EXHIBIT 10.1
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AGREEMENT AND PLAN OF MERGER
BY AND AMONG
BLUE HOLDINGS, INC.,
LR ACQUISITION CORPORATION,
LONG RAP, INC.,
THE LONG RAP, INC. STOCKHOLDERS
AND
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇,
AS STOCKHOLDERS' REPRESENTATIVE
JUNE 19, 2006
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of June 19, 2006 (this
"AGREEMENT"), is by and among Blue Holdings, Inc., a Nevada corporation
("PARENT"), LR Acquisition Corporation, a District of Columbia corporation and a
wholly owned subsidiary of Parent ("MERGER SUB"), Long Rap, Inc., a District of
Columbia corporation ("TARGET"), the stockholders of Target set forth on the
signature pages hereto (the "STOCKHOLDERS"), and the Stockholders'
Representative (the "STOCKHOLDERS' REPRESENTATIVE").
RECITALS
The board of directors of each of Parent, Merger Sub and Target have
determined that the Merger (as defined in Section 1.1) would be advisable and in
the best interests of the stockholders of their respective companies, and,
subject to the terms and conditions set forth in this Agreement, and in
furtherance thereof, have approved this Agreement and the transactions
contemplated by this Agreement.
The Stockholders have determined that the Merger would be advisable and
in the best interests of the Stockholders, and, subject to the terms and
conditions set forth in this Agreement, and in furtherance thereof, have
approved this Agreement and the transactions contemplated by this Agreement.
Parent and Target intend that the Merger qualify as a "reorganization"
under Section 368(a) of the Internal Revenue Code of 1986 (the "CODE").
AGREEMENT
In consideration of the representations, warranties, covenants and
other agreements in this Agreement, the parties hereto, intending to be legally
bound, agree as follows:
ARTICLE 1
THE MERGER
1.1 THE MERGER. Upon the terms and subject to the conditions in
this Agreement, and in accordance with the District of
Columbia Business Corporation Act (the "BCA"), Target shall be
merged with and into Merger Sub (the "MERGER") at the
effective time of the Merger (the "EFFECTIVE TIME"), which
shall be the time of Closing (as defined in Section 1.2)
unless otherwise agreed by both parties as set forth in the
articles of merger, in a form to be mutually agreed by the
parties prior to the Closing (the "ARTICLES OF MERGER"), to be
filed if, as and when the Closing occurs with the Department
of Consumer and Regulatory Affairs of the District of Columbia
- Corporation Division (the "DEPARTMENT"). Merger Sub shall be
the surviving company (sometimes referred to as the "SURVIVING
COMPANY") in the Merger and shall succeed to and assume all
the rights and obligations of Target in accordance with the
BCA. The parties shall cause the Articles of Merger to be
filed or pre-filed in a manner to permit the certificate of
merger with respect to the Merger to be issued on the Closing
Date (as defined in Section 1.2).
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1.2 CLOSING. The closing of the transactions contemplated by this
Agreement (the "CLOSING") shall take place as soon as
practicable, and no more than two business days, after the
satisfaction or waiver of each of the conditions set forth in
ARTICLE 5 or at such other time as the parties agree in
writing. The Closing shall take place at the offices of ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ & Markiles, LLP, ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇., ▇▇▇▇ ▇▇▇▇▇,
▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, or at such other location as the
parties agree. The date on which the Closing actually occurs
is herein referred to as the "CLOSING DATE."
1.3 EFFECTS OF THE MERGER.
(a) At the Effective Time, the effect of the Merger shall
be as provided in this Agreement, the Articles of
Merger and the applicable provisions of the BCA.
(b) At the Effective Time, the articles of incorporation
of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the articles of
incorporation of the Surviving Company until
thereafter amended as provided by the BCA and such
articles of incorporation; PROVIDED, HOWEVER, that,
at the Effective Time, the articles of incorporation
of the Surviving Company shall be amended so that the
name of the Surviving Company shall be "Long Rap,
Inc."
(c) At the Effective Time, the bylaws of Merger Sub, as
in effect immediately prior to the Effective Time,
shall be the bylaws of the Surviving Company until
thereafter amended as provided by the BCA, the
articles of incorporation of the Surviving Company
and such bylaws.
(d) At the Effective Time, the directors of Merger Sub,
as constituted immediately prior to the Effective
Time, and one of the Stockholders shall be the
directors of the Surviving Company, for so long as
provided under the BCA, the articles of incorporation
of the Surviving Company and the bylaws of the
Surviving Company.
(e) At the Effective Time, the officers of Target, as
constituted immediately prior to the Effective Time,
shall be the officers of the Surviving Company, for
so long as provided under the BCA, the articles of
incorporation of the Surviving Company and the bylaws
of the Surviving Company.
1.4 EFFECTS ON CAPITAL STOCK. As of the Effective Time, by virtue
of the Merger and without any action on the part of Parent,
Merger Sub, Target or the Stockholders, the following shall
occur:
(a) Each share of the capital stock of Target (the
"TARGET CAPITAL STOCK") that is owned by Parent,
Merger Sub or Target or any of their respective
Subsidiaries (as defined in Section 8.3(g)) shall
automatically be canceled and shall cease to exist,
and no consideration shall be delivered or
deliverable in exchange therefor.
(b) Each share of the common stock of Merger Sub (the
"MERGER SUB COMMON STOCK") issued and outstanding
immediately prior to the Effective Time shall remain
issued and outstanding and shall represent one
validly issued, fully paid and nonassessable share of
the common stock of the Surviving Company.
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(c) Each issued and outstanding share of Target Capital
Stock shall be converted into the right to receive
the consideration specified and allocated in this
Section 1.4 (the "MERGER CONSIDERATION"). As of the
Effective Time, all such shares of Target Capital
Stock shall no longer be outstanding and shall
automatically be canceled and shall cease to exist,
and each holder of a certificate formerly
representing any such shares of Target Capital Stock
(the "CERTIFICATES") shall cease to have any rights
with respect thereto, except the right to receive the
Merger Consideration as allocated in this Section 1.4
upon surrender of such Certificate in accordance with
Section 1.5. Upon surrender of each such Certificate
in accordance with Section 1.5, each holder of Target
Capital Stock shall be entitled to receive, and
Parent shall issue or deliver, in the aggregate, on
account of each share of Target Capital Stock
outstanding immediately prior to the Effective Time
(i) that number of shares of the common stock of
Parent, $0.001 par value per share (the "PARENT
COMMON STOCK"), equal to the Exchange Ratio, and (ii)
an amount of cash equal to the Per Share Cash Amount.
For the avoidance of doubt, the aggregate Merger
Consideration shall consist of (A) Sixteen Million
Dollars ($16,000,000) (less any adjustment required
by the provisions of Section 1.4(h)), and (B) a
number of shares of Parent Common Stock having a
value (as determined herein) equal to $16,000,000,
and shall be payable to each Stockholder as set forth
on Schedule 1.4(c).
(d) For purposes of this Agreement, (i) the "EXCHANGE
RATIO" means the quotient of (A) the Share
Consideration, divided by (B) 3,000; (ii) the "SHARE
CONSIDERATION" means the number of shares obtained by
dividing $16,000,000 by the average closing price of
a share of the Parent Common Stock, as quoted on the
NASDAQ Capital Market (or such other market, exchange
or quotation system in which such security is then
quoted), over the ten (10) trading days immediately
preceding the Effective Time (the "PARENT CLOSING
PRICE"); and (iii) the "PER SHARE CASH AMOUNT" means
the quotient of (A) $16,000,000 (less any adjustment
required by the provisions of Section 1.4(h)) minus
the Target Expenses (as defined in Section 4.13),
divided by (B) 3,000.
(e) Notwithstanding any portion of this SECTION 1.4 to
the contrary, the parties acknowledge and agree that
the aggregate Share Consideration to be issued by
Parent at the Closing shall in no event represent
voting power of Parent in excess of 19.99% of the
voting power of Parent outstanding immediately prior
to the Effective Time, or otherwise equal a number of
shares of Parent Common Stock in excess of 19.99% of
the number of shares of Parent Common Stock issued
and outstanding immediately prior to the Effective
Time, PROVIDED, HOWEVER, if, as a result of the
foregoing limitation, the value of the Share
Consideration to be issued at Closing is less than
$16,000,000 (based on a per share price equal to the
Parent Closing Price), then Parent shall pay the
difference, i.e., $16,000,000 less the value (based
on a per share price equal to the Parent Closing
Price) of the Share Consideration delivered at
Closing (the"REMAINING CONSIDERATION"), in cash,
provided that such cash payment does not adversely
affect the determination of the Merger as a
"reorganization" under Section 368(a) of the Code. In
the event that any such payment would adversely
affect the determination of the Merger as a
"reorganization" under Section 368(a) of the Code,
then the Merger shall be abandoned and this Agreement
shall be terminated pursuant to Section 6.1(g).
(f) Notwithstanding any portion of this SECTION 1.4 to
the contrary, One Million Dollars ($1,000,000) and a
number of shares of the Parent Common Stock having a
value equal to the quotient of One Million Dollars
($1,000,000) divided by the Parent Closing
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Price, that would be payable to the Stockholders as
Merger Consideration shall be deducted equally from
the Merger Consideration to be paid to each such
Stockholder (the "ESCROW FUND") and shall be
deposited at the Closing with U.S. Bank National
Association, as escrow agent (the "ESCROW AGENT"), in
accordance with an Escrow Agreement, dated as of the
Closing Date, substantially in the form of EXHIBIT A
(the "ESCROW AGREEMENT"), by and among Parent, the
Escrow Agent and the Stockholders' Representative.
The Escrow Fund will be held and distributed in
accordance with the terms of the Escrow Agreement and
ARTICLE 7 of this Agreement.
(g) If there is a stock split, reverse stock split, stock
dividend (including any dividend or distribution of
securities convertible into capital stock),
reorganization, reclassification, combination,
recapitalization or other like change with respect to
outstanding shares of Target Capital Stock or Parent
Common Stock (a "SHARE ADJUSTMENT") occurring after
the date of this Agreement and before the Effective
Time, all references in this Agreement to specified
numbers of shares of any class or series affected
thereby, and all calculations provided for that are
based upon numbers of shares of any class or series
(or trading prices therefor) affected thereby, shall
be equitably adjusted to the extent necessary to
provide the parties the same economic effect as
contemplated by this Agreement prior to such Share
Adjustment. After the Effective Time, the Target's
stock transfer books will be closed and there will be
no further transfers of Target Capital Stock prior to
the Effective Time. If, at or after the Effective
Time, Certificates are presented to the Surviving
Company, they will be canceled and exchanged in
accordance with this Agreement.
(h) The Parties acknowledge and agree that the Merger
Consideration has been calculated, and is being paid,
based on the understanding that the Target Financial
Statements, including, without limitation, the April
30 Balance Sheet, are correct and complete in all
material respects and consistent with the books and
records of Target. In the event that, as a result of
the Target Audit, (i) an adjustment is required to be
made to the Target Financial Statements, the result
of which reduces the previously stated income or
increases the previously stated loss reflected
therein, and correspondingly causes an increase in
the stated liabilities appearing in the April 30
Balance Sheet, or (ii) liabilities or other
obligations required to be included as stated
liabilities in the Target Financial Statements were
omitted, and correspondingly, cause an increase in
the stated liabilities appearing in the April 30
Balance Sheet, then, at the Closing, the cash portion
of the Merger Consideration shall be reduced dollar
for dollar by the amount of such increase in stated
liabilities.
1.5 EXCHANGE OF CERTIFICATES.
(a) At Closing, (i) the holders of Certificates will
surrender such certificates to Parent, (ii) upon
surrender of a Certificate the holder thereof will be
entitled to receive the applicable Merger
Consideration (less a pro rata portion of the Escrow
Fund), and (iii) the Certificates so surrendered will
forthwith be canceled.
(b) If any certificate for Parent Common Stock is to be
issued in a name other than that in which the
Certificate surrendered in exchange therefor is
registered, Parent will not be required to issue such
Parent Common Stock until (i) the Certificate so
surrendered has been properly endorsed and is
otherwise in proper form for transfer and (ii) the
Person requesting such
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exchange has paid to Parent or any agent it
designates any transfer or other Taxes required
because of the issuance of a certificate for Parent
Common Stock in any name other than that of the
registered holder of the Certificate surrendered, or
established to the satisfaction of Parent or any
agent it designates that such Tax has been paid or is
not payable.
(c) All Merger Consideration will be deemed to have been
issued in full satisfaction of all rights pertaining
to the Target Capital Stock.
(d) If any Certificate has been lost, stolen, or
destroyed, Parent will issue the Merger Consideration
deliverable in respect thereof upon the making of an
affidavit of that fact by the Person claiming such
Certificate to be lost, stolen, or destroyed.
1.6 FRACTIONAL SHARES. No fraction of a share of Parent Common
Stock will be issued in connection with the Merger, and in
lieu thereof each fraction of a share of Parent Common Stock
to which any holder would be entitled (after aggregating all
fractional shares of Parent Common Stock to be received by
such holder and its Affiliates) shall be rounded to the
nearest whole share of Parent Common Stock (with 0.5 being
rounded up and any lesser number being rounded down).
1.7 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time
after the Effective Time, any such further action is necessary
or desirable to carry out the purposes of this Agreement and
to vest the Surviving Company with full right, title and
possession to all assets, property, rights, privileges,
powers, and franchises of the Target and Merger Sub, the
officers and directors of Parent and the Surviving Company are
fully authorized in the name of their respective corporations,
in the name of Target or otherwise to take, and the Surviving
Company and Parent will cause them to take, all such lawful
and necessary action.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF TARGET
Subject to the exceptions set forth in the Disclosure Letter of Target
delivered concurrently with the execution of this Agreement (the "TARGET
DISCLOSURE LETTER") (which disclosures shall delineate the section or subsection
to which they apply but shall also qualify such other sections or subsections in
this ARTICLE 2 to the extent that it is clear on its face from a reading of the
disclosure item that such disclosure is applicable to such other section or
subsection), Target represents and warrants to Parent and Merger Sub as follows:
2.1 ORGANIZATION, STANDING AND POWER. Target is a company duly
organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Target has the
corporate power to own its properties and to conduct its
business as now being conducted and as currently proposed by
it to be conducted and is duly qualified to do business and is
in good standing in each jurisdiction where the failure to be
so qualified and in good standing, individually or in the
aggregate with any such other failures, could reasonably be
expected to have a Material Adverse Effect (as defined in
Section 8.3(c)) on Target. Target is not in violation of any
of the provisions of its organizational documents.
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2.2 CAPITAL STRUCTURE. The authorized capital stock of Target
consists of 3,000 shares of Target Capital Stock, of which
there are issued and outstanding 3,000 shares of Target
Capital Stock. There are no declared or accrued but unpaid
dividends with respect to any shares of Target Common Stock.
There are no other issued and outstanding shares of Target.
Each of the Stockholders owns 1,000 shares of the Target
Capital Stock. All issued and outstanding shares of Target
Capital Stock are duly authorized, validly issued, fully paid
and non-assessable and are free of any liens, charges, claims,
encumbrances, preemptive rights, rights of first refusal and
"put" or "call" rights created by statute or Target's
organizational documents or any agreement to which Target is a
party or by which it is bound or of which it has knowledge.
Other than readily marketable securities, Target does not
directly or indirectly own (and has not during the past 6
years directly or indirectly owned) any equity or similar
interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any
Person. Target does not have any Subsidiaries. Other than the
Shareholder's Agreement between Target and the Stockholders
dated June 1, 1987 (the "TARGET STOCKHOLDERS AGREEMENT"), a
copy of which is attached to Section 2.2 of the Target
Disclosure Letter, and this Agreement, Target is not a party
to or bound by any agreement relating to its capital stock.
There are no options, warrants, calls, rights, commitments or
(written or oral) contracts, agreements, instruments,
arrangements, understandings, commitments or undertakings,
including leases, licenses, guarantees, sublicenses and
subcontracts (each, a "CONTRACT"), to which Target is a party,
or by which it is bound, obligating Target to issue, deliver,
sell, or cause to be issued, delivered, or sold, any shares of
any Target Capital Stock, or obligating Target to grant any
option, warrant, call, right, commitment or agreement relating
to Target Capital Stock. Except for the Target Stockholders
Agreement, Target is not a party to or bound by any Contract
pursuant to which it has any obligation or right to repurchase
or redeem any Target Capital Stock. Except for the Target
Stockholders Agreement, there are no Contracts relating to the
voting, purchase or sale of any Target Capital Stock (1)
between or among Target and any of the Stockholders, or (2)
between or among any of the Stockholders. All outstanding
Target securities were issued in compliance with all
applicable foreign, federal and state securities laws.
2.3 AUTHORITY; NONCONTRAVENTION. Target has all requisite
corporate power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of
Target. This Agreement has been duly executed and delivered by
Target, and, assuming due authorization, execution and
delivery by Parent and Merger Sub, constitutes the valid and
binding obligation of Target enforceable against Target in
accordance with its terms. The execution and delivery of this
Agreement by Target does not, and the consummation of the
transactions contemplated hereby will not, (a) result in the
creation of a lien on any properties or assets of Target or
(b) conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or
give rise to a right of termination, cancellation,
renegotiation or acceleration of any obligation or loss of any
benefit under, or require any consent, approval or waiver from
any Person in accordance with, (i) any provision of the
organizational documents of Target, (ii) any permit, judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to Target or any of its properties or assets, or
(iii) any Contract to which Target is a party or otherwise
bound, except (A) in the case of subpart (iii) for violations,
breaches, defaults, accelerations, terminations or absences of
consent that would not, individually or in the aggregate,
result in a Material Adverse Effect on Target or (B) as set
forth in Section 2.3 of the Target Disclosure Letter. No
consent, approval, order or authorization of, or registration,
declaration or filing with, any government, court, tribunal,
arbitrator,
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administrative agency, commission or other governmental
official, authority or instrumentality, in each case whether
domestic or foreign, any stock exchange or similar
self-regulatory organization or any quasi-governmental or
private body exercising any regulatory, taxing or other
governmental or quasi-governmental authority (each a
"GOVERNMENTAL ENTITY") or third party is required by or with
respect to Target in connection with the execution and
delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for the filing of the
Articles of Merger.
2.4 FINANCIAL STATEMENTS. Target has delivered to Parent its
unaudited financial statements as at and for the years ended
January 31, 2005 and January 31, 2006 and unaudited financial
statements as at and for the three-month period ended April
30, 2006 (including, in each case, balance sheets, statements
of operations and statements of cash flows) (collectively, the
"TARGET FINANCIAL STATEMENTS"). The Target Financial
Statements (a) are, except as disclosed in Section 2.4 of the
Target Disclosure Letter, correct and complete in all material
respects and consistent with the books and records of Target,
(b) have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") (except for
the failure to accrue deferred rents on a current basis,the
absence of notes and as otherwise set forth in Section 2.4 of
the Target Disclosure Letter) applied on a consistent basis
throughout the periods indicated, and, (c) subject to the
foregoing, present fairly the financial condition and results
of operations and cash flows of Target as of the dates, and
for the periods, indicated therein (subject, in the case of
interim period financial statements, to normal recurring
year-end adjustments, none of which individually or in the
aggregate are material). There has been no change in Target
accounting policies since April 30, 2006 (the "TARGET BALANCE
SHEET DATE"), except as described in the Target Financial
Statements.
2.5 ABSENCE OF CERTAIN CHANGES; UNDISCLOSED LIABILITIES.
(a) Since the Target Balance Sheet Date, Target has
conducted its business only in the ordinary course of
business (except for the entering into of this
Agreement) and there has not occurred (i) through the
date hereof, any change, event or condition (whether
or not covered by insurance) that, individually or in
the aggregate with any other changes, events and
conditions, has resulted in, or could reasonably be
expected to result in, a Material Adverse Effect on
Target; or (ii) any event which, if it had taken
place following the execution of this Agreement,
would not have been permitted by Section 4.2 without
prior consent of Parent; or (iii) any condition,
event or occurrence which could reasonably be
expected to prevent, hinder or materially delay the
ability of Target to consummate the transactions
contemplated by this Agreement.
(b) Target has no obligations or liabilities of any
nature whether matured or unmatured, fixed or
contingent ("LIABILITIES") (whether or not required
to be reflected in the Target Financial Statements in
accordance with GAAP) other than (i) those set forth
or adequately provided for in the Balance Sheet
included in the Target Financial Statements as of
April 30, 2006 (the "APRIL 30 BALANCE SHEET"), (ii)
those incurred in the conduct of Target's business
since the date of the April 30 Balance Sheet (the
"April 30 Balance Sheet Date") which, except for
those obligations and liabilities incurred in the
ordinary course of business, individually or in the
aggregate do not exceed $200,000, (iii) deferred rent
that should be reflected as a current liability, (iv)
obligations under contracts, leases, licenses and
purchase
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order commitments incurred in the ordinary course of
business, (v) other obligations that would be
required under GAAP to be set forth in notes, and
(vi) costs and expenses relating to this Agreement
and the transactions contemplated herein.
2.6 LEGAL PROCEEDINGS. Except as set forth in Section 2.6 of the
Target Disclosure Letter, there is no private or governmental
action, suit, proceeding, claim, arbitration or investigation
pending before any Governmental Entity or arbitrator, or, to
the knowledge of Target, threatened against Target or any of
its assets or properties, including any Target IP Rights (as
defined in Section 2.8(a)), or any of its officers or
directors (in their capacities as such) involving a claim for
monetary relief in excess of $25,000 or requesting equitable
relief. There is no judgment, decree or order outstanding
against Target, any of its assets or properties, or, any of
its directors or officers (in their capacities as such), that
could prevent, enjoin or materially alter or delay any of the
transactions contemplated by this Agreement, or that,
individually or in the aggregate with any such other
judgments, decrees and orders, could reasonably be expected to
have a Material Adverse Effect on Target.
2.7 RESTRICTIONS ON BUSINESS ACTIVITIES. Except as set forth in
Section 2.7 of the Target Disclosure Letter, there is no
Contract (including covenants not to compete), judgment,
injunction, order or decree binding upon Target that has or
could reasonably be expected to have, whether before or after
consummation of the Merger, the effect of prohibiting,
impairing or restricting any current or future business
practice of Target, any acquisition of property by Target or
the conduct of business by Target, in each case, as currently
conducted or as currently proposed to be conducted by Target.
2.8 INTELLECTUAL PROPERTY.
(a) Target owns, or has a valid right or license to use,
all Intellectual Property (as described below) used
or held for use by Target in the conduct of its
business (the "TARGET IP RIGHTS"). Such Target IP
Rights are sufficient for such conduct of Target's
business as currently conducted and as currently
planned to be conducted. "INTELLECTUAL PROPERTY"
means any rights, licenses, liens, security
interests, charges, encumbrances, equities and other
claims that any Person may have to claim ownership,
authorship or invention, to use, to object to or
prevent the modification of, to withdraw from
circulation or control the publication or
distribution of any: (a) copyrights in both published
works and unpublished works, (b) fictitious business
names, trading names, corporate names, registered and
unregistered trademarks, service marks, and
applications, (c) any (i) patents and patent
applications, and (ii) business methods, inventions,
and discoveries that may be patentable, (d) computer
software or middleware (other than off the shelf
software), and (e) know-how, trade secrets,
confidential information, customer lists, software
(source code and object code), technical information,
data, process technology, plans, drawings, and blue
prints.
(b) Neither the execution, delivery and performance of
this Agreement nor the consummation of the Merger and
the other transactions contemplated by this Agreement
will materially impair the right of Target or the
Surviving Company to use, possess, sell or license
any Target IP Right or portion thereof. There are no
royalties, honoraria, fees or other payments payable
by Target to any third person (other than salaries
payable to employees and independent contractors not
contingent on or related to use of their work
product) as a result of the ownership,
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use, possession, license-in, sale, marketing,
advertising or disposition of any Target IP Rights by
Target to the extent necessary for the conduct of
Target's business as currently conducted or as
currently planned to be conducted and none shall
become payable as a result of the consummation of the
transactions contemplated by this Agreement. After
the Closing, all Target-Owned IP Rights will be fully
transferable, alienable or licensable by the
Surviving Company without restriction and without
payment of any kind to any third party.
(c) The operation of Target's business as currently
conducted or as currently planned to be conducted
does not and will not (i) violate any Contract
between Target and any third party, or (ii) infringe
or misappropriate any Intellectual Property right of
any other party. Target has not received any notice
asserting that any Target IP Right conflicts with or
infringes, or would conflict with or infringe, the
Intellectual Property or other rights of any third
party, nor to the knowledge of Target, is there any
reasonable basis for any such assertion, and Target
has not received any notice from any third party
offering a license under any such third party
Intellectual Property or other right to avoid
litigation or other claims.
(d) Target has taken all necessary and appropriate steps
to protect, preserve and maintain the secrecy and
confidentiality of trade secrets included among
Target IP Rights.
(e) Section 2.8(e) of the Target Disclosure Letter
contains a true and complete list of (i) all
worldwide registrations made by or on behalf of
Target of any Intellectual Property, (ii) all
applications, registrations, filings and other formal
written governmental actions made or taken in
accordance with applicable law by Target to secure,
perfect or protect its interest in Target IP Rights,
and where applicable the jurisdiction in which each
of the items of Target IP Rights has been applied
for, filed, issued or registered, and (iii) all inter
parties proceedings or actions before any court or
tribunal (including the United States Patent and
Trademark Office or equivalent authority anywhere
else in the world) related to any of Target IP
Rights. All registered Intellectual Property owned by
Target is valid, enforceable and subsisting, and
Target is the record owner thereof. Target is the
exclusive owner of all trademarks used in connection
with the operation and/or conduct of Target's
business as currently conducted or as currently
planned to be conducted.
(f) Target owns all right, title and interest in and to
all Target IP Rights free and clear of any and all
liens, claims, charges, security interests,
mortgages, easements, covenants, pledges, licenses,
options, preemptive rights, rights of first refusal
or first offer, proxies, levies, voting trusts or
agreements, or other adverse claims or restrictions
on title or transfer of any nature whatsoever
("ENCUMBRANCES"), other than the Encumbrances listed
in Section 2.8(f) of Target Disclosure Letter.
(g) To the knowledge of Target, there is no unauthorized
use, disclosure, infringement or misappropriation of
any Target IP Rights by any third party, including
any employee or former employee of Target. Target has
not agreed to indemnify any person for any
infringement of any Intellectual Property of any
third party by any Target product that has been sold,
licensed to third parties, leased to third parties,
supplied, marketed, distributed or provided by
Target.
9
(h) Neither this Agreement nor the transactions
contemplated by this Agreement, including the
assignment to the Surviving Company by operation of
law or otherwise of any Contracts to which Target is
a party, will result in: (i) Parent, Target or the
Surviving Company granting to any Person any right to
or with respect to any Intellectual Property owned
by, or licensed to Target or (ii) Parent, Target or
the Surviving Company being obligated to pay
royalties or other material amounts to any Person in
excess of those payable by Target in the absence of
this Agreement or the transactions contemplated
thereby.
2.9 TAXES.
(a) "TAX" means (i) any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits,
license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom duty or
other tax, governmental fee or other like assessment
or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or
additional amount imposed by any Governmental Entity
responsible for the imposition of any such tax
(domestic or foreign) (each, a "TAX AUTHORITY"), (ii)
any liability for the payment of any amounts of the
type described in clause (i) of this sentence as a
result of being a member of an Affiliated,
consolidated, combined, unitary or aggregate group
for any Taxable period, and (iii) any liability for
the payment of any amounts of the type described in
clause (i) or (ii) of this sentence as a result of
being a transferee of or successor to any Person or
as a result of any express or implied obligation to
indemnify any other Person. "TAX RETURN" means any
return, statement, report or form (including
estimated tax returns and reports, withholding tax
returns and reports and information returns and
reports) required to be filed with respect to Taxes.
(b) Target has properly completed and timely filed all
Tax Returns required to be filed by it. All such Tax
Returns are true and correct in all material respects
and have been completed in accordance with applicable
law, and Target has paid or withheld and paid to the
appropriate Tax Authority all Taxes due (whether or
not shown to be due on such Tax Returns). All
required estimated Tax payments sufficient to avoid
any underpayment penalties or interest have been made
by or on behalf of Target.
(c) The April 30 Balance Sheet reflects all unpaid Taxes
of Target for periods (or portions of periods)
through the April 30 Balance Sheet Date. Except for
Taxes arising in the ordinary course of business,
Target has no liability for unpaid Taxes subsequent
to the April 30 Balance Sheet Date accruing after the
April 30 Balance Sheet Date.
(d) There is (i) no claim for Taxes being asserted
against Target that has resulted in a lien against
the property of Target other than liens for Taxes not
yet due and payable, (ii) no audit of any Tax Return
of Target being conducted by a Tax Authority, and
(iii) no extension of any statute of limitations on
the assessment of any Taxes granted by Target
currently in effect. Target has not been informed by
any jurisdiction that the jurisdiction believes that
it was required to file any Tax Return that was not
filed. Target has not received any notice from a Tax
Authority that it intends to conduct an audit,
examination or investigation.
10
(e) Target has (i) not been and will not be required to
include any material adjustment in Taxable income for
any Tax period (or portion thereof) in accordance
with Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws
as a result of transactions, events or accounting
methods employed prior to the Merger, (ii) not filed
any disclosures under Section 6662 or comparable
provisions of state, local or foreign law to prevent
the imposition of penalties with respect to any Tax
reporting position taken on any Tax Return, (iii) not
engaged in a "reportable transaction," as set forth
in Treasury Regulation Section 1.6011-4(b), or any
transaction that is the same as or substantially
similar to one of the types of transactions referred
to as "listed transactions" in Treasury Regulation
Section 1.6011-4(b)(2), (iv) never been a member of a
consolidated, combined, unitary or aggregate group of
which Target was not the ultimate parent company, (v)
not been the "distributing company" or the
"controlled company" (in each case, within the
meaning of Section 355(a)(1) of the Code) with
respect to a transaction described in Section 355 of
the Code (A) within the two-year period ending as of
the date of this Agreement, or (B) in a distribution
that could otherwise constitute part of a "plan" or
"series of related transactions" (within the meaning
of Section 355(e) of the Code) that includes the
transactions contemplated by this Agreement, (vi)
never been a "United States real property holding
company" within the meaning of Section 897 of the
Code, (vii) any actual or potential liability under
Treasury Regulations Section 1.1502-6 (or any
comparable or similar provision of federal, state,
local or foreign law), as a transferee or successor,
in accordance with any contractual obligation, or
otherwise for any Taxes of any person other than
Target, (viii) taken or agreed to take any action not
specified in this Agreement (nor does Target have
knowledge of any fact or circumstance, other than
those arising pursuant to the terms of this
Agreement) that would prevent the Merger from
qualifying as a "reorganization" within the meaning
of Section 368(a) of the Code, (ix) has not executed
or entered into a closing agreement pursuant to
Section 7121 of the Code or any similar provision of
law; or (x) has not requested any extension of time
within which to file any Tax Return, which Tax Return
has since not been filed.
(f) Target is not a party to or bound by any Tax sharing
or Tax allocation agreement, nor does Target have any
liability or potential liability to another party
under any such agreement.
(g) Target has withheld or collected and paid over to the
appropriate Tax Authorities (or are properly holding
for such timely payment) all Taxes required by law to
be withheld or collected.
(h) Target will not be required to include any item of
income in, or exclude any item of deduction from,
taxable income for any period (or any portion
thereof) ending after the Closing Date as a result of
any: (i) installment sale or other open transaction
disposition made on or prior to the Closing, or (ii)
prepaid amount received on or prior to the Closing.
(i) Section 2.9(i) of the Target Disclosure Letter lists
all income Tax Returns (federal, state, local and
foreign) filed by Target for taxable periods since
February 1, 2000 and through April 30, 2006,
indicates the most recent income, franchise or
similar Tax Return for each relevant jurisdiction for
which an audit has been completed or the statute of
limitations has lapsed and indicates all Tax Returns
that currently are the subject of audit.
11
(j) None of the assets of Target (i) is property that is
required to be treated as being owned by any other
person in accordance with the provisions of former
Section 168(f)(8) of the Internal Revenue Code of
1954, (ii) is "tax-exempt use property" within the
meaning of Section 168(h) of the Code, or (iii) is
"limited use property" within the meaning of Revenue
Procedure 76-30; or (iv) is subject to Section
168(g)(1)(A) of the Code.
2.10 EMPLOYEE BENEFIT PLANS.
(a) Section 2.10 of the Target Disclosure Letter sets
forth a complete list of all "employee benefit
plans," as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA") sponsored or maintained by Target
("EMPLOYEE BENEFIT PLANS"). Target has no liability
with respect to any plan of the type described in the
preceding sentence other than the Employee Benefit
Plans.
(b) Each Employee Benefit Plan has been maintained,
operated and administered in compliance with its
terms and any related documents or agreements and in
compliance with all applicable laws. There have been
no prohibited transactions or breaches of any of the
duties imposed on "fiduciaries" (within the meaning
of Section 3(21) of ERISA) by ERISA with respect to
the Employee Benefit Plans that could result in any
liability or excise tax under ERISA or the Code being
imposed on Target.
(c) Each Employee Benefit Plan intended to be qualified
under Section 401(a) of the Code is so qualified and
has heretofore been determined by the Internal
Revenue Service (the "IRS") to be so qualified, and
each trust created thereunder has heretofore been
determined by the IRS to be exempt from tax under the
provisions of Section 501(a) of the Code, and nothing
has occurred since the date of any such determination
that could reasonably be expected to give the IRS
grounds to revoke such determination.
(d) Target does not currently have and at no time in the
past has had an obligation to contribute to a
"defined benefit plan" as defined in Section 3(35) of
ERISA, a pension plan subject to the funding
standards of Section 302 of ERISA or Section 412 of
the Code, a "multiemployer plan" as defined in
Section 3(37) of ERISA or Section 414(f) of the Code
or a "multiple employer plan" within the meaning of
Section 210(a) of ERISA or Section 413(c) of the
Code.
(e) No Employee Benefit Plan is or at any time was funded
through a "welfare benefit fund" as defined in
Section 419(e) of the Code, and no benefits under any
Employee Benefit Plan are or at any time have been
provided through a voluntary employees' beneficiary
association (within the meaning of subsection
501(c)(9) of the Code) or a supplemental unemployment
benefit plan (within the meaning of Section
501(c)(17) of the Code).
(f) All contributions, transfers and payments in respect
of any Employee Benefit Plan have been or are fully
deductible under the Code.
(g) There is no pending or threatened assessment,
complaint, proceeding, or investigation of any kind
in any court or government agency with respect to any
Employee Benefit Plan (other than routine claims for
benefits), nor is there any basis for one.
12
(h) All (i) insurance premiums required to be paid with
respect to, (ii) benefits, expenses, and other
amounts due and payable under, and (iii)
contributions, transfers or payments required to be
made to, any Employee Benefit Plan on or prior to the
Closing will have been paid, made or accrued on or
before the Closing Date.
(i) No Employee Benefit Plan provides benefits,
including, without limitation, death or medical
benefits, beyond termination of service or retirement
other than (i) coverage mandated by law, (ii) death
or retirement benefits under any Employee Benefit
Plan that is intended to be qualified under Section
401(a) of the Code, or (iii) deferred compensation
benefits reflected on the books of Target.
(j) There is no Contract covering any employee or former
employee of Target that, individually or
collectively, will give rise as of the Closing to the
payment of any amount that would not be deductible by
virtue of Section 280G of the Code.
2.11 EMPLOYEE MATTERS.
(a) Target is not liable for any payment to any trust or
other fund or to any Governmental Entity with respect
to unemployment compensation benefits, social
security or other benefits or obligations for
employees (other than routine payments to be made in
the ordinary course of business). There are no
pending claims against Target under any workers
compensation plan or policy or for long term
disability.
(b) Section 2.11(b) of the Target Disclosure Letter sets
forth a true, correct and complete list of all
severance Contracts and employment Contracts to which
Target is a party or by which Target is bound. Target
is not a party to or bound by any collective
bargaining agreement or other labor union contract,
no collective bargaining agreement is being
negotiated by Target, and Target has no duty to
bargain with any labor organization. Target is not
aware of any activities or proceedings of any labor
union or to organize its employees. There is no labor
dispute, strike or work stoppage against Target
pending or threatened that may interfere with its
business activities.
(c) Section 2.11(c) of the Target Disclosure Letter is a
true, correct and complete list as of April 30, 2006
of the names, positions and rates of compensation of
all officers, directors and employees (permanent,
temporary or otherwise) of Target showing each such
person's name, position, annual remuneration, status
as exempt/non-exempt, bonuses and fringe benefits for
the current fiscal year and the most recently
completed fiscal year. No officer of Target has given
notice to Target, nor is Target otherwise aware, that
any such officer intends to terminate his or her
employment with Target. Except as noted in Section
2.11(c) of the Target Disclosure Letter, the
employment of each of the employees of Target is "at
will," and Target has no obligation to provide any
particular form or period of notice prior to
terminating the employment of any of its employees,
except as otherwise established by customary practice
or as required by law.
13
(d) None of the execution and delivery of this Agreement
or the consummation of any transaction contemplated
hereby or any termination of employment or service in
connection therewith or subsequent thereto will (i)
result in any payment (including severance,
unemployment compensation, golden parachute, bonus or
otherwise) becoming due to any Person, except as
required by law, (ii) materially increase any
benefits otherwise payable by Target, (iii) result in
the acceleration of the time of payment or vesting of
any such benefits, except as required under Section
411(d)(3) of the Code, (iv) increase the amount of
compensation due to any Person, or (v) result in the
forgiveness in whole or in part of any outstanding
loans made by Target to any Person.
2.12 RELATED PARTY TRANSACTIONS. Except as set forth in Section
2.12 of the Target Disclosure Letter, no officer or director
of Target or any Stockholder (nor any immediate family member
of any of such Persons, or any trust, partnership or company
in which any of such Persons has or has had an interest), has
or has had, directly or indirectly, (i) any interest in any
entity which furnished or sold, or furnishes or sells,
products that Target furnishes or sells or proposes to furnish
or sell, (ii) any interest in any entity that purchases from
or sells or furnishes to Target any goods or services, or
(iii) any interest in any Contract to which Target is a party,
PROVIDED, HOWEVER, that ownership of no more than one percent
(1%) of the outstanding voting stock of a publicly traded
company shall not be deemed to be an "interest in any entity"
for purposes of this Section 2.12.
2.13 INSURANCE. Section 2.13 of the Target Disclosure Letter is a
true, correct and complete listing as of April 30, 2006 of all
material policies of insurance and bonds issued at the request
or for the benefit of Target. There is no material claim
pending under any of such policies or bonds as to which
coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. Target is in
compliance in all material respects with the terms of such
policies and bonds. Target has no knowledge of any threatened
termination of, or material premium increase with respect to,
any of such policies.
2.14 COMPLIANCE WITH LAWS. Target has complied in all material
respects with, is not in material violation of, and has not
received any notices of material violation with respect to,
any federal, state, local or foreign statute, law, regulations
or permits or licenses issued under such laws with respect to
the conduct of its business or the ownership or operation of
its business.
2.15 MINUTE BOOKS. The minute books of Target made available to
Parent contain a complete and accurate summary of all meetings
of directors and stockholders or actions by written consent
since the time of incorporation of Target and reflect all
transactions referred to in such minutes accurately in all
material respects.
2.16 BROKERS' AND FINDERS' FEES. Target has not incurred, nor will
it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or investment bankers'
fees or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.17 VOTE REQUIRED. The affirmative vote of the Stockholders is the
only vote of the holders of the Target Capital Stock necessary
to adopt this Agreement and the transactions contemplated
hereby. The Stockholders by resolutions duly adopted (and not
thereafter modified or rescinded) by unanimous vote at a
meeting duly called and held (or otherwise by unanimous
written consent), have (a) approved and adopted this Agreement
and approved the Merger, and (b) determined that the aggregate
Merger Consideration to be received by them pursuant to this
Agreement is fair from a financial point of view.
14
2.18 BOARD APPROVAL. Target's board of directors, by resolutions
duly adopted (and not thereafter modified or rescinded) by
unanimous vote (with no abstentions) at a meeting duly called
and held, has (a) approved this Agreement and the Merger, (b)
determined that this Agreement and the terms and conditions of
the Merger are fair, just, reasonable, equitable, advisable
and in the best interests of Target and its stockholders, and
(c) directed that the adoption of this Agreement be submitted
to the Stockholders for consideration and recommended that all
of the Stockholders of Target adopt this Agreement.
2.19 INVENTORY. The Target's inventory whether reflected on the
Target Financial Statements or not, consists of finished
goods, all of which are merchantable and fit for the purpose
for which they were procured. Target has and will continue to
write down slow moving, obsolete, damaged and defective
inventory in the ordinary course of business, other than items
that it has a right to return to the applicable manufacturer
or vendor. The value of the inventory stated on the face of
the balance sheets included in the Target Financial Statements
reflect adjustments for write downs in accordance with GAAP as
of their respective dates. Any inventory that has been written
down has either been written off or written down to its net
realizable value. There has been no change in inventory
valuation standards or methods with respect to the inventory
of Target in the prior three years. The quantities of any kind
of inventory are reasonable in the current (and the currently
foreseeable) circumstances of the Target. Except as set forth
in Section 2.19 of the Target Disclosure Letter, Target does
not hold any items of inventory on consignment from other
Persons and no other Person holds any items of inventory on
consignment from Target.
2.20 MATERIAL CONTRACTS. Except for the Contracts listed in Section
2.20 of the Target Disclosure Letter, as of the date hereof
Target is not a party to or bound by any material contract (a
"MATERIAL CONTRACT"), including specifically:
(a) any distributor, reseller, advertising, agency,
manufacturer's representative, joint marketing or
joint development Contract;
(b) any continuing Contract for the purchase of products,
materials, supplies, equipment or services involving
in the case of any such Contract more than $50,000
over the life of the contract;
(c) any Contract that expires (or may be renewed at the
option of any Person other than Target so as to
expire) more than one year after the date of this
Agreement involving annual payments in excess of
$24,000;
(d) any trust indenture, mortgage, promissory note, loan
agreement or other contract for the borrowing of
money, any currency exchange, commodities or other
hedging arrangement or any leasing transaction of the
type required to be capitalized in accordance with
GAAP;
(e) any Contract for any capital expenditure in excess of
$5,000 individually or $50,000 in the aggregate;
15
(f) any Contract in accordance with which Target is a
lessor or lessee of any machinery, equipment, motor
vehicles, office furniture, fixtures or other
personal property involving annual payments in excess
of $24,000;
(g) any license or other Contract providing rights to, or
based upon, any Intellectual Property, including any
Target IP;
(h) any Contract with any Person with whom Target does
not deal at arm's length;
(i) any agreement of guarantee, support, indemnification,
assumption or endorsement of, or any similar
commitment with respect to, the Liabilities (whether
accrued, absolute, contingent or otherwise) or
indebtedness of any other Person; or
(j) any Contract relating to the disposition or
acquisition of assets or any interest in any business
enterprise outside the ordinary course of Target's
business.
All Material Contracts are in executed written form, and Target has
performed all of the obligations required to be performed by it and is entitled
to all benefits under, and is not alleged to be in default in respect of any
Material Contract. Each of the Material Contracts is in full force and effect,
and there exists no default or event of default or event, occurrence, condition
or act that could reasonably be expected to result in the Surviving Company not
enjoying all economic benefits that Target enjoyed prior to the Closing and to
which they are entitled post-Closing under any Material Contract. Following the
Effective Time, the Surviving Company will be permitted to exercise all of their
rights under the Material Contracts without the payment of any additional
amounts of consideration, other than ongoing fees, royalties or payments that
Target would otherwise be required to pay in accordance with the terms of such
Contracts had the transactions contemplated by this Agreement not occurred.
2.21 TITLE OF PROPERTIES; ABSENCE OF ENCUMBRANCES.
(a) Target does not own any real property, nor has Target
ever owned any real property.
(b) Schedule 2.21(b) lists and describes briefly all real
property leased or subleased to Target as of the date
hereof. The Target has delivered to Parent correct
and complete copies of the lease and sublease
Contracts (as amended to date) listed in Schedule
2.21(b). With respect to each lease and sublease
Contract required to be listed in Schedule 2.21(b):
(i) the Contract is, and will continue to be on
identical terms following the consummation
of the Merger, a legal, valid, and binding
obligation of the Surviving Company, and to
the knowledge of Target, of the
counter-party, enforceable against such
Person in accordance with its terms, except
as such enforceability may be subject to the
effects of bankruptcy, insolvency,
reorganization, moratorium, or other laws
relating to or affecting the rights of
creditors, and general principles of equity;
16
(ii) Target (and to the knowledge of Target, each
counter-party) is not in breach of such
Contract, and, to the knowledge of Target,
no event has occurred which, with notice or
lapse of time, would constitute a breach
thereunder;
(iii) no party to the Contract has repudiated any
provision thereof;
(iv) there are no actions, claims, decrees,
suits, orders, or forbearances in effect as
to the Contract;
(v) with respect to each sublease Contract, the
representations and warranties set forth in
Sections 2.21(b)(i)-(iv) are true and
correct with respect to the underlying lease
Contract;
(vi) except for landlord liens and the security
interest granted to Target's commercial bank
secured lender, Target has not granted or
permitted to exist any Encumbrance in the
leasehold or subleasehold Contract;
(vii) all facilities leased or subleased under the
Contract have received all instruments,
permits, licenses and other approvals of any
Governmental Entity required in connection
with the operation thereof and have been
operated and maintained in all material
respects in accordance with applicable laws;
and
(viii) all facilities leased or subleased under the
Contract are supplied with utilities and
other services necessary for the operation
of said facilities.
(c) Target has good title to, or valid leasehold
interests in, all of its tangible properties and
assets, real, personal and mixed, used or held for
use in its business, free and clear of any
Encumbrances, except (i) as reflected in the April 30
Balance Sheet, (ii) liens for Taxes not yet due and
payable, (iii) the lien granted to Target's
commercial bank secured lender and statutory and
landlords liens, and (iv) such imperfections of title
and encumbrances, if any, which do not detract
materially from the value or interfere materially
with the present use of the property subject thereto
or affected thereby. All such tangible personal
property is adequate and suitable in all material
respects for the conduct by Target of its business as
presently conducted, and is in good working order and
condition in all material respects, ordinary wear and
tear excepted, and its use complies in all material
respects with all applicable laws.
2.22 WARRANTIES; INDEMNITIES. Except for warranties implied by law,
Target has not given any warranties or indemnities relating to
products sold by Target.
2.23 SECURITIES REPRESENTATIONS COMPLETE. None of the
representations or other information made or furnished by
Target or the Stockholders in writing for inclusion in any
filing to be made by Parent with the SEC relative to this
Agreement, the Merger, or the transactions contemplated
hereby, including the Registration Statement, will contain any
untrue statement of a material fact, or omit to state any
material fact necessary in order to make the statements
contained therein, in the light of the circumstances under
which made, not misleading.
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2.24 REPRESENTATIONS COMPLETE. None of the representations or
warranties made by Target in this Agreement, as modified by
the Target Disclosure Letter, any exhibit or schedule to this
Agreement or any other document required to be delivered to
Parent in accordance with any provision of this Agreement,
when all such documents are read together in their entirety,
contains any untrue statement of a material fact, or omits to
state any material fact necessary in order to make the
statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Subject to the exceptions set forth in the disclosure letter delivered
by Parent and Merger Sub to Target concurrently with the execution of this
Agreement (the "PARENT DISCLOSURE LETTER") (which disclosures shall delineate
the section or subsection to which they apply but shall also qualify such other
sections or subsections in this ARTICLE 3 to the extent it is clear from a
reading of the disclosure item that such disclosure is applicable to such other
section or subsection), Parent and Merger Sub represent and warrant to Target
and the Stockholders as follows:
3.1 ORGANIZATION, STANDING AND POWER. Each of Parent and each of
its Subsidiaries is a company duly organized, validly existing
and in good standing under the laws of its jurisdiction of
organization. Each of Parent and each of its Subsidiaries has
the corporate power to own its properties and to conduct its
business as now being conducted and as currently proposed by
it to be conducted and is duly qualified to do business and is
in good standing in each jurisdiction where the failure to be
so qualified and in good standing, individually or in the
aggregate with any such other failures, could reasonably be
expected to have a Material Adverse Effect on Parent. Neither
Parent nor any of its Subsidiaries is in violation of any of
the provisions of its organizational documents. All the
outstanding capital stock of each of Parent's Subsidiaries is
duly authorized, validly issued, fully paid and nonassessable.
3.2 CAPITAL STRUCTURE OF PARENT.
(a) Parent's authorized capital stock consists of
75,000,000 shares of Parent Common Stock, of which
26,057,200 shares were issued and outstanding as of
May 9, 2006 and 5,000,000 shares of preferred stock,
none of which are outstanding. All of the issued and
outstanding shares of Parent Common Stock (i) have
been duly authorized, are validly issued, fully paid,
and nonassessable, and (ii) were issued in compliance
with all applicable state and federal securities
Laws. Except as described in the Parent SEC
Documents, as of the date of this Agreement (and as
issued in the ordinary course of Parent's business
since the date of this Agreement), no options,
warrants, convertible debt or other rights exist with
respect to any shares of Parent Common Stock and no
such Commitments will arise in connection with the
Merger. There are no Contracts with respect to the
voting or transfer of Parent's capital stock. Parent
is not obligated to redeem or otherwise acquire any
of its outstanding capital stock.
(b) Merger Sub was formed for the purpose of
participating in the Merger and it owns no assets,
and has undertaken no activities, other than those
necessary to effectuate the Merger. All of the
outstanding stock of Merger Sub is owned directly by
Parent. There are outstanding no options, warrants,
convertible debt or other rights the exercise of
which, or pursuant to which, any Person can acquire
any of the stock of Merger Sub.
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3.3 ISSUANCE OF PARENT COMMON STOCK. The shares of Parent Common
Stock to be issued pursuant to the Merger, when issued in
accordance with the terms of this Agreement, will be duly
authorized, validly issued, fully paid and non-assessable.
3.4 AUTHORITY; NONCONTRAVENTION. Each of Parent and Merger Sub
have all requisite power and authority to enter into this
Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of each of Parent
and Merger Sub. This Agreement has been duly executed and
delivered by each of Parent and Merger Sub, and, assuming due
authorization, execution and delivery by Target, constitutes
the valid and binding obligation of each of Parent and Merger
Sub, enforceable against each of Parent and Merger Sub in
accordance with its terms. The execution and delivery of this
Agreement by each of Parent and Merger Sub does not, and the
consummation of the transactions contemplated hereby will not,
(a) result in the creation of a lien on any properties or
assets of Parent, Merger Sub or any of their Subsidiaries or
(b) conflict with, or result in any violation of, or default
under (with or without notice or lapse of time, or both), or
give rise to a right of termination, cancellation,
renegotiation or acceleration of any obligation or loss of any
benefit under, or require any consent, approval or waiver from
any Person in accordance with, (i) any provision of the
organizational documents of Parent, Merger Sub or any of their
Subsidiaries or (ii) any Contract, instrument, permit,
judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Parent, Merger Sub or any of their
Subsidiaries or any of their respective properties or assets.
No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental
Entity is required by or with respect to Parent or Merger Sub
in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated
hereby, except for the filing of the Articles of Merger.
3.5 PARENT SECURITIES FILINGS AND FINANCIAL STATEMENTS.
(a) Parent has furnished or made available to the Target
true and complete copies of all reports, forms,
offering circulars, proxy statements, registration
statements and all similar documents it has filed
with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended
(the "SECURITIES ACT"), and the Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), all in the form so
filed (collectively the "PARENT SEC DOCUMENTS"). As
of their respective filing dates, the Parent SEC
Documents complied in all material respects with the
requirements of the Securities Act or the Exchange
Act, as applicable, and none of the Parent SEC
Documents contained any untrue statement of a
material fact or omitted to state a material fact
required to be stated therein or necessary to make
the statements made therein, in light of the
circumstances in which they were made, not
misleading, except to the extent corrected by a
document filed with the SEC prior to the date hereof
or, for Parent SEC Documents filed after the date
hereof, to the extent corrected by a document filed
with the SEC prior to the Closing.
(b) Parent's financial statements, including the notes
thereto, included in the Parent SEC Documents (the
"BUYER FINANCIAL STATEMENTS") comply as to form in
all material respects with applicable accounting
requirements and with the published rules and
regulations of the SEC with respect thereto, have
been prepared in accordance with GAAP consistently
applied
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(except as may be indicated in the notes thereto) and
present fairly Parent's consolidated financial
position at the dates thereof and its results of
operations and changes in shareholders' equity and
cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal audit
adjustments). Since the date of the most recent
balance sheet included in the Buyer Financial
Statements, except as set forth in the Parent SEC
Documents filed on or prior to date hereof, Parent
has not effected any change in any method of
accounting or accounting practice, except for any
such change required because of a concurrent change
in GAAP. Parent has no Liabilities, except (i)
Liabilities accrued or reserved against in the most
recent balance sheet or notes thereto included in the
Buyer Financial Statements as of the date hereof and
not heretofore paid or discharged, (ii) Liabilities
of a type that would not be required to be accrued or
reserved against in the balance sheet of Parent or
the notes thereto prepared in accordance with GAAP,
and (iii) Liabilities that have arisen subsequent to
the date of the most recent balance sheet included in
the Buyer Financial Statements as of the date hereof
that have been incurred in the ordinary course of
business and that, singularly or in the aggregate,
could not reasonably be expected to have a Material
Adverse Effect on Parent.
3.6 LEGAL PROCEEDINGS. There is no material private or
governmental action, suit, proceeding, claim, arbitration or
investigation pending before any Governmental Entity or
arbitrator, or, to the knowledge of Parent, threatened against
Parent or any of its Subsidiaries or any of their respective
assets or properties, including any Parent IP Rights (as
defined in Section 3.7(a)), or any of their respective
officers or directors (in their capacities as such). There is
no judgment, decree or order against Parent or any of its
Subsidiaries, any of their respective assets or properties,
or, to the knowledge of Parent, any of their respective
directors or officers (in their capacities as such), that
could prevent, enjoin, or materially alter or delay any of the
transactions contemplated by this Agreement, or that,
individually or in the aggregate with any such other
judgments, decrees and orders, could reasonably be expected to
have a Material Adverse Effect on Parent.
3.7 INTELLECTUAL PROPERTY.
(a) To the knowledge of Parent, Parent and its
Subsidiaries own or have a valid right or license to
use all Intellectual Property used by them in the
conduct of their businesses as currently conducted
(the "PARENT IP RIGHTS").
(b) Neither the execution, delivery and performance of
this Agreement nor the consummation of the Merger and
the other transactions contemplated by this Agreement
will materially impair the right of Parent or any of
its Subsidiaries to use, possess, sell or license any
Parent IP Right or portion thereof.
(c) Parent has not received any notice asserting that any
Parent IP Right or the proposed use, sale, license or
disposition of any Parent product or service
conflicts with or infringes, or would conflict with
or infringe, the Intellectual Property or other
rights of any third party, nor to the knowledge of
the Parent, is there any reasonable basis for any
such assertion, and Parent has not received any
notice from any third party offering a license under
any such third party Intellectual Property or other
right to avoid litigation or other claims.
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(d) Parent and its Subsidiaries have taken appropriate
steps to protect, preserve and maintain the secrecy
and confidentiality of trade secrets included among
Parent IP Rights.
(e) All registered Intellectual Property held by Parent
and its Subsidiaries are subsisting, and Parent
and/or its Subsidiaries are the record owners
thereof.
(f) To the knowledge of Parent, there is no unauthorized
use, disclosure, infringement or misappropriation of
any Parent IP Rights by any third party, including
any employee or former employee of Parent or any of
its Subsidiaries.
3.8 COMPLIANCE WITH LAWS. Each of Parent and each of its
Subsidiaries has complied in all material respects with, is
not in material violation of, and has not received any notices
of material violation with respect to, any federal, state,
local or foreign statute, law, regulations or permits or
licenses issued under such laws with respect to the conduct of
its business, or the ownership or operation of its business.
3.9 BOARD APPROVAL. Parent's board of directors, by resolutions
duly adopted (and not thereafter modified or rescinded) by
unanimous vote (with no abstentions) at a meeting duly called
and held, has (a) approved and adopted this Agreement and
approved the Merger on behalf of Parent and acting on behalf
of Parent as the sole stockholder of Merger Sub, and (b)
determined that this Agreement and the terms and conditions of
the Merger are fair, just, reasonable, equitable, advisable
and in the best interests of Parent and its shareholders.
Merger Sub's board of directors, by unanimous written consent
in lieu of a meeting, has (i) approved this Agreement and the
Merger, and (ii) determined that this Agreement and the terms
and conditions of the Merger are fair, just, reasonable,
equitable, advisable and in the best interests of Merger Sub
and its stockholders.
3.10 MATERIAL CONTRACTS. All material Contracts of Parent or its
Subsidiaries are in executed written form, are in full force
and effect, and Parent or its applicable Subsidiary has
performed all of the obligations required to be performed by
it and is entitled to all benefits under, and is not alleged
to be in default in respect of any material Contract.
3.11 TITLE OF PROPERTIES; ABSENCE OF ENCUMBRANCES.
(a) Neither Parent nor any of its Subsidiaries owns any
real property, nor has either Parent or any of its
Subsidiaries ever owned any real property.
(b) Each of Parent and its Subsidiaries has good title
to, or valid leasehold interests in, all of its
respective tangible properties and assets, real,
personal and mixed, used or held for use in its
business, free and clear of any Encumbrances, except
(i) as reflected in the Buyer Financial Statements,
(ii) liens for Taxes not yet due and payable, and
(iii) such imperfections of title and encumbrances,
if any, which do not detract materially from the
value or interfere materially with the present use of
the property subject thereto or affected thereby. All
such tangible personal property is adequate and
suitable in all material respects for the conduct by
Parent of its business as presently conducted, and is
in good working order and condition in all material
respects, ordinary wear and tear excepted, and its
used complies in all material respects with all
applicable laws.
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3.12 ABSENCE OF CERTAIN CHANGES. Since December 31, 2005, there has
not occurred (i) through the date hereof, any change, event or
condition (whether or not covered by insurance) that,
individually or in the aggregate with any other changes,
events and conditions, has resulted in, or could reasonably be
expected to result in, a Material Adverse Effect on Parent; or
(ii) any condition, event or occurrence which could reasonably
be expected to prevent, hinder or materially delay the ability
of Parent or Merger Sub to consummate the transactions
contemplated by this Agreement.
3.13 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no Contract
(including covenants not to compete), judgment, injunction,
order or decree binding upon Parent or any of its Subsidiaries
that has or could reasonably be expected to have, whether
before or after consummation of the Merger, the effect of
prohibiting, impairing or restricting any current or future
business practice of Parent or any of its Subsidiaries, any
acquisition of property by Parent or any of its Subsidiaries
or the conduct of business by Parent or any of its
Subsidiaries, in each case, as currently conducted or as
currently proposed to be conducted by Parent, any of its
current Subsidiaries or the Surviving Company .
3.14 BROKERS' AND FINDERS' FEES. Except as set forth in Section
3.14 of the Parent Disclosure Letter, neither Parent nor any
of its Subsidiaries has incurred, nor will it incur, directly
or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar
charges in connection with this Agreement or any transaction
contemplated hereby.
3.15 REPRESENTATIONS COMPLETE. None of the representations or
warranties made by Parent and Merger Sub in this Agreement, as
modified by the Parent Disclosure Letter, any exhibit or
schedule to this Agreement or any other document required to
be delivered to Target in accordance with any provision of
this Agreement, when all such documents are read together in
their entirety, contains any untrue statement of a material
fact, or omits to state any material fact necessary in order
to make the statements contained herein or therein, in the
light of the circumstances under which made, not misleading.
ARTICLE 4
COVENANTS AND OTHER AGREEMENTS
4.1 CONDUCT OF BUSINESS OF TARGET AND SUBSIDIARIES. During the
period from the date hereof and continuing until the earlier
of the termination of this Agreement and the Effective Time:
(a) Target shall conduct its business in the usual,
regular and ordinary course in substantially the same
manner as heretofore conducted (except to the extent
expressly provided otherwise in this Agreement or as
consented to in writing by Parent);
(b) Target shall (i) pay all of its debts and Taxes when
due, subject to good faith disputes over such debts
or Taxes, (ii) pay or perform its other obligations
when due, and (iii) use reasonable best efforts to
preserve intact its present business organizations
(including, without limitation, its present
operations, facilities, and working conditions), keep
available the services of its present officers and
key employees and preserve its relationships with
customers,
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suppliers, distributors, licensors, licensees,
lessors and others having business dealings with it,
to the end that its goodwill and ongoing businesses
shall be unimpaired and transferred to the Surviving
Company at the Effective Time; and
(c) Target shall assure that each of its Contracts
entered into on or after the date hereof will not
require the procurement of any consent, waiver or
novation or provide for any material change in the
obligations of any party in connection with, or
terminate as a result of the consummation of, the
transactions contemplated by this Agreement.
4.2 RESTRICTIONS ON CONDUCT OF BUSINESS OF TARGET. Without
limiting the generality or effect of the provisions of Section
4.1, during the period from the date hereof and continuing
until the earlier of the termination of this Agreement and the
Effective Time, Target shall not do, cause or permit any of
the following (except to the extent expressly provided
otherwise in this Agreement or as expressly consented to in
writing by Parent, which consent shall not be unreasonably
withheld or delayed with respect to subsections (c), (k) and
(r)):
(a) Cause or permit any amendments to its organizational
documents;
(b) Declare or pay any dividends on or make any other
distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split,
combine or reclassify any of its capital stock or
issue or authorize the issuance of any other
securities in respect of, in lieu of or in
substitution for shares of its capital stock, or
repurchase, redeem or otherwise acquire, directly or
indirectly, any shares of its capital stock;
(c) Except for inventory commitments and purchases in the
ordinary course of business, or as otherwise set
forth in Section 4.2(c) of the Target Disclosure
Letter, enter into any material Contract (including
any Material Contract) or commitment, or violate,
amend or otherwise modify or waive any of the terms
of any of its Material Contracts;
(d) Issue or grant any securities or agree to issue or
grant any securities;
(e) Hire any additional consultants or independent
contractors or enter into, or extend the term of, any
employment or consulting agreement with any Person;
(f) Make any loans or advances to, or any investments in
or capital contributions to, any Person, or forgive
or discharge in whole or in part any outstanding
loans or advances;
(g) Transfer or license to any Person any rights to any
Target IP;
(h) Enter into or amend any agreement in accordance with
which any other party is granted exclusive marketing
or other exclusive rights of any type or scope with
respect to any of Target's business;
(i) Sell, lease, license or otherwise dispose of or
encumber any of its properties, inventory or assets,
other than sales of products or inventory in the
ordinary course of business and encumbrances pursuant
to the continuing lien of Target's commercial bank
secured lender, landlord liens and statutory purchase
money security interests;
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(j) Incur any indebtedness for borrowed money except
pursuant to its credit facility with its commercial
bank secured lender or guarantee any such
indebtedness or issue or sell any debt securities or
guarantee any debt securities of others;
(k) Pay, discharge or satisfy, in an amount in excess of
$5,000 in any one case or $25,000 in the aggregate,
any claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or
otherwise) arising otherwise than in the ordinary
course of business and not in violation of this
Agreement, other than the payment, discharge or
satisfaction of liabilities accrued or reserved
against in the Target Financial Statements, and costs
and expenses incurred in connection with this
Agreement and the transactions contemplated herein;
(l) Make any capital expenditures or commitments, capital
additions or capital improvements except in the
ordinary course of business or for emergency repairs
and replacements;
(m) Materially reduce the amount of any insurance
coverage provided by existing insurance policies;
(n) Terminate or waive any right of substantial value;
(o) Except as required by this Agreement, adopt or amend
any employee or compensation benefit plan, including
any stock purchase, stock issuance or stock option
plan, or amend any compensation, benefit,
entitlement, grant or award provided or made under
any such plan, except in each case as required under
ERISA or as necessary to maintain the qualified
status of such plan under the Code, or hire any new
officer-level or other management-level employee
(other than at the retail store level), pay any
increase in salaries or wage rates to its employees
or bonuses except in the ordinary course of business,
or add any new non-employee members to the board of
directors of Target;
(p) Enter into any employment contract or, unless
required by applicable law, any collective bargaining
agreement;
(q) Grant any severance or termination pay to any Person
except pursuant to customary historical practice or
as required by law, or amend or modify any existing
severance or termination agreement with any Person,
except claims for termination pay in the ordinary
course of business;
(r) Commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in
good faith determines that failure to commence suit
would result in the material impairment of a valuable
aspect of its business, PROVIDED that it consults
with Parent prior to the filing of such a suit, or
(iii) for a breach of this Agreement;
(s) Acquire or agree to acquire by merging or
consolidating with, or by purchasing the assets of,
or by any other manner, any business or any company,
partnership, association or other business
organization or division thereof, or otherwise
acquire or agree to acquire any assets (other than
inventory in the ordinary course of business) which
are material, individually or in the aggregate, to
Target's business;
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(t) Make or change any material election in respect of
Taxes, adopt or change any accounting method in
respect of Taxes, file any material Tax Return or any
amendment to a material Tax Return, enter into any
closing agreement, settle any claim or assessment in
respect of Taxes, or consent to any extension or
waiver of the limitation period applicable to any
claim or assessment in respect of Taxes;
(u) Enter into any Contract or transaction in which any
officer or director of Target (or any member of the
immediate family of such officer or director) has an
interest; and
(v) Voluntarily take or agree in writing or otherwise to
take, any of the actions described in the foregoing
clauses of this Section 4.2, or any action which
could reasonably be expected to make any of Target's
representations or warranties contained in this
Agreement untrue or incorrect or prevent Target from
performing or cause Target not to perform one or more
covenant required hereunder to be performed by
Target.
4.3 ADVICE OF CHANGES. Each party shall promptly advise the other
party or parties in writing of (a) any fact, event or
circumstance occurring subsequent to the date of this
Agreement that would have rendered any representation or
warranty of a party untrue or inaccurate in any material
respect as of the date of this Agreement, (b) any breach of
any covenant or obligation of a party pursuant to this
Agreement such that the conditions set forth in ARTICLE 5
would not be satisfied, (c) any Material Adverse Effect with
respect to a party, (d) any change, event, circumstance,
condition or effect that would reasonably be expected to
result in a Material Adverse Effect on a party or cause any of
the conditions set forth in ARTICLE 5 not to be satisfied, or
(e) any change, occurrence or event not in the ordinary course
of business of a party or any of its Subsidiaries; PROVIDED,
HOWEVER, that the delivery of any notice shall not be deemed
to amend or supplement the disclosure of a party hereunder or
to prevent or cure any misrepresentations or breach of any
representation, warranty or covenant, except that any change
in the Target Financial Statements resulting from the audit
and/or review conducted pursuant to Section 4.16, other than
changes arising as a result of substantial misstatements or
omissions which shall only allow Parent to terminate this
Agreement pursuant to Section 6.1(d), shall not constitute a
breach and the Target Financial Statements shall be deemed to
be amended by the audited and reviewed financial statements.
Without limiting any portion of the foregoing, at least two
(2) business days prior to the Closing, each party shall
update its Disclosure Letter for any fact, event or
circumstance arising subsequent to the date of this Agreement
to enable each party's representations and warranties to be
true and accurate in all material respects as of the Closing
as if made anew at such time; provided, however, in no event
shall the updated information diminish a party's
indemnification under Sections 7.2(a) and (b) or Sections
7.3(a) and (b), as applicable.
4.4 NO SOLICITATION. Until the earlier of the termination of this
Agreement and the Effective Time, Target shall not directly or
indirectly: (a) solicit, facilitate or encourage the
initiation of any inquiry, proposal or offer from any Person
(other than Parent) relating to a possible Acquisition
Transaction; (b) participate in any discussions or
negotiations or enter into any agreement with, or provide any
non-public information to, any Person (other than Parent)
relating to or in connection with a possible Acquisition
Transaction; or (c) accept any proposal or offer from any
Person (other than Parent) relating to a possible Acquisition
Transaction. Upon execution of this Agreement, Target shall
immediately cease and cause to be terminated any
25
existing direct or indirect discussions with any Person (other
than Parent) that relate to any possible Acquisition
Transaction. Target shall promptly (and in no event later than
24 hours after receipt thereof) notify Parent orally and in
writing of any proposal or offer relating to a possible
Acquisition Transaction, or any request for information from a
Person who may be considering a possible Acquisition
Transaction (including the identity of the Person making or
submitting such proposal, offer or request, and the terms
thereof (including a copy of any written proposal, offer or
request)) that is received by Target or any Affiliate (as
defined in Section 8.3(a)) or representative of Target. Target
shall keep Parent informed on a reasonably current basis of
the status and details of any such proposal, offer or request,
and shall promptly (and, in any event, within 24 hours)
provide to Parent a copy of all written materials subsequently
provided to or by Target in connection with such proposal,
offer or request. "ACQUISITION TRANSACTION" means any
transaction involving: (i) the sale, license, disposition or
acquisition of all or a substantial portion of the business or
assets of Target; (ii) the issuance, disposition or
acquisition of (A) any capital stock or other equity security
of Target, (B) any option, call, warrant or right (whether or
not immediately exercisable) to acquire any capital stock or
other equity security of Target, or (C) any security,
instrument or obligation that is or may become convertible
into or exchangeable for any capital stock or other equity
security of Target; in each of clauses (A) through (C),
representing in the aggregate 5% or more of the voting power
of Target; or (iii) any merger, consolidation, share exchange,
business combination, reorganization, recapitalization or
similar transaction involving Target.
4.5 ACCESS TO INFORMATION.
(a) Until the earlier of the termination of this
Agreement and the Effective Time, (i) Target shall
afford Parent and its accountants, counsel and other
representatives, reasonable access during normal
business hours to (A) all of Target's properties,
books, contracts, commitments and records and (B) all
other information concerning the business, properties
and personnel of Target as Parent may reasonably
request, and (ii) Target shall provide to Parent and
its accountants, counsel and other representatives
true, correct and complete copies of internal
financial statements promptly upon request. Until the
earlier of the termination of this Agreement and the
Effective Time, (i) Parent shall afford Target and
its accountants, counsel and other representatives,
reasonable access during normal business hours to (A)
all of Parent's and its Subsidiary's properties,
books, contracts, commitments and records and (B) all
other information concerning the business, properties
and personnel of Parent or any of its Subsidiaries as
Target may reasonably request, and (ii) Parent shall
provide to Target and its accountants, counsel and
other representatives true, correct and complete
copies of internal financial statements promptly upon
request.
(b) Subject to compliance with applicable law, until the
earlier of the termination of this Agreement and the
Effective Time, Target shall confer from time to time
as requested by Parent with one or more
representatives of Parent to discuss any material
changes or developments in the operational matters of
Target and the general status of the ongoing business
and operations of Target. Subject to compliance with
applicable law, until the earlier of the termination
of this Agreement and the Effective Time, Parent
shall confer from time to time as requested by Target
with one or more representatives of Target to discuss
any material changes or developments in the
operational matters of Parent and each of its
Subsidiaries and the general status of the ongoing
business and operations of Parent and each of its
Subsidiaries.
26
(c) No information or knowledge obtained in any
investigation in accordance with this Section 4.5
shall affect or be deemed to modify any
representation or warranty contained herein or the
conditions to the obligations of the parties hereto
to consummate the Merger.
4.6 CONFIDENTIALITY. The parties acknowledge that Parent and
Target have previously executed a non-disclosure agreement
(the "CONFIDENTIALITY AGREEMENT"), which shall continue in
full force and effect in accordance with its terms.
4.7 PUBLIC DISCLOSURE. Prior to the Effective Time, the parties
will consult with each other, and to the extent practicable,
agree, before issuing any press release or otherwise making
any public statement with respect to the Merger, this
Agreement or any material transaction involving Parent or
Target and will not issue any such press release or make any
such public statement prior to such consultation, except as
may be required by law.
4.8 CONSENTS. Each of Parent, Merger Sub and Target shall promptly
after the execution of this Agreement apply for or otherwise
seek, and use its reasonable best efforts to obtain, all
consents and approvals required to be obtained by it for the
consummation of the Merger.
4.9 LEGAL REQUIREMENTS.
(a) Each of Parent, Merger Sub and Target shall, and
shall cause their respective Subsidiaries to, (i)
take commercially reasonable actions necessary to
comply promptly with all legal requirements which may
be imposed on it with respect to the consummation of
the transactions contemplated by this Agreement, (ii)
promptly cooperate with and furnish information to
any party hereto necessary in connection with any
such requirements imposed upon such other party in
connection with the consummation of the transactions
contemplated by this Agreement, and (iii) take
commercially reasonable actions necessary to obtain
(and shall cooperate with the other parties hereto in
obtaining) any consent, approval, order or
authorization of, or any registration, declaration or
filing with, any Governmental Entity, required to be
obtained or made in connection with the taking of any
action contemplated by this Agreement.
(b) Target shall give all notices and other information
required by law to be given to its employees in
connection with the transactions contemplated by this
Agreement.
4.10 TREATMENT AS REORGANIZATION. Prior to the Effective Time,
Target shall not, and prior to and following the Effective
Time, Parent shall not, take any action that would cause the
Merger to fail to qualify as a "reorganization" within the
meaning of Section 368(a) of the Code.
4.11 EMPLOYEES. At the Effective Time, unless otherwise agreed by
the Parent and Stockholder Representative, all employees of
Target will become employees of the Surviving Company and they
will receive the same compensation and similar benefits as
employees of the Surviving Company that they received
immediately prior to the Effective Time, except the
compensation and benefits of (a) the senior executive officers
of Target shall be subject to the terms of their Employment
Agreements with Parent, and (b) the employees of Target who
are offered and accept Offer Letters from Parent shall be
subject to the terms of such letters. Until
27
such time as the employees of the Surviving Company become
participants without any waiting period in comparable benefit
plans of Parent, the Employee Benefit Plans and paid time off
policies of Target shall be continued by the Surviving
Company. To the extent practicable under comparable benefit
plans of Parent substituted for the Employee Benefit Plans of
Target, Parent will use its commercially reasonable efforts to
cause the employees of the Surviving Company to be given full
credit for their years of service with Target for eligibility,
participation and vesting in the employee benefit plans (as
well as, vacation and sick day policies) of the Surviving
Company including the comparable benefit plans of Parent
substituted for the Employee Benefit Plans of Target. To the
extent practicable under comparable benefit plans of Parent
substituted for the Employee Benefit Plans of Target, Parent
will use its commercially reasonable efforts to cause the
employees of the Surviving Company who were employees of
Target to not be subject to any waiting periods under any
substituted group health plan and to cause such substituted
group health plan to cover pre-existing conditions that were
previously covered under Target's group health plan. Nothing
herein is intended to confer upon any Target employee any
right of employment or retention.
4.12 INDEMNIFICATION. From and after the Effective Time, Parent
shall indemnify and hold harmless the officers and directors
of the Surviving Company (in such capacities only) to the
maximum extent permitted by law with respect to liabilities
and claims arising out of claims, actions, suits, proceedings
or investigations (each, a "CLAIM") made, asserted or arising
after the Effective Time, if such Claim pertains to any acts,
omissions, events, matters or circumstances occurring or
existing after the Effective Time as a result of such person
acting in such capacity, in each case, only on such terms and
conditions as Parent provides to its other officers and
directors (or officers and directors of its Subsidiaries) from
time to time. In no event will Parent or the Surviving Company
pursue any Claim against any officer or director of Target, in
such capacities, relating to acts or omissions occurring on or
prior to the Closing Date, provided, however, the foregoing
will in no event limit Parent's rights and remedies available
under this Agreement against the Stockholders, whether for
indemnification or fraud.
4.13 EXPENSES. Except as otherwise set forth herein, if the Merger
is not consummated, all costs and expenses incurred in
connection with this Agreement and the transactions
contemplated hereby (including the fees and expenses of
advisers, accountants and legal counsel) shall be paid by the
party incurring such expense. If the Merger is consummated,
the Stockholders shall be responsible for all fees and
expenses of Target (including legal, accounting and investment
banking fees of Target, if any) incurred in connection with
this Agreement and transactions contemplated hereby (the
"TARGET Expenses"). Within three days prior to the anticipated
Closing, Target shall provide Parent with a good faith
estimate of the Target Expenses (actual and anticipated) to be
borne by the Stockholders. To the extent the Target Expenses
have not been paid prior to the Closing, they shall be paid at
the Closing by Target, and in all events shall reduce the cash
portion of the Merger Consideration accordingly, in accordance
with Section 1.4(c) and 1.4(d).
4.14 FURTHER ASSURANCES. On the terms and subject to the conditions
set forth in this Agreement, each of the parties hereto shall
use commercially reasonable efforts, and shall cooperate with
each other party hereto, to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary,
appropriate or desirable to consummate and make effective, in
the most expeditious manner practicable, the Merger and the
other transactions
28
contemplated hereby, including the satisfaction of the
respective conditions set forth in ARTICLE 5. Without limiting
the generality or effect of the foregoing and subject to the
terms of this Agreement, in the event an injunction or other
order preventing the consummation of the Merger shall have
been issued by a court of competent jurisdiction, each party
hereto shall its use reasonable best efforts to have such
injunction or other order lifted. Each party hereto, at the
reasonable request of the other party hereto, shall execute
and deliver such other instruments and do and perform such
other acts and things as may be necessary or reasonably
desirable for effecting completely the consummation of the
Merger and the other transactions contemplated hereby.
4.15 REGISTERED SHARES; LISTING. The issuance of the shares of
Parent Common Stock to be made available to the Stockholders
at the Effective Time shall be registered with the SEC on Form
▇-▇, ▇▇-▇, ▇-▇ or such other available form determined by
Parent in its sole discretion to achieve the registration
thereof (the "REGISTRATION STATEMENT"), which Registration
Statement shall be filed by Parent not later than forty-five
(45) days following the date hereof. Prior to the Effective
Time, Parent agrees to list on the NASDAQ Capital Market the
shares of Parent Common Stock to be issued in the Merger
including any registration required under the Exchange Act.
For a period of two (2) years following the Effective Time,
Parent will utilize its commercially reasonable efforts to
remain a Section 12(g) reporting company in compliance with
and current in its reporting requirements under the Securities
Exchange Act of 1934, as amended.
4.16 TARGET AUDIT AND REVIEW. As soon as practicable after the date
hereof, Parent shall, at Target's sole cost and expense, cause
its independent accounting firm (the "ACCOUNTANT") to (i)
audit the financial statements of Target for the years ending
January 31, 2005 and January 31, 2006, and issue to Parent and
Target an audit report with respect thereto in accordance with
the auditing standards of the Public Company Accounting
Oversight Board (the "PCAOB"), and (ii) review the financials
statements of Target for the period February 1, 2006 through
and including April 30, 2006 in accordance with the review
standards of the PCAOB (clauses (i) and (ii) are referred to
herein as the "TARGET AUDIT"). Target shall, and shall cause
its independent accounting firm to, cooperate with and timely
provide information to, the Accountant to enable the Target
Audit to be conducted and completed as soon as reasonably
practicable. Notwithstanding any portion of the foregoing to
the contrary, in the event that this Agreement is terminated
for any reason other than breach by Target or the
Stockholders, Parent shall, following such termination and
within thirty (30) days of its receipt from Target of the
Accountant's invoice, reimburse Target for fifty percent (50%)
of the Accountant's fees and expenses incurred by Target in
connection with the Target Audit.
4.17 TARGET STOCKHOLDERS AGREEMENT. Prior to the Effective Time,
Target and the Stockholders shall terminate the Target
Stockholders Agreement.
4.18 STOCKHOLDER LOCK-UP. At the Closing, the Stockholders will
executed a lock-up agreement in a form acceptable to Parent
(the "LOCK-UP AGREEMENT"), with respect to all shares of
Parent Common Stock to be acquired in the Merger, pursuant to
which each Stockholder shall agree that, for a period of
twenty-four (24) months following the Closing, such
Stockholder will not, directly or indirectly, (i) offer, sell,
assign, transfer, pledge or otherwise dispose of any of such
Stockholder's shares of Parent Common Stock, or (ii) enter
into any hedging, swap, short
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sale or other similar transactions with respect to any such
shares, provided, however, each such Lock-Up Agreement will
permit (A) during any period after the first twelve (12)
months following the Closing, the transfer by any Stockholder
of up to 50,000 shares of Parent Common Stock in any 90-day
period (the "DRIBBLE OUT"), (B) the transfer, immediately
following the Closing, of an aggregate of 125,000 shares of
Parent Common Stock to specified employees and advisors of
Target (provided such persons execute lock-up agreements
containing the same terms and conditions applicable to the
Stockholders, including proportionate Dribble Out), (C) the
transfer of shares of Parent Common Stock to family members,
trusts and/or other entities for purposes of estate planning
(provided such recipients execute lock-up agreements
containing the same terms and conditions applicable to the
Stockholders, including proportionate Dribble Out).
4.19 TAXES.
(a) Without limiting the generality of Section 4.1(b),
with respect to the fiscal year ended January 31,
2006, Target shall properly complete and file all
income Tax Returns on or before the Closing Date, and
shall properly complete and file all other Tax
Returns that are required to be filed on or prior to
the Closing Date. All such Tax Returns shall be true
and correct in all material respects and shall be
completed in accordance with applicable law. Target
will pay, or withhold and pay to the appropriate Tax
Authority, all Taxes required to be paid, or withheld
and paid, on or prior to the Closing Date.
(b) The Stockholders, at their expense, shall prepare, or
cause to be prepared, and file, or cause to be filed,
all Tax Returns of Target, for all Tax periods ending
on or before the Closing Date which are filed after
the Closing Date. The Stockholder's Representative
shall submit written drafts of such Tax Returns to
Parent for its review and comment at least fifteen
(15) days prior to due date of any such Tax Return.
Parent shall casue the Surviving Company to timely
pay with the filing of such Tax Returns all amounts
to be paid therewith, to the extent that such Taxes
were accrued or reserved for on the April 30 Balance
Sheet or incurred and accrued or reserved for in the
ordinary course of business since the April 30
Balance Sheet Date through the Closing Date.
(c) Target, Surviving Company, Parent and the
Stockholders shall cooperate fully, as and to the
extent reasonably requested by the other parties, in
connection with the filing of Tax Returns pursuant to
this Section 4.19 and any audit, litigation or other
proceeding with respect to Taxes. Such cooperation
shall include the retention and the provision of
records and information by the Surviving Company and
Parent 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. Parent shall cause the
Surviving Company to (i) retain all books and records
in its possession with respect to Tax matters
pertinent to Target relating to any Tax periods
beginning before the Closing Date until the
expiration of the statute of limitations of the
respective Tax periods, and to abide by all record
retention obligations imposed by law or by any Tax
Authority, and (ii) give the Stockholders'
Representative reasonable written notice prior to
transferring, destroying or discarding any such books
and records and, if the Stockholders' Representative
so requests, Parent of the Surviving Company, as
applicable, shall allow the Stockholders'
Representative to take possession of such books and
records.
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4.20 RELEASE OF GUARANTIES. Each of Target, the Stockholders and
Parent shall use its commercially reasonable efforts to (a)
cause each Stockholder (and his wife, if applicable) who is a
guarantor of obligations to Target's commercial bank secured
lender to be released from all liability under the credit
facility of Target with such lender (in effect as of the date
hereof) and all other obligations of Target to such lender,
and (b) secure the release of each Stockholder (and his wife,
if applicable) who is a guarantor or surety of any other
liability or obligation of Target set forth on Schedule 4.20.
4.21 PRE-CLOSING FINANCIAL STATEMENTS; CLOSING BALANCE SHEET. At
least five (5) days prior to the Closing, Target shall deliver
to Parent and Merger Sub unaudited financial statements as at
the last day of the calendar month that is closest to the
thirtieth (30th) day prior to the anticipated Closing Date
(including a balance sheet and statement of operations but
excluding a cash flow statement) (the "PRE-CLOSING FINANCIAL
STATEMENTS"). The Pre-Closing Financial Statements will (a) be
correct and complete and consistent with the books and records
of Target, (b) have been prepared in accordance with GAAP
(except for the failure to accrue deferred rents on a current
basis and the absence of a statement of cash flow and notes)
applied on a consistent basis throughout the period indicated,
and (c) present fairly the financial condition of Target as of
the date thereof and its results of operations for the period
indicated therein. As soon as practicable following the
Closing Date, and in any event within forty-five (45) days
thereof, the Stockholders shall cause, at their expense, a
balance sheet as of the close of business on the Closing Date
(the "CLOSING BALANCE SHEET") to be prepared and delivered to
Parent and reflecting thereon all balance sheet items as of
such time consistent with the presentation of line items
included in the balance sheets of the Target Financial
Statements and the Pre-Closing Financial Statements inclusive
of all outstanding liabilities accrued or reserved for as
stated liabilities in the ordinary course of business since
the April 30 Balance Sheet Date. The Closing Balance Sheet
shall (x) fairly present the financial condition of Target
immediately prior to giving effect to the transactions
contemplated by this Agreement, (y) be prepared in accordance
with GAAP (except for the failure to accrue deferred rents on
a current basis and the absence of footnotes) and (z) be
prepared on a consistent basis with the balance sheets
included in the Target Financial Statements and the
Pre-Closing Financial Statements. As promptly as practicable
after receipt by Parent of the Closing Balance Sheet, and in
any event within forty-five (45) days thereof, Parent shall
cause the Accountant or another third party independent
registered accountant to (i) review the Closing Balance Sheet,
the work papers used in the preparation of the Closing Balance
Sheet and the financial books and records of Target and (ii)
deliver a report to Parent (A) confirming or disputing whether
the liabilities stated on the Closing Balance Sheet (other
than those included on the April 30 Balance Sheet) including
liabilities for Taxes were incurred and accrued or reserved
for in the ordinary course of business from the April 30
Balance Sheet Date through the Closing Date, (B) confirming or
disputing whether the liabilities stated on the Closing
Balance Sheet (other than those included on the April 30
Balance Sheet) including liabilities for Taxes were propertly
recorded as liabilities of Target in accordance with GAAP,
and/or (C) identifying any material items or omissions that,
in its professional opinion, should or should not be included
in the Closing Balance Sheet. Promptly after receipt, Parent
shall deliver the accountant's report to the Stockholders'
Representative. If any dispute(s) are set forth therein,
Parent and the Stockholders' Representative shall attempt to
resolve and settle the dispute(s) in writing within thirty
(30) days. If they are unsuccessful, the disputed matter(s)
will be submitted to a mutually agreed upon third party
independent registered accountant (and if they cannot agree to
a third party independent registered accountant, one shall be
selected by the mutual agreement of counsel to Parent and
counsel to the Stockholders' Representative), whose
determination will be final and binding upon the parties, and
non-appealable or reviewable by judicial process.
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ARTICLE 5
CONDITIONS TO THE MERGER
5.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER.
The respective obligations of each party to consummate the
transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Closing of each of the
following conditions, which to the maximum extent permitted by
law may be waived in a written agreement of Target and Parent
(for itself or Merger Sub) (each such condition is solely for
the benefit of the parties hereto and may be waived without
notice, liability or obligation to any Person):
(a) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No
temporary restraining order, preliminary or permanent
injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation
of the Merger shall be in effect, nor shall any
proceeding brought by a Governmental Entity seeking
any of the foregoing be pending. No action taken by
any Governmental Entity, and no statute, rule,
regulation or order shall have been enacted, entered,
enforced or deemed applicable to the transactions
contemplated by this Agreement, which makes the
consummation of the transactions contemplated by this
Agreement illegal.
(b) GOVERNMENTAL APPROVALS. Parent and Target and their
respective Subsidiaries shall have timely obtained
from each Governmental Entity all approvals, waivers
and consents, if any, necessary for consummation of,
or in connection with, the transactions contemplated
hereby.
5.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF TARGET. The
obligations of Target to consummate the transactions
contemplated hereby shall be subject to the satisfaction at or
prior to the Closing of each of the following conditions, any
of which may be waived, in writing, by Target (each such
condition is solely for the benefit of Target and may be
waived in its sole discretion without notice, liability or
obligation to any Person):
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of
the representations and warranties made by each of
Parent and Merger Sub in this Agreement that is
qualified by reference to materiality or Material
Adverse Effect shall be true and correct, and each of
the other representations and warranties made by each
of Parent and Merger Sub in this Agreement shall by
true and correct in all material respects, in each
case as of the date of this Agreement and, subject to
the additional disclosure contained in any update to
the Parent Disclosure Letter, at and as of the
Closing as if made at such time(except in any case
that representations and warranties that expressly
speak as of a specified date or time need only be
true and correct as of such specified date or time).
Each of Parent and its Subsidiaries shall have
performed and complied in all material respects with
all covenants, obligations and conditions of this
Agreement required to be performed and complied with
by it at or prior to the Closing.
32
(b) RECEIPT OF CLOSING DELIVERIES. Target and/or the
Stockholders shall have received each of the
agreements, instruments and other documents required
to have been delivered to Target and/or the
Stockholders at or prior to the Closing as set forth
in EXHIBIT B.
(c) NO MATERIAL ADVERSE CHANGE. There shall not have
occurred any event or condition of any character that
has had or is reasonably likely to have a Material
Adverse Effect on Parent since the date of this
Agreement.
(d) RELEASE OF CREDIT FACILITY GUARANTY. The Stockholders
and their wives, as applicable, shall be released
from all liability and obligations relating to
Target's secured credit facility and all other
obligations of Target to the secured credit facility
lender.
5.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER
SUB. The obligations of Parent and Merger Sub to consummate
the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Closing of each of the
following conditions, any of which may be waived, in writing,
by Parent (each such condition is solely for the benefit of
Parent and Merger Sub and may be waived by Parent in its sole
discretion without notice, liability or obligation to any
Person):
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. Each of
the representations and warranties made by Target in
this Agreement that is qualified by reference to
materiality or Material Adverse Effect shall be true
and correct, and each of the other representations
and warranties made by Target in this Agreement shall
be true and correct in all material respects, in each
case as of the date of this Agreement and, subject to
the additional disclosure contained in any update to
the Parent Disclosure Letter, at and as of the
Closing as if made at that time (except in any case
that representations and warranties that expressly
speak as of a specified date or time need only be
true and correct as of such specified date or time.
Target shall have performed and complied in all
material respects with all covenants, obligations and
conditions of this Agreement required to be performed
and complied with by it at or prior to the Closing.
(b) RECEIPT OF CLOSING DELIVERIES. Parent shall have
received each of the agreements, instruments and
other documents required to have been delivered to
Parent and Merger Sub at or prior to the Closing as
set forth in EXHIBIT B.
(c) INJUNCTIONS OR RESTRAINTS ON CONDUCT OF BUSINESS. No
temporary restraining order, preliminary or permanent
injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Parent's
ownership, conduct or operation of the business of
Target, following the Effective Time shall be in
effect, nor shall any suit, investigation, request
for additional information, action or proceeding
before any Governmental Entity seeking any of the
foregoing, seeking to obtain from Parent or Target or
any of their respective Affiliates in connection with
the Merger any damages, or seeking any other relief
that following the Merger, in the sole judgment of
Parent, could reasonably be expected to materially
limit or restrict the ability of Parent and/or its
Subsidiaries including the Surviving Company to own
and conduct both (i) the assets and businesses owned
and conducted by Parent and/or its Subsidiaries prior
to the Merger and (ii) the assets and businesses
owned and conducted by Target prior to the Merger, be
pending or threatened.
33
(d) NO MATERIAL ADVERSE CHANGE. There shall not have
occurred any event or condition of any character that
has had or is reasonably likely to have a Material
Adverse Effect on Target since the date of this
Agreement.
(e) STOCKHOLDER LOCK-UP. The Stockholders shall each have
executed a Lock-Up Agreement.
(f) TARGET AUDIT. At least five (5) days prior to the
Effective Time, Parent shall have received a report
from the Accountant evidencing the completion of the
Target Audit.
(g) COMPLETION OF DUE DILIGENCE. Parent and its Board of
Directors shall have approved the results of Parent's
due diligence investigation and evaluation of the
Target and its business, including the approval of
any review of the Target Disclosure Letter, as
updated through the Closing, and approval of the
Pre-Closing Financial Statements.
(h) FINANCING. Parent shall have obtained financing
adequate to comply with its obligations in the Merger
and to operate the business of the Surviving Company
after the Effective Time, the amount of gross
proceeds from which will be not less than $36,000,000
and which shall be on terms acceptable to Parent in
its sole discretion.
ARTICLE 6
TERMINATION, AMENDMENT AND WAIVER
6.1 TERMINATION. At any time prior to the Effective Time, this
Agreement may be terminated:
(a) by mutual written consent duly authorized by the
respective boards of directors of Parent (or a
committee thereof) and Target;
(b) by either Parent or Target, if the Closing shall not
have occurred on or before September 30, 2006 (the
"TERMINATION DATE"); PROVIDED, HOWEVER, that the
right to terminate this Agreement under this Section
6.1(b) shall not be available to any party whose
breach of this Agreement has resulted in the failure
of the Closing to occur on or before the Termination
Date;
(c) by either Target or Parent, if any permanent
injunction or other order of a court or other
competent Government Entity preventing the
consummation of the transactions contemplated by this
Agreement shall have become final and nonappealable;
(d) by Parent, if Target shall have breached any
representation, warranty or covenant contained herein
that would result in the failure of any of the
conditions set forth in Section 5.1 or 5.3(a) to be
satisfied and such breach shall not have been cured
within ten days after receipt by Target of written
notice of such breach (PROVIDED, HOWEVER, that no
such cure period shall be available or applicable to
any such breach which by its nature cannot be cured);
PROVIDED, FURTHER, that the termination right under
this Section 6.1(d) shall not be available to Parent
if Parent is at that time in material breach of this
Agreement;
34
(e) by Target, if Parent or Merger Sub shall have
breached any representation, warranty or covenant
contained herein that would result in the failure of
any conditions set forth in Section 5.1 or 5.2(a) to
be satisfied and such breach shall not have been
cured within 10 days after receipt by Parent of
written notice of such breach (PROVIDED, HOWEVER,
that no such cure period shall be available or
applicable to any such breach which by its nature
cannot be cured); PROVIDED, FURTHER, that the right
to terminate this Agreement under this Section 6.1(e)
shall not be available to Target if Target is at that
time in material breach of this Agreement;
(f) by Parent, by providing written notice to the Target
at any time if the Parent shall have advised the
Target in writing that the conditions set forth in
SECTIONS 5.3(F), (G), OR (H) are not reasonably
likely to be satisfied; or
(g) by either Parent or Target if it is determined by tax
counsel to such party that the Merger will not
qualify as a reorganization under Section 368(a) of
the Code.
6.2 EFFECT OF TERMINATION.
(a) If this Agreement is terminated in accordance with
Section 6.1(a), 6.1(b) after the satisfaction of all
of the conditions in Sections 5.3(f), (g) and (h), or
6.1(c), there shall be no liability or obligation on
the part of Parent, Merger Sub or Target or their
respective officers, directors, stockholders or
Affiliates under this Agreement, except for the
reimbursement of fees and expenses to Target pursuant
to Section 4.16, after payment of which this
Agreement shall forthwith become void.
(b) If this Agreement is terminated in accordance with
Section 6.1(b) prior to the satisfaction of all of
the conditions in Sections 5.3(f), (g) and (h), or
6.1(f) or (g), or by Target pursuant to Section
6.1(e), then as Target's sole and exclusive remedy
and as liquidated damages, Parent shall pay to
Target, within five (5) business days of such
termination, an amount equal to $50,000 plus
reimbursement for fees and expenses pursuant to
Section 4.16.
(c) If this Agreement is terminated by Parent in
accordance with Section 6.1(d), (A) as a result of a
breach by Target or the Stockholders of the
provisions of Section 4.4, or (B) as a result of the
refusal of Target or the Stockholders to consummate
the Merger, then as Parent's and Merger Sub's sole
and exclusive remedy and as liquidated damages,
Target shall pay Parent, within five (5) business
days of such termination, an amount equal to
$300,000.
(d) If this Agreement is terminated by Parent in
accordance with Section 6.1(d), for any reason other
than as set forth in clauses (A) and (B) of Section
6.2(c), then as Parent's and Merger Sub's sole and
exclusive remedy and as liquidated damages, Target
shall pay Parent, within five (5) business days of
such termination, an amount equal to $50,000.
(e) Notwithstanding the provisions of Section 6.2(a), but
subject to the other provisions of this Section 6.2,
each party hereto shall remain liable for any
breaches of this Agreement prior to its termination;
and the Confidentiality Agreement and the provisions
of Sections 4.13 and 6.2 and ARTICLE 8 shall remain
in full force and effect and survive any termination
of this Agreement.
35
6.3 AMENDMENT. Subject to the provisions of applicable law, the
parties hereto may amend this Agreement at any time in
accordance with an instrument in writing signed on behalf of
each of the parties hereto. Subject to the provisions of
applicable law, Parent and the Stockholders' Representative
(on behalf of all of the Stockholders) may cause this
Agreement to be amended at any time after the Effective Time
by execution of an instrument in writing signed on behalf of
Parent and the Stockholders' Representative (on behalf of all
of the Stockholders).
6.4 EXTENSION; WAIVER. Any party hereto may, to the extent legally
allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any
inaccuracies in the representations and warranties made to
such party herein or in any document delivered pursuant
hereto, and (c) waive compliance with any of the agreements or
conditions for the benefit of such party contained herein. At
any time after the Effective Time, the Stockholders'
Representative and Parent may, to the extent legally allowed,
(i) extend the time for the performance of any of the
obligations or other acts of the other, (ii) waive any
inaccuracies in the representations and warranties made to
Parent (in the case of a waiver by Parent) or made to Target
(in the case of a waiver by the Stockholders' Representative)
herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for
the benefit of Parent or Merger Sub (in the case of a waiver
by Parent) or made to Target (in the case of a waiver by the
Stockholders' Representative). Any agreement on the part of a
party hereto or the Stockholders' Representative to any such
extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Without
limiting the generality or effect of the preceding sentence,
no delay in exercising any right under this Agreement shall
constitute a waiver of such right, and no waiver of any breach
or default shall be deemed a waiver of any other breach or
default of the same or any other provision in this Agreement.
ARTICLE 7
INDEMNIFICATION
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
(a) The representations and warranties made by Target in
this Agreement or in any other document required to
be delivered in accordance with any provision of this
Agreement shall survive the Closing and remain in
full force and effect until the second anniversary of
the Effective Time. Notwithstanding the preceding
sentence, the representations and warranties made by
Target in Section 2.9 and 2.16 shall survive until
the expiration of the applicable statute of
limitations, and the representations and warranties
made by Target in Sections 2.2, 2.3, 2.17 and 2.18
shall survive indefinitely. The representations and
warranties made by Parent and Merger Sub in this
Agreement or in any other documents required to be
delivered to Target in accordance with any provision
of this Agreement shall survive the Closing and
remain in full force and effect until the second
anniversary of the Effective Time, except the
representations and warranties contained in Sections
3.3, 3.4, 3.9 and 3.15 shall survive indefinitely.
(b) Each covenant, agreement and other provision in this
Agreement or any certificate or document delivered
pursuant hereto will survive for the relevant statute
of limitations period, unless a different period is
expressly contemplated herein or thereby (including,
without limitation, covenants, agreements and other
provisions which by their terms contemplate
performance following the Closing).
36
(c) Indemnification under Sections 7.2(a) and (b) and
Sections 7.3(a), (b) and (c) will survive for the
relevant statute of limitations period.
7.2 INDEMNIFICATION PROVISIONS FOR PARENT'S BENEFIT. Subject to
the limitations in this ARTICLE 7, the Stockholders, which are
all of the stockholders of Target immediately prior to the
Effective Time, agree to indemnify and hold harmless Parent
and the Surviving Company and their respective officers,
directors, agents and employees, subsidiaries, directors and
employees of subsidiaries, and each person, if any, who
controls or may control Parent and the Surviving Company
within the meaning of the Securities Act (each of the
foregoing, a "PARENT INDEMNIFIED PERSON") from and against any
and all actual losses, liabilities, damages, claims, suits,
settlements, third party costs and expenses, including costs
of investigation, settlement, and defense and reasonable legal
fees, court costs, and any interest costs or penalties
(collectively, "LOSSES") arising out of any of the following:
(a) TAXES. All Taxes of Target (except with respect to,
and to the extent of, Taxes for which a liability is
accrued or reserved for as a stated liability in the
April 30 Balance Sheet, and Taxes accrued or reserved
for in the ordinary course of business since April
30, 2006 relating to the Target's operations after
such date and through the Closing Date), including,
without limitation, the following: (i) any and all
Taxes of Target (except with respect to, and to the
extent of, Taxes for which a liability is accrued or
reserved for as a stated liability in the April 30
Balance Sheet, and Taxes accrued or reserved for in
the ordinary course of business since April 30, 2006
relating to the Target's operations after such date
and through the Closing Date) with respect to all
taxable periods of Target ending on or prior to the
Closing Date, (ii) any and all Taxes resulting from
any breach of the representations and warranties
contained in Section 2.9 hereof; (iii) any and all
Taxes imposed on Target solely by reason of being or
having been a member of (or a predecessor thereof) an
affiliated, consolidated, combined or unitary group
on or prior to the Closing, pursuant to Treasury
Regulation Section 1.1502-6(a) (or any predecessor or
successor thereto or any analogous or similar
provision under state, local or foreign law), or
otherwise; and (iv) any out-of-pocket costs or
expenses (including reasonable legal and accounting
fees) incurred in connection with a claim in respect
to any of the foregoing.
(b) THIRD-PARTY CLAIMS. Any and all claims (including
claims for penalties and interest), demands, causes
of action or proceedings against Target (whether
instituted against Target or the Surviving Company as
successor in interest to Target) by parties other
than a Parent Indemnified Person, whether arising
before or after the Closing but relating solely to
facts, events or circumstances in existence or
occurring on or prior to the Closing Date, including,
without limitation, matters disclosed in the Target
Disclosure Letter, except (i) to the extent accrued
or reserved for as a stated liability on the April 30
Balance Sheet, (ii) liabilities, obligations and
commitments incurred and accrued or reserved for in
the ordinary course of business after April 30, 2006
relating to Target operations and which are not in
violation of this Agreement, and (iii) future
obligations under contracts, leases, or licenses
incurred in the ordinary course of business.
37
(c) BREACHES. Without limiting or being in any manner
limited by the foregoing, any breach of any
representation, warranty, covenant or agreement made
by Target in this Agreement, the Target Disclosure
Letter, any exhibit or schedule to this Agreement or
any other document delivered to Parent or Merger Sub
by Target or the Stockholders in accordance with any
provision of this Agreement. In determining the
amount of any Losses in respect to any breach of any
representation or warranty, any materiality or
Material Adverse Effect qualification contained in
such representation or warranty will in all respects
be ignored.
All references to the April 30 Balance Sheet shall mean the April 30
Balance Sheet as amended by the Target Audit.
7.3 INDEMNIFICATION PROVISIONS FOR TARGET INDEMNIFIED PERSONS.
Subject to the limitations in this ARTICLE 7, Parent agrees to
indemnify and hold harmless the Stockholders and Target's
respective officers, directors, agents and employees (each of
the foregoing, a "TARGET INDEMNIFIED PERSON") from and against
any and all Losses arising out of any of the following:
(a) TAXES. Any Taxes of Target (i) accrued or reserved
for as a stated liability on the April 30th Balance
Sheet, (ii) accrued or reserved for in the ordinary
course of business since April 30, 2006 relating to
the Target's operations after such date and through
the Closing Date, (iii) or the Surviving Company
incurred after the Closing Date relating to periods
after the Closing Date, to the extent arising from
facts, events or circumstances occurring after the
Closing Date, or (iv) or the Surviving Company
relating to the period on or prior to the Closing
Date based upon a Tax election made after the Closing
by Parent or the Surviving Company.
(b) THIRD-PARTY CLAIMS. Any and all claims (including
claims for penalties and interest), demands, causes
of action or proceedings against any of the
Stockholders relating to (i) any liability or
obligation of Target accrued or reserved as a stated
liability on the April 30th Balance Sheet, (ii)
liabilities, obligations and commitments incurred and
accrued or reserved for in the ordinary course of
business by Target after April 30, 2006 and which are
not in violation of this Agreement, (iii) future
obligations under Target contracts, leases and
licenses incurred in the ordinary course of business,
and (iv) facts, events or circumstances occurring
after the Closing Date relating to Target or the
Surviving Company.
(c) GUARANTIES. Any liability or obligation of a
Stockholder as a guarantor or surety as to the
payment or performance of obligations by Target under
Target's existing credit facility or any other
guaranty liability or obligation of Target set forth
on Section 4.20 of the Target Disclosure Letter.
(d) BREACHES. Without limiting or being in any manner
limited by the foregoing, any breach of any
representation, warranty, covenant or agreement made
by Parent in this Agreement, the Parent Disclosure
Letter, any exhibit or schedule to this Agreement or
any other document delivered to Target in accordance
with any provision of this Agreement. In determining
the amount of any Losses in respect to any breach of
any representation or warranty, any materiality or
Material Adverse Effect qualification contained in
such representation or warranty will in all respects
be ignored.
38
7.4 INDEMNIFICATION CLAIM PROCEDURES.
(a) If any Action is commenced in which any Parent
Indemnified Person or Target Indemnified Person (each
an "INDEMNIFIED PARTY") is a party that may give rise
to a claim for indemnification against any
indemnifying party (an "INDEMNIFICATION CLAIM") then
such Indemnified Party will promptly give written
notice to the indemnifying party and will give the
indemnifying party such information with respect
thereto as the indemnifying party may reasonably
request. Failure to notify the indemnifying party
will not relieve the indemnifying party of any
liability that it may have to the Indemnified Party,
except to the extent the defense of such Action is
materially prejudiced by the Indemnified Party's
failure to give such notice. For purposes hereof,
"ACTION" means any action, appeal, petition, plea,
charge, complaint, claim, suit, demand, litigation,
arbitration, mediation, hearing, inquiry,
investigation or similar event, occurrence, or
proceeding.
(b) In connection with any Indemnification Claim, the
Indemnified Party may defend with counsel of its
choice against the Indemnification Claim in any
manner it may deem appropriate and the indemnifying
party may participate in such defense with counsel of
its choice at its sole expense; provided, however, if
the indemnifying party acknowledges its
responsibility with respect to such Indemnification
Claim, then it shall have the sole right to defend
the Indemnification Claim with counsel of its choice
at its expense unless the Indemnified Party would be
materially prejudiced by not participating in the
defense, in which case the Indemnified Party shall be
entitled to participate in the defense of the
Indemnification Claim with counsel of its choice at
its sole expense without any right of indemnification
from the indemnifying party. The Indemnified Party
may not settle any such Indemnification Claim without
the written consent of the indemnifying party, which
consent will not be withheld unreasonably.
(c) If the Stockholders' Representative consents to any
settlement, neither the Stockholders' Representative
nor any Stockholder shall have any power or authority
to object to the amount or validity of any claim by
or on behalf of any Indemnified Party for indemnity
with respect to such settlement.
7.5 LIMITATIONS ON INDEMNIFICATION LIABILITY; FORM OF PAYMENT.
(a) WITH RESPECT TO CLAIMS BY THE PARENT INDEMNIFIED
PERSONS. Any claims the Parent Indemnified Persons
make under this ARTICLE 7 will be limited as follows:
(i) CEILING. Each Stockholder's aggregate
liability for Losses incurred under this
Agreement shall be $1.8 million (inclusive
of 1/3 of the Escrow Fund); except with
respect to Losses arising from any breach of
Section 2.2 or 2.3 in which case each
Stockholder's aggregate liability will not
exceed the value of the Merger Consideration
received by him, provided that the
limitations contemplated hereby will not be
applicable with respect to Sections 7.2(a)
and (b) or instances of fraud by Target or
the Stockholders.
(ii) BASKET/THRESHOLD. The Stockholders will have
no liability for Losses incurred under this
Agreement unless and until the aggregate of
such Losses exceeds $200,000 (the "PARENT
INDEMNIFIED PERSONS THRESHOLD AMOUNT") and
then only for Losses in excess of the Parent
Indemnified Persons Threshold Amount, except
for Losses incurred under Section 7.2(a),
7.2(b) (with respect to matters set forth on
the Target Disclosure Letter), or instances
of fraud by Target or the Stockholders for
which there shall be no basket or threshold;
39
(iii) SEVERAL LIABILITY. Each Stockholder shall be
severally liable for Losses under this
Article 7 in an amount equal to 1/3 of such
Losses subject to the other limitations set
forth in this Section 7.5(a) and except with
respect to instances of fraud by Target or
the Stockholders.
(iv) FORM OF PAYMENT. Each Stockholder shall have
the right, in his sole and absolute
discretion, to make payment for Losses 1/2
in cash and 1/2 in Parent Common Stock based
upon the value thereof set forth in Section
7.5(d).
(b) WITH RESPECT TO CLAIMS BY THE TARGET INDEMNIFIED
PERSONS. Any claims the Target Indemnified Persons
make under this ARTICLE 7 will be limited as follows:
(i) CEILING. The Parent's aggregate liability
for Losses incurred under this Agreement
shall be $500,000, except with respect to
(A) a breach of Section 3.3, 3.4 or 3.9
which results in the forfeiture of any of
the Merger Consideration received by the
Stockholders in which case the aggregate
liability of Parent for Losses arising
therefrom shall be limited to the amount of
the Merger Consideration actually forfeited
(with a value of Parent Common Stock based
upon the value set forth in Section 7.5(d))
plus the reasonable costs and expenses
incurred by the Target Indemnified Persons,
or (B) a breach of Section 3.5 arising as a
result of a filing by Parent prior to the
Closing of a Parent SEC Document wherein any
executive officer or director of Parent had
actual knowledge that information contained
therein contained an untrue statement of a
material fact, or omitted to state any
material fact necessary in order to make the
statements contained therein, in the light
of the circumstances under which made, not
misleading, in which case the aggregate
liability of Parent for Losses shall be
$5,400,000 LESS the aggregate value of the
shares of Parent Common Stock issued in the
Merger based upon the average closing price
of a share of Parent Common Stock, as quoted
or listed on its then applicable quotation
system or exchange, during the twenty
trading days immediately preceding the two
(2) year anniversary of the earlier of (each
the "ANNOUNCEMENT DATE") (X) the date that
corrected information is filed with the SEC,
or (Y) the date that such corrected
information is otherwise disseminated to the
public, PROVIDED, HOWEVER, (x) no
Stockholder shall be permitted to file,
serve, initiate or otherwise make any claim
as a result of the matters set forth in this
clause (B) until the expiration of the two
(2) year anniversary of the Announcement
Date, (y) the applicable statute of
limitations with respect to any such claim
will be tolled during such two (2) year
period plus an additional year thereafter,
and (z) as a condition to any recovery of a
Loss by a Stockholder pursuant hereto, if
any, such Stockholder shall be required to
deliver to Parent for cancellation a number
of shares of Parent Common Stock equal to
the value of the amount of Loss recovered
hereby (based on the value set forth in
Section 7.5(d)); PROVIDED, HOWEVER, that the
limitations contemplated hereby will not be
applicable with respect to Sections 7.3(a),
(b) and (c) or instances of fraud by Parent.
(ii) BASKET/THRESHOLD. The Parent will have no
liability for Losses incurred under this
Agreement unless and until the aggregate of
Losses exceeds $200,000 (the "TARGET
INDEMNIFIED PERSONS THRESHOLD AMOUNT") and
then only for Losses in excess of the Target
Indemnified Persons Threshold Amount, except
for Losses incurred under Section 7.3(a) or
(c) for which there shall be no basket or
threshold.
40
(c) No Indemnifying Stockholder shall have any
right of contribution, right of indemnity or
other right or remedy against Parent or the
Surviving Company in connection with any
indemnification obligation or any other
liability to which such Indemnifying
Stockholder may become subject under or in
connection with this Agreement.
(d) For the purposes of this ARTICLE 7, each
share of Parent Common Stock that
constitutes Merger Consideration shall be
valued at the Parent Closing Price as
adjusted for any Share Adjustment.
(e) Notwithstanding anything contained herein to
the contrary, the amount of any Loss
suffered by an Indemnified Party under this
Agreement shall be reduced by the amount, if
any, of the recovery or benefit (net of
reasonable expenses incurred in obtaining
such recovery or benefit) the Indemnified
Party shall have received or otherwise
enjoyed with respect thereto from any other
person (including any recovery under any
insurance policies); and if such a recovery
or benefit is received or enjoyed by an
Indemnified Party after it receives payment
under this Agreement or the Escrow Agreement
with respect to a Loss, then a refund equal
in the aggregate amount of the recovery, net
of reasonable expenses and Taxes or other
costs incurred in obtaining recovery, shall
be made promptly to the indemnifying party.
7.6 ESCROW. Parent may, in its sole and absolute discretion,
access the Escrow Fund, in accordance with the provisions of
the Escrow Agreement, to apply the cash and share amounts held
therein against any Losses incurred, and pursuant to which
Parent would be entitled to indemnification, hereunder.
7.7 STOCKHOLDERS' REPRESENTATIVE.
(a) At the Effective Time, ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ shall be
constituted and appointed as the Stockholders'
Representative. The Stockholders' Representative
shall be the exclusive agent for and on behalf of the
Stockholders to: (i) give and receive notices and
communications to or from Parent (on behalf of itself
or any other Indemnified Person) and/or the Escrow
Agent relating to this Agreement, the Escrow
Agreement or any of the transactions and other
matters contemplated hereby or thereby, (ii) to the
extent that the Escrow Fund is used to indemnify
Parent, authorize deliveries to Parent of amounts
from the Escrow Fund in satisfaction of claims
asserted by Parent (on behalf of itself or any other
Indemnified Person, including by not objecting to
such claims), (iii) object to claims in accordance
with the provisions hereof and the Escrow Agreement,
(iv) consent or agree to, negotiate, enter into
settlements and compromises of, and demand mediation
and arbitration and comply with orders of courts and
awards of arbitrators with respect to, claims, and
(v) take all actions necessary or appropriate in the
judgment of the Stockholders' Representative for the
accomplishment of the foregoing, in each case without
having to seek or obtain the consent of any Person
under any circumstance. The Stockholders'
Representative shall be the sole and exclusive means
of asserting or addressing any of the above, and no
former stockholder shall have any right to act on its
own behalf with respect to any such matters, other
than any claim or dispute against the Stockholders'
Representative. The Person serving as the
Stockholders' Representative may be
41
replaced from time to time by the Stockholders upon
not less than ten days' prior written notice to
Parent. No bond shall be required of the
Stockholders' Representative, and the Stockholders'
Representative shall receive no compensation for his
services. Notices or communications to or from the
Stockholders' Representative shall constitute notice
to or from each of the stockholders and option
holders of Target immediately prior to the Effective
Time.
(b) The Stockholders' Representative shall not be liable
to any Stockholder for any act done or omitted
hereunder as the Stockholders' Representative while
acting in good faith and any act done or omitted in
accordance with the advice of counsel or other expert
shall be conclusive evidence of such good faith. The
Stockholders shall severally indemnify the
Stockholders' Representative and hold him harmless
against any loss, liability or expense incurred
without gross negligence or bad faith on the part of
the Stockholders' Representative and arising out of
or in connection with the acceptance or
administration of his duties hereunder.
(c) The Stockholders' Representative shall have
reasonable access to information about Target and the
reasonable assistance of Target's former officers and
employees for purposes of performing his duties and
exercising its rights hereunder, PROVIDED that the
Stockholders' Representative shall treat
confidentially and not disclose any nonpublic
information from or about Target to anyone (except on
a need to know basis to individuals who agree to
treat such information confidentially).
7.8 ACTIONS OF THE STOCKHOLDERS' REPRESENTATIVE. Any notice or
communication given or received by, and any decision, action,
failure to act within a designated period of time, agreement,
consent, settlement, resolution or instruction of, the
Stockholders' Representative that is within the scope of the
Stockholders' Representative's authority under ARTICLE 7 shall
constitute a notice or communication to or by, or a decision,
action, failure to act within a designated period of time,
agreement, consent, settlement, resolution or instruction of
all Stockholders and shall be final, binding and conclusive
upon each such stockholder; and each Indemnified Person and
the Escrow Agent, if applicable, shall be entitled to rely
upon any such notice, communication, decision, action, failure
to act within a designated period of time, agreement, consent,
settlement, resolution or instruction as being a notice or
communication to or by, or a decision, action, failure to act
within a designated period of time, agreement, consent,
settlement, resolution or instruction of, each and every such
stockholder or option holder. Except for their gross
negligence and willful misconduct, each Indemnified Person and
the Escrow Agent are unconditionally and irrevocably relieved
from any liability to any person for any acts done by them in
accordance with any such notice, communication, decision,
action, failure to act within a designated period of time,
agreement, consent or instruction of the Stockholders'
Representative.
ARTICLE 8
GENERAL PROVISIONS
8.1 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered
personally or sent via facsimile (with confirmation of
receipt) to the parties hereto at the following address (or at
such other address for a party as shall be specified by like
notice):
42
(i) if to Parent or Merger Sub, to:
Blue Holdings, Inc.
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ ▇▇▇.
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇ ▇▇▇▇, Chief Executive Officer
Facsimile No.: ▇▇▇-▇▇▇-▇▇▇▇
Telephone No.: ▇▇▇-▇▇▇-▇▇▇▇
with a copy (which shall not constitute notice) to:
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & Markiles, LLP
▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇., ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Facsimile No.: ▇▇▇-▇▇▇-▇▇▇▇
Telephone No.: ▇▇▇-▇▇▇-▇▇▇▇
(ii) if to Target, to:
Long Rap, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
Telephone No.: ▇▇▇-▇▇▇-▇▇▇▇
E-mail: ▇▇▇▇▇@▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇
with a copy (which shall not constitute notice) to:
Silver ▇▇▇▇▇▇▇▇ & ▇▇▇▇ L.L.P.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
Facsimile No.: ▇▇▇-▇▇▇-▇▇▇▇
Telephone No.: ▇▇▇-▇▇▇-▇▇▇▇
(iii) if to the Stockholders' Representative, to:
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇
▇▇▇▇ #▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Telephone No.: ▇▇▇-▇▇▇-▇▇▇▇
E-mail: ▇▇▇▇▇@▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇
43
with a copy (which shall not constitute notice) to:
Silver ▇▇▇▇▇▇▇▇ & ▇▇▇▇ L.L.P.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
Facsimile No.: ▇▇▇-▇▇▇-▇▇▇▇
Telephone No.: ▇▇▇-▇▇▇-▇▇▇▇
8.2 INTERPRETATION. When a reference is made in this Agreement to
a section or article, such reference shall be to a section or
article of this Agreement, unless otherwise clearly indicated
to the contrary. Whenever the words "include," "includes" or
"including" are used in this Agreement they shall be deemed to
be followed by the words "without limitation." The words
"hereof," "herein" and "herewith" and words of similar import
shall, unless otherwise stated, be construed to refer to this
Agreement as a whole and not to any particular provision of
this Agreement, and annex, article, section, paragraph,
exhibit and schedule references are references to the annex,
articles, sections, paragraphs, exhibits and schedules of this
Agreement, unless otherwise specified. The plural of any
defined term shall have a meaning correlative to such defined
term and words denoting any gender shall include all genders
and the neuter. Where a word or phrase is defined herein, each
of its other grammatical forms shall have a corresponding
meaning. Any reference to a party to this Agreement or any
other agreement or document contemplated hereby shall include
such party's successors and permitted assigns. A reference to
any legislation or to any provision of any legislation shall
include any modification, amendment, re-enactment thereof, any
legislative provision substituted therefore and all rules,
regulations and statutory instruments issued or related to
such legislation. The headings and captions in this Agreement
are for reference only and shall not be used in the
construction or interpretation of this Agreement. The parties
have participated jointly in the negotiation and drafting of
this Agreement. If any ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties, and no presumption or burden
of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provision of this Agreement.
No prior draft of this Agreement nor any course of performance
or course of dealing shall be used in the interpretation or
construction of this Agreement. No parole evidence shall be
introduced in the construction or interpretation of this
Agreement unless the ambiguity or uncertainty at issue is
plainly discernable from a reading of this Agreement without
consideration of any extrinsic evidence. Although the same or
similar subject matters may be addressed in different
provisions of this Agreement, the parties intend that, except
as readily apparent on the face of the Agreement or as
expressly provided in this Agreement, each such provision
shall be read separately, be given independent significance
and not be construed as limiting any other provision of this
Agreement (whether or not more general or more specific in
scope, substance or content). The doctrine of election of
remedies shall not apply in constructing or interpreting the
remedies provisions of this Agreement or the equitable power
of a court considering this Agreement or the transactions
contemplated hereby.
44
8.3 DEFINITIONS.
For purposes of this Agreement:
(a) an "AFFILIATE," when used with reference to any
Person, means another Person that directly or
indirectly, through one or more intermediaries,
controls, is controlled by or is under common control
with such first Person;
(b) any reference to an event, change, condition or
effect being "MATERIAL" with respect to any Person
means any event, change, condition or effect that is
material in relation to the condition (financial or
otherwise), properties, assets (including intangible
assets), liabilities, business, operations or results
of operations of such Person and its Subsidiaries,
taken as a whole;
(c) a "MATERIAL ADVERSE EFFECT" with respect to any
Person means any effect that is materially adverse to
the condition (financial or otherwise), properties,
assets, liabilities, business, operations or results
of operations of such Person and its Subsidiaries,
taken as a whole;
(d) "IN THE ORDINARY COURSE OF BUSINESS," with respect to
any action, means such action is:
(i) consistent with the recent past practices of
such Person and is taken in the ordinary
course of business of such Person; and
(ii) not required to be authorized by the board
of directors of such Person;
(e) any reference to a Person's "KNOWLEDGE" means the
knowledge of such Person's officers and directors;
PROVIDED that such Persons shall be deemed to have
made reasonable inquiry of those employees, agents,
consultants or other Persons whom such officers and
directors reasonably believe would have knowledge of
the matters represented;
(f) a "PERSON" means any individual, firm, corporation,
partnership, company, limited liability company,
division, trust, joint venture, association,
Governmental Entity or other entity or organization;
(g) a "SUBSIDIARY" of any Person means another Person, an
amount of the voting securities, other voting
ownership or voting partnership interests of which is
sufficient to elect at least 50% of its board of
directors or other governing body (or, if there are
no such voting interests, 50% or more of the equity
interests of which) is owned directly or indirectly
by such first Person; and
8.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts (whether delivered by facsimile or otherwise),
each of which shall be considered one and the same instrument
and shall become effective when one or more counterparts have
been signed by each of the parties hereto and delivered to the
other parties hereto; it being understood that all parties
hereto need not sign the same counterpart.
45
8.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement
and the documents and instruments and other agreements
specifically referred to herein or delivered pursuant hereto,
including all the exhibits attached hereto, the Target
Disclosure Letter and the Parent Disclosure Letter, (a)
constitute the entire agreement among the parties with respect
to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among
the parties with respect to the subject matter hereof, except
for the Confidentiality Agreement, which shall continue in
full force and effect, and shall survive any termination of
this Agreement, in accordance with its terms, and (b) except
as provided herein are not intended to confer, and shall not
be construed as conferring, upon any Person other than the
parties hereto any rights or remedies hereunder.
8.6 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of
the parties (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.
8.7 SEVERABILITY. Any term or provision of this Agreement that is
held by a court of competent jurisdiction or arbitrator to be
invalid, void or unenforceable in any situation in any
jurisdiction shall not affect the validity or enforceability
of the remaining terms and provisions hereof or the validity
or enforceability of the invalid, void or unenforceable term
or provision in any other situation or in any other
jurisdiction. If the final judgment of such court or
arbitrator declares that any term or provision hereof is
invalid, void or unenforceable, the parties agree to reduce
the scope, duration, area or applicability of the term or
provision, to delete specific words or phrases, or to replace
any invalid, void or unenforceable term or provision with a
term or provision that is valid and enforceable and that comes
closest to expressing the original intention of the invalid or
unenforceable term or provision.
8.8 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of either party hereto in the
exercise of any right hereunder shall impair such right or be
construed to be a waiver of, or acquiescence in, any breach of
any representation, warranty or agreement herein, nor shall
any single or partial exercise of any such right preclude
other or further exercise thereof or of any other right. All
rights and remedies existing under this Agreement are
cumulative to, and not exclusive of, any rights or remedies
otherwise available.
8.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA, IRRESPECTIVE OF THE CHOICE OF LAWS
PRINCIPLES OF THE STATE OF CALIFORNIA, AS TO ALL MATTERS,
INCLUDING MATTERS OF VALIDITY, CONSTRUCTION, EFFECT,
ENFORCEABILITY, PERFORMANCE AND REMEDIES.
46
8.10 ENFORCEMENT. The parties agree that irreparable damage would
occur if any of the provisions of this Agreement were not
performed in accordance with their specific terms. Therefore,
the parties shall be entitled to specific performance of the
terms hereof, this being in addition to any other remedy to
which they are entitled under this Agreement, at law or in
equity.
[SIGNATURE PAGE FOLLOWS]
47
Each of Parent, Merger Sub, Target, the Stockholders and the
Stockholders' Representative have caused this Agreement to be executed and
delivered as of the date first written above.
BLUE HOLDINGS, INC.
By:____________________________________________
Name:__________________________________________
Title:_________________________________________
LR ACQUISITION CORPORATION
By:____________________________________________
Name:__________________________________________
Title:_________________________________________
LONG RAP, INC.
By:____________________________________________
Name:__________________________________________
Title:_________________________________________
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, AS
A STOCKHOLDER AND STOCKHOLDERS' REPRESENTATIVE
By:____________________________________________
Name:__________________________________________
STOCKHOLDERS:
-----------------------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
-----------------------------------------------
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
48
EXHIBIT A
FORM OF ESCROW AGREEMENT
EXHIBIT B
CLOSING DELIVERIES
PARENT AND MERGER SUB DELIVERIES:
1. a certificate, dated as of the Closing Date, executed on behalf of Parent
by a duly authorized officer of Parent to the effect that each of the
conditions set forth in Section 5.2(a) has been satisfied;
2. a certificate, dated as of the Closing Date, executed on behalf of Merger
Sub by a duly authorized officer of Merger Sub to the effect that each of
the conditions set forth Section 5.2(a) has been satisfied;
3. a copy of the Escrow Agreement duly executed by Parent and the Escrow
Agent;
4. a certificate of the secretary of Parent, attaching certified copies of its
certificate of incorporation, bylaws and its board resolutions approving
the transactions contemplated by this agreement;
5. a certificate of the secretary of Merger Sub, attaching certified copies of
its articles of incorporation, bylaws and its board and stockholder actions
approving the transactions contemplated by this agreement;
6. long form good standing certificate of Parent issued by the Secretary of
State of the State of Nevada and long form good standing certificate of
Merger Sub issued by the Department, each dated within five days of the
Closing Date;
7. issuance of Parent Common Stock and cash to the Escrow Agent;
8. an instruction letter to the transfer agent to issue the Parent Common
Stock portion of the Merger Consideration (less the shares to be delivered
into the Escrow Fund);
9. a letter agreement in a form mutually acceptable to the parties (the
"DIRECTOR LETTER"), providing, among other terms, that as soon as
practicable following the Closing, Parent shall use its commercially
reasonable efforts to appoint and/or to cause the appointment of a person
designated by the Stockholder Representative to be nominated and appointed
to the Board of Directors of Parent. Such designee shall be required to be
an independent director (as defined within the NASDAQ Marketplace Rules)
and shall be reasonably acceptable to the Governance and Nominating
Committee of the Board of Directors of Parent. The Director Letter shall
provide that (i) the designee will serve during the two (2) year period
following the Closing and during any period thereafter whereby the
Stockholders collectively hold at least five percent (5%) of the issued and
outstanding shares of the Common Stock of Parent, and (ii) the designee
will be recommended on any slate of directors recommended by the Board of
Directors of Parent and submitted to shareholders during the foregoing
period.
10. issuance of cash Merger Consideration to the Stockholders in immediately
available funds (less such Stockholder's pro-rata portion of all Target
Expenses and of the cash to be delivered in into the Escrow Fund); and
11. an executed copy of the Articles of Merger.
TARGET DELIVERIES:
1. a certificate, dated as of the Closing Date, executed on behalf of Target
by its Chief Executive Officer or Chief Financial Officer to the effect
that each of the conditions set forth Section 5.3(a) has been satisfied;
2. Employment Agreement, in substantially the form set forth in EXHIBIT C,
executed by the individuals listed on EXHIBIT C; which agreement will
provide for (i) salaries consistent with budgeted salaries previously
provided by Target, which contemplate salary increases as set forth
therein, (ii) a five (5) year term, and (iii) performance-based bonuses
acceptable to the relevant individual and to be approved by the
Compensation Committee of the Board of Directors of Parent.
3. Offer Letter, in substantially the form set forth in EXHIBIT D, executed by
the individuals listed on EXHIBIT D, each such letter of which will include
additional equity incentive compensation information applicable to the
relevant individual, to be mutually agreed by the parties prior to the
Closing and approved by the Compensation Committee of the Board of
Directors of Parent;
4. a certificate, dated as of the Closing Date, of the secretary of Target,
attaching copies of its articles of incorporation, bylaws, stock ledger,
board of directors actions and stockholders' actions in connection with the
transactions contemplated by this Agreement;
5. a long form good standing certificate issued by the Department within five
days of the Closing Date;
6. an executed copy of the Articles of Merger;
7. evidence of the novation or consent to assignment of any Person whose
novation or consent to assignment, as the case may be, may be required in
connection with the transactions contemplated by this Agreement under
contracts listed or described or that should have been listed or described
on Section 2.20 of the Target Disclosure Letter;
8. executed Director Letter by the Stockholders; and
9. executed Non-Competition Agreement in the form set forth on EXHIBIT E with
each Stockholder.
STOCKHOLDERS AND STOCKHOLDERS' REPRESENTATIVE DELIVERIES:
1. an executed copy of the Escrow Agreement
2. certificates for outstanding Target Capital Stock
3. evidence of termination of the Target Stockholders Agreement
EXHIBIT C
FORM OF EMPLOYMENT AGREEMENT
Persons intended to receive same:
1. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
2. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
3. ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
EXHIBIT D
FORM OF OFFER LETTER
Persons intended to receive same:
1. ▇▇▇▇ ▇▇▇▇▇▇▇▇▇
2. ▇▇▇ ▇▇▇▇▇▇
3. ▇▇▇▇▇▇ "▇▇▇▇▇" ▇▇▇▇▇▇▇
4. ▇▇▇▇ ▇▇▇▇▇▇▇▇▇
5. ▇▇▇▇▇ ▇▇
▇. ▇▇▇ ▇▇▇▇▇▇▇▇▇
7. Zac Ezrailson
8. ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇
9. ▇▇▇▇ ▇▇▇▇▇
10. Jacques Manga-Lobe
11. ▇▇▇▇▇▇ ▇▇▇▇
EXHIBIT E
FORM OF NON-COMPETITION AGREEMENT