AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

 

AGREEMENT AND PLAN OF MERGER

 

BY AND AMONG

 

GREGG INVESTMENT CORPORATION, LLC

 

GIC CORPORATION,

 

GREGG APPLIANCES, INC.

 

AND

 

THE SELLERS NAMED HEREIN

TABLE OF CONTENTS

 

 

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TABLE OF CONTENTS

(continued)

 

 

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TABLE OF CONTENTS

(continued)

 

 

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TABLE OF CONTENTS

(continued)

 

 

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AGREEMENT AND PLAN OF MERGER

 

THIS AGREEMENT AND PLAN OF MERGER (this “ Agreement ”) is made this 19th day of October, 2004 (the “ Execution Date ”), by and among Gregg Investment Corporation, LLC, a Delaware limited liability company (“ Investor ”), GIC Corporation, an Indiana corporation (the “ Merger Sub ”), Gregg Appliances, Inc., an Indiana corporation (the “ Company ”), and Jerry W. Throgmartin, Gregg William Throgmartin (on his own behalf and as trustee for the Jerry W. Throgmartin Charitable Trust and the Jerry W. Throgmartin Irrevocable Trust for the benefit of Christy and Nicky Throgmartin), Kelli Throgmartin Ball, Sandra M. Throgmartin, Janice K. Malone, Monica L. Adams, William G. Throgmartin and Dennis L. May, each an individual residing in the State of Indiana, (collectively, the “ Sellers ” and each individually, a “ Seller ”).

 

PRELIMINARY STATEMENTS

 

WHEREAS , the Company is a specialty retailer of brand name appliances and consumer electronics and provides related installation, servicing, financing, extended warranty plans and repair services (the “ Business ”);

 

WHEREAS , each of the Sellers is the holder of the number of shares of Common Stock of the Company (the “ Shares ”), set forth opposite such Seller’s name as listed on Exhibit A attached hereto and designated as “ Owned Shares ”;

 

WHEREAS, Investor desires to acquire 80.01% of the outstanding Shares following the Merger by merging Merger Sub with and into the Company, with the Company as the Surviving Corporation in the Merger (the “ Surviving Corporation ”);

 

WHEREAS, certain Sellers will retain a portion of their Owned Shares and such Owned Shares will not be converted into the right to receive the Per Share Merger Consideration, which shares will represent in the aggregate 19.99% of the outstanding Shares following the Merger.

 

WHEREAS, the respective Managing Member or Boards of Directors of Investor, the Merger Sub and the Company each have approved and adopted this Agreement and the Merger on the terms and conditions set forth herein;

 

WHEREAS, each Seller has approved and bound itself to the terms of this Agreement as provided herein;

 

WHEREAS , Sellers desire to appoint Jerry W. Throgmartin as their Sellers’ Representative to represent them in the conduct of this transaction, in accordance with Section 12.04(a) of this Agreement;

 

WHEREAS, the parties hereto desire to enter into the transactions contemplated by this Agreement, all pursuant to the terms and conditions set forth herein; and

 

WHEREAS , capitalized terms used herein and not otherwise defined shall have the meanings set forth in Article XI .

 

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NOW THEREFORE , in consideration of the covenants, representations, warranties and mutual agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

ARTICLE I

 

Merger; Closing

 

Section 1.01. The Merger .

 

(a) On and subject to the terms and conditions of this Agreement, at the Effective Time, the Merger Sub shall be merged with and into the Company (the “ Merger ”) in accordance with the IBCL. At the Closing, articles of merger, in the form attached hereto as Exhibit B (the “ Articles of Merger ”), shall be duly executed and acknowledged by the Merger Sub and the Company in accordance with the IBCL and shall be filed with the Indiana Secretary of State. The Merger shall become effective upon the filing of the Articles of Merger. The date and time when the Merger shall become effective is hereinafter referred to as the “ Effective Time .”

 

(b) At the Effective Time, the Merger Sub shall be merged with and into the Company, and the separate corporate existence of the Merger Sub shall cease, and the Company shall continue as the “Surviving Corporation” under the IBCL.

 

(c) From and after the Effective Time, the Merger shall have the effects set forth in this Agreement and in Section IC 23-1-40-6 of the IBCL.

 

(d) As a result of the Merger and at the Effective Time, the Articles of Incorporation of the Company, as amended and restated in the form attached hereto as Exhibit C , shall be the Articles of Incorporation of the Surviving Corporation unless and until such Articles of Incorporation thereafter shall be duly amended in accordance with applicable law.

 

(e) As a result of the Merger and at the Effective Time, the Bylaws of the Company, as amended and restated in the form attached hereto as Exhibit D , shall be the Bylaws of the Surviving Corporation unless and until such bylaws thereafter shall be changed in accordance with the provisions thereof, the provisions of the Articles of Incorporation of the Surviving Corporation and applicable law.

 

(f) At the Effective Time, the directors of the Surviving Corporation shall be the directors of the Merger Sub in addition to Jerry W. Throgmartin and Dennis L. May, who shall be appointed in accordance with the Stockholders Agreement, with each of such directors to hold office, subject to the applicable provisions of the IBCL and the Articles of Incorporation and Bylaws of the Surviving Corporation, until the next annual shareholders’ meeting of the Surviving Corporation and until their respective successors shall be duly elected or appointed and qualified. At the Effective Time, the officers of the Company shall be, subject to the applicable provisions of the Articles of Incorporation and Bylaws of the Surviving Corporation, the officers of the Surviving Corporation.

 

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Section 1.02. Effect on Capital Stock . At the Effective Time, by virtue of the Merger and without any action on the part of Investor, the Merger Sub, the Company or any holder of Merger Shares:

 

(a) Each issued and outstanding share of Common Stock of the Company other than the Retained Shares (each, a “ Merger Share ” and, collectively, the “ Merger Shares ”) shall be converted into a right to receive, upon surrender of the certificate representing such Merger Share, cash equal to the Per Share Closing Payment. The Retained Shares shall remain outstanding and shall not convert into a right to receive such payment.

 

(b) Each issued and outstanding share of common stock of the Merger Sub shall be converted into and become that number of fully paid and nonassessable shares of Common Stock of the Surviving Corporation which equals the product of 4.0025 multiplied by the number of Retained Shares, rounded to the nearest whole share.

 

Section 1.03. Closing . The closing of the transactions contemplated by this Agreement (the “ Closing ”) will take place at 9:00 A.M. local time, at the offices of Ice Miller as soon as practicable after all of the conditions set forth in Sections 3.01 and 3.02 have been satisfied or waived (the “ Closing Date ”).

 

ARTICLE II

 

PURCHASE PRICE

 

Section 2.01. Purchase Price . The aggregate purchase price (the “ Purchase Price ”) for the Merger Shares shall be the amount calculated pursuant to this Section 2.01 , as adjusted in accordance with Sections 2.02 and 2.03(a) (the “ Closing Payment ”), subject to the further adjustment described in Section 2.03(b) . The amount of the Closing Payment, prior to adjustment in accordance with Sections 2.02 and 2.03(a) , shall be calculated as follows:

 

(a) Three Hundred Fifteen Million Dollars ($315,000,000) in cash;

 

(b) plus an amount equal to the Cash on the Closing Date;

 

(c) less the amount of any Debt that is not paid by the Sellers or the Company pursuant to Sections 3.01(h) and 3.01(i) prior to or simultaneously with the Closing;

 

(d) less the Sellers’ Expense Payments;

 

(e) less the amount of all cash payments paid, or payable (based on the value of the Common Stock as of the Closing), by the Company to holders of stock appreciation rights set forth on Schedule 4.04 upon the exercise of such stock appreciation rights;

 

(f) less all amounts owed to current or former stockholders of the Company in respect of accrued but unpaid dividends or reinvested dividends, including all amounts set forth on Schedule 4.04 ; and

 

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(g) less Thirty Million Seven Hundred Eighty-Four Thousand Six Hundred Dollars ($30,784,600) (the “ Rollover Investment Amount ”).

 

Section 2.02. EBITDA-Based Purchase Price Adjustment .

 

(a) Within two (2) Business Days after its receipt of the New 2004 Audited Financial Statements, Sellers’ Representative shall calculate consolidated earnings of the Company before interest, taxes, depreciation and amortization expenses for fiscal year 2004 as derived from the New 2004 Audited Financial Statements and as adjusted as set forth on Exhibit E attached hereto (the “ 2004 EBITDA ”) and shall deliver a statement of such calculation to Investor. The Closing Payment shall be adjusted in the following manner:

 

(i) If the 2004 EBITDA is greater than or equal to Thirty-Six Million Five Hundred Thousand Dollars ($36,500,000) and less than or equal to Thirty-Seven Million Five Hundred Thousand Dollars ($37,500,000), then there shall be no adjustment to the Closing Payment based upon this Section 2.02 ;

 

(ii) Subject to Section 9.01(h) , if the 2004 EBITDA is greater than Thirty-Seven Million Five Hundred Thousand Dollars ($37,500,000), then the Closing Payment shall be increased by an amount equal to six and one-half (6.5) times the amount by which the 2004 EBITDA is greater than Thirty-Seven Million Five Hundred Thousand Dollars ($37,500,000); and

 

(iii) Subject to Section 9.01(i) , if the 2004 EBITDA is less than Thirty-Six Million Five Hundred Thousand Dollars ($36,500,000), then the Closing Payment shall be reduced by an amount equal to six and one-half (6.5) times the amount by which the 2004 EBITDA is less than Thirty-Six Million Five Hundred Thousand Dollars ($36,500,000).

 

(b) Investor shall have ten (10) Business Days after the receipt of the statement of 2004 EBITDA to verify and confirm the accuracy thereof. If, after such review, Investor agrees with Sellers’ Representative’s determination of the 2004 EBITDA, Investor shall promptly notify Sellers’ Representative of its agreement. If, after such review, Investor objects to Sellers’ Representative’s determination of EBITDA, Investor shall promptly provide Sellers’ Representative with a written statement indicating the basis for its objection and Investor and Sellers’ Representative shall work in good faith to resolve such dispute, which dispute shall be resolved prior to the Closing. In the event that Investor and Sellers’ Representative are unable to resolve such dispute, such dispute shall be resolved in accordance with the procedures set forth in Section 2.03(c) as modified to provide for as prompt a resolution as practicable under the circumstances and to reflect the nature of such dispute, including a modification requiring the parties to direct the Neutral Accounting Firm to make its determination within ten (10) days after such dispute is submitted and a modification to provide that the parties shall each bear one-half of the fees and expenses of the Neutral Accounting Firm. The failure of Investor to provide such a notice of objection to Sellers’ Representative within ten (10) Business Days after its receipt of Sellers’ Representative’s determination of 2004

 

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EBITDA shall be deemed to be Investor’s agreement that Sellers’ Representative’s determination of 2004 EBITDA is accurate and final.

 

Section 2.03. Working Capital Purchase Price Adjustments .

 

(a) Closing Date Adjustments . No later than five (5) Business Days prior to the Closing, the Sellers’ Representative shall deliver to Investor a statement (the “ Preliminary Working Capital Statement ”) setting forth the Net Working Capital as of the Closing Date. The Preliminary Working Capital Statement shall (i) be prepared in accordance with GAAP and provide for the true up of all reserves, in all cases using the same accounting principles, practices and methodologies, consistently applied, that were used to prepare the New 2004 Audited Financial Statements, (ii) reflect the results of a physical inventory audit conducted by the Company and supervised by Investor on a date mutually acceptable to the Company and Investor (the “ Physical Inventory ”), and (iii) not reflect any Tax benefits or other accounting adjustments arising from the transactions resulting from or in connection with this Agreement or any of the Related Agreements. As part of this process, the reserves for general liability, automobile liability and workers’ compensation obligations shall also be trued up even though such reserves shall not be included in Current Liabilities when determining Net Working Capital. The Closing Payment shall be reduced by an amount equal to the excess, if any, of the Target Net Working Capital over the Net Working Capital set forth on the Preliminary Working Capital Statement. The Closing Payment shall be increased by an amount equal to the excess, if any, of the Net Working Capital set forth on the Preliminary Working Capital Statement over the Target Net Working Capital.

 

(b) Post-Closing Adjustments . As soon as practicable after the Closing but no later than sixty (60) Business Days after the Closing Date, Investor shall deliver to the Sellers’ Representative a final calculation of the Net Working Capital as of the Closing Date (the “ Final Working Capital Statement ”). The Final Working Capital Statement shall (i) be prepared in accordance with GAAP and provide for the true up of all reserves, in all cases using the same accounting principles, practices and methodologies, consistently applied, that were used to prepare the New 2004 Audited Financial Statements, (ii) reflect the results of the Physical Inventory, and (iii) not reflect any Tax benefits or other accounting adjustments arising from the transactions resulting from or in connection with this Agreement or any of the Related Agreements. As part of this process, the reserves for general liability, automobile liability and workers’ compensation obligations shall also be trued up even though such reserves shall not be included in Current Liabilities when determining Net Working Capital. If the Net Working Capital set forth on the Final Working Capital Statement is greater than the Net Working Capital set forth in the Preliminary Working Capital Statement, then the Company shall remit the entire amount of the difference to the Sellers’ Representative for payment to the Sellers according to their respective Ownership Percentages. If the Net Working Capital set forth on the Final Working Capital Statement is less than the Net Working Capital set forth in the Preliminary Working Capital Statement, then the Sellers’ Representative shall direct the Escrow Agent, pursuant to the Escrow Agreement, to pay to the Company, out of the then-remaining Escrow Amount, an amount equal to such difference. Sellers shall remit the entire amount of such difference in excess of such Escrow Amount to the

 

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Company according to their respective Ownership Percentages. Amounts payable under this Section 2.03(b) shall be due no later than ten (10) Business Days following the finalization of the Final Working Capital Statement pursuant to Section 2.03(c) below.

 

(c) Acceptance of Final Working Capital Statement. If the Sellers’ Representative disagrees with any item set forth on the Final Working Capital Statement or the calculation of Net Working Capital based thereon, the parties shall work together to resolve any such disagreements, including, but not limited to, providing each other with such financial information regarding the Company as of the Closing Date as each may reasonably request. If the parties are unable to resolve their disagreement regarding the Final Working Capital Statement or the calculation of Net Working Capital based thereon within ten (10) Business Days of the Sellers’ Representative’s receipt of the Final Working Capital Statement, then the parties shall submit the matter to an independent accounting firm willing to abide by the procedures set forth in this Section 2.03(c) and mutually acceptable to Investor and the Sellers’ Representative (the “ Neutral Accounting Firm ”). The Neutral Accounting Firm shall act as an arbitrator to determine only those issues still in dispute and the determination of the Neutral Accounting Firm shall either adopt the position of the Sellers (as stated by the Sellers’ Representative) or Investor or result in an adjustment that is within the range of those respective positions. If possible, the Neutral Accounting Firm shall make its determination based solely on presentations by the Sellers’ Representative and Investor; provided , that if the Neutral Accounting Firm is unable to reach a conclusion on this basis, the Neutral Accounting Firm shall review such additional information and perform such additional procedures as the Neutral Accounting Firm deems reasonably necessary. The determination of the Neutral Accounting Firm shall be made as promptly as practicable following the date on which the dispute is submitted (and the parties shall direct the Neutral Accounting Firm to use all commercially reasonable efforts to make such determination within thirty (30) days of such date), shall be set forth in a written statement delivered to the Sellers’ Representative and Investor, and shall be final, binding and conclusive on the parties and shall not be appealable or subject to further review. The fees and any expenses of the Neutral Accounting Firm shall be paid by Investor on the one hand and the Sellers (pro-rata in accordance with their respective Ownership Percentages, unless otherwise determined as set forth below) on the other hand within five (5) Business Days of such determination, as follows: (a) if the Neutral Accounting Firm adopts the position of the Sellers, Investor shall bear such fees and expenses; (b) if the Neutral Accounting Firm adopts the position of Investor, the Sellers shall bear such fees and expenses; or (c) if the Neutral Accounting Firm adopts a position within the range of the positions of Investor and the Sellers, each party shall bear that percentage of such fees and expenses deemed reasonable by the Neutral Accounting Firm in light of the final determination and the original positions of Investor and the Sellers. If a retainer is required by the Neutral Accounting Firm, the retainer shall be split equally between Investor and the Sellers; provided , however , that the retainer shall be considered part of the fees and expenses of the Neutral Accounting Firm and if either party has paid a portion of such retainer, that party will be entitled to be reimbursed by the other party to the extent required by this Section 2.03(c) . In the event a party does not comply with the procedural and time requirements contained herein or such other procedural or time requirements as the parties otherwise elect in writing, the Neutral Accounting Firm shall render a decision

 

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based solely on the evidence it has which was timely filed by the parties. The Final Working Capital Statement shall be deemed finalized at the first to occur of (i) the tenth (10 ^th ) Business Day following receipt of the Final Working Capital Statement, if the Sellers’ Representative does not provide written notice of any objections to or disagreements with the Final Working Capital Statement or the determination of Net Working Capital set forth thereon, which notice shall describe such objections in detail, (ii) the date on which the parties agree to a resolution of any objections or disagreements with the Final Working Capital Statement put forth by the Sellers’ Representative or (iii) the date on which the Neutral Accounting Firm delivers its decision to Investor and the Sellers’ Representative.

 

Section 2.04. Allocation of Purchase Price .

 

(a) The Sellers and Investor shall allocate the Purchase Price (and adjustments thereto) as provided on Schedule 2.04(a) pursuant to and in accordance with Code Section 338 and the Treasury Regulations thereunder. Investor shall prepare the final allocation in accordance with Schedule 2.04(a) , which final allocation shall be delivered at the Closing by Investor pursuant to Section 3.04(c) .

 

(b) The Sellers and Investor shall jointly file with the Internal Revenue Service Form 8023, Elections Under Section 338 for Corporations Making Qualified Stock Purchases, which shall be prepared in a manner that is consistent with the foregoing allocation, and the Sellers and Investor shall take no position inconsistent with such allocation in any Return, any proceeding before any taxing authority or otherwise. In the event that such allocation is disputed by any Taxing Authority, the party receiving notice of such dispute shall promptly notify and consult with the other party concerning the dispute.

 

Section 2.05. Required Withholding . Investor shall be entitled to deduct and withhold from any amount payable pursuant to this Agreement to the Sellers such amounts as may be required to be deducted or withheld therefrom under the Code or under any provision of state, local or foreign Tax law or under any other applicable Law. To the extent any such amounts are so deducted or withheld, they shall be treated for all purposes under this Agreement as having been paid to the Person to whom they would otherwise have been paid hereunder. Notwithstanding the foregoing, if Investor determines that withholding is required, Investor shall provide written notice to the Sellers’ Representative at least five (5) Business Days before the withholding is required describing the applicable Law under which withholding is required and indicating the amount of withholding. If the Sellers’ Representative provides an opinion of legal counsel reasonably acceptable to Investor that no withholding is required, then Investor shall not withhold the amount set forth in such written notice.

 

ARTICLE III

 

CONDITIONS PRECEDENT TO THE CLOSING

 

Section 3.01. Investor’s and the Merger Sub’s Conditions to Closing . The obligations of Investor and the Merger Sub to effect the Closing shall be subject to the

 

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satisfaction of the following conditions, any or all of which conditions may be waived by Investor in its sole and absolute discretion:

 

(a) Accuracy of Representations, Warranties and Agreements . The representations and warranties made by the Sellers herein or in any document delivered pursuant hereto shall be true and correct (after giving effect to any notifications and schedule updates made by the Sellers pursuant to Section 6.07 but without giving effect to any Material Adverse Effect or materiality qualifiers therein) when made and on and as of the Closing Date as though made at that time (unless a representation and warranty speaks as to a stated date, in which case such representation shall be true as of such date), except to the extent that all such failures of the representations and warranties to be true and correct, considered collectively, could not reasonably be expected to have a Material Adverse Effect on the Company or adversely affect the ability of the Sellers to consummate the transactions contemplated by this Agreement; provided that, the foregoing notwithstanding, the representations and warranties set forth in Sections 4.01 (other than the third sentence of Section 4.01(a) ), 4.02 and 4.03 shall be true and correct in all respects when made and on and as of the Closing Date as though made at the Closing Date (unless a representation and warranty speaks as to a stated date, in which case such representation shall be true as of such date). The Sellers shall have performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement to be performed and complied with by them at or prior to the Closing Date and the Sellers shall have delivered to Investor a certificate executed by the Sellers’ Representative on behalf of the Sellers certifying that the conditions set forth in this Section 3.01(a) have been satisfied as of the Closing Date (the “ Sellers’ Closing Certificate ”).

 

(b) Consents and Approvals . The Sellers shall have received and delivered to Investor any and all lien waivers, consents and approvals (“ Closing Approvals ”) set forth on Schedule 3.01(b) attached hereto, which schedule shall include all store and warehouse leases requiring landlord consent to the transactions contemplated by this Agreement, each in form and substance reasonably satisfactory to Investor.

 

(c) Hart-Scott-Rodino Act . All filings required pursuant to the Hart-Scott-Rodino Act will have been made, and any Closing Approvals required thereunder will have been obtained, or the waiting period required thereby will have expired or have been terminated, as the case may be.

 

(d) Sellers’ Closing Deliveries . Investor shall have received each of the Sellers’ and the Company’s closing deliveries set forth in Section 3.03 .

 

(e) Litigation . (i) No temporary restraining order, preliminary or permanent injunction, or cease and desist order issued by any Governmental Entity preventing the transactions contemplated hereby or the consummation of the Closing shall be in effect or threatened at the Closing Date, (ii) no proceeding seeking to restrict or prohibit the transactions contemplated hereby or the consummation of the Closing shall be pending or threatened on the Closing Date by any Governmental Entity and (iii) no material proceeding seeking to restrict or prohibit the transactions contemplated hereby or the

 

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consummation of the Closing which has a reasonable likelihood of success shall be pending or threatened on the Closing Date before any Governmental Entity.

 

(f) Material Adverse Change . There shall not have been a Material Adverse Change.

 

(g) Diligence . Investor shall be reasonably satisfied with the results of its due diligence examination of the Company. Investor acknowledges that (A) except for the items listed on Schedule 3.01(g) , it has completed its due diligence examination of the Company and is satisfied with the results of such due diligence examination, and (B) the information included on the disclosure schedules delivered on the Execution Date does not form the basis for any such dissatisfaction.

 

(h) Repayment of Debt . Investor shall have received evidence reasonably satisfactory to it (including, at Investor’s sole discretion, UCC-3 termination statements authorized by the applicable lenders) that the Sellers have caused the Company to repay all outstanding Debt other than Debt set forth on Schedule 3.01(h) that is outstanding as of the date of this Agreement and that the Inventory is free and clear of all Liens other than Liens set forth on Schedule 3.01(h) that are outstanding as of the date of this Agreement.

 

(i) Related Party Transactions . Investor shall have received evidence reasonably satisfactory to it that (i) the Company has repaid all Debt or other amounts payable to any of its Affiliates (other than amounts payable pursuant to any of the Leases); and (ii) each of the Company’s Affiliates has repaid all Debt or other amounts payable to the Company (or that such Debt will be repaid concurrent with the Closing).

 

(j) Affiliate Lease Amendments . Investor shall have received from Sellers amendments to the Leases with Affiliates of the Company described on Schedule 3.01(j) attached hereto containing terms substantially as set forth on Schedule 3.01(j) attached hereto, duly executed by each applicable Affiliate.

 

(k) Opinion of Counsel . Investor shall have received an opinion, dated as of the Closing Date, of Ice Miller, counsel to the Company, in substantially the form set forth on Exhibit F attached hereto.

 

(l) Financing . As of the Closing Date, the Company shall have obtained debt financing described in the Wachovia Commitment Letter.

 

(m) New 2004 Audited Financial Statements . The Company shall have delivered to the Investor the New 2004 Audited Financial Statements and the New 2004 Audited Financial Statements shall not differ in any material respect from the Annual Financial Statements for the fiscal year ended March 31, 2004, as determined by Investor acting in good faith.

 

(n) Trademark License . The Company and Affinity Logistic Corp. shall have executed an amendment, in form and substance reasonably satisfactory to Investor, to the Independent Contractor Agreement, dated as of March 4, 2003, which amendment shall

 

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grant to Affinity Logistic Corp. a license to use certain of the Company’s Marks subject to customary limitations.

 

(o) Intercreditor Agreements and Amendments . (i) GE Commercial Distribution Finance Corporation shall have entered into an intercreditor and subordination agreement regarding amounts payable, and security interests granted, under the GE Wholesale Financing Agreement, (ii) Electrolux Home Products, Inc. shall have entered into an intercreditor and subordination agreement regarding amounts payable, and security interests granted, under the Consignment Agreement dated September 24, 2003, and (iii) GE Capital Consumer Card Co. shall have entered into an amendment to the Private Label Consumer Credit Card Program Agreement dated August 26, 2004 to reset the financial covenants to reflect the Merger and the financing extended to the Company in connection therewith, and such amendment and each intercreditor and subordination agreement shall be in form and substance reasonably satisfactory to Investor, Congress Financial Corporation (Central) and Wachovia Bank, N.A.

 

(p) Releases . Each Person that has exercised, or is exercising concurrent with the Closing, a stock appreciation right granted by the Company shall have executed and delivered to Investor an agreement, in form and substance reasonably satisfactory to Investor, that (i) provides for release language substantially similar to that set forth in Section 7.05 and (ii) confirms that his or her obligations under the confidentiality, nonsolicitation and noncompete agreement executed in connection with the receipt of such stock appreciation right continue to be valid and binding.

 

Section 3.02. Sellers’ Conditions to Closing . The obligations of the Sellers to effect the Closing under this Agreement are subject to the satisfaction of the following conditions, any or all of which may be waived by the Sellers’ Representative in his sole and absolute discretion:

 

(a) Accuracy of Representations, Warranties and Agreements . The representations, warranties and agreements of Investor herein shall be true and correct in all material respects on the Closing Date. Investor shall have performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement to be performed and complied with by it at or prior to the Closing Date and Investor shall have delivered to the Sellers’ Representative a certificate certifying that the conditions set forth in this Section 3.02(a) are satisfied in all material respects as of the Closing Date (the “ Investor Closing Certificate ”).

 

(b) Consents and Approvals . Investor shall have received all Closing Approvals necessary to consummate the transaction contemplated by this Agreement all in form and substance reasonably satisfactory to the Sellers’ Representative.

 

(c) Litigation . No temporary restraining order, preliminary or permanent injunction, or cease and desist order issued by any Governmental Entity preventing the transactions contemplated hereby or the consummation of the Closing, shall be in effect or threatened at the Closing Date, and no proceeding by any Governmental Entity seeking to restrict or prohibit the transactions contemplated hereby or the consummation of the Closing shall be pending or threatened on the Closing Date.

 

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(d) Investor’s Closing Deliveries . The Sellers’ Representative shall have received the Closing Payment and each of Investor’s closing deliveries set forth in Section 3.04 .

 

(e) Hart-Scott-Rodino Act . All filings required pursuant to the Hart-Scott-Rodino Act will have been made, and any Closing Approvals required thereunder will have been obtained, or the waiting period required thereby will have expired or have been terminated, as the case may be.

 

Section 3.03. Closing Deliveries of the Sellers and the Company . At the Closing, the Company and the Sellers shall have delivered the following to Investor:

 

(a) Certificates representing the Merger Shares duly endorsed for transfer to the Company and accompanied by an appropriate stock power;

 

(b) The stock ledger, minute book, corporate seal and any other corporate records of the Company;

 

(c) A certificate of existence from the State of Indiana, and the equivalent thereof for each state in which the Company is qualified to do business, each dated within five (5) Business Days before the Closing Date, certifying that the Company is validly existing and, to the extent applicable, in good standing under the applicable Laws of the state;

 

(d) Counterparts to the Related Agreements to which the Company and/or each Seller are a party;

 

(e) Resignations of all of the directors of the Company other than Jerry W. Throgmartin, and the resignation of each person who is a trustee, custodian or authorized signatory under any employee benefit plan of the Company, effective as of the Closing Date, as designated by Investor;

 

(f) The Sellers’ Closing Certificate;

 

(g) The Preliminary Working Capital Statement;

 

(h) Counterparts of Form 8023, executed by the Sellers in connection with Section 338(h)(10) election for federal income tax purposes contemplated by Section 2.03(b) , as well as any other equivalent election for state tax purposes; and

 

(i) Such further certificates, instruments and other documents requested by Investor as may be reasonably required to effectively carry out the intent of this Agreement.

 

Section 3.04. Closing Deliveries of Investor . At the Closing, Investor shall deliver the following to the Sellers:

 

(a) The Investor Closing Certificate;

 

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(b) Counterparts to the Related Agreements to which Investor is a party;

 

(c) The final allocation of the Purchase Price (and adjustments thereto) in accordance with Schedule 2.04(a) ;

 

(d) Counterparts of Form 8023, executed by the Investor, in connection with Section 338(h)(10) election for federal income tax purposes contemplated by Section 2.03(b) , as well as any other equivalent election for state tax purposes;

 

(e) A certificate of good standing from the State of Delaware, and the equivalent thereof for each state in which Investor is qualified to do business, each dated within five (5) Business Days before the Closing Date, certifying that Investor is validly existing and in good standing under the applicable Laws of the state;

 

(f) A certificate of good standing from the State of Indiana, and the equivalent thereof for each state in which Merger Sub is qualified to do business, each dated within five (5) Business Days before the Closing Date, certifying that Merger Sub is validly existing and, to the extent applicable, in good standing under the applicable Laws of the state;

 

(g) Such further certificates, instruments and other documents requested by the Sellers’ Representative as may be reasonably required to effectively carry out the intent of this Agreement; and

 

(h) Counterparts of indemnity agreements in form and substance reasonably acceptable to Sellers’ Representative regarding the Company’s obligation to indemnify each of Jerry W. Throgmartin, Dennis L. May and Michael D. Stout from and against liabilities arising out of the performance of their respective duties as officers of the Company.

 

Section 3.05. Closing Deliveries of the Company . At the Closing, the Company shall deliver the Closing Payment as follows:

 

(a) Nine Million Four Hundred Thousand Dollars ($9,400,000) of the Closing Payment (the “ Escrow Amount ”) shall be delivered to the Escrow Agent in accordance with the terms of the Escrow Agreement, which terms shall provide that, subject to retention of amounts pursuant to the Escrow Agreement with respect to any pending claims pursuant to Article VIII or Article X , (i) Four Million Seven Hundred Thousand Dollars ($4,700,000) of the Escrow Amount less the amount of any payment previously made to the Company from the Escrow Amount as a result of an indemnity claim or a downward adjustment to the Purchase Price pursuant to Section 2.03(b) (or, if the amount of such adjustment has been disputed and such dispute has not yet been resolved pursuant to Section 2.03(c) , less the claimed amount of such adjustment based on the Final Working Capital Statement delivered by Investor) shall be released on the later of (A) June 30, 2005 and (B) twenty-one (21) days after audited financial statements for the fiscal year ended March 31, 2005 are made available and delivered to Investor, and (ii) the remainder of the Escrow Amount shall be released on the later of (A) June 30, 2006

 

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and (B) twenty-one (21) days after audited financial statements for the fiscal year ended March 31, 2006 are made available and delivered to Investor.

 

(b) The remainder of the Closing Payment shall be delivered to the Sellers’ Representative who shall distribute such amount in the following manner: Each Seller shall receive an amount of the Closing Payment equal to the number of Merger Shares owned by such Seller multiplied by the Per Share Closing Payment less such Seller’s pro-rata portion of the Escrow Amount based on his or her Ownership Percentage as set forth on Exhibit A hereto.

 

ARTICLE IV

 

REPRESENTATIONS, WARRANTIES AND

AGREEMENTS OF THE COMPANY AND THE SELLERS

 

The Company and the Sellers, jointly and severally (except as specifically otherwise set forth in Section 4.02) , represent and warrant to each of Investor and Merger Sub as follows (with the understanding that (i) each of Investor and Merger Sub is relying on such representations and warranties in entering into and performing this Agreement and (ii) each reference to the “Company” in this Article IV shall be deemed to be a reference to the Company and each of its subsidiaries):

 

Section 4.01. Organization and Standing; Authority .

 

(a) The Company is a corporation duly organized and validly existing under the laws of the State of Indiana. The Company has full power and authority to carry on its business as and where now conducted and to own or lease and operate its properties at and where now owned or leased and operated by it. Except as set forth on Schedule 4.01(a) , the Company is qualified to do business in every jurisdiction in which the nature of its business or ownership of its assets makes such qualification necessary, except where the failure to be so qualified would not result in a material liability or obligation of the Company. The Company has the full capacity, right, power and authority to enter into, execute and deliver this Agreement and any and all Related Agreements to which it is a party, to consummate the transactions contemplated by this Agreement and any and all Related Agreements to which it is a party, and to comply with and fulfill the terms and conditions of this Agreement and any and all Related Agreements to which it is a party.

 

(b) Except as set forth on Schedule 4.01(b) , the execution, delivery and performance of this Agreement and any and all Related Agreements to which it is a party by the Company has been authorized by all necessary corporate action on the part of the Company and each constitutes a valid and binding obligation of the Company, enforceable in accordance with its respective terms and conditions, except as such enforceability may be limited by bankruptcy, insolvency, reorganization and similar laws affecting creditors generally and by the availability of equitable remedies. Except as set forth on Schedule 4.01(b) , neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby, nor compliance by the Company

 

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with any of the provisions of this Agreement or the Related Agreements to which it is a party, will:

 

(i) Conflict with, violate, result in a breach or violation of, constitute a default (or an event which, with or without notice or lapse of time or both, would constitute a default) under, give rise to any right of termination, cancellation, or acceleration under, or require a consent or waiver under any provision of the Articles of Incorporation or Bylaws of the Company, or any of the terms, conditions or provisions of any note, Lien, bond, Lease, mortgage or indenture, or material license, lease, loan, contract, commitment, agreement, understanding, arrangement, restriction or other instrument or obligation to which the Company is a party or by which the Company or any of the properties or assets of the Company may be bound;

 

(ii) Violate, or conflict with, in any material respect any Law applicable to the Company or to any properties or assets of the Company; or

 

(iii) Conflict with, violate or cause the termination of any material Permit held by the Company;

 

(iv) Constitute an event which, with or without notice, lapse of time, or action by a third party, could result in the creation of any Lien upon any properties or assets of the Company, cause the maturity of any material liability, obligation or debt of the Company to be accelerated or increased or result in the loss of any material benefit to which the Company is entitled under any Contract or Lease.

 

(c) Except as set forth on Schedule 4.01(c) or described in Section 6.10 , the execution, delivery, and performance by the Company of this Agreement and any Related Agreements to which it is a party and the consummation by the Company of the transactions contemplated hereby or thereby will require any notice to, filing with, or consent, authorization or approval from any Governmental Entity or any other Person.

 

Section 4.02. Authority of the Sellers; No Violation . Each Seller represents as follows only with respect to himself or herself and the Shares set forth opposite his or her name on Exhibit A :

 

(a) He or she has the full capacity, right, power and authority to enter into, execute and deliver this Agreement and any and all Related Agreements to which he or she is a party, to consummate the transactions contemplated by this Agreement and any and all Related Agreements to which he or she is a party, and to comply with and fulfill the terms and conditions of this Agreement and any and all Related Agreements to which he or she is a party. This Agreement and all Related Agreements to which he or she is a party each constitute a valid and binding obligation of him or her enforceable in accordance with its respective terms and conditions, except as such enforceability may be limited by bankruptcy, insolvency, reorganization and similar laws affecting creditors generally and by the availability of equitable remedies. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated

 

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hereby, nor compliance by him or her with any of the provisions of this Agreement or any of the Related Agreements to which he or she is a party will constitute an event which, with or without notice, lapse of time, or action by a third party, could result in the creation of any Lien upon any of the Shares owned by him or her.

 

(b) Except as set forth on Schedule 4.02 or described in Section 6.10 , the execution, delivery, and performance by him or her of this Agreement and any Related Agreements to which he or she is a party and the consummation by him or her of the transactions contemplated hereby or thereby will not (i) require any notice to, filing with, or consent, authorization or approval from any Governmental Entity or any other Person, (ii) violate, or conflict with, in any material respect any law applicable to such Seller or (iii) conflict with, violate, result in a breach or violation of, constitute a default (or an event which, with or without notice or lapse of time or both, would cause a default) under, give right to any right of termination, cancellation, or acceleration under, or require a consent or waiver under, any of the terms, conditions or provisions of any note, lien, bond, mortgage, indenture, license, lease, loan, contract, commitment, agreement, understanding, arrangement, restriction or other instrument or obligation to which such Seller is a party.

 

(c) He or she is the lawful owner of record and owns beneficially that number of Shares set forth opposite his or her name on Exhibit A hereto, free and clear of all Liens and with no restriction on the voting rights and other incidents of record and beneficial ownership pertaining thereto except as set forth on Schedule 4.02 . Except for this Agreement and the Related Agreements, there are no agreements or understandings between such Seller and any other Person with respect to the acquisition, disposition, transfer, registration, or voting of, or any other matter pertaining or relating in any way to, the Shares except as set forth on Schedule 4.02 . At the Closing, Investor will receive good and valid title to the Shares owned by him or her, free and clear of all Liens.

 

Section 4.03. Capital Structure of the Company and Related Matters; Owners of Shares; Subsidiaries .

 

(a) The total authorized, issued and outstanding capital stock of the Company as of the date hereof is set forth on Exhibit A . All of the issued and outstanding shares of capital stock of the Company are owned by the Sellers. All outstanding capital stock of the Company has been duly authorized and validly issued and is fully paid and non-assessable and none of such shares was issued in violation of any preemptive right. Except as set forth on Schedule 4.03(a) , there are no outstanding options, warrants or other rights of any kind to acquire any shares of the Company’s capital stock, nor any outstanding securities convertible into or exchangeable for, or which otherwise confer on the holder thereof any right to acquire, any shares of the Company’s capital stock. Except as set forth on Schedule 4.03(a) , the Company is not committed to issue or deliver or to repurchase, redeem or otherwise acquire any such option, warrant, right, security or capital stock of the Company.

 

(b) Except as set forth on Schedule 4.03(b) , the Company does not have any direct or indirect ownership interest or investment of any kind in any Person. Except as set forth on Schedule 4.03(b) , the Company is not a party to any joint venture with any

 

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other Person and has no relations with any special purpose entities. HHG Distributing, LLC and each other subsidiary set forth on Schedule 4.03(b) is a “qualifying Subchapter S subsidiary” within the meaning of the Code.

 

Section 4.04. Transactions with Certain Persons . Except for compensation paid for services rendered in the ordinary course of the Business or except as set forth on Schedule 4.04 , the Company is not owed any amount from, owes no amount to, or guaranties any amount owed by, has no contracts with and has no commitments to: (a) any of the Sellers; (b) any employee of the Company; or (c) any Affiliate. Except as set forth on Schedule 4.04 , no officer or director of the Company (except in his or her capacity as such) has any direct or indirect interest in (i) any property or assets of the Company (except as a shareholder), (ii) any competitor, customer, supplier or agent of the Company or any other Person having any business dealings or a business relationship with the Company; or (iii) any Person which is a party to any contract or agreement with the Company. To the Knowledge of the Company and the Sellers, based on a review of the prevailing rental market in the various locations in which the Company’s stores are located and a comparison of the terms of the Affiliate Leases to the leases of stores by the Company from non-affiliated persons, the terms of each of the Affiliate Leases, including, without limitation, the amount of rent payable thereunder, are no less favorable to the Company than terms that would be available through arms-length negotiations with unaffiliated parties. No property that is the subject of an Affiliate Lease under which a Seller or an Affiliate (other than a sibling) of a Seller is the lessor is encumbered by a mortgage or deed of trust. To the Knowledge of the Company and the Sellers, based on a review of the prevailing rental market, the terms of the Aircraft Hourly Rental Agreement, dated August 5, 2002, between the Company and Throgmartin Leasing, LLC, including, without limitation, the amount of rent payable thereunder, are no less favorable to the Company than terms that would be available through arms-length negotiations with unaffiliated parties.

 

Section 4.05. Financial Statements .

 

(a) True and complete copies of the audited balance sheets of the Company as of March 31, 2002, 2003 and 2004 and the related audited income statements and statements of cash flows for the fiscal years ended March 31, 2002, 2003 and 2004, respectively (collectively, the “ Annual Financial Statements ”), and the internally prepared balance sheets and income statements of the Company as of August 31, 2004 and for the five (5) months then ended (the “ Interim Financial Statements ”) are attached hereto as Schedule 4.05(a) (collectively the “ Financial Statements ”). The Financial Statements are, and the Monthly Financial Statements, when delivered, will be, true, correct and complete, and have been, or will have been, prepared from the books and records of the Company in accordance with GAAP consistently applied except for the absence of notes and year end adjustments in the case of the Interim Financial Statements and the Monthly Financial Statements. The balance sheets included in the Financial Statements fairly present, and the Monthly Financial Statements, when delivered, will fairly present, the financial condition of the Company as of the respective dates thereof, and the income statements and statement of cash flows included therein, when delivered, will fairly present the results of operations of the Company for the periods indicated. The Financial Statements contain and reflect adequate provisions for all reasonably anticipated liabilities and adequate reserves for all reasonably anticipated losses, costs and expenses in accordance with GAAP, including reserves for uncollectible accounts

 

16

receivable, reserves related to general liability, automobile liability and workers’ compensation obligations and claims under Extended Service Plans in effect on the date hereof.

 

(b) The Company maintains a system of internal accounting controls and procedures that the management of the Company reasonably believes is sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Schedule 4.05(b) sets forth a true and correct list of all non-audit services set forth in Section 201 of Title II of the Sarbanes-Oxley Act of 2002 (i) performed by Ernst & Young LLP on behalf of the Company since March 31, 2001, (ii) performed by KPMG LLP on behalf of the Company since the date on which it was first engaged to perform any services on behalf of the Company, and (iii) for which any outside accounting firms are currently engaged to perform on behalf of the Company.

 

Section 4.06. Outstanding Debt and Related Matters . All outstanding Debt of the Company is set forth in the Financial Statements. There exists no material default under the provisions of any instrument evidencing such Debt or of any agreement relating thereto. Except as set forth on Schedule 4.06 , none of the Sellers nor any other Person has guaranteed any obligation of the Company, including obligations with respect to Debt. Schedule 4.06 sets forth all outstanding letters of credit issued on behalf of the Company. Prior to or in connection with the Closing, the Sellers have caused (or will have caused) the Company to repay all outstanding Debt except as set forth on Schedule 3.01(h) . Upon such repayment of outstanding Debt, the Inventory will be free and clear of all Liens except as set forth on Schedule 3.01(h) .

 

Section 4.07. Taxes . Except as set forth on Schedule 4.07 :

 

(a) The Company has timely filed all Returns that are required to be filed with respect to all Tax periods that end on or before the Closing Date and all such Returns are true, correct and complete.

 

(b) All Taxes that are due and payable by the Company with respect to all Tax periods that end on or before the Closing Date have been paid.

 

(c) There is no pending or, to the Knowledge of the Sellers and the Knowledge of the Company, threatened claim by a Taxing Authority in a jurisdiction wherein the Company does not file Returns that the Company is or may be subject to taxation by that jurisdiction.

 

(d) At all times since June 1, 1960, the Company has been a validly electing S corporation within the meaning of Sections 1361 and 1362 of the Code, and the Company will be an S corporation at all times up to and including the Closing Date. The Company does not have any liability for Taxes under Section 1374 of the Code.

 

17

(e) There is not now in force any extension of time with respect to the date on which any Return was or is due to be filed by or on behalf of or with respect to the Company, or any waiver or agreement by the Company for an extension of time for the assessment of any Tax.

 

(f) The Company is not subject to any penalty by reason of a violation of any order, rule or regulation of, or with respect to any Return required to be filed with, any Taxing Authority.

 

(g) The Company does not have any pending requests for a ruling with any Taxing Authority.

 

(h) There are no Liens for Taxes upon the assets of the Company except Liens for current Taxes not yet due and payable.

 

(i) The Company is not a “United States real property holding corporation” within the meaning of Section 897(c)(2) of the Code.

 

(j) The Company is not a nonresident alien individual, foreign person, or foreign corporation for purposes of the provisions of Sections 871, 882 or 1445 of the Code.

 

(k) The Company is not a party to any Contract that would result, separately or in the aggregate, in the payment of and has not previously made any “excess parachute payments” within the meaning of Code Section 280G.

 

(l) The Company is not a party to any express Tax settlement agreement, arrangement, policy or guideline, formal or informal, as of the Closing Date, and the Company has no obligation to make payments under any such arrangement.

 

(m) The Company has not been a party to any Tax allocation or sharing agreement.

 

(n) The Company has made all withholding of Taxes required to be made under all applicable Laws, including, without limitation, withholding with respect to sales and use Taxes and compensation paid to any employee, independent contractor, creditor of the Company or other third party and the amounts withheld have been properly and timely paid over to the appropriate Taxing Authority. The transactions contemplated by this Agreement are not subject to the Tax withholding provisions of Section 3406 of the Code or of Subchapter A of Chapter 3 of the Code, or of any comparable provision of Law.

 

(o) The Company has no liability for the Taxes of any other person under Treas. Reg. § 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.

 

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Section 4.08. Compliance with Laws; No Default or Litigation . Except as set forth on Schedule 4.08:

 

(a) The Company is not in default or violation (nor has any event occurred which, with or without notice or lapse of time or both, would constitute a default or violation or has the Company received any notice from, or been advised that, any Governmental Entity or other Person is claiming any violation or potential violation) under any Law (including, without limitation, Environmental, Health and Safety Laws and any Laws relating to antitrust, civil rights, health, or occupational health and safety); that could result in any material liability or obligation on the part of the Company.

 

(b) There are no actions, suits, claims, investigations, complaints, grievances, legal arbitrations or administrative proceedings in progress, pending, or, to the Knowledge of the Sellers or to the Knowledge of the Company, threatened by or against the Company or any of its assets or any of the Sellers with respect to the Shares or the transactions contemplated hereby whether at law or in equity, whether civil or criminal in nature, or whether before or by a Governmental Entity and all such matters set forth on Schedule 4.08 are covered by insurance and will not in the aggregate result in a material liability or obligation of the Company; and

 

(c) Neither the Company nor any of the Sellers has been charged with or received any notice of any violation of any Law relating to either the Company, any of the properties or assets of the Company, the Shares, or the transactions contemplated by this Agreement and there is no pending or, to the Knowledge of the Sellers or to the Knowledge of the Company, threatened investigation of the Company or the Sellers that could result in such charge or notice in the future.

 

Section 4.09. Absence of Certain Changes . Except as set forth on Schedule 4.09 hereto, since March 31, 2004 there has not been any: (a) damage, destruction, or casualty or personal injury or loss, whether or not insured, affecting a material portion of the assets or properties of the Company; (b) material change in the Company’s customary methods of operations or the manner in which the Business is conducted; (c) change in the Company’s accounting policies, procedures or methodologies or tax principles, practices or policies, (d) any increase in reserves or any revaluation of any of the Company’s assets; (e) sale, transfer or assignment of any material tangible or intangible asset of the Company, except in the ordinary course of the Business; (f) material mortgage, pledge or imposition of any Lien on any asset of the Company, or material lease of real property, machinery, equipment or buildings entered into by the Company; (g) declaration, setting aside or payment of any dividend or any other distribution in respect of any capital stock or other securities of the Company or, directly or indirectly, any purchase, redemption, issuance, or other acquisition or disposition by the Company of any shares of capital stock or other securities or grant of any option relating to its authorized shares of capital stock, except regularly scheduled quarterly dividends to pay Taxes that are due and payable by the Sellers and attributable to the earnings of the Company; (h) capital investment in, loan to, or acquisition of the securities or assets of (including by merger or consolidation), any other Person; (i) increase in the compensation, bonus or other benefits payable to directors, consultants, officers or employees of the Company, other than increases in the ordinary course of business consistent with past practice or payments made in the ordinary course of the Business consistent with past practice; (j) delay or postponement of any accounts payable or other material liabilities or acceleration or acceptance of the prepayment of any notes or accounts receivable outside the ordinary course of the Business; (k) change made or

 

19

authorization to make a change to the Company’s Articles of Incorporation or Bylaws; (l) amendment or termination of any material contract, agreement or Permit, (m) waiver, settlement or release of any material right or claim relating to the Business, except in the ordinary course of the Business, (n) write-off as uncollectible any notes or accounts receivable related to the Business, except write-offs in the ordinary course of the Business charged to applicable reserves, none of which individually or in the aggregate is material to the Business; (o) change in the terms of Extended Service Plans sold, (p) capital expenditure not in accordance with the capital expenditure plan included in the Confidential Memorandum, (q) event or condition of any character that constitutes or could reasonably be expected to constitute a Material Adverse Effect; or (r) agreement, whether or not in writing, to do any of the foregoing.

 

Section 4.10. Absence of Undisclosed Liabilities . Except as set forth on Schedule 4.10 or in the Financial Statements or notes thereto, the Company has no material liabilities, either direct or indirect, accrued, matured or unmatured or absolute, contingent or otherwise (whether or not required to be reflected in Financial Statements in accordance with GAAP), other than those liabilities which are not unusual in nature or amount incurred, consistent with past practice in the Business, in or as a result of the normal and ordinary course of the Business.

 

Section 4.11. Real Property .

 

(a) Real Property Defined . All real property (including, without limitation, all interests in and rights to real property) and improvements located thereon which are owned (the “ Owned Real Property ”) or leased (the “ Leased Real Property ”) by the Company are listed on Schedule 4.11(a) (Owned Real Property and Leased Real Property are collectively referred to herein as the “ Real Property ”). The Real Property constitutes all of the real property interests owned, leased or occupied in whole or in part by the Company or which are used in connection with the Business.

 

(b) Leases . Except as otherwise contemplated by this Agreement, any leases for Real Property (the “ Leases ”) are, and at the Closing shall be, in full force and effect and, except as otherwise specified in this Agreement, have not been assigned, modified, supplemented or amended by the Company or a predecessor tenant. True, correct and complete copies of the Leases have been made available to Investor. The Company is not in default in any material respect under any of the Leases, and, to the Knowledge of the Sellers and the Company, no circumstances or state of facts presently exists which, with the giving of notice or passage of time, or both, would constitute a material default thereunder. No landlord under any Lease is in material default under any of the Leases, and, to the Knowledge of the Sellers and the Company, no circumstances or state of facts presently exists which, with the giving of notice or passage of time, or both, would constitute a material default thereunder.

 

(c) Access . The buildings and structures included on the Real Property currently have access to (i) public roads or valid easements over private streets or private property for ingress to and egress from all such buildings and structures, and (ii) all appropriate public utilities at customary rates, in each case to the extent necessary for the conduct of the Business as it is currently conducted. All utilities serving the Real

 

20

Property are adequate and have sufficient capacity to serve the Real Property if used in a manner consistent with the Company’s current use of the Real Property.

 

(d) With respect to the Owned Real Property:

 

(i) There is no condemnation proceeding, eminent domain proceeding or compulsory acquisition order, as applicable, pending or, to the Knowledge of the Sellers and the Company, threatened against the Owned Real Property;

 

(ii) The Owned Real Property is occupied under a valid and current certificate of occupancy or the like, if applicable; there are to the Knowledge of the Sellers and the Company no facts which would prevent the Owned Real Property from being occupied after the Closing Date in substantially the same manner as before;

 

(iii) The Owned Real Property does not violate, and all improvements are constructed in compliance with, any applicable Laws including, without limitation, any building, zoning, fire or environmental laws or codes, except to the extent any such violations could not be reasonably expected to result in any material liability or obligation on the part of the Company;

 

(iv) There are no outstanding variances or special use permits affecting the Owned Real Property or its uses;

 

(v) No notice of a violation of any Laws, or of any covenant, condition, easement or restriction affecting the Owned Real Property or relating to its use or occupancy has been given to the Company;

 

(vi) All buildings, improvements and structures situated on the Owned Real Property, if any, are without material structural defects, are in good operating condition and are in a state of good maintenance and repair (subject to normal wear and tear), and are adequate for the uses to which they are put; and

 

(vii) The Company holds good, valid and marketable fee simple title to the Owned Real Property free and clear of all Liens, other than minor title imperfections and easements and encroachments created by the Company which do not adversely affect the use or operation of the Owned Real Property by the Company.

 

(e) With respect to the Leased Real Property:

 

(i) There is no condemnation proceeding, eminent domain proceeding or compulsory acquisition order, as applicable, pending or to the Knowledge of the Sellers and the Company threatened against the Leased Real Property;

 

(ii) The Leased Real Property is occupied under a valid and current certificate of occupancy or the like, if applicable; there are to the Knowledge of the Sellers and the Company no facts which would prevent the Leased Real

 

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Property from being occupied after the Closing Date in substantially the same manner as before;

 

(iii) The Leased Real Property does not violate, and all improvements are constructed in compliance with, any applicable Laws including, without limitation, any building, zoning, fire or environmental laws or codes, except to the extent any such violations could not be reasonably expected to result in any material liability or obligation on the part of the Company;

 

(iv) No notice of a violation of any Laws, or of any covenant, condition, easement or restriction which is material to the Leased Real Property or its use or occupancy has been given to the Company;

 

(v) All buildings, improvements and structures situated on the Leased Real Property are without material structural defects, are in good operating condition and in a state of good maintenance and repair (subject to normal wear and tear), and are adequate for the uses to which they are put except for inadequacies which in the aggregate would not result in a material liability or obligation of the Company;

 

(vi) Schedule 4.11(e)(vi) sets forth a list of all Leases where the lessor is either a Seller or an Affiliate thereof (the “ Affiliate Leases ”);

 

(vii) The Company holds good, valid and marketable leasehold title to the Real Property free and clear of all Liens, other than minor title imperfections and easements and encroachments created by the Company which do not adversely affect the use or operation of the Leased Real Property by the Company;

 

(viii) Except as set forth on Schedule 4.11(e)(viii) , the Company has obtained a nondisturbance agreement from the lender of each lessor of a Leased Real Property which interest in such Leased Real Property is encumbered by a mortgage or deed of trust; and

 

(ix) Except as set forth on Schedule 4.11(d)(ix) , no Leased Real Property is subject to any sublease, license, concession agreement or other similar occupancy agreement.

 

Section 4.12. Personal Property .

 

(a) Schedules 4.12 sets forth, lists or otherwise describes all equipment, machinery, furniture, fixtures and improvements and vehicles owned by the Company (the “ Owned Personal Property ”) or leased by the Company (the “ Leased Personal Property ” and together with the Owned Personal Property, the “ Personal Property ”) having a book value exceeding twenty-five thousand dollars ($25,000). Except as set forth on Schedule 4.12 , the Company has good, valid and marketable title to the Owned Personal Property free and clear of Liens, except for Liens for property taxes not yet due and payable. With respect to Leased Personal Property, Schedule 4.12 identifies and

 

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provides reasonable detail with respect to the applicable leases, including the Personal Property subject to the lease, the annual lease payments, the name and address of the lessor and the remaining term of the lease with respect to: (i) leases with total remaining obligations (determined as of the date of the Interim Financial Statements) in excess of twenty-five thousand dollars ($25,000); and (ii) leases ending within one (1) calendar year of the Closing Date. True and complete copies of all such leases have been delivered to Investor, and each of such leases is in full force and effect and constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms. Except as set forth on Schedule 4.12 , no consent of any lessor of the Personal Property is required in connection with the transactions contemplated by this Agreement, nor do the transactions contemplated by this Agreement give rise to a termination of any lease of Personal Property or any acceleration of payments or loss of a material benefit thereunder, either at the election of the lessor or otherwise.

 

(b) The Personal Property is in material compliance with all applicable Laws including, without limitation, applicable zoning, environmental, motor vehicle safety and occupational safety and health Laws.

 

(c) The Personal Property is adequate and sufficient for the continued operation of the Business in the manner conducted by the Company prior to the Closing Date and such assets are structurally sound and are in good operating condition and repair (subject to normal wear and tear) and adequate for the uses to which they are put, except for routine replacement, maintenance and repair.

 

Section 4.13. Intellectual Property .

 

(a) The Company owns, licenses, or possesses sufficient rights to make, use, offer for sale, sell, develop, license, distribute, modify, and otherwise use or exploit indefinitely the Intellectual Property used in, necessary or useful for the conduct of the Business as now conducted.

 

(b) Schedule 4.13(b) sets forth a complete and accurate list of all Intellectual Property owned by the Company and used in, necessary or useful in the conduct of the Business. The Intellectual Property listed on Schedule 4.13(b) , together with the Intellectual Property that is the subject of the Licenses, constitutes all the Intellectual Property used in, necessary or useful for the conduct of the Business in the manner in which it is currently, or historically has been, conducted.

 

(c) Except as otherwise indicated on Schedule 4.13(b) , no Person has any ownership of or any right to use any of the Intellectual Property listed on Schedule 4.13 , and the Company is the owner of all right, title, and interest in and to the Intellectual Property listed on Schedule 4.13(b) , free and clear of all Liens. No Affiliate of the Company has any right, title, or interest in any Intellectual Property.

 

(d) To the Knowledge of the Company, none of the Intellectual Property set forth on Schedule 4.13(b) is or has been infringed, interfered with, misappropriated, or, to the Company’s Knowledge, has been challenged or threatened in any way. Neither the operation of the Business, nor the Intellectual Property or the subject matter thereof, nor

 

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any process or Know-How used by the Company, infringes or misappropriates or is alleged to infringe or misappropriate, any valid, enforceable Intellectual Property right or other proprietary right of any other Person in a manner that when aggregated would result in a material liability or obligation of the Company. The Company has no Knowledge of any facts or circumstances that would render any Intellectual Property invalid or unenforceable. All Company Intellectual Property will be fully transferable, alienable or licensable without restriction and without payment of any kind to any third party.

 

(e) No Intellectual Property is subject to any proceeding or outstanding decree, order, judgment or settlement agreement or stipulation that restricts in any manner the use, transfer, provision, sale or licensing thereof by the Company or that may affect the validity, use or enforceability of such Intellectual Property.

 

(f) Each item of Intellectual Property set forth on Schedule 4.13(b) that is the property of the Company is currently in compliance with all formal legal requirements (including payment of filing, examination and maintenance fees and proofs of use) and is valid and enforceable. All necessary documents and certificates in connection with such Intellectual Property have been filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such Intellectual Property. There are no actions that must be taken by the Company within one hundred twenty (120) days of the Closing Date, including the payment of any registration, maintenance or renewal fees or the filing of any responses to PTO office actions, documents, applications or certificates for the purposes of obtaining, maintaining, perfecting or preserving or renewing any Company Registered Intellectual Property.

 

(g) All Intellectual Property owned by the Company that is used in, necessary to, or which would be infringed by the conduct of Business by the Company as presently conducted or currently planned to be conducted was written, invented, developed and created solely by either (i) employees of the Company acting within the scope of their employment or (ii) by third parties who have validly and irrevocably assigned all of their rights, in any such Intellectual Property, to the Company, and no third party owns or has any rights to any such Intellectual Property. In each case in which the Company has acquired or purported to acquire any Intellectual Property from any Person, the Company has obtained a valid and enforceable assignment sufficient to irrevocably transfer all rights in such Intellectual Property (including the right to seek past and future damages with respect thereto) to the Company.

 

(h) All contracts, licenses and agreements to which the Company is a party with respect to any Intellectual Property used in, necessary or useful for the conduct of the Business as now conducted and as currently planned to be conducted by the Company (including agreements to provide or receive services related to Software) (the “ Licenses ”) are listed on Schedule 4.13(h) ; provided , however that Schedule 4.13(h) need not list “off-the-shelf” Licenses for software (or maintenance therefor) used in the day-to-day business operations of the Company, provided that such software was not custom written and the source code of such software was not custom modified by or on behalf of the Company. The Licenses are valid, binding and enforceable, are in full force and effect

 

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and, except as otherwise specified on Schedule 4.13(h) , will continue in full force and effect after the Closing without the consent of any other party. Company is not in breach of, nor has the Company failed to perform under, any of the Licenses and, to the Company’s Knowledge, no other party to any License is in breach thereof or has failed to perform thereunder. The consummation of the transactions contemplated in this Agreement (i) will neither violate nor result in the breach, modification, termination or suspension of (or give the other party thereto the right to cause any of the foregoing) any of the Licenses referenced in this paragraph, (ii) will not result in the payment of any additional amounts or consideration other than the ongoing fees, royalties or other payments which the Company would otherwise have been required to pay to had the transactions contemplated by this Agreement not occurred and (iii) will not violate or conflict with any Intellectual Property or other rights of any Person.

 

(i) The Company has complied with all applicable Laws and its internal privacy policies relating to (i) the privacy of purchasers of the Company’s products and services, and users of all Websites owned, maintained or operated by the Company and (ii) the collection, storage and transfer of any personally identifiable information collected by the Company or by third parties having authorized access to the records of the Company except for failures to comply which in the aggregate would not result in a material liability or obligation of the Company. Copies of the current privacy policies of the Company, including the privacy policy included in the Company’s Website, are attached to Schedule 4.13(i) .

 

Section 4.14. Contracts .

 

(a) Schedule 4.14 lists all of the following contracts, agreements, arrangements, and understandings (whether oral or in writing) including all amendments thereto, to which the Company is a party (or by which any of its properties or assets are bound) (the “ Contracts ”); provided , however , that an agreement need not be disclosed on Schedule 4.14 and shall not be deemed a “Contract” if it requires the Company to pay, or authorizes the Company to receive, aggregate payments of twenty-five thousand dollars ($25,000) or less in any given year, except that this limitation shall not apply to subparagraphs (ii), (iv), (v), (vi), (vii), (x), (xi), (xii), (xiv), (xv), (xvi) or (xvii):

 

(i) Contracts, agreements, arrangements and understandings (whether oral or in writing) involving capital leases or capital expenditures or requiring the Company to make, or authorizing the Company to receive, payments ;

 

(ii) Loans, lines of credit, letters of credit, indentures, promissory notes, security agreements, pledges, mortgages, hypothecations, loan agreements, guaranties, or other payment or collateral obligations;

 

(iii) Agreements with vendors;

 

(iv) Agreements of guaranty or indemnification;

 

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(v) Agreements, contracts, and commitments containing any covenant, condition, or promise limiting the right of the Company to engage in any line of business or activity or compete with any Person;

 

(vi) Employment agreements, contracts, policies, and commitments with or between the Company and any of its employees, directors, or officers, including without limitation, those relating to severance;

 

(vii) Agreements with employees as a group or individually;

 

(viii) Contracts with subcontractors and other service providers;

 

(ix) Contracts (including rebate programs) with suppliers and vendors of parts, equipment, consumables and other items used by the Company in the ordinary course of the Business;

 

(x) Contracts with any present or former stockholder, director or employee or any Affiliate of the foregoing;

 

(xi) Profit sharing, stock option, stock purchase, stock appreciation, deferred compensation or other equity-based or profit sharing plan or arrangement for the benefit of the Company’s current or former directors, officers and employees;

 

(xii) Contracts that include minimum purchase conditions or requirements or other terms that restrict or limit the purchasing relationships of the Company or any customer, licensee or lessee thereof;

 

(xiii) Agreements to sell, lease or otherwise dispose of any assets or properties of the Company other than in the ordinary course of the Business;

 

(xiv) Joint venture, partnership or other similar agreements;

 

(xv) Shareholder agreements;

 

(xvi) Any other agreement that is material to the Company; and

 

(xvii) All commitments to enter into any of the foregoing.

 

(b) All of the Contracts are valid and binding obligations of the Company, are enforceable in accordance with their respective terms except as would not be reasonably expected to have a Material Adverse Effect on the Company, are in full force and effect and, except as otherwise specified on Schedule 4.14 , will continue in full force and effect after the Closing without the consent of any other party. Except as set forth on Schedule 4.14 , none of the Contracts contain any provision that is triggered by a change of control of the Company or by any transactions contemplated by this Agreement. Except as set forth on Schedule 4.14 , (i) none of the Contracts contain a provision imposing a penalty if any of the amounts due thereunder are prepaid; and (ii) there is no

 

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existing default by the Company and, to the Knowledge of the Sellers and to the Knowledge of the Company, there is no existing default by any third party or any event which, with or without notice or lapse of time, or both, would constitute a default or result in a right to accelerate or loss of rights under or with respect to any of the Contracts. The Company is not a party to, or bound by the provisions of, any contract (including purchase orders, blanket purchase orders and agreements and delivery orders) with any Governmental Entity. Correct and complete copies of all of the Contracts in written form have been delivered to Investor.

 

Section 4.15. Permits . The Company possesses all franchises, licenses, permits, certificates, approvals, consents, clearances, notifications, registrations, and other authorizations necessary to conduct the Business as now conducted (the “ Permits ”). Except as set forth on Schedule 4.15 , all Permits after the Closing Date will continue in full force and effect without the consent of any other party or Governmental Entity and no proceeding is pending, or, to the Knowledge of the Sellers and to the Knowledge of the Company, threatened to revoke or limit any Permit.

 

Section 4.16. Labor Relations: Employees .

 

(a) Except as set forth on Schedule 4.16(a) : (i) the Company’s employees are not members of any union; (ii) the Company has not agreed to recognize any union or other collective bargaining representative, nor has any union or other collective bargaining representative been certified as the exclusive bargaining representative of any of its employees; and (iii) there is no question concerning representation as to any collective bargaining representative concerning employees of the Company, and no labor union or representative thereof claims to or is seeking to represent employees of the Company. To the Knowledge of the Sellers and to the Knowledge of the Company, no union organizational campaign or representation petition is currently pending with respect to any of the employees of the Company, nor has any such campaign or petition occurred at any time during the previous twenty-four (24) months. There is no labor strike or labor dispute, slowdown, work stoppage or lockout pending or, to the Knowledge of the Sellers and to the Knowledge of the Company, threatened against or affecting the Company, and the Company has not experienced any labor strike, slowdown, work stoppage or lockout. Except as set forth on Schedule 4.16(a) , the Company is not a party to or bound by any collective bargaining agreement, other labor contract or individual agreement applicable to any of its employees.

 

(b) Except as set forth on Schedule 4.16(b) , the Company (i) is, and has always been, in substantial compliance with all applicable Laws regarding labor and employment practices, including, without limitation, Laws relating to terms and conditions of employment, equal employment opportunity, employee compensation, employee benefits, affirmative action, wages and hours, plant closing and mass layoff, occupational safety and health, immigration, workers’ compensation, disability, unemployment compensation, whistle blower laws or other employment or labor relations laws, (ii) is not engaged, nor has it engaged, in any unfair labor practices, and has no, and has not had any, unfair labor practice charges or complaints before the National Labor Relations Board pending or, to the Knowledge of the Sellers and to the Knowledge of the Company, threatened against it, and (iii) has no, and has not had any,

 

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charges, complaints, or proceedings before the Equal Employment Opportunity Commission, Department of Labor or any other Governmental Entity responsible for regulating labor or employment practices, pending, or, to the Knowledge of the Sellers, threatened against it.

 

(c) Except as set forth on Schedule 4.16(c) , the Company has no liability for payments or benefits due under the Worker Adjustment and Retraining Notification Act of 1988 (“ WARN ”) as a result of any “mass layoff” or “employment loss” (each as defined in WARN) which has not been satisfied in full; nor has the Company been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar state or local laws.

 

(d) All employees of the Company are lawfully authorized to work in the United States according to applicable immigration laws.

 

(e) The Company is, and at all times prior to Closing, has been, in full compliance in all material respects with all applicable Laws respecting labor, employment and employment practices and terms and conditions of employment, including, without limitation, wages and hours (including the payment of overtime wages), welfare, health and safety and immigration and naturalization.

 

(f) Schedule 4.16(f) sets forth an accurate and complete list of the names, titles, hire dates, current annual rates of salary, bonuses and other compensation, including any severance payments that may be owed from the Company upon termination of such employee’s employment for any reason, or upon the consummation of the Merger, whether pursuant to a written or oral agreement or arrangement, of all of the present officers, directors, employees, and agents of the Company or who are otherwise employed by the Company in connection with the Business, which list will be updated as of the Closing Date. Any such employees who are currently on disability leave or any other leave of absence have been so noted on such schedule.

 

Section 4.17. Employee Benefit Plans .

 

(a) Schedule 4.17(a) sets forth a list of all “employee benefit plans” (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”)), all bonus, incentive, deferred compensation, stock or stock option plans or arrangements, all severance, change-in-control and other employee fringe benefit plans or arrangements, and all welfare plans or arrangements, whether oral or written, under which any current or former employee, director or independent contractor of the Company or any other Person has any present or future right to benefits or under which the Company has any liability, whether actual or contingent (the “ Benefit Plans ”);

 

(b) As applicable with respect to each Benefit Plan, the Sellers have made available to Buyer copies of (i) each current Benefit Plan document, including any amendments, and written summaries of each unwritten Benefit Plan, (ii) all trust documents, custodial agreements and other funding documents relating thereto, (iii) any summary plan description provided under a Benefit Plan, (iv) the three most recent annual reports (Form 5500 and all schedules thereto) filed with the Department of Labor

 

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or IRS, (v) any audited financial statements and actuarial valuation reports for the three most recent fiscal years, (vi) the most recent IRS determination letter, (vii) all service provider agreements, and (viii) any governmental advisory opinions, rulings, compliance statements, closing agreements or similar materials;

 

(c) Except as disclosed on Schedule 4.17(c) , each Benefit Plan has been maintained, operated and administered, in all material respects, in compliance with its terms and any related documents or agreements and the applicable provisions of ERISA, the Code and other applicable laws, except in any case in which any Benefit Plan is currently required to comply with a provision of ERISA or of the Code, but is not yet required to be amended to reflect such provision, it has been adminis