Exhibit 2
STOCK ACQUISITION AGREEMENT
This Stock Acquisition Agreement (this "Agreement") dated as of February 9,
1999, is by and among Litronic Inc., a Delaware corporation ("Parent"), Litronic
Industries, Inc., a California corporation ("Litronic"), Pulsar Data Systems,
Inc., a Delaware corporation ("Pulsar"), ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇. and ▇▇▇▇▇▇▇ ▇.
▇▇▇▇▇ (collectively the "Pulsar Stockholders"), and ▇▇▇▇ ▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ ▇.
▇▇▇▇, as Trustees of the ▇▇▇▇ ▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇ Living Trust dated
October 9, 1997, ▇▇▇▇▇▇ ▇. ▇▇▇▇ and ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, as Trustees of the ▇▇▇▇▇▇
▇. ▇▇▇▇ and ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇ Living Trust dated March 22, 1982 as amended on
October 14, 1997, ▇▇▇▇▇ ▇. ▇▇▇▇ and ▇▇▇▇▇ ▇. ▇▇▇▇, as Trustees of the Shah
Living Trust dated November 14, 1995, ▇▇▇▇ ▇▇▇▇ as Trustee of the ▇▇▇▇▇ ▇▇▇▇
Trust dated October 16, 1997 and ▇▇▇▇ ▇▇▇▇, as Trustee of the ▇▇▇▇▇▇▇ ▇. ▇▇▇▇
Trust dated October 9, 1997 (each of the foregoing trustees in their capacity as
trustee, the same constituting all of the stockholders of Litronic, being
collectively referred to as the "Litronic Stockholders").
Pursuant to a Reorganization Agreement dated the date hereof by and among
Parent, Litronic and the Litronic Stockholders, at the Reorganization Closing
(as defined below), the Litronic Stockholders will exchange all of their
Litronic Shares (as defined below) for shares of Parent common stock, as a
result of which Litronic will become a wholly owned subsidiary of Parent (the
"Reorganization"). Pursuant to this Agreement, at the Acquisition Closing (as
defined below), the Pulsar Stockholders will exchange all of their Pulsar Shares
for shares of Parent common stock, as a result of which Pulsar will become a
wholly owned subsidiary of Parent (the "Acquisition").
The Boards of Directors of Parent, Litronic and Pulsar (collectively, the
"Companies") have determined that the Reorganization and Acquisition, as
applicable, are in the best interests of their respective stockholders and the
Reorganization and the Acquisition, as applicable, have been approved by the
Companies and their respective stockholders.
Accordingly, the parties hereto, in consideration of the mutual
representations, warranties and covenants contained herein, agree as follows:
1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
1.1 "Acquisition" has the meaning given to it in the preamble.
1.2 "Acquisition Closing" means the closing of the Acquisition as
described in Section 2.1.
1.3 "Acquisition Proposal" has the meaning given to it in Section 8.2
1.4 "Affiliate" has the meaning given to it in Section 3.12(a).
1.5 "Amended Charter" means the Amended and Restated Certificate of
Incorporation of Parent substantially in the form of Exhibit 1.3.
1.6 "Assumed Options" means options issued by Litronic under the Litronic
Industries, Inc. 1998 Stock Option Plan and assumed by Parent at the
Reorganization Closing in accordance with the terms of the Reorganization
Agreement.
1.7 "Average Closing Price" means the average of the closing prices of a
share of Parent Common Stock on each trading day during the stated period, as
recorded on Nasdaq or on such other exchange or market as is then the principal
exchange or market on which Parent Common Stock is traded.
1.8 "Balance Sheet Date" means December 31, 1997.
1.9 "best knowledge", "have knowledge of", "have no knowledge of", "do not
know of" or "to the knowledge of" and similar phrases means (i) in the case of a
natural person, the particular fact was known, or not known, as the context
requires, to such person after diligent investigation and reasonable inquiry by
such person, and (ii) in the case of an entity, the particular fact was known,
or not known, as the context requires, to any stockholder, member of the board
of directors or executive officer of such entity after diligent investigation
and reasonable inquiry.
1.10 "Claim Date" has the meaning given to it in Section 10.2(b)(ii).
1.11 "Code" means the Internal Revenue Code of 1986, as amended to date.
1.12 "Commission" means the Securities and Exchange Commission.
1.13 "Confidential Information" has the meaning given to it in Section
8.3(c).
1.14 "Cut-off Date" has the meaning given to it in Section 10.2(a).
1.15 "Damages" has the meaning given to it in Section 10.1(a)(i).
1.16 "Employment Contracts" means the employment agreements in the forms
attached hereto as Exhibit 8.12.
1.17 "Environmental Laws" has the meaning given to it in Section 3.23.
1.18 "Equitable Principles" has the meaning given to it in Section 3.2.
1.19 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
1.20 "ERISA affiliate" has the meaning given to it in Section 3.20(j).
1.21 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
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1.22 "Exchange Ratio" has the meaning given to it in Section 2.1.
1.23 "Export Control Laws" has the meaning given to it in Section 3.32(a).
1.24 "Financial Advisor" means Bluestone Capital Partners L.P.
1.25 "Financial Statements" means with respect to Litronic, the financial
statements of Litronic delivered to Pulsar as described in Section 3.5; and with
respect to Pulsar means the financial statements of Pulsar delivered to Litronic
as described in Section 5.6.
1.26 "Fraction" means that fraction which has one as its numerator and
which has, as its denominator, the number of Pulsar Shares outstanding
immediately prior to the Acquisition Closing.
1.27 "GAAP" has the meaning given to it in Section 3.5(a).
1.28 "Government" has the meaning given to it in Section 3.33(a).
1.29 "Government Contracts" has the meaning given to it in Section 3.33(a).
1.30 "Hazardous Material" has the meaning given to it in Section 3.23.
1.31 "Indemnified Party" has the meaning given to it in Section
10.1(a)(iv).
1.32 "Investigating Party" has the meaning given to it in Section 8.3(a).
1.33 "IPO" means the initial underwritten public offering of shares of
Parent Common Stock at not less than the Pre-IPO Valuation and generating at
least $30 million in gross proceeds to Parent.
1.34 "IPO Price" means the price at which shares of Parent Common Stock are
sold to the public in the IPO.
1.35 "IRS" has the meaning given to it in Section 3.15(a).
1.36 "ISO" has the meaning given to it in Section 2.5.
1.37 "Liens" has the meaning given to it in Section 3.2.
1.38 "Litronic Balance Sheet" means the balance sheet of Litronic as of
December 31, 1997 included in Litronic's Financial Statements.
1.39 "Litronic Consultant" has the meaning given to it in Section 3.21.
1.40 "Litronic Disclosure Schedule" means the Disclosure Schedule prepared
by Parent and attached hereto and incorporated herein by this reference.
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1.41 "Litronic Disclosure Supplement" has the meaning given to it in
Section 8.7.
1.42 "Litronic Employees" has the meaning given to it in Section 3.21.
1.43 "Litronic Guarantees" has the meaning given to it in Section 3.6.
1.44 "Litronic Indemnified Party" has the meaning given to it in Section
9.1(a)(iii).
1.45 "Litronic Indemnifying Party" has the meaning given to it in Section
9.2.
1.46 "Litronic Option" means an option to purchase Litronic Shares, whether
or not vested or exercisable as of the applicable time as set forth in the
Litronic Disclosure Schedule.
1.47 "Litronic Pension Plan" has the meaning given to it in Section
3.20(c).
1.48 "Litronic Plans" has the meaning given to it in Section 3.13.
1.49 "Litronic Proprietary Information" has the meaning given to it in
Section 3.11(a).
1.50 "Litronic Share" means a share of the Common Stock, no par value, of
Litronic, and "Litronic Shares" means all such shares.
1.51 "Litronic Stockholders" has the meaning given to it in the recitals.
1.52 "Litronic Systems" has the meaning given to it in Section 3.11(c).
1.53 "Litronic Welfare Plan" has the meaning given to it in Section
3.20(d).
1.54 "material" means, with respect to any entity or group of entities, any
material event, change, condition or effect related to the condition (financial
or otherwise), properties, assets, liabilities, business, operations, or results
of operations of such entity or group of entities, and the term "material" shall
be construed accordingly.
1.55 "Material Adverse Effect" means, with respect to any entity or group
of entities, any event, change or effect that is materially adverse to the
condition (financial or otherwise), properties, assets, liabilities, business,
operations, results of operations of such entity and its subsidiaries, taken as
a whole.
1.56 "Material Litronic Contracts" has the meaning given to it in Section
3.13.
1.57 "Material Pulsar Contracts" has the meaning given to it in Section
5.14.
1.58 "Notifying Party" has the meaning given it in Section 8.7.
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1.59 "ordinary course of business" means the usual and customary way in
which Pulsar or Litronic have done business in the past.
1.60 "Parent Common Stock" means the shares of common stock, par value $.01
per share, of Parent.
1.61 "Permits" has the meaning given to it in Section 3.22.
1.62 "Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization or a governmental entity (or any department, agency or political
subdivision thereof).
1.63 "Pre-IPO Valuation" means a valuation for Parent after and taking
into account the Reorganization and the Acquisition based on a total market
capitalization of Parent following the Reorganization and the Acquisition
(assuming no exercise of the Assumed Options), but not including the IPO, of not
less than $60,406,310 (assuming gross IPO proceeds of $30 million), as adjusted
pursuant to Section 2.2.
1.64 "Prospectus" means the prospectus relating to the IPO first filed with
the Commission pursuant to Rule 424(b) and Rule 430A of the rules and
regulations of the Commission under the Securities Act or (if no such filing is
required) as included in the Registration Statement and, if any supplement or
amendment to such prospectus after the date the Registration Statement becomes
effective under the Securities Act, such prospectus as so supplemented or
amended from and after the filing with the Commission of such supplement or the
effectiveness of such amendment.
1.65 "Pulsar Balance Sheet" means the balance sheet of Pulsar as of
December 31, 1997 included in Pulsar's Financial Statements.
1.66 "Pulsar Share" means a share of Common Stock, no par value, of Pulsar,
and "Pulsar Shares" means all such shares.
1.67 "Pulsar Consultants" has the meaning given to it in Section 5.22.
1.68 "Pulsar Disclosure Schedule" means the Disclosure Schedule prepared by
Pulsar and attached hereto and incorporated herein by this reference.
1.69 "Pulsar Disclosure Supplement" has the meaning given to it in Section
8.7.
1.70 "Pulsar Employees" has the meaning given to it in Section 5.22.
1.71 "Pulsar Guarantees" has the meaning given to it in Section 5.7.
1.72 "Pulsar Indemnified Party" has the meaning given to it in Section
10.1.
1.73 "Pulsar Indemnifying Party" has the meaning given to it in Section
10.2.
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1.74 "Pulsar Pension Plans" has the meaning given to it in Section 5.21.
1.75 "Pulsar Plans" has the meaning given to it in Section 5.14.
1.76 "Pulsar Proprietary Information" has the meaning given to it in
Section 5.12(a).
1.77 "Pulsar Stockholders" means ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇. and ▇▇▇▇▇▇▇ ▇.
▇▇▇▇▇.
1.78 "Pulsar Systems" has the meaning given to it in Section 5.12(c).
1.79 "Pulsar Welfare Plans" has the meaning given to it in Section 5.21.
1.80 "Registration Rights Agreement" means a registration rights agreement
in the form attached hereto as Exhibit 1.80.
1.81 "Registration Statement" means the registration statement on Form S-1,
including the related preliminary prospectus, to be filed with the Commission in
connection with the IPO, including all Exhibits and financial statements, in the
form in which it becomes effective under the Securities Act and, if any
amendment thereto after the effective date of any such registration statement,
such registration statement as so amended from and after the effectiveness of
such amendment.
1.82 "Reorganization" has the meaning given to it in the preamble.
1.83 "Reorganization Agreement" has the meaning given to it in the
preamble.
1.84 "Reorganization Closing" means the closing of the Reorganization in
accordance with the terms of the Reorganization Agreement.
1.85 "Representatives" has the meaning given to it in Section 8.3(c).
1.86 "Securities Act" means the Securities Act of 1933, as amended.
1.87 "Taxes" has the meaning given to it in Section 3.15(m).
1.88 "Tax Returns" has the meaning given to it in Section 3.15(m).
1.89 "Third Party Claim" has the meaning given to it in Section 9.3.
1.90 "Underwriter" means, collectively, the managing underwriters of the
IPO.
1.91 "Year 2000 Compliant" has the meaning given to it in Section 3.34.
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2. THE ACQUISITION
2.1 The Acquisition . At the Acquisition Closing, which shall be
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immediately prior to the IPO, upon the terms and subject to the conditions
hereof, each of the Pulsar Stockholders hereby agrees to deliver, and Parent
agrees to accept delivery of, stock certificates, duly endorsed for transfer,
representing all of the Pulsar Shares owned by such Pulsar Stockholder, for and
against delivery of duly executed stock certificates representing shares of
Parent Common Stock, as follows. Subject to Section 2.2, each Pulsar Share shall
be exchanged for that number of shares of Parent Common Stock determined by
multiplying the Fraction times the number obtained after dividing $21,699,380 by
the IPO Price (the "Exchange Ratio"). In lieu of any fractional shares, at the
Closing there shall be paid to each holder of Pulsar Shares who would otherwise
be entitled to receive a fractional share of Parent Common Stock an amount of
cash equal to the amount of such fraction times the IPO Price. Parent's issuance
of Parent Common Stock in exchange for Pulsar Shares is conditioned upon (i)
satisfaction of the conditions set forth in Article 9 and (ii) delivery by the
Pulsar Stockholders of certificates representing the Pulsar Shares, duly
endorsed for transfer. The Acquisition Closing will be held at the offices of
Arent Fox ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇, PLLC, ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇.,
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇-▇▇▇▇ (or such other place as the parties may agree).
2.2 Adjustment to Pre-IPO Valuation. The aggregate value (based on the
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IPO price per share of Parent Common Stock) of the Parent Common Stock exchanged
for the Pulsar Shares shall be equal to 35.9224% of the Pre-IPO Valuation. If
the Financial Advisor in its sole discretion determines, based upon preliminary
discussions with potential investors, that the Pre-IPO Valuation should be
increased or decreased and gives written notice thereof to Litronic and Pulsar
(such notice making specific reference to this Section 2.2), the Litronic
Stockholders and the Pulsar Stockholders agree that the Pre-IPO Valuation shall
be adjusted in accordance with the determination set forth in such notice;
provided, however, that in no event shall a party be obligated to proceed with
the Acquisition if the Pre-IPO Valuation, as so adjusted, is less than $58
million (assuming gross IPO proceeds of $30 million). If any adjustment to the
Pre-IPO Valuation is made pursuant to this Section 2.2 after the Reorganization
Closing, Parent and the Litronic Stockholders agree that the number of shares of
Parent Common Stock held by the Litronic Stockholders shall also be
proportionately adjusted so that the Litronic Stockholders hold in the aggregate
Parent Common Stock with an aggregate value (based on the IPO Price of Parent
Common Stock) equal to 64.0776% of the adjusted Pre-IPO Valuation.
2.3 Tax Consequences. It is intended that the Reorganization and the
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Acquisition shall qualify as a reorganization within the meaning of Section 368
of the Code, and that the Reorganization and the Acquisition shall be tax-free,
except to the extent of cash paid in lieu of fractional shares.
2.4 Stock Legend. Each stock certificate representing the Parent Common
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Stock issued in the Acquisition shall bear a legend in, or substantially in, the
following form:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended to date, and may not be sold,
pledged or otherwise transferred without
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an effective registration under said Act or unless Litronic Inc. shall have
received an opinion satisfactory to Litronic Inc. of counsel satisfactory
to Litronic Inc. that an exemption from registration under such Act is then
available."
2.5 Subsequent Actions. If, at any time after the Acquisition Closing,
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Parent believes or is advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in Parent its right, title or interest
in, to or under any of the rights, properties or assets of Litronic or Pulsar to
be acquired by Parent as a result of, or in connection with, the Acquisition or
otherwise to carry out this Agreement, the officers and directors of Parent
shall, at the sole cost and expense of Parent, be authorized to execute and
deliver, in the name and on behalf of Parent, to carry out all such deeds, bills
of sale, assignments and assurances and to take and do, in the name and on
behalf of Parent, all such other actions and things as may be necessary or
desirable to vest, perfect or confirm any and all right, title and interest in,
to and under such rights, properties or assets in Parent or otherwise to carry
out this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF LITRONIC
AND THE LITRONIC STOCKHOLDERS
Litronic and the Litronic Stockholders, jointly and severally, represent
and warrant to Parent, Pulsar and the Pulsar Stockholders that, except as
expressly provided in the Litronic Disclosure Schedule (but once disclosed in
the Litronic Disclosure Schedule, such matter shall be deemed disclosed for all
intents and purposes) by specific reference to a Section of this Article 3:
3.1 Organization and Authority. Litronic is a corporation duly organized,
--------------------------
validly existing, and in good standing under the laws of the State of California
and has all requisite corporate power and authority to (i) carry on its business
as currently conducted by it and (ii) own, lease and operate its properties.
Litronic is duly qualified or licensed and in good standing as a foreign
corporation, and has at all times when legally required been so qualified or
licensed and in good standing, in those states listed on the Litronic Disclosure
Schedule, which are the only jurisdictions in which a failure to be so qualified
or licensed would, in the aggregate, have a Material Adverse Effect on the
business of Litronic or the nature of the business conducted by it. Litronic has
full power and authority to execute and deliver this Agreement, the
Reorganization Agreement and each other agreement and instrument to be executed
and delivered by it pursuant hereto and to consummate the transactions
contemplated hereby and perform its obligations hereunder. The execution and
delivery of this Agreement and the Reorganization Agreement and the consummation
of the transactions contemplated hereby by Litronic and the performance of
Litronic's obligations hereunder have been duly and validly authorized by all
corporate actions including a unanimous vote of the Board of Directors of
Litronic, and no other corporate proceedings on the part of Litronic are
necessary to authorize this Agreement or the Reorganization Agreement or to
consummate the transactions so contemplated or to perform Litronic's obligations
hereunder. This Agreement and the Reorganization Agreement have been duly and
validly executed and delivered by Litronic and constitute a legal, valid and
binding obligation of Litronic enforceable against it in accordance with its
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
enforcement of creditors' rights generally
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and subject to the rules of law governing specific performance, injunctive
relief and other equitable remedies ("Equitable Principles"). True and complete
copies of the Articles of Incorporation of Litronic and all amendments thereof,
and of the Bylaws, as amended to date, have heretofore been forwarded to Pulsar.
Litronic's minute books contain complete and accurate records of all meetings of
Litronic's stockholders and Board of Directors or written consents in lieu
thereof through the date of this Agreement.
3.2 Capitalization of Litronic. Litronic has authorized capital
--------------------------
consisting of 20,000,000 shares of Common Stock, no par value, and 5,000,0000
shares of undesignated Preferred Stock, no par value. As of the date hereof,
there are 9,999,999 issued and outstanding Litronic Shares and no shares of
Preferred Stock are outstanding. Immediately prior to the Reorganization
Closing, the Litronic Shares issued and outstanding shall consist solely of the
foregoing number plus the number of Litronic Shares, if any, issued between the
date hereof and the Reorganization Closing upon the exercise of Litronic Options
(in each case solely if existing on the date hereof and disclosed on the
Litronic Disclosure Schedule). All of the Litronic Shares are duly authorized,
validly issued, fully paid and non-assessable and are owned of record and
beneficially by the Litronic Stockholders in the amounts listed on the Litronic
Disclosure Schedule. The Litronic Stockholders have good and marketable title to
all of the issued and outstanding shares of Litronic's capital stock, free and
clear of any liens, adverse claims, security interests, pledges, mortgages,
charges or encumbrances of any nature whatsoever ("Liens") and at the
Reorganization Closing will own all of Litronic's capital stock, free and clear
of any and all Liens, including but not limited to, any claims by any present or
former stockholders of Litronic. Litronic has no authorized class of capital
stock other than the Common Stock and Preferred Stock. Litronic does not own any
shares of capital stock or other securities of, or any other interest in, nor
does it control, directly or indirectly, of record or beneficially, any other
corporation, association, joint venture, partnership, or other business
organization. The Litronic Shares have been issued and sold in full compliance
with all applicable federal and state securities laws.
3.3 No Violation of Existing Agreements. The execution and delivery of
-----------------------------------
this Agreement and the Reorganization Agreement, together with all documents and
instruments contemplated herein, the consummation by Litronic of the
transactions contemplated hereby and thereby, including the IPO, the performance
by Litronic of its obligations hereunder and thereunder and compliance with the
terms, conditions and provisions hereof and thereof by Litronic do not (i)
contravene any provisions of Litronic's Articles of Incorporation or Bylaws or
other constituent document of Litronic, each as amended to date; (ii) conflict
with, result in a breach of, constitute a default (or an event that might, with
the passage of time or the giving of notice or both, constitute a default)
under, give rise to any right to terminate, cancel or accelerate, give rise to
any loss of benefit under, or result in the creation of any lien, security
interest or other encumbrance under, any of the material terms, conditions, or
provisions of any indenture, note, bond, license, mortgage, loan, or credit
agreement or any other material agreement or instrument to which Litronic is a
party or by which it or its assets may be bound or affected; (iii) violate or
constitute a material breach of any decision, judgment, writ, injunction,
decree, law, statute, rule or regulation or order of any court or arbitration
board or of any governmental department, commission, board, agency, or
instrumentality, domestic or foreign, by which Litronic is bound or to which it
is subject; (iv) violate any applicable law, rule, or regulation to which
Litronic or any of its property is bound; or (v) interfere or otherwise
adversely affect the
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ability of Litronic to carry on business after the Reorganization Closing on
substantially the same basis as is now conducted by Litronic.
3.4 No Consents or Approvals of Governmental Authorities. No consent or
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approval of, or filing and expiration of a period for disapproval by, any
governmental authority is required for Litronic to consummate the transactions
contemplated by this Agreement or the Reorganization Agreement.
3.5 Financial Statements.
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(a) Litronic heretofore delivered to Pulsar (a) its Financial Statements
consisting of audited balance sheets at December 31, 1995, December 31, 1996 and
December 31, 1997 and the related statements of income, stockholders equity and
cash flows for the three years then ended, which have been audited by KPMG Peat
Marwick LLP, independent certified accountants, and (b) its unaudited balance
sheet at September 30, 1998, statements of income, stockholders equity and cash
flows for nine months ended September 30, 1998. The Financial Statements were
prepared in accordance with generally accepted accounting principles ("GAAP"),
consistently applied, are intended to be consistent in form and substance with
the requirements of Regulation S-X of the Commission under the Securities Act,
and present fairly the financial position of Litronic as of their respective
dates, and the results of operations and cash flows for the periods presented
therein. The books and records of Litronic are complete and correct, have been
maintained in accordance with good business practices, and accurately reflect
the basis for the financial condition and results, subject to year end
adjustments.
(b) Litronic maintains a system of internal accounting controls sufficient
to provide reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and with statutory accounting principles and
to maintain accountability for assets; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.6 Guarantees. The Litronic Disclosure Schedule contains a complete and
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accurate list and summary description of all contractual guarantees currently in
effect heretofore issued by the Litronic Stockholders to any bank or other
lender in connection with any credit facilities extended by such creditors to
Litronic or issued by the Litronic Stockholders in connection with any other
contracts or agreements for the benefit of Litronic (collectively, the "Litronic
Guarantees") including the name of such creditor and the amount of the
indebtedness, together with any interest and fees currently owing and expected
to be outstanding as of the Reorganization Closing and the Acquisition Closing.
3.7 Absence of Undisclosed Liabilities. Except as set forth or reserved
----------------------------------
against in the Litronic Balance Sheet or where provision has been made for
adequate reserves for Taxes, Litronic (a) did not have as of the Balance Sheet
Date any material liability or obligation of any nature,
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whether accrued, absolute, contingent, or otherwise and whether due or to become
due, including without limitation, liabilities that may become known or arise
after the date hereof and which relate to transactions entered into or any state
of facts existing on or before the Balance Sheet Date and which would be
required under GAAP to be shown in such balance sheet or referenced in the notes
thereto, and (b) has not incurred since the Balance Sheet Date any such
liability or obligation except in the ordinary course of business. Without
limiting the foregoing, and except as specifically reserved against in the
Litronic Balance Sheet, Litronic has no material liability or obligation of any
nature, whether accrued, absolute, contingent, or otherwise, to the Government
for any adjustment or reimbursement of any amount previously paid to Litronic by
such entity under any agreement relating to the provision of any goods or
services by Litronic.
3.8 Conduct of Business Since the Balance Sheet Date. Since the Balance
------------------------------------------------
Sheet Date, Litronic has not taken (or suffered the occurrence of) any of the
following actions or events, agreed to take any of the following actions, or
taken any action that would otherwise result in a Material Adverse Effect to
Litronic (in each case except directly in connection with this Agreement):
(a) entered into any transaction, agreement or commitment other than in the
ordinary course of business; or
(b) entered into any transaction, agreement, or commitment, suffered the
occurrence of any event or events, or experienced any change in financial
condition, business, results of operations, prospects or otherwise, (i) that has
interfered or is reasonably likely to interfere with the normal and usual
operations of Litronic's business or (ii) that, singly or in the aggregate, has
resulted or is reasonably likely to result in a Material Adverse Effect; or
(c) incurred any indebtedness for borrowed money, or assumed, guaranteed,
endorsed or otherwise become responsible for the obligations of any other Person
(except to endorse checks for collection for deposit in the ordinary course of
business), or made any loan or advance to any Person; or
(d) mortgaged, pledged or otherwise encumbered, or, other than in the
ordinary course of business, sold, transferred or otherwise disposed of, any of
the properties or assets of Litronic, including any cancelled, released,
hypothecated or assigned indebtedness owed to Litronic, or any claims held by
Litronic, except for purchase money mortgages arising in the ordinary course of
business and statutory liens arising or incurred in the ordinary course of
business with respect to which the underlying obligations are not delinquent; or
(e) made any investment of a capital nature or entered into a commitment
for such investment either by purchase of stock or securities, contributions to
capital, property transfer, or otherwise, or by the purchase of any property or
assets of any other Person, except in each case in the ordinary course of
business; or
(f) declared, set aside or paid any dividend or other distribution (whether
in cash, stock, property or any combination thereof) in respect of the capital
stock of Litronic, or redeemed or otherwise acquired, directly or indirectly,
any shares of capital stock of Litronic, excepting only
11
dividends, distributions and redemptions that have not resulted and will not
result, directly or indirectly, in a Material Adverse Effect on Litronic; or
(g) paid any long-term liability, otherwise than in accordance with its
terms; or
(h) paid any bonus compensation to any officer, director, shareholder or
employee of Litronic except in the ordinary course of business consistent with
past practice or otherwise increased the compensation paid or payable to any of
the foregoing; or
(i) sold, assigned, or transferred any trademarks, trade names, logos,
copyrights, formulae or other intangible assets; or
(j) contracted with or committed to any third party (i) to sell any capital
stock of Litronic, (ii) to sell any material assets of Litronic other than in
the ordinary course of business, (iii) to effect any merger, consolidation or
other reorganization of Litronic, or (iv) to enter into any agreement with
respect thereto; or
(k) changed the costing system or depreciation methods of accounting for
assets in any material respect; or
(l) written up or written down the carrying value of its assets other than
accounts receivable or inventories in the ordinary course of business.
3.9 Title to Assets. Litronic owns no real property. Litronic has good and
---------------
clear record title to all properties owned by it, including, without limitation,
all property reflected in the Litronic Balance Sheet, other than property
disposed of in the ordinary course of business subsequent to the Balance Sheet
Date (none of such dispositions being individually or collectively materially
adverse), free and clear of any Liens, except (a) as reflected in the Litronic
Financial Statements, or as specified in the notes thereto, (b) liens for taxes
not yet due or payable or being contested in good faith by appropriate
proceedings and as to which appropriate reserves have been set aside in the
Litronic Balance Sheet and (c) such imperfections of title and encumbrances, if
any, as do not materially detract from the value or interfere with the use of
the properties subject thereto or affected thereby, or otherwise materially
impair business operations.
3.10 Leases. A list and brief description of leases of personal property
------
involving rental payments within any 12 month period in excess of $25,000, as to
which Litronic is a party, either as lessor or lessee, are set forth in the
Litronic Disclosure Schedule. All such leases are valid and, to the knowledge of
the Litronic, enforceable in accordance with their respective terms except as
may be limited by Equitable Principles.
3.11 Intellectual Property.
---------------------
(a) The Litronic Disclosure Schedule contains a correct and complete list
of all United States and foreign brand marks and brand name registrations,
copyrights, copyright registrations and copyright applications, trademark
registrations and applications for registration, patents and patent
12
applications, trademarks, service marks and trade names used in Litronic's
business as presently conducted and all licenses, assignments and releases of
the intellectual property rights of others in works embodied in its products and
all applications for all inventions, discoveries, improvements, formulae,
technology, know-how and other intellectual property, proprietary rights and
trade secrets relating to the business and all licenses and other agreements to
which Litronic is a party or otherwise bound which relate to any of the
intangibles or the inventions or Litronic's use thereof in connection with
Litronic's business (the "Litronic Proprietary Information"). There is (i) to
Litronic's knowledge, no existing or threatened infringement, misuse or
misappropriation of Litronic Proprietary Information by others and (ii) no
pending or threatened claim by Litronic against others for infringement, misuse
or misappropriation of any Litronic Proprietary Information. The Litronic
Proprietary Information is sufficient to carry on the business of Litronic as
presently conducted, and Litronic has the right to use, free and clear of claims
or rights of others, all Litronic Proprietary Information required for its
products or services or its business as presently conducted. Litronic is the
exclusive owner of all right, title and interest in the Litronic Proprietary
Information as purported to be owned by Litronic, and the Litronic Proprietary
Information is valid and in full force and effect. Neither the present business
activities of Litronic nor its products infringe, misuse or misappropriate any
patent, trademark, trade name, service ▇▇▇▇, trade secret, copyright or other
intellectual property right of others, and to Litronic's knowledge no one is
claiming nor is it anticipated that anyone will claim any such infringement,
misuse or misappropriation. To the knowledge of Litronic, the Litronic
Proprietary Information is presently valid and protectable and is not part of
the public domain or knowledge, nor, to the knowledge of Litronic, has any of it
been used, divulged or appropriated for the benefit of any person other than
Litronic to the detriment of Litronic. Litronic has not granted to any person
any license or other right to use in any manner any of the Litronic Proprietary
Information, whether or not requiring the payment of royalties, except as set
forth in the Litronic Disclosure Schedule. Litronic has no obligation still
outstanding to compensate other persons for the use of any Litronic Proprietary
Information or for the sale of any service or product comprising or derived from
Litronic Proprietary Information. No university, government agency (whether
federal or state) or other organization which sponsored research and development
conducted by Litronic has any claim of right to or ownership of or other
encumbrance upon the Litronic Proprietary Information.
(b) Litronic has taken reasonable measures to protect and preserve the
security, confidentiality and value of the Litronic Proprietary Information,
including its trade secrets and other confidential information. To Litronic's
knowledge, no employee or consultant of Litronic has used any trade secrets or
other confidential information of any other person in the course of his or her
work for Litronic. To Litronic's knowledge, Litronic is not making unlawful use
of any confidential information or trade secrets belonging to any past or
present employees of Litronic. Neither Litronic nor, to the knowledge of
Litronic, any of Litronic's employees or consultants have any agreements or
arrangements with former employers of such employees or consultants relating to
confidential information or trade secrets of such employers or are bound by any
consulting agreement relating to confidential information or trade secrets of
another entity. To Litronic's knowledge, the activities of Litronic's employees
on behalf of Litronic do not violate any agreements or arrangements known to
Litronic which any such employees have with former employers or any other entity
to whom such employees may have rendered consulting services.
13
(c) Litronic owns or has the right to use pursuant to lease, license,
sublicense, agreement or permission all computer hardware, software and
information systems listed on the Litronic Disclosure Schedule and necessary for
the operation of the business of Litronic as presently conducted (collectively,
"Litronic Systems"). Each Litronic System owned or used by Litronic immediately
prior to the Reorganization Closing will be owned or available for use by Parent
on identical terms and conditions immediately subsequent to the Reorganization
Closing and the Acquisition Closing. With respect to each Litronic System owned
by a third party and used by Litronic pursuant to lease, license, sublicense,
agreement or permission, to Litronic's knowledge: (a) the lease, license,
sublicense, agreement or permission covering the Litronic System is legal,
valid, binding, enforceable, and in full force and effect; (b) the lease,
license, sublicense, agreement or permission will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the Reorganization Closing and the Acquisition Closing; (c) no party to any such
lease, license, sublicense, agreement or permission is in breach or default, and
no event has occurred with which notice or lapse of time would constitute a
breach or default, and permit termination, modification or acceleration
thereunder; (d) no party to any such lease, license, sublicense, agreement or
permission has repudiated any provision thereof; (e) Litronic has not granted
any sublicense, sublease or similar right with respect to any such lease,
license, sublicense, agreement or permission; (f) Litronic's use and continued
use of the Litronic Systems does not and will not interfere with, infringe upon,
misappropriate or otherwise come into conflict with, any intellectual property
rights of third parties as a result of the continued operation of Litronic's
business.
3.12 Obligations to or from Affiliates.
---------------------------------
(a) All material transactions between Litronic and any stockholder,
executive officer or director of Litronic, or any Affiliate of any stockholder,
executive officer or director of Litronic, entered into on or after the Balance
Sheet Date have been conducted on an arm's-length basis on terms not materially
different than would be obtained if the transaction had been between Litronic
and an unrelated party. Except for debts or other outstanding obligations
reflected on the Litronic Balance Sheet, there are no debts or other obligations
of Litronic to, or to Litronic from, any stockholder or any executive officer or
director, or any Affiliate of a stockholder, executive officer or director of
Litronic. As used herein, "Affiliate" of a person means any member of the
immediate family of such person or any entity in which such person or any such
family member is an executive officer or owner of more than five percent of
beneficial interest in the outstanding equity securities.
(b) The Litronic Disclosure Schedule sets forth all information that would
be required to be provided under Item 404 of Regulation S-K of the Commission
under the Securities Act if a registration statement on Form S-1 were filed by
Litronic with the Commission on the date hereof.
3.13 Material Contracts. The Litronic Disclosure Schedule lists all
------------------
material leases, contracts, instruments, agreements or commitments (whether
written or oral) relating to the conduct of the business of Litronic (the
"Material Litronic Contracts"). Litronic has delivered to Pulsar true and
correct copies of each written Material Litronic Contract and a written
description, accurate in all material respects, of each oral arrangement so
listed. Without limiting the generality of the
14
foregoing, the aforesaid list includes all material contracts, agreements and
instruments of the following types to which Litronic is a party:
(a) labor union contracts, together with a list of all labor unions
representing or, to Litronic's knowledge, attempting to represent employees of
Litronic;
(b) (i) all employee benefit plans (as defined in Section 3(3) of ERISA and
subject to ERISA), maintained, administered or contributed by Litronic or any of
its ERISA affiliates, (ii) all supplemental retirement, severance, sabbatical,
medical, dental, vision care, disability, employee relocation, cafeteria benefit
(Section 125 of the Code) or dependent care (Section 129 of the Code), life
insurance or accident insurance, bonus, pension, profit sharing, savings,
deferred compensation, or incentive plans, programs, policies, commitments,
practices, or arrangements maintained, administered or contributed by Litronic
or any of its ERISA affiliates which are not employee benefit plans as otherwise
covered under clause (i) above, (iii) any stock option, stock purchase, phantom
stock, stock appreciation rights or similar stock-oriented compensation programs
maintained, administered or contributed by Litronic or any of its ERISA
affiliates, (iv) other fringe or employee benefit programs or arrangements
maintained, administered or contributed by Litronic or any of its ERISA
affiliates that apply to senior management of Litronic and that do not generally
apply to all employees which are not employee benefit plans otherwise covered
under clause (i) above, (v) any current or former employment or executive
compensation or severance agreements, written or otherwise, as to which
unsatisfied obligations of Litronic or any of its ERISA affiliates remain for
the benefit of or relating to any present or former employee, consultant or
director of Litronic or any of its ERISA affiliates which are not employee
benefit plans otherwise covered under clause (i) above, and (vi) all
arrangements which would otherwise be described in clauses (i) through (v) above
except for the fact that they are maintained, administered or contributed to by
Litronic or any of its ERISA affiliates primarily for non-U.S. citizens or non-
U.S. residents, together with a list of all pensioned employees of Litronic or
any of its ERISA affiliates or obligations to provide any pensions hereafter
other than pursuant to the plans, programs, policies, commitments, practices or
arrangements hereinbefore in this item described (all of items described in this
Section 3.13 being collectively referred to as the "Litronic Plans" or
individually as a "Litronic Plan");
(c) employment contracts or agreements, consulting agreements, agreements
providing for termination or severance benefits, non-competition agreements,
non-disclosure agreements, contracts for professional personal services,
contracts with other persons engaged in sales or distributing activities, and
advertising contracts;
(d) written or oral agreements, understandings and arrangements of any kind
with any officer, director, employee, shareholder or agent of Litronic relating
to present or future compensation or other benefits available to such person or
otherwise, together with a list of the names and current annual salary rates of
all present officers and employees of Litronic whose current salary rate is
$50,000 or more and any bonuses paid or payable to each such person for the 1997
fiscal year;
15
(e) indentures, loan agreements, notes, security agreements, mortgages,
conditional sales contracts, leases of real or personal property, contracts for
the purchase or sale of real or personal property, and agreements for financing;
(f) property, casualty, crime, directors and officers, and other forms of
insurance;
(g) all bank accounts and safety deposit boxes identifying all authorized
signatories, together with a list of all effective powers of attorney granted by
Litronic to anyone;
(h) agreements, contracts or other arrangements to which Litronic is a
guarantor, surety or endorser;
(i) contracts, agreements, commitments, arrangements or understandings
providing for the purchase or sale of all or substantially all of Litronic's
requisites of a particular product from a single supplier or to a single
customer;
(j) contracts, agreements, commitments, arrangements or understandings
which limit the freedom of Litronic from competing in any line of business or
with any person or entity;
(k) license agreements (as licensor or licensee);
(l) leases of real and personal property with a term of more than one year
(regardless of whether Litronic is lessor or lessee); and
(m) contracts, agreements, instruments, arrangements or understandings
which have not been included in items (a) through (l) above involving payment by
or to Litronic of more than $25,000 or not terminable without penalty or
otherwise materially affecting the assets, financial condition, properties or
business of Litronic.
All of the Material Litronic Contracts are in full force and effect. Except to
the extent that a Material Adverse Effect on Litronic's financial condition,
assets, liabilities, earnings, business or prospects would not result if the
following were not true: (A) Litronic and each other party to each of the
Material Litronic Contracts have performed all the obligations required to be
performed by them to date, have received no notice of default and are not in
default (with due notice or lapse of time or both) under any of the Material
Litronic Contracts, except as otherwise set forth in the Litronic Disclosure
Schedule; (B) Litronic has no knowledge of any breach or anticipated breach by
any other party to any of the Material Litronic Contracts; (C) there exists no
actual or, to the knowledge of Litronic, threatened termination, cancellation or
limitation of the business relationship of Litronic with any party to any
Material Litronic Contract; and (D) consummation of the transactions
contemplated hereby and performance by Litronic of its obligations hereunder
shall not require the consent or permission of any party to any Material
Litronic Contract or permit any party to terminate, suspend or alter the terms
of any Material Litronic Contract, except as set forth in the Litronic
Disclosure Schedule.
16
3.14 Litigation. There are no actions, suits, causes of action, claims,
----------
litigation, arbitration, administrative hearings or other form of proceedings or
disputes of any kind pending or, to the best knowledge of Litronic and the
Litronic Stockholders, threatened against Litronic or its officers or directors
(in their capacities as such) or involving, affecting or relating to its
capacity to complete the transactions contemplated herein, Litronic in any
court, at law or in equity, or before any arbitration board or any governmental
department, commission, board, bureau, agency or instrumentality; nor has
Litronic been, nor is it, subject to any orders, stipulations, awards, fines,
judgments, decrees or injunctions the effect of which in the aggregate would
have a Material Adverse Effect on the business or financial position of Litronic
including, but not limited to, limitation, restriction, regulation, enjoinment
or prohibition of any business practice of Litronic in any area or the
acquisition by Litronic of any properties, assets or businesses. Litronic does
not know or have grounds to know of any basis for any such action, suits, or
other form of proceeding or disputes or of any governmental investigation
relating to Litronic or its business.
3.15 Taxes.
-----
(a) (i) All Tax Returns of, relating to or which include Litronic which are
required to have been filed have been filed on a timely basis with the
appropriate authorities and all such Tax Returns are true, correct and complete
in all respects; (ii) all Taxes required to have been paid by Litronic
(including amounts collected or withheld from third parties required to have
been paid over to the appropriate authorities) have been paid in full on a
timely basis to the appropriate authorities or contested in good faith or
adequate provision made for payment; and (iii) all Taxes or other amounts
required to have been collected or withheld by Litronic have been timely and
properly collected or withheld. Litronic has duly withheld all payroll taxes,
FICA and other federal, state and local taxes and other items requiring to be
withheld by it from employer wages, and has duly deposited the same in trust for
or paid over to the proper taxing authorities. Litronic has not executed or
filed with any taxing authority any agreement extending the periods for the
assessment or collection of any Taxes, and is not a party to any pending or, to
the best knowledge of Litronic and the Litronic Stockholders, threatened, action
or proceeding by any governmental authority for the assessment and collection of
Taxes. Within the past three years, the United States federal income tax returns
of Litronic have not been audited by the Internal Revenue Service (the "IRS"),
nor has any state's taxing authority audited any merchandise, personal property,
sales or use tax returns of Litronic.
(b) (i) No taxing authority has asserted in writing to Litronic any
adjustment, deficiency, or assessment that could result in additional Tax for
which Litronic is or may be liable; (ii) there is no pending audit, examination,
investigation, dispute, proceeding or claim for which Litronic has received
notice relating to any Tax for which Litronic is or may be liable; (iii) no
statute of limitations with respect to any Tax for which Litronic is or may be
liable has been waived or extended; (iv) the due date of any Tax Returns that
Litronic is required to file has not been extended; and (v) Litronic is not a
party to any Tax sharing or Tax allocation agreement, arrangement or
understanding, except as otherwise set forth in the Litronic Disclosure
Schedule.
(c) There are no liens on any of the assets of Litronic which arose in
connection with any failure or asserted failure to pay any Tax, other than liens
for current Taxes not yet due and payable.
17
(d) Litronic is not a party to any compensation contract, agreement, plan
or arrangement that, individually or collectively, could give rise to any
payment that would not be deductible by reason of Section 162, 280G or 404 of
the Code.
(e) Litronic has not been a member of an affiliated group filing a
consolidated federal income Tax Return, and Litronic is not liable for the Taxes
of any person under Treasury Regulation 1.1502-6 (or any similar provision of
state, local, or foreign law) as transferee or successor, by contract or
otherwise.
(f) Copies of (i) correspondence or other documents relating to any Tax
examinations, (ii) extensions of statutory limitations, (iii) the federal, state
and local income Tax Returns and franchise Tax Returns of Litronic, and (iv)
correspondence between Litronic and all taxing authorities for its last three
(3) taxable years previously have been furnished to Pulsar and such Tax Returns
are true, correct and complete.
(g) The provision for Taxes, if any, shown on the Litronic Balance Sheet is
adequate to cover the aggregate liability of Litronic arising out of facts or
circumstances occurring, incurred in respect of or measured by income of
Litronic, arising out of transactions on or prior to the Balance Sheet Date for
all Taxes.
(h) Litronic has filed federal and state, and if applicable, local Tax
Returns for each period ending on or prior to the Reorganization Closing.
(i) Neither Litronic nor any Litronic Stockholder is a foreign person, as
such term is referred to in Section 1445(f)(3) of the Code.
(j) None of the assets of Litronic constitutes property that Litronic, will
be required to treat as being owned by another person pursuant to the "Safe
Harbor Lease" provisions of Section 168(f)(8) of the Code prior to repeal by the
Tax Equity and Fiscal Responsibility Act of 1982.
(k) Litronic has not at any time consented, and the Litronic Stockholders
will not permit Litronic to elect, to have the provisions of Section 341(f)(2)
of the Code apply to it.
(l) Litronic is not a personal service corporation subject to the
provisions of Section 269A of the Code.
(m) For purposes of this Agreement:
"Tax Returns" means all returns, amended returns, declarations,
reports, estimates, information returns and statements regarding Taxes which are
or were filed or required to be filed under applicable law, whether on a
consolidated, combined, unitary or individual basis.
"Taxes" means any federal, state, county, local, foreign or other tax,
fee, levy, assessment or other governmental charge, including without limitation
any income, franchise, gross receipts, property, sales, use, hotel, bed,
services, value added, withholding, social security, import
18
duties, estimated, accumulated earnings, alternative or add-on minimum,
transfer, license, privilege, payroll, profits, capital stock, employment,
unemployment, excise, severance, stamp, occupancy, customs or occupation tax,
and any interest, additions to tax fines, penalties in connection, and other
related liabilities therewith.
3.16 Absence of Material Events. Except as provided in this Section 3.16
--------------------------
and in the Litronic Disclosure Schedule, since the Balance Sheet Date the
business of Litronic has been conducted in the ordinary course of business
(including borrowing money for working capital purposes only) and there has not
been (a) any material adverse change in the business, affairs, operations,
earnings or financial condition of Litronic nor, to the best of Litronic's
knowledge, are any such changes threatened, anticipated or contemplated; (b) any
actual or, to Litronic's knowledge, threatened, anticipated or contemplated
damage, destruction, loss, conversion, termination, cancellation, default or
taking by eminent domain or other action by governmental authority which has
materially affected or may hereafter materially affect the properties, assets,
business affairs, cash flow, results of operation or prospects of Litronic; (c)
any material and adverse pending or, to Litronic's knowledge, threatened,
anticipated or contemplated dispute of any kind with any material customer,
supplier, source of financing, employee, landlord, subtenant or licensee of
Litronic, or any pending or, to Litronic's knowledge, threatened, anticipated or
contemplated occurrence or situation of any kind, nature or description which is
reasonably likely to result in any reduction in the amount, or any change in the
terms or conditions, of business with any material customer, supplier or source
of financing; (d) any pending, or to Litronic's knowledge, threatened,
anticipated or contemplated occurrence or situation of any kind, nature or
description materially and adversely affecting the properties, assets, business,
affairs or prospects of Litronic; (e) any waivers by Litronic of any right, or
cancellation of any debt or claim, of substantial value; (f) any declarations,
set asides or payments of any dividend or other distributions or payments in
respect of Litronic capital stock; or (g) any changes in the accounting
principles or methods which are utilized by Litronic.
3.17 Insurance. The Litronic Disclosure Schedule contains a complete and
---------
correct list and summary description of all contracts and policies of insurance
relating to any of Litronic's assets or business, to which Litronic is an
insured party, beneficiary or loss payable payee and a complete list of
insurance relating to the Litronic Stockholders to which Litronic is a
beneficiary or loss payable payee. Such policies are in full force and effect,
all premiums due and payable with respect thereto have been paid, and no notice
of cancellation or termination has been received by Litronic with respect to any
such policy.
3.18 Banks; Power of Attorney. The Litronic Disclosure Schedule contains a
------------------------
complete and correct list showing (a) the names of each bank in which Litronic
has an account or safe deposit box and the names of all persons authorized to
draw thereon or who have access thereto, and (b) the names of all persons, if
any, holding powers of attorney from Litronic.
3.19 Absence of Improper Payments. Since January 1, 1994, Litronic: (a) has
----------------------------
not made any contributions, payments or gifts of its property to or for the
private use of any governmental official, employee or agent where either the
payment or the purpose of such contribution, payments or gifts is illegal under
the laws of the United States, any state thereof or any other jurisdiction
(foreign or domestic); (b) has not established or maintained any unrecorded fund
or asset for any
19
purpose, or has made any false or artificial entries on its books or records for
any reason; (c) has not made any payments to any person where Litronic intended
or understood that any part of such payment was to be used for any other purpose
other than that described in the documents supporting the payment; or (d) has
not made any contribution, or has reimbursed any political gift or contribution
made by any other person, to candidates for public office, whether federal,
state or local, where such contribution would be in violation of applicable law.
3.20 ERISA.
-----
(a) The Litronic Disclosure Schedule contains a complete list of all
Litronic Plans.
(b) None of the Litronic Plans is a "multiemployer plan" as such term is
defined in Section 3(37) of ERISA, a "multiple employer plan" as such term is
defined in Section 413 of the Code, or a "defined benefit pension plan" as such
term is defined in Section 3(35) of ERISA. With respect to each Litronic Plan,
Litronic has delivered to Pulsar true and complete copies of the following for
each Litronic Plan, if applicable: (i) the plan document and any amendments
thereto; (ii) the summary plan description and any summary material
modifications; (iii) the trust agreement, insurance policy or other instrument
relating to the funding of Litronic Plans; (iv) the annual reports (Form 5500
series) and accompanying Schedules for Litronic Plans filed with the IRS or
Department of Labor for the last three years; (v) the audited financial
statements for Litronic Plans for the last three years; and (vi) the most recent
determination letters issued by the IRS with respect to Litronic Plans that are
intended to qualify under Section 401(a) of the Code; and (vii) any governmental
rulings, notices, determination, and opinions (and pending requests therefor).
The foregoing documents accurately reflect all of the terms of such Litronic
Plans including, without limitation, any agreement or provision which would
limit the ability of any entity to make prospective amendments to or to
terminate any of Litronic Plans.
(c) Each Litronic Plan which is an "employee pension benefit plan" as
defined in Section 3(2) of ERISA ("Litronic Pension Plan") has been determined
by the IRS to be qualified under Section 401(a) of the Code, and each such plans
remains so qualified, and to Litronic's knowledge after due inquiry, no facts or
circumstances exist which could result in the revocation of such qualification.
(d) Each Litronic Plan which is an "employee welfare benefit plan" as
defined in Section 3(1) of ERISA ("Litronic Welfare Plan") which is intended to
meet the requirements for tax-favored treatment under the Code to Litronic's
knowledge after due inquiry meets such requirements.
(e) Without limiting the generality of this Section 3.20, each Litronic
Plan has been administered in accordance with its terms and the Code, and each
Litronic Pension Plan and Litronic Welfare Plan has been administered in all
material respects in accordance with ERISA. No facts or circumstances exist
which might give rise to any liability of Litronic or ERISA affiliate, any of
the Litronic Stockholders or Pulsar. Litronic has paid all amounts required
under applicable law, any Litronic Pension Plan and any Litronic Welfare Plan to
be paid as a contribution to each Litronic Pension Plan and Litronic Welfare
Plan through the date hereof. Litronic has set aside adequate
20
reserves to meet contributions which are not yet due under any Litronic Pension
Plan and Litronic Welfare Plan.
(f) Neither Litronic nor any other "disqualified person" or "party in
interest" (as such terms are defined in Section 4975 of the Code and Section
3(14) or ERISA, respectively) has engaged in any action or taken any other
action with respect to any Litronic Plan which would subject Litronic or any
ERISA affiliate, Pulsar or the Litronic Stockholders to (i) any tax, penalty or
liability for a prohibited transaction under ERISA or the Code, (ii) any tax
under Code Sections 4971, 4972, 4976, 4977, or 4979, or (iii) a penalty under
ERISA Section 502(c) or 502(l).
(g) Litronic, to the extent it is a fiduciary with respect to any Litronic
Pension Plan or Litronic Welfare Plan, has not breached any of its
responsibilities or obligations imposed upon fiduciaries under ERISA or the Code
which could result in any claim being made under, by or on behalf of any
Litronic Pension Plan or Litronic Welfare Plan or any participant or beneficiary
thereof other then benefit claims in the ordinary course, in any such event
which could give rise to liability to Litronic or any of its ERISA affiliates.
(h) Each Litronic Welfare Plan which is a group health plan within the
meaning of Code Section 5000(b)(1) complies with and in each and every case has
complied with the applicable requirements of Code Section 4980B and Part 6 of
Title I of ERISA.
(i) Except as set forth in the Litronic Disclosure Schedule, no Litronic
Plan, other than a Litronic Pension Plan, provides benefits, including death,
life, health or medical benefits (whether or not insured), with respect to
current or former employees of Litronic and any of its subsidiaries beyond their
retirement or other termination of service with Litronic, any of its
subsidiaries or ERISA affiliates, other than coverage mandated by applicable
law.
(j) For purposes of this Section 3.20 and Section 5.21, "ERISA affiliate"
means any entity which is considered one employer with Litronic or Pulsar,
respectively, under Section 4001 of ERISA or Section 414 of the Code.
3.21 Labor Matters. A true and complete list of all of Litronic's officers,
-------------
employees (the "Litronic Employees") and consultants (the "Litronic
Consultants") and their respective salaries, wages, other compensation, dates of
employment, date and amount of last salary or compensation increase, and
positions has been provided to Pulsar by Litronic. There are no material
disputes, employee grievances, or disciplinary actions pending or, to the
knowledge of Litronic, threatened by or between Litronic and any of the Litronic
Employees or Litronic Consultants. With respect to the Litronic Employees and
Litronic Consultants, Litronic has complied in all material respects with all
provisions of all laws relating to the employment of labor and has no liability
for any arrears of wages or taxes or penalties for failure to comply with any
such law or for any severance or termination payments of any type. None of the
Litronic Consultants are or were (while classified by Litronic as Litronic
Consultants) employees of Litronic for any purpose whatsoever. No employees of
Litronic are or ever have been represented by a bargaining representative with
respect to Litronic, and no election or proceedings relating to the labor
relations of Litronic is pending or, to the best of Litronic's knowledge,
threatened. Litronic has not had any material union activity or had any
21
material labor disruption or material dispute with its employees of any kind,
nature or description at any time heretofore. All personnel policies and manuals
of Litronic are listed on the Litronic Disclosure Schedule and true and complete
copies thereof have been provided to Pulsar. No Litronic Employee or Litronic
Consultant shall have the right to receive from Pulsar a severance payment or
other payment in the nature thereof if his or her employment is terminated by
Pulsar following the Acquisition Closing, whether such right arises as a matter
of contract, past policy or understanding, by operation of law, or otherwise.
3.22 Permits: Compliance with Law. Litronic possesses all franchises,
----------------------------
permits, licenses, certificates, approvals and other authorizations ("Permits")
necessary to own or lease and operate its properties and to conduct its business
as now conducted, except for incidental Permits that would be readily obtainable
without undue burden in the event of any lapse, termination, cancellation, or
forfeiture or that if not obtained would not have a Material Adverse Effect on
Litronic's business. All such material Permits are in full force and effect,
and, to the knowledge of Litronic, no suspension or cancellation of any of them
is threatened, and no material Permits will be materially and adversely affected
by the consummation of the Reorganization or Acquisition. Litronic has not
failed nor is it failing to comply with any applicable law, rule, regulation,
order, zoning or other ordinance, statute, injunction, decree or any other
requirement of any court or governmental or administrative body or agency, where
such failure would have a Material Adverse Effect on Litronic's business, and
there are no proceedings pending or, to Litronic's knowledge, threatened, nor
has Litronic received any notice, regarding any such failure.
3.23 Environmental Matters. Litronic is, and to Litronic's knowledge all
---------------------
real property owned or otherwise occupied by Litronic is and has been at all
times when so owned or occupied, in material compliance with all applicable
existing federal, state and local laws and regulations relating to protection of
human health or the environment or imposing liability or standards of conduct
concerning any Hazardous Material (as hereinafter defined) ("Environmental
Laws"), except, in each case, where such noncompliance, singly or in the
aggregate, would not have a Material Adverse Effect on the condition, financial
or otherwise, or the earnings, business affairs or business prospects of
Litronic. No Hazardous Materials are stored, utilized or otherwise present on
any property owned or otherwise occupied by Litronic, excepting only (x)
cleaning supplies and similar materials customarily used by businesses in
Litronic's industry in quantities consistent with such use, and (y) petroleum
products that are used for heating (including water heating) in facilities
located on such property, none of which are stored in underground storage tanks,
or that are present in vehicles located on such property. Litronic has not
released, and has not affirmatively consented to any release of, Hazardous
Materials on, under or affecting any real property during the period of
Litronic's ownership, occupation or operation of such property (including its
participation in or exercise of any degree of control over the management of any
business located on such property). The term "Hazardous Material" means (a) any
"hazardous substance" as defined in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended through the date hereof, (b)
any "hazardous waste" as defined by the Resource Conservation and Recovery Act,
as amended through the date hereof, (c) any petroleum or petroleum product, (d)
any polychlorinated biphenyl and (e) any pollutant or contaminant or hazardous,
dangerous or toxic chemical, material, waste or substance regulated under or
within the meaning of any other Environmental Law as amended through the date
hereof. For purposes of this Section 3.23, real
22
property owned by third parties but "occupied" by Litronic shall mean only that
portion of such property as is either leased by Litronic or in fact is otherwise
physically occupied or utilized by Litronic. To the knowledge of Litronic, there
is no alleged or potential liability (including, without limitation, alleged or
potential liability for investigatory costs, cleanup costs, governmental
response costs, natural resources damages, property damages, personal injuries
or penalties) of Litronic arising out of, based on or resulting from any act or
event that constitutes a violation or alleged violation of any Environmental
Law, which alleged or potential liability (i) arises out of or relates to acts
or events occurring during Litronic's possession or occupation of the applicable
property, and (ii) singly or in the aggregate, would have a Material Adverse
Effect on the condition, financial or otherwise, or the earnings, business
affairs or business prospects of Litronic.
3.24 Corporate Records. The corporate record books of Litronic are in all
-----------------
material respects in good order, complete, accurate, up to date, with all
necessary signatures, and set forth all meetings and actions taken by the
shareholders and directors, and all votes of the shareholders or directors set
forth in certificates furnished to anyone at any time heretofore conform in all
material respects to the votes contained in the record book of Litronic.
3.25 Condition of Assets. All premises, fixtures and equipment owned or
-------------------
used by Litronic and material to its business have been properly maintained and
are in good operating order and repair, free from known defects in construction
or design, sound and properly functioning (normal wear and tear expected),
usable in the ordinary course of business and not obsolete, and (to Litronic's
knowledge in the case of leased property) in material compliance with all
applicable zoning, building and fire codes and all other applicable laws, rules,
regulations and requirements of governmental authorities and the fire insurance
rating association having jurisdiction.
3.26 Accounts Receivable. All of the accounts receivable of Litronic shown
-------------------
or reflected on the Litronic Balance Sheet, less the reserve for doubtful
accounts and notes in the amount shown on the Litronic Balance Sheet, are valid
and enforceable claims and subject to no setoff or counterclaim. All of the
accounts receivable of Litronic shown or reflected on the Litronic Balance Sheet
and as at December 31, 1998 (as reflected on Litronic's balance sheet as of such
date, when and as delivered to Pulsar) will be collected in full within 60 days
thereafter except to the extent of the reserve for doubtful accounts shown on
the Litronic's balance sheet or posted on the books of Litronic of such date.
The reserve for doubtful accounts as at December 31, 1998 will not be in excess
of said reserve as shown on the Litronic Balance Sheet. Litronic has no accounts
or loans receivable from any of its directors, officers or employees.
3.27 Charter Documents. Litronic has heretofore delivered to Pulsar copies
-----------------
of its Articles of Incorporation, as amended to date, certified by the
appropriate governmental authority, and copies of its Bylaws, as amended to
date, and a list of the officers and directors of Litronic in office, all as
certified by its Secretary.
3.28 Disclosure of all Material Matters.
----------------------------------
(a) No statement of a material fact set forth in this Agreement (including
without limitation all information in the Financial Statements, the Litronic
Disclosure Schedule and the other
23
Schedules, Exhibits and attachments hereto, taken as a whole) with respect to
Litronic or the Litronic Stockholders is false or misleading in any material
respect, nor does this Agreement (including, without limitation all information
in the Financial Statements, the Litronic Disclosure Schedule and the other
Schedules, Exhibits, and attachments hereto, taken as a whole) omit to state a
material fact necessary in order to make the statements made or information
disclosed, in the light of the circumstances under which they were made or
disclosed, not misleading.
(b) Litronic will promptly provide all information relating to its business
or operations necessary for inclusion in the Registration Statement to satisfy
all requirements of applicable state and Federal securities laws. Litronic shall
be solely responsible for any statement, information or omission in the
Registration Statement relating to Litronic or its Affiliates based upon written
information furnished by it.
3.29 Customers and Suppliers. The Litronic Disclosure Schedule sets forth a
-----------------------
complete and correct list, as of December 31, 1998, of (a) the 20 largest
customers of the business and (b) the 20 largest suppliers of the business. To
Litronic's knowledge, there are no (i) threatened cancellations by the aforesaid
customers or suppliers with respect to Litronic's business, (ii) outstanding
disputes by such customers or suppliers with Litronic and its business, or (iii)
any material or adverse changes in the business relationship between Litronic
and any such customer or supplier.
3.30 Product Warranty. Substantially all of the products manufactured,
----------------
sold, leased and delivered by Litronic have conformed in all material respects
with all applicable contractual commitments and all express and implied
warranties and, to Litronic's knowledge, Litronic has no material liability
(whether known or unknown, asserted or unasserted, absolute or contingent,
accrued or unaccrued, liquidated or unliquidated, and whether due or to become
due) for repair or replacement thereof or other damages in connection therewith.
Substantially all of the products manufactured, sold, leased and delivered by
Litronic are subject to standard terms and conditions of sale or lease. Litronic
has delivered to Pulsar copies of the standard terms and conditions of sale or
lease for Litronic (containing applicable guaranty, warranty and indemnity
provisions). The Litronic Disclosure Schedule sets forth the aggregate expenses
incurred by Litronic in fulfilling its obligations under its guaranty, warranty
and indemnity provisions during each of the fiscal years and interim period
covered by Litronic's Financial Statements and Litronic knows of no reason why
such expenses should significantly increase as a percentage of sales in the
future.
3.31 Year 2000 Compliance. Litronic's information technology is Year 2000
--------------------
Compliant. "Year 2000 Compliant" means, with respect to a company's information
technology, the information technology is designed to be used prior to, during
and after the calendar year 2000 A.D., and the information technology used
during each such time period will accurately receive, provide and process
date/time data (including calculating, comparing and sequencing) from, into and
between the 20/th/ and 21/st/ centuries, including the years 1999 and 2000, and
leap-year calculations and will not malfunction, cease to function, or provide
invalid or incorrect results as a result of date/time data, to the extent that
other information technology, used in combination with Litronic's information
technology, properly exchanges date/time data with it. For purposes of this
Section 3.31, Litronic's information technology shall include computer software,
computer firmware, computer hardware
24
(whether general or specific purpose), equipment including embedded programmable
microchips or controllers and other similar or related items of automated,
computerized, or software systems that are used or relied on by Litronic in the
conduct of its business.
3.32 Export Control and Related Matters.
----------------------------------
(a) Litronic is in compliance in all material respects with all United
States and foreign Export Control Laws. "Export Control Laws" means all federal,
state, local and foreign laws (including common law), statutes, codes,
ordinances, rules, regulations, executive orders or other requirements, now or
hereafter in effect, and in each case as amended or supplemented from time to
time, and any judicial or administrative interpretations thereof, relating to
the export or reexport of commodities and technologies. Export Control Laws
includes the Export Administration Act of 1979 (24 U.S.C. Sections 2401 - 2420);
the International Emergency Economic Powers Act (50 U.S.C. Sections 1701 -
1706); the Trading with the Enemy Act (50 U.S.C. Sections 1 et seq.); the Arms
Export Control Act (22 U.S.C. Sections 2778, 2779); and the International
Boycott Provisions of Section 999 of the Code.
(b) Litronic has all necessary authority under the Export Control Laws to
conduct its operations as currently conducted, including all necessary (i)
Permits for any pending export transactions, (ii) Permits for the disclosure of
information to foreign Persons and (iii) registrations with Governmental
Entities with authority to implement the Export Control Laws.
(c) Litronic has not participated directly or indirectly in any boycotts or
other similar practices in violation of the regulations of the United States
Department of Commerce or Section 999 of the Code.
3.33 Government Contracts.
--------------------
(a) For purposes of this Agreement, "Government Contracts" means, with
respect to any Person, any contract (including purchase orders, blanket purchase
orders and agreements and delivery orders) between such Person and the United
States Government or any department, agency or instrumentality thereof or any
state or local governmental agency or authority (the "Government"), and any
subcontract at any tier held by such Person under a prime government contract.
Except as set forth in the Litronic Disclosure Schedule, with respect to the
Government Contracts to which Litronic is a party: (i) such Government Contracts
constitute valid and binding obligations of Litronic and, to the knowledge of
Litronic, the other party or parties thereto, enforceable in accordance with
their terms, except as enforcement may be limited by Equitable Principles; (ii)
Litronic is in compliance in all material respects with the terms of all
Government Contracts to which it is a party and all laws, regulations and
contract provisions applicable to the obtaining, formation, pricing,
performance, billing, administration and other aspects of its Government
Contracts, including compliance in all material respects with the Truth in
Negotiations Act (as amended to date) and with all defective pricing, price
reduction or similar clauses contained or incorporated in its Government
Contracts, and Litronic is in compliance in all material respects with the False
Claims Act (as amended to date) or any similar applicable statutes or
regulations concerning false claims, false statements, defective pricing,
misrepresentation or procurement
25
integrity concerning any Government Contract, General Services Administration
Multiple Award Schedule or Supply Schedule, open market, commercial or other
sale order involving or pursuant to its Government Contracts, except to the
extent that noncompliance or violation does not and will not have a Material
Adverse Effect; (iii) neither Litronic nor any other party has terminated,
canceled or waived any material term or condition of any Government Contract,
except to the extent that such termination, cancellation or waiver does not and
will not have a Material Adverse Effect; and (iv) the cost accounting,
estimating, property and procurement systems relating to Litronic's Government
Contracts are in compliance in all material respects with applicable laws,
regulations and contract provisions, including applicable cost principles and
applicable cost accounting standards.
(b) (i) Each billed account receivable in excess of $25,000 (determined
individually) represents a bona fide claim against the Government for sales,
services performed or other charges arising on or prior to the date hereof, and
all the products delivered and services performed which gave rise to such
accounts were delivered or performed in accordance with applicable Government
Contracts; and (ii) all unbilled or unreserved amounts included in accounts
receivable in excess of $25,000 (determined individually) will, in the ordinary
course of business as currently conducted and consistent with past practices,
mature into and become billed accounts receivable in the same or greater amount.
(c) None of Litronic's Government Contracts has a currently incurred or
currently projected cost overrun in an amount exceeding $25,000.
(d) Except for liens securing obligations under Litronic's existing term
loans and lines of credit with Fidelity National Bank and Bank of ▇▇▇▇▇ ▇▇▇▇▇
and those liens made in accordance with the Assignment of Claims Act (as
amended), 31 U.S.C. (S) 3727, and the Assignment of Contracts Act (as amended to
date), 31 U.S.C. (S) 15, Litronic has not assigned or otherwise conveyed or
transferred, or agreed to assign, to any Person, any Government Contracts to
which it is a party, or any account receivable relating thereto, whether as a
security interest or otherwise.
(e) Litronic has not received any notice or other communication in any form
from the Government regarding its actual or threatened disqualification,
suspension, or debarment from contracting with the Government including without
limitation any show cause notice or cure notices.
(f) Except as set forth on the Litronic Disclosure Schedule there is no:
(i) pending or (to the knowledge of the Litronic Stockholders or Litronic)
threatened investigation relating to any Government Contract to which Litronic
is a party; (ii) existing or (to the knowledge of the Litronic Stockholders or
Litronic) threatened claim, cost disallowance, pricing adjustment, or adverse
audit finding relating to any Government Contract to which Litronic is a party,
involving an amount exceeding $25,000; or (iii) termination for default or cure
notice or show cause notice proposed or currently in effect, relating to any
Government Contract to which Litronic is a party, involving an amount exceeding
$25,000.
3.34 Cumulative Exceptions. The exceptions and qualifications to the
---------------------
representations and warranties of Litronic in this Article 3 which are based
upon such exceptions and qualifications not
26
being "material" or being "in all material respects," or not having a Material
Adverse Effect will not, individually or in the aggregate, have a Material
Adverse Effect.
4. REPRESENTATIONS AND WARRANTIES OF THE
LITRONIC STOCKHOLDERS
Each of the Litronic Stockholders, severally and not jointly, represents
and warrants to Parent, Pulsar and the Pulsar Stockholders that, except as
expressly provided in the Litronic Disclosure Schedule by specific reference to
a Section of this Article 4:
4.1 Title to the Litronic Shares. All of the issued and outstanding
----------------------------
Litronic Shares purported to be owned by such Litronic Stockholder as set forth
on the Litronic Disclosure Schedule pursuant to Section 3.2 are owned by such
Litronic Stockholder free and clear of any Liens whatsoever, and the Litronic
Shares are not bound by or subject to any proxy, agreement, voting trust or
other restriction regarding the voting thereof.
4.2 Authority. Such Litronic Stockholder has full power, authority and
---------
capacity to execute and deliver this Agreement and the Reorganization Agreement
and to consummate those transactions contemplated hereby which pertain to it,
and no other action is necessary by such Litronic Stockholder to consummate such
transactions. This Agreement and the Reorganization Agreement have been duly and
validly executed and delivered by such Litronic Stockholder and constitute
legal, valid and binding obligations of such Litronic Stockholder enforceable
against it in accordance with their terms, except as enforcement may be limited
by Equitable Principles.
4.3 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the Reorganization Agreement by such Litronic Stockholder does not
and will not (i) conflict with, result in a breach of, constitute a default (or
an event that might, with the passage of time or the giving of notice or both,
constitute a default) under, give rise to any right to terminate, cancel or
accelerate, give rise to any loss of benefit under, or result in the creation of
any Lien under, any of the material terms, conditions, or provisions of any
indenture, mortgage, loan, or credit agreement or any other agreement or
instrument to which such Litronic Stockholder is a party or by which it or its
assets may be bound or affected; (ii) violate or constitute a material breach of
any decision, judgment, or order of any court or arbitration board or of any
governmental department, commission, board, agency, or instrumentality, domestic
or foreign, by which such Litronic Stockholder is bound or to which it is
subject; or (iii) violate any applicable law, rule, or regulation to which such
Litronic Stockholder or any of its property is bound.
4.4 Investment Representations.
--------------------------
(a) Such Litronic Stockholder has been informed and understands that the
Parent Common Stock it will receive in the Reorganization has not been
registered under the Securities Act, and, therefore, that such shares must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Such Litronic
Stockholder acknowledges that, except as provided in the Registration Rights
Agreement, Parent is under no obligation to register under the Securities Act
any sale of such Parent Common Stock
27
by it, or to comply with any provisions which would entitle its sale to any such
exemption from registration. Such Litronic Stockholder is fully familiar with
Rule 144 promulgated under the Securities Act.
(b) Such Litronic Stockholder is acquiring Parent Common Stock in the
Reorganization for its own account with no view to any distribution thereof in
violation of the Securities Act. Such Litronic Stockholder has had the
opportunity to discuss Parent's business, management and financial affairs with
Parent's management. Such Litronic Stockholder has such knowledge and
experience in financial matters that it is capable of evaluating the merits and
risks of its investment in the Parent Common Stock. The financial condition of
such Litronic Stockholder is such that it is able to bear all economic risks of
investment in the Parent Common Stock, including the risks of holding the Parent
Common Stock for an indefinite period of time. Such Litronic Stockholder is an
"accredited investor" as such term is defined in Rule 501 promulgated under the
Securities Act.
5. REPRESENTATIONS AND WARRANTIES OF PULSAR
AND THE PULSAR STOCKHOLDERS
Pulsar and the Pulsar Stockholders jointly and severally represent and
warrant to Parent, Litronic and the Litronic Stockholders that, except as
expressly provided in the Pulsar Disclosure Schedule by specific reference to a
Section of this Article 5:
5.1 Organization and Authority. Pulsar is a corporation duly organized,
--------------------------
validly existing, and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to (i) carry on its business
as currently conducted by it and (ii) own, lease and operate its properties.
Pulsar is duly qualified or licensed and in good standing as a foreign
corporation, and has at all times when legally required been so qualified or
licensed and in good standing, in those states listed on the Pulsar Disclosure
Schedule, which are the only jurisdictions in which a failure to be so qualified
or licensed would, in the aggregate, have a Material Adverse Effect on the
business of Pulsar or the nature of the business conducted by it. Pulsar has
full power and authority to execute and deliver this Agreement and each other
agreement and instrument to be executed and delivered by it pursuant hereto and
to consummate the transactions contemplated hereby and perform its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby by Pulsar and the performance of Pulsar's
obligations hereunder have been duly and validly authorized by all corporate
actions including a unanimous vote of the Board of Directors of Pulsar and of
Pulsar's Stockholders, and no other corporate proceedings on the part of Pulsar
are necessary to authorize this Agreement or to consummate the transactions so
contemplated or to perform Pulsar's obligations hereunder. This Agreement has
been duly and validly executed and delivered by Pulsar constitutes a legal,
valid and binding obligation of Pulsar enforceable against it in accordance with
its terms, except as enforcement may be limited by Equitable Principles. True
and complete copies of the Certificate of Incorporation of Pulsar and all
amendments thereof, and of the Bylaws, as amended to date, have heretofore been
forwarded to Litronic. Pulsar's minute books contain complete and accurate
records of all meetings of Pulsar's stockholders and Board of Directors or
written consents in lieu thereof through the date of this Agreement.
28
5.2 Capitalization of Pulsar; No Subsidiaries. Pulsar has authorized
-----------------------------------------
capital consisting of 1,000 shares of Common Stock, no par value, of which no
shares are held in Pulsar's treasury. As of the date hereof, there are 1,000
issued and outstanding shares of Pulsar Common Stock. Immediately prior to the
Acquisition Closing, the shares of Pulsar Common Stock issued and outstanding
shall consist solely of the foregoing number plus the number of shares of Pulsar
Common Stock, if any, issued between the date hereof and the Acquisition Closing
upon the exercise or conversion of instruments (in each case solely if existing
on the date hereof and disclosed on the Pulsar Disclosure Schedule), which
exercise or conversion and which issuance are in accordance with the terms of
such instruments as in effect on the date hereof. All of the Pulsar Shares are
duly authorized, validly issued, fully paid and non-assessable and are owned of
record and beneficially by the Pulsar Stockholders in the respective amounts
listed on the Pulsar Disclosure Schedule. The Pulsar Stockholders have good and
marketable title to all of the issued and outstanding shares of Pulsar's capital
stock, free and clear of Liens and at the Acquisition Closing will own all of
Pulsar's capital stock, free and clear of any and all Liens, including but not
limited to, any claims by any present or former stockholders of Pulsar. Pulsar
has no authorized class of capital stock other than the Common Stock. Pulsar
does not own any shares of capital stock or other securities of, or any other
interest in, nor does it control, directly or indirectly, of record or
beneficially, any other corporation, association, joint venture, partnership, or
other business organization. The Pulsar Shares have been issued and sold in full
compliance with all applicable federal and state securities laws.
5.3 Name. Pulsar has not had any other name and does not conduct or
----
operate, and has not heretofore conducted or operated, its business under any
name other than its current name.
5.4 No Violation of Existing Agreements. The execution and delivery of
-----------------------------------
this Agreement, together with all documents and instruments contemplated herein,
the consummation by Pulsar of the transactions contemplated hereby and thereby,
including the IPO, the performance by Pulsar of its obligations hereunder and
thereunder and compliance with the terms, conditions and provisions hereof and
thereof by Pulsar do not (i) contravene any provisions of Pulsar's Certificate
of Incorporation or Bylaws or other constituent document of Pulsar, each as
amended to date; (ii) conflict with, result in a breach of, constitute a default
(or an event that might, with the passage of time or the giving of notice or
both, constitute a default) under, give rise to any right to terminate, cancel
or accelerate, give rise to any loss of benefit under, or result in the creation
of any lien, security interest or other encumbrance under, any of the material
terms, conditions, or provisions of any indenture, note, bond, license,
mortgage, loan or credit agreement or any other agreement or instrument to which
Pulsar is a party or by which it or its assets may be bound or affected; (iii)
violate or constitute a material breach of any decision, judgment, writ,
injunction, decree, law, statute, rule or regulation or order of any court or
arbitration board or of any governmental department, commission, board, agency,
or instrumentality, domestic or foreign, by which Pulsar is bound or to which it
is subject; (iv) violate any applicable law, rule, or regulation to which Pulsar
or any of its property is bound; or (v) interfere or otherwise adversely affect
the ability of Pulsar to carry on business after the Acquisition Closing on
substantially the same basis as is now conducted by Pulsar.
29
5.5 No Consents or Approvals of Governmental Authorities. No consent or
----------------------------------------------------
approval of, or filing and expiration of a period for disapproval by, any
governmental authority is required for Pulsar to consummate the transactions
contemplated by this Agreement.
5.6 Financial Statements.
--------------------
(a) Pulsar heretofore delivered to Litronic (a) its Financial Statements
consisting of audited balance sheets at December 31, 1995, December 31, 1996 and
December 31, 1997 and the related statements of income, stockholders equity and
cash flows for the three years then ended, which have been audited by KPMG Peat
Marwick LLP, independent certified accountants, and (b) its unaudited balance
sheet at September 30, 1998, statements of income, stockholders equity and cash
flows for nine months ended September 30, 1998. The Financial Statements were
prepared in accordance with GAAP, consistently applied, are intended to be
consistent in form and substance with the requirements of Regulation S-X of the
Commission under the Securities Act, and present fairly the financial position
of Pulsar as of their respective dates, and the results of operations and cash
flows for the periods presented therein. The books and records of Pulsar are
complete and correct, have been maintained in accordance with good business
practices, and accurately reflect the basis for the financial condition and
results, subject to year end adjustments.
(b) Pulsar maintains a system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and with statutory accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
5.7 Guarantees. The Pulsar Disclosure Schedule contains a complete and
----------
accurate list and summary description of all contractual guarantees currently in
effect heretofore issued by the Pulsar Stockholders to any bank or other lender
in connection with any credit facilities extended by such creditors to Pulsar or
issued by the Pulsar Stockholders in connection with any other contracts or
agreements for the benefit of Pulsar (collectively, the "Pulsar Guarantees")
including the name of such creditor and the amount of the indebtedness, together
with any interest and fees currently owing and expected to be outstanding as of
the Acquisition Closing.
5.8 Absence of Undisclosed Liabilities. Except as set forth or reserved
----------------------------------
against in the Balance Sheet or where provision has been made for adequate
reserves for Taxes, Pulsar (a) did not have as of the Balance Sheet Date any
material liability or obligation of any nature, whether accrued, absolute,
contingent, or otherwise and whether due or to become due, including without
limitation liabilities that may become known or arise after the date hereof and
which relate to transactions entered into or any state of facts existing on or
before the Balance Sheet Date and which would be required under GAAP to be shown
in such balance sheet or referenced in the notes thereto, and (b) has not
incurred since the Balance Sheet Date any such liability or obligation except in
the ordinary course of business. Without limiting the foregoing, and except as
specifically reserved against in the
30
Pulsar Balance Sheet, Pulsar has no material liability or obligation of any
nature, whether accrued, absolute, contingent, or otherwise, to the Government
for any adjustment or reimbursement of any amount previously paid to Pulsar by
such entity under any agreement relating to the provision of any goods or
services by Pulsar.
5.9 Conduct of Business Since the Balance Sheet Date. Since the Balance
------------------------------------------------
Sheet Date, Pulsar has not taken (or suffered the occurrence of) any of the
following actions or events, agreed to take any of the following actions, or
taken any action that would otherwise result in a Material Adverse Effect to
Pulsar (in each case except directly in connection with this Agreement):
(a) entered into any transaction, agreement, or commitment other than in
the ordinary course of business; or
(b) entered into any transaction, agreement, or commitment, suffered the
occurrence of any event or events, or experienced any change in financial
condition, business, results of operations, prospects or otherwise, (i) that has
interfered or is reasonably likely to interfere with the normal and usual
operations of Pulsar's business or (ii) that, singly or in the aggregate, has
resulted or is reasonably likely to result in a Material Adverse Effect on the
financial condition, assets, liabilities, earnings or business of Pulsar; or
(c) incurred any indebtedness for borrowed money, or assumed, guaranteed,
endorsed or otherwise become responsible for the obligations of any other Person
(except to endorse checks for collection for deposit in the ordinary course of
business), or made any loan or advance to any Person; or
(d) mortgaged, pledged, or otherwise encumbered, or, other than in the
ordinary course of business, sold, transferred, or otherwise disposed of, any of
the properties or assets of Pulsar, including any cancelled, released,
hypothecated or assigned indebtedness owed to Pulsar, or any claims held by
Pulsar, except for purchase money mortgages arising in the ordinary course of
business and statutory liens arising or incurred in the ordinary course of
business with respect to which the underlying obligations are not delinquent; or
(e) made any investment of a capital nature or entered into a commitment
for such investment either by purchase of stock or securities, contributions to
capital, property transfer, or otherwise, or by the purchase of any property or
assets of any other Person, except in each case in the ordinary course of
business; or
(f) declared, set aside, or paid any dividend or other distribution
(whether in cash, stock, property or any combination thereof) in respect of the
capital stock of Pulsar, or redeemed or otherwise acquired, directly or
indirectly, any shares of capital stock of Pulsar; or
(g) paid any long-term liability, otherwise than in accordance with its
terms; or
(h) paid any bonus compensation to any officer, director, shareholder or
employee of Pulsar or otherwise increased the compensation paid or payable to
any of the foregoing; or
31
(i) sold, assigned, or transferred any trademarks, trade names, logos,
copyrights, formulae or other intangible assets; or
(j) contracted with or committed to any third party to (i) sell any capital
stock of Pulsar, (ii) sell any material assets of Pulsar other than in the
ordinary course of business, (iii) effect any merger, consolidation or other
reorganization of Pulsar or (iv) enter into any agreement with respect thereto;
or
(k) changed the costing system or depreciation methods of accounting for
assets in any material respect; or
(l) written up or written down the carrying value of its assets.
5.10 Title to Assets. Pulsar owns no real property. Pulsar has good and
---------------
clear record title to all properties owned by it, including, without limitation,
all property reflected in the Pulsar Balance Sheet, other than property disposed
of in the ordinary course of business subsequent to the Balance Sheet Date (none
of such dispositions being individually or collectively materially adverse),
free and clear of any Liens, except (a) as reflected in the Pulsar Financial
Statements, or as specified in the notes thereto, (b) liens for taxes not yet
due or payable or being contested in good faith by appropriate proceedings and
as to which appropriate reserves have been set aside in the Pulsar Balance Sheet
and (c) such imperfections of title and encumbrances, if any, as do not
materially detract from the value or interfere with the use of the properties
subject thereto or affected thereby, or otherwise materially impair business
operations.
5.11 Leases. A list and brief description of leases of personal property
------
involving rental payments within any 12 month period in excess of $25,000, as to
which Pulsar is a party, either as lessee or lessor, are set forth in the Pulsar
Disclosure Schedule. All such leases are valid and, to the knowledge of Pulsar,
enforceable in accordance with their respective terms except as may be limited
by Equitable Principles.
5.12 Intellectual Property.
---------------------
(a) The Pulsar Disclosure Schedule contains a correct and complete list of
all United States and foreign brand marks and brand name registrations,
copyrights, copyright registrations and copyright applications, trademark
registrations and applications for registration, patents and patent
applications, trademarks, service marks and trade names used in Pulsar's
business as presently conducted and all licenses, assignments and releases of
the intellectual property rights of others in works embodied in its products and
all applications for all inventions, discoveries, improvements, processes,
formulae, technology, know-how and other intellectual property, proprietary
rights and trade secrets relating to the business and all licenses and other
agreements to which Pulsar is a party or otherwise bound which relate to any of
the intangibles or the inventions or Pulsar's use thereof in connection with
Pulsar's business (the "Pulsar Proprietary Information"). There is (i) to
Pulsar's knowledge, no existing or threatened infringement, misuse or
misappropriation of Pulsar Proprietary Information by others and (ii) no pending
or threatened claim by Pulsar against others for infringement, misuse or
misappropriation of any Pulsar Proprietary Information. The Pulsar
32
Proprietary Information is sufficient to carry on the business of Pulsar as
presently conducted, and Pulsar has the right to use, free and clear of claims
or rights of others, all Pulsar Proprietary Information required for its
products or services or its business as presently conducted. Pulsar is the
exclusive owner of all right, title and interest in the Pulsar Proprietary
Information as purported to be owned by Pulsar, and the Pulsar Proprietary
Information is valid and in full force and effect. Neither the present business
activities nor its products infringe, misuse or misappropriate any patent,
trademark, trade name, service ▇▇▇▇, trade secret, copyright or other
intellectual property right of others, and to Pulsar's knowledge no one is
claiming nor is it anticipated that anyone will claim any such infringement,
misuse or misappropriation. To the knowledge of Pulsar, the Pulsar Proprietary
Information is presently valid and protectable and is not part of the public
domain or knowledge, nor, to the knowledge of Pulsar, has any of it been used,
divulged or appropriated for the benefit of any person other than Pulsar to the
detriment of Pulsar. Pulsar has not granted to any person any license or other
right to use in any manner any of the Pulsar Proprietary Information, whether or
not requiring the payment of royalties, except as set forth in the Pulsar
Disclosure Schedule. Pulsar has no obligation still outstanding to compensate
other Person for the use of any Pulsar Proprietary Information or for the sale
of any service or product comprising or derived from Pulsar Proprietary
Information. No university, government agency (whether federal or state) or
other organization which sponsored research and development conducted by Pulsar
has any claim of right to or ownership of or other encumbrance upon the Pulsar
Proprietary Information.
(b) Pulsar has taken reasonable measures to protect and preserve the
security, confidentiality and value of the Pulsar Proprietary Information,
including its trade secrets and other confidential information. To Pulsar's
knowledge, no employee or consultant of Pulsar has used any trade secrets or
other confidential information of any other person in the course of his or her
work for Pulsar. To Pulsar's knowledge, Pulsar is not making unlawful use of any
confidential information or trade secrets belonging to any past or present
employees of Pulsar. Neither Pulsar nor, to the knowledge of Pulsar, any of
Pulsar's employees or consultants have any agreements or arrangements with
former employers of such employees or consultants relating to confidential
information or trade secrets of such employers or are bound by any consulting
agreement relating to confidential information or trade secrets of another
entity. The activities of Pulsar's employees on behalf of Pulsar do not violate
any agreements or arrangements known to Pulsar which any such employees have
with former employers or any other entity to whom such employees may have
rendered consulting services.
(c) Pulsar owns or has the right to use pursuant to lease, license,
sublicense, agreement or permission all computer hardware, software and
information systems listed on the Pulsar Disclosure Schedule and necessary for
the operation of the business of Pulsar as presently conducted (collectively,
"Pulsar Systems"). Each Pulsar System owned or used by Pulsar immediately prior
to the Acquisition Closing will be owned or available for use by Pulsar on
identical terms and conditions immediately subsequent to the Acquisition
Closing. With respect to each Pulsar System owned by a third party and used by
Pulsar pursuant to lease, license, sublicense, agreement or permission, to
Pulsar's knowledge: (a) the lease, license, sublicense, agreement or permission
covering the Pulsar System is legal, valid, binding, enforceable, and in full
force and effect; (b) the lease, license, sublicense, agreement or permission
will continue to be legal, valid, binding, enforceable, and in full force and
effect on identical terms following the Acquisition Closing; (c) no
33
party to any such lease, license, sublicense, agreement or permission is in
breach or default, and no event has occurred with which notice or lapse of time
would constitute a breach or default, and permit termination, modification or
acceleration thereunder; (d) no party to any such lease, license, sublicense,
agreement or permission has repudiated any provision thereof; (e) Pulsar has not
granted any sublicense, sublease or similar right with respect to any such
lease, license, sublicense, agreement or permission; (f) Pulsar's use and
continued use of the Pulsar Systems does not and will not interfere with,
infringe upon, misappropriate or otherwise come into conflict with, any
intellectual property rights of third parties as a result of the continued
operation of Pulsar's business.
5.13 Obligations to or from Affiliates.
---------------------------------
(a) All material transactions between Pulsar and any stockholder, officer
or director of Pulsar, or any Affiliate of any stockholder, officer or director
of Pulsar, entered into on or after the Balance Sheet Date have been conducted
on an arm's-length basis on terms no different than would be obtained if the
transaction had been between Pulsar and an unrelated party. Except for debts or
other outstanding obligations reflected on the Pulsar Balance Sheet, there are
no debts or other obligations of Pulsar to, or to Pulsar from, either of the
Pulsar Stockholders or any officer or director, or any Affiliate of the Pulsar
Stockholders or any officer or director of Pulsar.
(b) The Pulsar Disclosure Schedule sets forth all information that would be
required to be provided under Item 404 of Regulation S-K of the Commission under
the Securities Act if a registration statement on Form S-1 were filed by Pulsar
with the Commission on the date hereof.
5.14 Material Contracts. The Pulsar Disclosure Schedule lists all material
------------------
leases, contracts, instruments, agreements or commitments (whether written or
oral) relating to the conduct of the business of Pulsar (the "Material Pulsar
Contracts"). Pulsar has delivered to Litronic true and correct copies of each
written Material Pulsar Contract and a written description, accurate in all
material respects, of each oral arrangement so listed. Without limiting the
generality of the foregoing, the aforesaid list includes all material contracts,
agreements and instruments of the following types to which Pulsar is a party:
(a) labor union contracts, together with a list of all labor unions
representing or, to Pulsar's knowledge, attempting to represent employees of
Pulsar;
(b) (i) all employee benefit plans (as defined in Section 3(3) of ERISA and
subject to ERISA), maintained, administered or contributed by Pulsar or any of
its ERISA affiliates, (ii) all supplemental retirement, severance, sabbatical,
medical, dental, vision care, disability, employee relocation, cafeteria benefit
(Section 125 of the Code) or dependent care (Section 129 of the Code), life
insurance or accident insurance, bonus, pension, profit sharing, savings,
deferred compensation, or incentive plans, programs, policies, commitments,
practices, or arrangements maintained, administered or contributed by Pulsar or
any of its ERISA affiliates which are not employee benefit plans as otherwise
covered under clause (i) above, (iii) any stock option, stock purchase, phantom
stock, stock appreciation rights or similar stock-oriented compensation programs
maintained, administered or contributed by Pulsar or any of its ERISA
affiliates, (iv) other fringe or employee benefit programs or arrangements
maintained, administered or contributed by Pulsar or any of its
34
ERISA affiliates that apply to senior management of Pulsar and that do not
generally apply to all employees which are not employee benefit plans otherwise
covered under clause (i) above, (v) any current or former employment or
executive compensation or severance agreements, written or otherwise, as to
which unsatisfied obligations of Pulsar or any of its ERISA affiliates remain
for the benefit of or relating to any present or former employee, consultant or
director of Pulsar or any of its ERISA affiliates which are not employee benefit
plans otherwise covered under clause (i) above, and (vi) all arrangements which
would otherwise be described in clauses (i) through (v) above except for the
fact that they are maintained, administered or contributed to by Pulsar or any
of its ERISA affiliates primarily for non-U.S. citizens or non-U.S. residents,
together with a list of all pensioned employees of Pulsar or any of its ERISA
affiliates or obligations to provide any pensions hereafter other than pursuant
to the plans, programs, policies, commitments, practices or arrangements
hereinbefore in this item described (all of items described in this Section 5.14
being collectively referred to as the "Pulsar Plans" or individually as a
"Pulsar Plan");
(c) employment contracts or agreements, consulting agreements, agreements
providing for termination or severance benefits, non-competition agreements,
non-disclosure agreements, contracts for professional personal services,
contracts with other persons engaged in sales or distributing activities, and
advertising contracts;
(d) written or oral agreements, understandings and arrangements of any kind
with any officer, director, employee, shareholder or agent of Pulsar relating to
present or future compensation or other benefits available to such person or
otherwise, together with a list of the names and current annual salary rates of
all present officers and employees of Pulsar whose current salary rate is
$50,000 or more and any bonuses paid or payable to each such person for the 1997
fiscal year;
(e) indentures, loan agreements, notes, security agreements, mortgages,
conditional sales contracts, leases of real or personal property, contracts for
the purchase or sale of real or personal property, and agreements for financing;
(f) property, casualty, crime, directors and officers, and other forms of
insurance;
(g) all bank accounts and safety deposit boxes identifying all authorized
signatories, together with a list of all effective powers of attorney granted by
Pulsar to anyone;
(h) agreements, contracts or other arrangements to which Pulsar is a
guarantor, surety or endorser;
(i) contracts, agreements, commitments, arrangements or understandings
providing for the purchase or sale of all or substantially all of Pulsar's
requisites of a particular product from a single supplier or to a single
customer;
(j) contracts, agreements, commitments, arrangements or understandings
which limit the freedom of Pulsar from competing in any line of business or with
any person or entity;
(k) license agreements (as licensor or licensee);
35
(l) leases of real and personal property with a term of more than one year
(regardless of whether Pulsar is lessor or lessee); and
(m) contracts, agreements, instruments, arrangements or understandings
which have not been included in items (a) through (l) above involving payment by
or to Pulsar of more than $25,000 or not terminable without penalty or otherwise
materially affecting the assets, financial condition, properties or business of
Pulsar.
All of the Material Pulsar Contracts are in full force and effect. Except to the
extent that a Material Adverse Effect on Pulsar's financial condition, assets,
liabilities, earnings, business or prospects would not result if the following
were not true: (A) Pulsar and each other party to each of the Material Pulsar
Contracts have performed all the obligations required to be performed by them to
date, have received no notice of default and are not in default (with due notice
or lapse of time or both) under any of the Material Pulsar Contracts, except as
otherwise set forth in the Pulsar Disclosure Schedule; (B) Pulsar has no present
expectation or intention of not fully performing all of its obligations under
any of the Material Pulsar Contracts, and Pulsar has no knowledge of any breach
or anticipated breach by any other party to any of the Material Pulsar
Contracts; (C) there exists no actual or, to the knowledge of Pulsar, threatened
termination, cancellation or limitation of the business relationship of Pulsar
with any party to any Material Pulsar Contract; and (D) consummation of the
transactions contemplated hereby and performance by Pulsar of its obligations
hereunder shall not require the consent or permission of any party to any
Material Pulsar Contract or permit any party to terminate, suspend or alter the
terms of any Material Pulsar Contract, except as otherwise set forth in the
Pulsar Disclosure Schedule.
5.15 Litigation. There are no actions, suits, causes of action, claims,
----------
litigation, arbitration, administrative hearings, or other form of proceedings
or disputes of any kind pending or, to the best knowledge of Pulsar and the
Pulsar Stockholders, threatened against Pulsar or its officers or directors (in
their capacities as such) or involving, affecting or relating to its capacity to
complete the transactions contemplated herein in any court, at law or in equity,
or before any arbitration board or any governmental department, commission,
board, bureau, agency or instrumentality; nor has Pulsar been, nor is it,
subject to any orders, stipulations, awards, fines, judgments, decrees or
injunctions the effect of which in the aggregate would have a Material Adverse
Effect on the business or financial position of Pulsar including, but not
limited to, limitation, restriction, regulation, enjoinment or prohibition of
any business practice of Pulsar in any area or the acquisition by Pulsar of any
properties, assets or businesses. Pulsar does not know or have grounds to know
of any basis for any such action, suits, or other form of proceeding or disputes
or of any governmental investigation relating to Pulsar or its business.
5.16 Taxes.
-----
(a) (i) All Tax Returns of, relating to or which include Pulsar which are
required to have been filed have been filed on a timely basis with the
appropriate authorities and all such Tax Returns are true, correct and complete
in all respects; (ii) all Taxes required to have been paid by Pulsar (including
amounts collected or withheld from third parties required to have been paid over
to the appropriate authorities) have been paid in full on a timely basis to the
appropriate authorities or
36
contested in good faith or adequate provision made for payment; and (iii) all
Taxes or other amounts required to have been collected or withheld by Pulsar
have been timely and properly collected or withheld. Pulsar has duly withheld
all payroll taxes, FICA and other federal, state and local taxes and other items
requiring to be withheld by it from employer wages, and has duly deposited the
same in trust for or paid over to the proper taxing authorities. Pulsar has not
executed or filed with any taxing authority any agreement extending the periods
for the assessment or collection of any Taxes, and is not a party to any pending
or, to the best knowledge of Pulsar and the Pulsar Stockholders, threatened,
action or proceeding by any governmental authority for the assessment and
collection of Taxes. Within the past three years, the United States federal
income tax returns of Pulsar have not been audited by the IRS, nor has any
state's taxing authority audited any merchandise, personal property, sales or
use tax returns of Pulsar.
(b) (i) No taxing authority has asserted in writing to Pulsar any
adjustment, deficiency, or assessment that could result in additional Tax for
which Pulsar is or may be liable; (ii) there is no pending audit, examination,
investigation, dispute, proceeding or claim for which Pulsar has received notice
relating to any Tax for which Pulsar is or may be liable; (iii) no statute of
limitations with respect to any Tax for which Pulsar is or may be liable has
been waived or extended; (iv) the due date of any Tax Returns that Pulsar is
required to file has not been extended; and (v) Pulsar is not a party to any Tax
sharing or Tax allocation agreement, arrangement or understanding, except as
otherwise set forth in the Pulsar Disclosure Schedule.
(c) There are no liens on any of the assets of Pulsar which arose in
connection with any failure or asserted failure to pay any Tax, other than liens
for current Taxes not yet due and payable.
(d) Pulsar is not a party to any compensation contract, agreement, plan or
arrangement that, individually or collectively, could give rise to any payment
that would not be deductible by reason of Section 162, 280G or 404 of the Code.
(e) Pulsar has not been a member of an affiliated group filing a
consolidated federal income Tax Return, and Pulsar is not liable for the Taxes
of any person under Treasury Regulation 1.1502-6 (or any similar provision of
state, local, or foreign law) as transferee or successor, by contract or
otherwise.
(f) Copies of (i) any correspondence or other documents relating to any Tax
examinations, (ii) extensions of statutory limitations, (iii) the federal, state
and local income Tax Returns and franchise Tax Returns of Pulsar, and (iv)
correspondence between Pulsar and all taxing authorities for its last three (3)
taxable years previously have been furnished to Litronic and such Tax Returns
are true, correct and complete.
(g) The provision for Taxes, if any, shown on the Pulsar Balance Sheet is
adequate to cover the aggregate liability of Pulsar arising out of facts or
circumstances occurring, incurred in respect of or measured by income of Pulsar,
arising out of transactions on or prior to the Balance Sheet Date for all Taxes.
37
(h) Pulsar has filed federal and state, and if applicable, local Tax
Returns for each period ending on or prior to the Acquisition Closing.
(i) Neither Pulsar nor any Pulsar Stockholder is a foreign person, as such
term is referred to in Section 1445(f)(3) of the Code.
(j) None of the assets of Pulsar constitutes property that Pulsar, will be
required to treat as being owned by another person pursuant to the "Safe Harbor
Lease" provisions of Section 168(f)(8) of the Code prior to repeal by the Tax
Equity and Fiscal Responsibility Act of 1982.
(k) Pulsar has not at any time consented, and the Pulsar Stockholders will
not permit Pulsar to elect, to have the provisions of Section 341(f)(2) of the
Code apply to it.
(l) Pulsar is not a personal service corporation subject to the provisions
of Section 269A of the Code.
5.17 Absence of Material Events. Except as provided in this Section 5.17
--------------------------
and the Pulsar Disclosure Schedule, since the Balance Sheet Date the business of
Pulsar has been conducted in the ordinary course of business (including
borrowing money for working capital purposes only) and there has not been (a)
any material adverse change in the business, affairs, prospects, operations,
earnings or financial condition of Pulsar nor, to the best of Pulsar's
knowledge, are any such changes threatened, anticipated or contemplated; (b) any
actual or, to Pulsar's knowledge, threatened, anticipated or contemplated
damage, destruction, loss, conversion, termination, cancellation, default or
taking by eminent domain or other action by governmental authority which has
materially affected or may hereafter materially affect the properties, assets,
business affairs, cash flow or results of operation or prospects of Pulsar; (c)
any material and adverse pending or, to Pulsar's knowledge, threatened,
anticipated or contemplated dispute of any kind with any material customer,
supplier, source of financing, employee, landlord, subtenant or licensee of
Pulsar, or any pending or, to Pulsar's knowledge, threatened, anticipated or
contemplated occurrence or situation of any kind, nature or description which is
reasonably likely to result in any reduction in the amount, or any change in the
terms or conditions, of business with any material customer, supplier or source
of financing; (d) any pending, or to Pulsar's knowledge, threatened, anticipated
or contemplated occurrence or situation of any kind, nature or description
materially and adversely affecting the properties, assets, business, affairs or
prospects of Pulsar; (e) any waivers by Pulsar of any right, or cancellation of
any debt or claim, of substantial value; (f) any declarations, set asides or
payments of any dividend or other distributions or payments in respect of Pulsar
capital stock; or (g) any changes in the accounting principles or methods which
are utilized by Pulsar.
5.18 Insurance. The Pulsar Disclosure Schedule contains a complete and
---------
correct list and summary description of all contracts and policies of insurance
relating to any of Pulsar's assets or business, to which Pulsar is an insured
party, beneficiary or loss payable payee and insurance relating to the Pulsar
Stockholders to which Pulsar is a beneficiary or loss payable payee. Such
policies are in full force and effect, all premiums due and payable with respect
thereto have been paid, and no notice of cancellation or termination has been
received by Pulsar with respect to any such policy.
38
5.19 Banks; Power of Attorney. The Pulsar Disclosure Schedule contains a
------------------------
complete and correct list showing (a) the names of each bank in which Pulsar has
an account or safe deposit box and the names of all persons authorized to draw
thereon or who have access thereto, and (b) the names of all persons, if any,
holding powers of attorney from Pulsar.
5.20 Absence of Improper Payments. Since January 1, 1994, Pulsar: (a) has
----------------------------
not made any contributions, payments or gifts of its property to or for the
private use of any governmental official, employee or agent where either the
payment or the purpose of such contribution, payments or gifts is illegal under
the laws of the United States, any state thereof or any other jurisdiction
(foreign or domestic); (b) has not established or maintained any unrecorded fund
or asset for any purpose, or has made any false or artificial entries on its
books or records for any reason; (c) has not made any payments to any person
where Pulsar intended or understood that any part of such payment was to be used
for any other purpose other than that described in the documents supporting the
payment; or (d) has not made any contribution, or has reimbursed any political
gift or contribution made by any other person, to candidates for public office,
whether federal, state or local, where such contribution would be in violation
of applicable law.
5.21 ERISA.
-----
(a) The Pulsar Disclosure Schedule contains a complete list of all Pulsar
Plans.
(b) None of Pulsar Plans is a "multiemployer plan" as such term is defined
in Section 3(37) of ERISA, a "multiple employer plan" as such term is defined in
Section 413 of the Code, or a "defined benefit pension plan" as such term is
defined in Section 3(35) of ERISA. With respect to each Pulsar Plan, Pulsar has
delivered to Pulsar true and complete copies of the following for each Pulsar
Plan, if applicable: (i) the plan document and any amendments thereto; (ii) the
summary plan description and any summary material modifications; (iii) the trust
agreement, insurance policy or other instrument relating to the funding of
Pulsar Plans; (iv) the annual reports (Form 5500 series) and accompanying
Schedules for Pulsar Plans filed with the IRS or Department of Labor for the
last three years; (v) the audited financial statements for Pulsar Plans for the
last three years; and (vi) the most recent determination letters issued by the
IRS with respect to Pulsar Plans that are intended to qualify under Section
401(a) of the Code; and (vii) any governmental rulings, notices, determination,
and opinions (and pending requests therefore). The foregoing documents
accurately reflect all of the terms of such Pulsar Plans including, without
limitation, any agreement or provision which would limit the ability of any
entity to make prospective amendments to or to terminate any of Pulsar Plans.
(c) Each Pulsar Plan which is an "employee pension benefit plan" as defined
in Section 3(2) of ERISA ("Pulsar Pension Plan") has been determined by the IRS
to be qualified under Section 401(a) of the Code, and each such plans remains so
qualified, and to Pulsar's knowledge after due inquiry, no facts or
circumstances exist which could result in the revocation of such qualification.
(d) Each Pulsar Plan which is an "employee welfare benefit plan" as defined
in Section 3(1) of ERISA ("Pulsar Welfare Plan") which is intended to meet the
requirements for tax-favored treatment under the Code to Pulsar's knowledge
after due inquiry meets such requirements.
39
(e) Without limiting the generality of this Section 5.21, each Pulsar Plan
has been administered in accordance with its terms and the Code, and each Pulsar
Pension Plan and Pulsar Welfare Plan has been administered in all material
respects in accordance with ERISA. No facts or circumstances exist which might
give rise to any liability of Pulsar or ERISA affiliate or any of the Pulsar
Stockholders. Pulsar has paid all amounts required under applicable law, any
Pulsar Pension Plan and any Pulsar Welfare Plan to be paid as a contribution to
each Pulsar Pension Plan and Pulsar Welfare Plan through the date hereof. Pulsar
has set aside adequate reserves to meet contributions which are not yet due
under any Pulsar Pension Plan and Pulsar Welfare Plan.
(f) Neither Pulsar nor any other "disqualified person" or "party in
interest" (as such terms are defined in Section 4975 of the Code and Section
3(14) or ERISA, respectively) has engaged in any action or taken any other
action with respect to any Pulsar Plan which would subject Pulsar, any ERISA
affiliate or the Pulsar Stockholders to (i) any tax, penalty or liability for a
prohibited transaction under ERISA or the Code, (ii) any tax under Code Sections
4971, 4972, 4976, 4977, or 4979, or (iii) a penalty under ERISA Section 502(c)
or 502(l).
(g) Pulsar, to the extent it is a fiduciary with respect to any Pulsar
Pension Plan or Pulsar Welfare Plan, has not breached any of its
responsibilities or obligations imposed upon fiduciaries under ERISA or the Code
which could result in any claim being made under, by or on behalf of any Pulsar
Pension Plan or Pulsar Welfare Plan or any participant or beneficiary thereof
other then benefit claims in the ordinary course, in any such event which could
give rise to liability to Pulsar or any of its ERISA affiliates.
(h) Each Pulsar Welfare Plan which is a group health plan within the
meaning of Code Section 5000(b)(1) complies with and in each and every case has
complied with the applicable requirements of Code Section 4980B and Part 6 of
Title I of ERISA.
(i) Except as set forth in the Pulsar Disclosure Schedule, no Pulsar Plan,
other than a Pulsar Pension Plan, provides benefits, including death, life,
dental, health or medical benefits (whether or not insured), with respect to
current or former employees of Pulsar and any of its subsidiaries beyond their
retirement or other termination of service with Pulsar, any of its subsidiaries
or ERISA affiliates, other than coverage mandated by applicable law.
5.22 Labor Matters. A true and complete list of all of Pulsar's officers,
-------------
employees (the "Pulsar Employees") and consultants (the "Pulsar Consultants")
and their respective salaries, wages, other compensation, dates of employment,
date and amount of last salary or compensation increase, and positions has been
provided to Litronic by Pulsar. There are no material disputes, employee
grievances, or disciplinary actions pending or, to the knowledge of Pulsar,
threatened by or between Pulsar and any of the Pulsar Employees or Pulsar
Consultants. With respect to the Pulsar Employees and Pulsar Consultants, Pulsar
has complied in all respects with all provisions of all laws relating to the
employment of labor and has no liability for any arrears of wages or taxes or
penalties for failure to comply with any such law or for any severance or
termination payments of any type. None of the Pulsar Consultants are or were
(while classified by Pulsar as Pulsar Consultants) employees of Pulsar for any
purpose whatsoever. No employees of Pulsar are or ever have been represented by
a bargaining representative with respect to Pulsar, and no election or
proceedings relating to the
40
labor relations of Pulsar is pending or, to the best of Pulsar's knowledge,
threatened. Pulsar has not had any material union activity or had any material
labor disruption or material dispute with its employees of any kind, nature or
description at any time heretofore. All personnel policies and manuals of Pulsar
are listed on the Pulsar Disclosure Schedule and true and complete copies
thereof have been provided to Litronic. No Pulsar Employee or Pulsar Consultant
shall have the right to receive from Pulsar a severance payment or other payment
in the nature thereof if his or her employment is terminated by Pulsar following
the Acquisition Closing, whether such right arises as a matter of contract, past
policy or understanding, by operation of law, or otherwise.
5.23 Permits: Compliance with Law. Pulsar possesses all Permits necessary
----------------------------
to own or lease and operate its properties and to conduct its business as now
conducted, except for incidental Permits that would be readily obtainable
without undue burden in the event of any lapse, termination, cancellation, or
forfeiture or that if not obtained would not have a Material Adverse Effect on
Pulsar's business. All such material Permits are in full force and effect, and,
to the knowledge of Pulsar, no suspension or cancellation of any of them is
threatened, and no material Permits will be adversely affected by the
consummation of the Reorganization or the Acquisition. Pulsar has not failed nor
is it failing to comply with any applicable law, rule, regulation, order, zoning
or other ordinance, statute, injunction, decree or any other requirement of any
court or governmental or administrative body or agency, where such failure would
have a Material Adverse Effect on Pulsar's business, and there are no
proceedings pending or, to Pulsar's knowledge, threatened, nor has Pulsar
received any notice, regarding any such failure.
5.24 Environmental Matters. Pulsar is, and to Pulsar's knowledge all real
---------------------
property owned or otherwise occupied by Pulsar is and has been at all times when
so owned or occupied, in material compliance with all Environmental Laws,
except, in each case, where such noncompliance, singly or in the aggregate,
would not have a Material Adverse Effect on the condition, financial or
otherwise, or the earnings, business affairs or business prospects of Pulsar. No
Hazardous Materials are stored, utilized or otherwise present on any property
owned or otherwise occupied by Pulsar, excepting only (x) cleaning supplies and
similar materials customarily used by businesses in Pulsar's industry in
quantities consistent with such use, and (y) petroleum products that are used
for heating (including water heating) in facilities located on such property,
none of which are stored in underground storage tanks, or that are present in
vehicles located on such property. Pulsar has not released, and has not
affirmatively consented to any release of, Hazardous Materials on, under or
affecting any real property during the period of Pulsar's ownership, occupation
or operation of such property (including its participation in or exercise of any
degree of control over the management of any business located on such property).
For purposes of this Section 5.24, real property owned by third parties but
"occupied" by Pulsar shall mean only that portion of such property as is either
leased by Pulsar or in fact is otherwise physically occupied or utilized by
Pulsar. To the knowledge of Pulsar, there is no alleged or potential liability
(including, without limitation, alleged or potential liability for investigatory
costs, cleanup costs, governmental response costs, natural resources damages,
property damages, personal injuries or penalties) of Pulsar arising out of,
based on or resulting from any act or event that constitutes a violation or
alleged violation of any Environmental Law, which alleged or potential liability
(i) arises out of or relates to acts or events occurring during Pulsar's
possession or occupation of the applicable property, and (ii) singly or in the
aggregate,
41
would have a Material Adverse Effect on the condition, financial or otherwise,
or the earnings, business affairs or business prospects of Pulsar.
5.25 Corporate Records. The corporate record books of Pulsar are in all
-----------------
material respects in good order, complete, accurate, up to date, with all
necessary signatures, and set forth all meetings and actions taken by the
shareholders and directors, and all votes of the shareholders or directors set
forth in certificates furnished to anyone at any time heretofore conform in all
material respects to the votes contained in the record book of Pulsar.
5.26 Condition of Assets. All premises, fixtures and equipment owned or
-------------------
used by Pulsar and material to its business have been properly maintained and
are in good operating order and repair, free from known defects in construction
or design, sound and properly functioning (normal wear and tear expected),
usable in the ordinary course of business and not obsolete, and (to Pulsar's
knowledge in the case of leased property) in material compliance with all
applicable zoning, building and fire codes and all other applicable laws, rules,
regulations and requirements of governmental authorities and the fire insurance
rating association having jurisdiction.
5.27 Accounts Receivable. All of the accounts receivable of Pulsar shown or
-------------------
reflected on the Pulsar Balance Sheet, less the reserve for doubtful accounts
and notes in the amount shown on the Pulsar Balance Sheet, are valid and
enforceable claims and subject to no setoff or counterclaim. All of the accounts
receivable of Pulsar shown or reflected on the Pulsar Balance Sheet and as at
December 31, 1998 (as reflected on Pulsar's balance sheet as of such date, when
and as delivered to Litronic) will be collected in full within 60 days
thereafter except to the extent of the reserve for doubtful accounts shown on
the Pulsar Balance Sheet or posted on the books of Pulsar of such date. The
reserve for doubtful accounts as at December 31, 1998 will not be in excess of
said reserve as shown on the Pulsar Balance Sheet. Pulsar has no accounts or
loans receivable from any of its directors, officers or employees.
5.28 Charter Documents. Pulsar has heretofore delivered to Litronic copies
-----------------
of its Certificate of Incorporation, as amended to date, certified by the
appropriate governmental authority, and copies of its Bylaws, as amended to
date, and a list of the officers and directors of Pulsar in office, all as
certified by its Secretary.
5.29 Disclosure of all Material Matters.
----------------------------------
(a) No statement of a material fact set forth in this Agreement (including
without limitation all information in the Financial Statements, the Pulsar
Disclosure Schedule and the other Schedules, Exhibits and attachments hereto,
taken as a whole) with respect to Pulsar or its stockholders is false or
misleading, nor does this Agreement (including, without limitation all
information in the Financial Statements, the Pulsar Disclosure Schedule and the
other Schedules, Exhibits, and attachments hereto, taken as a whole) omit to
state a material fact necessary in order to make the statements made or
information disclosed, in the light of the circumstances under which they were
made or disclosed, not misleading.
42
(b) Provided only that any information furnished in writing by Litronic to
Pulsar specifically for inclusion in the Registration Statement or the
Prospectus (as applicable) is accurate, complete and not misleading, and that
Pulsar has deleted from the Registration Statement or the Prospectus (as
applicable) any information with respect to Litronic or its Business, operations
or affiliates that Litronic has specifically requested be deleted, (i) at the
time the Registration Statement becomes effective under the Securities Act, it
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading and will comply in all material respects with applicable
state and Federal securities laws, and (ii) at the time of each closing in
connection with the IPO, the Prospectus will not include an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and will comply in all material respects with applicable
state and Federal securities laws.
5.30 Customers and Suppliers. The Pulsar Disclosure Schedule sets forth a
-----------------------
complete and correct list, as of December 31, 1998, of (a) the 20 largest
customers of the business and (b) the 20 largest suppliers of the business.
There are no (i) threatened cancellations by the aforesaid customers or
suppliers with respect to Pulsar's business, (ii) outstanding disputes by such
customers or suppliers with Pulsar and its business, or (iii) any adverse
changes in the business relationship between Pulsar and any such customer or
supplier.
5.31 Product Warranty. Substantially all of the products manufactured,
----------------
sold, leased, and delivered by Pulsar have conformed in all material respects
with all applicable contractual commitments and all express and implied
warranties and, to Pulsar's knowledge, Pulsar has no material liability (whether
known or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated, and whether due or to become due) for
repair or replacement thereof or other damages in connection therewith.
Substantially all of the products manufactured, sold, leased and delivered by
Pulsar are subject to standard terms and conditions of sale or lease. Pulsar has
delivered to Litronic copies of the standard terms and conditions of sale or
lease for each of Pulsar (containing applicable guaranty, warranty, and
indemnity provisions). The Pulsar Disclosure Schedule sets forth the aggregate
expenses incurred by Pulsar in fulfilling its obligations under its guaranty,
warranty and indemnity provisions during each of the fiscal years and interim
period covered by Pulsar's Financial Statements and Pulsar knows of no reason
why such expenses should significantly increase as a percentage of sales in the
future.
5.32 Year 2000 Compliance. Pulsar's information technology is Year 2000
--------------------
Compliant. For purposes of this Section 5.32, Pulsar's information technology
shall include computer software, computer firmware, computer hardware (whether
general or specific purpose), equipment including embedded programmable
microchips or controllers and other similar or related items of automated,
computerized, or software systems that are used or relied on by Pulsar in the
conduct of its business.
5.33 Export Control and Related Matters.
----------------------------------
(a) Pulsar is in compliance in all material respects with all United States
and foreign Export Control Laws.
43
(b) Pulsar has all necessary authority under the Export Control Laws to
conduct its operations as currently conducted, including all necessary (i)
Permits for any pending export transactions, (ii) Permits for the disclosure of
information to foreign Persons and (iii) registrations with Governmental
Entities with authority to implement the Export Control Laws.
(c) Pulsar has not participated directly or indirectly in any boycotts or
other similar practices in violation of the regulations of the United States
Department of Commerce or Section 999 of the Code.
5.34 Government Contracts.
--------------------
(a) Except as set forth in the Pulsar Disclosure Schedule, with respect to
the Government Contracts to which Pulsar is a party: (i) such Government
Contracts constitute valid and binding obligations of Pulsar and, to the
knowledge of Pulsar, the other party or parties thereto, enforceable in
accordance with their terms, except as enforcement may be limited by Equitable
Principles; (ii) Pulsar is in compliance in all material respects with the terms
of all Government Contracts to which it is a party and all laws, regulations and
contract provisions applicable to the obtaining, formation, pricing,
performance, billing, administration and other aspects of its Government
Contracts, including compliance in all material respects with the Truth in
Negotiations Act (as amended) and with all defective pricing, price reduction or
similar clauses contained or incorporated in its Government Contracts, and
Pulsar is in compliance in all material respects with the False Claims Act (as
amended) or any similar applicable statutes or regulations concerning false
claims, false statements, defective pricing, misrepresentation, or procurement
integrity concerning any Government Contract, General Services Administration
Multiple Award Schedule or Supply Schedule, open market, commercial or other
sale order involving or pursuant to its Government Contracts, except to the
extent that noncompliance or violation does not and will not have a Material
Adverse Effect; (iii) neither Pulsar nor any other party has terminated,
canceled or waived any material term or condition of any Government Contract,
except to the extent that such termination, cancellation or waiver does not and
will not have a Material Adverse Effect; and (iv) the cost accounting,
estimating, property and procurement systems relating to Pulsar's Government
Contracts are in compliance in all material respects with applicable laws,
regulations and contract provisions, including applicable cost principles and
applicable cost accounting standards.
(b) (i) Each billed account receivable in excess of $25,000 (determined
individually) represents a bona fide claim against the Government for sales,
services performed or other charges arising on or prior to the date hereof, and
all the products delivered and services performed which gave rise to such
accounts were delivered or performed in accordance with applicable Government
Contracts; and (ii) all unbilled or unreserved amounts included in accounts
receivable in excess of $25,000 (determined individually) will, in the ordinary
course of business as currently conducted and consistent with past practices,
mature into and become billed accounts receivable in the same or greater amount.
(c) None of Pulsar's Government Contracts has a currently incurred or
currently projected cost overrun in an amount exceeding $25,000.
44
(d) Except for liens securing obligations under Pulsar's existing line of
credit with Wilmington Trust Company and IBM Global Finance Corporation, Pulsar
has not assigned or otherwise conveyed or transferred, or agreed to assign, to
any Person, any Government Contracts to which it is a party, or any account
receivable relating thereto, whether as a security interest or otherwise.
(e) Pulsar has not received any notice or other communication in any form
from the Government regarding its actual or threatened disqualification,
suspension, or debarment from contracting with the Government including without
limitation any show cause notice or cure notices.
(f) Except as set forth on the Pulsar Disclosure Schedule there is no: (i)
pending or (to the knowledge of the Pulsar Stockholders or Pulsar) threatened
investigation relating to any Government Contract to which Pulsar is a party;
(ii) existing or (to the knowledge of the Pulsar Stockholders or Pulsar)
threatened claim, cost disallowance, pricing adjustment or adverse audit finding
relating to any Government Contract to which Pulsar is a party, involving an
amount exceeding $25,000; or (iii) termination for default or cure notice or
show cause notice proposed or currently in effect, relating to any Government
Contract to which Pulsar is a party, involving an amount exceeding $25,000.
5.35 Cumulative Exceptions. The exceptions and qualifications to the
---------------------
representations and warranties of Pulsar in this Article 5 which are based upon
such exceptions and qualifications not being "material" or being "in all
material respects," or not having a Material Adverse Effect will not,
individually or in the aggregate, have a Material Adverse Effect.
6. REPRESENTATIONS AND WARRANTIES OF
THE PULSAR STOCKHOLDERS
Each Pulsar Stockholder, severally and not jointly, represents and
warrants to Litronic and the Litronic Stockholders that, except as expressly
provided in the Pulsar Disclosure Schedule by specific reference to a Section of
this Article 6:
6.1 Title to the Pulsar Shares. All of the issued and outstanding shares
--------------------------
of Pulsar Common Stock purported to be owned by such Pulsar Stockholder as set
forth on the Pulsar Disclosure Schedule pursuant to Section 5.2 are owned by
such Pulsar Stockholder free and clear of any Liens whatsoever, and such Pulsar
Shares are not bound by or subject to any proxy, agreement, voting trust or
other restriction regarding the voting thereof.
6.2 Authority. Such Pulsar Stockholder has full power, authority and
---------
capacity to execute and deliver this Agreement and to consummate those
transactions contemplated hereby which pertain to him or her, and no other
action is necessary by such Pulsar Stockholder to consummate such transactions.
This Agreement has been duly and validly executed and delivered by such Pulsar
Stockholder and constitutes a legal, valid and binding obligation of such Pulsar
Stockholder enforceable against him or her in accordance with its terms, except
as enforcement may be limited by Equitable Principles.
45
6.3 No Conflicts. The execution, delivery and performance of this
------------
Agreement by such Pulsar Stockholder does not and will not (i) conflict with,
result in a breach of, constitute a default (or an event that might, with the
passage of time or the giving of notice or both, constitute a default) under,
give rise to any right to terminate, cancel or accelerate, give rise to any loss
of benefit under, or result in the creation of any Lien under, any of the
material terms, conditions, or provisions of any indenture, mortgage, loan, or
credit agreement or any other agreement or instrument to which such Pulsar
Stockholder is a party or by which him or her or his or her assets may be bound
or affected; (ii) violate or constitute a material breach of any decision,
judgment, or order of any court or arbitration board or of any governmental
department, commission, board, agency, or instrumentality, domestic or foreign,
by which such Pulsar Stockholder is bound or to which he or she is subject; or
(iii) violate any applicable law, rule or regulation to which such Pulsar
Stockholder or any of his or her property is bound.
6.4 Investment Representations.
--------------------------
(a) Such Pulsar Stockholder has been informed and understands that the
Parent Common Stock he or she will receive in the Acquisition has not been
registered under the Securities Act, and, therefore, that such shares must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Such Pulsar
Stockholder acknowledges that, except as provided in the Registration Rights
Agreement, Parent is under no obligation to register under the Securities Act
any sale of such Parent Common Stock by him or her, or to comply with any
provisions which would entitle his or her sale to any such exemption from
registration. Such Pulsar Stockholder is fully familiar with Rule 144
promulgated under the Securities Act.
(b) Such Pulsar Stockholder is acquiring Parent Common Stock in the
Acquisition for his or her own account with no view to any distribution thereof
in violation of the Securities Act. Such Pulsar Stockholder has had the
opportunity to discuss Parent's business, management and financial affairs with
Parent's management. Such Pulsar Stockholder has such knowledge and experience
in financial matters that he or she is capable of evaluating the merits and
risks of its investment in the Parent Common Stock. The financial condition of
such Pulsar Stockholder is such that he or she is able to bear all economic
risks of investment in the Parent Common Stock, including the risks of holding
the Parent Common Stock for an indefinite period of time. Such Pulsar
Stockholder is an "accredited investor" as such term is defined in Rule 501
promulgated under the Securities Act.
7. REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Litronic, the Litronic Stockholders,
Pulsar and the Pulsar Stockholders as follows:
7.1 Organization and Authority. Parent is a corporation duly organized,
--------------------------
validly existing, and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to (i) carry on its business
as currently conducted by it and (ii) own, lease and operate its properties.
Parent is duly qualified or licensed and in good standing as a foreign
46
corporation, and has at all times when legally required been so qualified or
licensed and in good standing, in those states in which a failure to be so
qualified or licensed would, in the aggregate, have a Material Adverse Effect on
the business of Parent or the nature of the business conducted by it. Parent has
full power and authority to execute and deliver this Agreement and each other
agreement and instrument to be executed and delivered by it pursuant hereto and
to consummate the transactions contemplated hereby and perform its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby by Parent and the performance of Parent's
obligations hereunder have been duly and validly authorized by all corporate
actions including a unanimous vote of the Board of Directors of Parent, and no
other corporate proceedings on the part of Parent are necessary to authorize
this Agreement or to consummate the transactions so contemplated or to perform
Parent's obligations hereunder. This Agreement has been duly and validly
executed and delivered by Parent and constitutes a legal, valid and binding
obligation of Parent enforceable against it in accordance with its terms, except
as enforcement may be limited by Equitable Principles. True and complete copies
of the Certificate of Incorporation of Parent and all amendments thereof, and of
the Bylaws, as amended to date, have heretofore been forwarded to Litronic and
Pulsar. Parent's minute books contain complete and accurate records of all
meetings of the Parent Stockholders and Board of Directors or written consents
in lieu thereof.
7.2 Capitalization; No Subsidiaries. Parent has authorized capital
-------------------------------
consisting of 25,000,000 shares of Common Stock, par value $.01 per share, and
5,000,0000 shares of undesignated Preferred Stock, par value $.01 per share. As
of the date hereof, there are 100 issued and outstanding shares of Parent Common
Stock which are held by ▇▇▇▇ ▇▇▇▇. Immediately prior to the Reorganization
Closing, the Parent Common Stock issued and outstanding shall consist solely of
the foregoing number. All of the shares of outstanding Parent Common Stock are
duly authorized, validly issued, fully paid and non-assessable and are owned of
record and beneficially by ▇▇▇▇ ▇▇▇▇. ▇▇▇▇ ▇▇▇▇ has good and marketable title to
all of the issued and outstanding shares of Parent's capital stock, free and
clear of any Liens. At the Reorganization Closing, the Litronic Stockholders
will acquire the Parent Common Stock issued to them in the Reorganization free
and clear of any and all Liens. At the Acquisition Closing, the Pulsar
Stockholders will acquire the Parent Common Stock issued to them in the
Acquisition free and clear of any Liens. Parent has no authorized class of
capital stock other than the Common Stock and Preferred Stock. Parent does not
own any shares of capital stock or other securities of, or any other interest
in, nor does it control, directly or indirectly, of record or beneficially, any
other corporation, association, joint venture, partnership, or other business
organization.
8. COVENANTS
8.1 Conduct of Business of Litronic and Pulsar.
------------------------------------------
(a) Except as contemplated by this Agreement, during the period from the
date of this Agreement to the Acquisition Closing, Litronic and Pulsar will each
conduct their respective operations only in the ordinary and usual course of
business and consistent with past practice and will use all commercially
reasonable efforts to preserve intact their respective present business
organizations, keep available the services of their respective present officers
and employees, and
47
preserve their respective relationships with customers, suppliers, contractors,
and others having business dealings with each of them to the end that its
goodwill and on-going business shall not be impaired at the Acquisition Closing.
Litronic and Pulsar shall each collect its receivables and pay its trade
payables in the ordinary course of business consistent with past practice.
(b) Without limiting the generality of Section 8.1(a) and except as
otherwise expressly provided in this Agreement, before the Acquisition Closing,
Litronic and Pulsar will each comply with all laws applicable to the conduct of
their respective businesses and continue in effect their present insurance
coverage and, except with the prior written consent of the other, will not (i)
issue, sell, or pledge, or authorize or propose the issuance, sale, or pledge of
(A) any shares of capital stock of any class, or securities convertible into any
such shares, or any rights, warrants or options to acquire any such shares or
other convertible securities, excepting only pursuant to the exercise or
conversion of options and other instruments or securities outstanding on the
date hereof and disclosed on the Litronic Disclosure Schedule and the Pulsar
Disclosure Schedule which exercise or conversion and which issuance are in
accordance with the terms of such instruments or securities as in effect on the
date hereof, or (B) any other securities in respect of, in lieu of, or in
substitution for, Litronic Shares outstanding on the date hereof; (ii) purchase
or otherwise acquire, or propose to purchase or otherwise acquire, any shares of
capital stock; (iii) declare or pay any dividend or distribution on any shares
of its capital stock; (iv) authorize, recommend, propose or announce an
intention to authorize, recommend or propose, or enter into an agreement in
principle or an agreement with respect to, any change in its capitalization,
merger, consolidation or business combination, any acquisition of a material
amount of assets or securities, any disposition of a material amount of assets
or securities, or any entry into a material contract or any release or
relinquishment of any material contract rights, not in the ordinary course of
business; (v) propose or adopt any amendments to its Articles or Certificate of
Incorporation or Bylaws; (vi) incur, assume, or prepay any long-term debt or,
except in the ordinary course of business under existing lines of credit, incur
or assume any short term debt; (vii) make any loans, advances, or capital
contributions to, or investments in, any other person, other than travel or
other advances to employees consistent with past practice; (viii) assume,
guarantee, endorse, or otherwise become liable or responsible (whether directly,
contingently, or otherwise) for the obligations of any other person, except to
endorse checks for collection or deposit in the ordinary course of business; or
(ix) agree in writing or otherwise to take any of the foregoing actions or any
action that would make any representation or warranty in this Agreement untrue
or incorrect as of the date hereof or as of the Acquisition Closing, as if made
as of such time.
8.2 No Solicitation. Neither Litronic nor Pulsar shall, nor shall they
---------------
permit any of their officers, directors, employees, agents, or representatives
(including, without limitation, investment bankers, attorneys and accountants),
directly or indirectly to (a) initiate, contract with, solicit or encourage any
inquiries or proposals by, or (b) enter into any discussions or negotiations
with, or disclose directly or indirectly any information concerning its business
and properties to, or afford any access to its properties, books, and records
to, any corporation, partnership, person, or other entity or group in connection
with any acquisition proposal regarding a sale of Litronic's or Pulsar's capital
stock or a merger, consolidation, sale of all or a substantial portion of the
assets or any similar transaction that is material to Litronic or Pulsar
("Acquisition Proposal"). Litronic and Pulsar will each notify the other within
three business days of receipt if any discussions or negotiations are
48
sought to be initiated, any inquiry or proposal is made, or any such information
is requested with respect to an Acquisition Proposal or potential Acquisition
Proposal or if any Acquisition Proposal is received or indicated to be
forthcoming. Such notice shall state all substantive terms and conditions of any
Acquisition Proposal and the identity of the person making the Acquisition
Proposal or seeking to initiate discussions or negotiations or requesting
information.
8.3 Access to Information.
---------------------
(a) Between the date hereof and the Acquisition Closing, Pulsar, on the one
hand, and Litronic, on the other hand, may, directly and through their
Representatives, make such investigation of the other and its business and
assets as each deems necessary or advisable (the entity and/or its
representatives making such investigation being the "Investigating Party"), but
such investigation shall not affect any of the representations and warranties
contained herein or in any instrument or document delivered pursuant hereto.
(b) From the date of this Agreement, Litronic will give Pulsar and the
Underwriter and their respective Representatives full access, at reasonable
times and with reasonable notice, to the offices and other facilities and to the
books, contracts, commitments and records of Litronic, will permit Pulsar and
the Underwriter and their respective Representatives to make such inspections as
they may reasonably require, and will cause its Representatives to furnish
Pulsar and the Underwriter and their respective Representatives with such
financial and operating data and other information with respect to the business,
operations, assets, liabilities and prospects of Litronic as Pulsar and the
Underwriter and their respective Representatives may from time to time
reasonably request. From the date of this Agreement, Pulsar will give Litronic
full access, at reasonable times, to the offices and other facilities and to the
books, contracts, commitments and records of Pulsar and, to the extent in the
possession or control of Pulsar, will permit Litronic and its Representatives to
make such inspections as they may reasonably require, and will cause its
Representatives to furnish Litronic and its Representatives with such financial
and operating data and other information with respect to the business,
operations, assets, liabilities and prospects of Pulsar, as Litronic and its
Representatives may from time to time reasonably request.
(c) Pulsar, on the one hand, and Parent and Litronic, on the other hand,
will, and will cause their respective employees, agents, stockholders,
directors, officers, attorneys, accountants and other advisors (including the
Underwriter and its employees and agents) (collectively, "Representatives") to,
hold in strict confidence all Confidential Information and will not disclose the
same to any Person. If this Agreement is terminated, each party having received
or created any documents containing Confidential Information (including
documents received or created by its Representatives), will promptly return to
the other party or destroy (or cause to be returned or destroyed) all documents
(including all copies thereof) so received or created containing such
Confidential Information. For purposes hereof, "Confidential Information" means
all information of any kind (oral and written) concerning Litronic or Pulsar,
respectively, including, but not limited to, information relating to, identity
and description of goods and services used, purchasing, costs, pricing, sources,
technology, research, test procedures and results, customers and prospects,
marketing, and selling and servicing, except information (i) ascertainable or
obtained from public or published information, (ii) received from a third party
not known to Pulsar or its Representatives,
49
or to Litronic or its Representatives, as applicable, to be under an obligation
to Litronic or Pulsar, as applicable, to keep such information confidential,
(iii) that is or becomes known to the public (other than through a breach of
this Agreement), (iv) that was in the receiving party's possession before
disclosure thereof to it in connection with this Agreement, or (v) that is
independently developed by Pulsar or by Litronic (including their respective
Representatives), as applicable. After the Acquisition Closing, Pulsar, the
Litronic Stockholders and the Pulsar Stockholders agree not to, at any time,
directly or indirectly, use, communicate, disclose or disseminate any
Confidential Information in any manner whatsoever, except such disclosures which
are necessary to comply with their duties as officers of Parent. Notwithstanding
the foregoing, any party may disclose the Confidential Information as required
by legal process, applicable law or in connection with regulatory filings;
provided, that if any party or any of its Representatives is requested or
required by legal process (whether by oral questions, interrogatories, requests
for information or documents, subpoenas, civil investigative demands or similar
processes) by any person to disclose any Confidential Information supplied to it
in the course of its dealings, it is agreed that such party will (i) provide the
other parties with prompt notice of such request(s) and the documents requested
so that the other parties may seek an appropriate protective order or waive
compliance with the provisions of this Section 8.3(c), and (ii) consult with the
other parties as to the advisability of taking legally available steps to resist
or narrow such request, and not oppose any action by the other parties to obtain
an appropriate protective order or other reliable assurance that confidential
treatment will be accorded to the Confidential Information.
8.4 Reasonable Best Efforts; Stockholders Approval.
----------------------------------------------
(a) Subject to the terms and conditions hereof, each party to this
Agreement agrees to fully cooperate in all reasonable respects with the others
and the others' Representatives in connection with any steps required to be
taken as part of its obligations under this Agreement and in connection with the
IPO. Each of Litronic and Pulsar agrees that it will use its reasonable best
efforts to cause all conditions to its obligations under this Agreement to be
satisfied as promptly as possible, including, but not limited to, using all
reasonable efforts to obtain all required consents, waivers, amendments,
modifications, approvals, authorizations, novations and licenses, and will not
undertake a course of action inconsistent with this Agreement or which would
make any of its representations, warranties, agreements or covenants in this
Agreement untrue in any material respect or any conditions precedent to its
obligations under this Agreement unable to be satisfied at or prior to the
Reorganization Closing or Acquisition Closing, as applicable.
(b) Without limiting the foregoing, the Litronic Stockholders and the
Pulsar Stockholders shall execute and deliver a written consent in lieu of such
special meeting unanimously approving this Agreement.
8.5 Consents. Each of Pulsar and Litronic will use reasonable efforts to
--------
obtain as promptly as practicable such consents of third parties to agreements
that would otherwise be violated by any provisions hereof and to make such
filings with governmental authorities as are necessary to consummate the
transactions contemplated by this Agreement. The parties will cooperate to
immediately determine whether any filings are requested pursuant to the ▇▇▇▇-
▇▇▇▇▇-▇▇▇▇▇▇ Act. If filings are required, the parties shall cooperate with each
other and file as soon as practicable. If the
50
Acquisition occurs, Parent shall be responsible for the filing fees; otherwise
Pulsar and Litronic shall each be responsible for one-half of the filing fees.
8.6 Public Announcements. Except as provided in the immediately following
--------------------
sentence, all public announcements, notices or other communications regarding
this Agreement and the transactions contemplated hereby to third parties other
than the parties hereto and their respective Representatives shall require the
prior approval of Pulsar and Litronic. Notwithstanding the foregoing, neither
the filing of the Registration Statement (or any other document filed with any
public official in connection with the IPO), nor the distribution of the
Prospectus (whether in preliminary or final form), nor any selling activity
conducted by Parent or the Underwriter in connection with the IPO, including
without limitation those conducted as part of the so-called "road show", shall
be construed to be public announcements, notices or other communications
requiring the prior approval of Litronic and Pulsar.
8.7 Notification of Certain Matters. Each of the parties (the "Notifying
-------------------------------
Party") shall give prompt notice to the other parties of (i) the occurrence or
non-occurrence of any event that would be likely to cause any representation or
warranty of the Notifying Party contained in this Agreement to be untrue or
inaccurate in any material respect at or prior to the Acquisition Closing and
(ii) any material failure of the Notifying Party to comply with or satisfy any
covenant, condition, or agreement to be complied with or satisfied by it
hereunder. Without limiting the foregoing, from time to time prior to the
Closing Litronic will promptly supplement or amend the Litronic Disclosure
Schedule and Pulsar will promptly supplement or amend the Pulsar Disclosure
Schedule, in each case both to correct any inaccuracy in, respectively, the
Litronic Disclosure Schedule or the Pulsar Disclosure Schedule when delivered
and to reflect any development which, if existing at the date of this Agreement,
would have been required to be set forth in the applicable party's Disclosure
Schedule or which has rendered inaccurate the information contained in such
Disclosure Schedule (each notice furnishing such information being called, as
applicable a "Litronic Disclosure Supplement" or a "Pulsar Disclosure
Supplement"). Approximately six business days prior to the Acquisition Closing,
Litronic will deliver to Pulsar a final Litronic Disclosure Supplement and
Pulsar will deliver to Litronic a final Pulsar Disclosure Supplement consisting
of a complete update of, respectively, the Litronic Disclosure Schedule or the
Pulsar Disclosure Schedule as though all representations and warranties
contained in Article 3 hereof and Article 5 hereof were to be made as of the
date of the Acquisition Closing. In addition, Litronic and Pulsar shall promptly
notify each other in writing if at any time prior to a closing in connection
with the IPO it obtains knowledge of any facts relating to Litronic or Pulsar or
their officers, directors or stockholders that might make it necessary or
appropriate to amend or supplement the Prospectus in order to make the
statements contained therein not misleading or comply with applicable law. The
delivery of any Litronic Disclosure Supplement, any Pulsar Disclosure Supplement
or other notice pursuant to this Section 8.7 shall not render correct any
representation or warranty that was incorrect when made or limit or otherwise
affect the remedies available hereunder to the party receiving such Litronic
Disclosure Supplement, Pulsar Disclosure Supplement or notice.
8.8 Covenants of the Litronic Stockholders. The Litronic Stockholders, as
--------------------------------------
applicable, hereby covenant and agree with Pulsar and the Pulsar Stockholders
that they shall:
51
(a) take no action which Litronic may not take pursuant to Section 8.2;
(b) take action and refrain from action to the extent required of Litronic
pursuant to Section 8.4;
(c) vote, or cause to be voted, all of their Litronic Shares for the
approval of each aspect of this Agreement (including the Reorganization)
requiring the approval of the stockholders of Litronic, and against the approval
of any other agreement providing for a merger, consolidation, sale of assets or
other business combination of Litronic with any person or entity other than the
Companies;
(d) cause Litronic to provide to Pulsar the notifications required of
Litronic under Section 8.7;
(e) execute and deliver at the Reorganization Closing the Employment
Contracts;
(f) subject to the other terms of this Agreement, (i) use all commercially
reasonable efforts to take whatever action may be reasonably necessary or
desirable to effect, perform or confirm of record or otherwise in Parent full
right, title and interest in and to the business, properties and assets now
conducted or owned by Litronic, free and clear of all Liens (excepting only
Liens reflected on the Litronic Balance Sheet or otherwise disclosed on the
Litronic Disclosure Schedule) or to collect, realize upon, gain possession of or
otherwise acquire full right, title and interest in and to such business,
properties and assets and (ii) use their reasonable best efforts to take
whatever action may be reasonably necessary or desirable carry out the intent
and purposes of the transactions contemplated hereby and to permit Parent to
undertake and complete the IPO;
(g) notify Parent and Pulsar in writing if at any time prior to a closing
in connection with the IPO they obtain actual knowledge of any facts relating to
Litronic or its officers, directors or stockholders that might make it necessary
or appropriate to amend or supplement the Prospectus used in the registration
statement filed in connection with the IPO in order to make the statements
contained therein not misleading or comply with applicable law (with the
delivery of any notice pursuant to this Section 8.8(g) not limiting or otherwise
affecting the remedies available hereunder to the party receiving such notice);
(h) execute and deliver such other instruments and take such other actions
as may be reasonably required by Parent or the Underwriter in order to carry out
the intent of this Agreement and to complete and close the IPO, subject to the
other terms of this Agreement; and
(i) satisfy (or cause to be satisfied) prior to the Reorganization Closing
any indebtedness to Litronic owed by the Litronic Stockholders or by any
Affiliate of the Litronic Stockholders.
8.9 Covenants of the Pulsar Stockholders. The Pulsar Stockholders, as
------------------------------------
applicable, hereby covenant and agree with Litronic and the Litronic
Stockholders that they shall:
(a) take no action which Pulsar may not take pursuant to Section 8.2;
52
(b) take action and refrain from action to the extent required of Pulsar
pursuant to Section 8.4
(c) vote, or cause to be voted, all of their shares of Pulsar Common Stock
for the approval of each aspect of this Agreement (including the Acquisition)
requiring the approval of the stockholders of Pulsar, and against the approval
of any other agreement providing for a merger, consolidation, sale of assets or
other business combination of Pulsar with any person or entity other than the
Companies;
(d) cause Pulsar to provide to Litronic the notifications required of
Pulsar under Section 8.7;
(e) with respect to ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇., execute and deliver at the
Acquisition Closing the Employment Contracts;
(f) subject to the other terms of this Agreement, use their reasonable best
efforts to take whatever action may be reasonably necessary or desirable carry
out the intent and purposes of the transactions contemplated hereby and to
permit Pulsar to undertake and complete the IPO;
(g) notify Parent and Litronic in writing if at any time prior to a closing
in connection with the IPO they shall obtain actual knowledge of any facts
relating to Pulsar or its officers, directors or stockholders that might make it
necessary or appropriate to amend or supplement the Prospectus used in the
registration statement filed in connection with the IPO in order to make the
statements contained therein not misleading or comply with applicable law (with
the delivery of any notice pursuant to this Section 8.9(g) not limiting or
otherwise affecting the remedies available hereunder to the party receiving such
notice);
(h) execute and deliver such other instruments and take such other actions
as may be reasonably required by Litronic in order to carry out the intent of
this Agreement and by Pulsar to complete and close the IPO, subject to the other
terms of this Agreement;
(i) satisfy (or cause to be satisfied) prior to the Acquisition Closing any
indebtedness to Pulsar owed by the Pulsar Stockholders or by any Affiliate of
the Pulsar Stockholders; and
(j) with respect to Pulsar's indebtedness to IBM Global Finance Corporation
which is guaranteed by the Pulsar Stockholders, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇. agrees (i)
to use reasonable efforts after the Acquisition Closing to obtain the release of
the guarantee of such indebtedness by ▇▇▇▇▇▇▇ ▇▇▇▇▇ and (ii) to the extent IBM
Global Finance Corporation is willing to release some, but not all, of the
Pulsar Stockholders' guarantees, to require the release of all or as much as
possible of the guarantee of ▇▇▇▇▇▇▇ ▇▇▇▇▇ before releasing any of his
guarantee.
8.10 Tax Free Reorganization. From and after the Reorganization Closing,
-----------------------
neither Pulsar nor Litronic shall take or suffer to be taken any action which
will cause either of the Reorganization or the Acquisition not to qualify as a
reorganization within the meaning of Section 368 of the Code, which shall be
tax-free except to the extent of cash paid in lieu of fractional shares.
53
8.11 Monthly Financial Information. Within thirty days after the end of
-----------------------------
each month ending after the date of this Agreement and prior to the Acquisition
Closing, Litronic and Pulsar will each furnish to each other internally prepared
financial statements comparable to its Financial Statements prepared in a manner
consistent with its Financial Statements and certified by the chief financial
officer of Litronic and Pulsar.
8.12 Employment Contracts. At the Acquisition Closing, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇,
--------------------
Sr. and ▇▇▇▇ ▇▇▇▇ shall enter into the Employment Contracts with Parent, in the
form of Exhibit 8.12.
8.13 Covenants of Parent. Subject to the consummation of the Reorganization
-------------------
and the Acquisition, Parent hereby covenants and agrees with Litronic and the
Litronic Stockholders and Pulsar and the Pulsar Stockholders as follows:
(a) If, prior to the Acquisition Closing, any Litronic Stockholder or any
Pulsar Stockholder gives written notice to Parent of a statement contained in
the Registration Statement that, in such Stockholder's opinion, is false or
misleading, or that the Registration Statement omits to state a fact necessary
to make the statements contained therein not false or misleading, and if Parent
fails to amend the Registration Statement to address such statement or omission
to the reasonable satisfaction of such Stockholder, then Parent hereby agrees to
indemnify such Stockholder against any loss or damage (including reasonable
attorneys' fees) suffered by such Stockholder as a consequence of any claim
brought against such Stockholder by any third party on the basis of the
statement or omission of which such Stockholder gave notice.
(b) Parent will use all commercially reasonable efforts to obtain the
release, at or immediately following the Acquisition Closing, of all Litronic
Guarantees. Parent covenants that it will either (i) take steps to ensure, to
the Litronic Stockholders' reasonable satisfaction, that each such loan and
similar credit obligation guaranteed by the Litronic Stockholders will be
satisfied and permanently discharged as of the Acquisition Closing or (ii)
obtain and deliver to the Litronic Stockholders at or before the Reorganization
Closing the written assurance from the guaranteed party with respect to each
such loan and similar credit obligation guaranteed by the Litronic Stockholders
to the effect that, upon or as of the Acquisition Closing, the Litronic
Stockholders will be released from the applicable Litronic Guarantee. Parent
further covenants that it will indemnify the Litronic Stockholders against any
loss (including reasonable attorneys' fees) in connection with any Litronic
Guarantees that have been so disclosed and, if applicable, reflected.
(c) After completion of the IPO, Parent shall use its best efforts to
continue the quotation of the Parent Common Stock on the Nasdaq National Market.
(d) Parent agrees with respect to continuing employees of Litronic and
Pulsar to recognize all vacation time accrued through the Acquisition Closing
under the vacation policies of Litronic and Pulsar as of the Acquisition
Closing, and to implement health, retirement and other benefit plans with
benefits comparable or superior to those currently in place at Litronic and
Pulsar.
(e) At or prior to the Acquisition Closing, Parent shall take or cause to
be taken all necessary action such that, at the Acquisition Closing and
concurrent with the effectiveness of the
54
Amended Charter, the Board of Directors of Parent shall be comprised of five (5)
members. The first class of directors shall serve until the annual meeting of
stockholders held in 2000 and shall initially consist of two members, one of
whom shall be identified by Litronic and one of whom shall be identified by
Pulsar prior to the Reorganization Closing, who shall be elected to the Board of
Directors immediately after the Acquisition Closing. The second class of
directors shall serve until the annual meeting of stockholders held in 2001 and
shall initially consist of ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, who shall be elected to the Board of
Directors immediately after the Acquisition Closing. The third class of
directors shall serve until the annual meeting of stockholders held in 2002 and
shall initially consist of ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇. and ▇▇▇▇ ▇▇▇▇, who shall be
elected to the Board of Directors immediately after the Acquisition Closing. All
subsequent terms of each class of directors after such class first stands for
re-election shall expire at the third succeeding annual meeting of stockholders
after their election. At or prior to the Acquisition Closing, the Companies
shall take or cause to be taken all necessary action such that, at the
Acquisition Closing, the officers of Parent shall be as set forth on Exhibit
8.13(e), and each such person shall hold office until his or her respective
successor is duly elected or appointed and qualified.
(f) Prior to the Acquisition Closing, Parent shall take or cause to be
taken all necessary action to adopt the Parent 1999 Stock Option Plan in
substantially the form of Exhibit 8.13(f).
(g) Parent will cause a Form S-8 registration statement ("Form S-8") to be
filed under the Securities Act with respect to the Parent Common Stock issuable
upon exercise of the Assumed Options within 90 days of the first anniversary of
the Acquisition Closing and will use its best efforts to maintain the
effectiveness and current status of the Form S-8 for so long as any such Assumed
Options remain outstanding; provided that (i) any Assumed Options held by any
member of the immediate family of ▇▇▇▇ ▇▇▇▇ (other than A. R. Shah) or any
officer, director or stockholder of Parent as of the Acquisition Closing shall
be subject to the terms of applicable lock-up agreements with the Underwriter
and (ii) no more than 100,000 shares of Parent Common Stock in the aggregate may
be sold pursuant to the Form S-8 prior to the second anniversary of the
Acquisition Closing. With respect to those individuals, if any, who subsequent
to the Acquisition Closing will become subject to the reporting requirements
under Section 16(a) of the Exchange Act, Parent shall administer those
individuals' Assumed Options in a manner that complies with Rule 16b-3
promulgated under the Exchange Act.
(h) Parent will use all commercially reasonable efforts to ensure, to the
reasonable satisfaction of ▇▇▇▇▇▇▇ ▇▇▇▇▇, that (i) the indebtedness of Pulsar to
Wilmington Trust Company which is guaranteed by ▇▇▇▇▇▇▇ ▇▇▇▇▇ will be satisfied
and permanently discharged within 90 days of the Acquisition Closing, or, in
lieu thereof, (ii) ▇▇▇▇▇▇▇ ▇▇▇▇▇ will be released from such guarantee within
such 90-day period.
8.14 Cooperation. Each of the parties hereto hereby agrees to fully
-----------
cooperate with the other parties hereto in preparing and filing any notices,
applications, reports and other instruments and documents which are required by,
or which are desirable in the reasonable opinion of any of the parties hereto,
or their respective legal counsel, in respect of, any statute, rule, regulation
or order of any governmental or administrative body in connection with the
transactions contemplated by this Agreement.
55
9. CONDITIONS TO CONSUMMATION OF THE ACQUISITION
9.1 Conditions to the Obligations of Pulsar and the Pulsar Stockholders
-------------------------------------------------------------------
with respect to the Acquisition. The respective obligations of Pulsar and the
-------------------------------
Pulsar Stockholders to consummate the Acquisition are subject to the
satisfaction at the Acquisition Closing, or waiver by Pulsar in writing, in
whole or in part, of each of the following conditions:
(a) The IPO shall have been completed at the same time.
(b) Each of the representations, warranties, agreements and covenants of
Parent, Litronic and the Litronic Stockholders (giving effect to the Litronic
Disclosure Schedule) shall be true and correct as of, and shall not have been
violated in any respect at, the Acquisition Closing as though made on and as of
the Acquisition Closing, except for (i) representations, warranties, agreements
and covenants which make reference to a specific date (including the date of
this Agreement), which need only be true and correct as of the specified date,
and (ii) failures of representations or warranties to be true and correct as of
the Acquisition Closing solely on account of matters arising between the date
hereof and the Acquisition Closing in the ordinary course of Litronic's
business, if and to the extent such matters are consistent with past practice of
Litronic and do not create a Material Adverse Effect with respect to Litronic,
either singly or in the aggregate; Parent, Litronic and the Litronic
Stockholders shall, on or before the Acquisition Closing, have performed all of
their respective obligations under this Agreement which by the terms hereof are
to be performed on or before the Acquisition Closing; and there shall have been
delivered to Pulsar a certificate signed by the President of Litronic on behalf
of and in the name of Litronic and by the Litronic Stockholders dated as of the
date of the Acquisition Closing to the foregoing effect (except with respect to
the representations, warranties and agreements of Parent).
(c) The Pulsar Stockholders, the Litronic Stockholders and Parent shall
have entered into the Registration Rights Agreement.
(d) No action, claim, suit, inquiry, investigation or proceeding by or
before any court or other governmental body shall have been instituted by any
governmental body or other Person or threatened in writing by any governmental
body which seeks to restrain, prohibit or invalidate the transactions
contemplated by this Agreement or which would have a Material Adverse Effect on
the right of Pulsar to consummate the Acquisition.
(e) Pulsar shall have received the opinion dated the date of the
Acquisition Closing and in form and substance reasonably satisfactory to Pulsar
and its counsel of ▇▇▇▇▇ & ▇▇▇▇▇▇, LLP, counsel to Litronic, substantially to
the effect set forth on Exhibit 9.2(e) (subject to qualifications and
assumptions customary in transactions such as the Acquisition), which opinion
provides that it may be relied upon by the Underwriter.
(f) All proceedings taken by Litronic and all instruments executed and
delivered by Litronic prior to the date of the Acquisition Closing in connection
with the transactions herein contemplated shall be satisfactory in form and
substance to counsel for Pulsar acting reasonably.
56
(g) No statute, rule or regulation shall have been enacted or promulgated
which makes illegal or prohibits consummation of the transactions contemplated
hereby or which would have a Material Adverse Effect on the ability of Pulsar to
conduct the business of Litronic as presently conducted by Litronic.
(h) ▇▇▇▇ ▇▇▇▇ and ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇. shall have executed and delivered
to Parent the Employment Contracts.
(i) Litronic shall have delivered to Pulsar a certificate of its Secretary
certifying as to requisite corporate or other action authorizing the
transactions contemplated by this Agreement, the incumbency of officers and
directors, and the status of record ownership of the Litronic Shares.
(j) Parent and Litronic shall have delivered to Pulsar such other
certificates, documents and consents as Pulsar and its counsel shall reasonably
require.
(k) The Acquisition shall have been consummated on or prior to May 1, 1999
or such later date as the parties shall agree by a written instrument signed by
all of them.
(l) Except as otherwise provided by this Agreement, there shall not have
occurred after the date hereof, in the reasonable judgment of Pulsar, any
Material Adverse Effect on Litronic.
(m) Except as otherwise set forth in this Agreement including the Litronic
Disclosure Schedule, all necessary consents, waivers, approvals, licenses and
authorizations by third parties shall have been received.
(n) Parent shall have adopted and filed the Amended Charter with the
Secretary of State of the State of Delaware.
(o) The quotation of the Parent Common Stock on the Nasdaq National Market,
including the shares of Parent Common Stock issuable pursuant to the
Reorganization and the Acquisition and upon exercise of all Assumed Options,
shall have been authorized subject to completion of the IPO.
9.2 Conditions to the Obligations of Parent with respect to the
-----------------------------------------------------------
Acquisition .The obligations of Parent to consummate the Acquisition are subject
------------
to the satisfaction at the Acquisition Closing, or waiver by Parent in writing,
in whole or in part, of each of the following conditions:
(a) The IPO shall have been completed at the same time.
(b) Each of the representations, warranties and agreements of Pulsar and
the Pulsar Stockholders (giving effect to the Pulsar Disclosure Schedule) shall
be true and correct as of, and shall not have been violated in any respect at,
the Acquisition Closing (without giving effect to the Acquisition) as though
made on and as of the Acquisition Closing except for (i) representations and
warranties and agreements which make reference to a specific date (including the
date of this Agreement), which need only be true and correct as of the specified
date, and (ii) failures of representations or warranties to be true and correct
as of the Acquisition Closing solely on account
57
of matters arising between the date hereof and the Acquisition Closing in the
ordinary course of Pulsar's business, if and to the extent such matters are
consistent with past practice of Pulsar and do not create a Material Adverse
Effect with respect to Pulsar, either singly or in the aggregate; Pulsar and the
Pulsar Stockholders shall, on or before the Acquisition Closing, have performed
all of their respective obligations under this Agreement which by the terms
hereof are to be performed on or before the Acquisition Closing; and there shall
have been delivered to Parent a certificate signed by the President of Pulsar on
the behalf of and in the name of Pulsar and by the Pulsar Stockholders, dated as
of the date of the Acquisition Closing to the foregoing effect.
(c) The Pulsar Stockholders, the Litronic Stockholders and Parent shall have
entered into the Registration Rights Agreement.
(d) No action, claim, suit, inquiry, investigation or proceeding by or
before any court or other governmental body shall have been instituted by any
governmental body or other Person or threatened in writing by any governmental
body which seeks to restrain, prohibit or invalidate the transactions
contemplated by this Agreement or which would have a Material Adverse Effect on
the right of Parent to consummate the Acquisition.
(e) Parent shall have received the opinion, dated the date of the
Acquisition Closing and in form and substance satisfactory to Parent and its
counsel, of Arent Fox ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇, PLLC, substantially to the effect
set forth on Exhibit 9.3(e) (subject to qualifications and assumptions customary
in transactions such as the Acquisition).
(f) All proceedings taken by Pulsar and all instruments executed and
delivered by Pulsar prior to the date of the Acquisition Closing in connection
with the transactions herein contemplated shall be satisfactory in form and
substance to counsel for Parent, acting reasonably.
(g) No statute, rule or regulation shall have been enacted or promulgated
which makes illegal or prohibits consummation of the transactions contemplated
hereby or which would have a Material Adverse Effect on the ability of Parent to
conduct the business of Pulsar as presently conducted by Pulsar.
(h) ▇▇▇▇ ▇▇▇▇ and ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇., shall have executed and delivered
to Parent the Employment Contracts.
(i) Pulsar shall have delivered to Parent a certificate of its Secretary,
certifying as to requisite corporate or other action authorizing the
transactions contemplated by this Agreement, the incumbency of officers and
directors, and the status of record ownership of its capital stock.
(j) ▇▇▇▇ ▇▇▇▇ shall have been elected as chairman of the board, chief
executive officer and a director of Parent as of immediately following the
closing of the IPO.
(k) Pulsar shall have delivered to Parent such other certificates,
documents and consents (including the legal existence and good standing of
Pulsar) as Parent and its counsel shall reasonably require.
58
(l) The Acquisition shall have been consummated on or prior to May 1, 1999
or such later date as the parties shall agree by a written instrument signed by
all of them.
(m) Except as otherwise provided by this Agreement, there shall not have
occurred after the date hereof, in the reasonable judgment of Parent, any
Material Adverse Effect on Pulsar.
(n) Except as otherwise set forth in this Agreement, including the Pulsar
Disclosure Schedule, all necessary consents, waivers, approvals, licenses and
authorizations by third parties shall have been received.
(o) Parent shall have adopted and filed the Amended Charter with the
Secretary of State of the State of Delaware.
10. INDEMNIFICATION
10.1 Agreements to Indemnify.
-----------------------
(a) As used in this Article 10:
(i) "Damages" means claims, damages, liabilities, losses, judgments,
settlements and expenses, including, without limitation, all reasonable fees and
disbursements of counsel incident to the investigation or defense of any claim
or proceeding or threatened claim or proceeding, but shall not include claims
fully covered by insurance, calculated taking into account the after tax benefit
of any deductions arising out of such "Damages."
(ii) "Litronic Indemnified Party" means Litronic prior to the
Reorganization Closing and the former stockholders of Litronic collectively
after the Reorganization Closing, "Pulsar Indemnified Party" means Pulsar prior
to the Acquisition Closing and the former stockholders of Pulsar after the
Acquisition Closing and "Parent Indemnified Party" means Parent.
(iii) "Indemnified Party" means either of the Pulsar Indemnified Party,
the Litronic Indemnified Party or the Parent Indemnified Party, as applicable
under the circumstances.
(b) On the terms and subject to the limitations set forth in this
Agreement, Litronic, prior to the Reorganization Closing, and the Litronic
Stockholders, after the Reorganization Closing, shall indemnify, defend and hold
the Pulsar Indemnified Party and the Parent Indemnified Party harmless from,
against and in respect of any and all Damages incurred by any Pulsar Indemnified
Party or any Parent Indemnified Party arising from or in connection with any
actual or alleged breach of any representation, warranty, covenant or agreement
made by Litronic or by the Litronic Stockholders in this Agreement or in any
Exhibit, Schedule, certificate or other document delivered or to be delivered at
the Reorganization Closing or the Acquisition Closing by or on behalf of
Litronic or the Litronic Stockholders pursuant to the terms of this Agreement or
otherwise referred to or incorporated in this Agreement; provided, however, that
(i) this provision shall not be construed to provide to the Pulsar Indemnified
Party or the Parent Indemnified Party any indemnification with respect to the
Registration Statement and the information contained therein, or with respect to
any
59
failure of the IPO to be consummated, and (ii) each Litronic Stockholder shall
be severally, and not jointly, liable hereunder with respect to any actual or
alleged breach of any representation in Article 4.
(c) On the terms and subject to the limitations set forth in this
Agreement, Pulsar, prior to the Acquisition Closing, and the Pulsar
Stockholders, after the Acquisition Closing, shall indemnify, defend and hold
the Litronic Indemnified Party and the Parent Indemnified Party harmless from,
against and in respect of any and all Damages incurred by any Litronic
Indemnified Party or any Parent Indemnified Party arising from or in connection
with any actual or alleged breach of any representation, warranty, covenant or
agreement made by Pulsar or the Pulsar Stockholders in this Agreement or in any
Exhibit, Schedule, certificate or other document delivered or to be delivered at
the Reorganization Closing or the Acquisition Closing by or on behalf of Pulsar
or the Pulsar Stockholders pursuant to the terms of this Agreement or otherwise
referred to or incorporated in this Agreement; provided, however, that (i) this
provision shall not be construed to provide to the Litronic Indemnified Party or
the Parent Indemnified Party any indemnification with respect to the
Registration Statement and the information contained therein, or with respect to
any failure of the IPO to be consummated, and (ii) each Pulsar Stockholder shall
be severally, and not jointly, liable hereunder with respect to any actual or
alleged breach of any representation in Article 6.
(d) On the terms and subject to the limitations set forth in this
Agreement, Parent shall indemnify, defend and hold the Litronic Indemnified
Party and the Pulsar Indemnified Party harmless from, against and in respect of
any and all Damages incurred by any Litronic Indemnified Party or any Pulsar
Indemnified Party arising from or in connection with any actual or alleged
breach of any representation, warranty, covenant or agreement made by Parent in
this Agreement or in any Exhibit, Schedule, certificate or other document
delivered or to be delivered at the Reorganization Closing or the Acquisition
Closing by or on behalf of Parent pursuant to the terms of this Agreement or
otherwise referred to or incorporated in this Agreement; provided, however, that
this provision shall not be construed to provide to the Litronic Indemnified
Party or the Pulsar Indemnified Party any indemnification with respect to the
Registration Statement and the information contained therein, or with respect to
any failure of the IPO to be consummated.
(e) Subject to Section 10.2, Litronic's and the Litronic Stockholders'
representations and warranties set forth in Article 3, the Litronic
Stockholders' representations and warranties set forth in Article 4, Pulsar's
and the Pulsar Stockholders' representations and warranties set forth in Article
5, the Pulsar Stockholders' representations and warranties set forth in Article
6 and Parent's representations and warranties set forth in Article 7, shall, for
purposes of this Article 10, be deemed to have survived the Acquisition Closing
and the other transactions contemplated hereby notwithstanding any contrary
terms of this Agreement, and whenever such representations, warranties,
covenants and agreements are referred to in this Article 10, the text of the
same as set forth in the aforesaid Articles shall be deemed to be set forth in
their entirety herein, and the same are hereby incorporated herein by such
references. Each representation, warranty, covenant and agreement of Litronic
and the Litronic Stockholders shall be deemed to have been relied
60
upon by the Pulsar Indemnified Party and the Parent Indemnified Party, and each
representation, warranty, covenant and agreement of Pulsar and the Pulsar
Stockholders shall be deemed to have been relied upon by the Litronic
Indemnified Party and the Parent Indemnified Party, notwithstanding any
investigation or inspection made by or on behalf of any Pulsar Indemnified Party
or any Litronic Indemnified Party or any Parent Indemnified Party, as
applicable, and shall not be affected in any respect of any such investigation
or inspection. No waiver of a closing condition by a Pulsar Indemnified Party or
a Litronic Indemnified Party shall be deemed to relieve a party that is
otherwise obligated to provide indemnification of its obligations pursuant to
this Section 10.1 on account of the matters that were the subject of such
waiver.
10.6 Limitations on Indemnity Obligations. The indemnity obligations of
------------------------------------
Litronic or the Litronic Stockholders, as applicable (in either case, the
"Litronic Indemnifying Party"), or Pulsar or the Pulsar Stockholders, as
applicable (the "Pulsar Indemnifying Party") (both the Litronic Indemnifying
Party and the Pulsar Indemnifying Party being called generically the
"Indemnifying Party"), under this Agreement shall be subject to the following
limitations:
(a) The indemnity obligations of the Indemnifying Party shall expire on the
second anniversary of the Acquisition Closing (the "Cut-off Date"); provided,
however, that such obligations with respect to (i) the representations and
warranties contained in Sections 3.1, 3.2, 3.9, 4.1, 4.2, 5.1, 5.2, 5.10, 6.1
and 6.2 of this Agreement shall continue forever without limitation, and (ii)
the representations and warranties regarding Taxes, which are contained in
Section 3.15 and Section 5.16, shall remain in effect until all claims for Taxes
due by or on account of Litronic or Pulsar, respectively, for any period up to
and including the Acquisition Closing have been settled and any statute of
limitations period with respect to such Taxes has expired; and provided further
that the indemnity obligations of the Indemnifying Party for Damages timely
asserted by an Indemnified Party before the expiration of the applicable
indemnity period, if any, in the manner provided in this Agreement shall
continue until such Damages are finally resolved and discharged.
(b) Subject to the maximum aggregate amounts provided elsewhere in this
Section 10.2(b) with respect to the Litronic Stockholders' or the Pulsar
Stockholders' indemnity obligations, with respect to any Damages for which the
Litronic Stockholders or the Pulsar Stockholders are liable pursuant to Section
10.1, the Litronic Stockholders or the Pulsar Stockholders shall be liable
solely for a fraction of each dollar of Damages suffered equal to the fraction
derived by dividing the number of shares of Litronic Common Stock or shares of
Pulsar Common Stock held by the particular Litronic Stockholders or Pulsar
Stockholders, as the case may be, as of the date hereof by the total number of
shares of Litronic Common Stock or shares of Pulsar Common Stock outstanding on
a fully diluted basis as of the date hereof. The aggregate indemnity obligations
of such stockholders for any Damages shall not in any event exceed an amount
equal to the product of the total number of shares of Parent Common Stock to
which such stockholder becomes entitled pursuant to Section 2.1 or 2.2,
multiplied by the IPO Price. The indemnity obligations may be satisfied by
delivery of (a) cash or other immediately available funds or (b) shares of
Parent Common Stock, valued at the IPO Price.
(c) An Indemnified Party shall be entitled to indemnification only if the
aggregate and collective Damages incurred or suffered by it exceeds $100,000, in
which event it shall be entitled to indemnification of the full amount of such
Damages.
61
(d) Notwithstanding the preambles to, respectively, Article 3 and Article
5, the contractual liability of the Litronic Stockholders and the Pulsar
Stockholders for any breach of the representations and warranties contained in,
respectively, Article 3 and Article 5 shall be limited to such stockholder's
liability provided in this Article 10.
10.3 Notice of Third Party Claims. An Indemnified Party shall promptly
----------------------------
notify the Indemnifying Party in writing of any matter asserted by a third
person that might give rise to any indemnity obligation of the Indemnifying
Party hereunder (a "Third Party Claim"), specifying in reasonable detail the
nature thereof and indicating the amount (if known, or estimated if necessary)
of the Damages that have been or may be sustained by the Indemnified Party.
Failure of any Indemnified Party to promptly give such notice shall not relieve
the Indemnifying Party of its obligation to indemnify under this Article 10, but
as a result of any such failure, the Indemnified Party shall be liable to the
Indemnifying Party for, and only for, the amount of actual damages caused by
such failure, which amount shall be an offset against the amount of Damages for
which the Indemnifying Party is liable hereunder. Together with or following
such notice, the Indemnified Party shall deliver to the Indemnifying Party
copies of all notices and documents received by the Indemnified Party relating
to the Third Party Claim (including court papers).
10.4 Defense and Settlement of Third Party Claims. The Indemnifying Party
--------------------------------------------
shall have the right (without prejudice to the right of any Indemnified Party to
participate at its or his own expense through counsel of its or his own
choosing) to defend against any Third Party Claim at its or his expense and
through counsel of its own choosing and to control such defense if the
Indemnifying Party gives written notice of its intention to do so within 15
business days of its or his receipt of notice of the Third Party Claim. The
Indemnified Party shall cooperate fully in all reasonable respects in the
defense of such Third Party Claim and shall make available to the Indemnifying
Party or its counsel all pertinent information under their control relating
thereto. The Indemnified Party shall have the right to elect to settle any Third
Party Claim; provided, however, the Indemnifying Party shall not have any
indemnification obligation with respect to any monetary payment to any third
party required by such settlement unless the Indemnifying Party shall have
consented thereto. The Indemnifying Party shall have the right to elect to
settle any Third Party Claim subject to the consent of the Indemnified Party;
provided, however, that if the Indemnified Party fails to give such consent
within 15 business days of being requested to do so, the Indemnified Party
shall, at its expense, assume the defense of such Third Party Claim and
regardless of the outcome of such matter, the Indemnifying Party's liability
hereunder shall be limited to the amount of any such proposed settlement. The
foregoing provisions notwithstanding, in no event (a) may an Indemnifying Party
adjust, compromise or settle any Third Party Claim unless such adjustment,
compromise or settlement unconditionally releases the Indemnified Party from all
liability, (b) may an Indemnifying Party adjust, compromise or settle any Third
Party Claim if such adjustment, compromise or settlement affects the absolute
and sole right of Parent to own or use any of Litronic's or Pulsar's assets or
(c) may an Indemnifying Party defend any Third Party Claim which, if adversely
determined, would materially impair the financial condition, business or
prospects of Parent.
10.5 Notice of Other Claims. If any Indemnified Party incurs any Damages
----------------------
that does not involve a Third Party Claim, the Indemnified Party shall deliver a
notice of such Damages with
62
reasonable promptness to the Indemnifying Party. If the Indemnifying Party
notifies the Indemnified Party that it does not dispute the Damages described in
such notice or fails to notify the Indemnified Party within 30 days after
delivery of such notice by the Indemnified Party whether the Indemnifying Party
disputes the Damages described in such notice, the Damages in the amount
specified in the Indemnified Party's notice will be conclusively deemed a
liability of the Indemnifying Party and the Indemnifying Party shall pay the
amount of such Damages to the Indemnified Party on demand. Failure of any
Indemnified Party to promptly give such notice shall not relieve the
Indemnifying Party of its or his obligation to indemnify under this Article 10,
but as a result of any such failure, the Indemnified Party shall be liable to
the Indemnifying Party for, and only for, the amount of the actual damages
caused by such failure, which amount shall be an offset against the amount of
Damages for which the Indemnifying Party is liable hereunder.
11. TERMINATION; AMENDMENTS; WAIVER
11.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Acquisition Closing, notwithstanding approval thereof by the stockholders of
the Companies:
(a) by mutual consent of the stockholders of the Companies and their Boards
of Directors;
(b) by any party, in its sole discretion, if the Reorganization,
Acquisition and the IPO have not been consummated on or before May 1, 1999,
unless the failure of the Reorganization, Acquisition and IPO to occur by such
date shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe the covenants and agreements of such party set
forth herein;
(c) by Litronic or the Litronic Stockholders if there has been a
misrepresentation or breach on the part of Pulsar or the Pulsar Stockholders in
the representations, warranties, covenants or obligations of Pulsar or the
Pulsar Stockholders set forth herein, provided that in the case of a breach of
any such covenant or obligation, such breach has not been cured within ten
business days after Litronic has notified Pulsar or the Pulsar Stockholder in
question of such breach;
(d) by Pulsar or the Pulsar Stockholders if there has been a
misrepresentation or breach on the part of Litronic or the Litronic Stockholders
in the representations, warranties, covenants and obligations of Litronic and
the Litronic Stockholders set forth herein, provided that in the case of a
breach of any such covenant or obligation, such breach has not been cured within
ten business days after Pulsar has notified Litronic or the Litronic Stockholder
in question of such breach; or
(e) by any party if any court shall have issued an order, decree or ruling
or taken any other action permanently enjoining, restraining or otherwise
prohibiting either of the Reorganization or the Acquisition and such order,
decree, ruling or other action shall have become final and non-appealable.
The power of termination provided for by this Section 11.1 may be exercised
for Pulsar or Litronic only by their respective Boards of Directors in their
sole discretion, and will be
63
effective only after written notice thereof, signed on behalf of the party for
which it is given by its Chairman of the Board, President or other duly
authorized officer, shall have been given to the other. If this Agreement is
terminated in accordance with this Section 11.1, the Acquisition shall be
abandoned without further action by Pulsar or Litronic.
11.2 Effect of Termination. In the event of termination of this Agreement
---------------------
by any party as provided in Section 11.1, this Agreement shall forthwith become
void and have no effect, and none of the Companies, nor any of their officers,
directors or stockholders shall have any liability of any nature whatsoever
hereunder, or in connection with the transactions contemplated hereby, except
(a) Section 13.7 shall survive any termination of this Agreement and (b)
notwithstanding anything to the contrary contained in this Agreement, no party
shall be relieved of or released from any liabilities or damages arising out of
its breach of any provision of this Agreement.
11.3 Amendment. This Agreement may not be amended except by an instrument
---------
in writing signed on behalf of each of the parties hereto.
11.4 Extension; Waiver. At any time prior to the Acquisition Closing the
-----------------
parties hereto, by action taken or authorized (in the case of the Companies) by
their respective Boards of Directors, may, to the extent legally allowed,
subject to Section 10.3, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such extension or waiver
or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
12. DISPUTE RESOLUTION
Except for matters with respect to which injunctive relief is sought, all
claims, disputes and other matters in controversy (a "dispute") arising directly
or indirectly out of or related to this Agreement, or the breach thereof,
whether contractual or noncontractual, and whether during the term or after the
termination of this Agreement, shall be resolved exclusively according to the
procedures set forth in this Article 12.
12.1 Mediation. Neither party shall commence an arbitration proceeding
---------
pursuant to the provisions of Section 12.2 unless that party first gives a
written notice (a "Dispute Notice") to the other party setting forth the nature
of the dispute. The parties shall attempt in good faith to resolve the dispute
by mediation under the Commercial Mediation Rules of the American Arbitration
Association ("AAA") in effect on the date of the Dispute Notice. If the parties
cannot agree on the selection of a mediator within 20 days after delivery of the
Dispute Notice, the mediator will be selected by the AAA. If the dispute has not
been resolved by mediation as provided above within 60 days after delivery of
the Dispute Notice, then the dispute shall be determined by arbitration in
accordance with the provisions of Section 12.2.
64
12.2 Arbitration. Any dispute that is not settled through mediation as
-----------
provided in Section 12.1 above shall be resolved by arbitration in Orange
County, California, governed by the Federal Arbitration Act, 9 U.S.C. (S) 1 et
seq, and administered by the American Arbitration Association under its
Commercial Arbitration Rules in effect on the date of the Dispute Notice, as
modified by the provisions of this Section 12.2, by a single arbitrator. Each
party shall be entitled to strike on a peremptory basis, for any reason or no
reason, any or all of the names of potential arbitrators on the list submitted
to the parties by the AAA as being qualified in accordance with the criteria
established by the AAA. If the parties cannot agree on a mutually acceptable
single arbitrator from the one or more lists submitted by the AAA, the AAA shall
designate three persons who, in its opinion, meet the criteria established by
the AAA, which designees may include persons named on any list previously
submitted by the AAA. Each party shall be entitled to strike one of such three
designees on a peremptory basis, indicating its order of preference with respect
to the remaining designees, and the selection of the arbitrator shall be made
from among such designee(s) which have not been so stricken by either party in
accordance with their indicated order of mutual preference to the extent
possible. The arbitrator shall base the award on applicable law and judicial
precedent and, unless both parties agree otherwise, shall include in such award
the findings of fact and conclusions of law upon which the award is based.
Judgment on the award rendered by the arbitrator(s) may be entered in any court
having jurisdiction thereof.
12.3 Costs and Attorneys' Fees. If any party fails to proceed with
-------------------------
mediation or arbitration as provided herein or unsuccessfully seeks to stay such
mediation or arbitration, or fails to comply with any arbitration award, or is
unsuccessful in vacating or modifying the award pursuant to a petition or
application for judicial review, the other parties shall be entitled to be
awarded costs, including reasonable attorneys' fees, paid or incurred by such
other parties in successfully compelling such arbitration or defending against
the attempt to stay, vacate or modify such arbitration award and/or successfully
defending or enforcing the award.
12.4 Tolling Statute of Limitations. All applicable statutes of
------------------------------
limitations and defenses based upon the passage of time shall be tolled while
the procedures specified in this Article 12 are pending. The parties will take
such action, if any, required to effectuate such tolling.
13. MISCELLANEOUS
13.1 Entire Agreement; Assignment. This Agreement (a) constitutes, with
----------------------------
the Litronic Disclosure Schedule, the Pulsar Disclosure Schedule, the other
Schedules and the Exhibits hereto, the entire agreement among the parties with
respect to the subject matter hereto and supersedes all other prior agreements
and understandings, both written and oral, among the parties or any of them with
respect to the subject matter hereof and (b) shall not be assigned by operation
of law or otherwise.
13.2 Validity. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
65
13.3 Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given or made when delivered in person or by electronic facsimile
transmission, cable, telegram, or telex, or when mailed by registered or
certified mail (postage prepaid, return receipt requested) or delivered to a
courier of national reputation to the respective parties as follows:
If to Parent, to it at:
▇▇▇▇ ▇▇▇▇
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
with a copy to:
Arent Fox ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇, PLLC
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
If to Pulsar or the Pulsar Stockholders, to them at:
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
with a copy to:
▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, Esq.
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
If to Litronic or the Litronic Stockholders, to them at:
▇▇▇▇ ▇▇▇▇
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
66
with a copy to:
▇▇▇▇▇ & ▇▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇/▇▇/ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇ ▇▇▇▇▇, Esq.
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof). Receipts of notice shall be deemed to have occurred upon
receipt of confirmation if notice is by fax or upon passage of three days if
notice is by mail.
13.4 Governing Law. This Agreement and all rights of the parties arising
-------------
in connection with the transactions contemplated hereby (including the
negotiation hereof, and whether or not such transactions shall be consummated)
shall be governed by and construed in accordance with the internal laws of State
of Delaware, regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
13.5 Descriptive Headings. The descriptive headings herein are inserted
--------------------
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
13.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement. Copies (photostatic,
facsimile or otherwise) of signatures to this Agreement shall be deemed to be
originals and may be relied upon to the same extent as originals, and delivery
of a duly executed signature page to this Agreement shall be deemed to be
delivery of this Agreement in its entirety.
13.7 Expenses. All costs and expenses incurred in connection with the
--------
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses, except that, notwithstanding the foregoing, (a) the fees of Arent
Fox ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇, PLLC relating to the Reorganization, the Acquisition
and IPO, (b) the fees of KPMG Peat Marwick LLP relating to the preparation of
the pro forma financial statements needed for the completion of the
Reorganization, Acquisition and IPO and the representation of Pulsar in the IPO
registration process, and (c) the fees incurred by Parent as the registrant in
the registration statement relating to the IPO, including, but limited to,
printer, registration and filing, and "Blue Sky" fees, shall be payable by
Litronic and Pulsar at the rate of 64.0776% and 35.9224%, respectively.
Notwithstanding the foregoing and Section 13.8, if the IPO is completed, all of
the fees and expenses referred to in this Section 13.7 shall be paid by Parent.
13.8 Broker Fees. Pulsar and Litronic shall each be responsible for any
-----------
advisory, brokers' or finders' fees charged by its advisors, except for any fees
due to Financial Advisor pursuant to the Financial Advisor IPO engagement letter
and those certain engagement letters dated as of the date
67
hereof between Financial Advisor and each of Pulsar and Litronic relating to
Financial Advisor's role as exclusive financial advisor for the Reorganization
and Acquisition, which fees shall be payable by the parties in accordance with
the terms of such engagement letters. Each party will indemnify and hold
harmless the other from any claim for advisory, brokers' or finders' fees by any
person or entity other than the Financial Advisor engaged or claiming to be
engaged by the indemnifying party.
13.9 Parties in Interest. This Agreement shall be binding upon and inure
-------------------
solely to the benefit of each party hereto. Nothing in this Agreement, express
or implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
13.10 Interpretation. The parties acknowledge and agree that each party
--------------
and its counsel reviewed and negotiated the terms and provisions of this
Agreement and has contributed to its revision and that the rule of construction
to the effect that any ambiguities are resolved against the drafting party shall
not be employed in the interpretation of this Agreement.
13.11 Schedules. All references in this Agreement to Schedules shall
---------
mean the Schedules identified in this Agreement, which are incorporated into
this Agreement and shall be deemed a part of the representations and warranties
to which they relate. To the extent a disclosure has been made by Pulsar, the
Pulsar Stockholders, Litronic or the Litronic Stockholders on any Schedule, it
shall be in writing, shall indicate the Section pursuant to which it is being
delivered, and shall be initialed by the delivering party. For purposes of this
Agreement, information which is necessary to make a given Schedule complete and
accurate, but is omitted therefrom, shall nevertheless be deemed to be contained
therein if it is contained on any other Schedule; but only if such information
appears on such other Schedule in such form and detail that it is responsive to
the requirements of such given Schedule.
13.12 No Assignment. This Agreement shall not be assigned by operation
-------------
of law or otherwise, and any assignment shall be null and void.
13.13 Severability. If any term or other provision of this Agreement is
------------
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the greatest extent possible.
[Remainder of page intentionally blank]
68
IN WITNESS WHEREOF, each of the parties has caused this Stock Acquisition
Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the day and year first above written.
LITRONIC INC.
By:_____________________________
▇▇▇▇ ▇▇▇▇, Chief Executive Officer
PULSAR DATA SYSTEMS, INC.
By:__________________________
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇., President
_____________________________
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Individually
______________________________
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Individually
LITRONIC INDUSTRIES, INC.
By:_____________________________
▇▇▇▇ ▇▇▇▇, President
▇▇▇▇ ▇▇▇▇ AND ▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇ LIVING
TRUST DATED OCTOBER 9, 1997
By:______________________________
▇▇▇▇ ▇▇▇▇, Trustee
By:______________________________
▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
[Signatures continued on the following page]
69
▇▇▇▇▇▇ ▇. ▇▇▇▇ AND ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇ LIVING
TRUST DATED MARCH 22, 1982 AS AMENDED ON
OCTOBER 14, 1997
By:___________________________________
▇▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
By:____________________________________
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
SHAH LIVING TRUST DATED NOVEMBER 14, 1995
By:_______________________________________
▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
By:_______________________________________
▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
▇▇▇▇▇ ▇▇▇▇ TRUST DATED OCTOBER 16, 1997
By:__________________________
▇▇▇▇ ▇▇▇▇, Trustee
▇▇▇▇▇▇▇ ▇. ▇▇▇▇ TRUST DATED OCTOBER 9, 1997
By:__________________________
▇▇▇▇ ▇▇▇▇, Trustee
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REORGANIZATION AGREEMENT
by and among
LITRONIC INC.
AND
▇▇▇▇ ▇▇▇▇ AND ▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, AS TRUSTEES
▇▇▇▇▇▇ ▇. ▇▇▇▇ AND ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, AS TRUSTEES
▇▇▇▇▇ ▇. ▇▇▇▇ AND ▇▇▇▇▇ ▇. ▇▇▇▇, AS TRUSTEES
▇▇▇▇ ▇▇▇▇, AS TRUSTEE
▇▇▇▇ ▇▇▇▇, AS TRUSTEE
REORGANIZATION AGREEMENT
This Reorganization Agreement (this "Agreement") dated as of February 9,
1999, is by and among Litronic Inc., a Delaware corporation ("Parent"), and ▇▇▇▇
▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, as Trustees of the ▇▇▇▇ ▇▇▇▇ and ▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇
Living Trust dated October 9, 1997, ▇▇▇▇▇▇ ▇. ▇▇▇▇ and ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, as
Trustees of the ▇▇▇▇▇▇ ▇. ▇▇▇▇ and ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇ Living Trust dated March 22,
1982 as amended on October 14, 1997, ▇▇▇▇▇ ▇. ▇▇▇▇ and ▇▇▇▇▇ ▇. ▇▇▇▇, as
Trustees of the Shah Living Trust dated November 14, 1995, ▇▇▇▇ ▇▇▇▇ as Trustee
of the ▇▇▇▇▇ ▇▇▇▇ Trust dated October 16, 1997 and ▇▇▇▇ ▇▇▇▇, as Trustee of the
▇▇▇▇▇▇▇ ▇. ▇▇▇▇ Trust dated October 9, 1997 (each of the foregoing trustees in
their capacity as trustee, the same constituting all of the stockholders of
Litronic Industries, Inc., a California corporation ("Litronic"), being
collectively referred to as the "Litronic Stockholders").
This Agreement contemplates that, concurrent with the effectiveness of the
Registration Statement (as defined below), the Litronic Stockholders will
exchange all of their shares of Litronic common stock for shares of Parent
common stock, as a result of which Litronic will become a wholly owned
subsidiary of Parent (the "Reorganization"). Concurrent with the execution of
this Agreement, Parent, Litronic and the Litronic Stockholders are entering into
a Stock Acquisition Agreement with Pulsar Data Systems, Inc., a Delaware
corporation ("Pulsar"), and Pulsar's stockholders, pursuant to which Pulsar's
stockholders, concurrent with the closing of the IPO (as defined below), will
exchange all of their shares of Pulsar common stock for shares of Parent common
stock, as a result of which Pulsar will become a wholly owned subsidiary of
Parent (the "Acquisition").
Accordingly, the parties hereto, in consideration of the mutual
representations, warranties and covenants contained herein, agree as follows:
1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
1.1 "Acquisition" has the meaning given to it in the recitals.
1.2 "Assumed Options" has the meaning given to it in Section 2.4.
1.3 "Closing" has the meaning given to it in Section 2.1.
1.4 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
1.5 "IPO" means the initial underwritten public offering of shares of
Parent Common Stock at not less than the Pre-IPO Valuation and generating at
least $30 million in gross proceeds to Parent.
1.6 "IPO Price" means the price at which shares of Parent Common Stock are
sold to the public in the IPO.
1.7 "ISO" has the meaning given to it in Section 2.4.
1.8 "Exchange Ratio" has the meaning given to it in Section 2.1.
1.9 "Financial Advisor" means Bluestone Capital Partners L.P.
1.10 "Fraction" means that fraction which has one as its numerator and
which has, as its denominator, the number of Litronic Shares outstanding
immediately prior to the Closing.
1.11 "Litronic Option" means an option to purchase Litronic Shares, whether
or not vested or exercisable as of the applicable time as set forth in Exhibit
1.11.
1.12 "Litronic Share" means a share of the Common Stock, no par value, of
Litronic, and "Litronic Shares" means all such shares.
1.13 "Litronic Stockholders" has the meaning given to it in the recitals.
1.14 "Parent Common Stock" means the shares of common stock, par value $.01
per share, of Parent.
1.15 "Pre-IPO Valuation" means a valuation for Parent after and taking
into account the Reorganization and the Acquisition based on a total market
capitalization of Parent following the Reorganization and the Acquisition
(assuming no exercise of the Assumed Options), but not including the IPO, of not
less than $60,406,310, with the IPO generating gross proceeds of not less than
$30 million, as adjusted pursuant to Section 2.2.
1.16 "Registration Statement" means the registration statement on Form S-1
to be filed with the Securities and Exchange Commission in connection with the
IPO.
2. THE REORGANIZATION
2.1 The Reorganization. At the Closing, which shall occur concurrently
------------------
with the effectiveness of the Registration Statement, upon the terms and subject
to the conditions hereof, each of the Litronic Stockholders hereby agrees to
deliver, and Parent agrees to accept delivery of, stock certificates, duly
endorsed for transfer, representing all of the Litronic Shares owned by such
Litronic Stockholder, for and against delivery of duly executed stock
certificates representing shares of Parent Common Stock, as follows. Subject to
Section 2.2, each Litronic Share shall be exchanged for that number of shares of
Parent Common Stock determined by multiplying the Fraction times the number
obtained after dividing $38,706,930 by the IPO Price (the "Exchange Ratio");
provided that the number of shares of Parent Common Stock issuable pursuant to
the foregoing clause to any Litronic Stockholder shall be reduced by the number
of shares, if any, of Parent Common Stock held by such Stockholder immediately
prior to the Closing. In lieu of any fractional shares, at the Closing there
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shall be paid to each holder of Litronic Shares who would otherwise be entitled
to receive a fractional share of Parent Common Stock an amount of cash equal to
the amount of such fraction times the IPO Price. The Closing will be held at the
offices of Arent Fox ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇, PLLC, ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇.▇., ▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇-▇▇▇▇ (or such other place as the parties may
agree).
2.2 Adjustment to Pre-IPO Valuation. The aggregate value (based on the
-------------------------------
IPO price per share of Parent Common Stock) of the Parent Common Stock exchanged
for the Litronic Shares shall be equal to 64.0776% of the Pre-IPO Valuation. If
the Financial Advisor in its sole discretion determines, based upon preliminary
discussions with potential investors, that the Pre-IPO Valuation should be
increased or decreased and gives written notice thereof to Litronic (such notice
making specific reference to this Section 2.2), the Litronic Stockholders agree
that the Pre-IPO Valuation shall be adjusted in accordance with the
determination set forth in such notice; provided, however, that in no event
shall the Litronic Stockholders be obligated to proceed with the Reorganization
if the Pre-IPO Valuation, as so adjusted, is less than $58 million (assuming
gross IPO proceeds of $30 million). If any adjustment to the Pre-IPO Valuation
is made pursuant to this Section 2.2 after the Closing, Parent and the Litronic
Stockholders agree that the number of shares of Parent Common Stock held by the
Litronic Stockholders shall also be proportionately adjusted so that the
Litronic Stockholders hold in the aggregate Parent Common Stock with an
aggregate value (based on the IPO Price of Parent Common Stock) equal to
64.0776% of the adjusted Pre-IPO Valuation.
2.3 Tax Consequences. It is intended that the Reorganization shall qualify
----------------
as a reorganization within the meaning of Section 368 of the Code, and that the
Reorganization shall be tax-free, except to the extent of cash paid in lieu of
fractional shares.
2.4 Assumed Options. At the Closing, the Litronic 1998 Stock Option Plan
---------------
(the "1998 Plan") and each of the Litronic Options (whether or not then
exercisable or vested) issued thereunder will be assumed by Parent and, by
virtue of the closing of the Reorganization and without any further action on
the part of any holder, each of the Litronic Options shall be converted into an
option (collectively, the "Assumed Options") to purchase that number of shares
of Parent Common Stock determined by multiplying the number of Litronic Shares
subject to the Litronic Option at the Closing by the Exchange Ratio, at an
exercise price per share of Parent Common Stock equal to the exercise price per
share of the Litronic Option immediately prior to the Closing divided by the
Exchange Ratio and rounded up to the nearest whole cent. If the foregoing
calculation results in an Assumed Option being exercisable for a fraction of a
share of Parent Common Stock, then the number of shares of Parent Common Stock
subject to that option will be rounded to the nearest whole number of shares
(rounded down, in the case of Litronic Options that are "incentive stock
options" under Section 422 of the Code). Parent shall issue, upon any partial or
total exercise of Assumed Options in lieu of Litronic Shares the number of
shares of Parent Common Stock to which the holder of the Assumed Option is
entitled. Parent shall not grant any further options under the 1998 Plan, which
shall terminate except with respect to the administration of the Assumed
Options. Parent will reserve a sufficient number of shares of Parent Common
Stock for issuance upon exercise of the Assumed Options. If any adjustment to
the Pre-IPO Valuation is made pursuant to Section 2.2 after the Closing, Parent
and the Litronic Stockholders agree that the number of shares of Parent Common
Stock for which the Assumed Options shall be exercisable, and the per share
exercise price
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with respect thereto as determined in accordance with the foregoing provisions,
shall also be proportionately adjusted.
2.5 Stock Legend. Each stock certificate representing the Parent Common
------------
Stock issued in the Reorganization shall bear a legend in, or substantially in,
the following form:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended to date, and may not be sold,
pledged or otherwise transferred without an effective registration under
said Act or unless Litronic Inc. shall have received an opinion
satisfactory to Litronic Inc. of counsel satisfactory to Litronic Inc. that
an exemption from registration under such Act is then available."
2.6 Subsequent Actions. If, at any time after the Closing, Parent believes
------------------
or is advised that any deeds, bills of sale, assignments, assurances or any
other actions or things are necessary or desirable to vest, perfect or confirm
of record or otherwise in Parent its right, title or interest in, to or under
any of the rights, properties or assets of Litronic to be acquired by Parent as
a result of, or in connection with, the Reorganization or otherwise to carry out
this Agreement, the officers and directors of Parent shall, at the sole cost and
expense of Parent, be authorized to execute and deliver, in the name and on
behalf of Parent, to carry out all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of Parent, all such
other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in Parent or otherwise to carry out this Agreement.
3. TERMINATION; AMENDMENTS.
3.1 Termination. This Agreement may be terminated at any time prior to the
-----------
Closing:
(a) by mutual consent of Parent and the Litronic Stockholders;
(b) by any party, in its sole discretion, if the Registration Statement has
not become effective by May 1, 1999; or
(c) by any party if any court shall have issued an order, decree or ruling or
taken any other action permanently enjoining, restraining or otherwise
prohibiting the Reorganization and such order, decree, ruling or other
action shall have become final and non-appealable.
3.2 Effect of Termination. In the event of termination of this Agreement
---------------------
by any party as provided in Section 3.1, this Agreement shall forthwith become
void and have no effect, and none of Parent, its officers, directors or
stockholders or the Litronic Stockholders shall have any liability of any nature
whatsoever hereunder, or in connection with the transactions contemplated
hereby.
3.3 Amendment. This Agreement may not be amended except by an instrument
---------
in writing signed on behalf of each of the parties hereto.
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4. MISCELLANEOUS
4.1 Entire Agreement; Assignment. This Agreement (a) constitutes the
----------------------------
entire agreement among the parties with respect to the subject matter hereto and
supersedes all other prior agreements and understandings, both written and oral,
among the parties or any of them with respect to the subject matter hereof and
(b) shall not be assigned by operation of law or otherwise.
4.2 Validity. The invalidity or unenforceability of any provision of this
--------
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
4.3 Governing Law. This Agreement and all rights of the parties arising in
-------------
connection with the transactions contemplated hereby (including the negotiation
hereof, and whether or not such transactions shall be consummated) shall be
governed by and construed in accordance with the internal laws of State of
Delaware, regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
4.4 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same agreement. Copies (photostatic,
facsimile or otherwise) of signatures to this Agreement shall be deemed to be
originals and may be relied upon to the same extent as originals, and delivery
of a duly executed signature page to this Agreement shall be deemed to be
delivery of this Agreement in its entirety.
4.5 Parties in Interest. This Agreement shall be binding upon and inure
-------------------
solely to the benefit of each party hereto. Nothing in this Agreement, express
or implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
[Remainder of page intentionally blank]
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IN WITNESS WHEREOF, each of the parties has executed or caused this
Reorganization Agreement to be executed on its behalf by its officers or other
representative thereunto duly authorized, all as of the day and year first above
written.
LITRONIC INC.
By:__________________________________
▇▇▇▇ ▇▇▇▇, Chief Executive Officer
▇▇▇▇ ▇▇▇▇ AND ▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇ LIVING
TRUST DATED OCTOBER 9, 1997
By: ______________________________
▇▇▇▇ ▇▇▇▇, Trustee
By: ______________________________
▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
▇▇▇▇▇▇ ▇. ▇▇▇▇ AND ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇ LIVING
TRUST DATED MARCH 22, 1982 AS AMENDED ON
OCTOBER 14, 1997
By: ___________________________________
▇▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
By: ____________________________________
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
SHAH LIVING TRUST DATED NOVEMBER 14, 1995
By: _______________________________________
▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
By: _______________________________________
▇▇▇▇▇ ▇. ▇▇▇▇, Trustee
[Signatures continued on following page]
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▇▇▇▇▇ ▇▇▇▇ TRUST DATED OCTOBER 16, 1997
By: __________________________
▇▇▇▇ ▇▇▇▇, Trustee
▇▇▇▇▇▇▇ ▇. ▇▇▇▇ TRUST DATED OCTOBER 9, 1997
By: __________________________
▇▇▇▇ ▇▇▇▇, Trustee
7