Exhibit 2.1
STOCK PURCHASE AGREEMENT
DATED AS OF APRIL 20, 2004
AMONG
DURASWITCH INDUSTRIES, INC.;
ACTIVE RECOGNITION TECHNOLOGIES, INC.;
XXXXXX XXXXXX;
XXX XXXXXXXX;
AND
XXXX XXXXXXX
TABLE OF CONTENTS
PAGE
SECTION I. PURCHASE OF STOCK.......................................... 1
1.1. Purchase and Sale of Stock.............................. 1
SECTION II. PURCHASE PRICE............................................ 1
2.1. Purchase Price.......................................... 1
2.2. Additional Consideration................................ 2
2.3. Books and Records....................................... 3
2.4. Dispute Resolution...................................... 3
2.5. Accelerated Payments.................................... 4
SECTION III. REPRESENTATIONS AND WARRANTIES........................... 5
3.1. Representations and Warranties of Sellers............... 5
3.2. Further Representations and Warranties of Sellers....... 16
3.3. Representations and Warranties of Buyer................. 17
SECTION IV. COVENANTS................................................. 19
4.1. Covenants of Sellers.................................... 19
4.2. Covenants of Buyer...................................... 22
4.3. No Solicitation......................................... 23
4.4. Best Efforts............................................ 24
4.5. Public Announcements.................................... 24
SECTION V. CONDITIONS PRECEDENT TO OBLIGATIONS........................ 25
5.1. Conditions Precedent to the Obligations of Buyer........ 25
5.2. Conditions Precedent to the Obligations of Sellers...... 27
SECTION VI. THE CLOSING............................................... 28
6.1. Closing................................................. 28
6.2. Deliveries by Company and Sellers....................... 28
6.3. Deliveries by Buyer..................................... 29
6.4. Obligations of All Parties.............................. 30
SECTION VII. WAIVER, MODIFICATION, ABANDONMENT........................ 30
7.1. Waivers................................................. 30
7.2. Modification............................................ 30
7.3. Abandonment............................................. 30
7.4. Right to Damages........................................ 32
SECTION VIII. NON-COMPETITION......................................... 32
8.1. Non-competition......................................... 32
8.2. Duration and Extent of Restriction...................... 32
8.3. Restrictions with Respect to Customers and Employees.... 33
8.4. Remedies for Breach..................................... 33
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TABLE OF CONTENTS
PAGE
SECTION IX. INDEMNIFICATION........................................... 34
9.1. Indemnification by Sellers.............................. 34
9.2. Indemnification by Buyer................................ 34
9.3. Notice and Right to Defend Third-Party Claims........... 34
9.4. The Stockholder Representative.......................... 35
SECTION X. GENERAL.................................................... 37
10.1. Indemnity Against Finders............................... 37
10.2. Controlling Law......................................... 37
10.3. Notices................................................. 37
10.4. Binding Nature of Agreement; No Assignment.............. 38
10.5. Entire Agreement........................................ 38
10.6. Severability............................................ 38
10.7. Section Headings........................................ 38
10.8. Gender.................................................. 38
10.9. Survival of Representations and Warranties.............. 39
10.10. Counterparts; Facsimile................................. 39
10.11. Subsidiaries............................................ 39
10.12. No Obligation to Hire................................... 39
10.13. Assignability........................................... 39
Exhibits:
A - Form of Employment Agreement
B - Form of Release
C - Form of Registration Rights Agreement
D - Form of Management Services Agreement
E - Form of Marketing and Sales Agreement
F - Form of Promissory Note
G - Form of Security Agreement
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STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of April 20, 2004, among
DURASWITCH INDUSTRIES, INC., a Delaware corporation ("Buyer"); ACTIVE
RECOGNITION TECHNOLOGIES, INC., a Delaware corporation ("Company"); XXXXXX
XXXXXX, XXX XXXXXXXX, and XXXX XXXXXXX (each a "Seller" and collectively
"Sellers"); and XXXXXX XXXXXX, as representative of the stockholders as defined
in Section 9.4 ("Stockholder Representative").
RECITALS
A. Company has developed and derives licensing revenue
from a unique proprietary software technology that, when used in conjunction
with certain surveillance camera systems and related hardware, facilitates the
recognition and identification of vehicles and vehicle license plates (the
"Business"). Sellers are the owners of all of the outstanding capital stock of
Company.
B. Buyer and Sellers desire that Buyer acquire all of
the capital stock of Company upon the terms and conditions set forth in this
Agreement. Buyer and Sellers intend for this transaction to qualify as a
tax-free exchange under Section 368(a)(1)(B) of the Internal Revenue Code of
1986, as amended (the "Code").
C. Company is a party to this Agreement for the limited
purposes specified herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants set forth herein, the parties agree as follows:
SECTION I.
PURCHASE OF STOCK
1.1. PURCHASE AND SALE OF STOCK. Based upon and subject to
the representations, warranties, covenants, agreements, and other terms and
conditions set forth in this Agreement, each Seller shall sell, convey,
transfer, assign, and deliver at the Closing (as defined in Section 6.1), and
Buyer shall purchase, acquire, and accept, from each Seller, the shares of
capital stock of Company set forth beside each Seller's name on Schedule 1.1
hereto (collectively the "Shares").
SECTION II.
PURCHASE PRICE
2.1. PURCHASE PRICE. The purchase price for the Shares to
be acquired pursuant to Section 1.1 shall be an amount equal to the total of (a)
950,000 shares of common stock of Buyer (the "Base Purchase Price"), plus (b)
the Additional Consideration, if any. The Base Purchase Price shall be payable
in full at the Closing and shall be allocated among Sellers in accordance with,
and in the manner set forth in, Schedule 2.1 (such allocation being referred
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to herein as the "Allocation Portion"). In the event Company achieves certain
financial targets during the three-year period following the Closing (the
"Measurement Period") or any of the Trigger Events (as defined below) occurs,
Buyer shall issue the number of shares of Buyer common stock (or cause to be so
issued) to Sellers in accordance with the Allocation Portion the Additional
Consideration set forth in Section 2.2. All of the common stock of Buyer to be
issued as a portion of the Base Purchase Price and the Additional Consideration
shall be referred to as the "Buyer Common Stock." Both the Base Purchase Price
and the Additional Consideration will be subject to adjustment, under certain
circumstances, under Section 2.6 of this Agreement.
2.2. ADDITIONAL CONSIDERATION. The Earnout Payments (as
defined below) during the Earnout Period are sometimes referred to as the
"Additional Consideration." At the time that any Additional Consideration is due
and payable pursuant to this Section 2.2 or Section 2.5, Buyer shall issue the
number of shares of Buyer Common Stock (or cause to be so issued) to Sellers, in
accordance with the Allocation Portion, the Additional Consideration.
(a) DEFINITIONS. For the purposes of this
Agreement, the following terms shall be defined as follows:
(i) "Earnout Period" shall mean the
three-year period commencing on the Closing Date.
(ii) "EBIT" shall mean earnings before
interest and taxes of Company, determined in accordance with Company's
books and records and calculated in accordance with United States
generally accepted accounting principles and practices ("GAAP") as
applied on a consistent basis; provided, however, (1) that the
calculation of EBIT shall not include any allocation or other charge to
Company from Buyer related to overhead expenses from Buyer; (2) a
majority of the revenue recorded shall be derived from licensing
revenue; and (3) shall not include any reversal of accrued liabilities
rewarded during periods prior to the date of this Agreement.
(iii) "Measurement Period" means any
calendar quarter ending during the Earnout Period, it being understood
that the first Measurement Period will be shorter than a calendar
quarter.
(b) EARNOUT PAYMENT. If total EBIT accumulated
during the Earnout Period at any time equals or exceeds $4,000,000, Sellers will
be entitled to receive, in accordance with the Allocation Portion, an additional
850,000 shares of common stock of Buyer. Buyer and Sellers will measure EBIT at
the end of each Measurement Period. If total EBIT accumulated before the end of
any Measurement Period equals or exceeds any amount set forth in Schedule 2.2(b)
(the "Target EBIT"), then Sellers shall be entitled to receive, in accordance
with the Allocation Portion, the number of shares of Buyer Common Stock (each an
"Earnout Payment" and collectively the "Earnout Payments"), set forth in
Schedule 2.2(b) with respect to such Target EBIT, less any Earnout Payments
previously made in respect of lower Target EBITs.
(c) PAYMENT OF ADDITIONAL CONSIDERATION. As
promptly as practicable after the end of each Measurement Period, but in no
event later than thirty days following the end of each Measurement Period,
Sellers shall provide Buyer a report, setting forth
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the amount of Company's EBIT for the immediately prior three-month period ended
and the Earnout Payment to be paid by Buyer (the "Earnout Report"). If
applicable, promptly after the delivery of the Earnout Report (and, if an
Earnout Dispute Notice is not delivered pursuant to Section 2.4, then in no
event later than ten business days following delivery of each Earnout Report,
Buyer shall issue to Sellers the number of shares of Buyer Common Stock (or
cause to be so issued) with respect to the applicable Earnout Payment in
accordance with Seller's Allocation Portion, to such account or accounts as
specified in writing by each Seller to Buyer from time to time in accordance
with Section 10.3.
(d) ALLOCATION PORTIONS; TAX BENEFIT.
Notwithstanding anything to the contrary set forth herein, each Earnout Payment
payable to Sellers pursuant to this Agreement shall be payable in the respective
amounts and to the respective parties as specified in Schedule 2.1 hereof,
subject to potential reallocation in accordance with Section 2.7.
(e) DELIVERY OF SHARES. Any shares of Buyer
Common Stock to be delivered pursuant to this Section 2.2 shall be sent by any
method as is commonly employed by the transfer agent for the common stock of
Buyer.
(f) MEASUREMENT OF TARGETS. For purposes of this
Section 2, "revenue" shall be recorded in accordance with accounting principles
generally accepted in the United States, consistently applied.
2.3. BOOKS AND RECORDS. Buyer or Company shall keep full,
clear, separate and accurate books and records with respect to Company. The
books and records shall be maintained in accordance with generally accepted
accounting principles and shall be available for inspection by representatives
of Sellers once during each quarter during the Measurement Period, all upon
reasonable prior notice and during normal business hours. The information
contained in the books and records of Company shall remain confidential. In no
event shall Sellers be entitled to examine the books and records of Company more
than the times indicated above. In the event Sellers' inspection reveals an
overpayment or deficiency in any payment of Additional Consideration, to the
extent applicable, due under this Agreement, Sellers or Buyer shall remit the
overpayment or deficiency, as the case may be, within 10 days after Sellers
complete their inspection. Should Sellers fail to examine records for a period
of one year from the date of any Earnout Report from which they were compiled,
then that Earnout Report shall be deemed final and binding and no Seller shall
have any further right to contest the Earnout Report or the amount of the
Earnout Payment included in the Earnout Report. Except as provided in this
Section 2.3, Sellers will conduct all inspections under this Section 2.3 at
their sole cost and expense. If any such inspection reveals a deficiency in any
payment of Additional Consideration of five percent (5%) or more, Buyer will
reimburse Sellers for all reasonable out of pocket expenses incurred in
connection with the inspection.
2.4. DISPUTE RESOLUTION. In the event that Sellers shall
dispute the information set forth by Buyer pursuant to Section 2.3, then, within
90 days following the date of the delivery by Buyer of the information, Sellers
shall provide written notice to Buyer specifying the amount disputed and the
basis for the dispute together with supporting documentation reflecting the
analysis of and justification for any recomputation made. Sellers and Buyer
shall make good faith efforts to resolve the dispute through negotiations for a
period of 60 days following the
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receipt of the written notice defining and describing the nature of the dispute.
In the event that the parties are unable to finally resolve the dispute within
such 60 day period, the parties to the dispute may elect by mutual agreement to
extend the period of negotiation and may elect by mutual agreement to engage a
mediator to assist in such negotiation. To the extent that any matter remains
unresolved following negotiations, the unresolved matter only shall be resolved
by binding arbitration before one arbitrator who shall be mutually agreeable to
Buyer and Sellers. To the extent necessary, at the sole discretion and under the
direction of the arbitrator, the arbitrator may independently review and audit
any matters in dispute. The decision of the arbitrator shall be a final
resolution of the parties' dispute and shall be non-appealable and shall not be
subject to further arbitration or review. The arbitration shall be governed in
accordance with the expedited Commercial Rules of the American Arbitration
Association and shall be held in Phoenix, Arizona, including all hearings
related to such arbitration. All hearings shall be commenced and completed
within 60 days of the selection of the arbitrator. The arbitrator shall render
his or her decision within 30 days of all hearings related thereto. The
arbitration award shall be in writing. If the disputed information is provided
in connection with the non-payment of any portion of the Additional
Consideration and the arbitrator's decision indicates that Sellers are entitled
to the disputed portion of the Additional Consideration, then Buyer shall be
responsible for payment of all reasonable costs and expenses (including
attorneys' fees) incurred by Sellers in connection with the dispute and the
arbitration, including all costs and expenses of the arbitrator. If the
arbitrator's decision indicates that Sellers are not entitled to the disputed
portion of the Additional Consideration, then Sellers shall be jointly and
severally responsible for payment of all reasonable costs and expenses
(including attorneys' fees) incurred by Buyer in connection with the dispute in
the arbitration, including all costs and expenses of the arbitrator.
2.5. ACCELERATED PAYMENTS.
(a) TRIGGER EVENTS. In the event that any of the
following events occurs (each a "Trigger Event"), then within five business days
after the occurrence of such Trigger Event, Buyer shall issue the number of
shares of Buyer Common Stock to Sellers in accordance with the maximum amount of
Earnout Payments that could otherwise be earned by Sellers as set forth in
Schedule 2.2(b) in accordance with the Allocation Portion for the Measurement
Period in which such Trigger Event occurs and each subsequent Measurement
Period, if applicable, regardless of whether the Target EBIT has been or will be
achieved for such Measurement Periods:
(i) Substantially all of the
assets or stock of Company or Buyer are sold, transferred, or otherwise
disposed of;
(ii) Buyer or Company dissolves
or terminates its existence as a going business concern; or
(iii) Buyer or Company (with
Buyer's approval) takes any corporate or other action to authorize or
cause any of the foregoing.
2.6. ADJUSTMENT OF NUMBER OF SHARES. If Buyer shall, at
any time before the Closing or the end of any Measurement Period, (A) pay a
dividend or make a distribution in shares of capital stock (whether shares of
common stock or capital stock of any other class),
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(B) effect a stock split or subdivide its common stock, (C) effect a reverse
stock split or combine its common stock into a smaller number of shares, or (D)
effect any other reclassification or recapitalization resulting in an increase
in the number of shares of Buyer's capital stock without the receipt of
consideration (each, an "Adjustment Event"), then the Base Purchase Price, if an
Adjustment Event occurs before the Closing, or the Earnout Payment, if an
Adjustment Event occurs before the end of the Measurement Period giving rise to
the Earnout Payment, shall be adjusted so that Sellers shall be entitled to
receive the number of shares, and the same class and series, of Buyer capital
stock that Sellers would have been entitled to receive after the occurrence of
the Adjustment Event had the Closing occurred or such Earnout Payment been made
immediately before the occurrence of the Adjustment Event. Any adjustment made
pursuant to this Section 2.6 shall become effective immediately after the record
date for any event requiring such adjustment or shall become effective
immediately after the effective date of such event if no record date is set.
2.7. REALLOCATION OF EARNOUT PAYMENTS. If Buyer's
obligation to continue making Earnout Payments to any Seller terminates in
accordance with Section 4(b)(vii) of Buyer's Employment Agreement with such
Seller, Buyer shall make any further Earnout Payments that otherwise would be
due to such Seller to the remaining Sellers in the proportion that each such
remaining Seller's Allocation Portion bears to the aggregate Allocation Portions
of all such remaining Sellers.
SECTION III.
REPRESENTATIONS AND WARRANTIES
3.1. REPRESENTATIONS AND WARRANTIES OF SELLERS. Except as
otherwise set forth in the Sellers' Disclosure Schedule hereto ("Seller's
Disclosure Schedule"), Sellers jointly and severally represent and warrant to
Buyer and Designated Subsidiary as follows:
(a) DUE INCORPORATION, GOOD STANDING, AND
QUALIFICATION. Each of Company and its subsidiaries is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation and has the requisite corporate power and
authority to own, operate, and lease its assets and properties and to carry on
its business as now being conducted. Neither Company nor any subsidiary of
Company is subject to any material disability by reason of the failure to be
duly qualified as a foreign corporation for the transaction of business or to be
in good standing under the laws of any jurisdiction. As used in this Agreement
with reference to Company, the term "subsidiaries" shall include all direct and
indirect subsidiaries of Company. Seller's Disclosure Schedule includes a list
setting forth, as of the date of this Agreement, each jurisdiction in which
Company or any of its subsidiaries is qualified to do business.
(b) CAPITAL STOCK; OPTIONS, WARRANTS, AND
RIGHTS. As of the date hereof, Company has authorized capital stock consisting
of 110 shares of Common Stock of which 110 shares are issued and outstanding.
All of the outstanding capital stock of Company is owned by Sellers. As of such
date, there are no shares of Company's capital stock reserved for issuance upon
the exercise of outstanding stock options. All of the issued and outstanding
shares of capital stock of Company and of each of its subsidiaries have been
duly authorized and validly issued, are fully paid and nonassessable, and are
free of preemptive rights. Company has no
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treasury shares. Neither Company nor any subsidiary of Company has outstanding
any subscriptions, options, warrants, or other rights to purchase, or securities
or other obligations convertible into or exchangeable for, or contracts,
commitments, agreements, arrangements, or understandings, to issue, any shares
of its capital stock, membership interests, or other securities, other than
those referred to in Seller's Disclosure Schedule.
(c) SUBSIDIARIES. Seller's Disclosure Schedule
includes a list setting forth, as of the date of this Agreement, (i) the name,
jurisdiction of incorporation, and list of stockholders of each subsidiary of
Company; and (ii) the name and a description of every other person, corporation,
partnership, limited liability company, joint venture, or other business
association in which Company directly or indirectly owns a material interest.
The outstanding shares of capital stock of the subsidiaries of Company are owned
by Company free and clear of all claims, liens, charges, and encumbrances.
Company does not own, directly or indirectly, any capital stock or other equity
securities of any corporation or have any direct or indirect equity or ownership
interest in any corporation or other business other than with respect to its
subsidiaries.
(d) FINANCIAL STATEMENTS. The unaudited
Consolidated Balance Sheet of Company and its subsidiaries as of December 31,
2003, as well as the Consolidated Statement of Operations, the Consolidated
Statement of Stockholders' Equity, and the Consolidated Statement of Cash Flows
of Company and its subsidiaries for the year ended December 31, 2003, and all
related schedules and notes to the foregoing, have been prepared by the Company,
without audit or review, and the Consolidated Balance Sheet of Company and its
subsidiaries as of March 31, 2004 ("Company Base Balance Sheet") and the
Consolidated Statement of Operations, the Consolidated Statement of
Stockholders' Equity, and the Consolidated Statement of Cash Flows of Company
and its subsidiaries for the three months ended March 31, 2004 have been
prepared by Company without audit or review. Except as set forth in any of the
financial statements or any related schedules or notes, all of the foregoing
financial statements have been prepared in accordance with generally accepted
accounting principles, which were applied on a consistent basis, and present
fairly and accurately, in all material respects, the consolidated financial
position, results of operations, stockholders' equity, and cash flow of Company
and its subsidiaries as of their respective dates and for the periods indicated.
To the knowledge of Company or Sellers, neither Company nor any subsidiary of
the Company has any material liabilities or obligations of a type that would be
included in a balance sheet prepared in accordance with generally accepted
accounting principles, whether related to tax or non-tax matters, accrued or
contingent, due or not yet due, liquidated or unliquidated, or otherwise, except
as and to the extent disclosed or reflected in Company's Base Balance Sheet or
incurred since the date of that balance sheet in the ordinary course of business
and as contemplated by this Agreement.
(e) ACTIONS IN THE ORDINARY COURSE OF BUSINESS.
Since the date of Company's Base Balance Sheet, and except for the transactions
contemplated by this Agreement, neither Company nor any subsidiary of Company
(i) has taken any action or entered into any material transaction outside the
ordinary and usual course of business; (ii) has borrowed any money or become
contingently liable for any obligation or liability of another; (iii) has failed
to pay any of its debts and obligations as they become due; (iv) has incurred
any debt, liability, or obligation of any nature to any party, except for
obligations arising from the purchase of goods or the rendition of services in
the ordinary and usual course of business; (v) has failed to use its
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best efforts to preserve its business organization intact, to keep available the
services of its employees and independent contractors, or to preserve its
relationships with its customers, suppliers, and others with which it deals;
(vi) has sold, transferred, leased, or encumbered any of its assets or
properties outside the ordinary and usual course of business; (vii) has waived
any material right; (viii) has written off any assets or properties; or (ix) has
hired any employees or increased the compensation of any employees outside the
ordinary and usual course of business.
(f) NO MATERIAL CHANGE. Since the date of
Company's Base Balance Sheet, there has not been and, to the knowledge of
Company or Sellers, there is not threatened (i) any material adverse change in
the financial condition, business, assets, properties, or operating results of
Company and its subsidiaries taken as a whole; (ii) any loss or damage (whether
or not covered by insurance) to any of the assets or properties of Company or
any subsidiary of Company that materially affects or impairs its ability to
conduct its business; or (iii) any mortgage or pledge of any assets or
properties of Company or any subsidiary of Company, or any indebtedness incurred
by Company or any subsidiary of Company, other than indebtedness, not material
in the aggregate, incurred in the ordinary and usual course of business.
(g) TITLE TO PROPERTIES. Each of Company and its
subsidiaries has good and marketable title to and rightful possession of all of
its real and personal assets and properties, including all assets and properties
reflected in Company's Base Balance Sheet or acquired subsequent to the date of
Company's Base Balance Sheet, except assets or properties disposed of subsequent
to the date of Company's Base Balance Sheet in the ordinary and usual course of
business or as contemplated by this Agreement. Such assets and properties are
subject to no mortgage, indenture, pledge, lien, claim, encumbrance, charge,
security interest or title retention, or other security arrangement, except for
liens for the payment of federal, state, and other taxes, the payment of which
is neither delinquent nor subject to penalties, and except for other liens and
encumbrances incidental to the conduct of the business of Company and its
subsidiaries or the ownership of their assets or properties, which were not
incurred in connection with the borrowing of money or the obtaining of advances
and which do not in the aggregate materially detract from the value of the
assets or properties of Company and its subsidiaries taken as a whole or
materially impair the use thereof in the operation of their respective
businesses, except in each case as disclosed in Company's Base Balance Sheet.
All leases pursuant to which Company or any subsidiary of Company leases any
substantial amount of real or personal property are valid and effective in
accordance with their respective terms. Seller's Disclosure Schedule sets forth
(i) a complete list of real property owned by Company, and (ii) the location,
physical description, basis of occupancy, ownership, and terms of any mortgages
or leases with respect to all real property used in the conduct of the Business.
(h) CONDITION OF ASSETS AND PROPERTIES. The
buildings, equipment, machinery, storage facilities, fixtures, furniture,
furnishings, office equipment, and all other tangible personal assets and
properties presently used in, and material to the operation of, the Business, do
not require any repairs other than normal maintenance and are in good operating
condition and in a state of reasonable maintenance and repair. Seller's
Disclosure Schedule sets forth a list of all of Company's motor vehicles,
furniture, fixtures, machinery, equipment, and tools that are material to its
Business.
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(i) LITIGATION; ABSENCE OF CLAIMS OR PRODUCT OR
SERVICE WARRANTIES. There are no actions, suits, claims, proceedings,
investigations, or other litigation pending or, to the knowledge of Company or
Sellers, threatened or that could be threatened against Company or any
subsidiary of Company, at law or in equity, or before or by any federal, state,
municipal, or other governmental department, commission, board, bureau, agency,
or instrumentality that, if determined adversely to Company or any subsidiary of
Company, would individually or in the aggregate have a material adverse effect
on the business, assets, properties, operations, operating results, prospects,
or condition, financial or otherwise, of Company and its subsidiaries taken as a
whole. None of Company or any subsidiary of Company is a party to any decree,
order, or arbitration award (or agreement entered into in any administrative,
judicial, or arbitration proceeding with any governmental authority) with
respect to or affecting any of the Shares or the Business (or the conduct
thereof). To the knowledge of Company or Sellers, neither Company, nor any
subsidiary of Company, nor any officer, director, manager, employee, or agent of
Company or any subsidiary of Company has made any oral or written warranties
with respect to the quality or absence of defect of the products or services
sold or performed by Company or any subsidiary of Company that are in force as
of the date hereof, other than Company's customary warranties in the ordinary
course of its Business. There are no material claims pending, anticipated, or to
the knowledge of Company or any Seller, threatened against Company or any
subsidiary of Company with respect to the quality of or absence of defects in
such products or services. Neither Company nor any subsidiary of Company has
been required to pay direct, incidental, or consequential damages to any person
or entity in connection with any of such products or services at any time during
the five-year period preceding the date of this Agreement.
(j) LICENSES AND PERMITS. Neither Company nor
any subsidiary of Company is subject to any material disability or liability by
reason of its failure to possess any license, permit, franchise, certificate,
consent, approval, or authorization necessary for the Business and the ownership
or use of all assets and properties and the premises occupied by it or to file
any reports with or pay any fees or other monies to any federal, state or local
authority having jurisdiction over the Business or the assets, property and
premises used by Company and its subsidiaries. Seller's Disclosure Schedule
includes a true, correct, and complete list of all licenses, permits,
franchises, certificates, consents, approvals, and authorizations that Company
currently holds in connection with the Business.
(k) NO VIOLATION. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby will
not violate or result in a breach by Company or any subsidiary of Company of, or
constitute a default under, or conflict with, or cause any acceleration of any
obligation that has or is likely to have a material adverse effect on Company or
the Business with respect to, (i) any provision or restriction of any charter,
bylaw, shareholders' agreement, articles of organization, operating agreement,
voting trust, proxy, or other similar agreement with respect to Company or any
subsidiary of Company; (ii) any loan agreement, indenture, lease, or mortgage of
Company or any subsidiary of Company; (iii) any provision or restriction of any
lien, lease agreement, sales agreement, contract, or instrument to which Company
or any subsidiary of Company is a party or by which any of them is bound; or
(iv) any order, judgment, award, decree, law, rule, ordinance, or regulation or
any other restriction of any kind or character to which any assets or properties
of Company or any subsidiary of Company is subject or by which Company or any
subsidiary of Company is bound.
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Neither the execution and delivery of this Agreement or any of the other
agreements contemplated hereby, nor the consummation of the transactions
contemplated hereby or thereby, will result in the creation of any lien, claim,
right, charge, encumbrance or security interest of any nature or type whatsoever
with respect to any of the stock of any of Company's subsidiaries or any of the
assets of Company.
(l) TAXES.
(i) Company has filed all Tax Returns
that it was required to file. All such Tax Returns were correct and complete in
all respects. All Taxes owed by Company (whether or not shown on any Tax Return
and whether or not any Tax Return was required) have been paid. Company is not
currently the beneficiary of any extension of time within which to file any Tax
Return. No claim has ever been made by a taxing authority in a jurisdiction
where Company does not file Tax Returns that it is or may be subject to taxation
by that jurisdiction. There are no liens on any of the properties of Company
that arose in connection with any failure (or alleged failure) to pay any Tax,
except for liens for Taxes not yet due. Company has withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder, or other third
party.
(ii) No Seller or other director or
officer (or employee responsible for Tax matters) of Company expects any taxing
authority to assess any additional Taxes for any period for which Tax Returns
have been filed. There is no dispute or claim concerning any Tax liability of
Company either (i) claimed or raised by any taxing authority in writing, or (ii)
as to which any of the Sellers or other directors or officers (or employees
responsible for Tax matters) of Company has actual knowledge (after reasonable
investigation) based upon personal contact with any agent of such taxing
authority. No issue relating to Taxes has been raised in writing by a taxing
authority during any pending audit or examination, and no issue relating to
Taxes was raised in writing by a taxing authority in any completed audit or
examination, that reasonably can be expected to recur in a later taxable period.
Company has delivered to Buyer correct and complete copies of all federal income
Tax Returns, examination reports, and statements of deficiencies assessed
against or agreed to by the Company since January 1, 1999.
(iii) Company has not waived any statute
of limitations in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency.
(iv) Company is not a party to any Tax
allocation or sharing agreement. Company (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 or entity under Treasury regulation
section 1.1502-6 (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract, or otherwise. The unpaid Taxes of Company
(i) did not, as of the most recent fiscal month end, exceed the reserve for Tax
liability (other than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) set forth on the face of the
most recent balance sheet (rather than in any notes thereto) and (ii) do not
9
exceed that reserve as adjusted for the passage of time through the Closing Date
in accordance with the past custom and practice of Company in filing its Tax
Returns.
(v) Company is not a party to any joint
venture, partnership, or other arrangement or contract that could be treated as
a partnership for federal income tax purposes.
(vi) Company has not entered into any
sale leaseback or leveraged lease transaction that fails to satisfy the
requirements of Revenue Procedure 2001-28 (or similar provisions of foreign law)
or any safe harbor lease transaction.
(vii) All material elections with respect
to Taxes affecting Company are disclosed or attached to a Tax Return of Company.
(viii) All private letter rulings issued
by the Internal Revenue Service to Company (and any corresponding ruling or
determination of any state, local, or foreign taxing authority) have been
disclosed on Seller's Disclosure Schedule, and there are no pending requests for
any such rulings (or corresponding determinations).
(ix) None of the Sellers nor Company has
taken or will take any action that could result in a deemed election under
section 338 of the Code with respect to Buyer's purchase of the Shares.
(x) Company will not be required to
include any items of income in, or exclude any items 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 under Section 481(c) of the Code (or any
corresponding or similar provision of state, local or foreign income tax law);
(ii) "closing agreement" as described in Section 7121 of the Code (or any
corresponding or similar provision of state, local or foreign income tax law);
(iii) installment sale or open transaction made on or prior to the Closing Date;
or (iv) prepaid amount received on or prior to the Closing Date.
(xi) During the five-year period ending
on the Closing Date, Company was not a distributing corporation or a controlled
corporation in a transaction intended to be governed by Section 355 of the Code.
(xii) Company has disclosed on its Tax
Returns all positions taken therein that could reasonably be expected to give
use to a substantial understatement of Tax within the meaning of Section 6662 of
Code (or any similar provision under any state, local, or foreign tax law).
(xiii) Company has not engaged in any
"listed transaction" as defined in Section 1.6011-4 of the Treasury Regulations.
(xiv) CERTAIN DEFINITIONS. For purposes
of this Agreement, the (A) term "Taxes" shall mean all taxes, charges, fees,
levies, or other assessments, including, without limitation, income, gross
receipts, profits, excise, property, sales, use, transfer, license,
10
payroll, employment, franchise, severance, stamp, occupation, premium, windfall
profits, environment, customs duties, capital stock, withholding, Social
Security, unemployment disability, registration, value added, alternative or
add-on minimum, or estimated taxes, imposed by the United States or any state,
local, or foreign government or subdivision or agency thereof, and such term
shall include any interest, penalties, or additions to tax attributable to such
assessments or to the failure to file any Tax Return; (B) the term "Tax Return"
shall mean any report, return, declaration, claim for refund, information
return, or other information, including any schedule or attachment thereto and
any amendment thereof, required to be supplied to a taxing authority or required
by a taxing authority to be supplied to any other person; (C) "Affiliated Group"
means any affiliated group within the meaning of Section 1504(a) of the Code or
any similar group defined under a similar provision of state, local or foreign
law; and (D) "Code" means the Internal Revenue Code of 1986, as amended
(m) ACCOUNTS RECEIVABLE. Each account receivable
of Company or any subsidiary of Company has been acquired in the ordinary course
of business, is valid and enforceable, and is fully collectible, subject to no
defenses, deductions, set-offs, or counterclaims, except to the extent of the
reserve reflected in Company's Base Balance Sheet or in such other amount that
is not material in the aggregate. Each such account receivable is fully
collectible to the extent of the face value thereof (less the amount of the
reserve for doubtful accounts, if any, reflected on the books of Company or any
subsidiary of Company with respect to such account, and except to the extent any
customer may obtain and assert a valid right of set-off based on any events
occurring after the Closing Date or any limitations under any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
generally affecting creditor's rights, general equity principles or laws
limiting the availability of equitable relief). Seller's Disclosure Schedule
sets forth a complete and accurate list of the accounts receivable of Company,
including the amount of each receivable and the name and mailing address of the
obligor.
(n) CONTRACTS. Neither Company nor any
subsidiary of Company is a party to (i) any plan or contract providing for
bonuses, incentives, pensions, stock options, stock purchases, deferred
compensation, retirement payments, pension, profit sharing, or welfare benefits;
(ii) any plan or agreement providing for fringe benefits to present or former
employees, including sick leave, severance pay, medical, hospitalization, life
insurance, or related benefits; (iii) any lease, installment purchase agreement,
or other contract with respect to any real or personal property used or proposed
to be used in its operations, excepting, in each case, items included within
aggregate amounts disclosed or reflected in Company's Base Balance Sheet; (iv)
any employment, consulting, or other similar arrangement not terminable by it
upon 30 days or less notice without penalty to it or that provides for payments
upon or after termination; (v) any contract or agreement for the purchase of any
commodity, material, fixed asset, or equipment in excess of $25,000; (vi) any
contract or agreement creating an obligation of $25,000 or more; (vii) any
mortgage, deed of trust, pledge agreement, security agreement, lease, or other
contract or agreement, which by its terms does not terminate or is not
terminable by it without penalty to it; (viii) any loan agreement, letter of
credit, financing agreement, indenture, promissory note, or other similar type
of arrangement; (ix) any agency, sales, brokerage, wholesaling, franchise,
license, conditional sales agreement, or similar agreement, other than license
agreements entered and licenses granted in the ordinary course of the Business;
(x) any purchase commitment to, or contract or agreement with, any manufacturer
or other supplier; or (xi) any license, authority, or
11
permit in favor of any person or entity with respect to the Business or any
assets or properties of Company or any of its subsidiaries, other than license
agreements entered and licenses granted in the ordinary course of the Business.
All mortgages, leases, contracts, agreements, and other arrangements to which
Company or any subsidiary of Company is a party are valid and enforceable in
accordance with their terms in all material respects, subject to any limitations
under applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws generally affecting creditor's rights, general equity principles or
laws limiting the availability of equitable relief; Company, its subsidiaries,
and all other parties to each of the foregoing have performed all obligations
required to be performed to date and have waived no rights thereunder; neither
Company, nor any subsidiary of Company, nor to the knowledge of Company or
Sellers any such other party is in default or in arrears under the terms of any
of the foregoing; and to the knowledge of Company or Sellers no condition exists
or event has occurred that, with the giving of notice or lapse of time or both,
would constitute a default under any of them. With respect to the Business,
neither Company nor any subsidiary of Company is bound by any agreement or
arrangement to sell or provide goods or services at prices below the prevailing
market prices therefor or to purchase goods or services at prices above the
prevailing market prices therefor. With respect to the Business, neither Company
nor any Seller has any reason to believe that there is a likelihood that any of
the manufacturers for or suppliers to Company or any of its subsidiaries will
terminate their business relationship with Company or any of its subsidiaries
for any reason whatsoever. Seller's Disclosure Schedule contains a true,
correct, and complete list of all contracts, including but not limited to, all
sales agreements, manufacturing agreements, design agreements, supply
agreements, sales representative agreements, consulting agreements, and
technical service agreements that are necessary in any material respect for the
conduct of the Business, as conducted as of the date hereof (the "Key
Contracts").
(o) COMPLIANCE WITH LAW AND OTHER REGULATIONS.
(i) GENERAL. Each of Company and its
subsidiaries is in compliance in all material respects with all requirements of
federal, state, and local law and all requirements of all governmental bodies
and agencies having jurisdiction over it, the conduct of its business, the use
of its assets and properties, and all premises occupied by it. Neither Company
nor any subsidiary of Company has received any notice from any federal, state,
or local authority or any insurance or inspection body that any of its assets,
properties, facilities, equipment, or business procedures or practices fails to
comply with any applicable law, ordinance, regulation, building, or zoning law,
or requirement of any public authority or body noncompliance with which would
have a material adverse affect on the business, assets or properties of Company
or any subsidiary.
(ii) ENVIRONMENTAL. Without limiting the
foregoing, there is no environmental contamination, toxic waste or other
discharge, spill, construction component, structural element or condition,
adversely affecting any of the properties owned, leased, or used by Company or
any subsidiary of Company, nor has Company nor any subsidiary of Company
received any official notice or citation that any of its properties in any way
contravene any federal, state, or local law or regulation relating to
environmental, health, or safety matters, including, without limitation, any
requirements of CERCLA or any OSHA requirements. There has been no (A) storage,
treatment, generation, or transportation or any (B) spill, discharge, leak,
emission, injection, escape, dumping, or release of any kind into the
environment (including
12
without limitation, into air, water, or ground water) of any materials
(including, without limitation, industrial, toxic, or hazardous substances or
solid, medical, or hazardous waste) by, or on behalf of, Company or any
subsidiary of Company or from any property owned, leased, or used by Company or
any subsidiary of Company in violation of any federal, state, or local law,
statute, rule, or regulation or the common law or any decree, order, arbitration
award, or agreement with or any license or permit from any federal, state, or
local governmental authority. Seller's Disclosure Schedule, sets forth a
complete list of all aboveground and underground storage tanks, vessels, and
related equipment and containers that are or have been used by Company or any
subsidiary of Company, or are located on property owned, leased, or operated by
Company or any subsidiary of Company, and that are subject to federal, state, or
local laws, statutes, rules or regulations, and such schedule sets forth their
present contents, what the contents have been at any time in the past, and what
program of redemption, if any, is contemplated with respect thereto.
(p) EMPLOYEE BENEFIT AND EMPLOYMENT MATTERS.
(i) ERISA MATTERS. Each of Company and
its subsidiaries has fulfilled its obligations, if any, under the minimum
funding standards of Section 302 of ERISA and the regulations and published
interpretations thereunder with respect to each "plan" (as defined in Section
3(3) of ERISA and such regulations and published interpretations) in which
employees of Company or its subsidiaries are eligible to participate, and each
such plan is in compliance in all material respects with the presently
applicable provisions of ERISA and such regulations and published
interpretations. Company has not incurred any unpaid liability to the Pension
Benefit Guaranty Corporation (other than for the payment of premiums in the
ordinary course) or to any such plan under Title IV of ERISA. Company has
furnished to Buyer as an attachment to Seller's Disclosure Schedule true and
complete copies of each pension plan, welfare plan, and employment benefit plan
applicable to Company or any of its subsidiaries and related trust agreements or
annuity contracts, Internal Revenue Service determination letters, and summary
plan descriptions; all of the foregoing plans, agreements, and commitments are
valid, binding, and in full force and effect, and there are no defaults
thereunder; and none of the rights of Company or any of its ERISA Affiliates (as
defined under ERISA) thereunder will be impaired by this Agreement or the
consummation of the transactions contemplated by this Agreement.
(ii) LABOR MATTERS. Each of Company and
its subsidiaries has complied with all other applicable federal, state, and
local laws relating to the employment of labor, including, without limitation,
the provisions thereof relative to wages, hours, collective bargaining, working
conditions, and payment of taxes of any kind, and neither Company nor any
subsidiary of Company is liable for any arrears of wages or any taxes or
penalties for failure to comply with any of the foregoing or has any obligations
for any vacation, sick leave, or other compensatory time. Neither Company nor
any subsidiary of Company is a party to any collective bargaining or other
contract or agreement with any labor union, and there is no request for union
representation pending or threatened against Company or any subsidiary of
Company. There is not pending or threatened any (A) labor dispute, grievance,
strike, or work stoppage involving any of the employees of Company or any
subsidiary of Company, (B) charge or complaint against or involving any
employees of Company or any subsidiary of Company by the National Labor
Relations Board, the Department of Labor, the Occupational Health and Safety
13
Administration, or any similar federal, state, or local board or agency, or (C)
unfair employment or labor practice charges by or on behalf of any employee of
Company or any subsidiary of Company.
(iii) ARRANGEMENTS WITH EMPLOYEES. The
employment of each employee of Company or any subsidiary of Company is
terminable at will without cost to Company or any subsidiary of Company. All
officers and independent contractors of Company and its subsidiaries are paid
salaries or other compensation in accordance with the amounts set forth in
Seller's Disclosure Schedule, and Seller's Disclosure Schedule correctly and
accurately sets forth all salaries, expenses, and personal benefits paid to or
accrued for all directors, officers, managers, and principal shareholders of
Company and its subsidiaries as of the date of this Agreement, all of which are
reflected as appropriate in Company's Base Balance Sheet.
(q) INSURANCE. Each of Company and its
subsidiaries maintains in full force and effect insurance coverage on its
assets, properties, premises, operations, and personnel in such amounts as
Company deems appropriate. Each of Company and its subsidiaries has been
continuously, and is presently, insured by insurers unaffiliated with Company
with respect to its property and the conduct of its business in such amounts and
against such risks as are adequate to protect its business and assets,
including, without limitation, liability insurance. Seller's Disclosure Schedule
contains a description (identifying insurer, coverage, premiums, named insured,
deductibles, and expiration date) of all policies of fire, liability, and other
forms of insurance that currently are, or at any time within the past five years
have been, maintained in force by or for the account of Company or any of its
subsidiaries with respect to the business and assets of Company or its
subsidiaries (such policies are hereinafter referred to as the "Policies").
(r) NO PAYMENTS TO DIRECTORS, OFFICERS,
STOCKHOLDERS, OR OTHERS. Since the date of Company's Base Balance Sheet, there
has not been any purchase or redemption of any shares of capital stock of
Company or any subsidiary of Company or any transfer, distribution, or payment
by Company or its subsidiaries, directly or indirectly, of any assets or
properties to any director, officer, stockholder, or other person, other than
the payment of compensation for services actually rendered at rates not in
excess of the rates prevailing on the date of Company's Base Balance Sheet.
(s) NO PROHIBITED PAYMENTS. Neither Company, nor
any subsidiary of Company, nor, to the knowledge of Company or Sellers, any
officer, director, employee, independent contractor, or agent, acting on behalf
of Company or any subsidiary of Company, has at any time (i) made any
contributions to any candidate for political office in violation of law or
failed to disclose fully any contributions to any candidate for political office
in accordance with any applicable statute, rule, regulation, or ordinance
requiring such disclosure; (ii) made any payment to any local, state, federal,
or foreign governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or allowed
by applicable law; (iii) made any payment outside the ordinary course of
business to any purchasing or selling agent or person charged with similar
duties of any entity to which Company or any subsidiary of Company sells
products or renders services or from which Company or any subsidiary of Company
buys products or services for the purpose of influencing such agent or person to
buy products or services from or sell products or services to Company or any
subsidiary of Company; or (iv) engaged in any transaction, maintained any bank
account, or used
14
any corporate funds, except for transactions, bank accounts, and funds that have
been and are reflected in the normally maintained books and records of Company
or any subsidiary of Company.
(t) GOVERNING DOCUMENTS AND MINUTE BOOKS.
Company has previously delivered to Buyer true and complete copies of the
certificate of incorporation and bylaws of Company and its subsidiaries as
currently in effect. The minute books of Company and its subsidiaries contain
complete and accurate records of all meetings and other corporate actions held
or taken by the Boards of Directors (or committees of the Boards of Directors)
and stockholders of Company and its subsidiaries, as the case may be, since
their incorporation.
(u) INTELLECTUAL PROPERTY. Each of Company and
its subsidiaries owns or holds all of the rights to use all trademarks, trade
names, trade secrets, logos, fictitious names, service marks, slogans, patents,
and copyrights that are used in or necessary to the operation of the Business as
conducted on the date of this Agreement (the "Intellectual Property"). Neither
Company nor any subsidiary of Company is, and following the Closing neither
Company nor any subsidiary of Company will be, obligated to pay any royalty or
other payment with respect to any of the Intellectual Property. To the knowledge
of Company or Sellers, no person or entity is producing, providing, selling, or
using products or services that would constitute an infringement of any of the
Intellectual Property. Seller's Disclosure Schedule sets forth a true, complete,
and correct list of all of the Intellectual Property owned or used by Company or
any subsidiary of Company. To the knowledge of Sellers, none of the matters
covered by the Intellectual Property, nor any of the products or services sold
or provided by Company or any subsidiary of Company, nor any of the processes
used or the business practices followed by Company or any subsidiary of Company,
infringes or has infringed upon any trademark, trade name, trade secret, logo,
fictitious name, service xxxx, slogan, patent, or copyright owned by any person
or entity (or any application with respect thereto), or constitutes unfair
competition.
(v) SUFFICIENCY OF ASSETS. The assets and
properties of Company and its subsidiaries constitute all or substantially all
of the assets and properties that are necessary to permit Buyer or Designated
Subsidiary to continue to conduct the Business after the Closing Date in the
manner in which the Business is currently being conducted by Company and its
subsidiaries. Seller's Disclosure Schedule sets forth a complete and accurate
list of all customers and suppliers of Company and its subsidiaries on the date
of and during the twelve months preceding the date of this Agreement and their
last known business address.
(w) SECURITIES MATTERS. Each Seller represents
and warrants to Buyer and Designated Subsidiary as follows:
(i) ACQUISITION OF BUYER COMMON STOCK
FOR OWN ACCOUNT. Such Seller will acquire the Buyer Common Stock for such
Seller's own account and not with a view to the distribution thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act").
(ii) KNOWLEDGE AND EXPERIENCE IN
FINANCIAL AND BUSINESS MATTERS. Such Seller has sufficient knowledge and
experience in financial and business matters
15
that it is capable of evaluating the merits and risks of the acquisition of the
Buyer Common Stock, and such Seller has the ability to bear the economic risk of
acquiring the Buyer Common Stock.
(iii) RESTRICTED SECURITIES. Such Seller
acknowledges and understands that the Buyer Common Stock will constitute
"restricted securities" as defined under Rule 144 under the Securities Act and
the certificates representing such shares will contain a legend to this effect.
As a result, such shares of Buyer Common Stock may be sold only pursuant to
registration under the Securities Act or pursuant to an exemption therefrom.
(iv) AVAILABLE INFORMATION. Such Seller
has been supplied with, or had access to, information to which a reasonable
investor would attach significance in making investment decisions, including,
without limitation, all publicly available filings by Buyer under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), including Buyer's Form
10-K Report for the year ended December 31, 2003; Buyer's Proxy Statement for
its 2004 Annual Meeting of Stockholders; and any information with respect to
Buyer's financial condition, business, and prospects and other information such
Seller has requested to enable such Seller to make the decision to acquire the
Buyer Common Stock.
(x) ACCURACY OF STATEMENTS. Neither this
Agreement nor any statement, list, certificate, or any other agreement executed
in connection with this Agreement or other information furnished or to be
furnished by Company or Sellers to Buyer in connection with this Agreement or
any of the transactions contemplated hereby contains or will contain an untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein, in light of
circumstances in which they are made, not misleading.
3.2. FURTHER REPRESENTATIONS AND WARRANTIES OF SELLERS.
Each Seller, jointly and severally, further represents, warrants, and
acknowledges to Buyer as follows:
(a) OWNERSHIP OF STOCK. Sellers own, and at all
times preceding the date hereof, have owned, all of the issued and outstanding
shares of capital stock of Company, free and clear of all liens, claims, rights,
charges, encumbrances, and security interests of whatsoever nature or type.
(b) POWER OF SELLERS TO EXECUTE AGREEMENT.
Sellers have the full right, power, and authority to execute, deliver, and
perform this Agreement, and this Agreement is the legal and binding obligation
of Sellers and is enforceable against them in accordance with its terms, except
that (i) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium, or other similar laws now or hereafter in effect
relating to creditors' rights, and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefore may be brought.
(c) AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS
AFFECTING SELLERS. The execution and delivery of this Agreement, the
consummation of the transactions hereby contemplated, and the fulfillment of the
terms hereof will not result in the breach of any
16
term or provision of, or constitute a default under, or conflict with, or cause
the acceleration of any obligation under any agreement or other instrument of
any description to which any Seller is a party or by which any Seller is bound,
or any judgment, decree, order, or award of any court, governmental body, or
arbitrator or any applicable law, rule, or regulation.
3.3. REPRESENTATIONS AND WARRANTIES OF BUYER. Except as
otherwise set forth in the Buyer's Disclosure Schedule hereto ("Buyer's
Disclosure Schedule"), and except as disclosed in Buyer's Form 10-K Report for
the year ended December 31, 2003, and all subsequent reports and proxy
statements filed by Buyer thereafter with the Securities and Exchange Commission
("SEC") pursuant to Section 13(a) or 14(a) of the Exchange Act, Buyer represents
and warrants to Sellers as follows:
(a) DUE INCORPORATION, GOOD STANDING, AND
QUALIFICATION. Buyer is a corporation duly organized, validly existing, and in
good standing under the laws of the state of Nevada. Buyer is not subject to any
material disability by reason of the failure to be duly qualified as a foreign
corporation for the transaction of business or to be in good standing under the
laws of any jurisdiction.
(b) CORPORATE AUTHORITY. Buyer has the corporate
power and authority to enter into this Agreement and carry out the transactions
contemplated hereby. The Board of Directors of Buyer has taken all actions
required by law to authorize the execution and delivery by Buyer of this
Agreement and the consummation by Buyer of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by and constitutes a legal,
valid, and binding agreement of Buyer, enforceable against it in accordance with
its terms, except that (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium, or other similar laws now or hereafter
in effect relating to creditors' rights; and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefore may be brought.
(c) NO VIOLATION. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby will
not violate or result in a breach by Buyer of, or constitute a default under, or
conflict with, or cause any acceleration of any obligation with respect to, (i)
any provision or restriction of any charter, bylaw, articles of incorporation,
loan, indenture, or mortgage of Buyer; or (ii) any provision or restriction of
any lien, lease agreement, contract, instrument, order, judgment, award, decree,
ordinance, or regulation or any other restriction of any kind or character to
which any assets or properties of Buyer is subject or by which Buyer is bound.
(d) CERTIFICATE OF INCORPORATION AND BYLAWS.
Buyer has heretofore delivered to Sellers true and complete copies of the
Certificate of Incorporation and Bylaws of Buyer as currently in effect.
(e) INTENT AND ACCESS. Buyer is acquiring the
Shares and the shares of capital stock of Company's subsidiaries and any other
securities owned by Company without a view to the distribution or resale of such
stock or securities in violation of any applicable federal or state securities
laws. Buyer has been furnished with such information, both financial and
non-
17
financial, with respect to the operations, business, capital structure, and
financial position of Company and its subsidiaries as Buyer believes necessary
and has been given the opportunity to ask questions of and receive answers from
Company and its subsidiaries and their officers concerning Company and its
subsidiaries.
(f) ACCURACY OF STATEMENTS. Neither this
Agreement nor any statement, list, certificate, or other information furnished
or to be furnished by Buyer to Sellers in connection with this Agreement or any
of the transactions contemplated hereby contains or will contain an untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading.
(g) SEC REPORTS. Buyer's Form 10-K Report for
the year ended December 31, 2003, and all subsequent reports and proxy
statements filed by Buyer thereafter with the SEC pursuant to Section 13(a) or
14(a) of the Exchange Act, do not contain a misstatement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading as of the time the document was filed. No
report, proxy statement, or other document has been required to be filed by
Buyer pursuant to Section 13(a) or 14(a) of the Exchange Act that has not been
filed. All such reports and registration statements, which are filed between the
date hereof and the Closing Date, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances in
which they are made, not misleading.
(h) STATUS OF BUYER COMMON STOCK TO BE ISSUED.
The shares of Buyer Common Stock to be issued in payment for the Shares will be,
when issued, validly authorized and issued, fully paid, nonassessable, free of
preemptive or other similar rights, and listed for trading on the NASDAQ
SmallCap Market.
(i) NO MATERIAL CHANGE. Since the date of
Buyer's Form 10-K Report for the year ended December 31, 2003, there has not
been and, to the knowledge of Buyer, there is not threatened (III) any material
adverse change in the financial condition, business, assets, properties, or
operating results of Buyer and its subsidiaries taken as a whole; (IV) any loss
or damage (whether or not covered by insurance) to any of the assets or
properties of Buyer or any subsidiary of Buyer that materially affects or
impairs its ability to conduct its business as currently conducted; or (V) any
mortgage or pledge of any assets or properties of Buyer or any subsidiary of
Buyer, or any indebtedness incurred by Buyer or any subsidiary of Buyer, other
than in all cases indebtedness, not material in the aggregate, incurred in the
ordinary and usual course of business.
(j) NO LITIGATION. There are no actions, suits,
claims, proceedings, investigations or other litigation pending or, to the
knowledge of Buyer, threatened or that could be threatened against or affecting
the transactions contemplated by this Agreement. To Buyer's knowledge, there is
no basis for any such action, suit, claim, proceeding, investigation or other
litigation.
18
SECTION IV.
COVENANTS
4.1. COVENANTS OF SELLERS. Unless Buyer otherwise agrees
in writing and except as set forth in the Sellers' Disclosure Schedule, Sellers
jointly and severally agree to, and Sellers shall cause Company to, at all times
from the date of this Agreement through the Closing Date, comply with, this
Section 4.1.
(a) PRESERVATION OF BUSINESS. Company shall use
its best efforts to (i) preserve intact the present business organization of
Company and its subsidiaries; (ii) preserve the present goodwill and
advantageous relationships of Company and its subsidiaries with all persons
having business dealings with Company or its subsidiaries; (iii) preserve the
net worth of Company; and (iv) preserve and maintain in force all licenses,
registrations, franchises, patents, trademarks, copyrights, bonds, and other
similar rights of Company and its subsidiaries.
(b) NO ORGANIC CHANGE. Neither Company nor any
subsidiary of Company shall (i) amend its charter or bylaws; (ii) make any
change in its capital stock by reclassification, subdivision, reorganization, or
otherwise; or (iii) merge or consolidate with or sell any assets to any other
corporation, trust, or entity or change the character of its business, except as
contemplated by this Agreement.
(c) ORDINARY COURSE. Each of Company and its
subsidiaries shall operate its business only in the usual, regular, and ordinary
course and manner. Without limiting the foregoing, neither Company nor any
subsidiary of Company shall take any of the following actions without Buyer's
written consent: (i) encumber or mortgage any assets or properties; (ii) incur
any obligation or liability (contingent or otherwise), incur or modify any
indebtedness, incur or make any capital expenditures, purchase or acquire, or
transfer or convey, any assets or properties, enter into any license agreement
granting exclusive rights respecting any material technology or Intellectual
Property belonging to Company or enter into any transaction or make or enter
into any contract or commitment, except in the usual and ordinary course of
business consistent with past practice or as contemplated by this Agreement and
except for transactions that are not material, either individually or in the
aggregate; (iii) create or acquire any subsidiary, invest in or acquire any
stock or other equity interest in any corporation, trust, or other entity, or
purchase any investment assets; (iv) expend more than $25,000 in any month,
except in the ordinary course of business consistent with prior periods and as
permitted by this Agreement without the written approval of Buyer, which shall
not be unreasonably withheld; (v) waive any material right; or (vi) make any
material change in the nature or conduct of the Business.
(d) MAINTENANCE OF ASSETS AND PROPERTIES. Each
of Company and its subsidiaries shall keep the premises occupied by it and all
of the equipment and other tangible assets and personal property used by it in
good operating condition and shall perform all necessary repairs and
maintenance. Company and its subsidiaries shall not remove any personal property
from any facility of Company or its subsidiaries unless same are replaced with
similar items of at least equal quality prior to the Closing Date. Company and
its subsidiaries shall not sell or permit to be sold or otherwise transferred or
disposed of any item or group of items constituting personal property, except
items sold in the ordinary and usual course of business. Neither Company nor any
subsidiary of Company shall convey any interest in any of its assets or
19
properties or subject any of its assets or properties, or any portion thereof,
to any additional liens, encumbrances, or similar matters.
(e) SATISFACTION OF OBLIGATIONS AND LIABILITIES.
Each of Company and its subsidiaries shall (i) pay or cause to be paid all of
the obligations and liabilities arising out of its business as they mature
including those related to taxes, except for those that are in good faith
disputed with the written approval of Buyer; (ii) maintain and perform in all
material respects its obligations under all agreements and contracts to which it
is bound in accordance with their terms; and (iii) comply in all material
respects with all requirements of applicable federal, state, and local laws,
regulations, and rules. Company and its subsidiaries shall pay or cause to be
paid in full all bills and invoices for labor, goods, materials, supplies,
services, and utilities of any kind relating to the Business, which were
contracted for by Company or any of its subsidiaries or which were delivered to
or performed on their assets or properties.
(f) BOOKS AND RECORDS. Each of Company and its
subsidiaries shall maintain its books, accounts, and records in the usual,
regular, and ordinary manner and on a basis consistent with prior years, and
each of Company and its subsidiaries shall comply with all laws applicable to it
or to the conduct of its business.
(g) INSURANCE. Each of Company and its
subsidiaries shall maintain in force through the Closing Date all of the
property, casualty, crime, directors and officers, and other forms of insurance
that it is presently carrying and shall refrain from making any change in any
such insurance coverage.
(h) ENTRY INTO OBLIGATIONS. Neither Company nor
any subsidiary of Company shall take any of the following actions without
Buyer's written consent: (i) enter into any lease, contract, agreement, or other
obligation with any party other than contracts for the sale of products or
services and contracts for the purchase of supplies or services in the ordinary
and usual course of business or, whether or not in the ordinary course of
business, which involve obligations in excess of $25,000 or which extend beyond
six months from the date of this Agreement; (ii) amend, modify, extend, change,
or terminate any presently existing lease, contract, agreement, or other
obligation; or (iii) enter into any manufacturing agreement, supply agreement,
service agreement, maintenance agreement, contract, or other arrangement
relating to the operation or maintenance of the assets and properties or
business of Company or its subsidiaries, other than in the ordinary course of
business.
(i) NO ISSUANCE OF SHARES, OPTIONS, OR OTHER
SECURITIES. Neither Company nor any subsidiary of Company shall (i) issue any
shares of capital stock; or (ii) grant any option, warrant, or other right to
purchase or to convert any obligation into shares of capital stock ("New
Securities") unless the recipient of such New Securities agrees to be bound by
this Agreement.
(j) ACQUISITIONS AND DISPOSITIONS. Neither
Company nor any subsidiary of Company shall (i) order, purchase, or lease any
products, inventory, or equipment, except in the ordinary course of business and
consistent with past practice or as contemplated by this Agreement; (ii)
transfer, sell, pledge, dispose of, or encumber any assets or properties, except
in the ordinary course of business and consistent with past practice or as
contemplated by
20
this Agreement; or (iii) directly or indirectly acquire, purchase, or redeem any
shares of its capital stock or that of its subsidiaries or permit any of its
subsidiaries to do so.
(k) DIVIDENDS. Neither Company nor any
subsidiary of Company shall declare, make, or pay any dividend or other
distribution with respect to Company's capital stock or otherwise.
(l) COMPENSATION. Neither Company nor any
subsidiary of Company shall (i) increase the compensation payable (including
bonus compensation) to any officer or director or to other management personnel
from the amount payable as of the date of Company's Base Balance Sheet to any
level that exceeds the amount set forth for each Seller in Schedule 4.1(l) to
this Agreement, or (ii) introduce or change any pension or profit sharing plan
or any other employee benefit arrangement.
(m) EMPLOYEES. Each of Company and its
subsidiaries shall use its best efforts to retain and keep available the
services of each of its present employees, representatives, and agents. Neither
Company nor any subsidiary of Company shall hire any employees, except in the
ordinary course of business and consistent with past practice. Company and its
subsidiaries shall not enter into any employment agreements with any of its
officers, management personnel, or employees that may not be canceled by them
without penalty upon notice not exceeding 30 days.
(n) RIGHT OF INSPECTION. Company shall make
available to Buyer and its representatives for inspection at all reasonable
times during Company's normal business hours all of the assets, properties,
facilities, and agreements (including all documents of any description
evidencing any right or obligation of Company or its subsidiaries) and the
books, records, accounts, and financial statements of Company and its
subsidiaries as they shall reasonably request and allow Buyer and its
representatives the right to make whatever copies of such materials they
require, and Company shall permit Buyer and its independent accountants to audit
or make such audit tests respecting the accounts of Company and its subsidiaries
as Buyer or those accountants consider appropriate.
(o) CONSENTS AND APPROVALS. Each of Company and
its subsidiaries shall use its best efforts to obtain all consents and approvals
of other persons and governmental authorities necessary to the performance by
Sellers and Company of the transactions contemplated by this Agreement. Each of
Company and its subsidiaries shall make or cause to be made all filings,
applications, statements, and reports to all federal, state, and local
government agencies and entities that are required to be made prior to the
Closing Date by or on behalf of Company or such subsidiary pursuant to any
statute, rule, or regulation in connection with the transactions contemplated by
this Agreement and necessary to the continued conduct of the business of Company
and its subsidiaries in the current manner.
Each Seller acknowledges the covenants set forth in this
Section 4.1 and agrees to be bound by them.
21
4.2. COVENANTS OF BUYER. Buyer agrees that, unless Sellers
otherwise agree in writing and except as set forth in Buyer's Disclosure
Schedule or contemplated by this Agreement, at all times between the date of
this Agreement through the Closing:
(a) CONSENTS AND APPROVALS. Buyer shall use its
best efforts to obtain all necessary consents and approvals of other persons and
governmental authorities to the performance by Buyer of the transactions
contemplated by this Agreement. Buyer shall make or cause to be made all
filings, applications, statements, and reports to all federal and state
government agencies and entities that are required to be made prior to the
Closing Date by or on behalf of Buyer pursuant to any statute, rule, or
regulation in connection with the transactions contemplated by this Agreement.
(b) RIGHT OF INSPECTION. Buyer shall make
available to Sellers and their representatives for inspection at all reasonable
times all of the assets, properties, facilities, records, agreements (including
all documents of any description evidencing any right or obligation of Buyer),
and financial statements of Buyer as they shall reasonably request and allow
Sellers and their representatives the right to make whatever copies of such
materials they require at Sellers' expense.
(c) CONVERTIBLE LOAN COMMITMENT. For the purpose
of funding the business operations of Company until June 30, 2005 (the
"Profitability Period"), Buyer agrees to loan Company an aggregate of up to
$500,000 during the first 12-months of the Profitability Period in accordance
with this Section 4.2(c). Subject to the limits in this Section 4.2(c), Buyer
will advance loan proceeds to Company in such amounts, and at such times, as
Company may request in writing from time to time. Buyer's obligation to make
advances to Company will not exceed $70,000 in the first month of the
Profitability Period, $40,000 in each of the next ten months of the
Profitability period, $30,000 in the twelfth month of the Profitability Period
and, in any month of the Profitability Period, any amount specified by this
Section 4.2(c) but not advanced to Company with respect to any previous month.
If implemented, principal amounts outstanding under the loan shall bear interest
at 5% per annum, compounded annually, shall mature 24 months following the
initial funding of the loan, and shall be secured by a first priority lien on
all assets of Company. If Company terminates this Agreement at any time under
Section 7.3(g), Buyer may, at its option, (1) accelerate the funding of any
loans not yet due under this Section 4.2(c), up to a maximum aggregate principal
amount of $500,000, and (2) convert all or part of the principal amount
outstanding under the loan shall into an amount of shares of Company's capital
stock sufficient to equal 12.5% of the outstanding capital stock of Company on a
fully diluted basis on the date of Company's Notice of Superior Proposal under
Section 4.3(c), assuming that the maximum aggregate principal amount is
outstanding on such date. To exercise its option under this Section 4.2(c),
Buyer shall deliver a written notice to Company, at least ten (10) business days
before the scheduled closing date for a transaction described in a Notice of
Superior Proposal, indicating the amount of any loans extended under this
Section 4.2(c) that Buyer intends to convert into capital stock of Company. If
Buyer exercises its option, (a) Company will cooperate with Buyer, at Buyer's
expense, in obtaining access to information regarding the entity making the
Superior Proposal for purposes of Buyer's reasonable due diligence; (b) the
conversion contemplated by this Section 4.2(c) will take place if and only if,
and on the date on which, the transaction resulting from the Superior Proposal
closes. Buyer also may convert all or part of any principal amount of the loan
contemplated by this Section 4.2(c)
22
outstanding on the Closing Date into an amount of shares of Company's capital
stock sufficient to equal 12.5% of the outstanding capital stock of Company on a
fully diluted basis on the Closing Date, assuming that the maximum aggregate
principal amount is outstanding on such date, prorated to reflect the actual
principal balance outstanding on such date. Interest on the loan shall accrue
and shall be payable only in cash at maturity of the loan or conversion of the
loan into equity of Company. Interest on the loan shall not be convertible into
Company's capital stock. The loan shall be evidenced by a promissory note and
security agreement in the form attached hereto as Exhibit F ("Promissory Note").
(d) REIMBURSEMENT OF EXPENSES. Subject to the
limitations in this Section 4.2(d), Buyer shall reimburse Company for all
expenses, including without limitation all legal and accounting fees and related
expenses, incurred in connection with this Agreement and the transactions that
it contemplates. Buyer's reimbursement obligations under this Section 4.2(d)
shall not exceed $20,000. Buyer shall reimburse Company for all such expenses
incurred through the date of this Agreement upon the execution of this
Agreement, up to a maximum reimbursement of $8,000. Subject to the limitations
in this Section 4.2(d), Buyer shall reimburse Company for all remaining
expenses, regardless whether incurred before or after the execution of this
Agreement, on the Closing Date.
4.3. NO SOLICITATION.
(a) Unless and until this Agreement shall have
been terminated pursuant to Section 7, neither Sellers, nor Company, nor any of
Company's officers, directors, affiliates, representatives, or agents shall:
(i) directly or indirectly, encourage,
solicit, or initiate discussions or negotiations with, any corporation,
partnership, person, or other entity or group (other than Buyer, its affiliates,
employees, representatives, and advisors) concerning any merger, sale of assets,
sale of shares of capital stock, tender offer, or similar transaction involving
Company or any of its subsidiaries (an "Acquisition Proposal"); or
(ii) subject to the fiduciary duties of
Company's Board of Directors under applicable law as advised by its counsel,
disclose, directly or indirectly, any non-public information to any corporation,
partnership, person, or other entity or group (other than to Buyer, its
affiliates, employees, representatives, or agents) concerning the business and
assets of Company or its subsidiaries, afford to any such party access to the
books or records of Company or its subsidiaries, or otherwise assist or
encourage any such party in connection with any of the foregoing.
(b) Upon execution of this Agreement, the
Company shall cease immediately and cause to be terminated any and all existing
discussions or negotiations with any parties conducted heretofore with respect
to an Acquisition Proposal and promptly request that all confidential
information with respect thereto furnished on behalf of the Company be returned.
(c) Company shall, as promptly as practicable
(and in no event later than 24 hours after receipt thereof), advise Buyer of any
inquiry received by it relating to any potential Acquisition Proposal and of the
material terms of any proposal or inquiry, including the
23
identity of the person and its affiliates making the same, that it may receive
in respect of any such potential Acquisition Proposal, or of any information
requested from it or of any negotiations or discussions being sought to be
initiated with it, shall furnish to Buyer a copy of any such proposal or
inquiry, if it is in writing, or a written summary of any such proposal or
inquiry, if it is not in writing and shall keep Buyer fully informed on a prompt
basis with respect to any developments with respect to the foregoing. Company
shall not exercise its right to terminate this Agreement under Section 7.3(g)
until three business days after Buyer's receipt of written notice (a "Notice of
Superior Proposal") advising Buyer that Company's Board of Directors intends to
cause Company to accept such Superior Proposal, specifying the material terms
and conditions of the Superior Proposal. Company shall, during such three
business day period, negotiate in good faith with Buyer to make such adjustments
to the terms and conditions of this Agreement such that such Acquisition
Proposal would no longer constitute a Superior Proposal.
(d) For purposes of this Agreement, a "Superior
Proposal" shall mean a bona fide written Acquisition Proposal made by a third
party which was not solicited by any Seller, the Company, any subsidiary of
Company, any representative, director, officer, agent, or other employee of
Company, or any other affiliates and which, in the good faith judgment of the
Company Board of Directors, taking into account, to the extent deemed
appropriate by it, the various legal, financial, and regulatory aspects of the
proposal and the person making such proposal (A) if accepted, is reasonably
likely to be consummated, (B) if consummated would, based upon the written
advice of the Company's financial advisor, result in a transaction that is more
favorable to the Company's stockholders, from a financial point of view, than
the transactions contemplated by this Agreement, and (C) if consummated would
provide Company's stockholders with aggregate consideration of more than $4.0
million.
4.4. BEST EFFORTS. Subject to the terms and conditions of
this Agreement, and subject to fiduciary duties under applicable law, as advised
by counsel, each of the parties hereto shall use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper, or advisable to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
using its best efforts to obtain all necessary, proper, or advisable permits,
consents, authorizations, requests, and approvals of third parties and
governmental authorities. If at any time after the Closing Date, any further
action is necessary or desirable to carry out the purposes of this Agreement
(including providing any information in any way related to the assets to be
purchased pursuant to this Agreement), the parties to this Agreement shall take
all such action. Each party hereto shall use its best efforts to cause the
transaction to qualify, and shall use its best efforts to not take any actions
which could prevent the transaction from qualifying, as a reorganization under
the provisions of Section 368(a) of the Code.
4.5. PUBLIC ANNOUNCEMENTS. Buyer and Sellers shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to 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 law on the advice of counsel or by any listing agreement with
any national securities exchange.
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SECTION V.
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER. The
obligations of Buyer to consummate the transactions contemplated by this
Agreement are, at the option of Buyer, subject to the satisfaction of the
following conditions on or before the Closing Date:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Sellers herein contained shall have been
true and correct in all material respects when made and, in addition, shall be
true and correct in all material respects on the Closing Date with the same
force and effect as though made on and as of the Closing Date, except as
affected by transactions contemplated hereby.
(b) PERFORMANCE OF AGREEMENTS. Sellers shall
have in all material respects performed all obligations and agreements and
complied with all covenants and conditions contained in this Agreement to be
performed and complied with by them on or prior to the Closing Date and shall
have delivered all documents, instruments, and materials required by Section
6.2.
(c) NO MATERIAL ADVERSE CHANGE. There shall be
no material adverse change in the business, assets, properties, operating
results, or financial condition of Company and its subsidiaries taken as a
whole.
(d) LITIGATION. No action or proceeding by any
governmental agency shall have been instituted or threatened that would enjoin,
restrain, or prohibit, or might result in substantial damages in respect of,
this Agreement or the consummation of the transactions contemplated by this
Agreement and would, in the reasonable judgment of Buyer, make it inadvisable to
consummate such transactions, and no court order shall have been entered in any
action or proceeding instituted by any other party that enjoins, restrains, or
prohibits this Agreement or consummation of the transactions contemplated by
this Agreement.
(e) PROCEEDINGS SATISFACTORY TO COUNSEL. All
proceedings taken by Company and its subsidiaries and Sellers and all
instruments executed and delivered by Company and its subsidiaries and Sellers
on or prior to the Closing Date in connection with the transactions contemplated
hereby shall be reasonably satisfactory in form and substance to counsel for
Buyer.
(f) DELIVERY OF DOCUMENTS. All other documents
required to be delivered by Company and Sellers on or prior to the Closing Date
shall be delivered or shall be tendered by the Closing Date.
(g) CLOSING CERTIFICATE OF SELLERS. Buyer shall
have received from Sellers a closing certificate of Sellers ("Closing
Certificate of Sellers"), dated the date of the Closing Date, certifying that
all representations and warranties of Sellers set forth in this Agreement are
true, complete, and correct in all material respects on and as of the Closing
Date as if made at that time, and that Sellers have performed and complied in
all material respects with all agreements, covenants, and conditions required by
this Agreement to be performed or complied with by them at or before the Closing
Date.
25
(h) SELLER RELEASES. Each Seller shall have
executed a general release of Company substantially in the form of Exhibit B
attached hereto (the "Seller Releases").
(i) CONSENTS. All necessary consents, approvals,
and estoppel letters of Company's or Buyer's lenders, landlords, and other
persons whose consent or approval is required shall have been obtained and, to
the extent licenses, authorities, or permits held by Company are not assignable
or transferable, Buyer shall have either obtained licenses, authorities, and
permits on substantially the same terms as such licenses, authorities, and
permits were originally issued to Company, or Buyer shall have obtained binding
commitments from the applicable persons to issue such licenses, authorities, and
permits to Buyer or Company following the Closing Date.
(j) COMPANY PROFITABILITY. During the
Profitability Period, Company shall have generated average EBIT of at least
$100,000 and revenue of at least $400,000 during two consecutive fiscal
quarters.
(k) COMPANY ACCRUED LIABILITIES Company shall
have discharged or secured the release of any accrued salaries recorded on the
Base Balance Sheet (and updated as of the Closing Date) related to salaries or
other compensation payable to any of its employees or independent contractors.
(l) EXECUTION OF EMPLOYMENT AGREEMENTS. Each of
Xxxxxx X. Xxxxxx, Xxx Xxxxxxxx and Xxxx Xxxxxxx shall have entered into an
Employment Agreement with Buyer, which employment agreement shall be
substantially in the form of Exhibit A attached hereto (the "Employment
Agreements").
(m) EXECUTION OF REGISTRATION RIGHTS AGREEMENT.
Company shall have entered into the Registration Rights Agreement, which
registration rights agreement shall be substantially in the form of Exhibit C
(the "Registration Rights Agreement").
(n) EXECUTION OF MANAGEMENT SERVICES AGREEMENT.
Company shall have entered into the Management Services Agreement, which
Management Services Agreement shall be substantially in the form of Exhibit D
attached hereto (the "Management Services Agreement").
(o) EXECUTION OF MARKETING AND SALES AGREEMENT.
Company shall have entered into Marketing and Sales Agreement with Buyer, which
Marketing and Sales Agreement shall be substantially in the form of Exhibit E
attached hereto (the "Marketing and Sales Agreement").
(p) AIR NOTIFICATION Company shall have provided
a written notification of the transaction contemplated by this Agreement to
Active Imaging Recognition, Inc. ("AIR"), disclosing the assignment of the
License Agreement between AIR and Xxxxxx Xxxxxx dated ________ to Company and
requesting AIR's confirmation that the License Agreement is in full force and
effect.
(q) ABSENCE OF OUTSTANDING OPTIONS, WARRANTS, OR
RIGHTS TO ACQUIRE. There shall not be outstanding any options, warrants,
securities convertible into, or
26
rights to subscribe for or purchase any shares of Company's capital stock, other
than the rights created under Section 4.2 of this Agreement.
5.2. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS.
The obligations of Sellers under this Agreement are, at the option of Sellers,
subject to the satisfaction of the following conditions on or before the Closing
Date:
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Buyer herein contained shall have been
true and correct in all material respects when made and, in addition, shall be
true and correct in all material respects on and as of the Closing Date with the
same force and effect as though made on and as of the Closing Date, except as
affected by transactions contemplated hereby.
(b) PERFORMANCE OF AGREEMENTS. Buyer shall have
in all material respects performed all obligations and agreements and complied
with all covenants and conditions contained in this Agreement to be performed
and complied with by Buyer on or prior to the Closing Date and shall have
delivered all consideration, documents, instruments, and other materials
required by Section 6.3.
(c) NO MATERIAL ADVERSE CHANGE. There shall be
no material adverse change in the business, assets, properties, operating
results or financial condition of Buyer and its subsidiaries taken as a whole.
(d) LITIGATION. No action or proceeding by any
governmental agency shall have been instituted or threatened that would enjoin,
restrain, or prohibit, or might result in substantial damages in respect of,
this Agreement or the consummation of the transactions contemplated by this
Agreement and would, in the reasonable judgment of Sellers, make it inadvisable
to consummate such transactions, and no court order shall have been entered in
any action or proceeding instituted by any other party that enjoins, restrains,
or prohibits this Agreement or consummation of the transactions contemplated by
this Agreement.
(e) PROCEEDINGS SATISFACTORY TO COUNSEL. All
proceedings taken by Buyer and all instruments executed and delivered by Buyer
on or prior to the Closing Date in connection with the transactions contemplated
hereby shall be reasonably satisfactory in form and substance to counsel for
Sellers.
(f) DELIVERY OF DOCUMENTS. All other documents,
required to be delivered by Buyer on or prior to the Closing Date shall be
delivered or shall be tendered by the Closing Date.
(g) CLOSING CERTIFICATE OF BUYER. Sellers shall
have received from Buyer a certificate executed by a duly authorized officer of
Buyer dated the date of the Closing Date ("Closing Certificate of Buyer"),
certifying that all representations and warranties of Buyer set forth in this
Agreement are true, complete, and correct in all material respects on and as of
the Closing Date as if made at that time and that Buyer has performed and
complied in all material respects with all agreements, covenants, and conditions
required by this Agreement to be performed or complied with by Buyer on or
before the Closing Date.
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(h) CONSENTS. All necessary consents, approvals,
and estoppel letters of Company's or Buyer's lenders, landlords, and other
persons whose consent or approval is required shall have been obtained or waived
by each person whose consent or approval is required.
(i) EXECUTION OF EMPLOYMENT AGREEMENTS. Buyer
shall have entered into the Employment Agreements with Xxxxxx X. Xxxxxx, Xxx
Xxxxxxxx and Xxxx Xxxxxxx.
(j) EXECUTION OF REGISTRATION RIGHTS AGREEMENT.
Buyer shall have entered into the Registration Rights Agreement.
(k) EXECUTION OF MANAGEMENT SERVICES AGREEMENT.
Buyer shall have entered into the Management Services Agreement.
(l) EXECUTION OF MARKETING AND SALES AGREEMENT.
Buyer shall have entered into the Marketing and Sales Agreement.
SECTION VI.
THE CLOSING
6.1. CLOSING. The closing (the "Closing") of the
transactions contemplated by this Agreement shall take place at the offices of
Xxxxxxxxx Traurig, LLP, 0000 X. Xxxxxxxxx Xxxx, Xxxxxxx, Xxxxxxx within ten
business days after any party gives all other parties to this Agreement written
notice that it has satisfied, or is prepared to waive, all conditions to its
obligations under this Agreement specified in Section 5 or at such other date,
time, and place as may be agreed upon by Buyer and Sellers, which date is
sometimes herein called the "Closing Date."
6.2. DELIVERIES BY COMPANY AND SELLERS. At the Closing,
Company and Sellers shall deliver the following:
(a) CERTIFICATES FOR SHARES. Certificates for
one hundred (100) shares of Company's Common Stock, endorsed in blank, or with
stock powers executed in blank attached, with signatures guaranteed, with all
required transfer stamps, if any, affixed.
(b) CLOSING CERTIFICATE OF SELLERS. The Closing
Certificate of Sellers.
(c) RESIGNATIONS. The written resignations of
all directors and officers of Company.
(d) BOOKS AND RECORDS. All of the books,
records, and files of Company and its subsidiaries, including the corporate
minute books, stock books, or records, and employee and tax records of Company
and each subsidiary of Company.
(e) RELEASES. The Seller Releases.
(f) CONSENTS AND ESTOPPEL LETTERS. All written
consents, approvals, and estoppel letters of all parties whose consent is
necessary to the continued effectiveness and
28
validity of, or otherwise reasonably requested by Buyer in connection with the
assignment of, or alternate arrangements satisfactory to Buyer with respect to,
any contract, lease, license, permit, agreement, indenture, or other instrument,
or which may be necessary, appropriate, or required in order to permit Buyer to
conduct the Business after the Closing in all respects the same as Company and
Sellers conducted the Business prior to the Closing, and written evidence of
other consents and approvals of the transactions contemplated hereby.
(g) GOOD STANDING CERTIFICATES. Certificates of
good standing of Company and each of its subsidiaries, issued not earlier than
seven days prior to the Closing Date by the proper authority of the state of
such entity's jurisdiction of incorporation and by the proper authority of each
state in which Company and any of its subsidiaries is qualified to transact
business.
(h) EMPLOYMENT AGREEMENTS. The Employment
Agreements executed by each of Xxxxxx Xxxxxx, Xxxx Xxxxxxx, and Xxx Xxxxxxxx.
(i) REGISTRATION RIGHTS AGREEMENT. The
Registration Rights Agreement executed by each Seller.
(j) MANAGEMENT SERVICES AGREEMENT. The
Management Services Agreement executed by Company.
(k) MARKETING AND SALES AGREEMENTS. The
Marketing and Sales Agreements executed by Company.
(l) PROMISSORY NOTE. The Promissory Note
executed by Company and an accompanying UCC-1 Financing Statement in a form
suitable for filing with the [Delaware] Secretary of State.
(m) LOCKUP AGREEMENT. A Lockup Agreement,
substantially in the form accompanying this agreement as Exhibit G, executed by
each Seller.
All assignments, consents, certificates, and other documents
delivered by Company shall be in form reasonably satisfactory to counsel for
Buyer.
6.3. DELIVERIES BY BUYER. At the Closing, Buyer shall
deliver the following:
(a) BASE PURCHASE PRICE. Payment of the Base
Purchase Price provided for in Section 2.1.
(b) CLOSING CERTIFICATE OF BUYER. The Closing
Certificate of Buyer.
(c) SECRETARY'S CERTIFICATE. The Certificate of
the Secretary or an Assistant Secretary of Buyer certifying to the resolutions
constituting all necessary corporate action by the Board of Directors of Buyer
to authorize the consummation of the transactions provided for herein.
29
(d) CONSENTS AND APPROVALS. Any written evidence
of all consents and approvals of the transactions contemplated hereby required
to be obtained by Buyer.
(e) THE EMPLOYMENT AGREEMENTS. The Employment
Agreements, each executed by Buyer.
(f) REGISTRATION RIGHTS AGREEMENT. The
Registration Rights Agreement executed by Buyer.
(g) MANAGEMENT SERVICES AGREEMENT. The
Management Services Agreement executed by Buyer.
(h) MARKETING AND SALES AGREEMENTS. The
Marketing and Sales Agreements executed by Buyer.
(i) PROMISSORY NOTE. The Promissory Note
executed by Buyer and an accompanying UCC-1 Financing Statement in a form
suitable for filing with the [Delaware] Secretary of State.
All certificates and other documents delivered by Buyer shall
be in form reasonably satisfactory to counsel for Sellers.
6.4. OBLIGATIONS OF ALL PARTIES.
(a) THIRD-PARTY CLAIMS. The parties shall
cooperate with each other with respect to the defense of any claims or
litigation made or commenced by third parties subsequent to the Closing Date
that are not subject to the indemnification provisions contained in Section 9 of
this Agreement.
(b) FURTHER ASSURANCES. The parties shall
execute such further documents and perform such further acts as may be necessary
to consummate the transactions contemplated herein on the terms herein contained
and to otherwise comply with the terms of this Agreement.
SECTION VII.
WAIVER, MODIFICATION, ABANDONMENT
7.1. WAIVERS. The failure of Sellers to comply with any of
their obligations, agreements, or conditions as set forth in this Agreement may
be waived expressly in writing by Buyer, by action of its Board of Directors.
The failure of Buyer to comply with any of its obligations, agreements, or
conditions as set forth in this Agreement may be waived expressly in writing by
Sellers.
7.2. MODIFICATION. This Agreement may be modified at any
time in any respect by the mutual consent of all of the parties.
7.3. ABANDONMENT. The transactions contemplated by this
Agreement may be abandoned on or before the Closing Date:
30
(a) By the mutual agreement of the Boards of
Directors of Buyer and Sellers, or
(b) By Buyer, if any of the conditions provided
in Section 5.1 shall not have been satisfied, complied with, or performed in any
material respect by the Closing Date, and Buyer shall not have waived such
failure of satisfaction, noncompliance, or nonperformance, or
(c) By Sellers, if any of the conditions
provided in Section 5.2 shall not have been satisfied, complied with, or
performed in any material respect by the Closing Date, and Sellers shall not
have waived such failure of satisfaction, noncompliance, or nonperformance, or
(d) By Sellers, if the NASDAQ official close
price for the common stock of Buyer averages $1.00 or less during any twenty
(20) consecutive trading days before the Closing.
(e) At the option of Buyer or Sellers, if there
shall have been instituted and be pending or threatened any legal proceeding
before any court or governmental agency seeking to restrain or prohibit or to
obtain damages in respect of this Agreement or the consummation of the
transactions contemplated by this Agreement, or if any order restraining or
prohibiting the transactions contemplated by this Agreement shall have been
issued by any court or governmental agency and shall be in effect.
(f) By Buyer if (A) any person (other than Buyer
or an affiliate of Buyer) or group becomes the beneficial owner of 20% or more
of the outstanding shares of Company's capital stock, or (B) Company shall have
furnished or caused to be furnished confidential information or data, or engaged
in negotiations or discussions with another person in violation of Section
4.3(a);
(g) By Company, if the Company Board determines
to accept a Superior Proposal.
(h) By Buyer, if Xxxxxx X. Xxxxxx dies, departs
from his employment at Company or suffers a disability that prevents him from
performing his duties to Company for more than eight consecutive weeks or eight
weeks in any six month period.
In the event of any termination pursuant to this Section 7.3
(other than pursuant to subparagraph (a) hereof) written notice setting forth
the reasons thereof shall forthwith be given by Sellers if Sellers are the
terminating party, to Buyer, or by Buyer, if Buyer is the terminating party, to
Sellers. If Sellers elect to terminate this Agreement under Section 7.3(d), they
must provide a written notice of termination to Buyer within thirty (30) days
after the event described in Section 7.3(d) occurs. This Agreement shall
terminate automatically if the Closing Date shall not have occurred on or before
July 31, 2005 (subject to extension as specified herein), or such later date as
shall have been agreed to by the parties hereto under Section 7.2.
(i) EFFECT OF ABANDONMENT. (a) Subject to the
provisions of Section 4.4 and subject to that certain Confidentiality Agreement
dated _________, 2004 between Buyer
31
and Sellers (the "Confidentiality Agreement"), if the transactions contemplated
by this Agreement are abandoned pursuant to Sections 7.3(a), (b), (c), (d) or
(e), (i) this Agreement shall forthwith become wholly void and of no effect
without liability to any party to this Agreement or to the directors, officers,
representatives, and agents of any such party; (ii) Buyer and Sellers shall each
pay such party's own fees and expenses incident to the negotiation, preparation,
and execution of any term sheet and this Agreement and the obtaining of the
necessary approvals thereof, including fees and expenses of each party's
counsel, accountants, investment bankers, and other experts; and (iii) Buyer and
Sellers (and their representatives) shall return to the other all copies of
books, records, documents, or other papers given by Buyer or Sellers (or their
representatives) to the other (or their representatives). Notwithstanding
anything herein to the contrary, the obligations set forth in the
Confidentiality Agreement shall survive any abandonment or termination of this
Agreement.
(b) In the event that this Agreement is terminated pursuant to
Section 7.3(f) or Section 7.3(g), then Company shall pay to Buyer within two
business days thereafter, (i) all expenses of Buyer, including all reasonable
out-of-pocket expenses (including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants to a party
hereto and its affiliates) incurred by Buyer or on its behalf in connection with
or related to the authorization, preparation, negotiation, execution and
performance of this Agreement and the transactions contemplated hereby,
provided, however, that in no event shall such expenses of Buyer exceed $20,000;
and (ii), if the Agreement is terminated pursuant to Section 7.3(g), a
termination fee equal to 5% of the aggregate consideration received by Company
stockholders in connection with the Superior Proposal.
7.4. RIGHT TO DAMAGES. If this Agreement is terminated, no
party hereto shall have any liability or obligation to the others; provided,
however, that each party hereto shall remain liable for any breach of any of
that party's representations and warranties or the terms of this Agreement, or
any willful failure by the party to perform any of his, her, or its obligations
or agreements contained or referenced in this Agreement.
SECTION VIII.
NON-COMPETITION
8.1. NON-COMPETITION. Because of the importance of Sellers
to the development and operation of the business of Company, as well as their
knowledge of and reputation in Company's industry, Buyer is unwilling to enter
into and perform this Agreement unless Sellers enter into the non-competition
agreement contained in this Section 8. To induce Buyer to enter into this
Agreement and for the benefit of Buyer, Sellers jointly and severally agree as
follows:
8.2. DURATION AND EXTENT OF RESTRICTION. Subject to the
limitation in Section 8.5, no Seller shall, for a period ending five years after
the Closing Date, or, in the alternative, in the event any reviewing court finds
five years to be overbroad or unenforceable, for a period of four years from the
Closing Date, or, in the alternative, in the event any reviewing court finds
four years to be overbroad or unenforceable, for a period of three years from
the Closing Date, or, in the alternative, in the event any reviewing court finds
three years to be overbroad or unenforceable, for a period of two years from the
Closing Date, or, in the alternative, in the event
32
any reviewing court finds two years to be overbroad or unenforceable, for a
period of one year from the Closing Date, engage in a business that competes
with the Business in the Restricted Territory. The term "engage in" shall
include, but shall not be limited to, activities, whether direct or indirect, as
proprietor, partner, shareholder, landlord, principal, agent, employee,
consultant or lender; provided, however, that the ownership of not more than 5%
in the aggregate by Sellers of the stock of a publicly held corporation shall
not be included in such term. The Restricted Territory shall mean the United
States.
8.3. RESTRICTIONS WITH RESPECT TO CUSTOMERS AND EMPLOYEES.
In furtherance of, and without in any way limiting the restriction in Section
8.2, for the period specified in Section 8.2, no Seller shall, directly or
indirectly,
(a) request any past, present, or future
customers of Company or any subsidiary of Company to curtail or cancel their
business with Buyer, Company, or any of their affiliates;
(b) disclose the identity of any past, present,
or future customers of Company or any subsidiary of Company, Buyer, or any
subsidiary or affiliate of Buyer to any other person, firm, or entity;
(c) solicit, canvas, or accept, or authorize any
other person to solicit, canvas, or accept, from any past, present, or future
customers of Company or any subsidiary of Company, Buyer, or any subsidiary or
affiliate of Company or Buyer, any business for any other person, firm, or
entity engaged in a business the same as, similar to, or in general competition
with the business of Company or its subsidiaries being conducted within the
territorial limits described in Section 8.2; or
(d) induce or attempt to influence any employee
of Company or any subsidiary of Company, Buyer, or any affiliate or subsidiary
of Buyer to terminate such employee's employment.
As used in this Section 8.3 "future customer" shall mean a customer with whom
business will have been transacted between the date hereof and the end of the
term specified in Section 8.2.
8.4. REMEDIES FOR BREACH. Sellers acknowledge that the
restrictions contained in this Section 8, in view of the nature of the business
in which they are engaged, are reasonable and necessary to protect the
legitimate interests of Buyer and its subsidiaries and other affiliated entities
and that any violation of these restrictions would result in irreparable injury
to Buyer, and its subsidiaries and other affiliated entities. Sellers agree
that, in the event of a violation of any of such restrictions, Buyer shall be
entitled to preliminary and permanent injunctive relief as well as an equitable
accounting of all earnings, profits, and other benefits arising from such
violation, which rights shall be cumulative and in addition to any other rights
or remedies to which Buyer may be entitled. In the event of a violation, the
period of non-competition referred to in Section 8.2 shall be extended by a
period of time equal to that period beginning when such violation commenced and
ending when the activities constituting such violation shall have been finally
terminated in good faith.
33
8.5. LIMITATION ON RESTRICTIVE COVENANTS. Notwithstanding
any other provision in this Section 8, all restrictions imposed by Section 8.1,
8.2 and 8.3 will expire and cease to be of any further effect as to any
particular Seller twelve months after that Seller's employment at Buyer
terminates for any reason other than Seller's material breach of his Employment
Agreement or, if later, 24 months after the Closing Date.
SECTION IX.
INDEMNIFICATION
9.1. INDEMNIFICATION BY SELLERS. Sellers, jointly and
severally, covenant and agree to defend, indemnify, and hold Buyer and each of
Buyer's officers, directors, stockholders, employees, and agents (each an "Buyer
Indemnitee") harmless for, from, and against any and all damages, losses,
liabilities (absolute and contingent), fines, penalties, costs, and expenses
(including, without limitation, reasonable counsel fees, costs, and expenses)
(collectively, "Buyer Damages") incurred in the investigation, defense, or
settlement with respect to or arising out of any demand, claim, inquiry,
investigation, proceeding, action, or cause of action that any Buyer Indemnitee
may suffer or incur by reason of (i) the inaccuracy of any of the
representations or warranties of any Seller contained in this Agreement, or any
of the agreements, certificates, documents, exhibits, or schedules delivered in
connection with this Agreement; or (ii) the failure of any Seller to comply
with, or the breach, or the default by any Seller of, any of the covenants,
warranties, or agreements made by any Seller contained in this Agreement, or any
of the agreements, certificates, documents, exhibits, or schedules delivered in
connection with this Agreement.
9.2. INDEMNIFICATION BY BUYER. Buyer covenants and agrees
to defend, indemnify, and hold Sellers harmless for, from, and against any and
all damages, losses, liabilities (absolute and contingent), fines, penalties,
costs, and expenses (including, without limitation, reasonable counsel fees,
costs, and expenses) (collectively, "Seller Damages") incurred in the
investigation, defense, or settlement with respect to or arising out of any
demand, claim, inquiry, investigation, proceeding, action, or cause of action
that any Seller may suffer or incur by reason of (a) the inaccuracy of any of
the representations or warranties of Buyer contained in this Agreement or any of
the agreements, certificates, documents, exhibits, or schedules delivered in
connection with this Agreement; or (b) the failure to comply with, or the breach
or the default by Buyer, of any of the covenants, warranties, or agreements made
by Buyer in this Agreement or any of the agreements, certificates, documents,
exhibits, or schedules delivered in connection with this Agreement.
9.3. NOTICE AND RIGHT TO DEFEND THIRD-PARTY CLAIMS.
Promptly upon receipt of notice of any claim, demand, or assessment or the
commencement of any suit, action, or proceeding with respect to which indemnity
may be sought pursuant to this Agreement, the party seeking to be indemnified or
held harmless (the "Indemnitee") shall notify in writing, if possible, within
sufficient time to respond to such claim or answer or otherwise plead in such
action, the party from whom indemnification is sought (the "Indemnitor"). In
case any claim, demand, or assessment shall be asserted, or suit, action, or
proceeding commenced against the Indemnitee, the Indemnitor shall be entitled,
at the Indemnitor's expense, to participate therein, and, to the extent that it
may wish, to assume the defense, conduct, or settlement thereof, at its own
expense, with counsel satisfactory to the Indemnitee, whose consent to the
selection of
34
counsel shall not be unreasonably withheld or delayed, provided that the
Indemnitor confirms to the Indemnitee that it is a claim to which its rights of
indemnification apply. The Indemnitor shall have the right to settle or
compromise monetary claims without the consent of Indemnitee; however, as to any
other claim, the Indemnitor shall first obtain the prior written consent from
the Indemnitee, which consent shall be exercised in the sole discretion of the
Indemnitee. After notice from the Indemnitor to the Indemnitee of Indemnitor's
intent so to assume the defense, conduct, settlement, or compromise of such
action, the Indemnitor shall not be liable to the Indemnitee for any legal or
other expenses (including, without limitation, settlement costs) subsequently
incurred by the Indemnitee in connection with the defense, conduct, or
settlement of such action while the Indemnitor is diligently defending,
conducting, settling, or compromising such action. The Indemnitor shall keep the
Indemnitee apprised of the status of the suit, action, or proceeding and shall
make Indemnitor's counsel available to the Indemnitee, at the Indemnitor's
expense, upon the request of the Indemnitee. At Indemnitor's expense, the
Indemnitee shall cooperate with the Indemnitor in connection with any such claim
and shall make personnel, books, and records and other information relevant to
the claim available to the Indemnitor to the extent that such personnel, books,
and records and other information are in the possession and/or control of the
Indemnitee. If the Indemnitor decides not to participate, the Indemnitee shall
be entitled, at the Indemnitor's expense, to defend, conduct, settle, or
compromise such matter with counsel satisfactory to the Indemnitor, whose
consent to the selection of counsel shall not be unreasonably withheld or
delayed.
9.4. THE STOCKHOLDER REPRESENTATIVE.
(a) Buyer and Sellers hereby appoint Xxxxxx X.
Xxxxxx to act as the Stockholder Representative from the date hereof and
authorize and direct the Stockholder Representative to (i) take any and all
actions (including without limitation executing and delivering any documents,
receiving notices of claims, incurring any costs and expenses for the account of
Buyer and the Sellers, settling all claims, and making any and all
determinations) which may be required or permitted by this Agreement to be taken
by Buyer, the Sellers or the Stockholder Representative, and (ii) exercise such
rights, power, and authority as are incidental to the foregoing. Sellers also
appoint the Stockholder Representative as their attorney in fact, with full
power of substitution, to take any and all actions and to execute and deliver
any and all instruments as the Stockholder Representative may deem necessary or
appropriate to discharge his responsibilities under this Section 9.4. Any such
actions taken, exercises of rights, power, or authority, and any decision or
determination made by the Stockholder Representative consistent therewith, shall
be absolutely and irrevocably binding on Buyer and the Sellers (the "Buyer
Indemnitors"), as if such party personally had taken such action, exercised such
rights, power, or authority or made such decision or determination in such
party's individual capacity. Xxxxxx Xxxxxx hereby acknowledges and accepts the
foregoing authorization and appointment and agrees to serve as the Stockholder
Representative in accordance with this Agreement and any ancillary agreement
delivered in connection herewith.
(b) The Stockholder Representative shall serve
as Stockholder Representative until his resignation, removal from office,
incapacity or death; provided, however, that the Stockholder Representative
shall not have right to resign without (a) prior written notice to the Buyer
Indemnitors and (b) picking a successor reasonably satisfactory to Buyer to
serve until a successor thereto is elected by the Buyer Indemnitors. The
Stockholder
35
Representative may be removed at any time and a successor representative,
reasonably satisfactory to Buyer, may be appointed, pursuant to written action
by Sellers who, immediately prior to the Closing, held shares of Company capital
stock constituting at least a majority of all such shares then outstanding. Any
successor to the Stockholder Representative shall, for purposes of this
Agreement and any ancillary agreement, be deemed to be, from the time of the
appointment thereof the "Stockholder Representative" for the relevant time
period, and from and after such time, the term "Stockholder Representative" as
used herein and therein shall be deemed to refer to such successor. No
appointment of a successor shall be effective unless such successor agrees in
writing to be bound by the terms of this Agreement.
(c) Notwithstanding any notice received by Buyer
to the contrary (except any notice for the appointment of a successor
Stockholder Representative approved by Buyer in accordance with Section
11.7(b)), Buyer and its affiliates (i) shall be fully protected in relying upon
and shall be entitled to rely upon, shall have no liability to the Buyer
Indemnitors with respect to, and shall be indemnified by the Buyer Indemnitors
from and against all liability arising out of (any such indemnifiable amounts)
actions, decisions, and determinations of the Stockholder Representative and
(ii) shall be entitled to assume that all actions, decisions, and determinations
of the Stockholder Representative are fully authorized by the Buyer Indemnitors.
(d) The Stockholder Representative shall not be
liable to the Buyer Indemnitors for the performance of any act or the failure to
act so long as he acted or failed to act in good faith in what he reasonably
believed to be the scope of his authority and for a purpose which he reasonably
believed to be in the best interests of the Buyer Indemnitors.
(e) Buyer shall issue the shares of common stock
of Buyer that constitute the Base Purchase Price and each Earnout Payment to the
recipients designated in, and in accordance with, the Stockholder
Representative's written instructions.
9.5. TIME LIMITS. No party will have any liability with
respect to any Buyer Damages or Seller Damages subject to indemnification under
Section 9.1 or Section 9.2 unless the party entitled to such indemnification
provides the party who must provide such indemnification with written notice,
within 18 months after the Closing Date, describing the claim giving rise to the
Buyer Damages or the Seller Damages in reasonable detail.
9.6. LIMITATIONS ON AMOUNT. Sellers shall have no
liability for any Buyer Damages until such Buyer Damages exceed $200,000. If
Buyer Damages exceed that sum, Sellers shall then be liable for all Buyer
Damages. Buyer shall have no liability for any Seller Damages until such Seller
Damages exceed $200,000. If Seller Damages exceed that sum, Buyer shall then be
liable for all Seller Damages. Seller's maximum liability for Buyer Damages and
Buyer's maximum liability for Seller Damages will not exceed the fair market
value of the shares of Buyer stock included in the Base Purchase Price and any
Additional Consideration paid to Sellers under this Agreement, as measured, with
respect to either party, on each date such party asserts that it has met its
maximum liability under this Section 9.6.
36
SECTION X.
GENERAL
10.1. INDEMNITY AGAINST FINDERS. Each party hereto shall
indemnify and hold the other parties harmless against any claim for finders'
fees based on alleged retention of a finder by it.
10.2. CONTROLLING LAW. This Agreement, and all questions
relating to its validity, interpretation, performance, and enforcement, shall be
governed by and construed in accordance with the laws of Arizona,
notwithstanding any Arizona or other conflict-of-law provisions to the contrary.
10.3. NOTICES. All notices, requests, demands, and other
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made, and received when delivered
against receipt, 12 hours after being sent by facsimile or e-mail, or 72 hours
after being sent by registered or certified mail, postage prepaid, as set forth
below:
If to Buyer:
Duraswitch Industries, Inc.
000 Xxxxx Xxxxxxxxx, Xxx. 000
Xxxx, Xxxxxxx 00000
Attention: Xxxxxx X. Xxxxxx
Phone: (000) 000-0000
Fax: (000) 000-0000
E-mail: xxx@xxxxxxxxxx.xxx
with a copy given in the manner
prescribed above, to:
Xxxxxxxxx Traurig, LLP
0000 Xxxx Xxxxxxxxx Xxxx
Xxxxx 000
Xxxxxxx, Xxxxxxx 00000
Attention: Xxxxx X. Xxxxx, Esq.
Phone: (000) 000-0000
Fax: (000) 000-0000
E-mail: xxxxxxx@xxxxx.xxx
If to Sellers:
Active Recognition Technologies, Inc.
0000 Xxxxx Xxxxxxx Xxxxxx, Xxxxx 000
Xxxxxxx, Xxxxxxx 00000
Attention: Xxxxxx Xxxxxx
Phone: (000) 000-0000
Fax: (000) 000-0000
E-mail: xxxxxxx@xxxxxxxxxxxxxxxxx.xxx
37
with a copy given in the manner
prescribed above, to:
Xxxxxxx & Van Cott, PLLC
0000 Xxxxx Xxxxxxxxxx Xxxx, Xxxxx X-000
Xxxxxxxxxx, Xxxxxxx 00000
Attention: Xxxxxxx Van Cott
Phone: (000) 000-0000
Fax: (000) 000-0000
E-mail: xxx@xxxxxxxxxxxxxx.xxx
Any party may alter the address to which communications or
copies are to be sent by giving notice to such other parties of change of
address in conformity with the provisions of this paragraph for the giving of
notice.
10.4. BINDING NATURE OF AGREEMENT; NO ASSIGNMENT. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that no party may assign,
delegate, or transfer such party's rights or obligations under this Agreement
(other than as provided for herein) without the prior written consent of the
other parties hereto. Any assignment, delegation, or transfer made in violation
of this Section 10.4 shall be null and void.
10.5. ENTIRE AGREEMENT. All Schedules and Exhibits
referenced in this Agreement are attached to and form part of this Agreement.
This Agreement and the Schedules and Exhibits hereto contain the entire
understanding among the parties hereto with respect to the subject matter hereof
and supersede all prior and contemporaneous agreements and understandings,
inducements, or conditions, express or implied, oral or written, except as
herein contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
10.6. SEVERABILITY. Each and every provision set forth in
this Agreement is independent and severable from the others, and no provision
shall be rendered unenforceable by virtue of the fact that, for any reason, any
other or others of them may be unenforceable in whole or in part. The parties
hereto agree that if any provision of this Agreement shall be declared by a
court of competent jurisdiction to be unenforceable for any reason whatsoever,
the court may appropriately limit or modify such provision, and such provision
shall be given effect to the maximum extent permitted by applicable law.
10.7. SECTION HEADINGS. The section headings in this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
10.8. GENDER. Words used herein, regardless of the number
and gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine, or
neuter, as the context requires.
38
10.9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations or warranties made in or pursuant to Section 3 shall survive the
Closing for a period of 18 months.
10.10. COUNTERPARTS; FACSIMILE. This Agreement may be
executed in two or more counterparts, each of which shall be deemed to be an
original, but all of which shall constitute one and the same agreement, and this
Agreement may be executed by facsimile provided that the parties deliver the
original execution pages within 48 hours of the Closing.
10.11. SUBSIDIARIES. For purposes of this Agreement, all
references to a subsidiary or subsidiaries of Seller or Buyer shall mean any
corporation, partnership, or limited liability company in which Seller or Buyer,
as the case may be, owns a majority interest or otherwise controls.
10.12. NO OBLIGATION TO HIRE. Nothing contained in this
Agreement shall impose, or be deemed to impose, upon Buyer or Company any
obligation to employ or retain any persons who are employed by Company or any of
its subsidiaries as of the Closing Date or to offer employment to such persons
under similar working conditions as those existing prior to the Closing.
10.13. ASSIGNABILITY. At any time hereafter, Buyer may
assign all or part of its rights under this Agreement to Buyer and any of its
affiliates, and Buyer and any of its affiliates (as applicable) shall receive
and enjoy the benefits of all of Sellers' obligations hereunder with respect to
the rights so assigned.
10.14. CONSENT TO LEGAL REPRESENTATION. All parties to this
Agreement acknowledge that the law firm of Xxxxxxxxx Xxxxxxx ("GT") is solely
representing the Buyer in all matters relating to the transaction contemplated
by this Agreement. Upon advice of legal counsel, Company and each Seller
consents to GT's representation of Buyer and unconditionally waives any and all
conflicts that may exist due to any pre-existing relationship or representation
of them by GT. Company and Sellers acknowledge that GT is relying on this waiver
in representing the Buyer.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
39
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
DURASWITCH INDUSTRIES, INC.
By: /s/ Xxxxxx X. Xxxxxx
---------------------------------
Name: Xxxxxx X. Xxxxxx
Title: Chief Executive Officer
ACTIVE RECOGNITION TECHNOLOGIES, INC.
By: /s/ Xxxxxx Xxxxxx
---------------------------------
Name: Xxxxxx Xxxxxx
Title: Chief Executive Officer
SELLERS:
/s/ Xxxxxx X. Xxxxxx
-------------------------------------
Xxxxxx X. Xxxxxx
/s/ Xxx Xxxxxxxx
-------------------------------------
Xxx Xxxxxxxx
/s/ Xxxx Xxxxxxx
-------------------------------------
Xxxx Xxxxxxx
STOCKHOLDER REPRESENTATIVE:
/s/ Xxxxxx X. Xxxxxx
-------------------------------------
Xxxxxx X. Xxxxxx
40
