AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made and
entered into effective as of April 24, 2000 (the "Agreement Date"), by and among
XXXXXXXXXXXXXX.XXX, INC., a Florida corporation ("Merchant"), INNOVONICS, INC.,
an Arizona corporation ("Target"), INNOVONICS ACQUISITION CORP., an Arizona
corporation that is a wholly-owned subsidiary of Merchant ("Newco"), and Xxxxxx
X. Xxxxx, individually and in his capacity as Target Stockholder Representative
(as defined in Section 1.5 below).
RECITALS
A. Target is developing and marketing proprietary products for
online authentication.
B. Merchant provides businesses with real-time credit card
processing, shopping cart services, online checking transactions and secure
hosting services.
C. The parties intend that, subject to the terms and conditions
hereinafter set forth, Newco will merge with and into Target in a reverse
triangular merger (the "Merger"), with Target to be the surviving corporation of
the Merger, all pursuant to the terms and conditions of this Agreement and the
applicable provisions of the Arizona Revised Business Corporation Act (the
"Arizona Law") and the applicable provisions of the Florida Business Corporation
Act (the "Florida Law"). The Merger is intended to be treated as a tax-free
reorganization pursuant to the provisions of Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "Code"), by virtue of the
provisions of Section 368(a)(2)(E) of the Code.
D. Upon the effectiveness of the Merger, the outstanding Common
Stock of Target will be converted into Common Stock of Merchant, except for
certain shares of Target's Common Stock currently held by Xxxxxx and Xxxxx
Xxxxx, which will continue to be held by them, all in the manner and on the
basis determined herein.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing premises and the
mutual representations, warranties, covenants and agreements herein contained,
the parties hereto do hereby agree as follows:
ARTICLE 1
PLAN OF REORGANIZATION
1.1 THE MERGER. Subject to the terms and conditions of this
Agreement, Newco and Target will execute Articles of Merger in substantially the
form attached hereto as Exhibit 1.1 and meeting the requirements of the Arizona
Law (the "Articles of Merger"), providing for the merger of Newco with and into
Target in a statutory merger in accordance with the terms and conditions of this
Agreement and the applicable provisions of the Arizona Law, with Target as the
surviving corporation, and with the Merger to be effective upon the filing of
the Articles of Merger with the Arizona Corporation Commission (the "Effective
Time").
1.2 CONVERSION OF SHARES.
1.2.1 CONVERSION OF NEWCO COMMON STOCK. The shares of the
Common Stock of Newco, no par value, which are issued and outstanding
immediately prior to the Effective Time shall be converted into and exchanged
for a total of 1,800,819 fully paid and non-assessable shares of the Common
Stock of Target (the "Surviving Corporation"), so that after giving effect to
such conversion and exchange, immediately following the Effective Time, 90.1% of
the outstanding shares of the Surviving Corporation will be held by Merchant and
the Retained Target Shares (as defined in Section 1.2.3 below) will represent
9.9% of the shares of the Surviving Corporation then outstanding.
1.2.2 CONVERSION OF TARGET COMMON STOCK. Each share of the
Common Stock of Target, no par value (the "Target Common Stock") issued and
outstanding immediately prior to the Effective Time (other than the Retained
Target Shares and the Dissenting Shares, as defined in Section 1.2.4 below)
will, by virtue of the Merger and at the Effective Time, and without any action
on the part of any holder thereof, be canceled and converted into the right to
receive a number of shares of validly issued, fully paid and non-assessable
Common Stock, $0.001 par value, of Merchant ("MRTO Common Stock"), determined in
accordance with the "Conversion Ratio," as defined below. The Conversion Ratio
is the quotient determined by dividing (i) 5,000,000 by (ii) the sum of (x) the
number of all shares of Target Common Stock outstanding immediately prior to the
Effective Time, minus (y) the Retained Target Shares, and (z) plus all shares of
Target Common Stock issuable (as determined immediately prior to the Effective
Time) upon the exercise of all outstanding Target Options (as defined in Section
1.3 below), but excluding the shares of Target Common Stock issuable on the
exercise of Target Options held by Xxxxxx Xxxxx and Xxxxxx Xxxxx (the
"Terminating Options") that will terminate as of the Closing (as defined in
Section 5.1 below) and any other Target Options not exercised prior to, and
which will terminate as of, the Closing. If there are no Dissenting Shares and
no Target Options are exercised prior to the Closing, and no Target Options
other than the Terminating Options terminate upon the Closing, then shares of
MRTO Common Stock would be issued on conversion of outstanding shares of Target
Common Stock as set forth in Schedule 2.2(a) attached hereto.
1.2.3 RETAINED TARGET SHARES. 197,870 shares of Target Common
Stock held by Xxxxxx and Xxxxx Xxxxx (the "Retained Target Shares") will remain
outstanding, unaffected by the Merger, and will be retained by Xxxxxx and Xxxxx
Xxxxx following the Effective Time. The Retained Target Shares will represent
9.9% of the shares of Target Common Stock issued and outstanding immediately
prior to the Effective Time.
1.2.4 DISSENTING SHARES. Holders of shares of Target Common
Stock who have complied with all requirements for perfecting dissenters' rights
as set forth in Sections 10-1321 and 10-1323 of the Arizona Law shall be
entitled to exercise rights with respect to the shares as to which such rights
have been perfected (the "Dissenting Shares"), to the extent provided in the
Arizona Law. Dissenting Shares will not be converted into shares MRTO Common
Stock in the Merger. Shares of Target Common Stock that are outstanding
immediately prior to the Effective Time and with respect to which dissenters'
rights under the Arizona Law may be, but have not yet been, perfected, will, if
and when such dissenters' rights can no longer be legally perfected or exercised
under the Arizona Law, be converted into shares of MRTO Common Stock as provided
in Section 1.2.2 above.
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1.2.5 FRACTIONAL SHARES. No fractional shares of MRTO Common
Stock will be issued in connection with the Merger, but in lieu thereof each
holder of Target Common Stock who would otherwise be entitled to receive a
fraction of a share of MRTO Common Stock will receive from Merchant, promptly
after the Effective Time, an amount of cash equal to the per share market value
of MRTO Common Stock based on the average closing sale price of MRTO Common
Stock as quoted on the principal market or exchange on which shares of MRTO
Common Stock are then traded, during the twenty day period immediately preceding
(but not including) the Closing Date (as defined in Section 5.1 below),
multiplied by the fraction of a share of MRTO Common Stock to which such holder
would otherwise be entitled. The fractional interests of each holder of Target
Common Stock (each a "Target Stockholder" and collectively the "Target
Stockholders") will be aggregated so that no Target Stockholder will receive
cash in an amount equal to or greater than the value of one full share of MRTO
Common Stock.
1.3 TREATMENT OF TARGET OPTIONS. Target has issued certain options
and warrants exercisable for the purchase of shares of Target Common Stock, as
further identified in Section 2.2 below and Schedule 2.2 attached hereto (the
"Target Options"). To the extent the Target Options are exercised prior to the
Effective Time, the Target Common Stock issued with respect thereto shall be
converted into shares of MRTO Common Stock at the Effective Time, in accordance
with the provisions of Section 1.2 above. To the extent any of the Target
Options are not exercised, and do not expire or terminate as of the Effective
Time, each such Target Option will, by virtue of the Merger and at the Effective
Time, and without further action on the part of the holder thereof, be converted
into an option or warrant (an "MRTO Option") to purchase the number of shares of
MRTO Common Stock determined by multiplying the number of shares of Target
Common Stock subject to the Target Option by the Conversion Ratio, at an
exercise price per share of MRTO Common Stock equal to the exercise price per
share of such Target Option immediately prior to the Effective Time divided by
the Conversion Ratio and rounded up to the nearest cent. If the foregoing
calculation would result in an MRTO Option being exercisable for a fraction of a
share of MRTO Common Stock, then the number of shares of MRTO Common Stock
subject to such MRTO Option will be rounded down to the nearest whole number,
with no cash being payable for such fractional share. The term and
exercisability of each MRTO Option will be the same as for the Target Option
from which it was converted. A new option or warrant, evidencing the number of
shares of MRTO Common Stock and the exercise price per share applicable to each
MRTO Option, will be issued in substitution and exchange for each converted
Target Option. Assuming that no Target Options are exercised prior to the
Closing, and no Target Options other than the Terminating Options terminate upon
the Closing,, effective as of the Closing, MRTO Options exercisable for shares
of MRTO Common Stock will be held by the persons indicated in Schedule 2.2(a)
attached hereto.
1.4 ADJUSTMENTS FOR CAPITAL CHANGES. If prior to the Merger,
Merchant or Target recapitalizes either through a split-up of its outstanding
shares into a greater number, or through a combination of its outstanding shares
into a lesser number, or reorganizes, reclassifies or otherwise changes its
outstanding shares into the same or a different number of shares of another
class, or declares a dividend on its outstanding shares payable in shares or
securities
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convertible into shares, the number of shares of MRTO Common Stock into which
shares of Target Common Stock are to be converted, and the number of shares of
Target Common Stock that will constitute Retained Shares, will be adjusted
appropriately so as to maintain the proportionate interests of the holders of
the stockholders and optionholders of Target and Merchant in the outstanding
equity of Merchant immediately following the Merger as contemplated by this
Agreement.
1.5 ESCROW AGREEMENT. Pursuant to the provisions of an Escrow
Agreement to be entered into on or before the Closing Date in the form attached
hereto as Exhibit 1.5 (the "Escrow Agreement") among Merchant, Target, the
Target Stockholder Representative (as defined below) and the person or entity
designated in the Escrow Agreement as the escrow agent (the "Escrow Agent"),
Merchant will withhold 10% of the shares of MRTO Common Stock to be issued to
the Target Stockholders pursuant to this Article 1 (the "Escrow Shares") and
will deposit the Escrow Shares (which will be represented by a certificate or
certificates issued in the name of the Target Stockholders or the Target
Stockholder Representative) with the Escrow Agent pursuant to the terms of the
Escrow Agreement, to be held by the Escrow Agent as collateral for, and an
exclusive source of payment of, the indemnification obligations arising under
Section 12.1 of this Agreement, pending release from escrow pursuant to the
terms of the Escrow Agreement. The Escrow Shares will be held by the Escrow
Agent from the Effective Time until the first anniversary of the Effective Time
(the "Escrow Release Date"). In the event the Merger is approved by the Target
Stockholders as provided herein, the Target Stockholders shall, without any
further act of any Target Stockholder, be deemed to have consented to and
approved (i) the use of the Escrow Shares as collateral for Target's
indemnification obligations under Section 12.1 of this Agreement in the manner
set forth in the Escrow Agreement, (ii) the appointment of Xxxxxx Xxxxx (who
together with any successor or successors, whether acting singly or in concert,
is referred to herein as the "Target Stockholder Representative") as the legal
representative, attorney-in-fact and agent of the Target Stockholders (other
than holders of Dissenting Shares) to: do any and all things and execute all
documents and papers, for and on behalf of and in the names of such Target
Stockholders in connection with the execution and performance of the Escrow
Agreement; and take any and all actions and make any decisions required or
permitted to be taken by or on behalf of the Target Stockholders pursuant to the
terms of the Escrow Agreement (including, without limitation, the exercise of
the power to: authorize delivery to Merchant or any other indemnified persons of
Escrow Shares in satisfaction of claims by any such indemnified persons; agree
to, accept, negotiate, and enter into settlements and compromises of and demand
arbitration and comply with orders of courts and awards of arbitrators with
respect to such claims; raise and resolve any indemnification claim pursuant to
the Escrow Agreement and Article 12 of this Agreement; amend or waive any terms
of the Escrow Agreement; and take all actions necessary in the judgment of the
Target Stockholder Representative for the accomplishment of the foregoing),
(iii) that, in performing the functions specified in this Agreement and the
Escrow Agreement, the Target Stockholder Representative will not be liable to
any Target Stockholder in the absence of gross negligence or willful misconduct
and further, that the Target Stockholders will jointly and severally defend and
hold harmless the Target Stockholder Representative for any acts or omissions in
performing the functions specified in this Agreement and the Escrow Agreement
and will pay any out-of-pocket costs and expenses reasonably incurred by the
Target Stockholder Representative in connection with actions taken pursuant to
the terms of the Escrow Agreement pro rata in proportion to the Target
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Stockholders' respective percentage interests in the Escrow Shares, (iv) payment
of the out-of-pocket expenses of the Target Stockholder Representative in
accordance with the terms of the Escrow Agreement, and (v) all of the other
terms, conditions and limitations in the Escrow Agreement. A successor or
additional person may be appointed to serve as the Target Stockholder
Representative by persons who held a majority of the shares of Target Common
Stock outstanding immediately prior to the Effective Time.
1.6 EFFECTS OF THE MERGER. At the Effective Time, the parties
agree that the following shall occur, whether by operation of law or by action
of any party hereto:
(a) The separate existence of Newco will cease and Newco will
be merged with and into Target, with Target being the Surviving Corporation,
pursuant to the terms of this agreement and the Articles of Merger.
(b) The Articles of Incorporation and Bylaws of Target as in
effect immediately prior to the Effective Time will be the Articles of
Incorporation and Bylaws of the Surviving Corporation.
(c) All shares of Newco Common Stock that are outstanding
immediately prior to the Effective Time will be converted into shares of Target
Common Stock as provided in Section 1.2.1 above, all shares of Target Common
Stock (other than the Retained Target Shares and Dissenting Shares) that are
outstanding immediately prior to the Effective Time will be converted into a
right to receive shares of MRTO Common Stock as provided in Section 1.2.2 above,
and each Target Option other than a Terminating Option that is outstanding
immediately prior to the Effective Time will be converted into an MRTO Option,
as provided in Section 1.3 above.
(d) The officers and directors of the Surviving Corporation
will be the officers and directors of Newco as in place immediately prior to the
Effective Time.
(e) The Merger will, from and after the Effective Time, have
all of the effects provided by applicable law, including, without limitation,
the Arizona Law.
1.7 PRIVATE PLACEMENT; CERTIFICATE LEGENDS. The shares of MRTO
Common Stock to be issued pursuant to this Article 1 shall not have been
registered and shall be characterized as "restricted securities" under the
federal securities laws, and under such laws such shares may be resold without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), only in certain limited circumstances. Each certificate evidencing shares
of MRTO Common Stock to be issued pursuant to this Article 1 shall bear a legend
reading substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT
BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION WITHOUT AN EXEMPTION UNDER THE SECURITIES ACT OR
AN OPINION OF LEGAL COUNSEL REASONABLY ACCEPTABLE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
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and any legends required by state securities laws. Specifically, the shares of
MRTO Common Stock issuable in connection with the Merger will not be eligible
for public resale under Rule 144 for a period of one year following the Merger;
provided, however, that Article 9 below provides for certain registration rights
with respect to such shares.
1.8 TAX-FREE REORGANIZATION. The parties intend to adopt this
Agreement as a tax-free plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(1)(A) of the Code, by virtue of
the provisions of Section 368(a)(2)(E) of the Code. For purposes of this Section
1.8, Merchant and Target agree to report the transactions contemplated in this
Agreement in a manner consistent with the reorganization treatment they intend
and will not take any position inconsistent therewith in any tax return, refund
claim, litigation or otherwise unless required to do so by any governmental
authority. The shares of MRTO Common Stock and the MRTO Options to be issued in
the Merger will be issued solely in exchange for the Target Common Stock and
Target Options pursuant to this Agreement, and no transaction other than the
Merger represents, provides for or is intended to be an adjustment to the
consideration paid for the Target Common Stock and Target Options. Except for
the cash paid in lieu of fractional shares, Merchant will pay no consideration
that could constitute "other property" within the meaning of Section 356 of the
Code for shares of Target Common Stock or Target Options in the Merger.
Merchant, Newco and Target will use all reasonable best efforts prior to the
Effective Time to cause the Merger to qualify as a reorganization under Section
368(a)(1)(A) of the Code.
1.9 PURCHASE ACCOUNTING. The parties intend that the Merger be
treated as a purchase for accounting purposes.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF TARGET
2.1 REPRESENTATIONS AND WARRANTIES; COMPLETION OF TARGET
DISCLOSURE SCHEDULE. Target makes no representations or warranties to Merchant
in this Agreement regarding the status or business of Target. However, a
condition to the Closing, as set forth in Section 7.13 below, is that Target
provide to Merchant representations and warranties in the form attached hereto
as EXHIBIT 2, subject to such modifications and limitations as may be set forth
in the disclosure schedule (the "Target Disclosure Schedule") to be prepared by
Target, which will be attached to, and which will constitute a part of, the
representations and warranties to be provided by Target to Merchant at or prior
to the Closing.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF MERCHANT AND NEWCO
Each of Merchant and Newco, where applicable, hereby represents and
warrants to Target that, except as set forth in Merchant's Disclosure Schedule
attached hereto as Exhibit 3 ("Merchant's Disclosure Schedule"), each of the
following representations, warranties and statements is true and correct.
3.1 CORPORATE ORGANIZATION; ETC. Merchant is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida, and Newco is a corporation duly organized, validly existing and in good
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standing under the laws of the State of Arizona. Each of Merchant and Newco has
the corporate power and authority to carry on its business as now being
conducted and to own the properties and assets it now owns.
3.2 AUTHORIZATION, ETC. Each of Merchant and Newco has full
corporate power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby. Each of Merchant and Newco has taken all
action required to authorize the execution and delivery of this Agreement and
the transactions contemplated hereby, and this Agreement is a valid and binding
agreement of Merchant and Newco, enforceable in accordance with its terms. No
filing, authorization or approval, governmental or otherwise, is necessary or
required to be made or obtained to enable Merchant and Newco, as applicable, to
enter into, and to perform its obligations under, this Agreement, except for (a)
the filing of the Articles of Merger with the Arizona Corporation Commission,
the filing of such officers' certificates and other documents as are required to
effectuate the Merger under the Arizona Law and the filing of appropriate
documents with relevant authorities of states other than Arizona and Florida in
which any parties hereto are qualified to do business, if any, and (b) such
filings as may be required to comply with federal and state securities laws in
connection with the issuance of shares of MRTO Common Stock as contemplated
hereby, which filings will be timely made by Merchant.
3.3 NO VIOLATION. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
violate any provisions of the Certificate of Incorporation or Bylaws of Merchant
or Newco, or violate, or be in conflict with, or constitute a default under, or
cause the acceleration of the maturity of any debt or obligation pursuant to,
any agreement, contract or commitment to which Merchant or Newco is a party or
by which Merchant or Newco is bound, or violate any statute, law, regulation,
judgment, decree, order, regulation or rule of any court or governmental
authority.
3.4 NEWCO. Newco has been formed for the sole purpose of effecting
the Merger and, except as contemplated by this Agreement, Newco has not
conducted any business activities and does not have any material liabilities or
obligations. The sole stockholder of Newco is Merchant, and Merchant, as the
sole shareholder of Newco, has adopted this agreement in accordance with the
requirements of the Arizona Law.
3.5 DULY ISSUED SHARES. The shares of MRTO Common Stock to be
issued pursuant to the Merger will be duly and validly issued, fully paid and
non-assessable.
3.6 FORM 10-KSB. Merchant has heretofore delivered to Target and
the Target Stockholders copies of its Annual Report on Form 10-KSB for the year
ended October 31, 1999 (the "Form 10-KSB") which contains audited financial
statements for Merchant as of and for the year ended October 31, 1999 (the
"Merchant Financial Statements"). The Merchant Financial Statements and the
notes thereto are true, complete and accurate and fairly present the assets,
liabilities, financial condition and results of operations of Merchant as at the
respective dates thereof, all in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, and consistent
with the books and records of Merchant.
3.7 FILINGS WITH THE SEC. Merchant has made all filings with the
Securities and Exchange Commission ("SEC") that it has been required to make
under the Securities Act and the Securities Exchange Act of 1934, as amended
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(the "Exchange Act") (collectively the "Public Reports"). Each of the Public
Reports has complied with all applicable requirements of the Securities Act and
the Exchange Act in all material respects. None of the Public Reports, as of
their respective dates, contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. All financial statements set forth in the Public Reports present
fairly the financial condition of Merchant as of and for the periods ending on
their respective dates.
3.8 EVENTS SUBSEQUENT TO MOST RECENT PUBLIC REPORT. Since the end
of the period covered by the Merchant Financial Statements, except as disclosed
in the Form 10-KSB, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of Merchant, and Merchant has not entered into any agreement, or
otherwise operated, other than in the ordinary course of business.
3.9 NO UNDISCLOSED LIABILITIES, ETC. To the best of its knowledge,
Merchant has no liabilities or obligations of any nature (absolute, accrued,
contingent or otherwise) which were not fully reflected or reserved against in
the Merchant Financial Statements, except for liabilities and obligations
incurred in the ordinary course of business and consistent with past practice
since the date thereof, and the reserves reflected in the Merchant Financial
Statements are adequate, appropriate and reasonable.
3.10 LITIGATION. Except as disclosed in the Form 10-KSB, there is
no pending or threatened action, suit, inquiry, proceeding or investigation by
or before any court or governmental or other regulatory or administrative agency
or commission pending or threatened against or involving Merchant, or which
questions or challenges the validity of this Agreement or any action taken or to
be taken by Merchant pursuant to this Agreement or in connection with the
transactions contemplated hereby; nor is there any valid basis for any such
action, proceeding or investigation. To the best of its knowledge, Merchant is
not in default under or in violation of, nor is there any valid basis for any
claim of default under or violation of, any agreement, contract, commitment or
restriction to which it is a party or by which it (or its assets) is bound.
Merchant is not in violation of, or in default with respect to, any provision of
its Articles of Incorporation or Bylaws, or any law, rule, regulations, order,
judgment, or decree; nor is Merchant required to take any action in order to
avoid such violation or default. Neither Merchant nor any of its assets is
subject to any judgment, order or decree entered in any lawsuit or proceeding
which may have an adverse effect on Merchant's business or financial condition,
or on its ability to acquire any property or conduct its business in any area.
3.11 BROKERS. Except as set forth in Merchant's Disclosure
Schedule, Merchant has not engaged, consented to or authorized any broker,
finder, investment banker or other third party to act on its behalf, directly or
indirectly, as a broker or finder in connection with the transactions
contemplated by this Agreement, and Merchant agrees to indemnify the Target
Stockholders against, and to hold them harmless from, any claim for brokerage or
similar commissions or other compensation that may be made against Target
Stockholders by any third party in connection with the transactions contemplated
hereby.
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3.12 DISCLOSURE. The representations and warranties contained in
this Section 3 and in Merchant's Disclosure Schedule do not contain any untrue
statement of a material fact or omit to state any material facts necessary in
order to make the statements and information contained in this Section 3 and in
Merchant's Disclosure Schedule not misleading.
ARTICLE 4
CERTAIN COVENANTS OF THE PARTIES
4.1 SATISFACTION OF CONDITIONS. Each of the parties hereto will
use its commercially reasonable best efforts to take all actions and to do all
things necessary, proper, or advisable in order to consummate and make effective
the transactions contemplated by this Agreement (including satisfaction, but not
waiver, of the closing conditions set forth in Articles 6 and 7 below).
4.2 CONSENTS. Each party will use its commercially reasonable best
efforts to obtain, prior to the Closing, all consents required of such party, in
the opinion of any party's legal counsel, to the consummation of the
transactions contemplated hereby.
4.3 SUPPLEMENTS TO SCHEDULES; ADVICE OF CHANGES. Each party hereto
will promptly advise the other parties hereto in writing (a) of any event
occurring subsequent to the Agreement Date that would render any representation
or warranty of such party contained in this Agreement, if made on or as of the
date of such event or the Closing Date, untrue or inaccurate in any material
respect (however, no notice need be provided regarding any event or action
contemplated or permitted under this Agreement) and (b) of the occurrence of any
material adverse change in such party's business, operations or financial
condition.
4.4 OTHER TRANSACTIONS. From the date of this Agreement until the
Closing or Termination Date, Target will not enter into any discussions
concerning, or approve or recommend any merger, consolidation, disposition of
all or substantially all of its business, properties or assets, acquisition or
other business combination, or proposal therefor, or furnish or cause to be
furnished any information concerning its business, properties or assets to any
party in connection with any such transaction, other than the transactions
contemplated by this Agreement, without the disclosure of any such transaction
to Merchant.
4.5 REMEDIES. In the event of the breach or threatened breach of
any of the terms or conditions of this Agreement by any party hereto, then any
party adversely affected by such breach shall be entitled, if it so elects, to
institute and prosecute any proceedings in any court of competent jurisdiction
either in law or equity, for such relief as it deems appropriate including,
without limiting the generality of the foregoing proceedings, damages for any
breach of this Agreement, specific performance thereof by the breaching party,
or enjoining the breaching party from performing services for any other person,
firm or corporation. In the event of any such the prevailing party shall be
entitled to recover its reasonable attorney's fees in the prosecution of such
action, in addition to any other relief to which it may be entitled.
4.6 ACCESS TO INFORMATION. Until the Closing Date, each party
hereto will provide each other party, and its agents, with reasonable access to
its management and officers and material information regarding such party,
including
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without limitation, material information relating to such party's business and
financial condition. Each party will cause its accountants to cooperate with
each other party's accountants in making available all financial information
reasonably requested to evaluate such party's financial statements.
ARTICLE 5
CLOSING MATTERS
5.1 THE CLOSING. Subject to termination of this Agreement as
provided below, the closing of the transactions contemplated by this Agreement
(the "Closing") will take place at the offices of Merchant, 0000 X. Xxxxx
Xxxxxxx, Xxxx Xxxxx, Xxxxxxx 00000, on or before April 30, 2000 or such other
day as mutually agreed by the parties (the "Closing Date"), but not later than
May 31, 2000 (the "Termination Date"), assuming the satisfaction or waiver,
prior to the Closing of all of the conditions thereto as set forth in this
Agreement. Concurrently with the Closing, the Articles of Merger will be filed
in the offices of the Arizona Corporation Commission.
5.2 EXCHANGE OF CERTIFICATES, ETC.
(a) As of the Effective Time, all shares of Target Common
Stock other than the Retained Target Shares that are outstanding immediately
prior thereto will, by virtue of the Merger and without further action, cease to
exist, and all such shares will be converted into the right to receive from
Merchant the number of shares of MRTO Common Stock as set forth in Section 1.2,
subject to Sections 1.2.2, 1.2.4 and 1.2.5 hereof.
(b) As of the Effective Time, all shares of Newco Common Stock
that are outstanding immediately prior thereto will, by virtue of the Merger and
without further action, cease to exist, and all certificates representing such
shares will be surrendered to Target at the Closing and exchanged for
certificates representing a number of shares of Target Common Stock as set forth
in Section 1.2.1 hereof.
(c) At and after the Effective Time, each certificate
representing outstanding shares of Target Common Stock other than the Retained
Target Shares will represent the number of shares of MRTO Common Stock into
which such shares of Target Common Stock have been converted as set forth in
Section 1.2.2 hereof, and such shares of MRTO Common Stock will be deemed
registered in the name of the holder of such certificate. As soon as practicable
after the Effective Time, each holder of shares of Target Common Stock will
surrender (a) the certificates representing such shares (the "Target
Certificates") to Merchant for cancellation or (b) an affidavit of lost
certificate with appropriate indemnification (the "Affidavit") in form
reasonably satisfactory to Merchant. Promptly following the Effective Time and
receipt of the Target Certificates and/or Affidavit, Merchant will cause its
transfer agent to issue to such surrendering holder certificate(s) representing
the number of shares of MRTO Common Stock to which such holder is entitled
pursuant to Article 1 hereof, less such holder's pro rata share of the Escrow
Shares deposited into escrow as referenced in Section 1.5 hereof, and any cash
payable for any fractional shares under Section 1.2.5.
(d) After the Effective Time there will be no further
registration of transfers on the books of Target of Target Common Stock that was
outstanding immediately prior to the Effective Time. If, after the Effective
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Time, Target Certificates are presented for any reason, they will be cancelled
and exchanged as provided herein.
(e) Promptly after the Effective Time, Merchant will notify in
writing each holder of an outstanding Target Option of the conversion of such
Target Option into a MRTO Option, and of the number of shares, exercise price
and other terms relating to such MRTO Option as set forth in Section 1.3 hereof.
Merchant will also prepare option agreements reflecting the terms of the MRTO
Options, to be delivered to the holders of outstanding Target Options, in
exchange for the agreements reflecting the Target Options they currently hold.
5.3 OTHER ITEMS TO BE DELIVERED AT CLOSING. At the Closing, the
parties will deliver to the indicated parties the various certificates,
instruments and documents referenced in Articles 6 and 7 below, including
written confirmation of satisfaction of the various covenants and conditions
referenced in such Articles.
5.4 FURTHER ASSURANCES. After the Closing Date, each of the
parties hereto shall from time to time, at the request of any other party, and
without further cost or expense to requesting party, take such other actions as
a requesting party may reasonably request, in order to consummate the
transactions contemplated hereby. Without limiting the generality of the
foregoing, Merchant shall prepare or cause to be prepared the documents and
notices required for Target and Newco to comply with Section 10-1105 of the
Arizona Law.
ARTICLE 6
CONDITIONS TO OBLIGATIONS OF TARGET
Target's obligations hereunder are subject to the fulfillment or
satisfaction, on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Target):
6.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Merchant contained herein shall be in all material respects true
and accurate as of the date when made and at and as of the Closing as though
such representations and warranties were made at and as of such date, except for
changes expressly permitted or contemplated by terms of this Agreement, and
Target shall have received a certificate to such effect executed on behalf of
Merchant by its Chief Executive Officer and Chief Financial Officer.
6.2 PERFORMANCE. Merchant shall have performed and complied with
all agreements, obligations and conditions required by this Agreement to be
performed or complied with by it on or prior to the Closing.
6.3 INVESTIGATIONS; ETC. Neither any investigation of Merchant by
Target, nor Merchant's Disclosure Schedule or any supplement thereto provided by
Merchant, nor any other document delivered to Target by Merchant as contemplated
by this Agreement, shall have revealed any facts or circumstances which, in the
sole and exclusive judgment of Target, reflect in a material adverse way on the
financial condition, assets, liabilities (absolute, accrued, contingent or
otherwise), reserves, business, operations or prospects of Merchant.
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6.4 CONSENTS. The consents from third parties and government
agencies required to consummate the transactions contemplated hereby shall have
been obtained.
6.5 NO GOVERNMENTAL PROCEEDING OR LITIGATION. No suit, action,
investigation, inquiry or other proceeding by any governmental body or other
person or legal or administrative proceeding shall have been instituted or
threatened which questions the validity or legality of the transactions
contemplated hereby.
6.6 EXECUTION OF EMPLOYMENT AGREEMENTS. On or before the Closing
Date, Xxxxxx Xxxxx, Xxxxxx Xxxxx and Xxxxx Xxxxxxx shall have entered into
Employment Agreements with Target in a form approved by the signatories thereto
and Merchant. The employment agreement for Xx. Xxxxx will include the grant of
options to purchase 1,000,000 shares of Merchant's Common Stock, exercisable at
a price of $5.875 per share, with 200,000 of such options to vest immediately
and remaining 800,000 options to vest at a rate of 25% of the option shares
annually on the anniversary of each of the four years commencing from the date
of such agreement. The employment agreement for Xx. Xxxxx will include the grant
of options to purchase 80,000 shares of Merchant's Common Stock, exercisable at
a price of $5.875 per share, with 20,000 of such options to vest immediately and
remaining 60,000 options to vest at a rate of 25% of the option shares annually
on the anniversary of each of the four years commencing from the date of such
agreement. The employment agreement for Xx. Xxxxxxx will include the grant of
options to purchase 30,000 shares of Merchant's Common Stock, exercisable at a
price of $5.875 per share, to vest at a rate of 20% of the option shares
annually on the anniversary of each of the five years commencing from the date
of such agreement.
6.7 AVAILABILITY OF FUNDS. Merchant shall have obtained and be
holding $1,050,000 in cash (the "Cash Amount") and $2,500,000 in commitments for
cash investments in exchange shares of Merchant's Common Stock on terms
acceptable to Target (the "Cash Commitment"). Neither (i) the commitment of
Xxxxxx Private Equity, LLC to purchase up to $30,000,000 of Merchant's Common
Stock pursuant to an agreement dated January 5, 2000, nor (ii) any issuance of
or commitment for Merchant Common Stock granting the holder or prospective
holder thereof a right of redemption, put or similar right shall count toward
the Cash Amount or the Cash Commitment. At or prior to the Closing Date, the
Cash Amount shall be deposited into an account (the "Funding Account") with a
bank or other financial institution designated by Xxxxxx Xxxxx, which shall be
in the exclusive name of Target and may be drawn on only by Xxxxxx Xxxxx or a
representative he authorizes upon approval of Merchant's Chief Executive Officer
or Chief Financial Officer, which approval shall not be unreasonably withheld.
The Cash Amount may be used to permit Target to immediately satisfy Target's
obligations with respect to accrued salaries, credit card debts and other
corporate obligations, as listed on Exhibit 6.7 attached hereto in an amount
equal to $550,000; to make an initial payment on an application specific
integrated circuit, which has an anticipated total cost of $500,000 (an "ASIC");
and to fund a portion of Merchant's funding obligations set forth in Section
10.5(b).
6.8 ELECTION OF XXXXX AS DIRECTOR OF MERCHANT, AND AS DIRECTOR AND
OFFICER OF NEWCO. Xxxxxx Xxxxx shall have been elected to Merchant's Board of
Directors, as provided in Section 10.2 below. Xxxxxx Xxxxx shall also have been
elected as an officer and director of Newco, so that upon the Effective Time, he
will hold those positions with Newco as referenced in Section 10.7 below. The
other officers and directors of Newco, which will become the officers and
directors of the Surviving Corporation at the Effective Time, shall have been
approved by Xxxxxx Xxxxx.
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6.9 ESCROW AGREEMENT. The Escrow Agreement shall have been
executed and delivered by each of the parties named therein.
6.10 NO INJUNCTION. On the Closing Date there shall be no
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be consummated as so provided or imposing
any conditions on the consummation of the transactions contemplated hereby which
Target deems unacceptable in its sole discretion.
6.11 MATERIAL CHANGE. From the date of this Agreement to the
Closing Date, neither Merchant nor Target shall have suffered any unanticipated
material adverse change (whether or not such change is referred to or described
in any supplement to the Schedules) in its business, prospects, financial
condition, working capital, assets, liabilities (absolute, accrued, contingent
or otherwise), reserves or operations.
6.12 MINIMUM TRADING PRICE OF MERCHANT SHARES. The closing or last
sale price for the MRTO Common Stock shall not have dropped below $5.00 for any
trading day following the effective date of this Agreement and the Closing Date.
6.13 CORPORATE APPROVALS. The principal terms of this Agreement
shall have been approved and adopted by the Target Stockholders, as required by
the Arizona Law and Target's Articles of Incorporation and Bylaws. The principal
terms of this Agreement shall have also been approved and adopted by Merchant
and Newco by their respective Boards of Directors and as otherwise required by
the Florida Law and the Arizona Law.
6.14 WAIVER OF RIGHTS. Rainbow Technologies, Inc. shall have waived
in writing any rights it may have arising under that certain Master Funding and
Relationship Agreement dated as of April 30, 1996 regarding the acquisition of
outstanding shares or newly issued shares of Target, including all rights of
first refusal as described in such agreement.
6.15 OPINION OF COUNSEL. Merchant's counsel shall have delivered to
Target its opinion in a form reasonably approved by Target.
ARTICLE 7
CONDITIONS TO OBLIGATIONS OF MERCHANT
Each and every obligation of Merchant under this Agreement to be
performed on or before the Closing shall be subject to the satisfaction, on or
before the Closing, of each of the following conditions, unless waived in
writing by Merchant:
7.1 REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Target contained in this Agreement and to be delivered by Target
pursuant hereto or in connection with the transactions contemplated hereby shall
be true, complete and accurate as of the Closing Date. Merchant shall have
received a certificate to such effect executed on behalf of Target by its Chief
Executive Officer.
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7.2 PERFORMANCE. Target shall have performed and complied with all
agreements, obligations and conditions required by this Agreement to be
performed or complied with by it on or prior to the Closing.
7.3 INVESTIGATIONS; ETC. Neither any investigation of Target by
Merchant, nor Target's Disclosure Schedule nor any supplement thereto provided
by Target, nor any other document delivered to Merchant as contemplated by this
Agreement by Target, shall have revealed any facts or circumstances which, in
the sole and exclusive judgment of Merchant, reflect in a material adverse way
on the financial condition, assets, liabilities (absolute, accrued, contingent
or otherwise), reserves, business, operations or prospects of Target.
7.4 CONSENTS. The consents from third parties and government
agencies required to consummate the transactions contemplated hereby shall have
been obtained.
7.5 NO GOVERNMENT PROCEEDING OR LITIGATION. No suit, action,
investigation, inquiry or other proceeding by any governmental body or other
person or legal or administrative proceeding shall have been instituted or
threatened which questions the validity or legality of the transactions
contemplated hereby.
7.6 NO INJUNCTION. On the Closing Date there shall be no
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be consummated as so provided or imposing
any conditions on the consummation of the transactions contemplated hereby which
Merchant deems unacceptable in its sole discretion.
7.7 MATERIAL CHANGE. From the date of this Agreement to the
Closing Date, Target shall not have suffered any unanticipated material adverse
change (whether or not such change is referred to or described in any supplement
to the Schedules) in its business, prospects, financial condition, working
capital, assets, liabilities (absolute, accrued, contingent or otherwise),
reserves or operations.
7.8 OPINION OF COUNSEL. Target's counsel shall have delivered to
Merchant its opinion in a form reasonably approved by Merchant.
7.9 COVENANTS NOT TO COMPETE; AGREEMENTS NOT TO USE OR DISCLOSE
TRADE SECRETS. Such of the Target Stockholders and the officers, directors and
employees of Target as Merchant shall determine to be appropriate shall have
executed agreements restricting their ability to compete with Merchant or
Target, and restricting their right to disclose or use any information that is
confidential or proprietary to Merchant or Target, with such agreements to be in
a form approved by Merchant.
7.10 DISSENTING SHARES. The Dissenting Shares shall not constitute
more than 2% of the total number of shares of Target Common Stock outstanding
immediately prior to the Effective Time.
7.11 TARGET STOCKHOLDER APPROVAL. The proposed terms of this
Agreement, the Articles of Merger and the Merger shall have been duly and
validly approved
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and adopted by the requisite vote of the Target Stockholders, in accordance with
the provisions of the Arizona Law and Target's Articles of Incorporation and
Bylaws.
7.12 ESCROW AGREEMENT. Merchant shall have received a fully
executed counterpart of the Escrow Agreement.
7.13 REPRESENTATIONS AND WARRANTIES. Target shall have delivered to
Merchant a certificate executed by an officer of Target, certifying as to the
accuracy of the representations and warranties set forth in EXHIBIT 2 attached
hereto, subject to such modifications and qualifications as may be set forth in
the Target Disclosure Schedule to be prepared by Target and appended to such
representations and warranties.
ARTICLE 8
CONDUCT OF THE TARGET'S BUSINESS PENDING THE CLOSING
Pending the Closing and until the Termination Date, and except as
otherwise expressly consented to or approved by Merchant in writing:
8.1 CONDUCT OF BUSINESS. Target will carry on its business
diligently and substantially in the same manner as heretofore conducted, so that
at the Closing no representation or warranty of Target will be inaccurate, and
no covenant or agreement of Target will be breached. Except as otherwise agreed
by Merchant in writing, until the Closing, Target will use its best efforts to
preserve its business, to keep available the services of its present personnel,
to preserve in full force and effect the contracts, agreements, instruments,
leases, licenses, arrangements, and understandings of Target, and to preserve
the good will of their suppliers, customers, and others having business
relations with any of them.
8.2 AMENDMENTS. No change or amendment shall be made in the
charter documents of Target.
8.3 CAPITAL CHANGES; DIVIDENDS REDEMPTION. Target will not issue
or sell any additional shares of its capital stock or other securities, acquire
directly or indirectly, by redemption or otherwise, any such shares or split-up
any such capital stock, declare or pay any dividends thereon in cash, securities
or other property or make any other distribution with respect thereto, or grant
or enter into any options, warrants, calls or commitments of any kind with
respect thereto; provided that this covenant shall not be construed to restrict
Target from issuing shares of Target Common Stock on exercise of the Target
Options, or from accelerating the vesting provisions of any Target Options.
8.4 SUBSIDIARIES. Target will not organize any new subsidiary,
acquire any capital stock or other equity securities of any corporation,
partnership, or other entity or acquire any equity or ownership interest in any
business.
8.5 CERTAIN CHANGES. Target will not:
(a) Borrow or agree to borrow any funds or incur, or assume or
become subject to, whether directly or by way of guarantee or
otherwise, any obligation or liability (absolute or contingent), except
15
obligations and liabilities incurred in the ordinary course of business
and consistent with past practice;
(b) Pay, discharge or satisfy any claim, liability or
obligation (absolute, accrued, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of business
and consistent with past practice of liabilities or obligations
reflected or reserved against in the Financial Statements or incurred
in the ordinary course of business and consistent with past practice
since the date of the Financial Statements;
(c) Prepay any obligation having a fixed maturity of more than
90 days from the date such obligation was issued or incurred;
(d) Permit or allow any of its property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any
mortgage, pledge, lien or encumbrance;
(e) Write off as uncollectible any notes or accounts
receivable except in the ordinary course of business;
(f) Cancel any debts or waive any claims or rights of
substantial value or sell, transfer, or otherwise dispose of any of its
properties or assets, except in the ordinary course of business and
consistent with past practice;
(g) Grant any general increase in the compensation of its
officers or employees (including any such increase pursuant to any
bonus, pension, profit sharing or other plan or commitment) or any
increase in the compensation payable or to become payable to any
officer or employees, other than in the employment agreements for
Xxxxxx Xxxxx, Xxxxxx Xxxxx and Xxxxx Xxxxxxx contemplated by this
Agreement;
(h) Pay, loan or advance any amount to, or sell transfer or
lease any properties or assets to, or enter into any agreement or
arrangement with, any Target Stockholders, officers or any affiliates;
or
(i) Agree, whether in writing or otherwise, to do any of the
foregoing.
8.6 CONTRACTS. No contract or commitment will be entered into, and
no purchase of raw material or supplies and no sale of assets will be made, by
or on behalf of Target, except (i) normal contracts or commitments for the
purchase of, and normal purchases of, inventory or supplies, made in the
ordinary course of business an consistent with past practice, and (ii) other
contracts, commitments, purchases or sales in the ordinary course of business
and consistent with past practice not in excess of $40,000 in the aggregate.
8.7 INSURANCE; PROPERTY. Target shall adequately insure all
property, real, personal and mixed, owned or leased by Target, against all
ordinary and insurable risks; and all such property shall be used, operated,
maintained and repaired in a careful and reasonably efficient manner.
8.8 NO DEFAULT. Target shall not do any act or omit to do any act,
or permit any action or omission to act, which will cause a breach of any
material contract or commitment of Target or which would cause the breach of any
warranty made hereunder.
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8.9 COMPLIANCE WITH LAWS. Target shall duly comply with all laws
applicable to it and its properties, operations, business and employees.
8.10 MATERIAL DEVELOPMENTS. Target shall promptly notify Merchant
of the occurrence of any and all events which have, or may have, a material
effect upon the business or financial condition of Target.
ARTICLE 9
REGISTRATION RIGHTS
9.1 REGISTRABLE SECURITIES. As used herein the term "Registrable
Securities" means (i) the 5,000,000 shares of MRTO Common Stock issued pursuant
to Section 1.2 of this Agreement, (ii) the Additional MRTO Shares, if any,
issued pursuant to Section 10.1 below, (iii) shares of MRTO Common Stock issued
to the Clarks for the Put Shares pursuant to Section 10.3 below, and (iv) any
shares of MRTO Common Stock issuable or issued in respect to any such shares,
including any shares issued or issuable upon any stock split, dividend or
distribution, or any recapitalization or other similar event, provided, however,
that with respect to any particular Registrable Security, a security shall cease
to be a Registrable Security when (x) it has been effectively registered under
the Securities Act, and disposed of pursuant thereto, (y) registration under the
Securities Act is no longer required for the immediate public distribution of
such security without restriction, and any restrictive legends with respect
thereto may be removed, or (z) it has ceased to be outstanding. In the event of
any merger, reorganization, consolidation, recapitalization or other change in
corporate structure affecting the MRTO Common Stock, such adjustment shall be
made in the definition of "Registrable Securities" as is appropriate in order to
prevent any dilution or enlargement of the rights granted pursuant to this
Agreement.
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9.2 PIGGYBACK REGISTRATION.
(a) NOTICE AND PIGGY BACK REGISTRATIONS. If Merchant at any
time or from time to time proposes to register any of its securities under the
Securities Act (other than in connection with a merger on Form S-4, pursuant to
Form S-8 or other comparable form (relating to equity securities to be issued
solely in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee benefit
plans) or the registration statement to be filed in connection with the
Company's investment agreement with Xxxxxx Private Equity, LLC dated January 5,
2000), then Merchant shall, on each such occasion, (i) promptly give to each
holder of Registrable Securities (each a "Holder" and collectively the
"Holders"), or to the Target Stockholder Representative on behalf of such
Holders, written notice thereof, and (ii) upon the written request or requests
of any Holders, given within 20 days after Merchant's giving of such notice
(which request shall state the intended method of disposition of such
Registrable Securities by the prospective sellers), Merchant will cause the
Registrable Securities as to which registration shall have been so requested to
be included in the securities to be covered by the registration statement
proposed to be filed by Merchant, all to the extent requisite to permit the sale
or other disposition (in accordance with the written request of the Holders, as
aforesaid) by the prospective seller or sellers of such Registrable Securities
so registered.
(b) UNDERWRITING; LIMITATION ON SHARES TO BE REGISTERED. If
the registration of which Merchant gives notice is for a registered public
offering involving an underwriting, Merchant shall so advise the Holders (or
Target Stockholder Representative on behalf of such Holders) as a part of the
written notice given pursuant to Section 9.2(a) above. In such event the right
of any Holder to registration pursuant to Section 9.2(a) shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with Merchant and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by Merchant.
Notwithstanding any other provisions of this Section 9.2, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit the Registrable
Securities to be included in such registration. No Registrable Securities shall
be excluded from a registration unless Merchant has first excluded all
outstanding securities the holders of which are not entitled by right to
inclusion of securities in the registration statement. After giving effect to
the exclusion of such securities not having registration rights, any exclusion
of Registrable Securities shall be made pro rata with holders of other
securities having the right to include such securities in the registration
statement, based on the number of securities for which registration is
requested. Merchant shall advise all Holders who would otherwise be distributing
Registrable Securities through such underwriting pursuant of any limitation on
the number of Registrable Securities to be included as provided herein, the
basis for calculating the adjustment of the number of Registrable Securities to
be included in the registration by each Holder.
(c) TERMINATION OR DELAY OF REGISTRATION. Merchant shall have
the right to terminate, delay or withdraw any registration initiated by it under
this Section 9.2 prior to the effectiveness of such registration whether or not
any Holder has elected to include any Registrable Securities in such
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registration. However, no such action shall relieve Merchant from its obligation
to pay registration expenses in connection therewith or to register the
Registrable Securities in a subsequent transaction.
9.3 DEMAND REGISTRATION.
(a) At any time after the first anniversary of the Closing
Date, the Holders of a majority of the then outstanding Registrable Securities
shall have the right, exercisable by written notice to Merchant, to have
Merchant prepare and file with the SEC under the Securities Act, a registration
or offering statement on Form S-1 or such other form, and such other documents,
including a prospectus, as may be necessary in the opinion of counsel for
Merchant, in order to comply with the provisions of the Securities Act, so as to
permit a public offering and sale, for a period of six (6) months, of such of
the Registrable Securities as the Holders may elect to have included in such
registration (but not any Registrable Securities which are included in a current
registration effected pursuant to Section 9.2 above), by notice given to
Merchant within twenty (20) business days after receipt by the Holders of the
notice given by Merchant as described in this Section.
(b) Merchant covenants and agrees to give written notice of
any registration request under this Section 9.3 to all non-requesting Holders of
Registrable Securities (or to Target Stockholder Representative on behalf of
such Holders) within twenty (20) days from the date of the receipt of any such
registration request. Merchant shall use its best efforts to register under the
Securities Act, for public sale in accordance with the method of disposition
specified in the notice requesting registration as given by the Holders of a
Majority of the Registrable Securities as referenced above, the Registrable
Securities specified in such notice, and in all notices received by Merchant
from the other Holders within twenty (20) days after the giving of notice of
such request by Merchant. If such method of disposition shall be an underwritten
public offering, the Holders of a Majority of the Registrable Securities to be
sold in such offering may designate the managing underwriter of such offering,
subject to the approval of Merchant, which approval shall not be unreasonably
withheld or delayed. Merchant shall be obligated to register Registrable
Securities pursuant to this Section 9.3 on one occasion only, provided, however,
that such obligation shall be deemed satisfied only when a registration
statement covering all shares of Registrable Securities specified in notices
received as aforesaid, for sale in accordance with the method of disposition
specified by the requesting Holders, shall have become effective and, if such
method of disposition is a firm commitment underwritten public offering, all
such shares shall have been sold pursuant thereto. A registration which does not
become effective after Merchant has filed a registration statement with respect
thereto by reason of the refusal of the Holders of the Registrable Securities to
proceed shall be deemed to have been effected by Merchant at the request of such
Holders, unless such Holders shall have elected to pay all Registration Expenses
(as defined below) in connection with such registration.
(c) Merchant shall not be obligated to proceed with any
registration pursuant to this Section 9.3 during any period in which Merchant
would be required to undertake an audit it would not otherwise have to undertake
in the ordinary course of business, in order to have available for inclusion in
the registration statement current financial statements as required by the
Securities Act.
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(d) If Merchant shall furnish to the Holders requesting a
registration pursuant to this Section 9.3 a certificate signed by the Chief
Executive Officer or President stating that in the good faith judgment of the
Board of Directors of Merchant it would be seriously detrimental to Merchant and
its shareholders for such registration statement to be filed and it is therefore
essential to defer the filing of the registration statement, Merchant shall have
the right to defer taking action with respect to such filing for a period of not
more than 90 days after the receipt of the request of the Target Stockholders
for registration pursuant to this Section 9.3; provided, however, that Merchant
may not make such deferral more than once in any twelve (12) month period.
(e) Merchant shall not be obligated to proceed with any
registration pursuant to this Section 9.3 during any period during which
Merchant is actively using its reasonable best efforts have to have a
registration statement previously filed with the SEC pursuant to Section 9.2
hereof declared effective.
9.4 REGISTRATION PROCEDURES. In connection with each registration
statement filed pursuant to this Agreement, Merchant hereby agrees to:
(a) keep each Holder advised in writing as to the initiation
of each participating registration and as to the completion thereof.
(b) prepare and file with the SEC a registration statement
covering the Registrable Securities which are participating in the registration
as provided herein and use its best efforts to cause such registration statement
to become effective and remain effective until all the Registrable Securities
are sold or become capable of being publicly sold without registration under the
Securities Act.
(c) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the sale or
other disposition of all securities covered by such registration statement
whenever the Holder or Holders of such securities shall desire to sell or
otherwise dispose of the same;
(d) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Securities Act, and such other documents as such Holder may reasonably
request in order to facilitate the public sale or other disposition of the
securities owned by such Holder;
(e) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as each Holder shall request, and do any and
all other acts and things which may be necessary or advisable to enable such
Holder to consummate the public sale or other disposition in such jurisdictions
of the securities owned by such Holder, except that Merchant shall not for any
such purpose be required to qualify to do business as a foreign corporation in
any jurisdiction wherein it is not so qualified or to file therein any general
consent to service of process;
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(f) use its best efforts to list such securities on any
securities exchange on which any securities of Merchant are then listed;
(g) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering;
(h) notify each Holder covered by such registration statement,
at any time when a prospectus relating thereto covered by such registration
statement is required to be delivered under the Securities Act, of the happening
of any event of which it has knowledge as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing; and
(i) take such other actions as shall be reasonably requested
by any Holder to facilitate the registration and sale of the Registrable
Securities.
9.5 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement pursuant to this Agreement:
(a) BY MERCHANT. Without limitation of any other indemnity
provided to any Holder pursuant to this Agreement, to the extent permitted by
law, Merchant shall indemnify and hold harmless each Holder, the affiliates,
officers, directors and partners of each Holder, any underwriter (as defined in
the Securities Act) for such Holder, and each person, if any, who controls such
Holder or underwriter (within the meaning of the Securities Act or the Exchange
Act) (each, a "Holder Indemnitee"), against any losses, claims, damages or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any of the following statements, omissions or violations
(collectively a "VIOLATION"): (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statements including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, (iii) any violation or alleged violation by Merchant of
the Securities Act, the Exchange Act, or any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law, and Merchant shall reimburse each Holder Indemnitee for any
legal or other expenses incurred by them in connection with investigating,
defending or settling any such loss, claim, damage, liability or action;
provided, however, that Merchant shall not be liable to any Holder Indemnitee in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder or any officer,
director or controlling person thereof.
21
(b) BY HOLDERS. Each Holder will, if Registrable Securities
held by such Holder are included in the securities as to which such registration
is being effected, indemnify and hold harmless Merchant, its affiliates, its
counsel, officers, directors, shareholders and representatives, each other
Holder, any underwriter (as defined in the Securities Act) and each person, if
any, who controls Merchant or the underwriter (within the meaning of the
Securities Act or the Exchange Act) (each, a "Merchant Indemnitee"), against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Securities Act, the Exchange Act or any state
securities law, and such Holder will reimburse each Merchant Indemnitee for any
legal or other expenses incurred by them in connection with investigating,
defending or settling any such loss, claim, damage, liability or action; insofar
as such losses, claims, damages or liabilities (or actions and respect thereof)
arise out of or are based upon any statements or information provided by such
Holder to Merchant in connection with the offer or sale of Registrable
Securities held by such Holder.
(c) NOTICE; RIGHT TO DEFEND. Promptly after receipt by an
indemnified party under this Section 9.5 of notice of the commencement of any
action (including any governmental action), such indemnified party shall, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 9.5, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in and if the indemnifying party agrees in writing that it will be
responsible for any costs, expenses, judgments, damages and losses incurred by
the indemnified party with respect to such claim, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if the indemnified party reasonably
believes that representation of such indemnified party by the counsel retained
by the indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action shall relieve such indemnifying party of any liability to the
indemnified party under this Agreement only if and to the extent that such
failure is prejudicial to its ability to defend such action, and the omission so
to deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Agreement.
(d) CONTRIBUTION. If the indemnification provided for in this
Agreement is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
hand in connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relevant fault of the indemnifying party and the indemnified
party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
22
Notwithstanding the foregoing, the amount any Target Stockholder shall be
obligated to contribute pursuant to the Agreement shall be limited to an amount
equal to the proceeds to such Target Stockholder of the Registrable Securities
sold pursuant to the registration statement which gives rise to such obligation
to contribute (less the aggregate amount of any damages which the Target
Stockholder has otherwise been required to pay in respect of such loss, claim,
damage, liability or action or any substantially similar loss, claim, damage,
liability or action arising from the sale of such Registrable Securities).
(e) SURVIVAL OF INDEMNITY. The indemnification provided by
this Agreement shall be a continuing right to indemnification and shall survive
the registration and sale of any Registrable Securities by any person entitled
to indemnification hereunder and the expiration or termination of this
Agreement.
9.6 ASSIGNMENT OF REGISTRATION RIGHTS. The rights of the Holders
under this Article 9, including the rights to cause Merchant to register
Registrable Securities, shall be transferable to any transferee of Registrable
Securities, provided that a transfer of rights shall not be effective until
Merchant is given written notice of the transfer, stating the name and address
of the transferee and identifying the Registrable Securities with respect to
which the rights under this Article 9 are being assigned.
9.7 TERMINATION OF THIS AGREEMENT. The provisions of this Article
9 shall continue in full force and effect until such time as there are no
Registrable Securities outstanding.
9.8 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of Merchant under this Article 9 to take any action as contemplated
by this Article 9 with respect to each Holder that such Holder shall furnish to
Merchant such information regarding the Holder, the Holder's Registrable
Securities and the intended method of disposition of the Registrable Securities
and shall execute such documents in connection with such registration as
Merchant and/or any managing underwriters may reasonably request.
9.9 EXPENSES OF REGISTRATION. All expenses incurred in connection
with all registrations contemplated by this Section, including without
limitation all registration and filing fees, qualification fees, listing fees,
printing expenses, fees and disbursements of counsel for Merchant, and blue sky
fees and expenses, but excluding underwriting discounts and commissions incurred
by Holders in connection with the sale of any Registrable Securities as
contemplated by this Article 9 (the "Registration Expenses"), shall be borne by
Merchant.
ARTICLE 10
ADDITIONAL TERMS AND COVENANTS
10.1 ISSUANCE OF ADDITIONAL SHARES.
(a) If on the first anniversary of the Closing Date (the
"Adjustment Date"), the Aggregate Value (as defined below) of the MRTO
Common Stock issued pursuant to this Agreement is less than $25
million, then Merchant shall issue to the Target Stockholders (or to
the Target Stockholder Representative on behalf of the Target
23
Stockholders), on a pro-rata basis, such number of additional shares of
MRTO Common Stock calculated by subtracting the Aggregate Value from
$25 million and dividing the result by the Average Price (as defined
below) (the "Additional MRTO Shares").
(b) If prior to the Adjustment Date, Merchant is acquired
through a merger, stock purchase or the sale of all or substantially
all of its assets, then the date of closing of such transaction shall
be deemed the Adjustment Date for purposes of determining whether the
Target Stockholders shall be issued additional shares. In that case,
the Additional MRTO Shares may be shares of MRTO Common Stock or
securities of the acquirer, depending on the consideration of the
transaction. If Merchant's shareholders other than the Target
Stockholders are to receive freely tradable securities, then the Target
Stockholders shall also receive freely tradable securities.
(c) The "Average Price" means the average of the closing or
last sale price for the 20 trading days ending of the Adjustment Date
on the principal market or exchange on which the MRTO Common Stock is
then traded. The "Aggregate Value" means 5,000,000 times the Average
Price.
10.2 BOARD OF DIRECTORS. Effective as of the Closing, Xxxxxx Xxxxx
shall be elected to Merchant's Board of Directors. Commencing with the effective
date of this Agreement and continuing until the Closing or Termination Date,
Xxxxxx Xxxxx shall have the right to attend all meetings of the Board of
Directors of Merchant as an observer, and shall be provided with copies of all
actions for written consent distributed to or executed by the directors. During
the term that Xxxxxx Xxxxx serves as a member of Merchant's Board of Directors,
Merchant shall maintain reasonable levels of director and officer insurance.
Merchant agrees to use its best efforts to maintain Xx. Xxxxx'x position on the
Merchant Board of Directors until the later of (i) the third anniversary of the
Closing Date, or (ii) the date the equity interest of Xx. Xxxxx and his wife in
Merchant falls below 3%, unless Xx. Xxxxx otherwise agrees in writing, and to
secure the written agreement of Xxxxx Xxxxxxxx and Xxxxxxx Xxxxxx to vote their
shares of Merchant during such period for Xx. Xxxxx'x retention on the Board.
10.3 RIGHT TO PUT RETAINED TARGET SHARES. If at any time ending on
the third anniversary of the Closing Date Xxxxxx and Xxxxx Xxxxx (the "Clarks")
desire to sell all or a portion (but not less than one-half) of the Retained
Target Shares held by them as of the Closing to Merchant (the "Put Shares"),
they shall provide Merchant with written notice of their election to require
Merchant to purchase such shares (the "Put Election Notice"). Such notice shall
specify the consideration for which the Clarks are willing to sell the Put
Shares (the "Put Offer Price"), which may be cash, shares of MRTO Common Stock,
or a combination of cash and shares. Merchant shall be obligated to purchase the
Put Shares for the Put Offer Price unless Merchant provides written notice to
the Clarks of its objection to the Put Offer Price, within 15 days following
delivery of the Put Election Notice to Merchant. If Merchant fails to object to
the Put Offer Price within such time period, it shall complete the purchase of
the Put Shares by paying the Put Offer Price therefore, within five business
days following the expiration of the 15 day objection period. If Merchant makes
a timely objection to the Put Offer Price, then it shall negotiate in good faith
with the Clarks regarding the price at which Merchant will purchase the Put
Shares, and the closing of the sale of the Put Shares shall be held five
business days following the agreement of the parties regarding the purchase
price therefor. If the parties are unable to agree on the purchase price of the
Put Shares within 30 days following delivery of the Put Election Notice to
Merchant, then the parties shall each submit their proposed purchase price to an
independent investment banking firm jointly selected by the parties, and such
firm shall select from the two proposed purchase prices submitted to it by
Merchant and the Clarks which it determines to most closely approximate the then
current fair market value of the Put Shares, and the closing for the sale of the
24
Put Shares to Merchant shall be held five business days after the determination
of the investment banking firm regarding the purchase price. Notwithstanding the
foregoing, in no event will the purchase price for all of the Retained Target
Shares be less than $10 million. At the closing for the sale of the Put Shares
to Merchant, the Clarks shall deliver to Merchant all documents necessary to
transfer good and marketable title to such shares, free and clear of all liens
and encumbrances, to Merchant. So long as Xxxxxx Xxxxx remains an officer,
director or employee of Merchant or any of its subsidiaries, the Clarks shall
not offer, sell or transfer the Retained Target Shares without the written
consent of Merchant and Merchant shall have a right of first refusal,
exercisable for a period of thirty (30) days following notice given by the
Clarks to Merchant, to acquire any Retained Target Shares the Clarks may
determine to sell. The preceding sentence shall not apply to an offer, sale or
transfer of any of the Retained Target Shares (i) pursuant to applicable laws of
descent and distribution or (ii) among the Clarks' family group; provided that
such restrictions shall continue to be applicable to the Retained Target Shares
after any such transfer and the transferees of the Retained Target Shares shall
have agreed in writing to be bound by the provisions of this Section. The
Clarks' "family group" means the Clarks' descendants (whether natural or
adopted) and any trust solely for the benefit of the Clarks and/or the Clarks'
descendants.
10.4 RIGHT TO REACQUIRE TARGET. The Target Stockholders shall have
the right to acquire all outstanding shares of Target Common Stock in exchange
for the MRTO Common Stock issued in this transaction if (i) prior to the second
anniversary of the Closing Date, Merchant shall (w) file a bankruptcy proceeding
(or have a bankruptcy action filed against it which is not dismissed within 60
days), (x) cease operations or become insolvent, (y) be delisted, for a period
equal to at least ten (10) days, from Nasdaq National Market, the OTC Bulletin
Board or other public exchange on which Merchant's Common Stock then trades, or
(z) be subject to an event which materially adversely affects the Surviving
Corporation or Merchant and which would significantly adversely affect the
Surviving Corporation's business; or (ii) Merchant does not fulfill its
obligations under Sections 10.5 or 10.6. If the Target Stockholders exercise
such right and have sold MRTO Common Stock, they shall be required to pay
Merchant $5.00 for each share of MRTO Common Stock not returned.
10.5 COVENANTS OF MERCHANT REGARDING CONDUCT OF TARGET BUSINESS.
Merchant covenants that from the Closing Date until the second anniversary of
the Closing Date, Merchant will operate the Surviving Corporation in accordance
with the following principles, unless otherwise agreed by Xxxxxx Xxxxx:
(a) Merchant shall maintain the Surviving Corporation as a
separate entity, with all transactions between Merchant and the Surviving
Corporation subject to approval by the Board of Directors of each entity;
(b) The Surviving Corporation's business shall be conducted in
accordance with its business plan existing as of the Closing, or such other
business plan as may be mutually approved by Merchant and Xxxxxx Xxxxx, with all
funding required to enable the Surviving Corporation to perform in accordance
with such plan to be provided by Merchant, on terms reasonably approved by
25
unanimous approval of Target's Board of Directors. Exclusive of Merchant's
funding obligations for the ASIC and the payment of the obligations set forth in
Exhibit 6.7, during the first five months following the Closing, Merchant will
provide the Surviving Corporation with minimum funding of $200,000 per month,
and during the following seven months, Merchant will provide the Surviving
Corporation with minimum funding of $150,000 per month;
(c) Xxxxxx Xxxxx shall be maintained as the President, Chief
Executive Officer and Chairman of the Board of Directors of the Surviving
Corporation, and as a director of Merchant, and the Surviving Corporation's
headquarters will be maintained in Arizona, unless otherwise agreed by Xx.
Xxxxx;
(d) Xxxxxx Xxxxx shall have the right to review any proposed
press release or announcement before such release or announcement is made
public, if such release or announcement in any way relates to or concerns the
Surviving Corporation.
(e) Merchant will not engage in any conduct that would
interfere with the Surviving Corporation's conduct of its business, or that
would harm the reputation of the Surviving Corporation, or make it ineligible to
pursue its current or intended customers, and will not develop or acquire any
hardware encryption devices competitive with those offered by the Surviving
Corporation; and
(f) The assets of the Surviving Corporation shall not be
encumbered, nor will assets of the Surviving Corporation be sold outside the
ordinary course of business, nor will any securities of the Surviving
Corporation be sold, issued or encumbered, except on such terms as may be
approved by the unanimous approval of the Surviving Corporation's Board of
Directors, or except for a financing transaction, the primary purpose of which
is to obtain working capital for the Surviving Corporation's business.
10.6 FUNDING ACCOUNT. Within thirty (30) days following the Closing
Date, Merchant shall deposit an additional $1,500,000 into the Funding Account
referred to in Section 6.7 above (the "Second Cash Payment"). The Second Cash
Payment may be used to fund the balance that Target owes for Target's purchase
of an ASIC, and to fund a portion of Merchant's funding obligations set forth in
Section 10.5(b).
10.7 EMPLOYEE MATTERS. Merchant agrees that, as of the Effective
Time, it shall cause the Surviving Corporation to continue to employ all of the
employees of Target, it being understood that nothing in this Section shall be
deemed to create any employment status other than employment at will, unless an
employment agreement with any such employee otherwise specifies.
10.8 INDEMNIFICATION OF TARGET OFFICERS AND DIRECTORS. From and
after the Effective Time, Merchant agrees to indemnify and hold harmless each
current and former director and officer of Target against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities incurred in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of matters existing or occurring at or prior to the
Effective Time, asserted or claimed after the Effective Time, to the fullest
extent that Target would have been permitted under its Articles of Incorporation
26
or Bylaws as in effect on the date hereof to indemnify such persons (and in
connection therewith, Merchant shall advance expenses as incurred to the fullest
extent provided for under Merchant's Articles of Incorporation and Bylaws as
from time to time in effect, provided the person to whom expenses are advanced
provides an undertaking to repay such advances if it is ultimately determined
that such person is not entitled to indemnification).
10.9 EXPANSION OF BOARD OF DIRECTORS. Merchant will promptly take
action to expand its Board of Directors to include two outside directors, and to
cause the expanded Board to consider the adoption of budgets to which the
actions of officers of Merchant would be subject.
10.10 NASDAQ LISTING. Either prior to or as promptly as practicable
after the Closing, Merchant shall file an application to list its common stock
on the Nasdaq National Market System and use its best efforts to cause the
listing to be approved.
ARTICLE 11
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; TERMINATION
11.1 INVESTIGATIONS; SURVIVAL OF WARRANTIES. The representations,
warranties and agreements of the parties contained herein or in any certificates
or other documents delivered prior to or at the Closing shall survive the
Closing for a period of one year and not be deemed waived or otherwise affected
by any investigation made by any party hereto.
11.2 METHODS OF TERMINATION. The transactions contemplated herein
may be terminated and/or abandoned at any time but not later than the Closing:
(a) By mutual and joint consent of the parties hereto; or
(b) By Merchant, (i) at any time if the representations and
warranties of Target contained in Exhibit 2 hereof were incorrect in
any material respect when made or at any time thereafter, or (ii) upon
written notice to Target given on the Closing Date if all of the
conditions precedent to the obligations of Merchant set forth in this
Agreement have not been fulfilled; or
(c) By Target, (i) at any time if the representations and
warranties of Merchant contained in Article 3 hereof were incorrect in
any material respect when made or at any time thereafter, or (ii) upon
written notice to Merchant given on the Closing Date if all of the
conditions precedent to the obligations of Target set forth in this
Agreement have not been fulfilled.
11.3 PROCEDURE UPON TERMINATION. In the event of termination and
abandonment of this Agreement pursuant to Section 11.2 hereof, notice thereof
shall forthwith be given by the initiating party or parties to the other parties
to this Agreement, and the transactions contemplated by this Agreement shall be
terminated and/or abandoned, without further action by any party. If the
transactions contemplated by this Agreement are terminated and/or abandoned as
provided herein:
27
(a) Target shall be entitled to retain the $50,000 deposit
previously delivered;
(b) Each party will redeliver all documents, work papers and
other material of any other party relating to the transactions
contemplated hereby, whether so obtained before or after the execution
hereof, to the party furnishing the same;
(c) All confidential information received by any party hereto
with respect to the business of any other party shall be treated in
accordance with Section 14.9 hereof; and
(d) No party hereto shall have any liability or further
obligation to any other party to this Agreement except as stated in
subparagraphs (a), (b) and (c) of this Section 11.3 other than
liability for damages resulting from representations and warranties
being inaccurate when made.
ARTICLE 12
INDEMNIFICATION
12.1 INDEMNIFICATION OF MERCHANT. In the event that the
transactions contemplated by this Agreement are consummated, then subject to the
limitations set forth in this Article 12, Merchant shall be indemnified and held
harmless (but only to the extent of the Escrow Shares) from, against and in
respect of: (i) all of Merchant's losses, liabilities, damages, costs and
expenses arising from any misrepresentation or breach of any representation,
warranty, covenant or agreement made by Target in or pursuant to this Agreement,
provided that Merchant makes a written claim for indemnification as provided in
the Escrow Agreement within the one year survival period referenced in Section
11 above.
12.2 INDEMNIFICATION BY MERCHANT. In the event that the
transactions contemplated by this Agreement are consummated, then subject to the
limitations set forth in this Article 12, Merchant shall indemnify and hold
harmless each of the Target Stockholders from, against and in respect of: (i)
all of the Target Stockholders' losses, liabilities, damages, costs and expenses
arising from any misrepresentation or breach of any representation, warranty,
covenant or agreement made by Merchant in or pursuant to this Agreement,
provided that the Target Stockholders make a written claim for indemnification
against Merchant as provided in the Escrow Agreement within the one year
survival period referenced in Section 11 above.
12.3 LIMITATIONS.
(a) LIMITATIONS ON ACTIONS BY MERCHANT. Notwithstanding
anything to the contrary contained herein, Merchant will not assert an
indemnification claim under Section 12.1 until the total of all losses,
liabilities, costs and expenses suffered by Merchant and as to which
Merchant is entitled to indemnification under Section 12.1 (the
"Adverse Consequences to Merchant") equals or exceeds in the aggregate
$50,000, at which time all claims for indemnity with respect to all
Adverse Consequences to Merchant, including those constituting the
$50,000 base amount, may be claimed in full, to the extent of the
indemnity obligations set forth herein.
(b) LIMITATIONS ON ACTIONS AGAINST MERCHANT. Notwithstanding
anything to the contrary contained herein, no indemnification claim
will be asserted against Merchant under Section 12.2 above until the
28
total of all losses, liabilities, costs and expenses as to which an
indemnification claim may be brought against Merchant under Section
12.2 (the "Adverse Consequences to Target Stockholders") equals or
exceeds in the aggregate $50,000, at which time all claims for
indemnity with respect to all Adverse Consequences to Target
Stockholders, including those constituting the $50,000 base amount, may
be claimed in full, to the extent of the indemnity obligations set
forth herein.
(c) LIMITATIONS ON AMOUNT OF CLAIMS BY MERCHANT.
Notwithstanding anything to the contrary contained herein, in no event
will Merchant be entitled to recovery of any indemnification claim
hereunder from any source other than the Escrow Shares.
(d) LIMITATIONS ON AMOUNT OF CLAIMS AGAINST MERCHANT.
Notwithstanding anything to the contrary contained herein, in no event
will Target Stockholders be entitled to recovery of any indemnification
claim against Merchant hereunder in excess of $200,000.
12.4 SATISFACTION OF CLAIMS. Any claim for indemnification pursuant
to Sections 12.1 will be satisfied by delivery of Escrow Shares, with such
shares being valued at the greater of (i) $5.00 per share, or (ii) the average
price of such shares for the 20 trading days ending on the date such shares are
delivered to satisfy such indemnification claim, determined in accordance with
the calculation of "Average Price" as provided in Section 10.1 above, with the
date of delivery of the shares to satisfy the indemnification claim being
considered the Adjustment Date (with the value so determined referred to as the
"Indemnification Value" of the shares of MRTO Common Stock issued at the
Closing).
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1 WAIVER OF COMPLIANCE. Any failure of Target, on the one hand,
or Merchant, on the other, to comply with any obligation, covenant, agreement or
condition herein may be expressly waived in writing by the other party, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
13.2 NOTICES. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered by hand or if mailed, certified or
registered mail, return receipt requested, with postage prepaid or if delivered
to an overnight courier that guarantees next-day delivery:
(a) If to Target or the Target Stockholders, to:
Xxxxxx X. Xxxxx
Innovonics, Inc.
00000 X. Xxxxx Xxxxxx, Xxxxx 000
Xxxxxxx, Xxxxxxx 00000
29
with a copy, to:
Xxxxx Xxxxxxx, Esq.
Xxxxx & Xxxxxx LLP
One Arizona Center
000 Xxxx Xxx Xxxxx
Xxxxxxx, Xxxxxxx 00000-0000
or to such other person or address as Target shall furnish to Merchant in
writing.
(b) If to Merchant, to:
Xxxxx Xxxxxxxx
Xxxxxxxxxxxxxx.xxx, Inc.
0000 X. Xxxxx Xxxxxxx, Xxxxx 000
Xxxx Xxxxx, Xxxxxxx 00000
with a copy, to:
Xxxxxxx X. Xxxxxx, P.A.
Broad and Xxxxxx
0000 Xxxxxx Xxxx, Xxxxx 000
Xxxx Xxxxx, Xxxxxxx 00000
or to such other person or address as Merchant shall furnish to Target in
writing.
13.3 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any party
without the prior written consent of the other parties.
13.4 GOVERNING LAW. This Agreement and the legal relations among
the parties hereto shall be governed by and construed in accordance with the
laws of the State of Florida, without regard to its conflicts of law doctrine.
13.5 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
13.6 HEADINGS. The headings of the Sections and Articles of this
Agreement are inserted for convenience only and shall not constitute a part
hereof or affect in any way the meaning or interpretation of this Agreement.
13.7 ENTIRE AGREEMENT. This Agreement, including the Exhibits and
Schedules hereto; and the other documents and certificates delivered pursuant to
the terms hereof, set forth the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein, and supersede
all prior agreements, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto.
30
13.8 THIRD PARTIES. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or corporation other than the parties hereto
and their successors or assigns, any rights or remedies under or by reason of
this Agreement.
13.9 CONFIDENTIALITY. Each of Merchant and the Target will hold and
will cause its consultants and advisors to hold in strict confidence, unless
compelled to disclose by judicial or administrative process or, in the opinion
of its counsel, by other requirements of law, all documents and information
concerning the other parties furnished it by such other party or its
representatives in connection with the transactions contemplated by this
Agreement, including, without limitation, all letters of intent negotiated among
and/or executed by the parties hereto and/or their affiliates, principals or
related entities and any standstill agreements with respect thereto and
confidential and proprietary information of the disclosing party (except to the
extent that such information can be shown to have been (i) previously known by
the party to which it was furnished, or (ii) later lawfully acquired from other
sources by the party to which it was furnished), and each party will not release
or disclose such information to any other person, except its auditors,
attorneys, financial advisors, bankers and other consultants and advisors in
connection with this Agreement. If the transactions contemplated by this
Agreement are not consummated, such confidence shall be maintained except to the
extent such information comes into the public domain through no fault of the
party required to hold it in confidence, and such information shall not be used
to the detriment of, or in relation to any investment in, the other party and
all such documents (including copies thereof) shall be returned to the other
party immediately upon the written request of such other party. Each party shall
be deemed to have satisfied its obligation to hold confidential information
concerning or supplied by the other party if it exercises the same care as it
takes to preserve confidentiality for its own similar information.
31
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be
duly executed all as of the day and year first above written.
INNOVONICS, INC.,
an Arizona corporation
By: /s/ XXXXXX X. XXXXX
----------------------------------------------------
Xxxxxx X. Xxxxx, President
XXXXXXXXXXXXXX.XXX, INC.,
a Florida corporation
By: /s/ XXXXX XXXXXXXX
----------------------------------------------------
Xxxxx Xxxxxxxx, President
INNOVONICS ACQUISITION CORP.
an Arizona corporation
By: /s/ XXXXX XXXXXXXX
----------------------------------------------------
Xxxxx Xxxxxxxx, President
/s/ XXXXXX X.XXXXX
----------------------------------------------------
Xxxxxx X. Xxxxx, individually and in his capacity as
Target Stockholder Representative
32
The undersigned, as a holder of a Terminating Option, as defined in
Section 1.2.2 above, agrees that such option will not be exercised prior to the
Closing and that, as provided in Section 1.2.2 above, effective as of the
Closing, such Terminating Option will be terminated and be of no further force
and effect. The undersigned is not to be considered a party to the Agreement for
any other purposes.
/s/ XXXXXX XXXXX
--------------------------------
Xxxxxx Xxxxx
33
EXHIBIT 1.1
[TO BE COMPLETED AS OF CLOSING]
34
EXHIBIT 1.5
ESCROW AGREEMENT
35
EXHIBIT 2
Form of representations and warranties to be given by Target to
Merchant at or prior to the Closing, subject to such modifications and
limitations as may be set forth in the Target Disclosures Schedule to be
prepared by Target and attached to such representations and warranties, when
given (the "Target Disclosure Schedule").
2.1 ORGANIZATION; GOOD STANDING. Target is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Arizona and has full corporate power and authority to carry on its business as
it is now being conducted and to own the properties and assets it now owns. The
copies of the charter documents of Target attached hereto as Schedule 2.1 are
complete and correct copies of such instruments as presently in effect.
2.2 CAPITALIZATION OF TARGET. The authorized capital stock of
Target consists of 10,000,000 shares of Common Stock, of which 1,998,689 shares
are currently outstanding and held as set forth on Schedule 2.2 hereto. Target
Options are outstanding for the purchase of an aggregate of 401,846 shares of
Target Common Stock. The outstanding shares of Target Common Stock and the
outstanding Target Options are held by the individuals and entities and in the
amounts indicated in Schedule 2.2. Assuming the exercise in full of the Target
Options other than the Terminating Options, a total of 2,201,535 shares of
Target Common Stock would be issued and outstanding immediately prior to the
Closing, and held as indicated in Schedule 2.2. All issued and outstanding
shares of Target Common Stock are validly issued, fully paid and non-assessable.
Except as set forth on Schedule 2.2 or the Target Disclosure Schedule, there are
no outstanding (a) securities convertible into or exchangeable for shares of
Target Common Stock; (b) options, warrants or other rights to purchase or
subscribe to capital stock of Target or securities convertible into or
exchangeable for capital stock of Target; or (c) contracts, commitments,
agreements, understandings or arrangements of any kind relating to the issuance
of any capital stock of Target, any such convertible or exchangeable securities
or any such options, warrants or rights. The Merger will result in shares of
MRTO Common Stock being issued to the Target Stockholders indicated in Schedules
2.2(a), assuming the exercise in full of all Target Options other than the
Terminating Options, and assuming there are no Dissenting Shares.
2.3 CORPORATE RECORD BOOKS. The corporate minute books of Target
have been made available to Merchant, are complete and correct and contain all
of the proceedings of the shareholders and directors of Target.
2.4 AUTHORIZATION, ETC. Target has full corporate power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. Target has taken all actions required by law, its charter
documents, or otherwise to be taken by it to authorize the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby, and this Agreement is a valid and binding agreement of Target,
enforceable in accordance with its terms.
2.5 NO VIOLATION. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
violate any provision of the charter documents of Target, or, to the best
knowledge of Target, be in conflict with, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in
36
the termination of, or accelerate the performance required by, or cause the
acceleration of the maturity of any debt or obligation pursuant to, or cause the
acceleration of the maturity of any debt or obligation pursuant to, or result in
the creation or imposition of any security interest, lien or other encumbrance
upon any property or assets of Target under, any agreement or commitment to
which Target is a party or to which the assets of Target are subject, or violate
any statute, law, judgement, decree, order, regulation or rule of any court or
governmental authority by which Target is bound or to which its assets are
subject.
2.6 FINANCIAL STATEMENTS. Target has heretofore delivered to
Merchant unaudited financial statements (the "Financial Statements") as of and
for the period ended January 31, 2000 (the "Balance Sheet Date"). Such Financial
Statements and the notes thereto are complete and accurate and fairly present
the assets, liabilities, financial condition and results of operations of Target
as at the respective dates thereof all in accordance with generally accepted
accounting principles consistently applied throughout the periods involved.
Target's books and records have been maintained in accordance with good business
practice and are in a form and condition to be audited by Merchant's independent
accountants.
2.7 NO UNDISCLOSED LIABILITIES; ETC. Except as set forth in the
Financial Statements and the notes thereto, or in the Target Disclosure
Schedule, to the best knowledge of Target, Target has no material liabilities or
obligations of any nature (absolute, accrued, contingent or otherwise), except
for liabilities which have arisen after the Balance Sheet Date in the ordinary
course of business, and obligations arising by the application of law to the
conduct of Target's business.
2.8 ABSENCE OF CERTAIN CHANGES. Except as and to the extent set
forth in the Target Disclosure Schedule, since the date of the Financial
Statements, Target has not:
(a) Suffered any material adverse change in its working
capital, financial condition, assets, liabilities (absolute, accrued,
contingent or otherwise), reserves, business, operations or prospects;
(b) Incurred any liabilities or obligations (absolute,
accrued, contingent or otherwise), except non-material items incurred
in the ordinary course of business and consistent with past practice,
or increased or experienced any change in any assumptions underlying,
or methods of calculating, any bad debt, contingency or other reserves;
(c) Paid, discharged or satisfied any claim, liabilities or
obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction in the ordinary course of business
and consistent with past practice or liabilities and obligations
reflected or reserved against in the Financial Statements or incurred
in the ordinary course of business and consistent with past practice,
or pursuant to this Agreement and the transactions contemplated hereby,
since the Balance Sheet Date;
(d) Permitted or allowed any of its property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any
mortgage, pledge, lien, security interest, encumbrance, restriction or
charge of any kind, except for liens for current taxes not yet due;
37
(e) Become aware of any fact or event which materially
adversely affects or may in the future materially adversely affect the
financial condition, results of operations, business, properties,
assets, liabilities, or future prospects of Target;
(f) Cancelled any debts, waived any claims or rights or
substantial value or accepted a purchase order, quotation, arrangement
or understanding for future sale of services of Target, knowing that it
will not result in a profit to Target;
(g) Entered into or amended any employment agreement, except
as contemplated by this Agreement;
(h) Sold, transferred, or otherwise disposed of any of its
properties or assets (real, personal or mixed, tangible or intangible),
except in the ordinary course of business and consistent with past
practice; and
(i) Agreed, whether in writing or otherwise, to take any
action described in this Section.
2.9 LITIGATION. There is no pending or threatened action, suit,
inquiry, proceeding or investigation by or before any court or governmental or
other regulatory or administrative agency or commission pending or threatened
against or involving Target, or which questions or challenges the validity of
this Agreement or any action taken or to be taken by Target pursuant to this
Agreement or in connection with the transactions contemplated hereby; nor to the
knowledge of Target is there any valid basis for any such action, proceeding or
investigation. Target is not in default under or in violation of, nor is there
any valid basis for any claim of default under or violation of, any contract,
commitment or restriction to which it is a party or by which it is bound. Target
is not in violation of, or in default with respect to, any law, rule,
regulations, order, judgment, or decree; nor is Target required to take any
action in order to avoid such violation or default. Target is not subject to any
judgement, order or decree entered in any lawsuit or proceeding which may have
an adverse effect on its business practices or on its ability to acquire any
property or conduct its business in any area.
2.10 COMPLIANCE. Except as set forth in the Target Disclosure
Schedule, to the knowledge of Target, each of Target and its properties are is
in compliance with all material Legal Requirements, including, without
limitation, those relating to zoning (but excluding those relating to
Environmental, Health, or Safety Requirements which are covered by Section 2.13
hereof), except for such failures to comply or to be in compliance as have not
had, and would not have, individually or in the aggregate, a Material Adverse
Effect with respect to Target. Except as set forth in the Target Disclosure
Schedule, Target has not received any written notice asserting any
non-compliance with any such Legal Requirements, except for such failures to
comply as have not had, and would not have, a Material Adverse Effect with
respect to Target.
38
2.11 TAXES.
(a) Except as set forth in the Target Disclosure Schedule, (A)
all federal, state, local and foreign income tax returns and reports and any
other tax return or report for which there is a liability for the payment of
Taxes in excess of $50,000 (collectively, "Target Tax Returns") required to be
filed by or on behalf of Target (and any combined, consolidated, unitary or
affiliated group of which Target is or has been a member prior to the Closing
Date) for Taxes have been duly and timely filed with the appropriate taxing
authorities in all jurisdictions in which such Target Tax Returns are required
to be filed (after giving effect to any valid extensions of time in which to
make such filings); (B) all such Target Tax Returns are correct and complete in
all material respects; and (C) all amounts shown as due on such Target Tax
Returns and any other required payment of any other Tax liability in excess of
$50,000 due from Target (and any combined, consolidated, unitary or affiliated
group of which Target is or has been a member prior to the Closing Date) have
been timely paid or accrued for on the Target Financial Statements. Except as
set forth in the Target Disclosure Schedule, Target shall prepare and timely
file, in a manner consistent with prior years except as required by a change in
applicable laws and regulations, all Target Tax Returns required to be filed on
or before the Closing Date (after giving effect to any valid extensions of time
in which to make such filings). Target has established an adequate accrual or
reserve for the payment of all Taxes payable in respect of the period, including
portions thereof, subsequent to the period covered by such Returns up to and
including the Closing Date.
(b) Target has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
creditor, independent contractor or other party.
(c) Merchant has received copies of (A) all federal, state,
local and foreign income or franchise Target Tax Returns relating to the tax
periods ended in 1999 and (B) any audit report issued within the last twelve
(12) months (or otherwise with respect to any audit or investigation in
progress) relating to Taxes due from or with respect to Target and its income,
assets or operations. The income and franchise Target Tax Returns filed by or on
behalf of Target for the taxable period ended in 1999 as set forth in the Target
Disclosure Schedule have been examined by the relevant taxing authority or the
statute of limitations with respect to such Target Tax Returns has expired.
(d) Except as set forth in the Target Disclosure Schedule, no
written claim has been made by a taxing authority in a jurisdiction where Target
does not file Target Tax Returns such that it is or may be subject to taxation
by that jurisdiction. The Target Disclosure Schedule contains a list setting
forth all the states, territories and jurisdictions in which Target is required
to file a Return or report with respect to Taxes.
(e) Except as set forth in the Target Disclosure Schedule, all
deficiencies asserted or assessments made as a result of any examinations by the
IRS or other taxing authority of Target Tax Returns of or covering or including
Target have been fully paid, and to the knowledge of Target there are no other
audits or investigations by any taxing authority in progress, nor has Target
received any written notice from any taxing authority that it intends to conduct
such an audit or investigation.
39
(f) Target is not a party to any tax sharing or similar
contract or arrangement currently in effect (whether or not written) with any
Person.
(g) Except as set forth in the Target Disclosure Schedule,
Target has not been a member of any consolidated, combined, unitary or
affiliated group of corporations for any tax purposes.
(h) Target has not filed a consent pursuant to Section 341(f)
of the Code or agreed that Section 341(f)(2) of the Code shall apply to the
disposition of any assets.
(i) Target has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
2.12 Employee Benefit Plans.
(a) The Target Disclosure Schedule contains a true and
complete list of each "employee benefit plan" (within the meaning of Section
3(3) of ERISA), and each stock purchase, stock option, severance, employment,
change-in-control, fringe benefit, welfare benefit, collective bargaining,
bonus, incentive, deferred compensation and all other employee benefit plans,
agreements, programs, policies or other arrangements, whether or not subject to
ERISA (including any funding mechanism therefor now in effect or required in the
future as contemplated by this Agreement or otherwise), whether formal or
informal, oral or written, legally binding or not, under which any employee or
former employee of Target has, by virtue of such employee or former employee's
employment with Target, any present or future right to benefits or under which
Target has any present or future liability. All such plans, agreements,
programs, policies and arrangements shall be collectively referred to as the
"Target Plans."
(b) The documents relating to the Target Plans provided to
Merchant are accurate copies thereof, and Target will, to the extent not
delivered or made available prior to the date hereof with respect to each Target
Plan, deliver or make available to Merchant promptly following the date hereof a
current, accurate and complete copy (or, to the extent no such copy exists, an
accurate description) thereof and, to the extent applicable: (A) any related
trust agreement or other funding instrument; (B) the most recent determination
letter; (C) any summary plan description and other written communications (or a
description of any material oral communications) by Target to its employees
concerning the extent of the benefits provided under a Target Plan; and (D) for
the most recent year (1) the Form 5500 and attached schedules, (2) audited
financial statements, (3) actuarial valuation reports and (4) attorney's
response to an auditor's request for information.
(c) Except as disclosed in the Target Disclosure Schedule, (A)
each Target Plan has been established and administered in all material respects
in accordance with its terms, and with the applicable provisions of ERISA, the
Code and other applicable laws, rules and regulations; (B) each Target Plan
which is intended to be qualified within the meaning of Code Section 401(a) is
so qualified and has received a favorable determination letter as to its
qualification, and, to the knowledge of Target, nothing has occurred, whether by
action or failure to act, that could reasonably be expected to cause the loss of
such qualification; (C) for each Target Plan that is a "welfare plan" within the
meaning of ERISA Section 3(1), Target does not have nor will have any liability
40
or obligation under any plan which provides medical or death benefits with
respect to current or former employees of Target beyond their termination of
employment (other than coverage mandated by law); (D) to the knowledge of
Target, no event has occurred and no condition exists that would subject Target,
either directly or by reason of its affiliation with any Commonly Controlled
Entity (defined as any organization which is a member of a controlled group of
organizations within the meaning of Code Sections 414(b), (c), (m) or (o)), to
any material tax, fine, lien, penalty or other material liability imposed by
ERISA, the Code or other applicable laws, rules and regulations; (E) for each
Target Plan with respect to which a Form 5500 has been filed, no material change
has occurred with respect to the matters covered by the most recent Form 5500
since the date thereof; and (F) no "prohibited transaction" (as such term is
defined in ERISA Section 406 and Code Section 4975) for which Target has any
liability has occurred with respect to any Target Plan.
(d) No Target Plan is subject to Title IV of ERISA.
(e) No Target Plan is a multiemployer plan within the meaning
of ERISA Section 4001(a)(3). Target has not contributed nor had any obligation
to contribute in the preceding five (5) years to such a multiemployer plan.
(f) With respect to any Target Plan, (A) no material actions,
suits or claims (other than routine claims for benefits in the ordinary course)
are pending or threatened, and (B) to the knowledge of Target, no facts or
circumstances exist that could give rise to any such actions, suits or claims.
(g) Except as disclosed in the Target Disclosure Schedule, the
consummation of the transactions contemplated by this Agreement will not (A)
entitle any current or former employee or director of Target to severance pay,
unemployment compensation or any similar payment or (B) accelerate the time of
payment or vesting, or increase the amount of any compensation due to, any
current or former employee of Target.
2.13 ENVIRONMENTAL MATTERS. Except as set forth in the Target
Disclosure Schedule, Target has obtained and is in compliance with all Permits
issuable and issued pursuant to any Environmental, Health or Safety
Requirements; (ii) as of the date hereof, there are no administrative, civil or
criminal actions, suits, demands, notices, investigations, writs, injunctions,
decrees, orders or judgments outstanding or, to the knowledge of Target,
threatened against Target based upon or arising out of any Environmental, Health
or Safety Requirements; (iii) Target has not caused and has not received notice
and has no knowledge of any Release or threatened Release in a quantity
requiring reporting or remediation under any Environmental, Health or Safety
Requirements of any Hazardous Materials on or from the assets owned or operated
by Target; (iv) Target does not have any current liability in connection with
any Release of Hazardous Materials into the indoor or outdoor environment,
whether on-site or off-site; (v) none of the operations of Target involves the
treatment, storage for longer than ninety (90) days, or disposal of hazardous
waste on any property owned, leased or operated by Target or any subsidiary, as
defined under 40 C.F.R. Parts 260-270 or any state equivalent; and (vi) Target
has provided all Phase I environmental assessments, and all reports of
investigations conducted as a result of any recommendation in any such
41
assessments that have been performed within the past three (3) years with
respect to the currently or previously owned, leased or operated properties of
Target.
2.14 Intellectual Property.
(a) AGREEMENTS. The Target Disclosure Schedule contains a
complete and accurate list and summary description, including any royalties paid
or received by Target, of all Contracts relating to the Intellectual Property to
which Target is a party or by which Target is bound. There are no outstanding
and, to Target's knowledge, no threatened disputes or disagreements with respect
to any such agreement.
(b) KNOW HOW NECESSARY FOR THE BUSINESS.
(i) The Intellectual Property consists of all
Intellectual Property as necessary for the operating of Target's businesses as
it is currently conducted or as reflected in the business plan given to
Merchant. Target is the owner or licensee of all right, title, and interest in
and to each of the Intellectual Property assets, free and clear of all liens,
security interests, charges, encumbrances, equities, and other adverse claims,
or has the right to use without payment to a third party all of the Intellectual
Property, other than the payments referenced in the Target Disclosure Schedule.
(ii) Except as set forth in the Target Disclosure
Schedule, all former and current employees of Target have executed written
Contracts with Target that assign to Target all rights to any inventions,
improvements, discoveries, or information relating to the business of Target. To
the knowledge of Target, no Target employee has entered into any Contract that
restricts or limits in any way the scope or type of work in which the employee
may be engaged or requires the employee to transfer, assign, or disclose
information concerning his work to anyone other than Target.
(c) PATENTS.
(i) The Target Disclosure Schedule contains a complete
and accurate list and summary description of all Patents. Target is the owner of
all right, title, and interest in and to each of the Patents, free and clear of
all liens, security interests, charges, encumbrances, entities, and other
adverse claims.
(ii) All of the issued Patents, in their applicable
jurisdictions, are currently in compliance with Legal Requirements (including
payment of filing, examination, and maintenance fees and proofs of working or
use), are valid and enforceable, and are not subject to any maintenance fees or
taxes or actions falling due prior to the Closing Date.
(iii) No Patent has been or is now involved in any
interference, reissue, reexamination, or opposition proceeding. To Target's
knowledge, there is no potentially interfering patent or patent application of
any third party.
(iv) No Patent is infringed or, to Target's knowledge,
has been challenged or threatened in any way. To Target's knowledge, none of the
42
products manufactured and sold, nor any process or know-how use, by Target
infringes or is alleged to infringe any patent or other proprietary right of any
other Person.
(v) To the extent commercially practicable, all
products made, used, or sold under the Patents have been marked with the proper
patent notice.
(d) TRADEMARKS.
(i) The Target Disclosure Schedule contains a complete
and accurate list and summary description of all Marks. Target is the owner of
all right, title, and interest in and to each of the Marks, free and clear of
all liens, security interests, charges, encumbrances, equities, and other
adverse claims.
(ii) All Marks that have been registered with the
United States Patent and Trademark Office are currently in compliance with all
formal legal requirements (including the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
filling due within ninety days after the Closing Date.
(iii) No Xxxx has been or is now involved in any
opposition, invalidation, or cancellation and, to Target's knowledge, no such
action is threatened with the respect to any of the Marks.
(iv) To Target's knowledge, there is no potentially
interfering trademark or trademark application of any third party.
(v) No Xxxx is infringed or, to Target's knowledge,
has been challenged or threatened in any way. To Target's knowledge, none of the
Marks uses by Target infringes or is alleged to infringe any trade name,
trademark, or service xxxx of any third party.
(vi) All products and materials containing a Xxxx xxxx
the proper federal registration notice where permitted by law.
(e) COPYRIGHTS.
(i) The Target Disclosure Schedule contains a complete
and accurate list and summary description of all Copyrights. Target is the owner
of all right, title, and interest in and to each of the Copyrights, free and
clear of all liens, security interests, charges, encumbrances, equities, and
other adverse claims.
(ii) All the Copyrights have been registered and are
currently in compliance with formal legal requirements, are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety days after the date of Closing.
(iii) No Copyright is infringed or, to Target's
knowledge, has been challenged or threatened in any way. None of the subject
matter of any of the Copyrights infringes or is alleged to infringe any
copyright of any third party or is a derivative work based on the work of a
third party.
43
(iv) To Target's knowledge, all works encompassed by
the Copyrights have been marked with the proper copyright notice.
(f) TRADE SECRETS.
(i) With respect to each Trade Secret, the
documentation relating to such Trade Secret is currently accurate, and
sufficient in detail and content to identify and explain it and to allow its
full and proper use without reliance on the knowledge or memory of any
individual.
(ii) Target has taken all reasonable precautions to
protect the secrecy, confidentiality, and value of its Trade Secrets.
(iii) Target has good title and an absolute (but not
necessarily exclusive) right to use the Trade Secrets. The Trade Secrets are not
part of the public knowledge or literature, and, to Target's knowledge, have not
been used, divulged, or appropriated either for the benefit of any Person (other
than Target) or to the detriment of Target. No Trade Secret is subject to any
adverse claim or has been challenged or threatened in any way.
2.15 Real Property.
(a) The Target Disclosure Schedule identifies all the real
property owned, or which will be owned, by Target as of the Closing, as well as
all contracts, agreements or options to acquire other real property, or to sell
or lease owned property, in each case, binding on Target. Except as disclosed in
the Target Disclosure Schedule, Target has good, valid and insurable title to
all such real property and all improvements located thereon free and clear of
all Liens, except Permitted Liens.
(b) The Target Disclosure Schedule identifies the real
property ("Target Leased Real Property") leased, subleased, occupied or used by
Target pursuant to a Lease or other agreement (each such Lease or other similar
agreement being hereinafter referred to as a "Target Lease") and Target owns or
leases the improvements located on such Target Leased Real Property. Target has
not received any written notification that it is in default with respect to any
Target Leases pursuant to which it occupies or uses any Target Leased Real
Property and/or such improvements nor, to the knowledge of Target, are there any
disputes between any Person and Target with respect to Target Leases, which
default or dispute would materially adversely affect the right of Target to
remain in possession of the property in question or otherwise adversely affect
in any material respect the ability to use such property for its current use.
Except as set forth in the Target Disclosure Schedule, Target has performed all
obligations required to be performed by it to date under, and is not in default
in respect of, any Target Lease, and no event has occurred which, with due
notice or lapse of time or both, would constitute such a default, except for
such obligations, the non-performance of which, and such defaults, the existence
of which, in each case, would not result in a termination or cancellation of any
Lease (or other such agreement). To the knowledge of Target, no other party to
any Target Lease or such other agreement is in default in respect thereof, and
no event has occurred which, with due notice or lapse of time or both, would
constitute such a default, except for defaults which, individually or in the
aggregate, would not have a Material Adverse Effect with respect to Target.
44
Except as disclosed in the Target Disclosure Schedule, Target has a valid
leasehold interest in each Target Leased Real Property subject to a Target
Lease, which leasehold interest is free and clear of all Liens, except Permitted
Liens.
2.16 Tangible Personal Property.
(a) The Tangible Personal Property owned, leased or used by
Target is in the aggregate sufficient and adequate to carry on its business as
presently conducted and is, in the aggregate, in good operating condition and
repair, normal "wear and tear" excepted.
(b) Except as set forth in the Target Disclosure Schedule or
property and assets sold or disposed of in the ordinary course of business of
Target, Target has good and valid title to all Tangible Personal Property shown
on the Financial Statements as being owned by it, in each case free and clear of
all Liens, except for Permitted Liens.
2.17 CONTRACTS AND COMMITMENTS. The Target Disclosure Schedule
contains a true, complete and accurate list of all contracts, agreements,
instruments, leases, licenses, arrangements, or understandings (whether written
or oral) to which Target is a party or by which any of its assets or properties
are bound. All contracts, agreements, plans, leases, policies and licenses
referred to in the Target Disclosure Schedule are valid and in full force and
effect, and true copies thereof have been heretofore made available to Merchant.
2.18 CONSENTS. The Target Disclosure Schedule sets forth a true and
complete list of all consents of governmental and other regulatory agencies,
foreign or domestic, and of other third parties required to be received by or on
the part of Target to enable Target to enter into and carry out this Agreement.
All such requisite consents have been, or prior to the Closing will have been,
obtained.
2.19 INSURANCE. The Target Disclosure Schedule sets forth a list of
all policies or binders of fire, liability, workmen's compensation or other
insurance held by or on behalf of Target (specifying the insurer, the policy
number or covering note number with respect to such binders). Correct and
complete copies of such policies or binders have been delivered or made
available to Merchant. Target is not in default with respect to any material
provision contained in any such policy or binder and has not received a notice
of cancellation or non-renewal of any such policy or binder. All of such
insurance is in full force and effect and all premiums due and payable thereon
have been paid.
2.20 LABOR MATTERS. Target is not party to any collective
bargaining agreement or other labor agreement with any union or labor
organization, and no union or labor organization has been recognized by Target.
Except as disclosed in the Target Disclosure Schedule, as of the date hereof,
(i) to the knowledge of Target after reasonable inquiry, there is no union or
labor organization actively seeking to organize any employees of Target and (ii)
there is no strike, picketing or work stoppage by, or any lockout of, employees
of Target pending or, to the knowledge of Target, threatened, against or
involving Target.
2.21 QUESTIONABLE PAYMENTS. Neither Target nor any director,
officer, agent, employee or other person associated with or acting on behalf of
Target has, directly or indirectly: (A) used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
45
political activity; (B) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns from corporate funds; (C) established or maintained any unlawful or
unrecorded fund of corporate monies or other assets; (D) made any false or
fictitious entry on the books or records of Target; or (E) made any bribe,
kickback, or other payment of a similar or comparable nature, whether lawful or
not, to any person or entity, private or public, regardless of form, whether in
money, property, or services, to obtain favorable treatment in securing business
or to obtain special concessions, or to pay for favorable treatment for business
secured or for special concessions already obtained.
2.22 BROKERS. Except as set forth in the Target Disclosure
Schedule, Target has not engaged, consented to or authorized any broker, finder,
investment banker or other third party to act on its behalf, directly or
indirectly, as a broker or finder in connection with the transactions
contemplated by this Agreement. Target has no liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which Merchant could become
liable or obligated.
2.23 CERTAIN DEFINITIONS. The following definitions are used in
this Exhibit 2:
"CONTRACT" shall mean, whether in writing or oral, any contract, note,
bond, deed, mortgage, indenture, lease, license, agreement or other instrument
or obligation.
"ENVIRONMENTAL, HEALTH OR SAFETY REQUIREMENTS" means (i) any and all
federal, state and local statutes, regulations and ordinances, and any rules of
common law, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act (42 X.X.X.xx. 9601 et seq.), the
Hazardous Materials Transportation Act (49 X.X.X.xx. 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C.ss.6901 et seq.), the Clean Water Act
(33 X.X.X.xx. 1251 et seq.), the Clean Air Act (42 X.X.X.xx. 7401 et seq.), the
Toxic Substance Control Act (15 X.X.X.xx. 2601 et seq.), the Federal
Insecticide, Fungicide and Rodenticide Act (7 U.S.C.ss.136 et seq.), and the
Occupational Safety and Health Act (29 U.S.C.ss.651 et seq.), and the
regulations promulgated pursuant to each of the foregoing; and (ii) with respect
to any Person, any and all administrative or judicial orders, consent decrees,
settlement agreements, injunctions, Permits, licenses, codes, covenants and deed
restrictions and other provisions having the force or effect of law, issued by a
Governmental Authority in respect of such Person's or its Subsidiaries'
operations or assets, or applicable thereto; in each case concerning pollution
or protection of the environment, or human health, or safety, including worker
safety, to the extent that such safety may be affected by exposure to Hazardous
Materials (including, without limitation, all those relating to the presence,
use, production, generation, handling, transportation, treatment, storage,
disposal, distribution, labeling, testing, processing, discharge, release,
threatened release, control, or cleanup of or exposure to any Hazardous
Materials, hazardous materials, or wastes).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"GOVERNMENTAL AUTHORITY" shall mean any foreign, Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, including, without limitation, any court of competent
jurisdiction.
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"HAZARDOUS MATERIAL" shall mean any chemical, waste, pollutant,
contaminant or substance that is regulated by any Environmental, Health or
Safety Requirements, including, without limitation, asbestos in friable
condition, urea formaldehyde foam insulation, petroleum and its derivatives,
by-products and other petroleum hydrocarbons, radioactive materials and
polychlorinated biphenyls (PCBs), and any material or substance which is defined
as a "hazardous waste," "hazardous substance," "hazardous material," "restricted
hazardous waste," "industrial waste," "solid waste," "contaminant," "pollutant,"
"toxic waste" or "toxic substance" under any Environmental, Health or Safety
Requirement.
"INTELLECTUAL PROPERTY" shall mean and include (i) the name
"Innovonics, Inc.", all fictional business names, trading names, registered and
unregistered trademarks, service marks, and applications (collectively, the
"Marks"); and (ii) all patents, patent applications, and inventions and
discoveries that may be patentable (collectively, "Patents"); (iii) all
copyrights in both published works and unpublished works (collectively, the
"Copyrights"); and (iv) all know-how, trade secrets, confidential information,
customer lists, software, technical information, data, process technology,
plans, drawings, and blue prints (collectively, "Trade Secrets"); which, in each
case, are owned, used, or licensed by Target.
"LEASES" with respect to any Person, shall mean all leases of real,
personal or intangible property under which either such Person or any of its
affiliates is lessee or lessor (or sublessee or sublessor).
"LEGAL REQUIREMENTS" with respect to any Person, shall mean (a) all
statutes, laws, ordinances, codes, rules, regulations, judgments, decrees,
decisions, writs, rulings, injunctions, orders and other requirements of any
Governmental Authority and (b) any consent, approval, authorization, waiver,
Permit, agreement, license, certificate, exemption, order, registration,
declaration or filing of, with or to any Governmental Authority, in each case
other than relating to Taxes, and in each case binding upon such Person or such
Person's assets, business or properties.
"LIEN" shall mean any encumbrance, charge, security interest, mortgage,
pledge, hypothecation, title defect, title retention agreement, lease, sublease,
license, occupancy agreement, easement, covenant running with the land,
encroachment, voting trust agreement, restriction, option, right of first offer
or refusal, proxy or lien, including, but not limited to, liens for taxes.
"MATERIAL ADVERSE EFFECT," with respect to any Person, shall mean any
change or effect that is or would be reasonably expected to be materially
adverse to the business, assets, properties, financial condition or results of
operations of such Person.
"PERMIT" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license,
notice, permit, or right to which any Person is a party or that is or may be
binding upon or inure to the benefit of any Person or its securities, assets, or
business.
"PERMITTED LIEN" shall mean (i) any Lien for Taxes not yet due or
delinquent or as to which there is a good faith dispute and for which there are
adequate reserves on the financial statements of the Person affected thereby,
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(ii) with respect to real property, any Lien which is not in a material
liquidated amount and which does not, individually or in the aggregate,
interfere materially with the current use or materially detract from the value
or marketability of such property (assuming its continued use in the manner in
which it is currently used), (iii) a Lien arising pursuant to any order of
attachment, distraint or similar legal process arising in connection with court
proceedings, so long as the execution or other enforcement thereof has been
stayed and the claims secured thereby are being contested in good faith by
appropriate proceedings and for which there are adequate reserves on the
financial statements of the Person affected thereby, (iv) Liens for assessments,
levies or other governmental charges not delinquent or being contested in good
faith and by appropriate proceedings and for which there are adequate reserves
on the financing statements of the Person affected thereby, (v) deposits or
pledges to secure bids, tenders, contracts, franchises, leases, statutory
obligations, indemnity, performance, surety and appeal bonds or other
obligations of a like nature, in each case arising in the ordinary course of
business, (vi) deposits or pledges to secure obligations under workers
compensation, social security or similar laws or under employment insurance,
(vii) mechanics', workers', materialmen's or other like Liens arising in the
ordinary course of business that do not materially detract from the value, or
interfere with the present use, of the properties or assets affected thereby and
(viii) Liens existing on the date hereof in respect of any capital leases in
effect on the date hereof.
"PERSON" shall mean and include an individual, a partnership, a joint
venture, a limited liability company, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
"TANGIBLE PERSONAL PROPERTY" shall mean, collectively, machinery,
equipment, furniture, fixtures and other tangible personal property.
"TAX" or "TAXES" shall mean all taxes, charges, fees, levies or other
assessments, and all estimated payments thereof, including, but not limited to,
income, excise, property, sales, use, value added, franchise, payroll, transfer,
transfer gain, gross receipts, withholding, social security and unemployment
taxes or other taxes of any kind, imposed by any foreign, Federal, state, county
or local government, or any subdivision or agency thereof (a "TAX AUTHORITY"),
and any interest, penalty and expense relating to such taxes, charges, fees,
levies or other assessments.
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EXHIBIT 6.7
Target Obligations to be paid by Merchant concurrently with the
Closing:
A. $68,000 is to be paid to satisfy obligations owing under
Target's current credit card accounts.
B. $427,000 will be used to pay deferred wages, and accrued
interest with respect thereto, owed by Target to Xxxxxx Xxxxx.
C. $55,000 will be paid toward satisfaction of expenses
incurred by Target in connection with the preparation, execution and performance
of this Agreement, and the consummation of the Merger and other transactions
contemplated hereby.
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