders named in Annex III
hereto and the Founding Stockholders, each such stockholder will be permitted to
sell a number of shares proportionate to the number of shares of HDS Stock owned
by such stockholder immediately after the Closing, provided that if any
stockholder does not wish to sell all shares such stockholder is permitted to
sell, the opportunity to sell additional shares shall be reallocated in the same
manner to those stockholders named in Annex III hereto and the Founding
Stockholders who wish to sell more shares until no more shares can be sold by
such stockholders.
17.2 Demand Registration Rights. At any time after the date one year
--------------------------
after the Closing Date, Founding Stockholders holding shares of HDS Stock issued
pursuant to this Agreement and the Other Agreements which shares have (i) not
been previously registered or sold, (ii) which are not entitled to be sold under
Rule 144(k) (or any similar or successor provision) and (iii) which have an
aggregate market value in excess of $5 million (based on the average closing
price on the five days prior to the date of such request) may request in writing
that HDS file a registration statement under the 1933 Act covering such shares
of HDS Stock then held by such Founding Stockholders (a "Demand Registration");
provided that the aggregate value of HDS Stock proposed to be sold under such
registration statement is not less than $5 million (based on the closing market
price of the HDS Stock within five (5) business days of the date of such
request), and provided further that HDS shall have the right to reduce the
----------------
number of shares included in such registration to the extent that inclusion of
such shares could, in the opinion of tax counsel to HDS or its independent
auditors, jeopardize the status of the transactions contemplated hereby and by
the Registration Statement as a reorganization described in Section 368(a)(1)(A)
of the Code. Within ten (10) days of the receipt of such request, HDS shall
give written notice of such request to all other Founding Stockholders and
shall, as soon as practicable, file and use its best efforts to cause to become
effective a registration statement covering all such shares. HDS will use its
best efforts to keep such Demand Registration current and effective for one
hundred twenty (120) days (or such shorter period during which holders shall
have sold all HDS Stock which they requested to be registered). HDS shall be
obligated to effect only two (2) Demand Registrations for all Founding
Stockholders, and the second request may not be
55
made until at least one (1) year after the effective date of the registration
statement for the first Demand Registration.
Notwithstanding the foregoing paragraph, following such a demand a
majority of the COMPANY's disinterested directors (i.e, directors who have not
---
demanded or elected to sell shares in any such public offering) may postpone the
filing of the registration statement for a thirty (30) day period beyond the
period provided above.
If at the time of any request by the Founding Stockholders for a
Demand Registration HDS has fixed plans to file within sixty (60) days after
such request a registration statement covering the sale of any of its
securities, no registration of the Founding Stockholders' HDS Stock shall be
initiated under this Section 17.2 until ninety (90) days after the effective
date of such registration unless HDS is no longer proceeding diligently to
effect such registration; provided that HDS shall provide the Founding
--------
Stockholders the right to participate in such public offering pursuant to, and
subject to, Section 17.1 hereof.
17.3 Registration Procedures. All expenses incurred in connection
-----------------------
with the registrations under this Article 17 (including all registration,
filing, qualification, legal, printer and accounting fees, but excluding
underwriting commissions and discounts) shall be borne by HDS. In connection
with registrations under Sections 17.1 and 17.2, HDS shall (i) prepare and file
with the SEC as soon as reasonably practicable, a registration statement with
respect to the HDS Stock and use its best efforts to cause such registration to
promptly become and remain effective for a period of at least one hundred twenty
(120) days (or such shorter period during which holders shall have sold all HDS
Stock which they requested to be registered); (ii) use its best efforts to
register and qualify the HDS Stock covered by such registration statement under
applicable state securities laws as the holders shall reasonably request for the
distribution for the HDS Stock; and (iii) take such other actions as are
reasonable and necessary to comply with the requirements of the 1933 Act and the
regulations thereunder.
17.4 Underwriting Agreement. In connection with each registration
----------------------
pursuant to Sections 17.1 and 17.2 covering an underwritten registered public
offering, HDS and each participating holder agree to enter into a written
agreement with the managing underwriters in such form and containing such
provisions as are customary in the securities business for such an arrangement
between such managing underwriters and companies of HDS's size and investment
stature, including indemnification. In a registration under Section 17.1, the
managing underwriters shall be selected by HDS (or, if required by a "demand"
registration right of a stockholder requiring such registration, by such
requiring stockholder), and in a registration under Section 17.2, may be
selected by the holders of a majority of the shares that have demanded to be
included in such registration pursuant to Section 17.2, provided the managing
underwriters so selected by such majority are reasonably acceptable to HDS.
17.5 HDS Stock. For the purposes of this Section 17, HDS Stock issued
---------
pursuant to this Agreement shall include shares issued as a stock dividend or
stock split, or
56
otherwise distributed by HDS to its stockholders without consideration, in
respect of shares of HDS Stock previously issued pursuant to this Agreement.
17.6 Availability of Rule 144. HDS shall not be obligated to register
------------------------
shares of HDS Stock held by any STOCKHOLDER at any time when the resale
provisions of Rule 144(k) (or any similar or successor provision) promulgated
under the 1933 Act are available to such STOCKHOLDER.
17.7 Survival. The provisions of this Section 17 shall survive the Pre-
--------
Closing and Closing Date until December 31, 2002.
18. GENERAL.
18.1 Cooperation. Except as otherwise provided in Section 12, the
-----------
COMPANY, STOCKHOLDERS and HDS shall each (i) attempt in good faith (without
being required to incur unreasonable expense) to cause all conditions to actions
to be taken on the Pricing Date and the Closing Date to be satisfied, and (ii)
deliver or cause to be delivered to the other on the Pricing Date and Closing
Date, and at such other times and places as shall be reasonably agreed to, such
additional instruments, and take such additional actions as can be taken without
unreasonable expense, as any other may reasonably request for the purpose of
carrying out this Agreement. The COMPANY will cooperate and use its reasonable
efforts to have the present officers, directors and employees of the COMPANY
cooperate with HDS on and after the Closing Date in furnishing information,
evidence, testimony and other assistance in connection with any Tax Return
filing obligations, actions, proceedings, arrangements or disputes of any nature
with respect to matters pertaining to all periods prior to the Closing Date.
18.2 Successors and Assigns. This Agreement and the rights of the
----------------------
parties hereunder may not be assigned (except by operation of law) and shall be
binding upon and shall inure to the benefit of the parties hereto, the
successors of HDS, and the heirs and legal representatives of the STOCKHOLDERS.
18.3 Entire Agreement. This Agreement (including the schedules, exhibits
----------------
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the STOCKHOLDERS, the
COMPANY and HDS and supersede any prior agreement and understanding relating to
the subject matter of this Agreement. This Agreement, upon execution,
constitutes a valid and binding agreement of the parties hereto enforceable in
accordance with its terms. Except as otherwise stated herein, this Agreement and
the Annexes hereto may be modified or amended only by a written instrument
executed by the STOCKHOLDERS, the COMPANY and HDS, acting through their
respective officers, duly authorized by their respective Boards of Directors.
Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to
have been disclosed for purposes of any other Schedule required hereby.
57
18.4 Counterparts. This Agreement may be executed simultaneously in
------------
two (2) or more counterparts, each of which shall be deemed an original and all
of which together shall constitute but one and the same instrument.
18.5 Brokers and Agents. Except as disclosed on Schedule 18.5, each
------------------
party represents and warrants that it employed no broker or agent in connection
with this transaction and agrees to indemnify the other against all loss, cost,
damages or expense arising out of claims for fees or commission of brokers
employed or alleged to have been employed by such indemnifying party.
18.6 Expenses. Whether or not the transactions herein contemplated
--------
shall be consummated, (i) HDS will pay the fees, expenses and disbursements of
HDS and its agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement and any amendments thereto,
including all costs and expenses incurred in the performance and compliance with
all conditions to be performed by HDS under this Agreement, including the fees
and expenses of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, LLP, and Howard, Rice, and the costs of
preparing the Registration Statement, and (ii) prior to the Closing, the COMPANY
will pay the fees, expenses and disbursements of counsel and accountants for the
STOCKHOLDERS and the COMPANY incurred in connection with the subject matter of
this Agreement or the Registration Statement. Set forth on Schedule 18.6 hereto
is the estimated amount of such fees, expenses and disbursements to be paid by
the COMPANY pursuant to the foregoing clause (ii). The STOCKHOLDERS shall pay
all sales, use, transfer, real property transfer, recording, gains, stock
transfer and other similar taxes and fees ("Transfer Taxes") incurred in
connection with the transactions contemplated by this Agreement. The
STOCKHOLDERS shall file all necessary documentation and Tax Returns with respect
to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and
not the COMPANY or HDS, will pay all taxes due upon receipt of the consideration
payable to such STOCKHOLDER pursuant to Section 2 hereof.
18.7 Notices. All notices and other communications required or
-------
permitted hereunder shall be effective upon receipt (or refusal of receipt) and
shall be in writing and delivered by depositing the same in United States mail,
addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, by delivering the same in person to
such party or to an officer or agent of such party or by facsimile transmission
(followed by delivery by United States mail).
If mailed to HDS addressed to it at:
Hospitality Design & Supply, Inc.
▇.▇. ▇▇▇ ▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Chief Executive Officer
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
58
with copies to:
Howard, Rice, Nemerovski, Canady, ▇▇▇▇ & ▇▇▇▇▇▇
A Professional Corporation
▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
(a) If mailed to the STOCKHOLDERS, addressed to them at their
addresses set forth on Annex II, with copies to such counsel, if any, as is set
forth with respect to each STOCKHOLDER on such Annex II; if mailed to the
COMPANY, addressed to it at its address set forth on Annex II marked "Personal
and Confidential" with copies to the COMPANY's counsel as set forth on Annex II,
provided that notice to the COMPANY shall only be for notices or communications
--------
required or permitted hereunder prior to the Effective Time of the Merger; or to
such other address or counsel as any party hereto shall specify pursuant to this
Section 18.7 from time to time.
18.8 Governing Law; Forum. This Agreement shall be governed by and
--------------------
construed in accordance with the laws of the State of California, without giving
effect to laws concerning choice of law or conflicts of law. All disputes
arising out of this Agreement or the obligations of the parties hereunder,
including disputes that may arise following termination of this Agreement, shall
be subject to the exclusive jurisdiction and venue of the California State
courts of the City and County of San Francisco, California (or, if there is
federal jurisdiction, then the exclusive jurisdiction and venue of the United
States District Court having jurisdiction over the City and County of San
Francisco). Each party hereby irrevocably and unconditionally consents to the
personal and exclusive jurisdiction and venue of said courts and any objection
that it may now or hereafter have to the venue of any such action or proceeding
in any such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same. THE PARTIES HERETO
EACH HEREBY KNOWINGLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING, CLAIM OR COUNTER-CLAIM, WHETHER IN CONTRACT OR TORT OR OTHERWISE,
ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR ANY OTHER AGREEMENTS
EXECUTED IN CONNECTION HEREWITH.
18.9 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties, covenants and agreements of the parties made herein, or in writing
delivered pursuant to the provisions of this Agreement shall survive the
consummation of the transactions contemplated hereby and any examination on
behalf of the parties until the applicable Expiration Date.
18.10 Exercise of Rights and Remedies. Except as otherwise provided
-------------------------------
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair
59
any such right, power, or remedy, nor shall it be construed as a waiver of or
acquiescence in any such breach or default, or of any similar breach or default
occurring later; nor shall any waiver of any single breach or default be deemed
a waiver of any other breach or default occurring before or after that waiver.
18.11 Time. Time is of the essence with respect to this Agreement.
----
18.12 Reformation and Severability. In case any provision of this
----------------------------
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
18.13 Remedies Cumulative. Except as otherwise provided in Section 11,
-------------------
no right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
18.14 Construction. This Agreement has been negotiated among HDS, the
------------
COMPANY, the STOCKHOLDERS and their respective legal counsel, and legal or
equitable principles that might require the construction of this Agreement or
any provision of this Agreement against the party drafting this Agreement will
not apply in any construction or interpretation of this Agreement.
18.15 Captions. The headings of this Agreement are inserted for
--------
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
60
HOSPITALITY DESIGN & SUPPLY, INC.
By /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇
------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Chief Executive Officer
STOCKHOLDER:
/s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇
---------------------------------
▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ RESTAURANT EQUIPMENT
AND SUPPLY, INC.
By /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇
------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: President
61
ANNEX I
CONSIDERATION TO FOUNDING COMPANY STOCKHOLDERS
Part I
A. Aggregate consideration to be paid to STOCKHOLDERS:
1. COMPANY Stock will be converted into 83,333 shares of common stock of
HDS and $1,000,000 in cash, subject to the hold back of the Reserved
Amount, as set forth in Paragraph B below.
2. The STOCKHOLDERS and the COMPANY will not be obligated to consummate the
Merger if the initial public offering price per share when the
Registration Statement goes effective (the "Effective IPO Price") is
less than $10 per share (the "Minimum IPO Price").
3. The amount of cash paid to STOCKHOLDERS will be offset and reduced by
the amount of any receivables from STOCKHOLDERS as of the Effective
Time.
B. Hold Back of Reserved Amount
1. STOCKHOLDERS and HDS agree that on the Closing Date, HDS shall hold back
from the aggregate purchase price payable to STOCKHOLDERS $162,500 in
cash and 13,542 shares of common stock of HDS (collectively, the
"Reserved Amount"). If the Attributed Pre-Tax Earnings (as defined
herein) are at least $50,000 for the months of March through May, 1999,
the entire Reserved Amount shall be paid to STOCKHOLDER within sixty
(60) days of the date that financial statements become available for
such period. If the Attributed Pre-Tax Earnings are less than $50,000
for such period, then a portion of the Reserved Amount shall be retained
by HDS in an amount equal to 6.5 times the amount by which $50,000
exceeds the Attributed Pre-Tax Earnings, and the remainder, if any,
shall be paid to STOCKHOLDER within said sixty-day period. Payment of
such remainder of the Reserved Amount shall be made in equal proportions
of cash and stock, with the stock valued for such purpose at $12 per
share.
2. "Attributed Pre-Tax Earnings" shall mean that portion of the pre-tax
earnings generated by HDS directly attributable to the operations of the
▇▇▇▇▇▇▇ Restaurant Equipment and Supply, Inc. division (formerly the
operations of the COMPANY), as shown on the financial statements of such
division, calculated in accordance with generally accepted accounting
principles, with respect to the period beginning March 1, 1999 and
ending May 31, 1999.
3. The Reserved Amount, if any, will be paid without interest (even though
interest may be imputed for purposes such as income taxes).
4. Any disputes concerning the amount of the Reserved Amount to be paid to
STOCKHOLDERS or retained by HDS will be finally determined by ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇, LLP; and the STOCKHOLDERS and HDS each will bear one-half of
the fees of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, LLP, for making such determination.
C Consideration to be paid to each STOCKHOLDER:
Percentage
Cash Before Allocation of Any
Shares of Common Offsets & Offsets and
STOCKHOLDER Stock of HDS Reductions(1) Reductions(2)
----------- ---------------- ------------- ------------------
▇▇▇▇▇ ▇▇▇▇▇▇▇ 83,333 $1,000,000 100%
---------- ----------- -----
TOTALS: 83,333 $1,000,000 100%
____________________
(1)For purposes of Section 11.5(i) and 11.5(iii) of the Agreement, the term
"Cash Consideration" means, as to each STOCKHOLDER, the Cash Before Offsets and
Reductions shown for such STOCKHOLDER in this column.
(2)Excluding offsets and reductions pursuant to Part I, paragraph A.3. of
this Annex I.