Exhibit 2.1
STOCK PURCHASE/SALE AGREEMENT
THIS AGREEMENT (the "Agreement"), dated January 7, 2004, is between and
among AROTECH CORPORATION, a Delaware corporation (the "Buyer") with its
principal place of business located at ▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇
▇▇▇▇ ▇▇▇▇▇, FAAC INCORPORATED, a Michigan corporation with its principal place
of business at ▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ (the "Company"),
and ▇▇▇▇ ▇. ▇▇▇▇▇▇ and ▇▇▇ ▇. ▇▇▇▇, the sole shareholders of the Company
(respectively "Jordan" and "▇▇▇▇" and collectively the "Shareholders").
WHEREAS, the Buyer has proposed to purchase and the Shareholders have
proposed to sell all of the outstanding shares of Common Stock issued by the
Company (the "Company Common Stock") and the Board of Directors of the Company
has determined that it is in the best interests of the Company and its
Shareholders to consent to that purchase and sale (the "Purchase/Sale") upon the
terms and conditions set forth herein; and
NOW, THEREFORE, the Buyer, the Company and the Shareholders hereby agree
as follows:
ARTICLE I
Definitions
1.1 Defined Terms. For the purposes of this Agreement, the terms listed
below shall have the following meanings:
1.1.1 "Agent" shall have the meaning defined in Section 2.4.6.
1.1.2 "Allocable Portion" shall have the meaning defined in Section
9.3.
1.1. 3 "Annual Financial Statements" shall have the meaning defined
in Section 4.1.4.
1.1.4 "Arotech Common Stock" shall mean the Common Stock, with $0.01
par value, issued by the Buyer.
1.1.5 "Association" shall have the meaning defined in Section 11.2.
1.1.6 "Audit" shall have the meaning defined in Section 2.3.1.
1.1.7 "Bank" shall have the meaning defined in Section 2.4.6.
1.1.8 "Broker" shall have the meaning defined in Section 2.3.2.
1.1.9 "Burdensome Condition" shall have the meaning defined in
Sections 7.2.7 and 7.3.8.
1.1.10 "Buyer" shall mean Arotech corporation, a Delaware
corporation.
1.1.11 "Buyer's Accountant" shall mean ▇▇▇▇ ▇▇▇▇▇ & ▇▇▇▇▇▇, a member
of Ernst & Young Global.
1.1.12 "Buyer's Threshold" shall have the meaning defined in Section
9.3.1.
1.1.13 "▇▇▇▇" shall mean ▇▇▇ ▇. ▇▇▇▇.
1.1.14 "Claim" shall have the meaning defined in Section 9.6
1.1.15 "Closing" shall have the meaning defined in Section 8.1.
1.1.16 "Closing Cash Consideration" shall have the meaning defined
in Section 2.3.1.
1.1.17 "Closing Consideration" shall have the meaning defined in
Section 2.3.
1.1.18 "Closing Stock Consideration" shall have the meaning defined
in Section 2.3.2.
1.1.189 "Closing Date" shall have the meaning defined in Section
8.1.
1.1.20 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.1.21 "Company" shall mean FAAC Incorporated, a Michigan
corporation.
1.1.22 "Company Common Stock" shall mean the Company's Common Stock,
par value $0.01 per share.
1.1.23 "Company Financial Statements" shall have the meaning defined
in Section 4.1.4.
1.1.24 "Disclosure Schedule" shall have the meaning defined in
Section 1.3.
1.1.25 "Dispute Notice" shall have the meaning defined in Section
11.1.
1.1.26 "EBITDA" shall mean the income of the Company before any
deductions for interest expenses, taxes, depreciation and amortization and
before any deductions for any fees and expenses directly and primarily
attributable to the
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transaction contemplated by this Agreement and the transition in the
management of the Company as a result of that transaction, but otherwise
as determined in accordance with generally accepted accounting principles,
consistently applied from period to period. The fees and expenses directly
attributable to the transaction contemplated by this Agreement will
include, without limitation, attorney fees, accountant fees and brokerage
fees and commissions.
1.1.27 "Earnout Consideration" shall have the meaning defined in
Section 2.4.
1.1.28 "2004 Earnout Consideration" shall have the meaning defined
in Section 2.4.1.
1.1.29 "2005 Earnout Consideration" shall have the meaning defined
in Section 2.4.2.
1.1.30 "2005 Earnout Operating Income" shall have the meaning
defined in Section 2.4.2.
1.1.31 "Expenses" shall have the meaning defined in Section 10.2.2.
1.1.32 "Expiration Date" shall have the meaning defined in Section
10.1.2.
1.1.33 "Governmental Authority" shall mean any nation, territory or
government, foreign or domestic, any state, local or other political
subdivision thereof, and any bureau, tribunal, board, commission,
department, agency or other entity exercising executive, legislative,
judicial, regulatory or administrative functions of government, including,
without limitation, all taxing authorities.
1.1.34 "Indemnified Party" shall have the meaning defined in Section
9.5.
1.1.35 "Indemnifying Parties" shall have the meaning defined in
Section 9.6
1.1.36 "Indemnity Notice" shall have the meaning defined in Section
9.6.
1.1.37 "Indirect Cost Rate" shall mean the ratio of the sum of all
allowable costs (including, but not limited to fringe benefit costs,
overhead costs, general and administrative costs and direct labor costs)
divided by direct labor expenses. Costs will be "allowable" as agreed by
the Company and the Defense Contract Audit Agency.
1.1.38 "Intercreditors Agreement" shall have the meaning defined in
Section 2.4.7
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1.1.39 "Intellectual Property" shall mean any and all proprietary
technology, knowledge, formulas, specifications, processes, techniques,
technical data and other know-how, whether now existing or hereafter
developed, including without limitation Patents and Marks, to which
Company has any rights. Until such time as any particular patent has
issued in accordance with the terms of a patent application, the term
"Intellectual Property" shall be deemed to include all inventions claimed
in such patent application. The term "Intellectual Property" shall also
include all proprietary technology, knowledge, formulas, specifications,
processes, techniques, technical data and other know-how included in any
patent application but which have not been included within an allowed
claim in any patent.
1.1.40 "Interim Financial Statements" shall have the meaning defined
in Section 4.14.
1.1.41 "Jordan" shall mean ▇▇▇▇ ▇. ▇▇▇▇▇▇.
1.1.42 "Letter of Credit" shall have the meaning defined in Section
2.4.6.1.
1.1.43 "Lien" shall mean any interest, consensual or otherwise, in
property, whether real, personal or mixed property or assets, tangible or
intangible, securing an obligation owed to, or a claim by a third Person,
or otherwise evidencing an interest of a Person other than the owner of
the property, whether such interest is based on common law, statute or
contract, and including, but not limited to, any security interest,
security title or lien arising from a mortgage, recordation of abstract of
judgment, deed of trust, deed to secure debt, encumbrance, restriction,
charge, covenant, restriction, claim, exception, encroachment, easement,
right of way, license, permit, incorporeal hereditament, pledge,
conditional sale, option trust (constructive or otherwise) or trust
receipt or a lease, consignment or bailment for security purposes and
other title exceptions and encumbrances affecting the property.
1.1.44 "Losses" shall have the meaning defined in Section 9.1.
1.1.45 "Marks" shall mean all trademarks, service marks, trade dress
and trade names, including all registrations and applications with respect
thereto, and all copyright registrations owned by Company or in which
Company has any rights or licenses.
1.1.46 "Organizational Documents" shall mean a corporation's
Articles of Incorporation, Certificate of Incorporation, Bylaws or
equivalent organizational documents.
1.1.47 "Participation Rights Agreements" shall mean those
PARTICIPATION RIGHTS AGREEMENTS listed in Schedule 4.3.2.
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1.1.48 "Participation Rights Holders" shall mean those individuals
holding rights under the Participation Rights Agreements.
1.1.49 "Patent Rights" shall mean shall mean the Company's right,
title and interest in and to all unexpired domestic and foreign patents,
patent applications, similar grants and applications therefor, and any
improvements, continuations, continuations-in-part, divisionals,
extensions, reissues, reexaminations or substitutions thereof, and any and
all inventions embodied within the foregoing.
1.1.50 "Person" shall mean any individual or any corporate or other
entity, including without limitation federal, state, local and foreign
governmental agencies and all subdivisions thereof.
1.1.51 "Plan" shall have the meaning defined in Section 4.19.
1.1.52 "Pro-Safe Earnout" shall have the meaning defined in Section
2.4.3.
1.1.53 "Pro-Safe Receivable" shall mean the account receivable
payable by Pro-Safe Fire Response Services, Inc. to the Company under its
Purchase Order #001 dated January 28, 2002.
1.1.54 "Purchase Price" shall have the meaning defined in Section
2.2.
1.1.55 "Purchase/Sale" shall mean the purchase and sale of the
Company Common Stock pursuant to this Agreement
1.1.56 "Requisite Regulatory Approval" shall have the meaning
defined in Section 7.1.2.
1.1.57 "Resolution Notice" shall have the meaning defined in Section
11.1.
1.1.58 "Review Notice" shall have the meaning defined in Section
11.1.
1.1.59 "Security Agreement" shall have the meaning defined in
Section 2.4.7.
1.1.60 "Security Deposit" shall have the meaning defined in Section
2.4.6.2.
1.1.61 "Selection Notice" shall have the meaning defined in Section
11.1.
1.1.62 "Shareholders" shall mean Jordan and ▇▇▇▇.
1.1.63 "Shareholders' Accountant" shall mean ▇▇▇▇▇▇ & ▇▇▇▇▇, LLP.
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1.1.64 "Shareholders' Threshold" shall have the meaning defined in
Section 9.4.1.
1.1.65 "Smithfield" shall mean Smithfield Fiduciary LLC as Agent for
the various secured parties under that certain security agreement among,
inter alia, Buyer and Smithfield dated as of September 30, 2003.
1.1.66 "Subchapter S Tax Liability" shall mean the federal and state
income Taxes payable by the Shareholders with respect to the taxable
income realized by the Company in 2003 that is allocated to the
Shareholders pursuant to Subchapter S of the Code, calculated for each
Shareholder upon the assumption that such allocated taxable income will be
subject to income tax at the highest marginal rate under the Code or other
applicable taxing statute.
1.1.67 "Tax" means any federal, state, local, or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes
under Code ss.59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax, assessment
or levy of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
1.1.68 "Tax Return" means any federal, state, local or foreign
return, declaration, report, claim for refund, or information return or
statement relating to Taxes, including any schedule or attachment thereto,
and including any amendment thereof.
1.1.69 "Trade Secrets" shall mean shall mean any and all proprietary
technology, knowledge, formulas, specifications, processes, techniques,
technical data and other know-how, whether now existing or hereafter
developed, to which the Company has any rights. Until such time as any
particular patent has issued in accordance with the terms of a patent
application, the term "Trade Secrets" shall be deemed to include all
inventions claimed in such patent application. The term "Trade Secrets"
shall also include all proprietary technology, knowledge, formulas,
specifications, processes, techniques, technical data and other know-how
included in any patent application but which have not been included within
an allowed claim in any patent.
1.1.70 "Unaffiliated Accountant" shall have the meaning defined in
Section 11.1.
1.2 Other Definitional Matters. Other terms used herein are defined in the
preamble and elsewhere in this Agreement Terms defined in the singular shall
have a comparable meaning when used in the plural, and vice versa.
1.3 Disclosure Standards. Immediately prior to the execution and delivery
of this Agreement, the Shareholders have delivered to the Buyer, and the Buyer
has delivered to the
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Shareholders, a schedule ("Disclosure Schedule") setting forth, among other
things, on schedules corresponding to the Sections hereof, items the disclosure
of which is necessary or appropriate either in response to an express disclosure
requirement contained in a provision hereof or as an exception to one or more of
such party's representations, warranties or covenants contained in this
Agreement, or that are necessary to make the statements made in this Agreement
and in the Disclosure Schedule, individually and taken as a whole, not
misleading.
ARTICLE II
Purchase/Sale and Transfer of Company Common Stock
2.1 Purchase/Sale. Subject to the terms and conditions of this Agreement,
the Buyer shall purchase and the Shareholders shall sell all of the Company
Common Stock at the Closing but effective as of the Closing Date.
2.2 Purchase Price. The aggregate purchase price (the "Purchase Price")
for all of the issued and outstanding shares of Company Common Stock is the sum
of the Closing Consideration established pursuant to Section 2.3 and the Earnout
Consideration established pursuant to Section 2.4.
2.3 Closing Consideration. The portion of the Purchase Price payable in
connection with the Closing (the "Closing Consideration") will equal the
following:
2.3.1 The Closing Consideration payable in cash (the "Closing Cash
Consideration") will be an amount equal to (i) $12,000,000 minus (ii) the
amounts, if any, payable by the Company to the Participation Rights
Holders based upon the Closing Consideration payable by the Buyer to the
Shareholders.
2.3.2 At the Closing, the Buyer shall issue in the name of the
Shareholders and deliver to a licensed securities broker selected by the
Buyer and approved by the Shareholders, which approval will not be
unreasonably withheld (the "Broker"), that number of registered shares of
Arotech Common Stock having a value, based upon the last sale price of
such Common Stock on the Nasdaq National Market on the trading day
immediately preceding the Closing Date, of $2,500,000 for sale or
distribution as provided in Section 6.6.
2.4 Earnout Consideration. The portion of the Purchase Price payable on
the basis of the operations of the Company following the Closing (the "Earnout
Consideration") will equal the following:
2.4.1 The Buyer shall pay to the Shareholders as the Earnout
Consideration for operations of the Company in 2004 (the "2004 Earnout
Consideration") an additional amount equal to (A) the amount, if any, by
which (i) 5.75 times the EBITDA realized by the Company from all
operations during the calendar year 2004 exceeds (ii) the sum of (a)
$14,000,000 plus (b) the amounts, if any, payable by the Company to the
Participation Rights Holders based upon the 2004 Earnout Consideration
payable by the Buyer to the Shareholders, plus (B) interest at the rate of
12% per annum on the amount
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yielded by (A) above from March 31, 2005 through the date of the payment
to the Shareholders of the 2004 Earnout Consideration. For such purposes
the EBITDA realized by the Company for 2004 will be determined in
accordance with generally accepted accounting principles consistently
applied from period to period, but subject to the limitation on allocable
overhead and general administrative expenses of the Company as provided in
Section 2.4.4. The Buyer will cause the Buyer Accountants, not later than
April 30, 2005, to prepare and deliver to the Shareholders and the Buyer
an audited financial statement of the Company for its year ended December
31, 2004, together with a computation prepared by the Buyer's Accountants
of the Company's EBITDA for 2004 based upon the information contained in
that financial statement and the 2004 Earnout Consideration payable to the
Shareholders based upon that EBITDA. Not later than July 1, 2005, the
Buyer shall pay to the Shareholders, by cashier's check or wire transfer
of funds, the amount specified by the Buyer's Accountants as the 2004
Earnout Consideration; provided, however, that if the sum of the amount
payable by the Buyer as the 2004 Earnout Consideration (exclusive of the
interest computed pursuant to Subparagraph B) plus the amount payable by
the Company to the Participation Rights Holders based upon the 2004
Earnout Consideration exceeds $26,000,000, then the Buyer may elect to
defer the payment of the amount in excess of $26,000,000 until January 1,
2006. Any questions regarding that computation of the 2004 Earnout
Consideration shall be resolved in the manner specified in Section 11.1
2.4.2 The Buyer shall pay to the Shareholders as the Earnout
Consideration for operations of the Company in 2005 (the "2005 Earnout
Consideration") an amount equal to (i) the 2005 Earnout Operating Income
(as defined below) realized by the Company during the calendar year 2005
minus (ii) the amounts, if any, payable by the Company to the
Participation Rights Holders based upon the 2005 Earnout Consideration
payable by the Buyer to the Shareholders. For such purposes, the "2005
Earnout Operating Income" shall equal the net income realized by the
Company from specific Programs that are identified in writing by the Buyer
and the Shareholders as appropriate targets for revenue increases in 2005.
For such purposes the 2005 Earnout Operating Income will equal (i) the
sales revenues realized by the Company from those Programs minus (ii) the
sum of (a) the direct costs of sales allocable to that revenue plus (b)
the direct operating expenses allocable to those Programs, all as
determined in accordance with generally accepted accounting principles
consistently applied from period to period, but subject to the limitation
on allocable overhead and general administrative expenses of the Company
as provided in Section 2.4.4. The Buyer will cause the Buyer Accountants,
not later than March 31, 2006, to prepare and deliver to the Shareholders
and the Buyer an audited financial statement of the Company for its year
ended December 31, 2005, together with a computation prepared by the
Buyer's Accountants of the 2005 Earnout Operating Income based upon the
information contained in that financial statement and the 2005 Earnout
Consideration payable to the Shareholders based upon that 2005 Earnout
Operating Income. Within five (5) days after that computation of the 2005
Earnout Consideration is delivered to the Buyer and the Shareholders, the
Buyer shall pay to the Shareholders, by cashier's check or wire transfer
of funds,
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the amount specified by the Buyer's Accountants as the 2005 Earnout
Consideration. Any questions regarding that computation of the 2005
Earnout Computation shall be resolved in the manner specified in Section
11.1
2.4.3 If at any time the Company receives any payments from Pro-Safe
Fire Response Services, Inc. with respect to the Pro-Safe Receivable, then
the Purchaser shall pay or shall cause the Company to pay to the
Shareholders as the Earnout Consideration with respect to the Pro-Safe
Receivable (the "Pro-Safe Earnout Consideration") an additional amount
equal to the amount, if any, by which (i) the amounts received by the
Company as payments against Pro-Safe Receivable exceed (ii) any direct
expenses incurred by the Company after the date of this Agreement in
securing such payments. For such purposes, direct expenses incurred by the
Company in collecting payments under the Pro-Safe Receivable will be
determined in accordance with generally acceptable accounting principles
consistently applied from period to period. The Company, if and at each
time that it receives any payment under the Pro-Safe Receivable shall
within thirty (30) days following the date of that receipt, deliver
written notice to the Shareholders confirming that receipt, detailing the
expenses, if any, incurred by the Company in securing payments under the
Pro-Safe Receivable that have not been previously recovered by the Company
pursuant to this Section, and shall include with that notice a check to
the Shareholders equal to the amount of the payment received less the
expenses incurred in securing such payment. Any questions regarding the
computation of the Pro-Safe Earnout Consideration shall be resolved in the
manner specified in Section 11.1.
2.4.4 During the periods for which the 2004 Earnout Consideration
and the 2005 Earnout Consideration will be computed, the Buyer will cause
the operation of the Company's business to be conducted in a commercially
reasonable manner consistent with past practices. In computing the EBITDA
for purposes of the 2004 Earnout Consideration and in computing the 2005
Earnout Operating Income for purposes of the 2005 Earnout Consideration,
the cumulative Indirect Cost Rates imposed on revenues shall not be less
than 3.11 and not more than 3.21. During the periods for which the 2004
Earnout Consideration and the 2005 Earnout Consideration will be computed,
the Buyer will provide to the Shareholders unaudited monthly statements of
income for the Company and such other accounting and related information
as the Shareholders may reasonably request in order to monitor the
operations of the Company as they relate to the Earnout Consideration.
2.4.5 For so long as any amount remains payable under the Pro-Safe
Receivable, the Company will consult and comply with all directives
reasonably made by the Shareholders regarding the collection of the
Pro-Safe Receivable, including, without limitation the directive of the
Shareholders to compromise or otherwise settle its claim for the Pro-Safe
Receivable for an amount that is less than the full amount stated as owing
to the Company. As a limitation to the foregoing, if the Shareholders
direct that the Company initiate litigation to collect the Pro-Safe
Receivable, the Shareholders must undertake to pay, and thereafter pay
when and as due, all attorney's fees and related expenses that the Company
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may incur in proceeding with such litigation. As an alternative, if
requested by the Company, the Company may assign to the Shareholders all
of its rights under and with respect to the Pro-Safe Receivable, and the
Shareholders may thereafter initiate and prosecute that litigation for
collection in the names of the Shareholders as the assignees of the
Company.
2.4.6 As security for the payment by the Buyer of the 2004 Earnout
Consideration, the Buyer, within 95 calendar days following the Closing
Date, will take one of the following actions:
2.4.6.1 Secure from a bank approved by the Shareholders (the
"Bank"), which approval will not be unreasonably withheld, and
deliver to the Shareholders an irrevocable letter of credit issued
for the benefit of the Shareholders in the amount of $6,000,000 (the
"Letter of Credit") which will (i) remain in effect until August 31,
2005, (ii) be payable to the Shareholders within five (5) days after
the Shareholders deliver a written demand to the Bank at any time
after July 1, 2005, as supported by the sworn affidavit of the
Shareholders confirming that the 2004 Earnout Consideration has not
as of the date of such demand been paid in accordance with the terms
of this Agreement and (iii) otherwise contain terms and conditions
acceptable to the Shareholders in their reasonable discretion,
including without limitation provision for an interpleader
proceeding through a court of competent jurisdiction in Washtenaw
County, Michigan in the event of a dispute between the Buyer and the
Shareholders in respect of the amount of 2004 Earnout Consideration
owing; or
2.4.6.2 Deposit with the Bank in an interest-bearing savings
account, interest-bearing certificate of deposit, interest-bearing
time deposits, or any other investment constituting the direct
obligation of the Bank, the principal amount of $6,000,000 (the
"Security Deposit") and grant to the Shareholders a first priority
security interest in that Security Deposit to secure payment of the
2004 Earnout Consideration when and as due under this Agreement and
perfect that security interest as required by applicable law. The
Security Deposit will (i) have a maturity date not before March 31,
2005 and not later than August 31, 2005 and (ii) will be payable to
the Shareholders within five (5) days after the Shareholders deliver
a written demand to the Bank at any time after July 1, 2005, as
supported by the sworn affidavit of the Shareholders confirming that
the 2004 Earnout Consideration has not as of the date of such demand
been paid in accordance with the terms of this Agreement and (iii)
otherwise be subject to terms and conditions acceptable to the
Shareholders in their reasonable discretion, including without
limitation provision for an interpleader proceeding through a court
of competent jurisdiction in Washtenaw County, Michigan in the event
of a dispute between
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the Buyer and the Shareholders in respect of the amount of 2004
Earnout Consideration owing.
The Buyer shall be obligated to complete one or the other of the actions
prescribed in Section 2.4.6.1 or Section 2.4.6.2 by the date stated above,
but the Buyer has the right, in its absolute discretion, to choose which
of those actions to complete by such date.
2.4.7 As further security for the payment by the Buyer of the 2004
Earnout Consideration and the 2005 Earnout Consideration, the Buyer, on
the Closing Date, (i) pursuant to the SECURITY AGREEMENT in the form
attached as Schedule 2.4.7 (the "Security Agreement") will grant to the
Shareholders a security interest in and to the Company Common Stock which
is subordinate only to the first priority security interest in the Company
Common Stock granted to Smithfield as Agent (the "Agent") for the various
secured parties under that certain security agreement among, inter alia,
Buyer and Smithfield dated as of September 30, 2003, and grant to the
Shareholders the option to repurchase the Company Common Stock at a price
of $6,000,000 in the event that the Buyer, for any reason, (A) fails to
provide the security to the Shareholders required in Section 2.4.6 on or
before the date specified in Section 2.4.6 or (B) fails to pay any
installment of the Earnout Consideration within sixty (60) days after its
due date under this Agreement and (ii) will secure the written agreement
of the Agent (the "Intercreditors Agreement") in form and substance
reasonably satisfactory to the Shareholders that in the event that the
Shareholders have and exercise the option to repurchase the Company Common
Stock pursuant to the Security Agreement, then, upon the tender by the
Shareholders of the $6,000,000 payment required pursuant to that option,
the Agent will forever release and discharge its security interest in the
Company Common Stock so that the Shareholders will acquire that Company
Common Stock free of all liens and encumbrances.
The amounts payable by the Buyer to the Shareholders pursuant to this Section
2.4 are not subject to any of the limitations on the liability of the Buyer for
indemnity in Sections 9.4 and 9.5.
2.5 Allocation of Purchase Price. The Purchase Price shall be allocated
and paid 59.97 % to Jordan and 40.03 % to ▇▇▇▇.
2.6 Transfer of Shares. At the Closing, each Shareholder shall transfer
all of the shares of Company Common Stock registered in the Shareholder's name
or otherwise beneficially owned by the Shareholder to the Buyer by endorsing (by
means of an undated stock power executed in blank) and delivering to the Buyer
the original Stock Certificate(s) representing such shares of Company Common
Stock.
ARTICLE III
Individual Representations and Warranties of the Shareholders
Each Shareholder, individually, hereby represents and warrants to the
Buyer that:
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3.1 Ownership of Company Common Stock. The Shareholder owns, beneficially
and of record, the shares of Company Common Stock set forth opposite the
Shareholder's name on the signature page to this Agreement, free and clear of
all Liens of any nature whatsoever, with Jordan owning 400 shares of Company
Common Stock and ▇▇▇▇ owning 267 shares of Company Common Stock, and no other
shares of Company Common Stock issued or outstanding.
3.2 Authority. The Shareholder has the requisite legal capacity, power and
authority to enter into and to perform the Shareholder's obligations under this
Agreement and this Agreement has been duly and validly executed and delivered by
the Shareholder and constitutes the valid and binding obligation of the
Shareholder, enforceable against the Shareholder in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general applicability
relating to or affecting creditors' rights generally and by the application of
general principles of equity.
3.3 No Conflict. Neither the execution, delivery nor performance of this
Agreement by the Shareholder nor the consummation of the transactions
contemplated hereby, nor compliance by the Shareholders with any of the terms
and conditions hereof, will (i) conflict with, violate or result in the breach
of any provision of any statute, code, ordinance, rule, regulation, order, writ,
judgment, injunction or decree applicable to the Company or to the Shareholder
or by which the Company Common Stock held by the Shareholder is bound or
affected or (ii) conflict with, violate or result in the breach of any provision
of or any loss of any benefit under, constitute a default (or an event, which,
with notice of lapse of time or both, will constitute a default) under or result
in the creation of a Lien, pledge, security interest, charge or any other
encumbrance on any Company Common Stock owned by the Shareholder, pursuant to
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, contract, agreement, lease, license, permit, franchise
or other instrument or other obligation to which the Shareholder is party.
3.4 Consents and Approvals. Except as provided in any applicable
requirements, if any, of state takeover laws, the execution, delivery and
performance of this Agreement by the Shareholder does not require any consent,
approval, authorization or permit of, or filing with or notification to, any
Governmental Authority or with any third party. The Shareholder is not aware of
any reason why the approvals, consents and waivers referred to herein should not
be obtained.
3.5 Absence of Litigation. The Shareholder is not a party to any, and
there are no pending, or to the knowledge of the Shareholder, threatened legal,
administrative, arbitral or other claims, actions, proceedings or investigations
of any nature, against the Shareholder or any property or asset of the
Shareholder, before any Governmental Authority and no facts or circumstances
have come to the Shareholder's attention which have caused him to believe that a
material claim, action, proceeding or investigation against or affecting the
Shareholder could reasonably be expected to occur. Neither the Shareholder, nor
any property or asset of the Shareholder, is subject to any order, writ,
judgment, injunction, decree, determination or award which restricts its ability
to conduct business in any area in which it presently does business or has or
could reasonably be expected to have, either individually or in the aggregate, a
material adverse effect.
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3.6 Competing Interests. Neither the Shareholder, nor or any immediate
family member of any of the foregoing (i) owns, directly or indirectly, an
interest in any entity that is a competitor, customer or supplier of the Company
or that otherwise has material business dealings with the Company or (ii) is a
party to, or otherwise has any direct or indirect interest opposed to the
Company under, any agreement or other business relationship or arrangement
material to the Company, provided that the foregoing will not apply to any
investment in publicly traded securities constituting less than Three Percent
(3%) of the outstanding securities in such class.
3.7 No Governmental Consent or Approval Required. Except as set forth in
Schedule 4.7, no authorization, consent, approval or other order of, declaration
to, or filing with, any Governmental Authority or body is required for or in
connection with the valid and lawful authorization, execution, delivery and
performance by the Shareholder of this Agreement.
3.8 Disclosure. No representation or warranty contained in this Agreement,
and no statement contained in any Schedule, certificate, list or other writing
furnished to the Buyer pursuant to the provisions hereof, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements herein or therein, in
light of the circumstances in which they are made, not misleading. No
information believed by the Shareholder to be material to the Purchase/Sale and
which is necessary to make the representations and warranties herein contained,
taken as a whole, not misleading, to the knowledge of the Shareholder, has been
withheld from, or has not been delivered in writing to, the Buyer.
ARTICLE IV
Joint Representations and Warranties of the Shareholders
The Shareholders, jointly and severally, hereby represent and warrant to
the Buyer that, except as set forth in the appropriately numbered Disclosure
Schedules delivered by the Shareholders to the Buyer:
4.1 Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Michigan and has
all requisite corporate power and authority to own and lease its properties, to
carry on its business as presently conducted and as proposed to be conducted and
to carry out the transactions contemplated hereby. The Company is qualified as a
foreign corporation to do business in the States of California, Florida,
Missouri and North Carolina and the Company is not, by the manner in which it
conducts its business or owns or leases its property, required to be qualified
as a foreign corporation to do business in any other jurisdictions. The
Disclosure Schedules contain true, complete and accurate copies of the
Organizational Documents of the Company.
4.2 Organizational Documents; Corporate Records. The Company has
heretofore made available to the Buyer a complete and correct copy of the
Organizational Documents, each as amended to date, of the Company. Such
Organizational Documents are in full force and effect. The Company is not in
violation of any provision of its Organizational Documents. The minute books of
the Company, which have heretofore been made available in their entirety to the
Buyer, contain in all material respects true and correct records of all meetings
held or true and
13
complete records of all other corporate actions taken at any time by written
consent or otherwise by its shareholders or Board of Directors or by any
committee of the Board of Directors.
4.3 Capitalization.
4.3.1 The authorized capital stock of the Company consists of 10,000
shares of the Company Common Stock. As of the date hereof and as of the
Closing Date and the Closing, 667 shares of the Company Common Stock are
issued and outstanding, all of which are duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof.
4.3.2 Except as set forth in Schedule 4.3.2, (i) there are no
outstanding subscriptions, options, warrants, calls, preemptive or other
rights, agreements, arrangements or commitments of any character relating
to the issued or unissued capital stock of the Company or obligating the
Company to issue or sell any shares of capital stock of, or other equity
interests in, the Company and (ii) there are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any
shares of capital stock of, or other equity interests in, the Company or
to provide funds to, or make any investment (in the form of a loan,
capital contribution or otherwise) in, any other entity.
4.3.2 Upon payment by the Company to the Participation Rights
Holders of the amounts stated in Schedule 4.3.2 and the amounts
contemplated by Section 6.5, all obligations of the Company under the
Participation Rights Agreements will be paid in full and the Company will
have no further obligations with respect to those Participation Rights
Agreements, and the Shareholders hereby agree to indemnify and hold the
Company and the Buyers harmless from any further liability in connection
with such Participation Rights Agreements.
4.4 Ownership of Company Common Stock. All of the shares of the Company
Common Stock are held of record and beneficially by the Shareholders, in the
respective amounts set forth opposite their names on the signature pages hereof,
free and clear of all Liens of any nature whatsoever. All of the shares of
Common Stock are duly authorized, validly issued in compliance with all
applicable laws, and are fully paid and nonassessable and free of preemptive or
similar rights created by statute, the Organizational Documents of the Company,
or any other agreement to which the Company is a party or by which it is bound.
4.5 Authority. The Company has full corporate power and authority (i) to
execute and deliver this Agreement; (ii) to perform its obligations under this
Agreement and (iii) to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly approved by the
Board of Directors and Shareholders of the Company and no other corporate or
other proceedings on the part of the Company are necessary to approve this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by the Company and constitutes
valid and binding obligations of the Company, enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization,
14
moratorium and other similar laws of general applicability relating to or
affecting creditors' rights generally and by the application of general
principles of equity.
4.6 No Conflict.
4.6.1 Except as provided in Schedule 4.6, neither the execution,
delivery and performance of this Agreement by the Company, nor the
consummation by the Company of the transactions contemplated hereby or
thereby, nor compliance by the Company with any of the terms or provisions
hereof or thereof, will (i) conflict with, violate or result in a breach
of any provision of the Organizational Documents of the Company, (ii)
conflict with, violate or result in a breach of any statute, code,
ordinance, rule, regulation, order, writ, judgment, injunction or decree
applicable to the Company, or by which any property or asset of the
Company is bound or affected, or (iii) conflict with, violate or result in
a breach of any provisions of or the loss of any benefit under, constitute
a default (or an event, which, with notice or lapse of time, or both,
would constitute a default) under, or, except as set forth in Schedule
4.6, give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien, pledge, security
interest, charge or other encumbrance on any property or asset of the
Company pursuant to any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to
which the Company is a party, or by which the Company is bound or
affected.
4.6.2 Except as provided in Schedule 4.6, neither the execution,
delivery and performance of this Agreement by the Company, nor the
consummation by the Company of the transactions contemplated hereby, nor
compliance by the Company with any of the terms or provisions hereof or
thereof, will result the cancellation or termination of, or give any party
the right to cancel, modify or amend: (i) any security clearance held by
the Company or employee and used or useful in connection with its business
or (ii) any agreement for the sale of materials, products, services or
supplies or qualification authorizing or permitting the Company to sell
materials, products, services or supplies or qualification to any person.
4.7 Consents and Approvals. Except as provided in Schedule 4.7 and except
for any applicable requirements, if any, of state takeover laws, the execution,
delivery and performance of this Agreement by the Company does not require any
consent, approval, authorization or permit of, or filing with or notification
to, any Governmental Authority or with any third party. The Company is not aware
of any reason why the approvals, consents and waivers referred to herein should
not be obtained.
4.8 Absence of Certain Payments. Neither the Company, nor any director,
officer, agent, employee or other person acting on behalf of the Company has
used any funds of the Company for unlawful contributions, gifts, entertainment
or other unlawful expenses relating to political activity, or made any direct or
indirect unlawful payments to government officials or employees from corporate
funds,
15
or established or maintained any unlawful or unrecorded funds, or violated any
provisions of the Foreign Corrupt Practices Act of 1977 or any rules or
regulations promulgated thereunder.
4.9 Compliance. The Company has secured and maintained all material
licenses, franchises, permits or authorizations for the lawful conduct of its
business. The Company has in all material respects complied with and is not in
material conflict with, or in default or material violation of, (i) any statute,
code, ordinance, law, rule, regulation, order, writ, judgment, injunction or
decree, published policies and guidelines of any Governmental Authority,
applicable to the Company or by which any property or asset of the Company is
bound or affected or (ii) any note, bond, mortgage, indenture, deed of trust,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company is a party or by which the Company or any
property or asset of the Company is bound or affected.
4.10 Taxes and Tax Matters.
4.10.1 The Company has filed all Tax Returns that it has been
required to file since January 1, 1999. All such Tax Returns were correct
and complete in all respects. All such Tax Returns were filed on the basis
that the Company was an electing corporation under Subchapter S of the
Code. All Taxes owed by the Company with respect to its income (whether or
not shown on any Tax Return) have been paid. Except for taxes payable with
respect to the Company's operation in 2003 that are not yet due and
payable, all Taxes owed by the Shareholders with respect to the income of
the Company (whether or not shown on any Tax Return) have been paid. The
Company is not currently the beneficiary of any extension of time within
which to file any Tax Return. The Company is not required to file Tax
Returns in any jurisdiction where the Company does not file Tax Returns.
There are no Liens on any of the assets of the Company that arose in
connection with any failure (or alleged failure) to pay any Tax.
4.10.2 The Company has withheld and paid all Taxes required to be
withheld or paid by the Company in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder, or other
third party.
4.10.3 There is no dispute or claim concerning any Tax Liability of
the Company either (i) claimed or raised by any authority in writing or
(ii) as to which any of the Company and the directors and officers (and
employees responsible for Tax matters) of the Company has knowledge based
upon personal contact with any agent of such authority. The Company has
delivered to the Buyer correct and complete copies of all federal income
Tax Returns filed by the Company since January 1, 1999, none of which have
been the subject of any examination reports, or statements of
deficiencies.
4.10.4 The Company has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
16
4.10.5 The Company elected as of April 1, 1990 to report its taxes
under Subchapter S of the Code and such election remains in effect as of
the date of this agreement.
4.11 Assets. The Company has good and marketable title to all of the
assets it purports to own, and owns all of such assets free and clear of any
Liens, other than (i) statutory liens securing current taxes and other
obligations that are not yet delinquent, (ii) minor imperfections of title and
encumbrances that do not materially detract from or interfere with the present
use or value of such properties and (iii) liens disclosed in Schedule 4.11. The
assets that the Company owns are all of the assets necessary for the continued
conduct of the Company's business in the manner in which it has heretofore been
conducted. The Company does not have any leased property (real or personal)
except as disclosed in Schedule 4.11.
4.12 Condition of Assets. All of the assets of the Company, including any
assets held under leases or licenses, will be in the same condition and repair
as of the date of this Agreement, ordinary wear and tear excepted.
4.13 Equity Investments. Except as set forth in Schedule 4.13, the Company
does not currently own any capital stock or other proprietary interest, directly
or indirectly, in any corporation, association, trust, partnership, joint
venture or other entity.
4.14 Financial Statements. The balance sheets and related statements of
operations and cash flows of Company (the "Company Financial Statements")
internally prepared as of and for the period ended December 31, 2000, prepared
and reviewed by the Shareholders' Accountant as of and for the period ended
December 31, 2001 and prepared and audited by the Shareholders' Accountant as of
and for the period ended December 31, 2002 (the "Annual Financial Statements")
and the internally prepared balance sheet and related statement of operations of
the Company as of and for the period ended October 31, 2003 (the "Interim
Financial Statements") that are included in Schedule 4.14 fairly present in all
material respects the financial position of the Company as at such dates and the
results of its operations for the periods then ended in accordance with
generally accepted accounting principles consistently applied from period to
period, subject to, in the case of the Interim Financial Statements, adjustments
required in the normal course upon audit for the year ended December 31, 2003
Since the date of the Interim Financial Statements, there has been no material
adverse change in the business, financial condition, assets, liabilities or
prospects of the Company. To the knowledge of the Shareholders based upon their
general familiarity with the financial condition and results of operations of
the Company and upon their review of the preliminary drafts of the internally
prepared balance sheet and related statement of operations of the Company as of
and for the twelve-month period ended December 31, 2003, the audited financial
statements of the Company for that twelve-month period, computed in accordance
with generally accepted accounting principles consistently applied from period
to period, will reflect "Net Sales" of not less than $10,070,000 (95% of
$10,600,000) and "Operating Income" of not less than $1,498,150 (95% of
$1,660,000).
4.15 Absence of Undisclosed Liabilities. Except as set forth in the
Company Financial Statements, the Company has no liabilities of any nature
(matured or unmatured, accrued, fixed or contingent, including, without
limitation, any liabilities for unpaid taxes),
17
except as have accrued in the ordinary course of business from the date of the
Interim Financial Statements to the date of this Agreement and to the Closing
Date.
4.16 Absence of Certain Changes or Events. Since the date of the Interim
Financial Statements, except as set forth in Schedule 4.16, the Company has
conducted its business only in the ordinary course and in manners consistent
with past practice and there has not been (i) either individually or in the
aggregate, any change or effect that is or would be materially adverse to the
business, assets, liabilities, financial condition or results of operations of
the Company, (ii) any material damage, destruction or loss with respect to any
property or asset of the Company, (iii) any change by the Company in its
accounting methods, principles or practices, other than changes required by
applicable law or GAAP or regulatory accounting as concurred in by the Company's
independent accountants, (iv) any entry by the Company into any contract or
commitment of more than $25,000.00, (v) any material liability or obligation of
any nature (whether accrued, absolute, contingent or otherwise and whether due
or to become due), including without limiting the generality of the foregoing,
liabilities as guarantor under any guarantees or liabilities for taxes, other
than in the ordinary course of business consistent with past practice, (vi) any
mortgage, pledge, lien or lease of any assets, tangible or intangible, of the
Company with a value in excess of $25,000.00 in the aggregate, (vii) any
acquisition or disposition of any assets or properties having a value in excess
of $25,000.00, or any contract for any such acquisition or disposition entered
into, or (viii) any lease of real or personal property entered into, other than
in the ordinary course of business consistent with past practice.
4.17 No Bonuses or Other Payments to Employees, Directors, Officers. Since
December 31, 2002, except in the ordinary course of business or as set forth in
Schedule 4.17, the Company has not (i) paid or agreed to pay any bonus or any
other increase in the compensation payable or to become payable or (ii) granted
or agreed to grant any bonus, severance or termination pay, or entered into any
contract or arrangement to grant any bonus, severance or termination pay, to any
director, officer or employee of the Company. Except as set forth in Schedule
4.17, the Company has made no severance or similar commitment to any of its
employees. Without limiting the generality of the preceding sentences, the
Company has not paid or agreed to pay any payments that would result, either
individually or in aggregate, in the payment of an "excess parachute payment"
within the meaning of Section 208G of the Code or that would result, either
individually or in the aggregate, in payments that would be nondeductible
pursuant to Section 162(m) of the Code.
4.18 Absence of Litigation. The Company is not a party to any, and there
are no pending, or to the knowledge of the Company, threatened legal,
administrative, arbitral or other claims, actions, proceedings or investigations
of any nature, against the Company or any property or asset of the Company,
before any Governmental Authority and no facts or circumstances have come to the
Company's attention which have caused it to believe that a material claim,
action, proceeding or investigation against or affecting the Company could
reasonably be expected to occur. Neither the Company, nor any property or asset
of the Company, is subject to any order, writ, judgment, injunction, decree,
determination or award which restricts its ability to conduct business in any
area in which it presently does business or has or could reasonably be expected
to have, either individually or in the aggregate, a material adverse effect.
18
4.19 Employee Benefits. Attached as Schedule 4.19 is the Company's
"Employee Manual" detailing the employee benefits established by the Company for
its employees. Except as set forth in Schedule 4.19, the Company does not
currently maintain any pension, profit sharing, retirement, deferred
compensation, welfare, insurance, disability, bonus, vacation pay, severance pay
or other similar plans, programs or agreements, or any personnel policy, whether
reduced to writing or not, relating to any persons employed by the Company (as
defined for purposes of Section 414(b), (c) and (m) of the Code, a "Plan") and
has no liability under ERISA or any other law or regulation relating to any
Plans. The Company has never been obligated to contribute to any "multi-employer
plan," as defined in Section 3(37) of ERISA.
4.20 Work Stoppages. No work stoppage involving the Company is pending or,
to the knowledge of the Company, threatened. The Company is not involved in, or,
to the knowledge of the Company, threatened with or affected by, any dispute,
arbitration, lawsuit or administrative proceeding relating to labor or
employment matters which might reasonably be expected to interfere in any
material respect with the respective business activities of the Company. No
employees of the Company are represented by any labor union, and, to the
knowledge of the Company, no labor union is attempting to organize employees of
the Company.
4.21 Intellectual Property Rights.
4.21.1 The Marks that are listed in Schedule 4.21 are the only
trademarks, service marks, trade names, trade dress and copyrights used or
proposed to be used by Company in its business. To Company's knowledge,
Company is the sole and exclusive owner of such Marks, free and clear of
all Liens and the use by the Buyer of such Marks will not infringe upon
any trademark, service ▇▇▇▇, trade name, trade dress or copyright
belonging to any other Person.
4.21.2 The Patents that are listed in Schedule 4.21 are the only
patents and patents applications used or proposed to be used by Company in
its business. To Company's knowledge, Company is the sole and exclusive
owner of such Patents and patent applications, free and clear of all Liens
and the use by the Buyer of such Patents will not infringe upon any patent
or patent application belonging to any other Person.
4.21.3 Company has not misappropriated any of the Intellectual
Property from any third Person and Company has taken all reasonable
security measures to protect and maintain the secrecy, confidentiality and
value of any Intellectual Property owned by Company and used in its
business.
4.21.4 No other Person has any right, title or interest in any
Patent, Trade Secret or ▇▇▇▇, which has arisen out of the activities by
Company or on behalf of Company by any of its current or former officers,
directors, employees, consultants or agents or any holder of securities of
Company.
4.22 Proprietary Information of Third Parties. To the knowledge of the
Company, no third party has claimed that Company or any person employed by or
otherwise providing services to Company has (i) violated any of the terms or
conditions of his or her employment,
19
non-competition, non-disclosure or inventions agreement with such third party,
(ii) disclosed or utilized any trade secret of such third party or (iii)
interfered in the employment relationship between such third party and any of
its present or former employees.
4.23 Environmental Liability. Except as disclosed in Schedule 4.23, the
Company is in full compliance with all Environmental Laws (as defined below).
There is no litigation or other proceeding seeking to impose, or that could
reasonably result in the imposition on the Company of any liability arising
under any of the Environmental Laws, pending or, to the knowledge of the
Company, threatened or unasserted but considered probable of assertion and which
if asserted would have at least a reasonable probability of an unfavorable
outcome against the Company; the Company does not have any knowledge of any
reason for any such potential litigation that would impose any such liability;
and the Company is not subject to any agreement, order, judgment, decree, or
memorandum by or with any Governmental Authority or third party imposing any
such liability. For the purposes of this Agreement, the term "Environmental
Laws" shall mean any Federal, state or local law or ordinance or regulation
pertaining to the protection of human health or the environment, including,
without limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. Sections 9601, et seq., the Emergency Planning and
Community Right-to-Know Act, 42 U.S.C. Sections 11001, et seq., and the Resource
Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq.
4.24 Competing Interests. Except as set forth in Schedule 4.24, neither
the Company, nor any director or officer of the Company, or any immediate family
member of any of the foregoing (i) owns, directly or indirectly, an interest in
any entity that is a competitor, customer or supplier of the Company or that
otherwise has material business dealings with the Company or (ii) is a party to,
or otherwise has any direct or indirect interest opposed to the Company under,
any agreement or other business relationship or arrangement material to the
Company, provided that the foregoing will not apply to any investment in
publicly traded securities constituting less than Three Percent (3%) of the
outstanding securities in such class
4.25 No Governmental Consent or Approval Required. Except as set forth in
Schedule 4.7, no authorization, consent, approval or other order of, declaration
to, or filing with, any Governmental Authority or body is required for or in
connection with the valid and lawful authorization, execution, delivery and
performance by Company of this Agreement.
4.26 Investment Banker. Except for ▇▇▇▇▇▇ Partners, LLC, no broker, finder
or investment banker, is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company.
4.27 Disclosure. No representation or warranty contained in this
Agreement, and no statement contained in any Schedule, certificate, list or
other writing furnished to the Buyer pursuant to the provisions hereof, contains
or will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary in order to make the statements herein or
therein, in light of the circumstances in which they are made, not misleading.
No information believed by the Company to be material to the Purchase/Sale and
which is necessary to make the representations and warranties herein contained,
taken as a whole, not misleading, to the knowledge of the Company, has been
withheld from, or has not been delivered in writing to, the Buyer.
20
ARTICLE V
Representations and Warranties of Buyer
The Buyer represents and warrants to the Company and the Shareholders
that, except as set forth in the appropriately numbered Disclosure Schedules
delivered by the Buyer to the Company and the Shareholders:
5.1 Organization. The Buyer 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 own and lease its properties, to
carry on its business as presently conducted and as proposed to be conducted and
to carry out the transactions contemplated hereby.
5.2 Authority. The Buyer has full corporate power and authority (i) to
execute and deliver all documents to be executed by the Buyer in connection with
or pursuant to this Agreement; (ii) to perform its obligations under this
Agreement and (iii) to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly approved by the
Board of Directors of the Buyer and no other corporate proceedings on the part
of the Buyer are necessary to approve this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Buyer and constitute valid and binding obligations
of the Buyer, enforceable against the Buyer in accordance with their respective
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general applicability
relating to or affecting creditors' rights generally and by the application of
general principles of equity.
5.3 No Conflict. Neither the execution, delivery and performance of this
Agreement by the Buyer, nor the consummation by the Buyer of the transactions
contemplated hereby, nor compliance by the Buyer with any of the terms or
provisions hereof, will (i) conflict with, violate or result in a breach of any
provision of the Organizational Documents of the Buyer, (ii) conflict with,
violate or result in a breach of any statute, code, ordinance, rule, regulation,
order, writ, judgment, injunction or decree applicable to the Buyer, or by which
any property or asset of the Buyer is bound or affected, or (iii) conflict with,
violate or result in a breach of any provisions of or the loss of any benefit
under, constitute a default (or an event, which, with notice or lapse of time,
or both, would constitute a default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a Lien, pledge, security interest, charge or other encumbrance on
any property or asset of the Buyer pursuant to any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Buyer is a party, or by which the Buyer is bound or affected.
5.4 Consents and Approvals. The execution, delivery and performance of
this Agreement by the Buyer does not require any consent, approval,
authorization or permit of, or filing with or notification to any Governmental
Authority or with any third party, except for filings with the Securities and
Exchange Commission and the Nasdaq Stock Market. The Buyer is not aware of any
reason why the approvals, consents and waivers of Governmental Authorities
referred to herein should not be obtained.
21
5.5 Investment Banker. Except for ▇▇▇▇▇▇ Partners, LLC, no broker, finder
or investment banker, is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Buyer.
5.6 Arotech Common Stock. The shares of Arotech Common Stock issued to the
Shareholders as the Closing Stock Consideration will, as of the date of
issuance, be duly authorized, validly issued, fully paid, nonassessable and free
of preemptive rights, with no personal liability attaching to the ownership
thereof.
5.7 Disclosure. No representation or warranty contained in this Agreement,
and no statement contained in any Schedule, certificate, list or other writing
furnished to the Company or the Shareholders pursuant to the provisions hereof,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make the statements
herein or therein, in light of the circumstances in which they are made, not
misleading. No information believed by the Buyer to be material to the
Purchase/Sale and which is necessary to make the representations and warranties
herein contained, taken as a whole, not misleading, to the knowledge of the
Buyer, has been withheld from, or has not been delivered in writing to, the
Company.
ARTICLE VI
Covenants of the Parties
6.1 Legal Conditions to Purchase/Sale. Each of the Buyer, the Shareholders
and the Company shall use his or its commercially reasonable best efforts (i) to
take, or cause to be taken, all actions necessary, proper or advisable to comply
promptly with all legal requirements which may be imposed on such party with
respect to the Purchase/Sale and, subject to the conditions set forth in Article
VII, to consummate the transactions contemplated by this Agreement and (ii) to
obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Authority and any other third party which is required to be obtained in
connection with the Purchase/Sale and the other transactions contemplated by
this Agreement.
6.2 Additional Agreements. In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, or to vest the Buyer with full title to the Company Common Stock,
each party to this Agreement shall take all such necessary action as may be
reasonably requested by the Buyer.
6.3 Ordinary Course Operations. From the date of this Agreement until the
Closing, the Shareholders shall cause the Company to conduct its business only
in the ordinary course and in a manner consistent with prior practices. Without
limiting the generality of the foregoing, from the date of this Agreement until
the Closing, the Shareholders shall not and shall not permit the Company to
directly or indirectly: (i) issue any new shares of Company Common Stock, cause
or permit any sale, assignment, transfer or conveyance of any outstanding
Company Common Stock, or sell, assign, transfer or convey any of the Company's
assets (other than sales of its products in the ordinary course of business);
(ii) solicit any offers for, respond to any
22
unsolicited offers for, or enter into or conduct any negotiations in respect of
any of the foregoing; or (iii) in any way assist or encourage any person in
connection with any proposed acquisition of any Company Common Stock or any
assets of the Company (other than sales of its products in the ordinary course
of business). The Buyer acknowledges that the Company, prior to the Closing, may
authorize and pay bonuses to its employees (other than the Shareholders) and
will authorize and pay salaries to the Shareholders in the ordinary course and
will authorize and pay distributions to the Shareholders the amounts reasonably
estimated to fund Subchapter S Tax Liabilities of the Shareholders for the
income of the Company for 2003. The Shareholders agree that from the date of
this Agreement to the Closing, the Shareholders shall not cause permit the
Company to make any payments to the Shareholders other than salaries in the
ordinary course, distributions to fund the liabilities of the Shareholders for
taxes with respect to the Company's taxable income and expense and similar
reimbursements in the ordinary course.
6.4 Post-Closing Tax Matters. The following provisions shall govern the
allocation of responsibility as between the Buyer and the Shareholders for
certain tax matters following the Closing Date:
6.4.1 The Shareholders shall prepare or cause to be prepared and
file or cause to be filed all Tax Returns for the Company for the year
ended December 31, 2003 and all periods ending on or prior to that date
that are filed after the Closing Date. The Buyer shall provide the
Shareholders with all access reasonably required to the financial records
of the Company to prepare such Tax Returns. The Shareholders shall permit
the Buyer to review and approve of each such Tax Return described in the
preceding sentence prior to filing, which approval shall not be
unreasonably withheld or delayed. The Shareholders confirm that the
amounts specified in Schedule 6.4.1 have prior to the date of this
Agreement been distributed by the Company to the Shareholders to fund the
Shareholders' Subchapter S Tax Liabilities with respect to the income
realized by the Company in 2003. The Shareholders agree that any further
distributions that are made to them by the Company from the date of this
Agreement to the Closing will be limited to the amounts which the
Shareholders estimate will be necessary, when added to the amounts
described in Schedule 6.4.1, to fully fund the Shareholders' Subchapter S
Tax Liabilities for all of the taxable income realized by the Company for
the full year ended December 31, 2003. If, based upon the Tax Returns
prepared for the Company by the Shareholders and approved by the Buyer for
the year 2003, the amount payable by the Shareholders as Subchapter S Tax
Liabilities for the year 2003 is more or less than the sum of all
distributions made by the Company to the Shareholders to fund such
Subchapter S Liabilities, then (i) if the amounts distributed exceed such
Subchapter S Liabilities, then the Shareholders shall immediately refund
such excess to the Company and (ii) if the amounts distributed are less
than such Subchapter S Liabilities, then the Company shall immediately
make a distribution of such deficiency to the Shareholders. In either
instance, the amount paid by or to the Shareholders shall be recorded as a
correcting adjustment to the amounts distributed by the Company to the
Shareholders retroactively effective as of December 31, 2003, while they
continued to be the holders of the Company Common Stock. Any dispute
regarding the computation of the Subchapter S Tax Liabilities of the
Shareholders shall be resolved in the manner described in Section 11.1.
The amount payable
23
under this Section shall be in addition to all other amounts payable by
the Buyer under this Agreement. Except as expressly provided in this
Section, the Shareholders shall be solely responsible for the payment of
Taxes due under such Tax Returns (whether or not shown in those Tax
Returns) and shall indemnify and hold the Company and the Buyers harmless
from any liability for any income Taxes payable with respect to the income
realized by the Company prior to the Closing Date.
6.4.2 The Buyer shall cause the Company to prepare or cause to be
prepared and file or cause to be filed all Tax Returns for the Company for
all periods ending after the Closing Date.
6.4.3 If requested by the Buyer by written notice delivered within
180 days following the Closing Date, the Buyer, the Company and, if
required, the Shareholders shall sign and file Form 8023 providing for an
election under Section 338(h)(10) of the Code with respect to the
transactions contemplated by this Agreement and the Shareholders shall
cooperate in good faith with Buyer in making that election. As a condition
to the agreement and cooperation of the Shareholders in making the
election under Section 338(h)(10), Buyer agrees to reimburse Shareholders
for all additional federal and state income tax incurred by Shareholders
(or the Company prior to the Closing Date) as a result of making that
election. The Shareholders shall cause the Shareholders' Accountant, as
soon as reasonably possible after the Shareholders receive the written
request from the Buyer regarding an election under 338(h)(10), to prepare
and to provide to the Buyer a written determination of all such additional
taxes and such amount shall be payable by the Buyer to the Shareholders
not later than twenty (20) days before such taxes will be payable by the
Shareholders. Any dispute regarding the computation of the taxes payable
by the Shareholders as a result of the election under Section 338(h)(10)
shall re resolved in the manner described in Section 11.1. The amount
payable under this Section shall be in addition to all other amounts
payable by the Buyer under this Agreement.
6.4.4 Buyer, the Company and the Shareholders shall cooperate fully,
as and to the extent reasonably requested by the other party, in
connection with the filing of Tax Returns pursuant to this Section and any
audit, litigation or other proceeding with respect to Taxes, with the
Shareholders having the right and responsibility to conduct and resolve
(and to indemnify the Buyer and the Company from any liability with
respect to) the audit of any returns filed pursuant to Section 6.4.1 and
with the Buyer having the right and responsibility to conduct and resolve
(and to indemnify the Shareholders from any liability with respect to) the
audit of any returns filed pursuant to Section 6.4.2. Such cooperation
shall include the retention and (upon the other party's request) the
provision of records and information which are reasonably relevant to any
such audit, litigation or other proceeding and making employees available
on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder. The Company and the
Shareholders agree (i) to retain all books and records with respect to tax
matters pertinent to the Company relating to any tax period beginning
before the Closing Date until the expiration of the statute of
24
limitations (and, to the extent notified by Buyer, any extensions thereof)
of the respective tax periods, and to abide by all record retention
agreements entered into with any taxing authority, and (ii) to give the
other party reasonable written notice prior to transferring, destroying or
discarding any such books and records and, if the other party so requests,
the Company and the Shareholders, as the case may be, shall allow the
other party to take possession of such books and records.
6.4.3 All transfer, documentary, sales, use, stamp, registration and
other such Taxes and fees (including any penalties and interest) incurred
in connection with this Agreement shall be paid when due by the Person to
whom or which such Taxes are assessed under applicable law and each Person
will, at such Person's own expense, file all necessary Tax Returns and
other documentation with respect to all such transfer, documentary, sales,
use, stamp, registration and other Taxes and fees, and, if required by
applicable law, all other Persons will, and will cause its affiliates to,
join in the execution of any such Tax Returns and other documentation.
6.5 Post-Closing Participation Rights Payments. The Buyer shall cause the
Company at each time that an installment of the Earnout Consideration is paid to
the Shareholders to pay to each Participation Rights Holder the amount, if any,
payable to that Participation Rights Holder under his Participation Rights
Agreement at the time of the payment of that installment of the Earnout
Consideration. The Shareholders covenant that if the amounts required to fully
satisfy the Company's obligations to the Participation Rights Holders under the
Participation Rights Agreements exceed the amounts subtracted by the Buyer for
such purposes in computing the Closing Cash Consideration and the Earnout
Consideration paid to the Shareholders, then the Shareholders shall pay such
excess to the Participation Rights Holders (or, if such excess has already paid
by the Company, shall immediately reimburse the Company for such payment).
6.6 Disposition of Closing Stock Consideration. Immediately following the
Closing Date, the Buyer will cause the Broker to initiate and thereafter
implement as rapidly as possible the sale, in one or more transactions, of that
number of the shares of the Closing Stock Consideration as will be required to
generate net proceeds to the Shareholders (after all fees to the Broker and all
other transactional expenses) of $2,000,000 and, within three (3) business days
following each such sale, to disburse such net proceeds to the Shareholders by
wire transfer to an account or accounts designated by the Shareholders. In
implementing those sales, the Broker shall operate with the primary objective to
generate $2,000,000 in net proceeds for distribution to the Shareholders within
sixty (60) days following the Closing Date and, to the extent (but only to the
extent) consistent with that primary objective, to maximize the average price
per share at which the Closing Stock Consideration is sold. Unless at the
written directive of the Shareholders, no sales of shares of the Closing Stock
Consideration will be completed at a price that is less than 80% of the price
per share that was the valuation basis for the issuance of the Closing Stock
Consideration. All cumulative net proceeds in excess of $2,000,000 shall be
delivered to the Buyer. If any such excess cumulative net proceeds are not
delivered to the Buyer, the Buyer may deduct an amount equal to such excess
cumulative net proceeds from any Earnout Consideration to be paid. If as of the
sixtieth (60th) day following the Closing Date, the cumulative net proceeds from
the sale of the Closing Stock Consideration distributed to the Shareholders
equals less than $2,000,000, then the Shareholders shall have the right, as of
or at
25
any time after such sixtieth (60th) day, exercisable by written notice delivered
to the Broker and the Buyer, to require that the Broker release and deliver to
the Shareholders any remaining net proceeds from the prior sales of the Closing
Stock Consideration and any remaining shares of Closing Stock Consideration that
had not yet been sold as of the date such notice was delivered and the Broker,
on or after the fifth (5th) day following the date of delivery of such notice,
shall deliver such remaining net proceeds and the original Stock Certificate(s)
representing remaining shares of Closing Stock Consideration to the
Shareholders. If and in such event, the Shareholders shall receive and accept
such proceeds and shares in complete satisfaction of the Closing Stock
Consideration and free of any claims by the Buyer or the Broker.
6.7 Compliance With Security Agreement. Following the Closing Date, the
Buyer will comply and will cause the Company to comply in all material respects
with the provisions of the Security Agreement.
ARTICLE VII
Conditions to Closing
7.1 Conditions to Obligations of All Parties. The respective obligations
of each party under this Agreement shall be subject to the fulfillment at or
prior to the Closing of the following conditions, none of which may be waived:
7.1.1 No order, injunction or decree (whether temporary, preliminary
or permanent) issued by federal or state governmental authority or other
agency or commission or federal or state court of competent jurisdiction
or other legal restraint or prohibition preventing the consummation of the
Purchase/Sale or any of the other transactions contemplated by this
Agreement shall be in effect and no proceeding initiated by any
governmental entity seeking an such injunction, decree, restraint or
prohibition shall be pending. No statute, rule, regulation, order,
injunction or decree (whether temporary, preliminary or permanent) shall
have been enacted, entered, promulgated or enforced by any federal or
state governmental authority or other agency or commission or federal or
state court of competent jurisdiction, which prohibits, restricts or makes
illegal the consummation of the Purchase/Sale or any of the other
transactions contemplated by this Agreement.
7.1.2 Any filings with and notifications to, and all approvals and
authorizations of, third parties (including, without limitation,
governmental entities and authorities) required for the consummation of
the transactions contemplated by this Agreement shall have been made or
obtained and all such approvals and authorizations (the "Requisite
Regulatory Approvals") obtained shall be effective and shall not have been
suspended, revoked or stayed by action of any governmental entity or
authority.
7.2 Conditions to Obligations of the Buyer. The obligations of the Buyer
under this Agreement are, at the option of the Buyer, subject to the fulfillment
of all of the following conditions on the dates specified below:
26
7.2.1 As of the Closing, (i) the Buyer, based upon its due diligence
review of the Company, shall have determined in its discretion that the
assets, business and prospects of the Company are suitable for the Buyer's
intended purposes; (ii) the Buyer shall have secured financing for the
transactions contemplated by this Agreement in an amount and upon terms
acceptable to the Buyer in its discretion; (iii) Buyer, at its sole and
exclusive option, shall have obtained the opinion of an investment banker
confirming to the Buyer's satisfaction that the terms and conditions of
this Agreement are fair to the Buyer and its shareholders; and (iv) the
Board of Directors of the Buyer shall have approved of the transactions
contemplated by this Agreement.
7.2.2 As of the Closing, the Shareholders shall have delivered to
the Buyer a written notice confirming that each of the conditions to the
Shareholder's obligations under this Agreement that are specified in
Section 7.3 have been satisfied or waived by the Shareholders.
7.2.3 As of the Closing, each of the representations and warranties
of each Shareholder and the Company in this Agreement shall be true and
correct in all material respects, in each case as of the date of this
Agreement, as applicable, and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing.
7.2.4 On or prior to the Closing, each Shareholder and the Company
shall have performed in all material respects all obligations and complied
in all material respects with all agreements or covenants of such
Shareholder and the Company to be performed or complied with by the
Shareholder or the Company at or prior to the Closing under this
Agreement.
7.2.5 On or prior to the Closing, the consent and approval shall
have been obtained from (i) the Shareholders and the Board of Directors of
the Company as required under applicable law in order to permit the
Company to authorize the transactions contemplated by this Agreement, (ii)
the waiver shall have been obtained from KeyBank National Association
confirming that the Company will not be in default under its Promissory
Note as a result of the change in ownership resulting from the
Purchase/Sale and (iii) the consent, approval or waiver from each Person
whose consent or approval shall be required in order to permit the
acquisition by the Buyer of the Company Common Stock pursuant to the
Purchase/Sale and none of such permits, consents, waivers, clearances,
approvals or authorizations shall contain any term or condition which
would materially impair the value of the Company to the Buyer.
7.2.6 On or prior to the Closing, the Persons listed in Schedule
7.2.6 who will be employed by the Buyer shall have entered into the
Buyer's standard form employment-related agreements (including its
agreements relating to Confidentiality, Disclosure of Inventions and
Non-Competition), and such agreements shall be in full force and effect.
27
7.2.7 On or prior to the Closing, the Company shall have secured the
commitments of the following Persons to continue to perform services for
the Company following the Closing Date on terms and conditions acceptable
to those Persons and to the Buyer: (i) ▇▇▇▇ ▇. ▇▇▇▇▇▇ as a full time
employee for one year and a part time independent consultant for an
additional one year; (ii) ▇▇▇ ▇. ▇▇▇▇ as a full time employee for one
year; (iii) ▇▇▇▇ ▇. ▇▇▇▇▇▇ as a full time employee for a term of three
years; and (iv) ▇▇▇▇ ▇. ▇▇▇▇▇▇ as a full time employee for a term of three
years.
7.2.8 On or prior to the Closing, the Buyer shall have received the
opinion of Hooper, Hathaway, Price, Beuche & ▇▇▇▇▇▇▇, dated as of the
Closing Date, with respect to the matters set forth in Schedule 7.2.8.
7.2.9 As of the Closing, none of the Requisite Regulatory Approvals
shall impose any term, condition or restriction upon the Buyer or any of
its subsidiaries that the Buyer reasonably determines would materially
impair the value of the Company to the Buyer or be materially burdensome
(a "Burdensome Condition").
7.2.10 As of the Closing, neither Company nor any Shareholder shall
have taken any action or made any payments that would result, either
individually or in the aggregate, in the payment of an "excess parachute
payment" within the meaning of Section 280G of the Code or that would
result, either individually or in the aggregate, in payments that would be
nondeductible pursuant to Section 162(m) of the Code.
7.2.11 As of the Closing, the Company shall have redeemed and
satisfied or committed to satisfy all rights of each Participation Rights
Holder under each Participation Rights Agreement and confirmed the
termination of all Participation Rights Agreements to the reasonable
satisfaction of the Buyer.
7.3 Conditions to Obligations of the Shareholders. The obligations of the
Company and the Shareholder under this Agreement are, at the option of the
Company and the Shareholders, subject to the fulfillment or written waiver by
the Shareholders of all of the following conditions on or before the dates
specified below:
7.3.1 As of the Closing, the Board of Directors of the Company shall
have approved of the transactions contemplated by this Agreement.
7.3.2 As of the Closing, the Buyer shall have delivered to the
Shareholders a written notice confirming that each of the conditions to
the Buyer's obligations under this Agreement that are specified in Section
7.2 have been satisfied or waived by the Buyer.
7.3.3 As of the Closing, each of the representations and warranties
of the Buyer in this Agreement shall be true and correct in all material
respects as of the date of this Agreement, as applicable, and (except to
the extent such representations and warranties speak as of an earlier
date) as of the Closing.
28
7.3.4 On or prior to the Closing, the Buyer shall have performed in
all material respects all obligations and complied in all material
respects with all of the respective agreements or covenants to be
performed or complied with by the Buyer at or prior to the Closing under
this Agreement.
7.3.5 On or prior to the Closing, the Shareholders shall have
received the opinion of ▇▇▇▇▇▇ Har-Oz, Esq., dated as of the Closing Date,
with respect to the matters set forth in Schedule 7.3.5.
7.3.6 On or prior to the Closing, the Buyer shall have entered into
employment agreements with the Persons listed in Section 7.2.7 upon terms
and conditions acceptable to such Persons and such agreements shall be in
full force and effect.
7.3.7 On or prior to the Closing, the Buyer shall have delivered to
the Shareholders and the Shareholders in their discretion shall have
approved of the Letter of Credit and the Intercreditors Agreement required
pursuant to Section 2.4.7 and the acknowledgement and commitment of the
Broker required pursuant to Section 2.3.2 and 6.6.
7.3.8. As of the Closing, none of the Requisite Regulatory Approvals
shall impose any term, condition or restriction upon the Shareholders that
either Shareholder reasonably determines would materially impair the value
of the Arotech Common Stock received by the Shareholders as the Closing
Stock Consideration or would materially and adversely affect the Company's
prospects to maximize the Earnout Consideration payable to the
Shareholders (a "Burdensome Condition").
ARTICLE VIII
The Closing
8.1 Closing. Subject to the terms and conditions of this Agreement, the
closing of the Purchase/Sale (the "Closing") will take place at 9:00 a.m. on
January 13, 2004, or at such other date as is mutually approved by the Company
and the Buyer, but shall be retroactively effective as of 12:01 a.m. on January
1, 2004 (the "Closing Date"), at the offices of the Company in Ann Arbor,
Michigan, or at such other time and place as the Buyer and the Shareholders may
otherwise agree in writing.
8.2 Deliveries at Closing. Subject to satisfaction of the conditions
precedent set forth in this Agreement, at the Closing the parties will deliver
the following:
8.2.1 The Buyer shall (i) pay to each Shareholder by cashier's check
or wire transfer of funds the portion of the Closing Cash Consideration
specified in Section 2.3.1 allocable to each Shareholder, (ii) issue and
deliver to the Broker the original Stock Certificate(s) representing the
shares of Arotech Common Stock issuable to each Shareholder as the Closing
Stock Consideration pursuant to
29
Section 2.3.2 and secure from the Broker a written acknowledgment of
receipt of those Stock Certificates and the commitment of the Broker to
initiate and to complete a sale of those shares in accordance with the
provisions of Section 2.3.2 and 6.6 (iii) pay to each Participation Rights
Holder the amount specified in his Participation Rights Agreement to be
paid at the Closing, (iv) deliver to the Shareholders the Letter of
Credit, (v) sign and deliver the Security Agreement to the Shareholders
and (vi) cause Smithfield to deliver to the Shareholders the
Intercreditors Agreement.
8.2.2 Each Shareholder shall have endorsed and delivered to the
Broker the Stock Certificate(s) representing the shares of Company Common
Stock registered in such Shareholder's name; and
8.2.3 The parties shall exchange all other documents that the
Company or the Buyer may reasonably request be delivered at the Closing so
as effectively to consummate the transactions contemplated hereby.
ARTICLE IX
Indemnification
9.1 Indemnification of the Buyer. Subject to the limitations in other
Sections of this Article IX, each Shareholder will indemnify and hold Buyer
harmless from any and all Liabilities, obligations, claims, contingencies,
damages, costs and expenses, including all court costs and reasonable attorney
fees (collectively, "Losses"), that Buyer suffers or incurs as a result of or
relating to:
9.1.1 The breach of any representation or warranty made by the
Company or the Shareholders in this Agreement or pursuant hereto; or
9.1.2 The breach of any covenant or agreement of the Company or the
Shareholders under this Agreement.
The sole and exclusive recourse of the Buyer for any Losses within the scope of
this Section 9.1 shall be to seek and secure indemnification from the
Shareholders in accordance with the terms of this Article IX.
9.2 Indemnification of the Shareholders. Subject to the limitations in
other Sections of this Article IX, the Buyer will indemnify and hold the
Shareholders harmless from any and all Losses (as defined above), that any
Shareholder suffers or incurs as a result of or relating to:
9.2.1 The breach of any representation or warranty made by the Buyer
in this Agreement or pursuant hereto; or
9.2.2 The breach of any covenant or agreement of the Buyer under
this Agreement.
30
The sole and exclusive recourse of the Shareholders for any Losses within the
scope of this Section 9.2 shall be to seek and secure indemnification from the
Buyer in accordance with the terms of this Article IX.
9.3. Limitation of Liability of Shareholders. The liability of each
Shareholder with respect to any Loss shall be limited to such Shareholder's
Allocable Portion of that Loss. The portion of any Loss allocable to each
Shareholder (the "Allocable Portion") shall be as follows:
9.3.1 The Shareholders shall be required to indemnify and hold
harmless the Buyer with respect to Losses only if and after the aggregate
amount of all such Losses of Buyer exceed $200,000 (the "Buyer's
Threshold"), at which point Shareholders will be liable only for the
amount of such Losses in excess of the Buyer's Threshold;
9.3.2 For any Losses based upon the inaccuracy in any representation
or warranty made by a Shareholder in Article III, the Allocable Portion
for that Shareholder shall be One Hundred Percent (100%) of the Losses and
the Allocable Portion for each other Shareholder shall be none of the
Losses;
9.3.3 For any Losses based upon the inaccuracy in any representation
or warranty made with respect to the Company in Article IV or based upon
any breach of any of the Company's covenants in this Agreement, the
Allocable Portion of the Losses for Jordan will be 59.97 % and the
Allocable Portion of ▇▇▇▇ will be 40.03 %; and
9.3.4 Except for Losses resulting from the breach by the
Shareholders of any of the post-closing covenants in Sections 6.2 and 6.4,
the cumulative aggregate liability of both of the Shareholders for Losses
shall be limited to Twenty Percent (20%) of the Purchase Price that has
been paid by the Buyer to the Shareholders for the Company Common Stock.
For avoidance of doubt, if there is no Earnout Consideration paid pursuant
to Section 2.4, then this limitation will be to 20% of the Closing
Consideration and if there is Earnout Consideration is paid pursuant to
Section 2.4, then this limitation will be to 20% of the sum of the Closing
Consideration and the Earnout Consideration actually paid. . There shall
be no limit on the liability of the Shareholders for Losses resulting from
the breach by the Shareholders of any of the post-closing covenants in
Sections 6.2 and 6.4.
9.4 Limitation of Liabilities of the Buyer. The liability of the Buyer
with respect to any Losses shall be limited as follows:
9.4.1 The Buyer shall be required to indemnify and hold harmless the
Shareholders with respect to Losses (other than Losses resulting from a
breach by the Buyer of its commitment to pay the Purchase Price as
required pursuant to Section 2.3 and 2.4) only if and after the aggregate
amount of all such Losses of the Shareholders exceed $200,000 (the
"Shareholders' Threshold"), at which point Buyer will be liable only for
the amount of such Losses in excess of the Shareholders' Threshold; and
31
9.4.2 Except for Losses resulting from the breach by the Buyer of
any of the post-closing covenants in Sections 2.3, 2.4, 6.2 and 6.4, the
cumulative aggregate liability of the Buyer shall be limited to
$2,000,000.
9.5 Survival of Indemnification Provisions. The rights of the Buyer and
the Shareholders to indemnification under this Article IX (each, as such, and
"Indemnified Party") will survive the execution and delivery of this Agreement
and the consummation of the transactions contemplated, subject to the limitation
that the right of any Indemnified Party to indemnity for any Claim under this
Article IX shall terminate twenty-four (24) months after the Closing Date
unless, on or before such date, the Indemnified Party has delivered to the
Indemnifying Party an Indemnity Notice with respect to that Claim in the time
and manner specified in Section 9.6.
9.6 Notice of Claim. The Indemnified Parties entitled to receive
indemnification under this Article IX agree to give prompt written notice (an
"Indemnity Notice") to the party or parties from whom or which indemnification
is sought (the "Indemnifying Parties") upon the occurrence of any indemnifiable
Loss or the assertion of any claim or the commencement of any action or
proceeding in respect of which such a Loss may reasonably be expected to occur
(a "Claim"). Such Indemnity Notice will include a reference to the event or
events forming the basis of such Loss or Claim and the amount involved, unless
such amount is uncertain or contingent, in which event the Indemnified Parties
will give a later written notice when the amount becomes fixed.
9.7 Third Party Claims. If a claim or demand by a third party is made
against an Indemnified Party, and if such Indemnified Party intends to seek
indemnity with respect thereto under this Article IX or under any other
provisions of this Agreement providing for indemnification, such Indemnified
Party shall promptly deliver an Indemnity Notice to the Indemnifying Party
setting forth such claims in reasonable detail. The Indemnifying Party shall
have thirty (30) days after delivery of such Indemnity Notice to undertake,
conduct and control, through counsel of its own choosing and at its own expense,
the settlement or defense thereof, and the Indemnified Party shall cooperate
with it in connection therewith; provided that the Indemnifying Party may not
undertake, conduct and control such settlement or defense without the
Indemnified Party's consent unless:
9.7.1 The Indemnifying Party acknowledges in writing its obligation
to indemnify the Indemnified Party for any Losses relating thereto;
9.7.2 The Indemnifying Party provides reasonable evidence to the
Indemnified Party of its financial ability to satisfy its indemnification
obligations;
9.7.3 The suit, action, claim, liability or obligation does not seek
to impose any liability or obligation upon the Indemnified Party other
than for money damages;
9.7.4 The suit, action, claim, liability or obligation does not
relate to the Indemnified Party's customer, supplier, employee, or sales
representative
32
relationships or otherwise implicate the ongoing operation of the
Indemnified Party's business;
9.7.5 If the Indemnifying Party has assumed the defense, the
Indemnified Party may participate in any such settlement or defense
through counsel chosen by such Indemnified Party, and the fees and
expenses of such counsel shall be borne by such Indemnified Party unless
(i) the employment thereof has been specifically authorized by the
Indemnifying Party in writing, (ii) there exists a conflict of interest
between the interests of the Indemnified Party and the Indemnifying Party
or (iii) the Indemnifying Party has after a reasonable time failed to
assume such defense and employ counsel;
9.7.6 If the Indemnifying Party has assumed the defense, then so
long as the Indemnifying Party is reasonably contesting any such claim in
good faith, the Indemnified Party shall not pay or settle any such claim
without the written consent of the Indemnifying Party. Notwithstanding the
foregoing, the Indemnified Party shall have the right to pay or settle any
such claim without the consent of the Indemnifying Party; provided, that
in such event it shall waive any right to indemnity therefor by the
Indemnifying Party.
9.7.7 If the Indemnifying Party does not notify the Indemnified
Party within thirty (30) days after the date of delivery of the Indemnity
Notice that it elects to undertake the defense of the claim or is
otherwise not permitted to assume such defense under the terms hereof, the
Indemnified Party shall have the right to contest, settle or compromise
the claim but shall not thereby waive any right to indemnity therefor
pursuant to this Agreement. The Indemnifying Party shall not, except with
the consent of the Indemnified Party, enter into any settlement that does
not include as an unconditional term thereof the giving by the person or
persons asserting such claim to all indemnified parties an unconditional
release from all liability with respect to such claim or consent to entry
of any judgment.
ARTICLE X
Termination and Expenses
10.1 Termination. This Agreement may be terminated and the Purchase/Sale
and the other transactions contemplated by this Agreement may be abandoned at
any time prior to the Closing, notwithstanding any requisite approval and
adoption of this Agreement and the transactions contemplated in this Agreement
by the Board of Directors of the Buyer and the Board of Directors and
Shareholders of the Company:
10.1.1 By mutual written consent duly authorized by the Boards of
Directors of the Buyer and the Company;
10.1.2 By either the Buyer or the Shareholders if the Closing shall
not have occurred on or before February 14, 2004 or such later date as the
parties may have agreed upon in writing (the "Expiration Date"); provided,
however, that the
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right to terminate this Agreement under this Section 10.1.2 shall not be
available to any party whose failure to fulfill any material obligation
under this Agreement has been the cause of, or resulted in, the failure of
the Closing to occur on or before such date; or
10.1.3 By either the Buyer or the Shareholders (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein) if there shall
have been a material breach of any of the representations or warranties
set forth in this Agreement on the part of the other party, which breach
by its nature cannot be cured prior to the earlier of the Closing or
within thirty (30) days following receipt by the breaching party of
written notice of such breach from the other party hereto.
10.2 Effect of Termination; Expenses.
10.2.1 In the event of the termination of this Agreement pursuant to
Section 10.1, this Agreement shall forthwith terminate, and there shall be
no liability on the part of any party hereto, except as provided in
Section 10.2.2.
10.2.2 If this Agreement is terminated as a result of any uncured
breach of any material provision of this Agreement, then, the
non-breaching party shall have the right to seek and secure recovery from
the breaching party for (i) all damages permitted or required under
applicable law as a result of such breach and (ii) all out-of-pocket costs
and expenses (but in no event in an amount in excess of $50,000),
including, without limitation, the reasonable fees and expenses of
lawyers, accountants and investment bankers, incurred by such other party
in connection with the entering into of this Agreement and the carrying
out of any and all acts contemplated hereunder ("Expenses").
ARTICLE XI
Arbitration
11.1 Computation of the Purchase Price. If the Shareholders dispute the
Buyer's Accountant's computation of the 2004 Earnout Consideration pursuant to
Section 2.4.1, the 2005 Earnout Consideration pursuant to Section 2.4.2 or the
Pro-Safe Earnout Consideration pursuant to Section 2.4.3, then the Shareholders
shall have thirty (30) days from the date of delivery of the written notice
advising the Shareholders of that computation to notify the Buyer that the
Shareholders dispute the computation. If the Buyer disputes the Shareholders'
Accountant's computation of the amount of the Shareholders' Subchapter S Tax
Liabilities for 2003 and the amount required to be paid by (or to) the
Shareholders to (or from) the Buyer to reconcile that amount to distributions
made to the Shareholders for such purposes pursuant to Section 6.4 or, if
applicable, the computation of the amount required to be paid to reimburse the
Shareholders for their additional tax liability as a result of the Buyer's
decision to request an election under Section 338(h)(10) of the Code pursuant to
Section 6.4.3, then the Buyer shall have thirty (30) days from the date of
delivery by the Shareholders' Accountant of the written notice advising the
Buyer of that computation to notify the Shareholders that the Buyer disputes
that computation. If the party having the right to give notice of its dispute in
this Section has not delivered a written
34
notice advising of that dispute (the "Dispute Notice") within the applicable
thirty (30) day period, then the computation specified in the written notice
delivered by the Buyer's Accountant or the Shareholders' Accountant, as
applicable, shall be final and the payment shall be made by the Buyer or the
Shareholders, as applicable, pursuant to that computation. If the party having
the right to give notice of its dispute in this Section has delivered a Dispute
Notice within such thirty (30) day period, then the Shareholders' Accountant and
the Buyer's Accountant shall attempt to resolve the dispute regarding the
disputed computation within twenty (20) days after the date of delivery of the
Dispute Notice and, if they are able to agree upon a resolution, to deliver
within such twenty (20) day period a written notice (the "Resolution Notice") to
the Buyer and the Shareholders, and the computation confirmed in that Resolution
Notice shall be final and if based upon such Resolution Notice any additional
amount is payable by the Buyer or the Shareholders, the party obligated for
payment by that Resolution Notice shall pay such amount, together with interest
as specified in Section 12.1, within five (5) business days after the date that
the Resolution Notice is delivered to the Buyer and the Shareholders. If the
Shareholders' Accountant and the Buyer's Accountant have not delivered a
Resolution Notice within such twenty (20) day period, then the Shareholders'
Accountant and the Buyer's Accountant, within such twenty (20) day period, by
written notice (the "Selection Notice") delivered to the Buyer and the
Shareholders, shall select an independent accounting firm of nationally
recognized standing (the "Unaffiliated Accountant") to review the review and
resolve the disputed computation based upon the principles stated in this
Agreement and, to the extent not inconsistent with the principles stated in this
Agreement, generally accepted accounting principles consistently applied from
period to period.. The Unaffiliated Accountant shall, as soon thereafter as is
possible, complete its review and make its determination of the appropriate
computation of the disputed computation and shall deliver written notice (the
"Review Notice") to the Buyer and Shareholders specifying that computation. The
determination of the computation made by the Unaffiliated Accountant shall be
final and if based upon such Review Notice any additional amount is payable by
the Buyer or the Shareholders, the party obligated for payment by that
Resolution Notice shall pay such amount, together with interest as specified in
Section 12.1, within five (5) business days after the date that the Review
Notice is delivered to the Buyer and the Shareholders. The fees of the Buyer's
Accountant shall be paid by the Buyer. The fees of the Shareholders' Accountant
shall be paid by the Shareholders. The fees of the Unaffiliated Accountant shall
be paid one half by the Buyer and one half by the Shareholders.
11.2 Arbitration. Except as provided in Section 11.1 with respect to
dispute over the computation of the Purchase Price, any dispute between the
Buyer and the Shareholders with respect to this Agreement, including, without
limitation, any dispute regarding any Claim for indemnity under Article IX, must
be submitted to and resolved by arbitration through the American Arbitration
Association (the "Association"). The arbitration will be conducted through the
offices of the Association in Ann Arbor, Michigan. The arbitration will be
implemented under the rules and procedures of the Association for commercial
disputes. The decision of the arbitrator(s) will be conclusive and binding upon
the Buyer and the Shareholders and will not be subject to any challenge or
appeal. The decision of the arbitrator will be enforceable by either party
through the order of any court of competent jurisdiction.
35
ARTICLE XII
Miscellaneous
12.1 Interest On Late Payments. If any amount payable by any party is not
paid on or before its due date, including, without limitation, any amount
determined to be payable based under the procedure specified in this Section
11.1, then the party obligated for that payment shall be obligated to pay such
past due amount, plus interest on such amount at the rate of 8% per annum from
the date such amount should have been paid pursuant to the applicable provision
of this Agreement to the date of payment.
12.2 Assignment. Except as provided below, neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
12.3 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by email,
telecopy, telegram or telex or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified in a notice given in
accordance with this Section 11.2):
If to Company, to:
FAAC Incorporated
▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇ ▇. ▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
E-mail: ▇▇▇▇▇▇▇@▇▇▇▇.▇▇▇
With a copy to:
Hooper, Hathaway, Price, Beuche & ▇▇▇▇▇▇▇, P.C.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
E-mail:▇▇▇▇▇▇▇@▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇
36
If to the Shareholders:
▇▇▇▇ ▇. ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Fax:N/A
E-mail:▇▇▇▇▇▇▇@▇▇▇▇.▇▇▇
and
▇▇▇▇▇▇▇ ▇. ▇▇▇▇
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: N/A
E-mail:▇▇▇▇▇@▇▇▇▇.▇▇▇
With a copy to:
Hooper, Hathaway, Price, Beuche & ▇▇▇▇▇▇▇, P.C.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
E-mail:▇▇▇▇▇▇▇@▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇
If to Buyer, to:
Arotech Corporation
▇▇▇ ▇▇▇▇▇▇▇▇ - ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: Chairman and CEO
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
E-mail: ▇▇▇▇▇▇▇@▇▇▇▇▇▇▇.▇▇▇
With a copy to:
▇▇▇▇▇▇ Har-Oz
Vice President and General Counsel
Arotech Corporation
▇▇▇ ▇▇▇▇▇▇▇▇ - ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Telephone: ▇▇▇-▇▇▇-▇-▇▇▇-▇▇▇▇
Fax: ▇▇▇-▇▇▇-▇-▇▇▇-▇▇▇▇
E-mail: ▇▇▇▇▇▇▇@▇▇▇▇▇▇▇.▇▇▇
37
or at such other address for a party as shall be specified by like notice.
12.4 Expenses. Subject to the provisions of Section 10.2.2, each party
hereto shall pay its own expenses in connection with the transactions
contemplated hereby, whether or not they are completed; provided, however, that
the Shareholders shall be required to reimburse the Company for (i) any fees or
other expenses payable by the Company to ▇▇▇▇▇▇ Partners, LLC for services
rendered in connection with the transactions contemplated by this Agreement and
(ii) any expenses incurred by the Company in connection with the transactions
contemplated by this Agreement. In the event of any conflict between this
provision and the indemnification or termination provisions of this Agreement,
the indemnification or termination provisions, as the case may be, shall
control.
12.5 Publicity. The parties will consult with respect to the appropriate
public disclosure to be made with respect to the transactions contemplated
hereby, and will make no such disclosure without reasonable notice to the other
party prior to such disclosure. Notwithstanding the foregoing, Company
understands that the federal securities laws and applicable stock exchange
listing agreements require Buyer to make certain disclosures of material events.
Buyer will use reasonable efforts to consult with Company before providing any
information about this Agreement or Company in accordance with such
requirements.
12.6 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
12.7 Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the substantive laws of State of Michigan, without
giving effect to its conflicts of laws rules.
12.8 Counterparts. This Agreement may be executed in two (2) or more
counterparts, all of which shall be considered one (1) and the same agreement
and shall become effective when two (2) or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
12.9 Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, whether written or oral,
among the parties, or any of them, in connection with such subject matter except
for the Confidentiality Agreement dated as of March 2, 2003.
SIGNATURES ON NEXT PAGE
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IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the day and year first above written.
COMPANY: FAAC INCORPORATED
By:_____________________________________
▇▇▇▇ ▇. ▇▇▇▇▇▇, President
BUYER AROTECH CORPORATION
By:_____________________________________
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Chairman and CEO
SHAREHOLDERS:
________________________________________
▇▇▇▇ ▇. ▇▇▇▇▇▇ (400 shares)
________________________________________
▇▇▇▇▇▇▇ ▇. ▇▇▇▇ (267 shares)
39