EXHIBIT 10.18
Letter of Intent
May 31, 2001
Ladies and Gentlemen:
This letter confirms our agreement on the principal terms and conditions of
Lantronix, Inc.'s (the "Acquirer") proposed option to acquire Synergetic Micro
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Systems, Incorporated (the "Target"). Each party understands and agrees that
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preparation and execution of formal, comprehensive agreements is required,
containing the terms set forth in Exhibit A and such additional terms as
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Acquirer and Target might agree following good faith negotiation. This Letter
of Intent is intended to be non-binding with respect to the matters discussed in
Exhibit A, except for Sections 14, 15, 16 and 17, which are intended to be
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binding. This letter of intent may be executed in one or more counterparts,
each of which shall be deemed an original for all purposes.
"ACQUIRER"
LANTRONIX, INC.
By: /s/ XXXXXX X. XXXXXX
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Name: Xxxxxx X. Xxxxxx
Title: Chief Financial Officer
"TARGET"
SYNERGETIC MICRO SYSTEMS, INCORPORATED
By: /s/ XXXXXXX XXXXXXX
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Name: Xxxxxxx Xxxxxxx
Title: Chief Executive Officer
Exhibit A
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Lantronix, Inc./ Synergetic Micro Systems, Incorporated
TERM SHEET
May 31, 2001
This term sheet sets forth the proposed terms and structure of a potential
transaction in which Lantronix, Inc. (the "Acquirer") will obtain an option to
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acquire all of the capital stock of Synergetic Micro Systems, Incorporated (the
"Target") (including any and all options or other rights to acquire capital
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stock) of Target (the "Option"). This term sheet is for discussion purposes
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only and does not constitute a binding agreement or commitment of any nature
whatsoever between the parties, with the exception of Sections 14, 15, 16, and
17, which the parties intend to be binding. Any transaction will be subject in
all respects to a fully negotiated and executed definitive option and merger
agreement (together, the "Definitive Agreements") and approval by the board of
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directors and Shareholders of Target (the "Shareholders") and the board of
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directors of Acquirer. A description of the capitalization of the Target is
attached hereto as Annex A.
1. Stock Purchase/Option Acquirer shall deposit in an escrow account
established with a mutually acceptable third party
the amount of eight hundred thousand dollars
($800,000) (the "Initial Consideration"). Upon
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exercise of the Option by the Acquirer, the
initial consideration shall be delivered as a
portion of the purchase price. If the Option
Period, as defined below, expires or is terminated
by Acquirer without Acquirer exercising the
Option, the Initial Consideration will be released
from escrow and applied to purchase from Target
three hundred thirty-six thousand seven hundred
(336,700) newly issued shares of the Target's
Common Stock.
The Option shall be exercisable at any time on or
before December 17, 2001 (the "Option Period") for
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the Option Exercise Price (as defined below). Upon
the exercise of the Option, the parties shall use
commercially reasonable efforts to close the
Merger (as defined below) on or before December
31, 2001.
2. Form of Acquisition In connection with exercise of the Option,
Acquirer will create a new, wholly-owned
subsidiary of Acquirer ("Merger Sub"). The form of
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the transaction will be a merger of Merger Sub
with and into Target (the "Merger"). As a result
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of the Merger, Lantronix will be the sole
stockholder of Target and as a result of the
Merger, will have indirectly acquired all right,
title and interest in and to all intangible and
tangible assets of Target, including, but not
limited to, all contracts, trademarks, domain
names, website rights, know-how, patents, other
intellectual
property, and any confidential or proprietary
information owned by Target, and have indirectly
assumed all liabilities of the Target. The date on
which the Merger is consummated shall be referred
to as the "Closing Date."
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At Acquirer's request, Target will cause each
Shareholder to enter into an irrevocable proxy or
a voting trust at the time the Definitive
Agreements are executed.
3. Purchase Price The aggregate consideration to be paid by Acquirer
within three (3) business days of the Closing Date
shall equal $16,500,000 consisting of:
$3,300,000 in cash delivered by wire transfer,
including the Initial Consideration (the "Cash
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Purchase Price"); and
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$13,200,000 of unregistered Common Stock of the
Acquirer (the "Merger Shares").
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In addition, the Acquirer shall assume the options
of Target, including approximately $1,500,000 of
value as set forth in Section 5 below, subject to
final option calculations.
The number of Merger Shares shall be determined by
dividing $13,200,000 by the closing price of
Acquirer common stock on the Closing Date (the
"Closing Price"); provided, however, that the
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actual number of Merger Shares to be issued shall
be automatically adjusted at the Closing Date to
the extent necessary both to achieve a tax-free
transaction and to maintain the value of the Cash
Purchase Price plus the value of the Merger Shares
(valued at the Closing Price) equal to
$16,500,000.
4. Net Worth True-Up No later than five (5) business days prior to the
Closing Date, Target shall deliver to Acquirer an
estimated statement, prepared in good faith, of
the Closing Date Net Worth of Target (defined as
total assets less total liabilities of Target,
determined in accordance with generally accepted
accounting principles of the United States
("GAAP"), except that GAAP Notes will not be
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required and adjustments that would be made at
year-end under GAAP will be estimated on a pro-
rata basis). On the Closing Date, the Cash
Purchase Price and the Merger Shares (together the
"Purchase Price") shall be reduced pro rata as
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applicable, by the amount, if any, by which the
Closing Date Net Worth of Target is less than the
sum (or remainder) of three hundred thousand
dollars ($300,000) plus (or minus) any accumulated
earnings (or loss) from and after January 1, 2001.
Any Purchase Price reduction shall be satisfied
from the Cash Purchase Price and Merger Shares (on
a pro rata basis) that otherwise would be paid at
the Closing.
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At its election, Acquirer may have such Closing
Date Net Worth reviewed by Acquirer's internal
accountants (and to the extent a dispute arises,
by Acquirer's independent auditors). In the event
that Acquirer and a representative designated by
the Shareholders cannot agree upon a net worth
adjustment, Acquirer's auditors and the
Shareholder representative's auditors shall select
an independent auditor to resolve such dispute,
and any resulting decrease in the Closing Net
Worth of Target shall result in a post-Closing
purchase price adjustment in favor of Acquirer.
5. Options The Acquirer shall assume the outstanding but
unexercised options of the Target (the "Acquired
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Options"), provided, that the Purchase Price shall
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be reduced (in cash and Merger Shares, on a pro
rata basis) to the extent the Aggregate FMV of the
Acquired Options minus the Aggregate FMV of the
Acquirer Stock for which such Acquired Options
could be exercised (calculating using the Closing
Price, and assuming such options are fully vested)
exceeds one million five hundred thousand dollars
($1,500,000). The Aggregate FMV of the Acquired
Options shall equal the weighted average exercise
price of such options (on a post-assumption basis)
multiplied by the number of shares of Acquirer
Common Stock for which such options shall be
exercisable upon their assumption.
The Acquired Options will become exercisable for
Common Stock of Acquirer, consistent with the
existing option terms of the Target (including
vesting).
6. Indemnification and Twenty percent (20%) of the Cash Purchase Price
Escrow shall be placed in escrow with a third party
mutually acceptable to the Target and the Acquirer
(the "Escrow Cash") for a period ending eighteen
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(18) months from the Closing Date to provide an
exclusive remedy against which Acquirer shall
exercise any claims for any breaches of
Shareholders' or Target's representations,
warranties or covenants in the Definitive
Agreement. In addition, twenty percent (20%) of
the Merger Shares (the "Escrow Shares") issued
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pursuant to the Merger will be placed in escrow
for a period ending eighteen (18) from the Closing
Date to provide an exclusive remedy against which
Acquirer shall exercise any claims for any
breaches of Shareholders' or Target's
representations, warranties or covenants in the
Definitive Agreements. Notwithstanding the above,
Shareholders shall remain personally liable for
any liability arising from Excluded Claims (as
defined below), limited to such Shareholder's pro
rata portion of the Aggregate Consideration
(except in the case of Shareholder fraud, where
such Shareholder's liability shall not be so
limited).
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All such claims of Acquirer shall be satisfied pro
rata from the Cash Purchase Price and Merger
Shares (i.e., twenty percent (20%) shall be paid
from cash and eighty percent (80%) shall be paid
from Escrow Shares), with Merger Shares valued at
the Closing Price for the purposes of satisfying
any claims.
Except for claims relating to environmental, tax
and fraud ("Excluded Claims"), claims for
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indemnification shall be recoverable if such
claims in the aggregate exceed $100,000, and in
such event $50,000 of the first $100,000 of such
claims shall be recoverable and the entire amount
of such claims in excess of $100,000 shall be
recoverable. Except for claims relating to any of
the Excluded Claims (which shall survive until
expiration of applicable statute of limitations)
and all pending claims of which written notice to
the Shareholder's representative has been
delivered by Acquirer all of the Target's and the
Shareholder's obligations under the Definitive
Agreements shall expire on the eighteen (18) month
anniversary of the Closing Date (the "Release
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Date").
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Acquirer shall take commercially reasonable
efforts to mitigate its losses and damages from
any indemnification claim. The amounts of all
indemnification claims shall be reduced by amounts
actually received from insurance relating to such
claims; provided that the Acquirer shall take
commercially reasonable efforts to collect any
sums payable from such insurance.
No later than fourteen (14) days after the Release
Date, the Escrow Shares and Escrow Cash not
transferred to Acquirer or reserved for then
pending or threatened claim (for which written
notice to the Shareholder's representative has
been delivered by Acquirer) will be distributed to
the Shareholders by way of joint escrow
instructions. All interest on the Escrow Cash
shall be distributed to the Shareholders upon
distribution of the escrow. All dividends and
distributions, if any, on the Escrow Shares, shall
be distributed to the Shareholders as earned.
Acquirer on the one hand and Target's Shareholders
in the aggregate on the other hand each shall bear
fifty percent (50%) of the cost of a third party
escrow agent.
7. Tax and Accounting The parties intend that the proposed Merger will
qualify as a tax-free reorganization, and that the
proposed Merger will be accounted for as a
purchase. The parties will negotiate in good faith
any modifications to this term sheet with the
intent that the proposed Xxxxxx qualifies as a
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tax-free reorganization.
8. Securities Law Matters The Merger Shares will be issued pursuant to an
exemption from registration under the `33 Act. The
shares will be restricted securities, and shall be
subject to customary share legends and resale
restrictions.
Acquirer shall use commercially reasonable efforts
to file a Form S-8 registration statement with
respect to the Acquired Options within 90 days of
the close of the Merger (the "Registration Date")
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or as soon thereafter as reasonably practicable.
The Shareholders shall have Piggyback Rights with
respect to public offerings by Acquirer that are
on par with existing Piggyback Rights granted by
Acquirer.
9. Due Diligence Both parties agree to make available and grant
Investigation access to any corporate or financial information
as is reasonably necessary to conduct a due
diligence review. Both parties shall take
reasonable good faith efforts promptly to provide
the other party or its counsel such documents as
may reasonably be requested in writing. The
parties will enter into a mutually agreeable
confidentiality agreement promptly after execution
of this term sheet.
Acquirer shall have the right to continue due
diligence review after the Definitive Agreement is
entered into, which will provide, among other
things, that Acquirer and its representatives will
only speak with and otherwise contact regarding
the proposed transaction, those employees and
other representatives of Target as are designated
by Xxxxxxx Xxxxxxx. Subject to the foregoing,
Target will provide Acquirer and its consultants
access to the facilities of the Target after the
Definitive Agreement is entered into to perform
such investigations and tests as Acquirer deems
desirable.
10. Employment, Contemporaneous with the execution of the Merger
Non-competition and Agreement, Target will enter into employment, non-
Other Agreements competition and/or stock restriction agreements
with persons designated by Acquirer and on such
terms and conditions as are mutually acceptable to
Acquirer and Target. The Acquirer requires that
Xxxxxxx Xxxxxxx enter into an employment agreement
with Target with a term of three (3) years and
such other terms mutually acceptable to Xx.
Xxxxxxx and Acquirer. Key employees shall enter
into non-compete agreements with terms not less
than five (5) years from the Closing Date (or
three (3) years if such employee is terminated
other than for cause).
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11. Transaction in Each Shareholder shall agree that during the
Acquirer Securities period of the Option, and, in the event the Option
is exercised, for a period ending on the first
anniversary of the Closing Date, such Shareholder
will not sell any equity security nor establish or
increase a put equivalent position or liquidate or
decrease a call equivalent position (as such terms
are defined in Rule 16a-1 of the 1934 Act) or
enter into any hedging transaction with respect to
the Acquirer's capital stock, including without
limitation, equity swaps, pre-paid forward
contracts or zero cost collars; provided, however,
that (i) such non-employee Shareholders as Target
may designated with respect to no more than one
hundred thousand (100,000) shares of Merger Shares
and (ii) Xxxxxxx Xxxxxxx with respect to one-half
of the consideration he receives pursuant to the
Merger, may enter into hedging transactions and,
provided that any such transaction complies with
all applicable trading policies of the Acquirer
and all applicable laws.
Each Shareholder shall agree that during the
period of the Option, such Shareholder shall not
transfer his or her shares to any third party
other than to members of his or her immediate
family and trusts for his or their benefit.
12. Merger Agreement The Merger Agreement shall include, among other
things, representations and warranties by the
Acquirer, Shareholders and Target, covenants and
closing conditions customary for transactions of
this nature. The representations of Target shall
survive until the Release Date; provided, that
Excluded Claims shall survive until the expiration
of the applicable statute of limitations.
Representations and warranties of Acquirer shall
survive until the Closing Date, except that
representations and warranties of the Acquirer
relating to the Merger Shares shall survive until
the first anniversary of the Closing Date.
Conditions to closing shall include, without
limitation, (i) approval of this transaction by
the boards of directors of both parties,
Shareholders and any other necessary parties; (ii)
receipt of any necessary regulatory approvals
including an HSR filing, if necessary; and (iii)
completion of its diligence review to the
Acquirer's reasonable satisfaction.
The parties will use their reasonable efforts to
complete the Definitive Agreements within twenty
(20) days of the signing of the term sheet.
13. Shareholder Agreement At the time of the execution of the Definitive
Agreement, the Shareholders shall agree until
expiration or termination by Acquirer of the
Option without exercise, if applicable, to vote in
favor of the
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transaction and not to transfer their shares to
any third party.
14. Nondisclosure The parties will keep the existence and terms of
this term sheet confidential and will not make any
public announcement regarding this term sheet or
any transaction contemplated hereby, provided,
that Acquirer may announce the execution of this
term sheet on a date mutually agreed by the
parties and provide a general description of the
contemplated transaction, with any press release
using text mutually agreed upon by Target and
Acquirer. Acquirer may make public disclosure
required by applicable securities laws and
regulations after the execution of the Definitive
Agreement, or such earlier date as agreed by
Acquirer and Target.
15. No-Shop Provision and Until ninety (90) days after the date of this term
Termination Fee sheet, or such earlier date as Acquirer and Target
mutually agree in writing to discontinue
discussions regarding the Merger (the "Expiration
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Date"), and in consideration for Acquirer's
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commitment of time and resources to perform due
diligence and enter into discussions regarding the
Merger, Target will not, directly or indirectly,
through any officer, director, employee, affiliate
or agent or otherwise, take any action to solicit,
initiate, seek, encourage or support any inquiry,
proposal or offer from, furnish any information
to, or participate in any negotiations with, any
third party regarding any acquisition of Target,
any merger or consolidation with or involving
Target, or any acquisition of any portion of the
stock or assets of Target (other than the sale of
inventory in the ordinary course of business) (an
"Acquisition Transaction"). Target agrees that any
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such negotiations (other than negotiations with
Acquirer) in progress as of the date of this
letter will be suspended during such period and
that Target will not accept or enter into any
agreement, arrangement or understanding regarding
any Acquisition Transaction during such period.
If Target or any of its officers, directors,
employees, affiliates or agents receives any
proposal for, or inquiry respecting, any third
party acquisition transaction involving Target, or
any request for nonpublic information in
connection with any such proposal or inquiry,
Target will promptly notify Acquirer, describing
in detail the identity of the person making such
proposal or inquiry and the terms and conditions
of such proposal or inquiry.
16. Break-up Fee In the event that the transactions contemplated
hereby are not consummated due to Target's
violation of Section 15 Target will pay Acquirer a
five hundred thousand dollar ($500,000) cash
break-up fee.
In the event Target or any Shareholder refuses to
enter into an agreement substantially on the terms
provided herein and other
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customary and commercially reasonable terms,
Target shall reimburse the Acquirer its reasonable
out-of-pocket expenses associated with the
negotiation of this term sheet and the definitive
documentation, including legal and accounting
expenses, such reimbursement under this provision
not to exceed thirty thousand dollars ($30,000).
In the event Acquirer refuses to enter into an
agreement substantially on the terms provided
herein and other customary and commercially
reasonable terms, Acquirer shall reimburse the
Target its reasonable out-of-pocket expenses
associated with the negotiation of this Term Sheet
and the definitive documentation, including legal
and accounting expenses, such reimbursement under
this provision not to exceed thirty thousand
dollars ($30,000).
17. Expenses Except as expressly provided in Section 16,
Acquirer, Target and the Shareholders shall each
be liable for their own costs, including legal,
accounting, and other such costs, incurred by each
of them in the negotiation and closing of this
transaction, and the parties each shall indemnify
the other for any claims for brokerage or finders
fees by persons claiming to have been engaged by
such party; provided that upon exercise of the
Option, Acquirer shall pay for up to twenty-five
thousand ($25,000) of such legal fees. All other
out-of-pocket expenses of Target associated with
the negotiation and consummation of the
transaction, including but not limited to expenses
of counsel, accountants, finders fees and
investment banking fees, shall result in an
equivalent Cash Purchase Price reduction.
18. Opinion Counsel for Target and Acquirer each will give a
legal opinion customary for a transaction of this
type.
This term sheet represents only the current thinking of the parties with
respect to certain of the major issues relating to the proposed transaction.
Therefore, it is understood and acknowledged that except as to Sections 14, 15,
16 and 17 this term sheet is not intended and will not be deemed to be a legally
binding agreement among the parties for any purposes. All rights and
obligations of the parties will be subject to negotiation and execution of a
definitive acquisition agreement among the parties and completion of the due
diligence and other matters set forth above.
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