EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
DELTADATA, INC.
(d/b/a DELTA COMMUNICATIONS GROUP)
ZANETT, INC.
ZANETT MERGER SUB DCG, INC.
and
THE MAJORITY SHAREHOLDER OF DELTADATA, INC.
Dated as of November 30, 2003
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS AND CONSTRUCTION 1
1.1 Definitions 1
1.2 Construction 5
ARTICLE II. THE MERGER 5
2.1 The Merger 5
2.2 Effective Time Of The Merger; Closing 6
2.3 Deliveries by DCG and the Majority DCG Shareholder 6
2.4 Surviving Corporation 7
ARTICLE III. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; MERGER CONSIDERATION 8
3.1 Effect on Merger Sub Capital Stock 8
3.2 Effect on Shares; Exchange of Certificates 8
3.3 Merger Consideration 8
3.4 Payment of Merger Consideration 9
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF DCG 12
4.1 Organization; Qualification and Capital Stock; Corporate Records 12
4.2 No Violations of Laws or Agreements, consents or Defaults 14
4.3 No Subsidiaries 14
4.4 Financial Information 14
4.5 Absence of Certain Changes 15
4.6 Licenses; Regulatory Approvals 16
4.7 Regulatory Matters 17
4.8 Tax Matters 17
4.9 Litigation Claims 19
4.10 Properties, contracts; Leases and Other Agreements; Bank Accounts 19
4.11 Employee Matters; Benefit Plans; ERISA 21
4.12 Personnel 24
4.13 Title to and condition of Properties 24
4.14 Product and Service Warranties 24
4.15 Intellectual Property 25
4.16 Insurance 26
4.17 Relationships 26
4.18 Compliance With Laws 27
4.19 Environmental Matters 27
4.20 No Undisclosed Liabilities or Obligations 28
4.21 Receivables 29
4.22 Related Party Transactions 29
4.23 Vote Required 29
4.24 Brokers 29
4.25 Disclosure 30
4.26 Revolving Credit Agreements 30
4.27 Reorganization 30
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE MAJORITY DCG SHAREHOLDER 31
5.1 Shareholder Power and Authority; Ownership 31
5.2 Securities Matters 32
ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF PARENT ANDMERGER SUB 33
6.1 Organization, Existence and Capital Stock 33
6.2 Power and Authority 34
6.3 No Violations of Laws or Agreements, Consents or Defaults 34
6.4 SEC Filings 35
6.5 Subsidiaries 35
6.6 No Contracts or Liabilities 35
6.7 Related Party Transactions 35
6.8 Brokers 35
6.9 Reorganization 35
ARTICLE VII. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 36
7.1 Survival of Representations 36
7.2 Indemnification 37
7.3 Conditions of Indemnification 38
7.4 Remedies Cumulative 38
ARTICLE VIII. CONVENANTS 39
8.1 Public Disclosures 39
8.2 confidentiality 39
8.3 Hiring of Accountant 39
8.4 Determination of Actual EBITDA After Closing 40
8.5 Creation of DCG Stock Option Plan 40
8.6 Xxxxxx Xxxxxx to be Appointed to Management Committee 41
8.7 Release of Xxxxxx Xxxxxx from DCG Guarantees 41
8.8 Annual Financial Statements 41
8.9 Accounting Disputes 41
8.10 Audit; Cooperation 41
8.11 Key Man Life Insurance 42
8.12 Operating Cash Shortfall 42
ARTICLE IX. MISCELLANEOUS 42
9.1 Notices 42
9.2 Further Assurances 42
9.3 Governing Law 43
9.4 Right of Setoff 43
9.5 Consent to Jurisdiction 43
9.6 Integration of Exhibits and Schedules 43
9.7 Entire Agreement 43
9.8 Expenses 44
9.9 Counterparts 44
9.10 Binding Effect 44
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered
into as of November 30, 2003, by and among DELTADATA, INC. a California
corporation doing business under the name DELTA COMMUNICATIONS GROUP ("DCG"),
ZANETT, INC., a Delaware corporation ("Parent"), ZANETT MERGER SUB DCG, INC.,
a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger
Sub"), and Xxxxxx Xxxxxx, an individual residing in the State of California
and owner of a majority of the outstanding capital stock of DCG (the
"Majority DCG Shareholder").
W I T N E S S E T H:
WHEREAS, each of the Boards of Directors of DCG, Parent and Merger
Sub have approved the merger of DCG with and into Merger Sub upon the terms
and subject to the conditions set forth herein and in accordance with the
Delaware General Corporation Law and the California Corporations Code;
WHEREAS, Parent, Merger Sub, DCG and the Majority DCG Shareholder
desire to make certain representations, warranties and agreements in
connection with, and establish various conditions precedent to, the Merger;
and
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, representations, warranties, covenants and agreements of
the parties hereto agree as follows:
ARTICLE I. DEFINITIONS AND CONSTRUCTION
1.1 Definitions.
"Affiliate" shall mean, as to any Person, any other Person controlled
by, under the control of, or under common control with, such Person. As used
in this definition, "control" shall mean possession, directly or indirectly,
of the power to direct or cause the direction of management or policies
(whether through ownership of securities or partnership or other ownership
interests, by contract or otherwise).
"Annual Financial Statements" shall have the meaning ascribed to such
term in Section 8.8.
"Balance Sheet" shall mean the balance sheet of DCG included in the DCG
Financial Statements.
"Benefit Plans" shall mean any profit sharing, group insurance, medical,
dental and/or hospitalization, stock option, pension, retirement, bonus,
deferred compensation, stock bonus or stock purchase plan, or collective
bargaining agreements, contracts or other arrangements under which pensions,
deferred compensation or other retirement benefits are being paid or may
become payable by a party, or any other employee welfare or benefit
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agreements, plans or arrangements, as defined in Section 3(3) of ERISA, any
plan created in accordance with Section 125 of the Code, or any nonqualified
employee benefit plans or deferred compensation, bonus, stock or incentive
plans, or other employee benefit or fringe benefit programs, established for
the benefit of a party's former or current officers, directors or employees,
including each trust or other agreement with any custodian or any trustee for
funds held under any such agreement plan or agreement.
"Bonus Performance Period" shall mean the three-year period commencing
on December 1, 2003 and ending on November 30, 2006.
"Bonus EBITDA Target" means $2,074,800.
"Books and Records" shall mean (i) the minute books containing the
minutes of all meetings and written consents of the shareholders and
directors (and all committees thereof) and (ii) all books and records of DCG
prior to the Closing Date, including customer lists, reports, plans,
projections and advertising and marketing materials and financial and
accounting books and records.
"Business" shall mean the business currently carried on by DCG pursuant
to which DCG provides information technology consulting services for network
integration of public and private networks.
"Business Day" shall mean any day other than a Saturday, Sunday or legal
holiday in the State of New York.
"Cal. Corp. Code" shall mean the California Corporations Code, as
amended.
"Closing" shall mean the exchange of the Shares for the Initial Cash
Payment and Initial Stock Payment as set forth herein.
"Closing Date" shall mean the date on which the Closing is completed.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"DCG Financial Statements" shall mean DCG's unaudited balance sheets as
of December 31, 2000, 2001 and 2002 and November 30, 2003 and related
statements of income, statements of change in shareholders' equity and
statements of cash flows for such years, each prepared in accordance with
GAAP.
"DGCL" shall mean the Delaware General Corporation Law, as amended.
"Disclosure Documents" shall mean all agreements and documents referred
to in any of the Schedules, together with all other agreements and documents
disclosed by DCG to Parent during Parent's due diligence investigation
conducted prior to the Closing Date which are attached hereto as ANNEX A.
"EBITDA" means, for any period, earnings before (i) interest income and
interest expense, (ii) taxes based on income, and (iii) depreciation and
amortization expense for that period, calculated in accordance with GAAP.
"EBITDA Target" means (i) $460,000 for the first Performance Period,
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(ii) $529,000 for the second Performance Period, and (iii) $608,350 for the
third Performance Period.
"Encumbrance" shall mean a mortgage, charge, pledge, lien, option,
restriction, claim, right of first refusal, right of preemption, third party
right or interest or other encumbrance or security interest of any kind or
similar right or any other matter affecting title.
"Environmental Laws" means all federal, state and local, provincial and
foreign, civil and criminal laws, regulations, rules, ordinances, codes,
decrees, judgments, directives or judicial or administrative orders,
agreements or settlements relating to pollution or protection of the
environment, natural resources or human health and safety, including, without
limitation, laws relating to releases or threatened releases of Hazardous
Substances (including, without limitation, releases or threatened releases to
ambient air, surface water, groundwater, land, surface and subsurface strata)
or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, release, transport, disposal or handling of Hazardous
Substances. "Environmental Laws" include, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. 9601 et seq.), the Hazardous Materials Transportation Law (49
U.S.C. 5101 et seq.), the Resource Conservation and Recovery Act (42
U.S.C. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C.
1251 et seq.), the Clean Air Act (42 U.S.C. 7401 et seq.), the Toxic
Substances Control Act (15 U.S.C. 2601 et seq.), the Oil Pollution Act (33
U.S.C. 2701 et seq.), the Emergency Planning and Community Right-to-Know
Act (42 U.S.C. 11001 et seq.), the Occupational Safety and Health Act (29
U.S.C. 651 et seq.), each as amended to date and all other state laws
similar to any of the above.
"Environmental Liabilities" means all liabilities of DCG that (i) arise
under or relate to violations of Environmental Laws or arise in connection
with or related to any matter disclosed or required to be disclosed on
Schedule 4.19 and (ii) are attributable to actions or omissions occurring or
conditions existing on or prior to the Closing Date.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, together with all rules and regulations promulgated thereunder.
"GAAP" shall mean, at any particular time, accounting principles
generally accepted in the United States of America, consistently applied on a
going concern basis and, with respect to interim financial statements,
subject to normal year-end adjustments and excluding all final notes thereto.
"Hazardous Substances" means: (i) all Materials or Substances (whether
or not wastes, contaminants or pollutants) that are or become regulated by
any of the Environmental Laws; (ii) all Materials or Substances that are or
become defined or described by any of the Environmental Laws as "hazardous"
or "toxic" or a "pollutant," "contaminant," "hazardous substance," "hazardous
waste," "extremely hazardous waste," "acutely hazardous waste" or "acute
hazardous waste;" and (iii) petroleum, including crude oil or any fraction
thereof, asbestos, including asbestos containing materials, and
polychlorinated biphenyls.
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"Management Committee" shall mean the Management Committee appointed
from time to time by the Board of Directors of Parent.
"Materials or Substances" shall mean all elements, compounds,
substances, matrices or mixtures that are hazardous, toxic, ignitable,
reactive or corrosive.
"Percentage Interest" shall mean the quotient obtained by dividing one
by the number of Shares issued and outstanding immediately prior to the
Effective Time.
"Parent Stock" shall mean the Parent's common stock, $0.001 par value
per share.
"Performance Period" shall mean each of the three successive annual
periods commencing on December 1 and ending on November 30 following the
Closing Date.
"Person" shall mean an individual, company, partnership, limited
liability company, limited liability partnership, joint venture, trust or
unincorporated organization, joint stock corporation or other similar
organization, government or any political subdivision thereof, or any other
legal entity.
"Receivables" shall mean the accounts receivable, trade receivables,
notes receivable and other receivables arising out of or related to DCG's
operations, as of (i) December 31, 2002 or (ii) the close of business on
November 30, 2003, as the context may require, in each case determined in
accordance with GAAP.
"Related Agreements" shall mean all instruments, agreements and other
documents executed and delivered or to be executed and delivered pursuant to
this Agreement including without limitation the Ownership and Nondisclosure
Agreements, the Employment Agreements, the Consulting Agreements, the Lock-up
Agreements and the Option Cancellation and Release Agreements.
"Reserves" shall mean those reserves for bad debts, contractual
adjustments and disallowances, self-insured risks, risk management and
unspecified uninsured liabilities, established and maintained by DCG and
reflected in the Financial Statements.
"Schedules" shall mean the disclosure schedules delivered by DCG to
Parent pursuant to this Agreement.
"Shares" shall mean all issued and outstanding shares of DCG's common
stock, no par value.
"Taxes" shall mean all taxes, assessments, charges, duties, fees, levies
or other governmental charges, including but not limited to, all federal,
state local, foreign or other income, profits, unitary, business, franchise,
capital stock, real property, personal property, intangible taxes,
withholding, FICA, medicare, unemployment compensation, disability, transfer,
sales, use, excise and other taxes, assessments, charges, duties, fees, or
levies of any kind whatsoever (whether or not requiring the filing of Tax
Returns) and all deficiency assessments, additions to tax, penalties and
interest.
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"Tax Returns" shall mean any return, amended return or other report
(including but not limited to elections, declarations, disclosures,
schedules, estimates and information returns) required to be filed with any
taxing or governmental authority.
1.2 Construction.
(a) The headings and captions used herein are intended for
convenience of reference only, and shall not modify or affect in any manner
the meaning or interpretation of any of the provisions of this Agreement.
(b) As used herein, the singular shall include the plural, the
masculine and feminine genders shall include the neuter, and the neuter
gender shall include the masculine and feminine, unless the context otherwise
requires.
(c) The words "hereof", "herein", and "hereunder", and words of
similar import, when used in this Agreement shall refer to this Agreement as
a whole and not to any particular provision of this Agreement.
(d) All references herein to Sections, Schedules or Exhibits shall
be deemed to refer to Sections of and Schedules or Exhibits to this
Agreement, unless specified to the contrary. All Exhibits and Schedules to
this Agreement are integral parts of this Agreement as if fully set forth
herein.
(e) The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation."
(f) "To the knowledge", "to the best knowledge, information and
belief" or any similar phrase shall be deemed to mean that an individual or
the directors or executive officers of an entity (i) is actually aware of a
particular fact or matter or (ii) could be expected to discover or otherwise
become aware of that fact or matter in the course of conducting a reasonable
investigation regarding the accuracy of any representation or warranty
contained in this Agreement.
(g) "Material adverse change" or "material adverse effect" means,
with respect to a specified party, any change or effect, as the case may be,
that has, or is reasonably likely to have, individually or in the aggregate,
a material adverse impact on the assets, business, financial position of such
party and its subsidiaries taken as a whole.
(h) As all parties participated in negotiating and drafting this
Agreement, no rule of construction shall apply to this Agreement which
construes ambiguous language in favor of or against any party by reason of
that party's role in drafting this Agreement.
ARTICLE II. THE MERGER
2.1 The Merger. Upon the terms and subject to the conditions set forth
in this Agreement and in accordance with the DGCL and the Cal. Corp. Code, at
the Effective Time (as defined in Section 2.2 hereof), DCG shall be merged
with and into Merger Sub in accordance with the provisions of Section 252 of
the DGCL and Section 1108(d) of the Cal. Corp. Code (the "Merger").
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Following the Effective Time, the separate existence of DCG shall cease, and
Merger Sub shall continue as the surviving corporation in the Merger
(hereinafter sometimes referred to as the "Surviving Corporation") as a
business corporation incorporated under the laws of the State of Delaware
under the name "Delta Communications Group, Inc." and shall succeed to and
assume all the rights and obligations of DCG in accordance with the DGCL and
the Cal. Corp. Code.
2.2 Effective Time Of The Merger; Closing.
(a) The Merger shall become effective at such time (the "Effective
Time") as a duly executed Certificate of Merger (the "Certificate of Merger")
is filed with the Secretary of State of the State of Delaware and with the
Secretary of State of the State of California.
(b) Subject to the terms and conditions hereof, the closing of the
Merger and the transactions contemplated by this Agreement (the "Closing")
will occur simultaneously with the execution of this Agreement. The Closing
shall be held at the offices of Drinker Xxxxxx & Xxxxx LLP, One Xxxxx Square,
18th and Xxxxxx Xxxxxxx, XX 00000-0000 fax: (000) 000-0000 or at such other
place as Parent, Merger Sub and DCG may agree.
2.3 Deliveries by DCG and the Majority DCG Shareholder. Subject to the
terms and conditions hereof, prior to the Closing, DCG and/or the Majority
DCG Shareholder shall deliver or cause to be delivered to Parent each of the
following:
(a) A certificate, dated as of the Closing Date, executed by the
Secretary of DCG, certifying as to (a) DCG's articles of incorporation, (b)
DCG's by-laws, (c) resolutions with respect to the transactions contemplated
by this Agreement adopted by DCG's board of directors and shareholders and
attached to such certificate, and (d) incumbency and signatures of the
persons who have executed this Agreement, and any other documents,
certificates and agreements to be executed and delivered at the Closing
pursuant to this Agreement or any of the Related Agreements on behalf of DCG.
(b) An opinion of Xxxx Xxxxx, LLP, counsel to DCG, dated the
Closing Date, in form and substance reasonably satisfactory to Parent.
(c) Ownership and Nondisclosure Agreements signed by each
employee, officer, consultant or contractor of DCG identified on Schedule
4.15(g) substantially in the form of Exhibit A (collectively, the "Ownership
and Nondisclosure Agreements").
(d) Employment agreements executed by each of Xxxxxx Xxxxxx and
Xxxxxx Xxxxxxxx substantially in the form of Exhibit B-1 (the "Employment
Agreements").
(e) Consulting agreements executed by each of Xxxx Xxxxxxxx and
Xxx Xxxxxxx substantially in the form of Exhibit B-2 (the "Consulting
Agreements").
(f) Lock-up agreements executed by each shareholder of DCG
substantially in the form of Exhibit C (collectively, the "Lock-up
Agreements").
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(g) A Pay-off letter from Sunwest Bank stating that the revolving
credit agreement with Sunwest Bank (the "Sunwest Credit Agreement") may be
paid in full immediately by the Surviving Corporation or Parent after the
Closing and may be terminated without any additional fees or expenses,
including but not limited to termination fees, other than payment of the
amounts drawn under the Sunwest Revolving Credit Agreement as of Closing and
any applicable interest accrued after Closing (the "Sun West Pay-Off Letter")
and evidence that Sunwest Bank will relinquish any liens or right to setoff
against the Surviving Corporation, including the filing of any UCC-3
termination statements to effect such release.
(h) A Pay-off letter from Textron Financial Corporation stating
that the revolving credit agreement with Textron Financial Corporation (the
"Textron Credit Agreement") may be paid in full immediately by the Surviving
Corporation or Parent after the Closing and may be terminated without any
additional fees or expenses, including but not limited to termination fees,
other than payment of the amounts drawn under the Textron Revolving Credit
Agreement as of Closing and any applicable interest accrued after Closing
(the "Textron Pay-Off Letter") and evidence that Textron Financial
Corporation will relinquish any liens or right to setoff against the
Surviving Corporation, including the filing of any UCC-3 termination
statements to effect such release.
(i) An option cancellation and release agreement, substantially in
form of Exhibit D, duly executed by each holder of an unexpired issued and
outstanding option to purchase Shares granted under the DeltaData, Inc. 1998
Stock Option Plan (collectively, the "Option Cancellation and Release
Agreements").
2.4 Surviving Corporation.
(a) The certificate of incorporation of Merger Sub shall be the
certificate of incorporation of the Surviving Corporation, until duly amended
in accordance with the terms thereof and of the DGCL.
(b) The by-laws of Merger Sub shall be the by-laws of the
Surviving Corporation, until duly amended in accordance with their terms and
as provided by the certificate of incorporation of the Surviving Corporation
and the DGCL.
(c) Those individuals designated as directors on Schedule 2.4
shall, from and after the Effective Time, be the directors of the Surviving
Corporation until their respective successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal
in accordance with the Surviving Corporation's certificate of incorporation
and by-laws.
(d) Those individuals designated as officers on Schedule 2.4
shall, from and after the Effective Time, be the officers of the Surviving
Corporation until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's certificate of incorporation and by-laws
(e) If at any time after the Effective Time, any party shall
consider that any further deeds, assignments, conveyances, agreements,
documents, instruments or assurances in law or any other things are necessary
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or desirable to vest, perfect, confirm or record in the Surviving Corporation
the title to any property, rights, privileges, powers and franchises of DCG
by reason of, or as a result of, the Merger, or otherwise to carry out the
provisions of this Agreement, the remaining parties, as applicable, shall
execute and deliver, upon request, any instruments or assurances, and do all
other things necessary or proper to vest, perfect, confirm or record title to
such property, rights, privileges, powers and franchises in the Surviving
Corporation, and otherwise to carry out the provisions of this Agreement.
ARTICLE III. EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; MERGER CONSIDERATION
3.1 Effect on Merger Sub Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of capital stock of Merger Sub, each issued and outstanding share of
capital stock of Merger Sub shall remain outstanding and represent a validly
issued, fully paid and nonassessable share of common stock of the Surviving
Corporation.
3.2 Effect on Shares; Exchange of Certificates. As of the Effective
Time, by virtue of the Merger and without any action on the part of the
holder of any Shares, each Share issued and outstanding immediately prior to
the Effective Time shall be converted into the right to receive one
Percentage Interest of the Merger Consideration. At the Closing, immediately
after the Effective Time, the shareholders of DCG (the "DCG Shareholders")
shall surrender to the Surviving Corporation all of the outstanding
certificates representing the Shares in exchange for the Merger Consideration
payable to the DCG Shareholders at Closing. Until such certificates are
surrendered, outstanding certificates formerly representing Shares shall be
deemed for all purposes as evidencing the right to receive the Merger
Consideration into which such shares have been converted as though said
surrender and exchange had taken place. In no event will a holder of shares
be entitled to interest on the Merger Consideration issuable in respect of
such Shares.
3.3 Merger Consideration.
(A) The "Merger Consideration" shall consist of:
(i) An amount of cash equal to $328,370 payable to the DCG
Shareholders, at the Closing in accordance with Section 3.4(a) (the "Initial
Cash Payment");
(ii) an amount of cash equal to $435,000 payable to the DCG
Shareholders after the Closing in accordance with Section 3.4(c) (the
"Contingent Cash Payments");
(iii) a number of shares of Parent Stock calculated by
dividing $235,000 by the product of (A) the average closing price of a share
of Parent Stock as reported on NASDAQ for the three (3) consecutive trading
days ending on the day prior to date of Closing and (B) 0.925, such shares to
be issuable to the DCG Shareholders in accordance with Section 3.4(b) (the
"Initial Stock Payment"). Parent shall not be required to issue any
fractional shares or scrip with respect to the Initial Stock Payment. All
fractional shares shall be rounded up to the nearest whole number of shares
of Parent Stock; and
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(iv) a number of shares of Parent Stock calculated by
dividing $965,000 by the average closing price of a share of Parent Stock as
reported on NASDAQ for the ten (10) consecutive trading days ending on the
day prior to the applicable issuance date, such shares to be issuable to the
DCG Shareholders after the Closing in accordance with Section 3.4(d) (the
"Contingent Stock Payments"). Parent shall not be required to issue any
fractional shares or scrip with respect to the Contingent Stock Payments.
All fractional shares shall be rounded up to the nearest whole number of
shares of Parent Stock.
(v) a number of shares of Parent Stock calculated by dividing
$400,000 by the average closing price of a share of Parent Stock as reported
on NASDAQ for the ten (10) consecutive trading days ending on the day prior
to the applicable issuance date, such shares to be issuable to the DCG
Shareholders after the Closing in accordance with Section 3.4(f) (the "Bonus
Stock Payment"). Parent shall not be required to issue any fractional shares
or scrip with respect to the Final Contingent Stock Payment. All fractional
shares shall be rounded up to the nearest whole number of shares of Parent
Stock.
3.4 Payment of Merger Consideration.
(a) Initial Cash Payment. At the Closing, upon surrender to
Parent of certificates representing all and not less than all of the Shares
issued and outstanding immediately prior to the Effective Time, Parent shall
pay to each DCG Shareholder an amount of cash equal to the product of (i) the
number of Shares held by such DCG Shareholder immediately prior to the
Effective Time, (ii) the Percentage Interest, and (iii) the Initial Cash
Payment. The Initial Cash Payment will be payable by means of wire transfers
to accounts specified in writing to Parent not less than five Business Days
before the Closing Date.
(b) Initial Stock Payment. At the Closing, upon surrender to
Parent of certificates representing all and not less than all of the Shares
issued and outstanding immediately prior to the Effective Time, Parent shall
issue and deliver to each DCG Shareholder a certificate, registered in the
name of such DCG Shareholder, representing a number of shares of Parent Stock
equal to the product of (i) the number of Shares held by such DCG Shareholder
immediately prior to the Effective Time, (ii) the Percentage Interest, and
(iii) the Initial Stock Payment.
(c) Contingent Cash Payment. For each Performance Period, upon
complete satisfaction of the Performance Period Requirements set forth below,
Parent shall pay each DCG Shareholder an amount of cash determined in
accordance with the following formula:
CCP = 1/3*(S * PI * 435,000)
Where:
CCP = The amount of cash payable by Parent to such DCG
Shareholder with respect to such Performance Period.
S = The number of Shares held by such DCG Shareholder
immediately prior to the Effective Time.
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PI = The Percentage Interest.
With respect to each Performance Period, the requirements set forth in
paragraphs 1-3 below (the "Performance Period Requirements") must be
satisfied as a condition precedent to Parent's obligation to pay the
Contingent Cash Payments for such Performance Periods:
1. During each Performance Period, the EBITDA of the Surviving
Corporation must be equal to or exceed that Performance Period's EBITDA
Target; and
2. Procuring, paying and maintaining key-man life insurance in
the amount of $2,000,000 for Xxxxxx Xxxxxx, with Parent listed as owner and
beneficiary of such policy; and
3. Each of Xxxxxx Xxxxxx, Xxxxxx Xxxxxxxx, Xxxx Xxxxxxxx and
Xxx Xxxxxxx, shall be in compliance with all non-competition sections in each
of their respective Employment Agreement or Consulting Agreement to which
such individual is a party. For purposes of this Section 3.6(c), any attempt
by such individual to have the above referenced sections of the Employment
Agreement or Consulting Agreement to which such individual is a party deemed
void or unenforceable by a court of law or equity shall be deemed to be a
violation of the Performance Period Requirements.
(d) Contingent Stock Payment. Upon complete satisfaction of the
Performance Period Requirements, for each Performance Period, Parent shall
deliver to each DCG Shareholder a certificate representing a number of shares
of Parent Stock determined in accordance with the formula set forth below
within 30 days of Parent's delivery to the DCG Shareholders of the applicable
Annual Financial Statements (which delivery shall not be later than 30 days
following the end of such Performance Period):
CSP = 1/3*(S * PI * (965,000/ ZTA))
Where:
CSP = The number of shares of Parent Stock issuable by
Parent to such DCG Shareholder with respect to such
Performance Period.
S = The number of Shares held by such DCG Shareholder
immediately prior to the Effective Time.
PI = The Percentage Interest
ZTA = The average closing price of a share of Parent Stock
as reported on NASDAQ for the ten (10) consecutive
trading days ending on the date immediately preceding
the issue date.
With respect to each Performance Period, the Performance Period Requirements
must be satisfied as a condition precedent to Parent's obligation to issue
and deliver the Contingent Stock Payments for such Performance Period.
(e) Catch-up Payments.
10
(i) In the event that the Surviving Corporation (i) reports
less than the EBITDA Target in either the first or second Performance Period,
then, within 30 days after the end of the next measurement quarter following
the end of such Performance Period (the "NMQ"), the DCG Shareholders may
prepare and deliver to Parent a statement (a "Catch-up Statement") that
recalculates the Contingent Cash Payment and Contingent Stock Payment for
such Performance Period using a specified amount of EBITDA from the NMQ.
Within thirty days after receiving a Catch-up Statement, Parent shall pay the
Contingent Cash Payment and shall issue the Parent Stock representing the
Contingent Stock Payment using the average closing price of a share of Parent
Stock as reported on NASDAQ for the ten (10) consecutive trading days ending
on the day prior to the date of such issuance. Any amount of EBITDA that is
borrowed from a NMQ and used in connection with a Catch-up Statement shall,
for purposes of this Article III, irrevocably be deducted from the EBITDA for
the Performance Period in which it actually occurs.
(ii) In the event that the Surviving Corporation generates
for the three Performance Periods taken as a whole a combined EBITDA equal to
or higher than $1,597,350, then, within 30 days after the end of the third
Performance Period, the DCG Shareholders may issue a Catch-up Statement that
recalculates the Contingent Cash Payment and Contingent Stock Payment for any
Performance Period in respect of which no contingent payment was previously
made. Within thirty days after receiving such Catch-up Statement, Parent
shall pay the Contingent Cash Payment and issue the Parent Stock, using the
average closing price of a share of Parent Stock as reported on NASDAQ for
the ten (10) consecutive trading days ending on the day prior to the date of
such issuance, representing the Contingent Stock Payment for any Performance
Period's in which such Contingent Cash Payment and Contingent Stock Payment
was not made.
(f) Bonus Stock Payment. If, during the Bonus Performance Period,
taken as a whole, the EBITDA of the Surviving Corporation is equal to or
exceeds the Bonus EBITDA Target, Parent shall deliver to each DCG Shareholder
a certificate representing a number of shares of Parent Stock determined in
accordance with the formula set forth below within 30 days of Parent's
delivery to the DCG Shareholders of the third and last Annual Financial
Statements (which delivery shall not be later than 30 days following the end
of the Bonus Performance Period):
BSP = S * PI * (400,000 / ZTA)
Where:
BSP = The number of shares of Parent Stock issuable by
Parent to such DCG Shareholder with respect to the
Bonus Performance Period.
S = The number of Shares held by such DCG
Shareholder immediately prior to the Effective Time.
PI = The Percentage Interest.
ZTA = The average closing price of a share of Parent Stock
as reported on NASDAQ for the ten (10) consecutive
trading days ending on the date immediately preceding
the issue date.
11
(g) Taxes. All Taxes incurred in connection with this Agreement,
the Related Agreements and the transactions contemplated hereby and thereby
shall be paid by the Surviving Corporation, excluding any such Taxes incurred
by a holder of Shares. The DCG Shareholders shall prepare or cause to be
prepared, at their sole expense, and file or cause to be filed, and pay or
cause to be paid, all Tax Returns and all Taxes, together with any interest
or penalties applicable to such Taxes, for DCG for all periods prior to the
Closing Date which are filed after the Closing Date. The DCG Shareholders
shall permit the Surviving Corporation to review and comment on each such Tax
Return described in the preceding sentence. All Tax sharing agreements or
similar agreements with respect to or involving DCG shall be terminated as of
the Closing Date and, after the Closing Date, Surviving Corporation shall not
be bound thereby or have any liability thereunder.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF DCG
As a material inducement for Parent and Merger Sub to enter into this
Agreement and to consummate the transactions contemplated hereby, DCG and the
DCG Shareholders hereby jointly and severally make the following
representations and warranties as of the date hereof, each of which is relied
upon by Parent and Merger Sub regardless of any investigation made or
information obtained by or on behalf of Parent:
4.1 Organization; Qualification and Capital Stock; Corporate Records.
(a) DCG is a corporation duly organized, validly existing and in
good standing under the laws of the State of California, and has the
corporate power to own all of its property and assets, to incur all of its
liabilities and to carry on its Business as now being conducted.
(b)DCG is duly qualified to do business and in good standing in
each jurisdiction in which the nature or conduct of the Business or the
character or location of its properties makes such qualification necessary,
listed on Schedule 4.1(b),
(c) The names of the directors and officers of DCG, together with
the offices they hold, are set forth on Schedule 4.1(c). Attached to
Schedule 4.1(c) are true and complete copies of (i) the articles of
incorporation of DCG, together with all amendments thereto and (ii) the by-
laws of DCG, together with all amendments thereto, as currently in effect.
(d)The authorized capital stock of DCG consists of 10,000,000
shares of common stock, no par value, and 5,000,000 shares of preferred
stock, no par value, of which 5,460,013 shares of common stock are duly and
validly issued and outstanding, are fully paid and non-assessable and no
shares of preferred stock are outstanding. Other than the Shares, since its
date of incorporation, DCG has not issued any shares of its capital stock,
nor has DCG effected any stock split or otherwise changed its capitalization.
(e) None of the outstanding shares of DCG's capital stock has been
issued in violation of any preemptive rights of the current or past
shareholders of DCG, or any stock purchase agreement or other agreement to
which DCG was or is a party or bound.
(f) Except for options to purchase 65,000 Shares granted under the
DeltaData, Inc. 1998 Stock Option Plan, each of which shall be cancelled or
12
converted into Shares prior to Closing pursuant to Option Cancellation and
Release Agreements substantially in the form provided on Exhibit D (the
"Option Cancellation Agreements"), there are no unexpired issued or
outstanding options, warrants, rights to subscribe for, calls, or commitments
of any character whatsoever relating to, or securities or rights convertible
into or exchangeable for, shares of the capital stock of DCG, or contracts,
commitments, understandings or arrangements by which DCG is or may be
obligated to issue additional shares of its capital stock or options,
warrants or rights to purchase or acquire any additional shares of its
capital stock.
(g) Except as set forth on Schedule 4.1(g), since January 1, 2003,
DCG has not (i) paid any dividend to any of its equity owners, (ii) made any
other distribution on or with respect to, or redeemed or otherwise acquired,
any equity interest in DCG, (iii) made or permitted any change in the
authorized, issued, or treasury shares of its equity securities, or (iv)
taken any action which, if taken after the date of this Agreement, would
require the prior written consent of Parent and/or Merger Sub pursuant to
this Agreement. There is no liability for dividends declared or accumulated
but unpaid with respect to any of the Shares.
(h) DCG has not made any distributions to any holders of Shares or
participated in or effected any issuance, exchange or retirement of Shares,
or otherwise changed the equity interests of holders of Shares in
contemplation of effecting the Merger within the one year immediately
preceding the date of this Agreement.
(i) Except as set forth on Schedule 4.1(i), DCG has not conducted
business under any name other than its own. Schedule 4.1(i) includes a list
of all of DCG's fictitious name registrations.
(j) Subject to the satisfaction of the conditions precedent set
forth herein, DCG has the corporate power to execute, deliver and perform
this Agreement and the Related Agreements to which DCG is a party, and,
subject to the satisfaction of the conditions precedent set forth herein, has
taken all action required by its articles of incorporation, by-laws or
otherwise, to authorize the execution, delivery and performance of this
Agreement and the Related Agreements. The execution and delivery of this
Agreement has been approved by the Board of Directors of DCG. This Agreement
is a valid obligation of DCG, legally binding upon it and enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and remedies generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
(k) The Books and Records of DCG are complete and correct and have
been maintained in accordance with good business practice. True and complete
copies of all minutes, resolutions, stock certificates and stock transfer
ledgers of DCG are contained in the minute books and stock transfer ledgers
that have been delivered to the Parent for inspection and will be delivered
to the Parent at the Closing. The minute books, stock certificate books,
stock transfer records and such other books and other corporate records as
may be requested by Parent, are complete and correct in all material
respects.
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4.2 No Violations of Laws or Agreements, Consents or Defaults.
(a) The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement and the
Related Agreements will not result in any breach or violation of any of the
terms or provisions of, or constitute a default under, (i) the articles of
incorporation or by-laws of DCG or (ii) any statute, order, decree,
proceeding, rule, or regulation of any court or governmental agency or body,
United States or foreign, having jurisdiction over DCG, any assets of DCG or
the DCG Shareholders.
(b) Except as set forth in Schedule 4.2(b), the delivery of this
Agreement, the Related Agreements and the consummation of the transactions
contemplated hereby and thereby will not result in a breach or violation of
the term of, or constitute a default under, or require notice to any third
party under, any agreement, instrument, or commitment to which DCG or any of
the DCG Shareholders is party, by which it or any of the DCG Shareholders is
bound, or to which any of DCG's property is subject, and no consent or
approval is required from any third party for the Merger.
(c) DCG is not in default under, or in violation of any provision
of, its articles of incorporation, by-laws, any promissory note, indenture or
any evidence of indebtedness or security thereto, lease, purchase contract or
other commitment, or any other agreement that is material to the Business of
DCG.
4.3 No Subsidiaries. Except as disclosed on Schedule 4.3, DCG does not
own stock in and does not control, directly or indirectly, any other
corporation, association or business organization. DCG is not a party to any
joint venture or partnership.
4.4 Financial Information.
(a) Attached hereto as Schedule 4.4(a) are true and complete
copies of the DCG Financial Statements. Except as set forth on Schedule
4.4(a), the DCG Financial Statements (except as may be disclosed therein),
fairly present in all material respects the financial position and the
results of operations, changes in shareholders equity and cash flows of DCG
as of the dates and for the periods indicated, and do not include or omit any
material fact, the result of which inclusion or omission is to make the DCG
Financial Statements materially misleading. The DCG Financial Statements
provide in all material respects for all bad and doubtful debts, material
liabilities (actual, contingent, deferred or otherwise) and material
financial commitments existing as of the dates thereof.
(b) Except for obligations incurred in the ordinary course of
business since December 31, 2002, DCG has no material unrecorded liability or
obligation required to be reflected or disclosed in the DCG Financial
Statements which is not so reflected or disclosed, and DCG has no material
liability or obligation in the amount of $10,000 or more, whether accrued,
absolute, contingent or otherwise, as of the respective dates of the DCG
Financial Statements not required to be reflected or disclosed in the DCG
Financial Statements.
(c) Except as set forth on Schedule 4.4(c), there are no
liabilities or obligations of DCG whether known or unknown, asserted or
14
unasserted, absolute or contingent accrued or unaccrued, liquidated or
unliquidated, due or to become due, required in accordance with GAAP to be
reserved against or disclosed in the DCG Financial Statements, which, are not
so reserved or disclosed, nor, to the knowledge of DCG, is there any past or
present fact, situation, circumstance, condition or other basis for any
present or future action, suit or proceeding, hearing, charge, complaint,
claim or demand against DCG giving rise to any such liability or obligation.
(d) Except as disclosed on Schedule 4.4(d), the DCG Financial
Statements do not reflect any material income or expense that was unusual in
nature, nonrecurring, extraordinary, or otherwise not in the ordinary course
of DCG's Business, consistent with past practices.
(e) All tangible assets used by DCG in the Business are reflected
in the DCG Financial Statements.
4.5 Absence of Certain Changes. Since December 31, 2002, except as set
forth on Schedule 4.5, and except for transactions contemplated by this
Agreement, DCG has conducted the Business only in the ordinary course and
consistent with past practice, and has not:
(a) suffered any material adverse change;
(b)incurred any liabilities or obligations (absolute, accrued,
contingent or otherwise) except current liabilities incurred and liabilities
under contracts entered into in the ordinary course of business and
consistent with past practice (including obligations or liabilities arising
from one transaction or a series of related or similar transactions, and all
periodic installments or payments under any lease or other agreement
providing for periodic installments or payments, as a single obligation or
liability), or increased, or experienced any change in any assumptions
underlying or methods of calculating any bad debt, contingency or other
reserves;
(c) declared, set aside or paid any dividend or distribution in
respect of shares of the capital stock of DCG or redeemed, purchased or
otherwise acquired any DCG capital stock;
(d) issued, delivered, or sold, or authorized the issuance,
delivery or sale of, any share of capital stock or any option or rights with
respect thereto, or modification or amendment of any right of any holder of
outstanding shares of capital stock or options with respect thereto;
(e) paid, discharged or satisfied any claims, liabilities or
obligations (absolute, accrued, contingent, known or unknown, or otherwise)
other than the payment, discharge or satisfaction in the ordinary course of
business and consistent with past practice of liabilities and obligations
reflected or reserved against in the Balance Sheet or incurred in the
ordinary course of business and consistent with past practice since the
Balance Sheet Date;
(f) permitted or allowed any of the assets or properties of DCG to
be subjected to any mortgage, pledge, lien, security interest encumbrance,
restriction or charge of any kind;
15
(g) written down the value of any inventory or written off as
uncollectible any notes or accounts receivable;
(h) canceled any debts, or waived any claims or rights of
substantial value;
(i) sold, transferred or otherwise disposed of any of its
properties or assets, except in the ordinary course of business and
consistent with past practice;
(j) disposed of or permitted to lapse any rights to the use of any
patent, trademark, trade name or copyright, or disposed of or disclosed to
any Person other than an Affiliate any invention, discovery, know-how, trade
secret, formula, process or other intellectual property not theretofore a
matter of public knowledge;
(k) granted any general increase in the compensation of employees
of DCG (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 employee of DCG in excess of merit
increases consistent with past practice, and no such increase is customary on
a periodic basis or required by agreement or understanding;
(l) made any capital expenditure or commitment for capital
expenditures, other than those capital expenditures or commitments that have
been paid in full;
(m) made any change in any method of accounting or accounting
practice or failed to maintain the books and records of DCG in the ordinary
course of business and consistent with past practice;
(n) failed to maintain any of its properties or equipment in good
operating condition and repair, subject to ordinary wear and tear;
(o) failed to maintain in full force and effect all existing
policies of insurance at least at such levels as were in effect prior to such
date or canceled any such insurance or, to its knowledge, taken or failed to
take any action that would enable the insurers under such policies to avoid
liability for claims arising out of occurrences prior to the Closing;
(p) entered into any transaction or made or entered into any
material contract or commitment, or terminated or amended any material
contract or commitment, except in the ordinary course of business and
consistent with past practice, and not in excess of current requirements;
(q) taken any action that could reasonably be expected to have a
material adverse effect on the business organization of DCG or DCG's current
relationships with its customers, employees, suppliers, distributors,
advertisers, subscribers or others having business relationships with DCG; or
(r) agreed in writing or otherwise to take any action with respect
to any of the matters described in this Section 4.5.
4.6 Licenses; Regulatory Approvals. DCG holds all licenses,
certificates and other regulatory approvals required or necessary to be
applied for or obtained in connection with the Business as presently
16
conducted by DCG. All such licenses, certificates and other approvals are
listed on Schedule 4.6. Except as set forth on Schedule 4.6, all such
licenses, certificates and other regulatory approvals relating to the
Business, operations and facilities of DCG are in full force and effect. Any
and all past litigation concerning such licenses, certificates and regulatory
approvals, and all claims and causes of action raised therein, have been
finally adjudicated, and, in the case of such litigation finally adjudicated
since the Balance Sheet Date such adjudication has not had a material adverse
effect on DCG. Except as set forth on Schedule 4.6, no such license,
certificate or regulatory approval has been revoked, conditioned (except as
may be customary) or restricted, and no action (equitable, legislative or
administrative), arbitration or other process is pending, or to the knowledge
of DCG, threatened, which in any way challenges the validity of, or seeks to
revoke, condition or restrict any such license, certificate or regulatory
approval.
4.7 Regulatory Matters.
(a) Except as may be disclosed in Schedule 4.7(a), (i) DCG is not
the subject of any outstanding, and is not aware of any threatened,
investigation, audit, review or other examination of DCG by any federal or
state governmental agency having supervisory or regulatory authority with
respect to DCG or the Business, and (ii) DCG is not subject to, nor has DCG
received any notice or advice that it may become subject to, any order,
agreement, memorandum of understanding or other regulatory enforcement action
or proceeding with any federal or state governmental agency having
supervisory or regulatory authority with respect to DCG or the Business.
(b) DCG is not aware of any proposed or pending change in any law
or regulation affecting the Business which would have a material adverse
effect on DCG.
4.8 Tax Matters.
(a) DCG has prepared and filed in accordance with applicable laws,
rules and regulations all federal, state and local income, franchise, excise,
sales, use, real and personal property and other Tax Returns, information
statements and reports required to be filed by it, or DCG has prepared and
filed appropriate requests for extensions to file such Tax Returns and all
such requests have been timely filed and granted and have not expired in
accordance with applicable laws, rules and regulations. All such Tax Returns
for the last three (3) years have been previously disclosed in full to Parent
and are listed on Schedule 4.8(a).
(b) All such Tax Returns correctly and completely reflect the
information required to be presented therein, and DCG has not paid any
penalty, surcharge, fine or interest in connection with any alleged
underpayment of Taxes.
(c) Except as disclosed on Schedule 4.8(c) (which lists good faith
tax disputes which will be paid by the DCG Shareholders, if required, after
the Closing), DCG has paid all Taxes that have become due and payable to (or
claimed to be due and payable by) any federal, state, county, local, foreign
or other taxing authority. DCG has made full provision or reserve in the DCG
Financial Statements for all Taxes for which DCG is or may be accountable
with respect to income, profits or gains earned, accrued or received on or
17
before the dates thereof, including distributions made on or before such
dates or provided for in such DCG Financial Statements, and full and proper
provision has been made in such DCG Financial Statements for deferred Tax in
accordance with GAAP and in the aggregate do not materially fail to provide
for potential Tax liabilities. All estimated Tax payments that have become
due and payable prior to the date of this Agreement have been paid. No claim
has ever been made by an authority in a jurisdiction where DCG does not file
Tax Returns that it is or may be subject to taxation by that jurisdiction.
There are no liens for Taxes (other than Taxes not yet due and payable) upon
any of the assets of DCG.
(d) DCG has properly withheld from the salaries, wages or other
compensation paid or payable to officers, employees, consultants or other
persons, and has paid to the appropriate federal, state or local taxing
authorities, any amounts required to be withheld therefrom under applicable
laws, rules or regulations.
(e) To DCG's knowledge, no event, transaction, act or omission has
occurred which could result in DCG becoming liable for any Tax which is
primarily or directly chargeable against or attributable to a Person other
than DCG or which is charged by reference to the income or gains of another
Person. In the event that DCG has been part of a consolidated group of
taxpayers, DCG is not liable for any Tax obligations of the other members of
the group.
(f) To DCG's knowledge, no Tax Return (or item in a Tax Return) is
currently under audit by any taxing authority, and there are no agreements
for the waiver of any statute of limitations in respect of any Taxes or for
the extension of time for the assessment or payment of any Tax. DCG is not,
and does not expect to be, involved in any material dispute in relation to
any Tax matters, and to DCG's knowledge no taxing authority has investigated
or indicated that it intends to investigate DCG's Tax matters. DCG is not
aware of any facts which may constitute the basis for the proposal of any Tax
deficiencies for any unexamined year.
(g) DCG is not a party to any agreement, contract, arrangement or
plan that has resulted or would result, separately or in the aggregate, in
the payment of (i) any "excess parachute payment" within the meaning of Code
280G (or any corresponding provision of state, local or foreign Tax law) and
(ii) any amount that will not be fully deductible as a result of Code 162(m)
(or any corresponding provision of state, local or foreign Tax law). To the
knowledge of DCG, DCG has not been a United States real property holding
corporation within the meaning of Code 897(c)(2) during the applicable
period specified in Code 897(c)(1)(A)(ii). DCG has disclosed on its
federal income Tax Returns all positions taken therein that could give rise
to a substantial understatement of federal income Tax within the meaning of
Code 6662. DCG is not a party to or bound by any Tax allocation or sharing
agreement. DCG (i) has not been a member of an "Affiliated Group" filing a
consolidated federal income Tax Return and (ii) has no liability for the
Taxes of any Person under Reg. 1.1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract, or
otherwise.
(h) DCG has not entered into any transaction or course of conduct
(other than legitimate, good faith Tax planning) designed in whole or in part
to evade Taxes.
18
(i) DCG will not be required to include any item of income in, or
exclude any item of deduction from, taxable income for any taxable period (or
portion thereof) ending after the Closing Date as a result of any: (i) change
in method of accounting for a taxable period ending on or prior to the
Closing Date in accordance with Code 481 (or any corresponding or similar
provision of state, local or foreign income Tax law); (ii) "closing
agreement" as described in Code 7121 (or any corresponding or similar
provision of state, local or foreign income Tax law) executed on or prior to
the Closing Date; (iii) intercompany transactions or any excess loss account
described in Treasury Regulations under Code 1502 (or any corresponding or
similar provision of state, local or foreign income Tax law); (iv)
installment sale or open transaction disposition made on or prior to the
Closing Date; (v) prepaid amount received on or prior to the Closing Date;
(vi) transfer of intangible property to which Code 367(d) or Code 482 may
apply.
4.9 Litigation Claims.
(a) There is no action, suit, claim, investigation or proceeding,
whether at law or in equity (a "Claim"), pending or, to the knowledge of DCG,
threatened that questions the validity of this Agreement or the Related
Agreements or any action taken or to be taken by DCG or the DCG Shareholders
in connection with the consummation of the transactions contemplated hereby
or thereby or which seeks to prohibit, enjoin or otherwise challenge any of
the transactions contemplated hereby or thereby.
(b) Schedule 4.9(b) sets forth an accurate and complete list, and
a brief description (setting forth the names of the parties involved, the
court or other governmental or mediating entity involved, the relief sought
and the substantive allegations and the status thereof), of each Claim
pending or, to the knowledge of DCG, threatened against or affecting DCG.
None of the pending or threatened Claims set forth on Schedule 4.9(b), if
adversely determined, would individually or in the aggregate, result in a
materially adverse effect on DCG. To the knowledge of DCG no event has
occurred and no circumstance, matter or set of facts exist which would
constitute a valid basis for the assertion by any third party of any Claim,
other than those listed on Schedule 4.9(b). Except as set forth in Schedule
4.9(b) there is no outstanding or, to the knowledge of DCG, threatened
judgment, injunction, judgment, order or consent or similar decree or
agreement (including, without limitation, any consent or similar decree or
agreement with any governmental entity) against, affecting or naming DCG.
(c) To DCG's knowledge, except as disclosed in Schedule 4.9(c),
there is no claim (whether based on statute, negligence, breach of warranty,
strict liability or any other theory) relating directly or indirectly to any
product manufactured or sold, or any services performed, by DCG.
4.10 Properties, Contracts; Leases and Other Agreements; Bank Accounts.
(a) DCG does not own any real estate.
(b) All leasehold interests for real property and any material
personal property used by DCG in the Business are held pursuant to lease
agreements which are valid and enforceable in accordance with their terms,
the agreements for which are listed on Schedule 4.10(b). To the knowledge of
DCG, all such properties comply in all material respects with all applicable
19
private agreements, zoning requirements and other governmental laws and
regulations relating thereto and there are no condemnation proceedings
pending or, to the knowledge of DCG, threatened with respect to such
properties. DCG has not assigned or subleased its interests under such leases
or the assets covered thereby. Each such lease has been duly and validly
executed, is in full force and effect and constitutes the valid and binding
agreement of the parties thereto. Any additional business offices maintained
by DCG during the past two (2) years are also listed by location on Schedule
4.10(b).
(c) Except as set forth on Schedule 4.10(c), and excluding trade
accounts payable incurred in the ordinary course of business and payable to
Persons other than Affiliates of DCG, DCG does not have any liabilities for
borrowed funds, extensions of credit or other advances that are subject to
repayment whether pursuant to a written agreement, oral understanding or
course of conduct, and whether reflected on the DCG Financial Statements as
indebtedness, accounts payable or otherwise, and any such liability set forth
on Schedule 4.10(c) may be prepaid at any time without premium or penalty.
(d) Except as set forth in Schedule 4.10(d), DCG is not a party to
any agreements, contracts or commitments relating to the acquisition of the
assets or capital stock of any other business enterprise.
(e) Except as set forth in Schedule 4.10(e), DCG is not a party
to any agreements, loans, contracts, leases, guarantees, letters of credit,
lines of credit or commitments of DCG not referred to elsewhere in this
Agreement which:
(i) involve potential payments by DCG or incurring by DCG of
costs or obligations, of more than $10,000 in the aggregate;
(ii) involve payments based on profits of DCG;
(iii) relate to the future purchase of goods or services in
excess of the requirements of the Business at current levels or for normal
operating purposes;
(iv) include powers of attorney or grants of agency by DCG;
(v) cannot be canceled by DCG without penalty or premium on
no more than thirty (30) days' notice;
(vi) were not made in the ordinary course of business; or
(vii) otherwise materially affect the Business or financial
condition of DCG.
(f) Except as set forth in Schedule 4.10(f), no contracts material
to the Business will terminate or are subject to modification by reason of
the Merger and DCG has not received notice, of any potential termination or
modification of such contracts.
(g) Except as set forth in Schedule 4.10(g), neither DCG, nor any
other party, is in default, technical or otherwise, of any real estate lease,
equipment lease, loan or credit agreement, or any other contract or agreement
to which DCG is a party, and no event or condition has occurred or exists
20
which, with the passage of time, giving of notice or both, would cause any
party to be in default thereunder.
(h) Set forth on Schedule 4.10(h) is an accurate and complete list
showing the name and address of each bank, securities broker, mutual fund,
investment company, investment adviser or other financial institution or
similar Person with which DCG has an account, including the account or box
number and the names of all persons and entities authorized to draw thereon
or have access thereto.
(i) All material contracts and agreements to which DCG is a party
("Contracts") (i) are valid and enforceable in accordance with their
respective terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally and subject, as to enforceability, to general principles
of equity (regardless of whether enforcement is sought in a proceeding at law
or in equity); (ii) no Default (as defined below) exists under any Contract
either by DCG or, to the knowledge of DCG, by any other party thereto; (iii)
DCG is not aware of the assertion by any third party of any claim of Default
or breach under any of the Contracts; and (iv) DCG is not aware of any
present intention on the part of any significant customer or supplier or
other business partner of DCG to either (a) terminate or significantly change
its existing business relationship with DCG either now or in the foreseeable
future, or (b) fail to renew or extend its existing business relationship
with DCG at the end of the term of any existing contractual arrangement such
entity may have with DCG. For purposes of this Agreement, the term "Default"
means, with respect to any Contract, (x) any breach of or default under such
Contract, (y) any event, other than the normal passage of time, which would
(either with or without notice or lapse of time or both) give rise to any
right of termination, cancellation or acceleration of any obligation to repay
with respect to such Contract, or (z) any event, other than the normal
passage of time, which would result in either a significant increase in the
obligations or liabilities of, or a loss of any significant benefit to, the
party in question under such Contract.
(j) Set forth on Schedule 4.10(j) is an accurate and complete list
showing all Contracts whereby DCG is providing products or services of any
kind to a third party.
(k) Except as set forth on Schedule 4.10(k), DCG has not granted
any right of first refusal or similar right in favor of any third party with
respect to any material portion of its properties or assets or entered into
any non-competition agreement or similar agreement restricting its ability to
engage in any business in any location.
4.11 Employee Matters; Benefit Plans; ERISA.
(a) Except as may be disclosed in Schedule 4.11(a), DCG has not
entered into any collective bargaining agreement with any labor organization
with respect to any group of employees of DCG and, to the knowledge of DCG,
there is no present effort nor existing proposal to attempt to unionize any
group of employees of DCG.
(b) Except as may be disclosed in Schedule 4.11(b):
(i) DCG is and has been in material compliance with all
21
applicable laws relating to employment and employment practices, terms and
conditions of employment and wages and hours, including, without limitation,
any such laws respecting employment discrimination and occupational safety
and health requirements, and DCG is not engaged in any unfair labor
practices;
(ii) There is no material unfair labor practice complaint
against DCG pending or, to the knowledge of DCG, threatened before the
National Labor Relations Board;
(iii) There is no labor dispute, strike, slowdown or stoppage
actually pending or, to the knowledge of DCG, threatened against or directly
relating to DCG; and
(iv) DCG has not experienced any material work stoppage or
other material labor difficulty during the past year.
(c) Except as described and attached to Schedule 4.11(c), DCG is
not a party to any agreement for the employment, retention or engagement or
severance of any officer, employee, agent, advisor or consultant.
(d) Schedule 4.11(d) contains a correct and complete list of all
Benefit Plans maintained by DCG or to which DCG or any ERISA Affiliate (as
defined below) contributes. DCG has delivered or made available to Parent,
with respect to all such Benefit Plans, complete and correct copies of the
following: all plan documents, handbooks, manuals, collective bargaining
agreements and similar documents governing employment policies, practices and
procedures; the most recent summary plan descriptions and any subsequent
summaries of material modifications and all other material employee
communications discussing any employee benefit; Forms series 5500 as filed
with the IRS for the three most recent plan years (including all attachments
thereto); the most recent report of the enrolled actuary for any plans
requiring actuarial valuation; all trust agreements with respect to the
Benefit Plans; plan contracts with service providers or insurers providing
benefits for participants or liability insurance for fiduciaries and other
parties in interest or bonding; the most recent annual audit and accounting
of plan assets for all funded plans; and the most recent Internal Revenue
Service ("IRS") determination letter or opinion letter for all plans
qualified under Section 401(a) of the Code.
(e) Neither DCG nor any ERISA Affiliate participates in or
maintains or has ever maintained or been obligated to contribute to a multi-
employer plan (as defined in Section 3(37) of ERISA), and neither DCG nor any
ERISA Affiliate has withdrawal liability with respect to any multi-employer
plan.
(f) Neither DCG nor any ERISA Affiliate maintains or has ever
maintained or been obligated to contribute to an employee pension benefit
plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA.
(g) DCG has made full payment of all amounts it is required, under
applicable law or the terms of each Benefit Plan, to have contributed thereto
before the Closing Date for all periods through and including the close of
the last plan year ending prior to the Closing Date, or proper accruals for
such contributions have been made and are reflected on its balance sheet and
books and records. DCG will pay such contributions to the Benefit Plans for
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the current plan year prior to the Closing Date, or, if any such
contributions will not be due prior to the Closing Date, has made adequate
provision for reserves therefor. All such contributions are fully deductible
by DCG for purposes of DCG's federal income taxes, and DCG has no actual or
potential liability for the 10 percent tax imposed by section 4972 of the
Code.
(h) All Taxes, penalties, interest charges and other financial
obligations to federal, state and local governments and to participants or
beneficiaries under the Benefit Plans with respect to any period ending on or
before the Closing Date have been or will be met in full on or before the
Closing Date.
(i) All reports, returns, notices and similar documents with
respect to the Benefit Plans required to be filed with any governmental
agency or distributed to any Benefit Plan participant or beneficiary have
been duly and timely filed or distributed.
(j) Each Benefit Plan required to be listed on Schedule 4.11(d)
that is intended to be qualified under Section 401 of the Code is (and from
its establishment has been) the subject of a favorable determination letter
or opinion letter issued by the IRS, and no such determination letter or
opinion letter has been revoked nor, to DCG's knowledge, has revocation been
threatened, nor has any Benefit Plan been amended since the date of its most
recent determination letter or application therefor in any respect which
would adversely affect its qualification or materially increase its cost, and
no Benefit Plan has been amended in a manner that would require security to
be provided in accordance with Section 401(a)(29) of the Code. Each trust
maintained under any such Benefit Plan is (and from its establishment has
been) exempt from federal income tax under Section 501 of the Code.
(k) Each Benefit Plan required to be listed on Schedule 4.11(d)
complies, in both form and operation, with the applicable requirements of
ERISA, the Code and other applicable law. There are no pending
investigations by any governmental agency involving such Benefit Plans, no
termination proceedings involving the Benefit Plans, and, to DCG's knowledge,
no threatened or pending claims (except for routine claims for benefits),
suits or proceedings against any Benefit Plan or asserting any rights or
claims to benefits under any Benefit Plan which could give rise to any
liability nor, to DCG's knowledge, are there any facts which could give rise
to any liability in the event of any such investigation, claim, suit or
proceeding.
(l) Neither DCG nor any "party in interest" (as defined in section
3(14) of ERISA) or "disqualified person" (as defined in section 4975(e)(2) of
the Code) with respect to any Benefit Plan has engaged in a "prohibited
transaction" (as defined in Section 4975 of the Code or Section 406 of ERISA)
for which a statutory, administrative, or regulatory exemption is not
available. No Benefit Plan has been (or will be as a result of the
transactions contemplated hereby) completely or partially terminated or has
been (or will be as a result of the transactions contemplated hereby) subject
to a "reportable event" (as defined in section 4043 of ERISA) or to any event
requiring disclosure under section 4062(e) or 4063(a) of ERISA.
(m) DCG is in full compliance with the continuation coverage
23
requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985,
as amended, and the health insurance obligations (sometimes referred to as
"HIPAA") imposed by section 9801 of the Code and Part 7 of Subtitle B of
Title I of ERISA.
(n) Other than the group health plan continuation coverage
requirements required by applicable law (as described in subsection (m)
above), the cost of which is fully paid by the former employee or his or her
dependent, DCG does not maintain retiree life or retiree health plans
providing for continuing coverage for any employee or any beneficiary of an
employee after the employee's termination of employment.
(o) Prior to the Closing Date, DCG will not establish any new
Benefit Plan for the employees of DCG, except with the written consent of
Parent, nor will DCG amend or modify any existing Benefit Plan as to any
benefit or in any other way, except with the written consent of Parent.
(p) Except as set forth on Schedule 4.11(p), DCG is not a party to
any oral or written agreement with any director, executive, officer or other
key employee, the benefits of which are contingent or the terms of which are
materially altered or permit termination, upon the occurrence of a
transaction of the nature contemplated by this Agreement, and which provides
for the payment of in excess of Fifty Thousand Dollars ($50,000), or
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of
which will be increased, or the vesting of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement.
4.12 Personnel. Schedule 4.12 contains (i) the list of all persons
employed by, or engaged as an independent contractor by, DCG and (ii) an
accurate and complete list of the wage rates for all such persons employed by
DCG by classification. DCG is not in default with respect to any material
obligation to any of its employees or independent contractors.
4.13 Title to and Condition of Properties.
(a) Except as described in Schedule 4.13(a), DCG collectively owns
or uses all of the personal property included in the balance sheet (the
"Balance Sheet") dated as of November 30, 2003, (the "Balance Sheet Date")
(except assets as have been disposed of in the ordinary course of DCG's
business since the Balance Sheet Date), which owned assets are free and clear
of all Encumbrances and rights to possession of third parties, of every type
and nature. The assets of DCG are sufficient to carry on the business of DCG
in the ordinary course as presently conducted. Other than as disclosed in
Schedule 4.13(a) or specifically provided for in this Agreement, DCG has not
entered into any leases, licenses, easements or other agreements, recorded or
unrecorded, granting rights to third parties in any real or personal property
of DCG, and, except for property leased by DCG, to DCG's knowledge, no person
or other company has any right to possession, use or occupancy of any of the
property used by DCG.
(b) Except for inventory that is excess, damaged or obsolete, for
which DCG has established in the aggregate an adequate reserve in the Balance
Sheet in accordance with GAAP, the inventory reflected in the Balance Sheet
24
and not disposed of or reserved since the date of the Balance Sheet is of
good and merchantable quality, of a quantity and quality saleable in the
ordinary course of business of DCG in accordance with past practices and is
adequate as of the date hereof for the business of DCG as conducted as of
such date.
(c) Equipment used by DCG in the conduct of its business is, as of
the date hereof, taken as a whole in good and operating condition (reasonable
wear and tear excepted) and is sufficient to carry on the business of DCG in
the ordinary course as it is presently conducted.
4.14 Product and Service Warranties. Except as set forth on Schedule
4.14, each product or service delivered or licensed by DCG has been in
conformity in all material respects with all applicable federal, state, local
or foreign laws and regulations, contractual commitments and all express and
implied warranties, and, to the knowledge of DCG, DCG has no liability for
replacement or repair thereof or other damages in connection therewith,
except for liabilities incurred in the ordinary course of business, and no
product or service delivered or licensed by DCG is subject to any guaranty,
warranty, or other indemnity.
4.15 Intellectual Property.
(a) Except as set forth on Schedule 4.15(a), DCG owns, free and
clear of all liens, mortgages, security interests, charges and encumbrances
of every nature, kind and description, and has good and merchantable title
to, or holds adequate licenses or otherwise possesses all rights necessary to
use, all patents, trademarks, service marks, trade names, copyrights
(including any applications for any of the foregoing), the domain name
xxx.xxxxx-xxx.xxx, all other names embodying business or product goodwill (or
both), inventions, discoveries and improvements, processes, know-how, trade
secrets, scientific, technical, engineering and marketing data, computer
programs, software, including all object and source codes, programming tools
and all other techniques used or necessary for the conduct of the Business as
now conducted (collectively, the "Intellectual Property").
(b) Schedule 4.15(b) contains an accurate and complete list of (i)
all such patents, trademarks, trade names, service marks, assumed names and
copyrights, and all applications therefor, and, with respect to registered
items, contains a list of all jurisdictions in which such items are
registered and all registration numbers; (ii) all licenses, permits and other
agreements relating thereto; and (iii) all agreements relating to any of the
Intellectual Property that DCG is licensed or authorized to use by others.
The patents, trademarks, service marks and copyrights, licenses, permits and
other agreements constituting a part of the Intellectual Property and solely
owned by DCG, if any, are valid, subsisting and enforceable, and are duly
recorded in the name of DCG.
(c) All software, other than generally available software such as
Microsoft Word, Lotus 1-2-3, and the like, and generally available system
development tools, that is either marketed to customers of DCG as a program
or as part of a service to support the Business is owned by DCG or DCG has
the right to use, modify, copy, sell, distribute, sublicense and make
derivative works free and clear of any limitations or Encumbrance, except as
may be set forth in any license agreement listed in Schedule 4.15(c). To the
extent third party software is marketed to customers of DCG together with the
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Intellectual Property solely owned by DCG, the third party rights have been
identified in Schedule 4.15(c), all necessary licenses have been obtained and
no royalties or payments are due from DCG to third parties except as
identified on Schedule 4.15(c).
(d) Except as set forth on Schedule 4.15(d), to the knowledge of
DCG, DCG has the sole and exclusive right to use the patents, service marks
and copyrights listed in Schedule 4.15(b) and the trademarks and trade names
listed in Schedule 4.15(b), in each case, in all jurisdictions in which the
Business is conducted or in which any products of the Business are
distributed, and the consummation of the transactions contemplated hereby
will not alter or impair any such rights.
(e) No claims have been asserted by any Person challenging or
questioning the ownership, validity, enforceability or use by DCG of any of
the Intellectual Property and, to the knowledge of DCG, there is no valid
basis for any such claim, and, to the knowledge of DCG, the use or other
exploitation of the Intellectual Property by DCG does not infringe on or
dilute the rights of any Person; and, to the knowledge of DCG, no Person is
infringing on the rights of DCG with respect to any of the Intellectual
Property.
(f) DCG has taken all reasonable security measures to protect the
secrecy, confidentiality and value of the Intellectual Property of DCG,
including computer programs, trade secrets and other confidential
information. Except as disclosed in Schedule 4.15(f), no Person has any
marketing rights to the Intellectual Property of DCG. No Person listed in
such schedule is in breach or default under its obligations.
(g) Each employee, officer, consultant and contractor of DCG
and/or any other person or entity developing intellectual property on behalf
of DCG as identified on Schedule 4.15(g) has entered into and executed an
ownership and nondisclosure agreement (collectively, the "Ownership and
Nondisclosure Agreements") substantially in the form attached to this
Agreement as Exhibit A.
(h) DCG has made available to Parent all documents in DCG's
custody, possession or control with respect to any invention, discovery,
process, design, computer program or other know-how or trade secret included
in the Intellectual Property, which documents shall be accurate in all
material respects and reasonably sufficient in detail and content to identify
and explain such invention, discovery, process, design, computer program or
other know-how or trade secret and to facilitate its full and proper use.
4.16 Insurance. All material insurable properties owned or held by
DCG, and all insurable risks related to the Business, are adequately insured
by insurers which are, to DCG's knowledge, financially sound and reputable,
in such amounts and against fire and other risks insured against by extended
coverage and public liability insurance, property damage, product liability,
general liability, workers compensation, fidelity bonds, professional
liability insurance and errors and omissions insurance, and against other
risks and in such amounts as would be prudently insured against by comparable
businesses and as may be required by law or any agreement to which DCG is a
party. Schedule 4.16 lists all policies of insurance owned or held by DCG or
insuring its assets. All current premiums and any other obligations under
such insurance have been paid, and all such policies are valid and
26
enforceable and in full force and effect on the date hereof. DCG has not
received any notice of cancellation or of premium increase under any such
policies within the last ninety (90) days.
4.17 Relationships.
(a) Other than general economic conditions, DCG has no knowledge
of any present or future conditions or state of facts or circumstances which
would materially adversely affect DCG after the Closing Date.
(b) Schedule 4.17(b) lists the 10 most important customers of DCG
as a percentage of revenues for fiscal years 2002 and the 11 month period
ended November 30, 2003. DCG's relationships with its customers, clients and
vendors are satisfactory, and DCG has no knowledge of any facts or
circumstances, including a change of control in the ownership of DCG, that
might materially alter, negate, impair or in any way materially adversely
affect the continuity of any such relationships and the Business.
(c) Except as disclosed in Schedule 4.17(c), DCG has no knowledge
of and has not received notice of any complaints, claims or threats, plans or
intentions to discontinue commercial relations or transactions from any
customer of DCG, any purchaser of goods or services from DCG, any employee or
independent contractor significant to the conduct or operation of DCG or any
party to any agreement to which DCG is a party.
(d) DCG has no knowledge of any present or future condition or
state of facts or circumstances, including a change of control in the
ownership of DCG, that would materially prevent the Business of DCG from
being carried on after the Closing Date in essentially the same manner as it
is presently being carried on.
4.18 Compliance With Laws.
(a) Except as set forth in Schedule 4.18(a), the operations and
activities of DCG has previously and continues to comply in all material
respects with all applicable Federal, state and local laws, statutes, codes,
ordinances, rules, regulations, permits, judgments, orders, writs, awards,
decrees or injunctions (collectively, the "Laws") as in effect on or before
the date of this Agreement, including without limitation, all rules and
regulations of the Occupational Safety and Health Administration. The
conduct of the business of DCG as presently conducted does not conflict with
the rights of any other Person or violate or, with or without the giving of
notice or the passage of time, or both, will violate, conflict with or result
in a default, right to accelerate or loss of rights under, any terms or
provisions of its articles of incorporation or by-laws as presently in effect
or, to the knowledge of DCG, any Encumbrance, lease, license, agreement, Laws
or understanding to which DCG is a party or by which it may be bound or
affected. DCG has received no notice or communication from any Person
asserting a failure to comply with any Laws, nor has DCG received any notice
that any authority or third party intends to seek enforcement against DCG to
compel compliance with any such Laws.
(b) (i) DCG has not made, and, to the knowledge of DCG, no
officer, director, employee, agent or other representative of any of them
acting on behalf thereof has made, directly or indirectly, with respect to
the business of DCG, any illegal bribes, kickbacks or other illegal payments
27
of a similar nature, or illegal political contributions with corporate funds
not recorded in the corporate records of DCG, illegal payments from corporate
funds to governmental officials, or illegal payments from corporate funds to
obtain or retain business either within the United States or abroad, and (ii)
neither DCG nor, to the knowledge of DCG, any officer, employee or agent of
DCG acting on its behalf, nor any other Person acting on its behalf has,
directly or indirectly, within the past three (3) years given or agreed to
give any gift or similar benefit to any customer, supplier, governmental
employee or other Person who is or may be in a position to help or hinder DCG
(or assist DCG in connection with any actual or proposed transaction) which
(A) might subject DCG to any damage or penalty in any civil, criminal or
governmental litigation or proceeding, (B) if not given in the past might
have had a material adverse effect to DCG, or (C) if not continued in the
future, might result in a material adverse effect to DCG.
4.19 Environmental Matters.
(a) DCG has not obtained and is not required to obtain, any
permits, licenses or other authorizations under any applicable Environmental
Laws.
(b) Except as set forth on Schedule 4.19, DCG is, to its
knowledge, in material compliance with all limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in the Environmental Laws. Except as set forth on
Schedule 4.19, since DCG's incorporation, no written notice, demand, request
for information, citation, summons or complaint has been received or order
has been issued, no complaint has been filed, no suit or action has been
instituted, no penalty has been assessed and no investigation or review is
pending or, to the knowledge of DCG, threatened by any governmental entity or
other Person with respect to any (i) alleged violation by DCG of any
Environmental Law or liability thereunder, (ii) alleged failure by DCG to
have any permit, certificate, license, approval, registration or
authorization required under any Environmental Law, (iii) release of
Hazardous Substances by or on behalf of DCG, or (iv) any Environmental
Liabilities attributed to DCG.
(c) Except as set forth on Schedule 4.19, there are no
Environmental Liabilities that have had, or could reasonably be expected to
have individually, or in the aggregate, a material adverse effect with
respect to DCG.
(d) Except as set forth on Schedule 4.19, to the knowledge of DCG,
no state of facts exists as to environmental matters or Hazardous Substances
that involves the reasonable likelihood of a material capital expenditure by
DCG or a material fine or penalty imposed on or attributable to DCG, or that
may otherwise have a material adverse effect with respect to DCG or does or
could interfere with or prevent compliance with any Environmental Laws or
give rise to any common law or other legal liability.
(e) No Hazardous Substances have been manufactured, treated,
stored, transported or disposed of by DCG, or otherwise deposited by DCG, in
or on or are present beneath properties currently or formerly owned, leased
or used by DCG in violation of, or which may be required to be investigated
or remediated under, any applicable Environmental Laws.
28
(f) There has been no disposal, escape, seepage, leakage,
spillage, discharge, emission, release or threatened release of any Hazardous
Substance as a result of the actions or omissions of DCG (i) on, from or
affecting any properties owned, leased or used by DCG, or (ii) for which DCG
is, is alleged or may be held to be, responsible as a result of conduct
occurring or conditions existing at or before Closing.
4.20 No Undisclosed Liabilities or Obligations. To DCG's knowledge,
DCG has no material liability or obligation, asserted or unasserted, absolute
or contingent, accrued or unaccrued, liquidated or unliquidated, and due or
to become due (and there is no past or present fact, situation, circumstance,
condition or other basis for any present or future action, suit or
proceeding, hearing, charge, complaint, claim or demand against DCG giving
rise to any such liability), except:
(a) for liabilities or obligations accrued for or reserved against
on the DCG Financial Statements;
(b) for liabilities or obligations of the same type incurred in
the ordinary course of business of DCG since the date of the most recent
balance sheet included in the DCG Financial Statements; and
(c) as may be disclosed in Schedule 4.20(c).
4.21 Receivables. Schedule 4.21 sets forth a true and complete list of
all Receivables and the aging thereof. All Receivables represent sales
actually made or services actually performed in the ordinary course of
business with no additional services required to entitle DCG to collect such
Receivables, and have been fully collected or are fully collectible as of the
Closing Date or are fully reserved against in the Balance Sheet.
4.22 Related Party Transactions.
(a) Except as set forth on Schedule 4.22, there have been no
transactions or contractual relationships during the two (2) fiscal years
ended December 31, 2002 or between December 31, 2002 and the date hereof, and
no agreement or understanding to enter into or consummate any transactions or
contractual relationships between DCG on the one hand and (a) any of DCG's
officers, directors, employees, representatives, or agents or (b) any family
member (by blood or marriage) or Affiliate of any of the foregoing, directly
or indirectly, on the other hand. All such transactions have been on terms
and conditions no less favorable to DCG than could have been obtained from
any independent party after arms-length negotiations. Schedule 4.22 sets
forth the relationship between any such Person and DCG.
(b) Except as otherwise disclosed herein, there are no obligations
of DCG to pay any amounts to any DCG Shareholder and there are no obligations
of any DCG Shareholder to pay any amounts to DCG. There are no receivables
or payables to or from DCG Shareholders.
4.23 Vote Required. The affirmative vote of the holders of a majority
of the outstanding Shares is the only vote of the holders of any class or
series of DCG capital stock necessary to approve this Agreement, the Merger
and the transactions contemplated hereby.
4.24 Brokers. No Person other than Evergreen Capital, LLC will have,
29
as a result of the transactions contemplated by this Agreement, any valid
right to, interest in or claim upon Parent or the Surviving Corporation for
any commission, fee or other compensation as a finder or broker because or
any act or omission by DCG or the DCG Shareholders. All amounts due to
Evergreen Capital, LLC will be paid at Closing.
4.25 Disclosure. No representation or warranty by DCG contained in
this Agreement, and no statement contained in any document, list (including,
without limitation, the Schedules), certificate or other communication
furnished or to be furnished by or on behalf of DCG to Parent or any of its
representatives in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state any material fact necessary, in light of the circumstances
under which it was or will be made, in order to make the statements herein or
therein not misleading.
4.26 Revolving Credit Agreements. The combined total amounts
outstanding under the Sunwest Credit Agreement and the Textron Credit
Agreement is equal to or less than $436,630 in the aggregate.
4.27 Reorganization.
(a) The ratio for the exchange of Shares of DCG for Parent Stock
in the Merger was negotiated through arm's length bargaining. Accordingly,
the fair market value of the Parent Stock to be received by DCG Shareholders
in the Merger will be approximately equal to the fair market value of the
Shares surrendered by such DCG Shareholders in exchange therefor.
(b) DCG is not aware of any transfers of Shares by any holders
thereof prior to the Closing Date which were made in contemplation of the
Merger.
(c) As a result of the Merger, DCG will transfer to Merger Sub at
least ninety percent (90%) of the fair market value of the net assets and at
least seventy percent (70%) of the fair market value of the gross assets of
DCG held by it immediately prior to the Merger. DCG has not redeemed any of
the Shares, made any distribution with respect to any of the Shares, or
disposed of any of its assets in anticipation of or as a part of a plan for
the acquisition of DCG by Merger Sub.
(d) The assumption by Merger Sub of the liabilities of DCG
pursuant to the Merger is for a bona fide business purpose and the principal
purpose of such assumption is not the avoidance of federal income tax on the
transfer of assets of DCG to Merger Sub pursuant to the Merger.
(e) The liabilities of DCG assumed by Merger Sub and the
liabilities to which the transferred assets of DCG are subject were incurred
by DCG in the ordinary course of its business. No liabilities of any person
other than DCG will be assumed by Merger Sub or Parent in the Merger, and
none of the DCG Shares to be surrendered in exchange for Parent Stock in the
Merger will be subject to any liabilities.
(f) DCG will pay its expenses, if any, incurred in connection with
the Merger. None of Parent, Merger Sub, and DCG will pay any of the expenses
of the DCG Shareholders incurred in connection with the Merger.
30
(g) There is no intercorporate indebtedness existing between
Parent and DCG or between Merger Sub and DCG that was issued, acquired, or
will be settled at a discount.
(h) DCG is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(i) DCG is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(j) None of the compensation received by any stockholder-employee
of DCG pursuant to any employment, consulting or similar arrangement is or
will be separate consideration for or allocable to, any DCG Shares. None of
the Parent stock received by any stockholder-employee of DCG pursuant to the
Merger is or will be separate consideration for, or allocable to, any such
employment, consulting or similar arrangement. The compensation paid to any
stockholder-employee of DCG pursuant to any such employment, consulting or
similar arrangement is or will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's length
for similar services.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF
THE MAJORITY DCG SHAREHOLDER
As a material inducement for Parent and Merger Sub to enter into this
Agreement and to consummate the transactions contemplated hereby, the
Majority DCG Shareholder hereby makes the following representations and
warranties as of the date hereof, each of which is relied upon by Parent and
Merger Sub regardless of any investigation made or information obtained by or
on behalf of Parent:
5.1 Shareholder Power and Authority; Ownership.
(a) The Majority DCG Shareholder is an adult individual with full
power and authority to own his or her properties, to manage his or her fiscal
affairs and to enter into this Agreement and each of the Related Agreements
to which he or she is a party and to agree to the transactions contemplated
hereby and thereby and to perform all of his obligations hereunder and
thereunder. The Majority Shareholder is not subject to any legal disability
which would prevent him or her from performing under this Agreement or any
Related Agreement, and no order has been entered appointing a receiver for
the Majority DCG Shareholder or his assets. There is no claim, action, suit
or proceeding (including, without limitation, current investigations by
governmental agencies) pending against the Majority DCG Shareholder seeking
to enjoin the execution and delivery of this Agreement, the Related
Agreements or consummation of the transactions contemplated hereby or
thereby.
(b) This Agreement and each of the Related Agreements to which the
Majority DCG Shareholder is a party constitutes the legal, valid and binding
obligations of the Majority DCG Shareholder, enforceable against the Majority
DCG Shareholder in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights and
remedies generally and subject, as to enforceability, to general principles
of equity (regardless of whether enforceability is considered in a proceeding
at law or in equity).
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(c) The Majority DCG Shareholder owns that number of Shares set
forth in Schedule 5.1(c). The Majority DCG Shareholder has good and
marketable title to all of the Shares set forth on Schedule 5.1(c), free and
clear of all Encumbrances and restrictions, legal or equitable, of every
kind. The Majority DCG Shareholder has full and unrestricted legal right,
power, and authority to sell, assign, and transfer the Shares without
obtaining the consent or approval of any other person, entity, or
governmental authority and the delivery of the Shares to Parent pursuant to
this Agreement will transfer valid title thereto, free and clear of all
Encumbrances, claims, and restrictions of every kind, except for restrictions
on transferability imposed by federal and state securities laws. The
Majority DCG Shareholder hereby waives, as of the Closing Date, all rights
that exist pursuant to all shareholder agreements and other contractual
rights or charter document provisions relating to the transferability of
their respective Shares, as and to the extent necessary to permit the
consummation of the transactions provided for herein.
5.2 Securities Matters. The Majority DCG Shareholder understands that
none of the shares of Parent Stock included in the Merger Consideration has
been registered under the Securities Act, on the grounds that the issuance
thereof to the DCG Shareholders in connection with the Merger is exempt from
registration pursuant to Section 4(2) of the Securities Act and/or Regulation
D promulgated under the Securities Act ("Regulation D"), and that the
reliance of Parent on such exemptions is predicated in part on the
representations, warranties, covenants and acknowledgements set forth in this
Section 5.2.
(a) The Parent Stock will be acquired by the Majority DCG
Shareholder for his own account, not as a nominee or agent, for investment
and without a view to resale or other distribution within the meaning of the
Securities Act, and the Majority DCG Shareholder will not distribute or
transfer any of the Parent Stock in violation of the Securities Act.
(b) The Majority DCG Shareholder: (i) acknowledges that the
Parent Stock to be issued to the Majority DCG Shareholder is not registered
under the Securities Act and must be held indefinitely by the Majority DCG
Shareholder unless the Parent Stock is subsequently registered under the
Securities Act or an exemption from registration is available, (ii) is aware
that any routine sales of the Parent Stock made under Rule 144 of the
Securities and Exchange Commission under the Securities Act may be made only
in limited amounts and in accordance with the terms and conditions of that
Rule and that in such cases where the Rule is not applicable, registration or
compliance with some other registration exemption will be required, (iii) is
aware that Rule 144 is not now and for a period of at least one year
following the Closing Date hereof will not be, available for use by the
Majority DCG Shareholder for resale of the Parent Stock, and (iv) is aware
that Parent is not obligated to register any sale, transfer or other
disposition of the Parent Stock.
(c) The Majority DCG Shareholder has such knowledge and experience
in financial and business matters that the Majority DCG Shareholder is fully
capable of evaluating the risks and merits of such Shareholder's investment
in the Parent Stock.
(d) The Majority DCG Shareholder acknowledges and agrees that the
32
certificates representing the Parent Stock issuable to the Majority DCG
Shareholder will contain a restrictive legend noting the restrictions on
transfer described in this Section and under federal and applicable state
securities laws, and that appropriate "stop-transfer" instructions will be
given to Parent's stock transfer agent.
ARTICLE VI. REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUB.
As a material inducement for DCG to enter into this Agreement and to
consummate the transactions contemplated hereby, Parent and Merger Sub hereby
jointly and severally make the following representations and warranties as of
the date hereof, each of which is relied upon by DCG regardless of any
investigation made or information obtained by DCG:
6.1 Organization, Existence and Capital Stock.
(a) Each of Parent and Merger Sub is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all necessary corporate power to own all of its property and assets,
to incur all of its liabilities and to carry on its business as presently
conducted.
(b) The authorized capital stock of Parent consists of preferred
stock, $.001 par value per share, 10,000,000 shares of which are validly
authorized and none of which is issued or outstanding and of common stock,
$.001 par value per share, 50,000,000 shares of which are validly authorized.
As of October 31, 2003, 28,026,965 shares were validly issued, outstanding,
fully paid and non-assessable. The Parent's common stock has been duly and
validly registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") which registration is in full force
and effect. Merger Sub's authorized capital consists of One Thousand (1,000)
shares of common stock, par value $1.00 per share (the "Merger Sub Common
Stock"), all of which shares are issued and registered in the name of Parent.
All of the Merger Sub Common Stock is validly issued and outstanding, fully
paid and non-assessable, free and clear of all liens and encumbrances. Parent
has the corporate power to vote such shares of Merger Sub Common Stock
pursuant to this Agreement. Parent has, or will by the Effective Time have,
taken all such actions as may be required in its capacity as the sole
stockholder of Merger Sub to approve the Merger.
(c) None of the outstanding shares of Parent's capital stock has
been issued in violation of any preemptive rights of the current or past
stockholders of Parent, or any agreement to which Parent was or is a party or
bound. All of the shares of Parent Stock issued in connection with the
Merger will be, when issued in accordance with this Agreement, duly
authorized, validly issued, fully paid, nonassessable, and free of all
preemptive rights. The shares of Parent Stock issued in connection with the
Merger will be issued in the name of the shareholders of DCG, as recorded in
the Books and Records of DCG, with such shareholder as record holder of such
shares and such shareholder shall have good and marketable title to such
shares of Parent Stock, free of any liens, other than those created by or
through such shareholder of DCG pursuant to the Lock Up Agreements or
otherwise.
(d) As of September, except for 5,259,278 options to purchase
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shares of Parent stock, there are no issued or outstanding options, warrants,
rights to subscribe for, calls, or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable for,
shares of the capital stock of Parent, or contracts, commitments,
understandings or arrangements by which Parent is or may be obligated to
issue additional shares of its capital stock or options, warrants or rights
to purchase or acquire any additional shares of its capital stock.
6.2 Power and Authority. Subject to the satisfaction of the conditions
precedent set forth herein, each of Parent and Merger Sub has the corporate
power to execute, deliver and perform this Agreement and the Related
Agreements and to consummate the transactions contemplated hereby, and,
subject to the satisfaction of the conditions precedent set forth herein, has
taken all action required by law, its certificate of incorporation, its by-
laws or otherwise, to authorize the execution and delivery of this Agreement
and such related documents. The execution and delivery of this Agreement
does not, and the consummation of the Merger contemplated hereby will not,
violate any provisions of the certificate of incorporation or by-laws of
Parent or Merger Sub or any mortgage, lien, lease, agreement, instrument,
order, arbitration award, judgment or decree to which Parent or Merger Sub is
a party or by which it or its properties is bound, any legal or other
restrictions of any kind to which Parent or Merger Sub is subject, or result
in the creation of any lien, charge or encumbrance upon any of the property
or assets of Parent or Merger Sub. The execution and delivery of this
Agreement and the Related Agreements, and the consummation of the Merger
contemplated hereby, have been approved by the Board of Directors of Merger
Sub and the stockholder of Merger Sub and no other corporate proceedings on
the part of Parent or Merger Sub and the stockholder of Merger Sub are
necessary to authorize the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. This Agreement is a
valid obligation of Parent and Merger Sub and is legally binding on each in
accordance with its terms.
6.3 No Violations of Laws or Agreements, Consents or Defaults.
(a)The delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement and the Related Agreements will
not result in any breach or violation of any of the terms or provisions of,
or constitute a default under, (i) the certificate of incorporation or by-
laws of Parent or Merger Sub or (ii) any statute, order, decree, proceeding,
rule, or regulation of any court or governmental agency or body, United
States or foreign, having jurisdiction over Parent or Merger Sub or any
assets of Parent or Merger Sub.
(b) Except as set forth in Schedule 6.3(b) the delivery of this
Agreement, the Related Agreements and the consummation of the transactions
contemplated hereby and thereby will not result in a breach or violation of
the term of, or constitute a default under, any agreement, instrument, or
commitment to which Parent is party, by which it is bound, or to which any of
Parent's property is subject, and no consent or approval is required from any
third party for the Merger.
(c) Parent is not in default under, or in violation of any
provision of, its certificate of incorporation, by-laws, or any promissory
note, indenture or any evidence of indebtedness or security thereto, lease,
purchase contract or other commitment or any other agreement which is
material to Parent.
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6.4 SEC Filings.
(a) Parent has provided or made available to DCG and the DCG
Shareholders copies of each of the periodic reports and other documents filed
by Parent with the Securities and Exchange Commission ("SEC"). Parent has
filed all reports, documents and other information required of it to be filed
with the SEC (the "Parent SEC Reports"). The Parent SEC Reports were
prepared in accordance with the requirements of the Securities Act of 1933,
as amended (the "Securities Act"), or the Exchange Act, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such Parent
SEC Reports. None of Parent's subsidiaries is required to file any form,
reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in
each case, any related notes thereto) contained in the Parent SEC Reports
(the "Parent Financials") (x) complies as to form in all material respects
with the published rules and regulations of the SEC with respect thereto, (y)
was prepared in accordance with GAAP and (z) fairly presented the
consolidated financial position of Parent and its subsidiaries as at the
respective dates thereof and the consolidated results of its operations and
cash flows for the periods indicated.
6.5 Subsidiaries. Merger Sub does not own stock in and does not
control, directly or indirectly, any other corporation, association or
business organization. Merger Sub is not a party to any joint venture or
partnership.
6.6 No Contracts or Liabilities. Other than the obligations created
under this Agreement, Merger Sub has no obligations or liabilities
(contingent or otherwise) under any contracts, claims, leases, loans or
otherwise.
6.7 Related Party Transactions. Except as disclosed in the Parent SEC
Reports, no director, officer or employee of Parent is indebted to Parent,
nor is Parent indebted (or committed to make loans or extend or guarantee
credit) to any such person, nor is any such person a party to any transaction
(other than as an employee) with Parent providing for the furnishing of
services by, or rental of real or personal property from, or otherwise
requiring cash payments to, any such person.
6.8 Brokers. No Person other than Bayme Capital Group will have, as a
result of the transactions contemplated by this Agreement, any valid right
to, interest in or claim upon the DCG Shareholders or the Surviving
Corporation for any commission, fee or other compensation as a finder or
broker because or any act or omission by Parent or its Affiliates.
6.9 Reorganization.
(a) There is no plan or intention to reacquire any of the Parent
Stock issued in the transaction.
(b) There is no plan or intention to sell or otherwise dispose of
any of the assets of DCG acquired in the transaction, except for dispositions
made in the ordinary course of business.
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(c) Following the Closing Date, Merger Sub will continue the
historic business of DCG or use a significant portion of DCG's historic
business assets in a business.
(d) Prior to and following the Merger, Parent will be in control
of Merger Sub within the meaning of Section 368(c)(1) of the Code.
(e) Parent has no plan or intention to liquidate Merger Sub; to
merge Merger Sub with and into another corporation; or to sell or otherwise
dispose of the stock of Merger Sub.
(f) The ratio for the exchange of Shares of DCG for Parent Stock
in the Merger was negotiated through arm's length bargaining. Accordingly,
the fair market value of the Parent Stock to be received by DCG Shareholders
in the Merger will be approximately equal to the fair market value of the
Shares surrendered by such DCG Shareholders in exchange therefore.
(g) The assumption by Merger Sub of the liabilities of DCG
pursuant to the Merger is for a bona fide business purpose and the principal
purpose of such assumption is not the avoidance of federal income tax on the
transfer of assets of DCG to Merger Sub pursuant to the Merger.
(h) No liabilities of any person other than DCG will be assumed by
Merger Sub or Parent in the Merger, and none of the DCG Shares to be
surrendered in exchange for Parent Stock in the Merger will be subject to any
liabilities.
(i) Parent and Merger Sub will pay their respective expenses, if
any, incurred in connection with the Merger.
(j) There is no intercorporate indebtedness existing between
Parent and DCG or between Merger Sub and DCG that was issued, acquired, or
will be settled at a discount.
(k) Neither Parent or Merger Sub is an investment company as
defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
(l) Neither Parent or Merger Sub is under the jurisdiction of a
court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
(m) No stock of Merger Sub will be issued in the Merger.
(n) None of the compensation received by any stockholder-employee
of DCG pursuant to any employment, consulting or similar arrangement is or
will be separate consideration for or allocable to, any DCG Shares. None of
the Parent stock received by any stockholder-employee of DCG pursuant to the
Merger is or will be separate consideration for, or allocable to, any such
employment, consulting or similar arrangement. The compensation paid to any
stockholder-employee of DCG pursuant to any such employment, consulting or
similar arrangement is or will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's length
for similar services.
ARTICLE VII. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
7.1 Survival of Representations. All representations and warranties
36
made by any party to this Agreement or pursuant hereto, as modified by any
Schedule, exhibit, certificate or other document executed and delivered
pursuant hereto shall survive the Closing and any investigation made by or on
behalf of any party hereto for a period of eighteen months following the
Closing Date; provided, however, that the representations and warranties
contained in Sections 4.1 and 6.1 (Organization; Qualification and Capital
Stock; Corporate Records), Section 5.1(c) (Shareholder Power and
Authorization; Ownership), Section 4.8 (Tax Matters) and 4.11 (Employee
Matters; Benefit Plans; ERISA) shall survive the Closing and any
investigations made by or on behalf of the relevant party until expiration of
the applicable statute of limitations. All statements contained herein or in
any schedule, exhibit, certificate or other document executed and delivered
pursuant hereto shall be deemed representations and warranties for purposes
of Sections 7.1, 9.2(a), and 9.3(a). Notwithstanding the foregoing, the
covenants and agreements of the Parent and the DCG Shareholders made herein
shall survive the Closing and shall continue in full force and effect
indefinitely. The right to indemnification or other remedy based upon such
representations and warranties shall not be affected by any investigation
conducted with respect to, or any knowledge acquired at any time, whether
before or after execution and delivery of this Agreement or the Closing Date,
with respect to the accuracy or inaccuracy of any such representation or
warranty. Each of Parent, DCG and the Majority DCG Shareholder shall notify
the other parties in writing of the discovery any inaccuracy in any
representation or warranty of any party hereto.
7.2 Indemnification.
(a) Subject to the terms and conditions of this Article VII, the
DCG Shareholders jointly and severally shall indemnify, defend and hold
harmless Parent and the Surviving Corporation (and their respective officers,
directors, employees, Affiliates, successors or assigns other than the DCG
Shareholders) (collectively, the "Parent Indemnified Parties"), from and
against all Claims, assessments, losses, damages, liabilities, deficiencies,
judgments, settlements, costs and expenses, including interest, penalties and
reasonable attorneys' fees and expenses incurred in enforcing this
indemnification or in any litigation between the parties or with third
parties (collectively, "Damages") asserted against, resulting to, imposed
upon, suffered or incurred by a Parent Indemnified Party, directly or
indirectly, by reason of or resulting from: (i) any failure of DCG to duly
perform or observe any term, provision, instrument, covenant or agreement to
be performed or observed by it, prior to the Closing, pursuant to this
Agreement or any Related Agreement, (ii) a breach of any representation,
warranty, covenant or agreement of DCG or any DCG Shareholder contained in or
made pursuant to this Agreement or any of the Related Agreements, and/or
(iii) any claim by Evergreen Capital, LLC for any broker fees due as a result
of this Agreement or the transactions contemplated hereby.
(b) Subject to the terms and conditions of this Article VII,
Parent shallindemnify, defend and hold harmless the DCG Shareholders (and
their respective heirs, representatives and assigns) (collectively, the "DCG
Indemnified Parties") at any time after consummation of the Closing, from and
against all Damages asserted against, resulting to, imposed upon or incurred
by the DCG Indemnified Parties, directly or indirectly, by reason of or
resulting from: (i) the assertion against DCG Shareholders of any claim for
payment or performance of any obligation, debt, or liability in connection
37
with Parent or Merger-Sub's ownership or operation of the Business from and
after the Closing, (ii) any failure of Parent or Merger Sub to duly perform
or observe any term, provision, instrument, covenant or agreement to be
performed or observed by it, prior to the Closing, pursuant to this Agreement
or any Related Agreement, (iii) a breach of any representation, warranty,
covenant or agreement of Parent or Merger Sub contained in or made pursuant
to this Agreement, (iii) any claim by Bayme Capital Group for any broker fees
due as a result of this Agreement or the transactions contemplated hereby,
and/or (iv) any failure of Parent to duly perform its obligations under
Section 8.7.
(c) The DCG Shareholders' collective maximum liability to the
Parent Indemnified Parties for Damages under Section 7.2(a) shall not exceed
the aggregate Merger Consideration received by the DCG Shareholders hereunder
(the "Maximum DCG Indemnification Amount").
(d) Parents' maximum liability to the DCG Indemnified Parties for
Damages under this Section 7.2(b) shall not exceed the aggregate Merger
Consideration received by the DCG Shareholders hereunder.
(e) The DCG Shareholders shall not be liable to the Parent
Indemnified Parties, and Parent shall not be liable to the DCG Indemnified
Parties, unless the aggregate Damages for which a party is responsible for
under Section 7.2 shall exceed $50,000, after which such responsible party is
liable only for the excess amount of such Damages (the "Basket Amount").
(f) The Maximum DCG Indemnification Amount and the Basket Amount
shall not apply in respect of any Damages with respect to the breach by DCG
of any representation or warranty made by DCG or the DCG Shareholders in
Sections 3.6(g), 4.8, 4.11 or 8.12 (with respect to claims relating to the
subject matter addressed in the foregoing excluded representations and
warranties).
7.3 Conditions of Indemnification. The obligations and liabilities of
Parent, on the one hand, and the DCG Shareholders, on the other hand, as
indemnifying parties (each, an "Indemnifying Party") to indemnify the DCG
Indemnified Parties or the Parent Indemnified Parties, as applicable (each,
an "Indemnified Party"), under Section 7.2 with respect to Claims made by
third parties shall be subject to the following terms and conditions:
The Indemnified Party shall give written notice to the Indemnifying Party of
any Damages with respect to which it seeks indemnification promptly after the
discovery by such party of any matters giving rise to such Claim for
indemnification; provided, however, that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under Section 7.2 unless it shall have been prejudiced by the
omission to provide such notice. In case any Claim is brought against an
Indemnified Party, the Indemnifying Party shall be entitled to participate in
the defense thereof and, to the extent that it may wish, to assume the
defense thereof, with counsel reasonably satisfactory to the Indemnified
Party, and after notice from the Indemnifying Party of its election so to
assume the defense thereof, the Indemnifying Party will not be liable to the
Indemnified Party under Section 7.2 for any legal or other expense
subsequently incurred by the Indemnified Party in connection with the defense
thereof; provided, however, that (i) if the Indemnifying Party shall elect
not to assume the defense of such claim or action or (ii) if the Indemnified
38
Party reasonably determines that there may be a conflict between the
positions of the Indemnifying Party and the Indemnified Party in defending
such Claim, then separate counsel shall be entitled to participate in and
conduct such defense, and the Indemnifying Party shall be liable for any
reasonable legal or other expenses incurred by the Indemnified Party in
connection with such defense (but not more than one counsel). The
Indemnifying Party shall not be liable for any settlement of any Claim
effected without its written consent, which consent shall not be unreasonably
withheld. The Indemnifying Party shall not, without the Indemnified Party's
prior written consent, which consent shall not be unreasonably withheld,
settle or compromise any Claim to which the Indemnified Party is a party or
consent to entry of any judgment in respect thereof. The Indemnifying Party
further agrees that it will not, without the Indemnified Party's prior
written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof in any pending or threatened Claim in respect of
which indemnification may be sought hereunder (whether or not the Indemnified
Party is an actual or potential party to such Claim) unless such settlement
or compromise includes an unconditional release of the Indemnified Party from
all liability arising out of such Claim.
7.4 Remedies Cumulative. Except as expressly provided in this
Agreement, the remedies provided herein shall be cumulative and shall not
preclude assertion by any party hereto of any other rights or the seeking of
any other remedies against any other party hereto.
ARTICLE VIII. COVENANTS.
8.1 Public Disclosures. Parent and DCG will consult with each other
before issuing any press release or otherwise making any public statement
with respect to the transactions contemplated by this Agreement, and shall
not issue any such press release or make any such public statement prior to
such consultation except as may be required by applicable law or requirements
of NASDAQ. The parties shall issue a joint press release, mutually
acceptable to DCG and Parent, promptly upon execution and delivery of this
Agreement.
8.2 Confidentiality. Parent, DCG, the Surviving Corporation and the
DCG Shareholders and shall hold, and shall use their best efforts to cause
their respective auditors, attorneys, financial advisors, bankers and other
consultants and advisors to hold in strict confidence, unless compelled to
disclose by judicial or administrative process or by other requirements of
law, all documents and information concerning the other party furnished to it
by the other party or its representatives in connection with the transactions
contemplated by this Agreement, including, without limitation, the terms and
conditions of the Agreement (except to the extent that such information shall
be shown to have been (a) already known by the party to which it was
furnished, (b) in the public domain through no fault of such party or (c)
later lawfully acquired from other sources by the party to which it was
furnished) ("Confidential Information"), and each party shall not release or
disclose such Confidential Information to any other Person, except its
auditors, attorneys, financial advisors, bankers and other consultants and
advisors in connection with the transactions contemplated by this Agreement.
8.3 Hiring of Accountant. Within 10 days after the Closing Date, the
Surviving Corporation will hire a qualified accountant, who must be first
approved by Parent, capable of maintaining the Surviving Corporation's
39
accounting books and records and preparing monthly, quarterly and annual
financial statements in compliance with GAAP in a timely manner (the
"Surviving Corporation Accountant"). Parent shall have the right to
interview any Surviving Corporation Accountant candidate to verify that he or
she is qualified for the job.
8.4 Determination of Actual EBITDA After Closing. As promptly as
practicable after the Closing Date, Deloitte & Touche LLP shall be engaged by
Parent to prepare and deliver to Parent and the Surviving Corporation audited
balance sheets as of December 31, 2002 and November 30, 2003, and related
statements of income, statements of changes in shareholders' equity and
statements of cash flows for such periods, each prepared in accordance with
GAAP (the "D&T Financial Statements"). Upon receipt of the D&T Financial
Statements, Parent shall determine in good faith the actual EBITDA of DCG for
the trailing twelve months ended November 30, 2003 (the "Actual EBITDA").
8.5 Creation of DCG Stock Option Plan.
(a) At the Effective Time, Parent shall reserve options to
purchase a number shares of Parent Stock equal to the product of the Actual
EBITDA and 0.2 (each, a "Parent Option") for employees of the Surviving
Corporation.
(b) The number of Parent Options reserved for employees of the
Surviving Corporation shall be increased by 0.2 Parent Options for each $1.00
that the EBITDA generated by the Surviving Corporation during the first
Performance Period exceeds $400,000, such increase to become effective within
30 days of the delivery of the Annual Financial Statements pursuant to
Section 8.8 hereof.
(c)If the EBITDA of the Surviving Corporation in the second
Performance Period is greater than both (i) $400,000 and (ii) the EBITDA from
the first Performance Period, the number of Parent Options reserved for
employees of the Surviving Corporation shall be increased by 0.2 Parent
Options for each $1.00 that the EBITDA generated by the Surviving Corporation
during the second Performance exceeds the greater of (a) the EBITDA from the
first Performance Period or (b) $400,000, such increase to become effective
within 30 days of the delivery of the Annual Financial Statements pursuant to
Section 8.8 hereof.
(d) If the EBITDA of the Surviving Corporation in the third
Performance Period is greater than all of (i) $400,000, (ii) the EBITDA from
the first Performance Period, and (iii) the EBITDA from the second
Performance Period, the number of Parent Options reserved for employees of
the Surviving Corporation shall be increased by 0.2 Parent Options for each
$1.00 that the EBITDA generated by the Surviving Corporation during the third
Performance exceeds the greater of (a) the EBITDA from the first Performance
Period, (b) the EBITDA from the second Performance Period or (c) $400,000,
such increase to become effective within 30 days of the delivery of the
Annual Financial Statements pursuant to Section 8.8 hereof.
(e) All material terms and conditions of the Parent Options,
including the expiration dates and vesting schedules, shall be determined by
the Management Committee, subject to ratification by the Board of Directors
of Parent.
40
(f) The Management Committee shall review on an annual basis the
number of Parent Options available for grant to the Surviving Corporation's
employees and reserve additional Parent Options for grant to the Surviving
Corporation's employees if the Executive Committee shall determine, in its
sole discretion, that reservation of additional Parent Options is
appropriate.
8.6 Xxxxxx Xxxxxx to be Appointed to Management Committee. Promptly
after the Closing, Parent will cause Xxxxxx Xxxxxx to become a member of the
Management Committee.
8.7 Release of Xxxxxx Xxxxxx from DCG Guarantees. Immediately after
the Closing, Parent will cause the Surviving Corporation to release Xxxxxx
Xxxxxx from his personal guarantees to pay the Debts of DCG.
8.8 Annual Financial Statements. Within 60 days after the end of each
fiscal Performance Period of the Surviving Corporation, Parent shall deliver
to Surviving Corporation and the DCG Shareholders an income statement for
such Performance Period and a balance sheet as of the end of such Performance
Period. These annual financial statements (the "Annual Financial
Statements") shall (a) be prepared from monthly financial statements prepared
by the Surviving Corporation in accordance with GAAP and (b) set forth the
EBITDA of the Surviving Corporation for such Performance Period (including
the figures used and calculations made to determine the EBITDA.
8.9 Accounting Disputes. Notwithstanding anything to the contrary in
this Agreement, if the DCG Shareholders or Parent have any dispute relating
to the amount of EBITDA reported on any Annual Financial Statement, then the
DCG Shareholders or Parent, as applicable, will notify the other, in writing,
of each disputed amount (collectively, the "Disputed Amounts"), specifying
the grounds for such dispute, within 15 Business Days after delivery of such
Annual Financial Statements. If Parent and the DCG Shareholders cannot
resolve any such dispute within 10 Business Days after delivery of such
notice, then such dispute will be resolved by an independent accounting firm
reasonably acceptable to Parent and the DCG Shareholders (the "Independent
Accounting Firm"). If Parent and the DCG Shareholders do not agree upon a
mutually acceptable Independent Accounting Firm within the 10 Business Day
period after delivery of the notice, Parent and the DCG Shareholders will
each select an independent accounting firm, and the Independent Accounting
Firm will be selected by the firms chosen by Parent and the DCG Shareholders.
The determination of the Independent Accounting Firm (i) will be made as
promptly as practicable; (ii) will be prepared in accordance with GAAP and
this Agreement; and (iii) will be final and binding on the parties, absent
manifest error, which error may only be corrected by such Independent
Accounting Firm. Any expenses relating to the engagement of the Independent
Accounting Firm will be allocated evenly between Parent and the DCG
Shareholders, provided, however, that if the determination of the Independent
Accounting Firm results in a restatement of more or less than 10% of the
EBITDA or cash deposited into the Parent Account claimed by the party raising
the Disputed Amounts, then the other party shall pay all expenses related to
the engagement of the Independent Accounting Firm.
8.10 Audit; Cooperation. Following the Closing, the DCG Shareholders
jointly and severally shall cooperate with Parent and the Surviving
Corporation in connection with Parent's preparation of financial statements,
and, if necessary, an audit (the "Audit") of the financial performance of the
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Surviving Corporation, for all periods required in connection with Parent's
reporting obligations under the United States securities laws. Such
cooperation shall include, but not be limited to, providing full access to
the Books and Records, any work papers generated in connection therewith,
Surviving Corporation personnel, Surviving Corporation's outside auditors and
assisting Parent in obtaining any required consent of such outside auditors
in connection with Parent's reporting obligations under the United Stated
securities laws.
8.11 Key Man Life Insurance. Within 30 days of Closing, the Majority
DCG Shareholder shall deliver to Parent the $2,000,000 key-man life insurance
policy on the life of Xxxxxx Xxxxxx. Until November 30, 2007, the Majority
DCG Shareholder shall be responsible for payment of all premiums applicable
to this policy with Parent being the owner and beneficiary of this policy.
8.12 Operating Cash Shortfall. Each time, if any, within the first 180
days after the Closing Date, that the Surviving Corporation does not have
enough available cash to satisfy its obligations in the ordinary course, the
Majority DCG Shareholder shall promptly remit to the Surviving Corporation an
amount of cash sufficient to cover such cash deficit. The remittance shall
take the form of a permanent contribution and not as a loan.
ARTICLE IX. MISCELLANEOUS.
9.1 Notices. Any communications required or desired to be given
hereunder shall be deemed to have been properly given if sent by hand
delivery or by facsimile and overnight courier or overnight courier to the
parties hereto at the following addresses, or at such other address as either
party may advise the other in writing from time to time:
If to Parent or Merger Sub: with a copy to:
Zanett, Inc. Drinker, Xxxxxx & Xxxxx, LLP
000 Xxxx 00xx Xxxxxx One Xxxxx Square
15th Floor 18th and Cherry Streets
New York, NY 10022 Xxxxxxxxxxxx, XX 00000
Attention: Pierre-Xxxxxxx Xxx, Chief Attention: Xxxxxxx Xxxxxxx
Legal Officer
If to DCG or the DCG Shareholders: with a copy to:
Delta Communications Group Xxxx Xxxxx, LLP
65 Enterprise, Suite 150 000 Xxxxx Xxxxxxx Xxxxxx
Xxxxx Xxxxx, XX 00000 Suite 1500
Xxxxxxxxx, Xxxxxxxx 00000
Attention: Xxxx X. Xxxxxxxx
All such communications shall be deemed to have been delivered on the
date of hand delivery or facsimile or on the next Business Day following the
deposit of such communications with the overnight courier.
9.2 Further Assurances. Each party hereby agrees to perform any
further acts and to execute and deliver any documents which may be reasonably
necessary to carry out the provisions of this Agreement.
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9.3 Governing Law. This Agreement shall be interpreted, construed and
enforced in accordance with the laws of the State of Delaware, applied
without giving effect to any conflicts of law principles.
9.4 Right of Setoff. Notwithstanding any provision hereof to the
contrary, Parent shall be entitled to set-off (i) any amounts due to Parent
from the DCG Shareholders (or any one or more of them) hereunder, whether by
reason of overpayment of the Merger Consideration or, indemnification under
Article VII, or otherwise, against (ii) amounts due from Parent to the DCG
Shareholders (or any one or more of them) hereunder. Any set-off shall be
applied against amounts payable to the DCG Shareholders in the chronological
order all amounts of every kind payable to the DCG Shareholders are due until
the set-off is complete. Notwithstanding any provision hereof to the
contrary, after the end of the second Performance Period, upon the occurrence
of any event or existence of any condition which Parent reasonably believes
will result in a claim for indemnification under Article VII, Parent may
withhold from amounts otherwise due hereunder an amount equal to Parent's
reasonable estimate of the amount of such claim until such time as the actual
amount of Parent's indemnification claim, and right of set-off hereunder, is
determined. Claims for indemnification for which Parent exercises its right
of set-off hereunder shall be promptly submitted to binding arbitration in
New York in accordance with the rules and regulations of the American
Arbitration Association. The arbitrators will be selected by the American
Arbitration Association. The determination of the arbitrator(s) will be
conclusive and binding upon the parties, and any determination by the
arbitrator(s) of any award may be filed with the clerk of a court of
competent jurisdiction as a final adjudication of the claim involved, or
application may be made to such court for judicial acceptance of the award
and an order of enforcement. Each party will bear its own expenses with
respect to such arbitration. Any amount withheld by Parent pursuant to the
set-off right under this Section 10.4 that the arbitrator(s) determine was in
excess of the amount that the DCG Shareholders were liable under the
indemnification claim brought to such arbitration shall be returned forthwith
to the DCG Shareholders. The arbitrator may award reasonable attorneys' fees
and costs to the prevailing party.
9.5 Consent to Jurisdiction. Each of the parties hereto (a) consents to
submit itself to the personal jurisdiction of any Federal court located in
the State of Delaware in the event any dispute arises out of this Agreement
or any of the transactions contemplated by this Agreement, (b) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or
other request for leave from any such court, and (c) agrees that it will not
bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a Federal court
sitting in the State of Delaware.
9.6 Integration of Exhibits and Schedules. All Exhibits and Schedules
to this Agreement are integral parts of this Agreement as if fully set forth
herein.
9.7 Entire Agreement. This Agreement, the Related Agreements,
including all Exhibits and Schedules attached hereto and thereto contain the
entire agreement of the parties and supersede any and all prior or
contemporaneous agreements between the parties, written or oral, with respect
to the transactions contemplated hereby. Such agreement may not be changed
or terminated orally, but may only be changed by an agreement in writing
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signed by the party or parties against whom enforcement of any waiver,
change, modification, extension, discharge or termination is sought.
9.8 Expenses. Except as expressly provided otherwise, each party
hereto will bear its own costs and expenses (including fees and expenses of
auditors, attorneys, financial advisors, bankers, brokers and other
consultants and advisors) incurred in connection with this Agreement, the
Related Agreements and the transactions contemplated hereby and thereby.
9.9 Counterparts. This Agreement may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall together constitute and be one and the
same instrument.
9.10 Binding Effect. This Agreement shall be binding on, and shall
inure to the benefit of, the parties hereto, and their respective successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No party may assign any right or obligation
hereunder without the prior written consent of the other parties.
(SIGNATURE PAGE FOLLOWS)
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IN WITNESS WHEREOF, Parent, Merger Sub, DCG and the Majority DCG
Shareholder have caused this Agreement and Plan of Merger to be executed by
their respective duly authorized officers, all as of the day and year first
above written.
ZANETT, INC. ZANETT MERGER SUB DCG, INC.
By: /s/ Xxxxx XxXxxxxx By: /s/ Pierre-Xxxxxxx Xxx
Name: Xxxxx XxXxxxxx Name: Pierre-Xxxxxxx Xxx
Title: Chief Executive Officer Title: President
DELTADATA, INC.
By: /s/ Xxxxxx Norton____
Name: Xxxxxx Xxxxxx
Title: Chief Executive Officer & President
MAJORITY DCG SHAREHOLDER
/s/ Xxxxxx Norton____
XXXXXX X XXXXXX
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