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EXHIBIT 2.1
SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT (the "Agreement") is made as of October 26,
2000, by and among Productivity Enhancement Products, Inc., a California
corporation ("PEP" or "PEP Corporation"), the sole shareholder of PEP
Corporation, Xxxxx X. Xxxxxx ("Xxx" or the "Shareholder"), and Dense-Pac
Microsystems, Inc., a California corporation (the "Company").
RECITALS
A. The Shareholder is the holder of all of the issued and outstanding
capital stock of PEP Corporation (the "PEP Stock").
B. The Board of Directors of PEP has approved, and the sole Shareholder has
ratified, a dividend (the "Dividend") paid or payable in shares of WatchGuard
Technologies, Inc. ("WatchGuard") common stock (Nasdaq: WGRD) held of record by
PEP, in an amount and at a time determined by the Board of Directors of PEP.
C. The Shareholder has assumed or will assume (the "Assumption") from PEP
the principal amount of all indebtedness and related obligations due from PEP to
Xxxxxxx Xxxxx & Co., Inc. ("Xxxxxxx Xxxxx"), and PEP shall be released and
relieved from all such obligations.
D. PEP has effected or will effect prior to the Closing (as defined below)
a redemption (the "Redemption") of a portion of the shares of PEP Stock held by
the Shareholder. The Redemption price will be payable in the form of shares of
the WatchGuard common stock held of record by PEP. The Redemption will result in
a distribution to the Shareholder or his nominees or assigns of all of the
remaining WatchGuard shares then held by PEP and all of the rights, interests
and titles of PEP therein or related thereto. The Redemption price and time has
been or shall be determined by mutual agreement of PEP and the Shareholder.
E. Following the Redemption, the Company proposes to acquire all of the
then outstanding PEP Stock from the Shareholder, and the Shareholder proposes to
transfer his PEP Stock to the Company in exchange for shares of the Company's
Common Stock.
F. This Agreement is being entered into by the parties as part of a unified
plan of, among other things, (A) a redemption by PEP of a significant portion of
the presently outstanding PEP Stock held by Xxx, which is intended by the
parties to qualify as a distribution "not substantially equivalent to a
dividend," and (B) the exchange of stock referred to in recital E. above that is
intended by the parties to qualify for non-recognition treatment under Section
368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the "Code").
G. The parties intend to treat the foregoing transaction as a "purchase"
for accounting purposes.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the
respective promises of the parties set forth herein, the parties hereto agree as
follows:
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1. EXCHANGE OF SHARES.
1.1 EXCHANGE OF THE SHARES. Subject to the terms and conditions of this
Agreement, the Shareholder hereby agrees to assign, transfer and deliver to the
Company the shares of PEP Stock owned by the Shareholder free and clear of all
liens, claims, encumbrances, pledges, options, security interests and any other
adverse interests of any kind or nature whatsoever, and the Company hereby
agrees to accept delivery of the PEP Stock from the Shareholder (the "Exchange")
and to issue to the Shareholder the number of shares of the Company's Common
Stock (collectively, the "Shares") calculated in the manner set forth on Exhibit
A. No fractional shares shall be issued and in the event that the conversion
results in a fraction, the number of Shares to be issued shall be rounded down
to the nearest whole number.
1.2 CLOSING. The consummation of the Exchange shall take place at the
offices of Xxxxxxxxx Xxxxx Xxxxxxx & Xxxxx, a Professional Corporation, 000
Xxxxxxx Xxxxxx Xxxxx, Xxxxx 0000, Xxxxxxx Xxxxx, Xxxxxxxxxx, at 10:00 a.m., on
October 26, 2000 (the "Closing Date"), or at such other time and place as the
Company and Shareholder mutually agree upon, either orally or in writing (which
time and place are designated as the "Closing"). Upon receipt by the Company of
the PEP Stock at the Closing, the Shareholder shall receive from the Company
certificates evidencing the number of Shares calculated in the manner set forth
on Exhibit A.
1.3 FULL SATISFACTION. The Shares delivered by the Company upon the
surrender of PEP Stock, all in accordance with the terms hereof, will be deemed
to have been delivered in full satisfaction of all rights and obligations
pertaining to such PEP Stock.
1.4 ADJUSTMENTS FOR CAPITAL CHANGES. To the extent that, between the date
hereof and the Closing Date (as to the Company's Shares to be issued at the
Closing Date), the Company (a) recapitalizes either through a split-up of its
outstanding shares into a greater number of shares, or through a combination of
its outstanding shares into a lesser number of shares, or (b) reorganizes,
reclassifies or otherwise changes its outstanding shares into the same or a
different number of shares of other classes (other than through a split-up or
combination of shares provided for in the previous clause), or (c) declares a
dividend on its outstanding shares payable in shares or securities convertible
into shares, the calculation of the Exchange number of shares will be adjusted
proportionately and appropriately.
2. REPRESENTATIONS AND WARRANTIES OF PEP CORPORATION AND THE SHAREHOLDER
REGARDING THE SHARES. Except as specifically provided below, or in the
Disclosure Schedules delivered by PEP Corporation on the Closing Date, PEP
Corporation and the Shareholder, jointly and severally, represent and warrant to
the Company that:
2.1 ORGANIZATION AND GOOD STANDING. PEP Corporation is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California, has the power and authority to own, operate and lease its properties
and to carry on its business as now conducted and is duly qualified to do
business and is in good standing in each jurisdiction where the character of its
properties owned or leased or the nature of its activities make such
qualification necessary (each such jurisdiction being listed on Schedule 2.1),
except where the failure to be so qualified would not have a material adverse
effect on the Company.
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2.2 POWER, AUTHORIZATION AND VALIDITY.
2.2.1 PEP Corporation and the Shareholder have the right, power, legal
capacity and authority to enter into and perform their respective obligations
under this Agreement, and this Agreement constitutes the valid and legally
binding obligations of PEP Corporation and the Shareholder and is enforceable
against PEP and the Shareholder in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally, and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies. This Agreement has
been duly and validly approved by the directors of PEP Corporation.
2.2.2 No filing, authorization, consent or approval, governmental or
otherwise, or filing with any governmental authority or court is necessary to
enable PEP Corporation and the Shareholder to enter into, and to perform their
respective obligations under, this Agreement, except for (a) such filings as may
be required to comply with all applicable securities laws, and (b) consents
required under contracts disclosed in Schedule 2.13.
2.3 AUTHORIZED/OUTSTANDING CAPITAL STOCK OF THE PEP CORPORATION. The
authorized capital stock of PEP Corporation consists solely of 100,000,000
shares of "Common Stock," $.00004 par value per share. A total of 5,140,000
shares of PEP Stock are issued and outstanding as of the date of this Agreement,
all of which are held of record and owned by the Shareholder as set forth in
Exhibit A. Immediately following the last to occur of the Dividend, Assumption
and Redemption, the amounts and numbers of outstanding shares of PEP Stock will
be revised downward and shall be accurately set forth in Exhibit A. No equity
securities of PEP Corporation shall be issued and outstanding at the time of the
Closing other than the shares of PEP Stock set forth on Exhibit A. All issued
and outstanding shares of PEP Stock have been duly authorized and validly
issued, are fully paid and nonassessable, are not subject to any right of
rescission and have been offered, issued, sold and delivered by PEP Corporation
in compliance with all requirements of applicable laws. There is and as of the
Closing there shall be no liability for dividends accrued and unpaid by PEP
Corporation or its subsidiaries or affiliates.
2.4 OPTIONS/RIGHTS. Except as disclosed in Schedule 2.4, there are no stock
appreciation rights, options, warrants, calls, rights, commitments, conversion
privileges or preemptive or other rights or agreements outstanding to purchase
or otherwise acquire any shares of PEP Corporation, specifically including the
PEP Stock (collectively, "Capital Stock") or any securities or debt convertible
into or exchangeable for Capital Stock or obligating PEP Corporation to grant,
extend or enter into any such option, warrant, call, commitment, conversion
privileges or preemptive or other right or agreement. There are no voting
agreements, registration rights, rights of first refusal, preemptive rights,
co-sale rights, or other restrictions applicable to any outstanding securities
of PEP Corporation.
2.5 SUBSIDIARIES. Except for the ownership of all of the issued and
outstanding shares of capital stock of PE Sub Corporation, a California
corporation (the "Subsidiary"), and Productivity Enhancement Products, LLC, a
California limited liability company ("PEP LLC"), as set forth in Schedule 2.5,
PEP Corporation does not have any subsidiaries or any equity interest, direct or
indirect, in, or loans to, any corporation, partnership, joint venture, limited
liability company or other business entity. Neither the Subsidiary or PEP LLC
(a) have conducted business, been a party to any contract, agreement,
instrument, obligation or commitment, (b) had employees, or (c) held assets,
since their formation.
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2.6 NO VIOLATION OF ARTICLES OR EXISTING AGREEMENTS. Neither the execution
and delivery of this Agreement, nor the consummation of the transactions
provided for herein, will conflict with, or (with or without notice or lapse of
time, or both) result in a termination, breach, impairment or violation of, (a)
any provision of the Articles of Incorporation, Bylaws or other charter
documents (the "PEP Charter Documents") of PEP Corporation, as currently in
effect, (b) in any material respect, any instrument, contract, agreement,
permit, mortgage or license to which PEP Corporation, its Subsidiary or PEP LLC
is a party or by which PEP Corporation, its Subsidiary or PEP LLC, or any of
their assets, is bound or (c) any judgment, writ, decree, order, statute, rule
or regulation applicable to PEP Corporation, its Subsidiary or PEP LLC or any of
their assets or properties. Except as set forth in Schedule 2.6, the Exchange
will not require the consent of any third party and will not have any material
adverse effect upon any such rights, licenses, franchises, leases or agreements
pursuant to the terms of those agreements.
2.7 LITIGATION. Except as set forth on Schedule 2.7, there is no action,
proceeding or investigation pending or, to PEP Corporation's knowledge,
threatened against PEP Corporation, its Subsidiary or PEP LLC before any court
or administrative agency that, if determined adversely to any such person or
entity may reasonably be expected to have a material adverse effect on PEP
Corporation.
2.8 PEP CORPORATION FINANCIAL STATEMENTS. PEP Corporation has delivered to
the Company PEP Corporation's consolidated balance sheet as of September 30,
2000 ("Balance Sheet Date"), PEP Corporation's profit & loss statement as of
September 30, 2000 and PEP Corporation's statement of cash flows for the period
ended September 30, 2000 and a sales by item summary as of September 30, 2000
(collectively, the "PEP Corporation Financial Statements"), a copy of each of
which is included as Schedule 2.8. The PEP Corporation Financial Statements (a)
are in accordance with the books and records of PEP Corporation and (b) fairly
and accurately represent the financial condition of PEP Corporation at the
respective dates specified therein and the results of operations for the
respective periods specified therein in conformity with GAAP applied on a
consistent basis.
2.9 TAX RETURNS. Except as disclosed on Schedule 2.9, PEP Corporation has
duly and timely filed all tax returns and has duly and timely paid all material
taxes (whether or not shown on any tax return) due to any federal, foreign,
state, or local taxing authorities (the "Taxes") prior to the Closing or has set
up an adequate reserve for all material Taxes payable. PEP Corporation has been
since January 1, 2000, an "S Corporation," whose S election is valid and will
continue to and including the calendar day immediately preceding the Closing.
The Subsidiary has been since inception a qualified S corporation subsidiary of
PEP Corporation, whose S election is valid and will continue to and including
the date of the proposed post-Closing merger of the Subsidiary with and into PEP
Corporation. The transactions contemplated by this Agreement shall not result in
any liability of PEP Corporation for income taxes other than the amount of the
Tax Liability taken into account in determining the Purchase Price.
2.10 COOPERATION ON TAX MATTERS. The Company, PEP Corporation, and the
Shareholder shall reasonably cooperate with each other in connection with the
filing of tax returns pursuant to this Section and any audit, litigation or
other proceeding with respect to Taxes of PEP Corporation for any period ending
on or before the Closing Date, and for any period which begins before the
Closing Date and ends after the Closing Date ("Straddle Period") to the extent
of Taxes pertaining to the portion of the Straddle Period prior to the Closing
Date.
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2.11 TITLE TO PROPERTIES; CONDITION OF EQUIPMENT. Except as set forth on
Schedule 2.11, PEP Corporation has good and marketable title to all of its
assets used in its business or as shown on the balance sheet as of the Balance
Sheet Date included in the PEP Corporation Financial Statements, free and clear
of all liens, charges, encumbrances or restrictions (other than for taxes not
yet due and payable and Permitted Liens), other than such assets set forth on
Schedule 2.11 as were sold by PEP Corporation in the ordinary course of business
since the Balance Sheet Date or which are subject to capitalized leases.
2.12 ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date, PEP
Corporation has carried on its business in the ordinary course substantially in
accordance with the procedures and practices in effect on the Balance Sheet
Date, and except as set forth in Schedule 2.12, since the Balance Sheet Date
there has not been any material adverse change with respect to PEP Corporation.
2.13 AGREEMENTS AND COMMITMENTS. Except as set forth in Schedule 2.13, PEP
Corporation is not a party or subject to any oral or written executory
agreement, contract, obligation or commitment that is material to any of PEP
Corporation, its financial condition, business or prospects.
2.14 INTELLECTUAL PROPERTY. PEP Corporation owns all right, title and
interest in, or has the right to use, sell or license all patent applications,
patents, trademark applications, trademarks, service marks, trade names,
copyright applications, copyrights, trade secrets, know-how, technology,
customer lists, proprietary processes and formulae, all source and object code,
algorithms, inventions, development tools and all documentation and media
constituting, describing or relating to the above, including, without
limitation, manuals, memoranda and records and other intellectual property and
proprietary rights used in or reasonably necessary or required for the conduct
of its respective business as presently conducted ("PEP Corporation Intellectual
Property").
2.15 COMPLIANCE WITH LAWS. PEP Corporation has complied, and as of the
Closing Date is in compliance in all material respects, with all applicable
laws, ordinances, regulations and rules, and all orders, writs, injunctions,
awards, judgments and decrees, applicable to PEP Corporation or to the assets,
properties and business of PEP Corporation. PEP Corporation has received all
permits and approvals from, and has made all filings with, third parties,
including Government Authorities, that are necessary to the conduct of its
business as presently conducted, and there exists no current default under or
material violation of any such permit or approval.
2.16 EMPLOYEES. PEP Corporation is not subject to a collective bargaining
agreement with respect to its employees or subject to any current labor dispute.
Schedule 2.16 contains a list of all employment and consulting agreements,
pension, retirement, disability, medical, dental or other health plans, life
insurance or other death benefit plans, profit sharing, deferred compensation
agreements, stock, option, bonus or other incentive plans, vacation, sick,
holiday or other paid leave plans, severance plans or other similar employee
benefit plans maintained by PEP Corporation (the "Employee Plans").
2.17 CORPORATE DOCUMENTS. PEP Corporation has provided to the Company
complete and correct copies of and/or access to all documents identified in the
Schedules to this Agreement including, without limitation, the following: (a)
copies of PEP Corporation's Charter Documents (and those of the Subsidiary) as
currently in effect; (b) copies of its minute book containing records of all
proceedings, consents, actions and meetings of each of PEP Corporation's
directors, committees of the board of directors and shareholders; (c) copies of
its stock ledger, journal and other
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records reflecting all stock issuances and transfers and all stock option grants
and agreements; (d) copies of the material agreements, and all amendments
thereto; and (e) all permits, orders and consents issued by any regulatory
agency with respect to PEP Corporation, or any securities of PEP Corporation,
and all applications for such permits, orders and consents.
2.18 NO BROKERS. Except as disclosed on Schedule 2.18, PEP Corporation is
not obligated for the payment of fees or expenses of any investment banker,
broker or finder in connection with the origin, negotiation or execution of this
Agreement in connection with any exchange of stock transaction provided for
herein.
2.19 ENVIRONMENTAL, HEALTH AND SAFETY MATTERS. To PEP Corporation's
knowledge, each of PEP Corporation, its predecessors and affiliates have
complied and is in compliance with all environmental, health and safety
requirements imposed by federal, state or local laws in all material respects.
2.20 BANK ACCOUNTS. Schedule 2.20 sets forth the names and locations of all
banks, trust companies, savings and loan associations, and other financial
institutions at which PEP Corporation maintains accounts of any nature and the
names of all persons authorized to draw thereon or make withdrawals therefrom.
2.21 DISCLOSURE. This Agreement, its exhibits and schedules, and any of the
certificates or documents to be delivered by PEP Corporation and the Shareholder
to the Company under this Agreement, taken together, do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained herein and therein, in light of the
circumstances under which such statements were made, not misleading.
2.22 SECURITIES LAW COMPLIANCE.
2.22.1 In connection with the issuance of the Shares as of the
Closing, the Shareholder has been advised and understands and agrees that the
issuance by the Company to the Shareholder of the Shares will not be registered
under the Securities Act of 1933, as amended (the "1933 Act"), nor qualified
under any state securities laws before the Closing, on the ground (among others)
that no distribution or public offering of the Shares is to be effected in
connection with the issuance to such Shareholder as contemplated herein and, in
issuing the Shares to such Shareholder hereunder, the Company is relying on the
accuracy and completeness of the representations of the Shareholder set forth in
this Section 2.22.1.
2.22.2 The Shareholder is acquiring the Shares for the Shareholder's
own account, for investment and not with a view to distribution or resale
thereof. The Shareholder will immediately notify the Company if such intent
changes prior to the Closing. The Shareholder's only present intention to sell
the Shares would be pursuant to an effective registration and qualification
under applicable securities law.
2.22.3 The Shareholder acknowledges that the Shareholder has been
informed and understands that the Shares may not be sold or transferred except
in compliance with the 1933 Act or any exemption thereunder, and there is no
assurance that any exemption from registration, including Rule 144, under the
1933 Act will become available to permit resales of the Shares. This
acknowledgement does not limit or constitute a waiver of the terms and
provisions of the Registration Rights Agreement.
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2.22.4 The Shareholder (i) is familiar with the business of the
Company, (ii) has had an opportunity to discuss with representatives of the
Company the condition of and prospects for the continued operation of the
Company and such other matters as the Shareholder deemed appropriate in
considering whether to invest in the Shares, and (iii) has been provided access
to all available information about the Company requested by the Shareholder.
2.22.5 The Shareholder has made the Shareholder's own investigation
whether or not to exchange the PEP Stock for the Shares and the Shareholder has
sufficient business and financial experience so as to enable the Shareholder to
evaluate the merits and risks associated with the Shares.
2.22.6 THE SHAREHOLDER IS ABLE TO BEAR THE ECONOMIC RISK OF A TOTAL
LOSS OF THE INVESTMENT IN THE COMPANY, AND THE SHAREHOLDER HAS ADEQUATE MEANS OF
PROVIDING FOR THE CURRENT NEEDS AND FORESEEABLE PERSONAL CONTINGENCIES AND HAS
NO NEED FOR THE SHAREHOLDER'S INVESTMENT IN THE SHARES TO BE LIQUID.
2.22.7 The Shareholder acknowledges and agrees that the certificates
representing the Shares shall contain a restrictive legend substantially in the
form below:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE
CORPORATION HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
2.22.8 The Shareholder is an accredited investor as defined under
Section 501(a) of Regulation D promulgated under the 0000 Xxx.
2.22.9 The Shareholder acknowledges that he has been fully informed
of, and has had full opportunity to discuss with the Company's management, the
status of the Company and its operating, investment, financial and strategic
plans.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents
and warrants that, except as set forth on the Disclosure Schedules delivered by
the Company on the Closing Date:
3.1 ORGANIZATION. The Company is duly organized and validly existing and is
in good standing under the laws of the jurisdiction of its incorporation, and
has the corporate power and authority to own, operate and lease its properties
and to carry on its business as now conducted and as proposed to be conducted,
and is qualified to do business and is in good standing in each jurisdiction in
which such qualification is required.
3.2 POWER, AUTHORIZATION AND VALIDITY. The Company has the right, power,
legal capacity and authority to enter into and perform its obligations under
this Agreement and this Agreement constitutes the valid and legally binding
obligation of the Company and is enforceable against the Company in accordance
with its terms. The execution, delivery and performance of this
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Agreement have been duly and validly approved and authorized by all necessary
corporate and shareholder action on the part of the Company. No filing,
authorization, consent or approval, governmental or otherwise, is necessary to
enable the Company to enter into, and to perform its obligations under, this
Agreement, except for (a) such post-closing filings as may be required to comply
with federal and state securities and other applicable laws and (b) consents
obtained prior to the Closing Date.
3.3 CAPITALIZATION OF THE COMPANY. The authorized share capital of the
Company consists of 40,000,000 shares of Common Stock, without par value per
share, of which approximately 19,918,000 shares are issued and outstanding, and
8,000,000 shares of Preferred Stock, without par value per share, of which all
have been designated "Series A Preferred Stock," none of which are outstanding.
The Shares issued to the Shareholder in exchange for the shares of PEP Stock in
accordance with Section 1.1 above shall be validly issued, fully paid and
nonassessable and free and clear of all liens, claims, encumbrances, pledges,
options, security interests and any other adverse interest created by or under
the Company other than any restrictions under U.S. securities laws or state Blue
Sky laws.
3.4 COSTS. At the Closing, the Company will pay all of the costs and fees
incurred by PEP Corporation in connection with this acquisition and redemption
and ancillary activities undertaken or conducted by PEP Corporation prior to the
Closing. Following the receipt of a copy of a statement or invoice charging such
fees, the Company will pay these fees and costs directly to the service provider
upon or in advance of the Closing. The Company and the Shareholder will each
bear their own costs and expenses, including attorneys' and accountants' fees
and costs, to be paid by the Company in advance of the Closing and the
Shareholder will pay or reimburse the Company for any transaction expenses of
the Company that exceed $50,000 or the excess will be deducted from the Purchase
Price.
3.5 NO VIOLATION OF ARTICLE OR EXISTING AGREEMENTS. Neither the execution
and delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will conflict with or (with or without notice or lapse of
time, or both) result in a termination, breach, termination, impairment or
violation of (a) any provision of the Articles of Incorporation, Bylaws or other
charter documents of the Company, as currently in effect, (b) in any material
respect, any material agreement, instrument or contract to which the Company is
a party or by which the Company is bound, or (c) any national, provincial, local
or foreign judgment, writ, decree, order, statute, rule or regulation applicable
to the Company or its assets or properties.
3.6 LITIGATION. There is no action, proceeding or investigation pending or,
to the Company's actual knowledge, threatened against the Company before any
court or administrative agency that, if determined adversely to the Company, may
reasonably be expected to have a material adverse effect on the Company.
3.7 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule 3.7, since
(August 31, 2000), there has not been any change in the financial condition,
properties, assets, liabilities, business or results of operations of the
Company, which change by itself or in conjunction with all other such changes,
whether or not arising in the ordinary course of business, has had or can
reasonably be expected to have a material adverse effect on the Company, with
the exception of matters disclosed in filings made by the Company with the
Securities and Exchange Commission or in the Company's news releases.
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3.8 TAX MATTERS. Except as set forth in Schedule 3.8, following the
Exchange, the Company will not cause PEP Corporation, nor will PEP Corporation
issue, additional shares of its stock that would result in the Company losing
control of PEP Corporation within the meaning of Section 368(c) of the Code. The
Company has no plan or intention to reacquire any of its stock issued in the
Exchange. The Company has no plan or intention to liquidate PEP Corporation; to
merge PEP Corporation with or into another corporation (other than the proposed
merger of the Subsidiary with and into PEP Corporation after the Closing); to
cause PEP Corporation to sell or otherwise dispose of any of its assets, except
for dispositions made in the ordinary course of business; or to sell or
otherwise dispose of any of the PEP Corporation Shares acquired in the Exchange,
except for transfers described in Section 368(a)(2)(C) of the Code. The Company
does not own, directly or indirectly, nor has it owned during the past five (5)
years, directly or indirectly, any stock of PEP Corporation. Following the
transaction, PEP Corporation will continue the historic business of PEP
Corporation or use a significant portion of PEP Corporation's business assets in
a business. The Company is not an investment company as defined in Section
368(a)(iii) and (iv) of the Code. The Company will not assume any liabilities of
the Shareholders as part of the Exchange. Neither the Company nor PEP
Corporation will take any action prior to, in connection with or following the
Exchange that would disqualify such acquisition as a tax-free reorganization
under Section 368(a)(1)(B) of the Code, and agrees to treat the Exchange
consistent therewith, including but not limited to, complying with Treasury
Regulation Section 1.368-3.
3.9 NO BROKERS. Except as disclosed on Schedule 3.9, the Company is not
obligated for the payment of fees or expenses of any investment banker, broker
or finder in connection with the origin, negotiation or execution of this
Agreement in connection with the exchange of stock transaction provided for
herein (excluding transactions referred to in Section 3.4).
3.10 DISCLOSURE. The Company has made available to PEP Corporation and to
the Shareholder an investor disclosure package including reports filed by the
Company with the Securities and Exchange Commission. This Agreement, its
exhibits and schedules, and any of the certificates or documents to be delivered
by the Company under this Agreement, taken together, do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained herein and therein, in light of the
circumstances under which such statements are made, not misleading.
3.11 SECURITIES LAW COMPLIANCE.
3.11.1 The Company has been advised and understands and agrees that
the PEP Stock will not be registered under the Securities Act of 1933, as
amended (the "1933 Act"), nor qualified under any state securities laws, on the
ground (among others) that no distribution or public offering of the PEP Stock
is to be effected in connection with the transactions as contemplated herein
and, in transferring the Shares to the Company hereunder, PEP Corporation and
the Shareholder are relying on the accuracy and completeness of the
representations of the Company set forth in this Section 3.11.1.
3.11.2 The Company is acquiring the PEP Stock for the Company's own
account, for investment and not with a view to distribution or resale thereof.
The Company will immediately notify PEP Corporation and the Shareholder if such
intent changes prior to the Closing.
3.11.3 The Company acknowledges that the Company has been informed and
understands that no public market for the PEP Stock exists and that there can be
no assurance that
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any such market may develop or exist in the future and, even if a public market
does develop, that the PEP Stock may not be sold or transferred except in
compliance with the 1933 Act or any exemption thereunder, and there is no
assurance that any exemption from registration, including Rule 144, under the
1933 Act will become available to permit resales of the PEP Stock.
3.11.4 The Company (i) is familiar with the business of PEP
Corporation, (ii) has had an opportunity to discuss with representatives of PEP
Corporation the condition of and prospects for the continued operation of PEP
Corporation and such other matters as the Company deemed appropriate in
considering whether to invest in the PEP Stock, and (iii) has been provided
access to all available information about PEP Corporation requested by the
Company.
3.11.5 The Company has made the Company's own investigation whether or
not to exchange the Shares for the PEP Stock and the Company has sufficient
business and financial experience so as to enable the Company to evaluate the
merits and risks associated with the PEP Stock.
3.11.6 The Company is able to bear the economic risk of a total loss
of the investment in PEP Corporation, and the Company has adequate means of
providing for the current needs and foreseeable personal contingencies and has
no need for the Company's investment in the PEP Stock to be liquid.
3.11.7 The Company acknowledges and agrees that the certificates
representing the PEP Stock shall contain a restrictive legend substantially in
the form below:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE
CORPORATION HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
3.11.8 The Company is an accredited investor as defined under Section
501(a) of Regulation D promulgated under the 0000 Xxx.
3.11.9 The Company acknowledges that he has been fully informed of,
and has had full opportunity to discuss with PEP Corporation's management, the
status of PEP Corporation and operating, investment, financial and strategic
plans of PEP Corporation.
4. PRECLOSING COVENANTS OF PEP CORPORATION AND THE SHAREHOLDER. During the
period from the date of this Agreement until the Closing Date, PEP Corporation
and the Shareholder covenant and agree with the Company as follows:
4.1 MAINTENANCE OF BUSINESS. The parties hereto understand and acknowledge
that it is their intent to work closely together during the period from the date
hereof until the Closing Date. If PEP Corporation or the Shareholder become
aware of a material deterioration in the relationship with any material
customer, supplier or key employee, PEP Corporation or the Shareholder will
promptly
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bring such information to the attention of the Company in writing and, if
requested by the Company, will exert all reasonable efforts to restore the
relationship.
4.2 CONDUCT OF BUSINESS. PEP Corporation will continue to (and will cause
its Subsidiary to) conduct its business in the ordinary course consistent with
the manner as heretofore conducted and, to the extent consistent therewith, use
all reasonable efforts to preserve intact its current business organization,
keep available the services of its current officers and employees and preserve
its relationship with customers, suppliers, licensors, licensees, distributors
and others having business dealings with it.
4.3 NECESSARY CONSENTS. PEP Corporation and the Shareholder will each use
their reasonable efforts to obtain such written consents and take such other
actions as may be necessary or appropriate, to facilitate and allow the
consummation of the transactions provided for herein and to facilitate and allow
the Company to carry on PEP Corporation's business after the Closing.
4.4 PURCHASE ACCOUNTING. The parties believe that "pooling of interests"
accounting is unavailable as a result of historic changes in PEP Corporation's
equity structure, and therefore "purchase accounting" shall be applicable. If
that situation changes materially, then PEP Corporation and the Shareholder
shall cooperate with the Company and use all reasonable efforts at the expense
of the Company to cause the business combination to be effected by the
transactions in this Agreement to be accounted for as a "pooling of interests."
4.5 LOANS. The Company has furnished funds that repay PEP Corporation's US
Bank loan and may in the future make additional advances of funds to PEP
Corporation, including sums necessary to pay those sums due under Section 4.9
below (the "Loans"), and the Company and PEP Corporation have executed and
delivered such documents as evidence the Company's rights as a creditor of PEP
Corporation. No termination of this Agreement shall impair the obligation of the
parties under the agreements concerning the Loans. PEP Corporation and the
Company shall cooperate to cause US Bank to execute and deliver such documents
as shall be required to evidence a full and complete release by US Bank of US
Bank's rights in full. The Company reserves its rights against PEP Corporation,
which is the sole borrower under the Loans, for repayment of the Loans in
accordance with their terms, in addition to interest, finance charges, expenses
and costs of collection, including attorneys' fees. The Loans are not guaranteed
by the Shareholder.
4.6 THE TAX LIABILITY. The Redemption may result in a corporate-level tax
liability of PEP Corporation (the "Tax Liability"), which shall survive the
Closing. PEP Corporation and its accountants shall provide all information
requested by the Company, its accountants or other representatives, concerning
the manners in which the Redemption payment should be reported for tax purposes
and all further information that is material or necessary to make any relevant
information not misleading. The estimated amount of future Tax Liability shall
be taken into account in determining the Purchase Price, as set forth in
Exhibit A.
4.7 THE MERGER. Following the Closing, PEP Corporation shall cause the
Subsidiary to merge (the "Merger") with and into PEP Corporation, and the
separate existence of the Subsidiary shall cease, and all assets, liabilities
and operations shall become those of PEP Corporation.
4.8 THE REDEMPTION. In connection with the redemption of shares of its
common stock, PEP Corporation wishes to make a redemption payment that qualifies
to be accounted and treated for individual income tax purposes as a distribution
"not substantially equivalent to a dividend." In
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payment of the redemption price, PEP Corporation shall pay the Shareholder all
of the WatchGuard common stock then owned by PEP Corporation or its nominee in
exchange for some portion of the outstanding shares of PEP Stock held by such
Shareholder.
4.9 THE PEP CORPORATION DEFERRED COMPENSATION PLAN. PEP Corporation
exchanged rights to cash payments for cancellation of all previously granted and
outstanding stock options under its terminated stock option plan or plans. The
resulting rights to receive cash are subject to vesting requirements. The
unvested rights of PEP Corporation's employees to such future cash payments
shall be paid by PEP Corporation for all rights that would have vested through
September 30, 2001, but shall not otherwise accelerate upon or prior to the
Closing and shall continue without modification for all vesting period payments
after September 30, 2001.
4.10 THE SHAREHOLDER'S ASSUMPTION OF A PEP CORPORATION DEBT. PEP
Corporation is a borrower under a credit facility from Xxxxxxx Xxxxx. The credit
facility will be assigned to and assumed by the Shareholder and PEP Corporation
shall thereafter be forever relieved and released from all further liability
arising from such borrowing.
4.11 EXCLUSIVITY. Until the Closing Date or such earlier date as this
Agreement is terminated by mutual agreement (i) the Company will negotiate
exclusively and in good faith with the Company with respect to the sale of PEP
Corporation or any portion thereof (whether by merger or other combination,
equity sale, asset sale or otherwise, and (ii) PEP Corporation and its
affiliates will not, directly or indirectly (through agents or otherwise),
encourage or solicit any inquiries or accept any proposals by, or engage in any
discussions or negotiations with or furnish any information to, any other person
or entity concerning any such sale. If PEP Corporation or its affiliate or
representative receives any proposal or other communication from a third party
relating to a proposed purchase of PEP Corporation or any portion thereof, PEP
Corporation will promptly communicate in writing to the Company the substance
thereof. PEP Corporation agrees that, during the effectiveness of this
paragraph, it will not enter into any negotiations or new relationships with
others that would materially compromise its abilities or the Company's
incentives to enter into and perform this Agreement. PEP Corporation further
represents and warrants to the Company that, except as disclosed to the Company,
it is not involved in any agreements, contracts or relationships that would
either compromise its ability to enter into the type of transaction contemplated
herein or would expose the Company to liability as a result of any discussions
or agreements and furtherance of the objectives in this letter; provided, that
"consent to assignment" or similar requirements in PEP Corporation's business
contracts shall not be deemed a violation hereof.
5. THE COMPANY'S PRECLOSING COVENANTS. During the period from the Agreement Date
until the Closing Date, the Company covenants to and agrees as follows:
5.1 SATISFACTION OF CONDITIONS PRECEDENT. The Company will use all
reasonable efforts to satisfy or cause to be satisfied all the conditions
precedent which are set forth herein and will use all reasonable efforts to
cause the transactions provided for in this Agreement to be consummated, and,
without limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the transactions provided for herein.
5.2 PURCHASE ACCOUNTING. The parties believe that "pooling of interests"
accounting is unavailable as a result of historic changes in PEP Corporation's
equity structure, and therefore "purchase accounting" shall be applicable. If
that situation changes materially, then Company shall
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take all reasonable efforts at its expense to cause the business combination to
be effected by the Exchange to be accounted for as a "pooling of interests."
5.3 NO SEVERANCE PAYMENTS. The Company shall have no responsibility for any
severance payment which is or becomes due to any of the PEP Corporation
employees that does not remain an employee of PEP Corporation or the Company
upon or immediately following the Closing, unless caused by the Company.
6. CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDER. The Shareholder's obligations
hereunder are subject to the fulfillment or satisfaction, on and as of the
Closing, of each of the following conditions (any one or more of which may be
waived by the Shareholder, but only in a writing signed by the Shareholder):
6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company set forth in Section 3 shall be true and accurate in
every material respect on and as of the Closing. The Disclosure Schedule
delivered by the Company at the Closing shall be acceptable to PEP Corporation
and the Shareholder in all material respects.
6.2 COVENANTS. The Company shall have performed and complied in all
material respects with all of its covenants contained in Section 5 on or before
the Closing.
6.3 CLOSING CERTIFICATE. The Shareholder shall receive a certificate to the
effect that the requirements of Sections 3 and 5 have been satisfied, signed by
a duly authorized officer of the Company.
6.4 COMPLIANCE WITH LAW. There shall be no order, decree, or ruling by any
court or governmental agency or threat thereof, or any other fact or
circumstance, which would prohibit or render illegal the transactions
contemplated by this Agreement.
6.5 NO LITIGATION. No litigation or proceeding shall be pending for the
purpose or with the probable effect of enjoining or preventing the consummation
of any of the transactions contemplated by this Agreement or which would have a
material adverse effect on the Company.
6.6 REGISTRATION RIGHTS AGREEMENT. The Company shall have executed and
tendered to the Shareholder a registration rights agreement (the "Registration
Rights Agreement") in customary form providing for the Shares to be registered
on Form S-3 and continued effective pursuant to Rule 415 for sale on a
continuous basis for a period beginning promptly after the Closing and ending on
the first date when the Shareholder may resell all of the Shares immediately
under Rule 144, and containing other terms as the parties may mutually agree.
The registration statement shall include the Escrow Shares (as defined in
Section 7.11 below). The registration statement may also include additional
shares registered for the Company's own account of for other selling
securityholders, in an aggregate amount not to exceed 250,000 shares of the
Company's common stock. The Company shall submit applications to qualify Shares
in states that are designated by the Shareholder. The Company shall use its best
efforts to cause the registration statement to become effective before or
promptly after the Closing, in the Company's discretion. The registration
statement will include registration of the shares in the post-closing Escrow as
well as all of the Shares delivered to the Shareholder of the Company at the
Closing. The Company will bear the cost of registering the shares for resale
with the SEC and qualifying the shares for resale in all states with the
relevant state securities authorities, other than any underwriting or sales
costs or fees connected with the sale of the
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Shares. The registration statement will be kept effective until all of the
Shares are resold or can be immediately resold under Rule 144. These
registration rights are transferable only pursuant to gifts or other transfers
or dispositions of the Shares for estate planning purposes or to a pledgee of
Shares or the Escrow Holder contemplated in this Agreement. The Shares may be
distributed under the registration through underwriters, dealers or brokers, by
any customary or reasonable means, provided that the Company shall not be
responsible for any fees incurred in connection therewith. The Registration
Rights Agreement will be substantially in the Form of Exhibit B.
6.7 PERSONAL GUARANTIES. The Company will have cooperated, to the extent
requested by any Shareholder, in PEP Corporation's efforts to obtain releases of
personal guaranties made by the Shareholder. In regard to any Loans made by the
Company to PEP Corporation, concurrent with the Closing the Company shall
deliver evidence that the Shareholder shall have no liability or obligation to
repay the Loans.
6.8 EMPLOYEES OF PEP CORPORATION. Employees of PEP Corporation will be
offered participation in the Company's employee benefit plans provided to
employees of the Company at a similar level of responsibility after a term of
employment treated as if it included years of service for PEP Corporation.
6.9 LEGAL OPINION. The Shareholder shall have received a legal opinion from
Xxxxx Patch & Xxxxx, LLP, legal counsel to the Company in form and substance
customary in a transaction of this kind acceptable to the Shareholder.
7. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the Company
hereunder are subject to the fulfillment or satisfaction on, and as of the
Closing, of each of the following conditions (any one or more of which may be
waived by the Company, but only in a writing signed on behalf of the Company by
its Chief Executive Officer):
7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of PEP Corporation and the Shareholder set forth in Section 2 shall
be true and accurate in every material respect on and as of the Closing. The
Disclosure Schedule delivered by the PEP Corporation and the Shareholder at the
Closing shall be acceptable to the Company in all material respects.
7.2 COVENANTS. PEP Corporation and the Shareholder shall have performed and
complied in all material respects with all of their covenants contained in
Section 4 on or before the Closing.
7.3 CLOSING CERTIFICATE. The Company shall receive a certificate to the
effect that the requirements of Sections 2 and 4 have been satisfied, signed by
the Shareholder and a duly authorized officer of PEP Corporation.
7.4 COMPLIANCE WITH LAW. There shall be no order, decree, or ruling by any
court or governmental agency or threat thereof, or any other fact or
circumstance, which would prohibit or render illegal the transactions provided
for in this Agreement. The Company shall be and remain eligible to register the
Shares on Form S-3 under applicable SEC rules for resale by the Shareholder and
their nominees or assigns.
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7.5 NO LITIGATION. No litigation or proceeding shall be pending for the
purpose or with the probable effect of enjoining or preventing the consummation
of any of the transactions contemplated by this Agreement or which would have a
material adverse effect on the PEP Corporation or Shareholder.
7.6 SHARE CERTIFICATES. The Shareholder shall have delivered to the Company
all certificates representing the outstanding shares of PEP Corporation (or Lost
Stock Affidavit and Indemnitee Agreements for any that cannot be located),
together with Stock Powers executed in favor of the Company and cancelled share
certificates reflecting the Redemption.
7.7 TOTAL PEP CORPORATION LIABILITIES. The PEP Corporation Tax Liability
generated by the distribution of WatchGuard shares to the Shareholder in payment
of the redemption price, when aggregated with all other debts, liabilities or
reserves taken by PEP Corporation estimated as of the Closing Date, whether or
not otherwise permitted by this Agreement, shall not exceed $2,000,000. Based on
the amount of such PEP Corporation Tax Liability, the Purchase Price shall be
adjusted as set forth in Exhibit A.
7.8 NON-COMPETE AGREEMENT. The Shareholder shall have executed and tendered
to the Company a proprietary rights and non-competition agreement containing
provisions reasonable or customary in transactions such as those contemplated by
this Agreement, for a term of three (3) years from the date thereof, and taking
into account the Shareholder's anticipated activities as well as passive
investments. Xxx shall not be required to serve in any capacity that renders him
an affiliate of the Company for purposes of Rule 145 or Rule 144. The
Non-Compete Agreement will be substantially in the form of Exhibit C.
7.9 FAIRNESS OF TRANSACTION. The Company and Xxxx Capital Partners or its
substituted investment banker or advisors will have completed the due diligence
investigation of PEP Corporation, including legal, operational, financial and
technical matters, and the results of such investigation will be satisfactory in
their sole discretion, and the Company shall have received a favorable opinion
or assessment of its banker or advisors as to the fairness of the transaction to
its shareholders from a financial point of view.
7.10 LEGAL OPINION. The Company shall have received a legal opinion from
Xxxxxxxxx Xxxxx Xxxxxxx & Xxxxx, legal counsel to PEP Corporation and the
Shareholder in form and substance customary in a transaction of this kind
acceptable to the Company.
8. CONTINUING COVENANTS AND MUTUAL REPRESENTATIONS.
8.1 TERMINATION OF REPRESENTATIONS. All representations and warranties of
the Shareholder and PEP Corporation or the Company set forth in this Agreement
will remain operative and in full force and effect for a period ending on June
30, 2001 or such earlier date on which the Company files with the Securities and
Exchange Commission or otherwise publicly announces its actual results for the
year ending February 28, 2001 (the "Expiration Date"), regardless of any
investigation made or on behalf of the parties to this Agreement; provided,
however, that no claim for violations of any representation and warranty (absent
fraud or deliberate malfeasance) shall be made unless the Company gives written
notice thereof to the Shareholder, or the Shareholder gives written notice to
the Company, on or prior to the Expiration Date. Any claim which may be made
under this Agreement shall be an "Indemnification Claim."
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8.2 THRESHOLD; CEILING OF LIABILITY.
(a) Subject to Section 8.2(d), the Shareholder shall not be
required to make any payment of compensation to the Company pursuant to this
Agreement for any inaccuracy in, or breach of, any of the Specified
Representations (as defined below) until such time as the total amount of all
damages (including the damages arising from such inaccuracy or breach and all
other damages arising from any other inaccuracies in, or breaches of, any
representations or warranties) that have been directly or indirectly suffered or
incurred by the Company or any one or more of the directors, officers,
employees, insurers, representatives or agents of the Company (collectively
"Indemnitees"), or to which any one or more of the Indemnitees has or have
otherwise become subject, exceeds $50,000 in the aggregate. At such time as the
total amount of such damages exceeds $50,000, the Indemnitees shall be entitled
to be indemnified against the aggregate amount of such damages to the extent
such aggregate amount exceeds $50,000.
(b) Subject to Section 8.2(d) the maximum liability of the
Shareholder under this Agreement with respect to breaches of the Specified
Representations shall be equal to the Escrow Shares, valued for this purpose as
the value of the Shares for purposes of Exhibit A hereto.
(c) For purposes of this Section 8.2, the "Specified
Representations" shall mean the representations and warranties set forth in
Sections 2.8 (Financial Statements), 2.12 (Absence of Changes), 2.11 (Title to
Properties; Condition of Equipment), 2.20 (Bank Accounts), and 2.16 (Employees).
(d) Notwithstanding anything to the contrary contained herein,
the limitations on the indemnification obligations of the Shareholders that are
set forth in Sections 8.2(a) and (b) shall not apply to any inaccuracy or breach
arising directly or indirectly from any circumstance of which PEP Corporation or
the Shareholder had knowledge on, or prior to, the Closing Date.
8.3 SATISFACTION OF INDEMNIFICATION CLAIM. In the event Shareholder shall
have any liability (for indemnification or otherwise) to any Indemnitee under
Section 8.2, the Shareholder shall satisfy such liability by delivering to such
Indemnitee, at the election of the Shareholder, either (i) cash in the amount of
such liability or (ii) the number of Shares determined by dividing (a) the
aggregate dollar amount of such liability by the per share value calculated on
the date of Closing for purposes of Exhibit A.
8.4 PLEDGE. A portion equal to fifteen percent (15%) of the Shares issuable
at the Closing (the "Indemnification Shares") shall be deposited by the
Shareholder with the Secretary of the Company to secure indemnification
obligation of PEP Corporation and the Shareholder. The Indemnification Shares
(which shall include for purposes of this Section 8.4 any distributions accrued
or made thereon after the date of this Agreement, the net proceeds of any sale
of the Indemnification Shares and any other securities or property which may be
issued after the date hereof in exchange for the Indemnification Shares in any
merger or recapitalization or similar transaction involving the Company) shall
be deemed as of the Closing to be pledged by the Shareholder to, and
certificates representing the Indemnification Shares shall be held by, the
Secretary of the Company or any successor thereto pursuant to this Exchange
Agreement for a period ending on the earlier of June 30, 2001 or 30 days after
the Company files with the Securities and Exchange Commission or publishes its
fiscal year 2001 audited consolidated financial statements. So long as any
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Indemnification Shares are held by the Secretary of the Company hereunder, the
Company shall have, and the Shareholder by execution of this Agreement hereby
grants, effective as of the Closing, a perfected, first-priority security
interest in such Indemnification Shares to secure payment of amounts payable by
the Shareholder in respect of Indemnification Claims under this Section 8. In
connection therewith, the Shareholder shall execute and deliver such instruments
as the Company may from time to time reasonably request for the purpose of
evidencing and perfecting such security interest.
8.5 CLAIMS PROCEDURE. The procedure for payment from the Indemnification
Shares of indemnification amounts to which the Company or its Affiliates may
become entitled under this Section 8 shall be as follows:
(a) From time to time as the Company determines that it or its
Affiliate is entitled to an indemnification payment from the Indemnification
Shares for an Indemnification Claim under this Section 8, the Company shall give
a Claim Notice in accordance with Section 9.4
(b) If the Company has not received from the Shareholder within
30 business days after notice of such Indemnification Claim is delivered (the
"Response Period") a written objection to an Indemnification Claim stating the
facts and circumstances on which the objection is based, the Indemnification
Claim stated in such Claim Notice shall be conclusively deemed to be approved by
the Shareholder and the Company shall promptly thereafter transfer to the
Company or its Affiliate, as the case may be, from the Indemnification Shares an
amount of Indemnification Shares equal in value to the amount of such
Indemnification Claim, as set forth in Section 8.3 above.
(c) If, within the Response Period, the Company shall have
received from the Shareholder a written objection to the Claim Notice specifying
the nature of and grounds for such objection, then such Indemnification Claim
shall be deemed to be a "Company Open Claim," and the Company or its Secretary
shall reserve within the Indemnification Shares a number of shares equal in
value to the amount of such Company Open Claim (which amount designated for each
Company Open Claim is referred to herein as the "Claim Reserve Amount"). The
number of Indemnification Shares to be reserved shall be determined by dividing
the amount of the Company Open Claim by the Fair Market Value at the Closing.
(d) The Claim Reserve Amount for each Company Open Claim shall be
transferred by Company or its Affiliate, as the case may be, from the
Indemnification Shares only in accordance with either (i) a mutual agreement
between the Company and the Shareholder, which shall be memorialized in writing,
or (ii) a court order from any competent court having jurisdiction over the
parties or a final and binding arbitration decision pertaining to the Company
Open Claim.
(e) After the expiration of the Survival Period, when a final
determination is made with respect to any Company Open Claim, the number of
Indemnification Shares transferable to the Company or its Affiliate shall be
transferred to the Company or its Affiliate, as the case may be, from the Claim
Reserve Amount for such Company Open Claim. The Indemnification Shares included
in such Claim Reserve Amount remaining after such transfer, and any remaining
Indemnification Shares not subject to a Company Open Claim, shall be released to
the Shareholder.
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8.6 VOTING; DISPOSITION. Until retransferred to the Company or its
Affiliate in accordance with the provisions of this Section 8, the
Indemnification Shares shall be held of record by the Shareholder for all
purposes (including federal income tax purposes), and the Shareholder shall have
full right to vote the Indemnification Shares on all matters coming before the
shareholders of the Company. No interest in the Indemnification Shares may be
sold or transferred to any Third Party prior to any distribution of the
Indemnification Shares pursuant to Section 8.5.
8.7 MERGER OR RECAPITALIZATION. In the event of any merger or
recapitalization or similar transaction involving the Company prior to the time
when all Indemnification Shares have been transferred or released in accordance
with the terms of this Section 8, such Indemnification Shares shall be converted
or exchanged in accordance with such transaction in the same manner as other
Company common stock, and any securities or property issued in conversion or
exchange thereof hall then be included within the definition of Indemnification
Shares and shall otherwise become subject to this Exchange Agreement in lieu of
such shares of Indemnification Shares.
8.8 TAXATION OF DIVIDENDS. For federal and state income tax purposes, any
dividends or other distributions with respect to the Indemnification Shares
shall be income of the Shareholder.
8.9 ELECTION OF REMEDIES. In the event that any party or any of its
Affiliates alleges that it is entitled to indemnification hereunder, and that
its Indemnification Claim is covered under more than one provision of this
Section 8, such party or Affiliate shall be entitled to elect the provision or
provisions under which it may bring an Indemnification Claim.
8.10 FAIR MARKET VALUE. The parties hereto acknowledge and agree that (a)
the fair market value of the Shares received by the Shareholder pursuant to the
Exchange will be approximately equal to the aggregate fair market value of the
PEP Stock surrendered in the Exchange, and (b) none of the compensation received
by the Shareholder after the Exchange will be separate consideration for, or
allocable to, any of his Shares; none of the Shares received by the Shareholder
in the Exchange will be separate consideration for, or allocable to, any
employment agreement; and the compensation paid to the Shareholder after the
Exchange pursuant to arrangements entered into after the Exchange will be for
services actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
8.11 PRESS RELEASE. Prior to the Closing, neither PEP Corporation nor the
Shareholder will issue a press release or make any statement to the general
public concerning this transaction or the absence thereof without the express
prior written consent of the Company; provided, however, that the Company may
issue a press release or make any statement to the general public concerning
such transaction or the absence thereof without the express prior written
consent of the Company as, in the advice of PEP Corporation's counsel, is
required by law, and shall provide notice to the Company as soon as practicable
and before the release thereof. Promptly after the Closing, the Company will
issue a press release. The Company shall provide PEP Corporation and the
Shareholders with a draft of the press release before its release and provide an
opportunity for questions or comments on such draft.
8.12 CONFIDENTIALITY. The terms hereof and all information communicated to
the Company by PEP Corporation or to PEP Corporation or the Shareholder by the
Company, whether before or after the date of this Agreement, will be received in
strict confidence, will be used only for purposes of this Agreement, and will
not be disclosed by the recipient of such information, its agents,
subcontractors, or employees without the prior written consent of the other.
Each party agrees to take
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all reasonable precautions to prevent the disclosure to outside parties of such
information, except as required by or advisable pursuant to legal, accounting,
or regulatory requirements beyond the reasonable control of the recipient of
such information. The provisions of this Section 8.4 will survive the expiration
or any termination of this Agreement for a period of three years. As of the
Closing, the Company shall be released of any further obligation to maintain
confidentiality of the PEP Corporation information.
8.13 NO CLAIMS FOR CONTEMPLATED TRANSACTIONS. None of the parties will make
any claims against the others for transactions described in the Recitals above
to this Exchange Agreement. Following the Closing under this Agreement, the
Company will subordinate its receivables and security interests from PEP
Corporation to the creditors of PEP Corporation as of the Closing Date; and the
Company and PEP Corporation shall indemnify and hold the Shareholder harmless
from any obligations to creditors of PEP Corporation as of and following the
Closing Date to the extent that: (a) the existence of such claims and
liabilities are not a breach of this Agreement in excess of allowances and (b)
such obligations or liabilities, including any for taxes, are not otherwise
provided for as an adjustment to the Purchase Price.
9. GENERAL PROVISIONS.
9.1 GOVERNING LAW; DISPUTE RESOLUTION. The internal laws of the State of
California (irrespective of its choice of law principles) will govern the
validity of this Agreement, the construction of its terms, and the
interpretation and enforcement of the rights and duties of the parties hereto.
Any dispute hereunder not otherwise settled by the parties ("Dispute") shall be
resolved by arbitration in Orange County, California, and, except as herein
specifically stated, in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA Rules") then in effect. However, in all
events, these arbitration provisions shall govern over any conflicting rules
that may now or hereafter be contained in the AAA Rules. Upon appointment, the
arbitrator shall establish procedures which (i) allow for limited and reasonable
discovery in preparation for a hearing on the merits of the Dispute; (ii) permit
the holding of such hearing within ninety (90) days, unless the parties agree or
the arbitrator concludes that the Dispute requires additional time to prepare
for hearing; and (iii) issue his award in writing within thirty (30) days from
the time that the hearing on the merits of the Dispute is concluded.
9.2 EXCLUSIVE REMEDY. Except as specifically otherwise provided in this
Agreement, arbitration will be the sole and exclusive remedy of the parties for
any Dispute arising out of this Agreement.
9.3 ATTORNEYS' FEES. Should any arbitration or any suit be brought to
enforce or interpret any part of this Agreement, the prevailing party will be
entitled to recover, as an element of the costs of suit and not as damages,
reasonable attorneys' fees to be fixed by the court or other trier of fact
(including, without limitation, costs, expenses and fees on any appeal). The
prevailing party will be entitled to recover its costs of suit, regardless of
whether such suit proceeds to final judgment.
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9.4 NOTICES. Any notice or other communication required or permitted to be
given under this Agreement will be in writing, will be delivered personally or
by registered or certified mail, postage prepaid, and will be deemed given upon
delivery, if delivered personally, or three days after deposit in the mails, if
mailed, to the following addresses:
IF TO PEP CORPORATION:
Productivity Enhancement Products, Inc.
00000 Xxxxx Xxxxxx, Xxxxx 000
Xxxxxx Xxxxx, XX 00000
Telecopy: (000) 000-0000
Attention: President
with a copy to:
Xxxxxxxxx Xxxxx Xxxxxxx & Xxxxx
000 Xxxxxxx Xxxxxx Xxxxx, Xxxxx 0000
Xxxxxxx Xxxxx, Xxxxxxxxxx 00000-0000
Telecopy: (000) 000-0000
Attention: Xxxx X. Xxxxx, Esq.
IF TO SHAREHOLDER:
Xxxxx X. Xxxxxx
27342 Capricio
Xxxxxxx Xxxxx, Xxxxxxxxxx 00000
Telecopy:
------------------------
IF TO THE COMPANY:
Dense-Pac Microsystems, Inc.
0000 Xxxxxxx Xxx
Xxxxxx Xxxxx, Xxxxxxxxxx 00000
Telecopy: (000) 000-0000
Attention: Xxx Xxxxx
with a copy to:
Yocca, Patch & Yocca, LLP
00000 XxxXxxxxx Xxxxxxxxx, Xxxxx 000
Xxxxxx, Xxxxxxxxxx 00000
Telecopy: (000) 000-0000
Attention: Xxxxxxxx X. Xxxxx, Esq.
or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 9.4.
9.5 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other
parties and to execute such further instruments, documents and agreements and to
give such further written assurances as may be reasonably requested by any other
party to evidence and reflect the transactions
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described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
9.6 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof will be personal solely between the parties
to this Agreement.
9.7 ENTIRE AGREEMENT. This Agreement and the exhibits, schedules and
appendices hereto constitute the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof, subject to provisions
of law applicable to this Agreement and the transactions provided for herein,
and supersede all prior and contemporaneous agreements or understandings,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto. The express terms hereof control and supersede any
course of performance or usage of the trade inconsistent with any of the terms
hereof.
9.8 ASSIGNMENT. The Shareholders may not assign this Agreement, or assign
their respective rights or delegate their respective duties hereunder, without
the prior written consent of the Company.
9.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned parties have executed this Share
Exchange Agreement as of the date first above stated.
PRODUCTIVITY ENHANCEMENT PRODUCTS, INC.
By: /s/ XXX XXXXXX
-----------------------------------------
Name: Xxx Xxxxxx
-----------------------------------------
Title: Chairman
-----------------------------------------
DENSE-PAC MICROSYSTEMS, INC.
By: /s/ XXX XXXXX
-----------------------------------------
Name: Xxx Xxxxx
-----------------------------------------
Title: CEO/President
-----------------------------------------
SHAREHOLDER:
/s/ XXX XXXXXX
------------------------------------------------
XXXXX X. XXXXXX, an individual
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EXHIBIT A
PRESENT PEP CORPORATION SHARE OWNERSHIP
(PRE-DIVIDEND & PRE-ASSUMPTION)
NUMBER OF SHARES OF
NAME OF SHAREHOLDER PEP STOCK OWNED
------------------- ---------------
Xxxxx X. Xxxxxx 5,140,000
OWNERSHIP OF PEP CORPORATION
POST-DIVIDEND, POST-ASSUMPTION & PRE-REDEMPTION
NUMBER OF SHARES OF
NAME OF SHAREHOLDER PEP STOCK OWNED
------------------- ---------------
Xxxxx X. Xxxxxx 5,140,000
OWNERSHIP OF PEP CORPORATION
AFTER REDEMPTION BY PEP CORPORATION
NUMBER OF SHARES OF PEP STOCK
OWNED AND EXCHANGED NUMBER OF THE COMPANY'S
NAME OF SHAREHOLDER EXCHANGE SHARES TO BE ISSUED IN
------------------- ------------------------------ ----------------------
Xxxxx X. Xxxxxx 2,683,091 884,167
23
PURCHASE PRICE ADJUSTMENTS
Gross Purchase Price (unadjusted):
$3,795,000
+ 218,282
$4,013,282
Adjustments:
1. If the tax liability of PEP Corporation is less than $1,750,000, then
add the negative difference to the Gross Purchase Price. If the tax liability is
more than $1,750,000 and less than $2,000,000, then subtract the amount of the
excess above the $1,750,000 from the Gross Purchase Price. If the tax liability
of PEP Corporation is more than $2,000,000, then Xxx will pay PEP Corporation in
cash the excess amount due to the extent it exceeds $2,000,000.
2. Prior to the Closing, the PEP Corporation debt payable to Xxxxxxx Xxxxx
& Company, Inc. will have been assumed by Xxxxx X. Xxxxxx and Xxxxx X. Xxxxxx
shall obtain from Xxxxxxx Xxxxx appropriate releases of liens on PEP Corporation
assets as they will exist as of the Closing Date.
3. If any terminations of employees of PEP Corporation are experienced,
subtract from the Gross Purchase Price any severance payment (other than the
Deferred Compensation) which is or becomes due to any of PEP Corporation
employees who do not remain as employees of PEP Corporation, or of the Company
or of any of its subsidiaries upon or immediately following the Closing.
Purchase Price (as adjusted) for purposes of calculating amount of Shares
issuable:
$4,013,282
EXCHANGE RATIO CALCULATION
For each one (1) share of PEP Stock, the Company will deliver a number of
shares of its common stock having an aggregate value equal to the Purchase Price
(as adjusted on the Closing Date) divided by the fully-diluted number of shares
of PEP Stock outstanding immediately prior to the Closing (and after the
Redemption).
VALUATION
Each Share shall be valued for purposes of determining the number of shares
deliverable by the Company at the Closing based on the average closing sale
price over the 20 consecutive trading days ending on the trading day ending
immediately prior to October 20, 2000.
