EXHIBIT 4.2
EXECUTION COPY
AGREEMENT AND PLAN OF
MERGER
This AGREEMENT AND PLAN OF MERGER
(this "Agreement" ) dated as of June 6, 2008, is by and
among National Technical Systems, Inc., a California corporation (
"Parent" ), NTS Acquisition Corp., a California corporation
and wholly owned subsidiary of Parent ( "Merger Subsidiary"
), ELA, LLC, a California limited liability company and wholly
owned subsidiary of Parent ( "Double Merger Subsidiary" ),
Elliott Laboratories, Inc., a California corporation (the
"Company" ), Thomas H. Parker ( "Parker" )
, Edward J. Pavlu, III ( "Pavlu" ) ,
Barry W. Klinger ( "Klinger"), Gerard J. Grenier (
"Grenier" ), Thomas E. Wetzel ( "Wetzel" )
, David W. Bare ( "Bare" ), and The
Gerard J. Grenier Revocable Trust U/A/D July 24, 1986, as
amended (the "Grenier Trust" ), the holders of 100% of the
outstanding capital stock of the Company (the "Shareholders"
), and solely for certain purposes of this Agreement, Gerard J.
Grenier in his capacity as the "Shareholders' Representative
. " Parent, Merger Subsidiary, Double Merger Subsidiary, the
Company and the Shareholders are referred to collectively as the
"Parties" and individually as a "Party ; "
Parent, Merger Subsidiary and Double Merger Subsidiary are referred
to collectively as the "Parent Parties" and individually as
a "Parent Party" ; and the Shareholders are referred to
collectively as the "Shareholder Parties" and individually
as a "Shareholder Party . " Capitalized terms used
but not defined herein have the meanings assigned to them in the
Exhibit A to this
Agreement.
WITNESSETH
WHEREAS, (i) the boards of
directors of the Parent and Merger Subsidiary, (ii) the Board
of Directors of the Company, and (iii) the Shareholders have
approved the merger of Merger Subsidiary with and into the Company
on the terms set forth in this Agreement (the "Merger"
);
WHEREAS, the boards of directors of
Parent, Merger Subsidiary and the Company and the managers of
Double Merger Subsidiary have approved the merger of the Company
with and into the Double Merger Subsidiary as expeditiously as
commercially reasonably possible following the Merger and as part
of the Plan of Reorganization (as defined below) (such merger, the
"Double Merger" );
WHEREAS, for federal income tax
purposes, consummations of the Merger and of the Double Merger in
accordance with this Agreement are part of a single, integrated
plan of reorganization ( "Plan of Reorganization" ), and it
is intended that the Merger and Double Merger shall qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of
the Internal Revenue Code of 1986, as amended (the "Code" ),
and the regulations thereunder; and
WHEREAS, following the Double
Merger, Parent intends to transfer all the interests in Double
Merger Subsidiary to NTS Technical Systems, a California
corporation and direct, wholly-owned subsidiary of Parent, as
permitted by Section 368(a)(2)(C) of the Code;
NOW, THEREFORE, in consideration of
the foregoing and the respective representations, warranties,
covenants, agreements and conditions hereinafter set forth, and
intending to be legally bound hereby, the Parties agree as
follows:
ARTICLE I
THE MERGER
1.1
Merger and Surviving Corporation . Upon the terms and
subject to the conditions of this Agreement, at the Effective Time
(as defined in Section 1 .
2 ) in accordance with the California Corporations Code
(the "CCC" ), Merger Subsidiary shall be merged with and
into the Company and the separate existence of Merger Subsidiary
shall thereupon cease. The Company shall be the surviving
corporation in the Merger and is hereinafter sometimes referred to
as the "Surviving Corporation . "
1.2
Effective Time of the Merger . The Merger shall become
effective at the time (the "Effective Time" ) stated in a
certified copy of the agreement of merger, in the form attached
hereto as Exhibit B , to be
filed with the Secretary of State of the State of California in
accordance with the CCC (the "Merger Filing" ). The Merger
Filing shall be made simultaneously with or as soon as practicable
after the closing of the transactions contemplated by this
Agreement in accordance with Section
3 . 5 . The Parties' intent is to consummate the
Merger as soon as practicable after the date hereof. Accordingly,
the Parties shall use all commercially reasonable efforts to
consummate, as soon as practicable, the transactions contemplated
by this Agreement. The Merger Filing does not include certain
provisions contained in this Agreement, including, but not limited
to, provisions relating to the calculation of the Net Closing
Consideration, the Closing Working Capital, the Earn-Out and
amounts that may be due and payable by the Parties pursuant to
Article IX hereof. Notwithstanding anything contained in the
Merger Filing, the terms of this Agreement shall govern the
transactions contemplated hereby to the extent inconsistent with
the terms of the Merger Filing. The Merger Filing is being made for
the purpose of fulfilling the requirements of the CCC to consummate
the Merger.
ARTICLE II
THE SURVIVING AND PARENT
CORPORATIONS
2.1
Articles of Incorporation . The Articles of Incorporation of
Merger Subsidiary in effect immediately prior to the Effective Time
shall be the Articles of Incorporation of the Surviving Corporation
after the Effective Time, and thereafter may be amended in
accordance with its terms and as provided in the CCC.
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2.2
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Bylaws . The Bylaws of Merger
Subsidiary in effect immediately prior to the Effective
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Time shall be the Bylaws of the
Surviving Corporation after the Effective Time, and thereafter may
be amended in accordance with their terms and as provided by the
Articles of Incorporation of the Surviving Corporation and the
CCC.
2.3
Directors . The directors of the Surviving Corporation shall
be as designated in Schedule 2.3 , and such directors
shall serve in accordance with the Bylaws of the Surviving
Corporation until their respective successors are duly elected or
appointed and qualified.
2.4
Officers . The officers of the Surviving Corporation shall
be as designated in Schedule 2.4 , and such officers
shall serve in accordance with the Bylaws of the Surviving
Corporation until their respective successors are duly elected or
appointed and qualified.
ARTICLE III
CONVERSION OF SHARES IN THE
MERGER
3.1
Conversion of Company Shares . At the Effective Time, by
virtue of the Merger and without any further action on the part of
the Company, Merger Subsidiary, Parent or any
Shareholder:
(a) The
shares of the Company's Common Stock, no par value, issued and
outstanding immediately prior to the Effective Time (the
"Company Common Stock" ), shall, subject to Sections
3 . 2 and 3 . 3 ,
be converted into the right to receive in the aggregate and shall
be exchangeable for:
(i) [REDACTED] in
cash (the "Cash Consideration" ); and
(ii) [REDACTED] in shares
of the Common Stock no par value of Parent ( "Parent Common
Stock" ), hereinafter referred to as the "Stock
Consideration" and together with Cash Consideration, the
"Gross Closing Consideration" ).
(iii) Except as specifically
and expressly provided otherwise in this Agreement, all amounts
payable and all other consideration deliverable to the Shareholders
as such pursuant to this Agreement shall be paid or delivered to
them, and all amounts payable and all other consideration
deliverable by the Shareholders as such pursuant to this Agreement,
shall be paid or delivered in proportion to the respective number
of shares of Company Common Stock held by each Shareholder as of
Closing as set forth on Schedule 5.2 .
(b) The
Gross Closing Consideration (and proportionally the Cash
Consideration and Stock Consideration) shall be reduced by an
amount calculated as of the time of Closing equal to the sum,
without duplication, of (1) the Comerica Debt (it being the
understanding of the Parties that at Closing the Company will not
have any funded Debt other than the Comerica Debt), or have any
capitalized leases; and if as of the time of Closing the Company
does have any funded Debt other than the Comerica Debt, or has any
capitalized leases, then the Cash Consideration shall be reduced by
the sum of (A) the outstanding balance
of such other funded Debt as of the
time of Closing plus (B) the liability with respect to such
capitalized leases as of the time of Closing (as determined in
accordance with GAAP), (2) unaccrued reorganization expenses
of the Company (such as legal fees and other expenses described in
Rev. Rul. 73-54, 1973 1 C.B. 187), and (3) without duplication
of any portion of the principal balance of the Comerica Debt
calculated at the time of Closing (the proceeds of which were used
to pay such amounts) the amounts required to cash out all
unexercised stock options, warrants and other rights to acquire
capital stock of the Company in accordance with
Section 3 . 1(g) . The
Company estimates that the sum of the amounts described in
immediately preceding clauses (1), (2) and (3) of this
Section 3 . 1(b) will be
approximately $1,250,000 (hereinafter referred to as the "Net
Liabilities" ). Parent or Double Merger Subsidiary will assume
and pay the Net Liabilities of the Company and succeed by merger to
the cash, and all stock options, warrants and other rights to
acquire capital stock of the Company will either be exercised
before Closing in accordance with their existing terms or cashed
out in accordance with Section 3 .
1(g) .
(c) The
Gross Closing Consideration shall be increased (with the Cash
Consideration and Stock Consideration increased proportionally) by
any excess of the Working Capital of the Company at the time of
Closing over the Working Capital of the Company on October 31,
2007, which, calculated based on the balance sheet of the Company
as of such date, was $771,240. If the Working Capital of the
Company, at the time of Closing (the "Closing Working
Capital" ) is less than $771,240, then the Cash Consideration
and the Stock Consideration shall be proportionally decreased by
the difference. The Closing Working Capital shall be determined and
calculated using the same principles, practices and methods as were
used in determining the entries on the October 31, 2007 balance
sheet of the Company and calculating the Company's Working Capital
of $771,240 based thereon; provided, however , (i) any
stock options, warrants and other rights to acquire capital stock
of the Company exercised before Closing on a net issuance basis
shall have no effect on Closing Working Capital (except that any
employment tax liabilities and withholding tax obligations incurred
by the Company as a result of such net issuance, and, for avoidance
of doubt, any employment tax liabilities and withholding tax
obligations incurred by the Company as a result of cashing out
unexercised stock options, warrants and other rights to acquire
capital stock of the Company in accordance with
Section 3 . 1(g) hereof,
shall be treated as current liabilities of the Company for purposes
of calculating Closing Working Capital, to the extent not (
x ) paid or reimbursed out of the Cash Consideration
payable to any such optionee or otherwise paid or ( y
) reimbursed by any such optionee) and (ii) the
liabilities taken into account as current liabilities in the
determination of Closing Working Capital ( x ) shall
include the Estimated Accounting Method Change Tax Liability (as
defined in Section 8 .
3(f) ), but (z) shall exclude Net Liabilities that
reduced Gross Closing Consideration pursuant to
Section 3 . 1(b) above.
The Closing Working Capital shall be determined in accordance with
the following procedures:
(i) Within 60 days
after the Closing Date (or, if later, within 30 days after the day
when Parent shall have received from the Shareholders'
Representative the deliveries to Parent required by
Section 8 . 3(f)(ii) ,
Parent shall prepare and deliver to the Shareholders'
Representative a written statement (the "Statement" )
setting forth in reasonable detail its calculation of the Closing
Working Capital and supporting documentation for such calculation.
The Shareholders' Representative shall assist and cooperate with
Parent in obtaining all records and all other information within
the possession or control of the Company that are
reasonably required to prepare the
Statement and, if requested, in preparing such
Statement.
(ii) During the 30-day
period following the Shareholders' Representative's receipt of the
Statement, the Shareholders' Representative and his representatives
shall be allowed further access to and permitted to review Company
books and records during normal business hours and make copies
reasonably required of (i) the working papers of Parent and
the Company relating to the preparation of the Statement and
(ii) any supporting schedules, supporting analyses and other
supporting documentation relating to the preparation of the
Statement. Provided that the Shareholders' Representative has
timely received access to the Company's records as described
herein, the Statement shall become final and binding upon the
Parties on the thirtieth (30th) day following delivery thereof,
except to the extent that the Shareholders' Representative gives
written notice of disagreement with the Statement (the "Notice
of Disagreement" ) to Parent prior to such date. Any Notice of
Disagreement shall (A) specify in reasonable detail (based
upon the documents provided by Parent to the Shareholders'
Representative accompanying the Statement) the nature of any
disagreement so asserted (any such disagreement to be limited to
whether such calculation of the Closing Working Capital is
mathematically correct and/or has been prepared in accordance with
the definition of Closing Working Capital), and (B) if
independent auditors are engaged by the Shareholders'
Representative in connection with the preparation of the Notice of
Disagreement, be accompanied by a certificate of such independent
auditors that they concur with each of the positions taken by the
Shareholders' Representative in the Notice of Disagreement. If a
Notice of Disagreement complying with the preceding sentence is
received by Parent in a timely manner, then the Statement (as
revised in accordance with clause (I) or (II) immediately
below) shall become final and binding upon the Parties on the
earlier of (I) the date Parent and the Shareholders'
Representative resolve in writing any differences they have with
respect to the matters specified in the Notice of Disagreement or
(II) the date any disputed matters are finally resolved in
writing by the Accounting Firm.
(iii) During the 20-day period
following the delivery of a Notice of Disagreement, Parent and the
Shareholders' Representative shall seek in good faith to resolve
any differences which they may have with respect to the matters
specified in the Notice of Disagreement. During such period, Parent
and its independent auditors shall be permitted to review and make
copies reasonably required of (i) the working papers of the
Shareholders' Representative's accountants relating to the
preparation of the Notice of Disagreement and (ii) any
supporting schedules, supporting analyses and other supporting
documentation relating to the preparation of the Notice of
Disagreement. If, at the end of such 20-day period, the differences
as specified in the Notice of Disagreement are not resolved, the
Shareholders' Representative and Parent shall promptly select BDO
Seidman, LLP (the "Accounting Firm" ) and submit to the
Accounting Firm for review and resolution any and all matters which
remain in dispute and which are properly included in the Notice of
Disagreement. In resolving any disputed item, the Accounting Firm
shall: (i) be bound by the provisions of this
Section 3 . 1(c) and the
definitions of Closing Working Capital; (ii) limit its review
to matters still in dispute as specifically set forth in the Notice
of Disagreement (and only to the extent such matters are still in
dispute following such 20-day period); and (iii) further limit
its review solely to whether the Statement has been prepared in
accordance with this Section 3 .
1(c) . The determination of any item that is a component
of Closing Working Capital and is the subject of a dispute shall
not, however, be in excess of, or less than, the greatest or lowest
value, respectively, claimed by the
Shareholders' Representative or
Parent for any particular item in the Statement or the Notice of
Disagreement (or, if different, the value claimed by the relevant
Party at the end of such 20-day period). The Shareholders and
Parent shall use commercially reasonable efforts to cause the
Accounting Firm to render a decision resolving the matters in
dispute within 20 days following the submission of such matters to
the Accounting Firm. The Shareholders' Representative and Parent
agree that judgment may be entered upon the determination of the
Accounting Firm in any court having jurisdiction over the Party
against which such determination is to be enforced. Except as
specified in the following sentence, the fees and expenses of the
Accounting Firm in connection with the Accounting Firm's
determination of Closing Working Capital pursuant to this
Section 3 . 1(c) shall be
borne, in its entirety, by the Party whose calculation of the
Closing Working Capital as initially submitted to the Accounting
Firm is furthest away from the Closing Working Capital as
determined by the Accounting Firm. The Parties agree to use
reasonable efforts to keep the Accounting Firm's fees and expenses
below $25,000, and no amounts shall be incurred in excess of
$25,000 absent the agreement of Shareholders' Representative and
Parent. The fees and expenses of the Parent's independent auditors
(if any) incurred in connection with the issuance of the Statement
shall be borne by the Parent, and the fees and expenses of any
independent auditors of the Shareholders' Representative incurred
in connection with their review of the Statement shall be borne by
the Shareholders. Accounting Firm fees owed by the Shareholders
shall be deducted from the Holdback.
(d) The
Gross Closing Consideration shall be further adjusted by (A) a
downward adjustment (with proportionate reduction of the Cash
Consideration and Stock Consideration) (i) in an amount, not
to exceed $75,000, in costs (which shall be reasonably documented)
to Parent of the Registration Statement and structuring of the
Merger and Double Merger as a reorganization within the meaning of
Section 368(a)(1) of the Code, (ii) in the amount of
$43,500 as an offset for unanticipated costs associated with a
Company employee matter, and (iii) in the amount of $100,000
attributable to the lost benefit of a net operating loss and
(B) an upward adjustment of an amount equal to 26.7% of 3% of
the Net Closing Consideration related to noncompetition agreements
executed by the Shareholders. The consideration to be delivered at
Closing shall be the Gross Closing Consideration, as adjusted
pursuant to Section 3 . 1(b) ,
(c) and (d) above (the "Net Closing
Consideration" ).
(e) At
or before the Closing, Parent and the Company shall agree upon an
estimate of the Net Closing Consideration (the "Estimated Net
Closing Consideration" ), and the respective amounts to be
delivered at Closing of Stock Consideration and Cash Consideration
shall be determined based upon the Estimated Net Closing
Consideration. If the final Net Closing Consideration is greater
than the Estimated Net Closing Consideration, Parent shall, within
five Business Days after the final determination of Closing Working
Capital, make payment to the Shareholders (i) of [REDACTED] of
the difference in the form of Parent Common Stock (determining the
number of shares of Parent Common Stock in the same manner as
specified in Section 3 .
1(f) ), and (ii) the balance by wire transfer or
check of immediately available funds of the amount of such excess,
together with interest thereon at the rate of 6% per annum (the
"Rate" ), calculated on the basis of the actual number of
days elapsed and a 360-day year, from the Closing Date until the
date of actual payment, compounded annually. If the Net Closing
Consideration as finally determined is (i) less than the
Estimated Net Closing Consideration and (ii) the amount of
such difference is $50,000 or less, then the Holdback shall be
reduced by such difference. If the Net Closing Consideration, as
finally determined is
(A) less than the Estimated Net
Closing Consideration and (B) the amount of such difference is
more than $50,000, then Parent shall reduce the Holdback by $50,000
and the Shareholders shall, within five Business Days after the
final determination of Closing Working Capital, make payment to
Parent of such excess greater than $50,000 by wire transfer of
immediately available funds or, at the Shareholders' discretion,
Stock Consideration previously received by them, pro rata, having a
value up to 45% of the amount owed (the number of shares to be
determined in the same manner as in Section
3 . 1(f) ), together with interest thereon at the
Rate, calculated on the basis of the actual number of days elapsed
and a 360 day year, from the Closing Date to the date of actual
payment, compounded annually. If any amounts are owed by the
Shareholders to Parent under this Section
3 . 1(e) and the same are not paid promptly by
the Shareholders upon Parent's request when due, Parent may at its
sole discretion proceed against the cash portion of the Holdback as
defined in Section 3 . 7
in order to recover such amounts or proceed directly against the
Shareholders.
(f) The
Estimated Net Closing Consideration shall be paid [REDACTED] in
Cash Consideration and [REDACTED] in Stock Consideration,
determining the value of Parent Common Stock and hence the number
of shares thereof to be delivered at Closing based on the average
closing price during the 20 trading days immediately preceding the
Closing, after excluding the highest and the lowest trading day
closing stock prices (the "Closing Date Value" ). The
Estimated Net Closing Consideration shall be in accordance with
Exhibit C . In no event,
however, will the Net Closing Consideration in the form of Cash
Consideration (including cash subject to the Holdback and including
debt and expenses assumed and amounts paid for options, warrants
and other rights) exceed [REDACTED]. The Parties intend the
combination of the Merger and Double Merger to qualify as a
tax-free reorganization and, to the extent consistent therewith,
the Parties may agree in their reasonable discretion to adjust the
consideration as between cash and Parent Common Stock delivered at
Closing and the portions thereof subject to the " Holdback
" as provided in Section 3 .
7 .
(g) The
Company shall use its best efforts to cause any stock options,
warrants and other rights to acquire Company Common Stock
outstanding immediately before Closing to terminate immediately
before Closing. Each holder of any stock option, warrant, or other
right cashed out pursuant to this Section
3 . 1(g) shall execute and deliver to Parent at
or before the Closing an agreement and release in the form of
Exhibit D-1 to this
Agreement.
(h) Each
officer, director or shareholder of the Company shall execute and
deliver to Parent at or before the Closing an agreement and release
(each a "General Release" ) in the form of
Exhibit D-2 to this
Agreement.
3.2
Exchange of Certificates . From and after the Effective
Time, each holder of an outstanding certificate which immediately
prior to the Effective Time represented shares of Company Common
Stock shall be entitled to receive in exchange therefor, upon
surrender thereof to an exchange agent reasonably satisfactory to
Parent and the Company (the "Exchange Agent" ), a
certificate or certificates representing the number of whole shares
of Parent Common Stock to which such holder is entitled pursuant to
Section 3 . 1 .
Notwithstanding any other provision of this Agreement,
(i) until holders or transferees of certificates theretofore
representing shares of Company Common Stock have surrendered them
for exchange as provided herein, no dividends shall be paid with
respect to any shares represented by such
certificates and no payment for
fractional shares shall be made and (ii) without regard to
when such certificates representing shares of Company Common Stock
are surrendered for exchange as provided herein, no interest shall
be paid on any dividends or any payment for fractional shares. Upon
surrender of a certificate which immediately prior to the Effective
Time represented shares of Company Common Stock, Parent shall pay
to the holder of such certificate the amount of any dividends which
theretofore became payable, but which were not paid by reason of
the foregoing, with respect to the number of whole shares of Parent
Common Stock represented by the certificate or certificates issued
upon such surrender.
(a) If
any certificate for shares of Parent Common Stock is to be issued
in a name other than that in which the certificate for shares of
Company Common Stock surrendered in exchange therefor is
registered, a condition of such exchange shall be the person
requesting such exchange pay the applicable transfer or other taxes
required by reason of such issuance.
(b) Promptly
after the Effective Time, Parent shall make available to the
Exchange Agent the certificates representing shares of Parent
Common Stock required to effect the exchanges referred to in
Section 3 . 2 above and
cash for payment of any fractional shares referred to in
Section 3 . 3
.
(c) Promptly
after the Effective Time, Parent's Exchange Agent shall mail to
each holder of record of a certificate or certificates that
immediately prior to the Effective Time represented outstanding
shares of Company Common Stock (the "Company Certificates" )
(i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Company
Certificates shall pass, only upon actual delivery of the Company
Certificates to the Exchange Agent) and (ii) instructions for
effecting the surrender of the Company Certificates in exchange for
certificates representing shares of Parent Common Stock and such
holder's respective portion of the Cash Consideration. Upon
surrender of Company Certificates for cancellation to the Exchange
Agent, together with a duly executed letter of transmittal and such
other documents as the Exchange Agent shall reasonably require, the
holder of such Company Certificates shall be entitled to receive in
exchange therefor a certificate representing that number of whole
shares of Parent Common Stock into which the shares of Company
Common Stock theretofore represented by the Company Certificates so
surrendered shall have been converted pursuant to the provisions of
Section 3 . 1(a) , along
with such holder's respective portion of the Cash Consideration,
and thereafter the Company Certificates so surrendered shall be
canceled.
(d) Nine
(9) months after the Effective Date, the Exchange Agent shall
deliver to Parent all cash, certificates (including any Parent
Common Stock) and other documents in its possession relating to the
transactions described in this Agreement, and the Exchange Agent's
duties shall terminate. Thereafter, each holder of a Company
Certificate may surrender such Company Certificate to the Surviving
Corporation and (subject to applicable abandoned property, escheat
and similar Laws) receive in exchange therefor the Net Closing
Consideration, without any interest thereon. Notwithstanding the
foregoing, none of the Exchange Agent, Parent, Merger Subsidiary,
the Company or the Surviving Corporation shall be liable to a
holder of Company Common Stock for any Net Closing Consideration
delivered to a public official pursuant to applicable abandoned
property, escheat and similar laws.
(e) If
any Company Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit or declaration and the signing by
such person of a Lost Stock Indemnity in form reasonably acceptable
to the Exchange Agent (but without any bond or similar requirement)
claiming such Company Certificate to be lost, stolen or destroyed,
the Surviving Corporation shall issue in exchange for such lost,
stolen or destroyed Company Certificate the Parent Common Stock
deliverable in respect thereof determined in accordance with this
Section 3 . 2 . If no
Lost Stock Indemnity form has been signed by such person, when
authorizing such payment in exchange therefor, the Board of
Directors of the Surviving Corporation may, in its discretion and
as a condition precedent to the issuance thereof, require the owner
of such lost, stolen or destroyed Company Certificate to give the
Surviving Corporation such indemnity (but no bond shall be
required), as it may reasonably request as protection against any
claim that may be made against the Surviving Corporation with
respect to the Company Certificate alleged to have been lost,
stolen or destroyed.
3.3
No Fractional Shares . Notwithstanding any other provision
of this Agreement, no certificates or scrip for fractional shares
of Parent Common Stock shall be issued in the Merger, and no Parent
Common Stock dividend, stock split or interest shall relate to any
fractional security, and such fractional shares shall not entitle
the owner thereof to vote or to any other rights of a security
holder. In lieu of any such fractional shares, each holder of
Company Common Stock who would otherwise have been entitled to
receive a fraction of a share of Parent Common Stock upon surrender
of Company Certificates for exchange pursuant to this
Section 3 . 3 shall be
entitled to receive from the Exchange Agent a cash payment equal to
such fraction multiplied by the average closing price per share of
Parent Common Stock calculated as described in
Section 3 . 1(f)
.
3.4
Closing of the Company's Transfer Books . At and after the
Effective Time, holders of Company Certificates shall cease to have
any rights as shareholders of the Company, except for the right to
receive Cash Consideration and Stock Consideration pursuant to
Section 3 . 1 and the
right to receive cash for payment of fractional shares pursuant to
Section 3 . 3 . At the
Effective Time, the stock transfer books of the Company shall be
closed and no transfer of shares of Company Common Stock which were
outstanding immediately prior to the Effective Time shall
thereafter be made. If, after the Effective Time, subject to the
terms and conditions of this Agreement, Company Certificates
formerly representing Company Common Stock or Lost Stock Indemnity
are presented to the Surviving Corporation, they shall be canceled
and exchanged for Parent Common Stock in accordance with
Section 3 . 2
.
3.5
Closing .
The closing (the "Closing" ) of the transactions
contemplated by this Agreement shall take place at a location
agreeable to Parent and the Company on June 6, 2008 or such
other date as the Parties shall agree (the "Closing Date"
).
3.6
Deliveries at the Closing . In addition to the other
requirements set forth herein, at the Closing:
(a) The
Company shall cause each of the following to be delivered to
Parent:
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(i)
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instruments
evidencing the resignation of all directors and
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officers of the Company;
(ii) General Releases
from each officer and/or director of the Company, as well as each
Shareholder who is not an officer or director of the Company, duly
executed by the applicable releasor;
(iii) a certificate duly
executed by the Secretary of the Company certifying as to:
(A) the full force and effect of resolutions of its board of
directors and shareholders attached thereto as exhibits evidencing
the authority of the Company to consummate the transactions
contemplated by the Transaction Documents to which it is a Party;
(B) the full force and effect of the organizational documents
of the Company attached thereto as exhibits; and (C) the
incumbency and signature of the officers of the Company who have
executed the Transaction Documents to which the Company is a
Party;
(iv) certificates from
appropriate government officials (each dated as of a recent date)
certifying as to the good standing of the Company in its
jurisdiction of organization and in each jurisdiction in which it
is qualified to conduct business as a foreign
corporation;
(v) the FIRPTA
Certificate called for by Section 5
. 7(p) ; and
(vi) all other customary
instruments and documents in transactions of this kind reasonably
requested by Parent.
(b) Parent
shall cause each of the following to be delivered to the
Shareholders:
(i) a certificate
of Parent, duly executed by Parent, regarding compliance by the
Parent with its covenants and the truth and accuracy of its
representations and warranties in this Agreements, in each case as
of Closing;
(ii) a certificate duly
executed by the Secretary (or Assistant Secretary) of Parent
certifying as to: (A) the full force and effect of resolutions
of its board of directors attached thereto as exhibits evidencing
the authority of Parent to consummate the transactions contemplated
by the Transaction Documents to which it is a Party; (B) the
full force and effect of the certificate of incorporation and
bylaws of Parent attached thereto as exhibits; and (C) the
incumbency and signature of the officers of Parent who have
executed the Transaction Documents to which Parent is a
Party;
(iii) a certificate from an
appropriate government official (dated as of a recent date)
certifying as to the good standing of Parent, Merger Subsidiary and
Double Merger Subsidiary in their respective jurisdictions of
formation and/or organization; and
(iv) all other instruments and
documents for transactions of similar nature reasonably requested
by the Company.
3.7
Holdback . A portion of the Net Closing Consideration
consisting of [REDACTED] in cash and [REDACTED] in Parent Common
Stock, will be held back at the Closing by Parent for
a period of 18 months as security
for the indemnification obligations of the Shareholders (the
"Holdback" ). On the date that is 18 months immediately
following the Closing (the "Release Date" ), an amount equal
to the excess (if any) of (a) the Holdback over (b) the
amount of Then Pending Claims (as defined below) shall be
distributed to the Shareholders. "Then Pending Claims" shall
mean the sum, determined as of the Release Date, of (x)
the amount of any claims that have been made against the
Holdback and that are fully concluded and completely liquidated in
dollar amount, plus (y) the amount of Parent's good
faith estimate of the aggregate amount of any then-known Claims or
potential Claims, of which Parent has knowledge, against the
Holdback and that are not fully concluded and completely liquidated
in dollar amount. Notwithstanding the foregoing provisions of this
Section 3 . 7 , the
amount of each Holdback component to be released or applied to
indemnification claims shall be in such ratio of cash and Parent
Common Stock as in good faith is determined to be necessary to
satisfy the " continuity of shareholder interest "
requirement for purposes of the tax-free reorganization aspects of
the Merger. For purposes of determining the number of shares of
Parent Common Stock to be applied in payment of an indemnification
claim, the Closing Date Value will apply. Indemnification claims
will be paid [REDACTED] in cash and [REDACTED] in Parent Common
Stock (or in such greater percentage of cash as must be paid in
cash in order that Parent Common Stock will comprise no less than
[REDACTED] of all consideration delivered by Parent that is taken
into account for purposes of calculating the " continuity of
shareholder interest " in connection with a tax-free
reorganization).
(a) In
addition to the Net Closing Consideration, the Shareholders shall
be entitled to receive additional consideration through an earn out
(the "Earn Out" ). The Earn Out will be based on the
cumulative facility gross profit of the two facilities operated by
the Surviving Corporation over the 24 months ( "Earn Out
Period" ) immediately following the Closing (the "CFGP"
) compared to the target cumulative facility gross profit of
[REDACTED] (the "Target CFGP" ). For these purposes, in
addition to interdivisional job order transfers ( "IJOs" )
between Parent and the Surviving Business Entity and fixed charges
to the Surviving Business Entity as agreed to by Pavlu as the
General Manager of the Surviving Business Entity and the Chief
Operating Officer of Parent (up to a maximum of $20,000 per year
unless a higher amount is agreed to by Pavlu as General Manager of
the Surviving Business Entity) for information technology services
provided by Parent, CFGP means the combined revenues attributable
to both facilities, less all combined local costs of both
facilities of the Surviving Business Entity other than costs for
Thomas H. Wetzel, V.P. Marketing and [REDACTED]. CFGP shall
exclude all accrued expenses included in Closing Working Capital
and all adjustments to Net Closing Consideration. The IJO's will be
treated as follows, unless otherwise agreed by the Parties in
writing: If the Surviving Business Entity accepts an IJO from
another Parent facility, which acceptance shall be at the
discretion of Pavlu as the General Manager of the Surviving
Business Entity, the Surviving Business Entity will record the full
sales price for the work when performed and will record only local
costs borne by the Surviving Business Entity in the normal course
of processing the IJO. If the Surviving Business Entity sends an
IJO to another Parent facility, the Surviving Business Entity will
record the full sales price when it receives the invoice request
and will be charged back as a local cost the full sales price from
the other Parent facility such that the costs and expenses shall be
neutral to the Surviving Business
Entity. Referral fees are not
applicable between the Surviving Business Entity and other Parent
facilities. For the sole purpose of determining CFGP during the
Earn Out Period, the combined local costs of both facilities of the
Surviving Business Entity shall include depreciation plus
amortization (calculated in accordance with GAAP) in the aggregate
amount of no more than [REDACTED] for the first 12-month period and
[REDACTED] for the second 12-month period unless Pavlu as the
General Manager of the Surviving Business Entity and the Chief
Operating Officer of Parent agree to capital investment resulting
in a higher amount of depreciation. The maximum Earn Out will be
[REDACTED] and shall be payable to the Shareholders (or as the
Shareholders direct in accordance with and subject to such
agreements, terms and conditions as Parent may reasonably require),
entirely in Parent Common Stock, the number of shares to be based
on the average price per share of Parent Common Stock for the 20
trading days immediately preceding to the second anniversary of the
Closing, after excluding the highest and the lowest trading day
closing stock prices. The Earn Out performance criteria will be as
follows:
(i) If the actual
CFGP is equal to or greater than 90% of the Target CFGP for the 24
months immediately following the Closing, the Shareholders will
receive the full Earn Out of [REDACTED].
(ii) If the actual CFGP
is at least 70% but less than 90% of the Target CFGP for the 24
months immediately following the Closing, the Shareholders will
receive a linear prorated amount of the Earn Out. This equates to a
5% reduction in the maximum Earn Out of [REDACTED] for every 1%
decrease in the CFGP below 90% of the Target CFGP. By way of
example only, if the actual CFGP for the 24 months immediately
following the Closing is 85% of the Target CFGP, the Shareholders
will receive 75% of the Earn Out or [REDACTED].
(iii) If the actual CFGP is
below 70% of the Target CFGP for the 24 months immediately
following the Closing, the Shareholders will receive no Earn
Out.
(c) Notwithstanding
the foregoing, if either or both of the facilities operated by the
Surviving Corporation is impacted by a force majeure event during
the 24-month period following the Closing, the 24-month period
shall be extended for a period of time equal to the period of time
that the force majeure has substantially impacted the productivity
of the facility in comparison with the facility's productivity
during the three months preceding the commencement of the force
majeure (and shall exclude the period during which the facility is
so impacted by the force majeure). A force majeure shall include,
without limitation, blockades; embargoes; insurrections; riots;
epidemics; flood; washouts; landslides; mudslides; earthquakes;
lightning; civil disturbances; failure to prevent or settle any
strike; fire; explosions; breakdown or failure or accident to
machinery, or the order of any court or governmental authority
having jurisdiction; war; acts of the pubic enemy; terrorism;
espionage; nuclear disaster; act of God; fire; severe weather;
earthquakes; floods; material shortage or unavailability at
reasonable cost not resulting from the failing Party's failure to
timely place orders or take other necessary actions therefor;
inability or delay in obtaining governmental permits; government
codes, ordinances, laws, rules, regulations, or restrictions; or
any other cause, whether similar or dissimilar to those
above mentioned (excluding, however,
any general economic downturns or loss of customers), which is
beyond the reasonable control of management and employees of the
facility and which, by the exercise of their due diligence, cannot
be prevented or overcome.
3.9
Withholding Taxes . To the extent required by applicable
Law, Parent shall be entitled to deduct and withhold any Taxes
required to be withheld from any payments due to the Shareholders
at any time pursuant to this Article III ; and
such amounts shall be treated for all purposes of this Agreement as
having been paid to the Shareholders.
ARTICLE IV
THE DOUBLE MERGER
4.1
Double Merger and Surviving Business Entity . Following the
Effective Time of the Merger, the Parent shall cause the Surviving
Corporation to be merged with and into the Double Merger Subsidiary
in accordance with the CCC, and the separate existence of the
Surviving Corporation shall thereupon cease. The Double Merger
Subsidiary shall be the surviving entity in the Double Merger and
is herein sometimes referred to as the "Surviving Business
Entity . "
4.2
Effective Time of the Double Merger . The Double Merger
shall become effective at such time as shall be stated in a
certified copy of a certificate of merger, in a form acceptable to
Parent, the Surviving Corporation and the Surviving Business Entity
as determined by them upon or after the Effective Time, to be filed
with the Secretary of State of the State of California in
accordance with the CCC (the "Double Merger Filing" ). The
Double Merger Filing shall be made as expeditiously as commercially
reasonably possible after the Effective Time, but in no event later
than sixty (60) days after the Effective Time.
4.3
Cancellation of Shares . Upon the Double Merger Filing, all
the shares of capital stock of the Surviving Corporation shall be
cancelled, and the membership interests of the Double Merger
Subsidiary held by Parent shall remain outstanding. All other
effects, terms and conditions of the Double Merger shall be as
determined by Parent, Double Merger Subsidiary and the Surviving
Corporation after the Effective Time and before the Double Merger
Filing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
REGARDING THE COMPANY
Except as set forth in the
Disclosure Schedule, the Company and the Shareholders jointly and
severally represent and warrant as follows:
5.1
Organization and Good Standing . The Company is a
corporation duly organized, validly existing and in good standing
under the laws of the State of California and has the requisite
corporate power and authority to own, lease and operate the
properties used in its business and to carry on its business as
currently conducted and currently contemplated to be conducted. The
Company is duly qualified to do business and is in good standing as
a foreign corporation in the states and jurisdictions set forth on
Schedule 5.1 and in each other jurisdiction where
qualification as a foreign corporation is required, except for such
failures to be qualified and in good standing that, individually or
in the aggregate, do not have, and are not reasonably likely to
have, a Material Adverse Effect. Prior to the date of this
Agreement, the Company has delivered to Parent complete and correct
copies of its articles of incorporation and bylaws, each as
presently in effect.
(a) The
authorized capital of the Company consists of 20,000,000 shares of
Company Common Stock, of which 4,489,100 shares are issued and
outstanding (the "Shares" ). As of the Closing, the Shares
shall constitute all the issued and outstanding capital stock of
the Company, and each Shareholder owns the Shares set forth next to
his name on Schedule 5.2 . The Shares have been duly
and validly authorized and issued, are fully paid and nonassessable
with no personal liability attaching to the ownership thereof and
have not been issued in violation of any preemptive right or of any
federal or state securities law. Except as set forth in
Schedule 5.2 , there is no security, option, warrant,
right, call, subscription, agreement, commitment or understanding
of any nature whatsoever, fixed or contingent, that directly or
indirectly (i) calls for the issuance, redemption, sale,
pledge or other disposition of any capital stock of the Company or
any securities convertible into, or other rights to acquire, any
capital stock of the Company, (ii) obligates the Company to
grant, offer or enter into any of the foregoing or
(iii) relates to the voting or control of the Shares. The
Company has not created any " phantom stock, " stock
appreciation rights or other similar rights, the value of which is
related to or based upon the price or value of any class or series
of capital stock or other securities of the Company. The Company
does not have outstanding debt or debt instruments providing for
voting rights with respect to the Company to the holders thereof.
No Shareholder or any other Person is entitled to any preemptive or
similar rights to subscribe for capital stock or other securities
of the Company. The Company has not granted to any Person the right
to demand or request that the Company effect a registration under
the Securities Act of any securities held by such Person or to
include any securities of such Person in any such securities
registration by the Company.
(b) The
Company does not have any Subsidiary or any investment in, or joint
venture agreement with, any other Person.
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5.3
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Authority, Approvals,
Enforceability and Consents .
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(a) The
Company has the corporate power and authority to enter into this
Agreement and the other Transaction Documents to be executed and
delivered by it and to perform its obligations hereunder and
thereunder.
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(b)
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The execution,
delivery and performance by the Company of this
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Agreement and the other Transaction
Documents to be executed and delivered by it and the consummation
by the Company of the transactions contemplated hereby and thereby
have been duly authorized and approved by the Board of Directors of
the Company and its shareholders and no other corporate proceedings
on the part of the Company or its shareholders are necessary to
authorize and approve this Agreement and the other Transaction
Documents to be executed and delivered by the Company and the
transactions contemplated hereby and thereby.
(c) This
Agreement has been, and the other Transaction Documents to be
executed and delivered by the Company at the Closing will, at the
Closing, have been, duly executed and delivered by the Company and
constitute (or will constitute at the Closing, as applicable) the
legal, valid and binding obligations of the Company and the
Shareholders enforceable against the Company and the Shareholders
in accordance with their respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other Laws relating to or
affecting the rights and remedies of creditors generally and to
general principles of equity (regardless of whether in equity or at
law).
(d) The
execution, delivery and performance by the Company of this
Agreement and the other Transaction Documents to be executed and
delivered by the Company and the Shareholders and the consummation
of the transactions contemplated hereby and thereby do not and will
not:
(i) contravene any
provision of the organizational documents of the
Company;
(ii) (after notice or
lapse of time or both) violate, conflict with, result in a breach
of any provision of, constitute a default under, result in or
permit the modification, revocation, cancellation, termination or
acceleration of, any Contract to which the Company is a Party or by
which any of its properties or assets are bound or otherwise
subject or, except as set forth on Schedule 5.3 ,
require any consent or waiver of any Party to any such
Contract;
(iii) result in the creation or
imposition of any Lien upon, or any Person obtaining any right to
acquire or other interest in, any properties, assets or rights of
the Company;
(iv) violate or conflict with
any Law applicable to the Company or its businesses or properties;
or
(v) require any
authorization, consent, order, permit or approval of, or notice to,
or filing, registration or qualification with, any Government
Authority.
(e) No
authorization, consent, order, permit or approval of, or notice to,
or filing, registration or qualification with, any Government
Authority is necessary to be obtained or made by the Company to
enable it to continue to conduct its businesses and operations and
use its properties after the Closing in a manner that is consistent
with the manner in which they are conducted and used.
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5.4
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Financial Statements
.
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(a) The
Company prior to the date of this Agreement has delivered to Parent
a true, correct and complete copy of:
(i) the unaudited
consolidated balance sheets of the Company as of May 31, 2005,
2006 and 2007, and the related unaudited consolidated statements of
operations, shareholders' equity and cash flows of the Company for
the fiscal years ended on such dates, together with the notes
thereto, in each case reviewed by Mohler, Nixon & Williams,
independent certified public accountants;
(ii) the unaudited
consolidated balance sheet of the Company as of May 31, 2008,
and the unaudited consolidated statements of operations,
shareholders' equity and cash flows of the Company for the fiscal
year ended on such date, as prepared by the Company and
(iii) the estimated unaudited
consolidated balance sheet of the Company as of June 6, 2008,
and the unaudited consolidated statement of operations of the
Company for the period from June 1, 2008 through June 6,
2008.
(all the foregoing financial
statements, including the notes thereto being referred to herein
collectively as the "Company Financial Statements" ). The
Company Financial Statements are in accordance with the books and
records of the Company and fairly present the financial position,
results of operations, shareholders' equity and cash flows of the
Company as of the dates and for the periods indicated, in each case
in accordance with GAAP consistently applied during such periods,
and the Company Financial Statements indicate all adjustments,
which consist of only normal recurring accruals and accruals
allowable, as delineated in this Agreement, as part of the Closing
expenses (that are not, individually or in the aggregate, material)
necessary for such fair presentations. The statements of operations
included in the Company Financial Statements do not contain any
items of special or nonrecurring income except as expressly
specified therein, and the balance sheets included in the Company
Financial Statements do not reflect any write-up or revaluation
increasing the book value of any assets. The books and accounts of
the Company are complete and correct and fully and fairly reflect
all of the transactions of the Company.
(b) The
management of the Company has: (i) designed disclosure
controls and procedures to ensure that material information
relating to the Company is made known to the management of the
Company by others within the Company; and (ii) disclosed,
based on its most recent evaluation, to the Company's Board of
Directors of the Company (or its audit committee, if any)
(A) any significant deficiencies in the design or operation of
internal controls which could adversely affect the ability of the
Company to record, process, summarize and report financial data and
have identified for the Company's Board of Directors any material
weaknesses in internal controls and (B) any fraud, whether or
not material, that involves management or other employees who have
a significant role in the internal controls of the Company. The
Company maintains a system of internal accounting controls
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 asset accountability, and
(iii) access to cash accounts is permitted only in accordance
with management's general or specific authorization.
(c) Since
May 31, 2006, neither the Company nor, to the Knowledge of the
Company, any Representative of the Company has received or
otherwise had or obtained knowledge of any complaint, allegation,
assertion or claim, whether written or oral, regarding the
accounting or auditing practices, procedures, methodologies or
methods of the Company with respect to the Company Financial
Statements or the internal accounting controls of the Company,
including any written or oral complaint, allegation, assertion or
claim that the Company has engaged in questionable accounting or
auditing practices. No attorney representing the Company, whether
or not employed by the Company has reported evidence of a material
violation of securities laws, breach of fiduciary duty or similar
violation by the Company or any of its respective Representatives
to the Board of Directors of the Company or any committee thereof
or to any director or officer of the Company.
(d) To
the Knowledge of the Company, no employee of the Company has
provided or is providing information to any law enforcement agency
regarding the commission or possible commission of any crime or the
violation or possible violation by Company of any Law by the
Company or any employee in his or her capacity as an employee of
the Company. The Company has not, and, to the Knowledge of the
Company, no contractor, subcontractor or agent of the Company, has
discharged, demoted, suspended, threatened, harassed or in any
other manner discriminated against an employee of the Company in
the terms and conditions of employment because of any act of such
employee described in 18 U.S.C. §1514A(a).
(e) The
Company is not subject to any " off-balance sheet
arrangement " (as defined in Item 303(a)(4)(ii) of
Regulation S-K promulgated under the Securities Exchange Act of
1934, as amended).
5.5
Absence of Undisclosed Liabilities . The Company has no
obligation, liability or commitment of any nature whatsoever
(whether direct or indirect, fixed or contingent, known or unknown,
due or to become due, accrued or otherwise, and whether or not
determined or determinable), and there is no existing condition,
situation or set of circumstances which is reasonably expected to
result in such a obligation, liability or commitment, except for
(a) obligations, liabilities and commitments reflected or
reserved against in the unaudited consolidated balance sheet as of
April 30, 2008 (the "Balance Sheet Date" ) included in the
Company Financial Statements (the "Company Balance Sheet" ),
and (b) current liabilities incurred in the Ordinary Course
after the Balance Sheet Date that, individually or in the
aggregate, do not have, and are not reasonably likely to have, a
Material Adverse Effect.
5.6
Absence of Certain Changes . Since the Balance Sheet Date,
the Company has conducted business only in the Ordinary Course
and:
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(a)
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except as set
forth on Schedule 5.6 , there has been no:
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(i)
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development,
change, event or occurrence that, individually
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or in the aggregate, has had, or is
reasonably likely to have, a Material Adverse Effect;
(ii) physical damage,
destruction or loss in an amount exceeding $15,000 in the aggregate
affecting the assets of the Company that is not covered by
insurance or has not been remedied within 30 days;
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(b)
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the Company has
not, directly or indirectly:
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(i) amended or
otherwise changed comparable organizational documents;
(ii) (A) issued,
granted or sold any equity securities or other security convertible
into equity, (B) issued, granted or sold any security, option,
warrant, call, subscription or other right of any kind, fixed or
contingent, that directly or indirectly calls for the issuance,
sale, pledge or other disposition of any equity securities,
(C) entered into any agreement, commitment or understanding
calling for any transaction referred to in clause (A) or (B)
of this paragraph (ii), or (D) made any other changes in
its equity capital structure;
(iii) excluding any buyout of
its existing optionees, and Karen Peirce and Mary Danner, as joint
tenants with a right of survivorship, declared, set aside or paid
any dividend or other distribution (whether in cash, securities,
property or any combination thereof) in respect of any Shares or
other equity securities, or purchase, redeem or otherwise acquire,
any Shares;
(iv) made any capital
expenditures (including expenditures for additions to plant,
property and equipment) or appropriations or commitments with
respect thereto;
(v) created, incurred or
assumed any indebtedness for money borrowed or obligations in
respect of capital leases;
(vi) excluding the payment of
debt under its existing banking agreements with Comerica Bank and
payments associated with the buyout of its existing optionees, and
Karen Peirce and Mary Danner, as joint tenants with a right of
survivorship, paid, discharged or satisfied claims, liabilities or
obligations (absolute, accrued, contingent or otherwise and whether
due or to become due) which involve payments or commitments to make
payments exceeding $20,000 in the aggregate, other than
(A) liabilities or obligations incurred in the Ordinary Course
and (B) scheduled repayments of current portions of and
interest on long-term indebtedness, the estimated amounts of which
payments (which in the case of interest payments on variable rate
debt have been projected on the basis of rates currently in effect)
have prior to the execution of this Agreement been disclosed by the
Company to Parent in a writing which specifically refers to this
Section;
(vii)assumed, endorsed, guaranteed
or otherwise become liable or responsible for (whether directly,
contingently or otherwise) any indebtedness for money borrowed or
any other obligation of any other Person;
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(viii)
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excluding any
payments associated with buying out
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its existing optionees and Karen
Peirce and Mary Danner, as joint tenants with a right of
survivorship, entered into any transaction or series of related
transactions, whether or not in the Ordinary Course, involving
total payments to or by it of, or involving the acquisition or
disposition by it of property, assets or rights having a value of,
more than $20,000 in the aggregate;
(ix) other than as contemplated
pursuant to Section 3 . 8
and Section 8 . 10 and
Section 8 . 11 of this Agreement,
approved or put into effect any increase in compensation or
benefits payable to any of its employees, made any bonus payment to
any of its employees, entered into or adopted a new Benefit Plan,
or amended any Benefit Plan to increase the amount of compensation
or benefits payable thereunder ;
(x) changed its
accounting methods, principles or practices, except as required by
GAAP;
(xi) waived any right or
entered into any one or more transactions that, individually or in
the aggregate, has had, or is reasonably likely to have, a Material
Adverse Effect;
(xii)mortgaged, pledged or subjected
to any Lien (other than Permitted Liens) any of its
assets;
(xiii) changed
or modified in any material respect any of the following:
(A) billing and collection policies, procedures and practices
with respect to accounts receivable or unbilled charges;
(B) policies, procedures and practices with respect to the
provision of discounts, rebates or allowances; or (C) payment
policies, procedures and practices with respect to accounts
payable;
(xiv) sold
or transferred any of its assets (including, without limitation,
any Intellectual Property), other than the sale of inventory in the
Ordinary Course);
(xv)other than as contemplated
pursuant to Section 8 .
3(f) , settled any Tax Audit or other proceeding, made
or changed any Tax accounting or recording method or election or
filed any amended Tax Return; or
(xvi) authorized,
or committed or agreed to take, whether in writing or otherwise,
any of the foregoing actions.
(a) The
Company has timely filed (or has had filed on its behalf) with the
appropriate Tax Authorities all Tax Returns required to be filed by
it, and such Tax Returns are true, correct and complete in all
material respects. The Company has paid, or has made adequate
provision in the Company Balance Sheet in accordance with GAAP for
the payment of, all Taxes for all periods (including any portions
thereof) ending through the date thereof. The unpaid Taxes of the
Company did not, as of the Balance Sheet Date, exceed the reserve
for Tax
liability set forth on the face of
the Company Balance Sheet (rather than in any notes thereto). Since
the Balance Sheet Date, the Company has incurred no liability for
Taxes outside the Ordinary Course (other than any liability for
Taxes arising as a result of the transactions contemplated by
Section 8 . 3(f)
).
(b) There
are no liens for Taxes upon any property or assets of the Company,
except for Taxes not yet due, and for which adequate reserves have
been established in accordance with GAAP, and which are being
contested in good faith.
(c) There
are no federal, state, local or foreign Tax Audits currently
pending with regard to any Taxes or Tax Returns of the Company and,
to the Knowledge of the Company, no such Tax Audit is threatened.
No claim has ever been made by a Tax Authority in a jurisdiction
where the Company does not file Tax Returns that it is or may be
subject to taxation by that jurisdiction. Prior to the date of this
Agreement, the Company has delivered or made available to Parent
complete and accurate copies of Tax Returns of the Company and its
predecessors for all open years and complete and accurate copies of
all examination reports and statements of deficiencies assessed
against or agreed to by the Company or any predecessor.
(d) There
are no outstanding requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the
assessment of any Taxes or deficiencies against the Company, and no
power of attorney granted by the Company with respect to any matter
relating to Taxes is currently in force. The Company has neither
requested nor received a ruling from, nor entered into a closing or
other agreement with, any Tax Authority that could affect the Tax
liability of the Company for periods after the Closing
Date.
(e) The
Company is not a Party to any agreement providing for the
allocation, indemnification, or sharing of Taxes that shall remain
in force after the Closing Date, and the Company shall have no
liability after the Closing Date for Taxes pursuant to any such
agreement.
(f) The
Company is not a Party to or partner in any joint venture,
partnership or other arrangement or contract that could be treated
as a partnership for federal income tax purposes.
(g) There
are no elections with respect to Taxes affecting the Company, to
the extent such elections are not shown on or in the Tax Returns
that have been delivered or made available to Parent prior to the
date of this Agreement.
(h)
Schedule 5.7(h) contains a list of all jurisdictions
(whether foreign or domestic) in which the Company currently files
Tax Returns, and the Company is not required to file Tax Returns in
any jurisdiction not listed on Schedule 5.7(h) . Except
as set forth in Schedule 5.7(h) , the Company does not
have a permanent establishment in any foreign country.
(i) Except
as set forth in Schedule 5.7(i) , the Company will not
be required to include any material item of income in, or exclude
any material item of deduction from, taxable income for any taxable
period (or portion thereof) ending after the Closing Date as a
result of any (i) " closing agreement " as
described in Section 7121 of the Code (or any corresponding or
similar provision of state, local or non-U.S. income Tax law)
executed on or
prior to the Closing Date,
(ii) installment sale or open transaction disposition made on
or prior to the Closing Date, (iii) prepaid amount received on
or prior to the Closing Date, (iv) intercompany item under
Treasury Regulation section 1.1502-13, (v) change in
accounting method for a taxable period ending on or before the
Closing Date, or (vi) other similar items.
(j) None
of the assets of the Company constitutes tax-exempt bond financed
property or tax-exempt use property, within the meaning of
Section 168 of the Code. The Company is not a Party to any
" safe harbor lease " that is subject to the
provisions of Section 168(f)(8) of the Internal Revenue Code
as in effect prior to the Tax Reform Act of 1986, or to any
" long-term contract " within the meaning of
Section 460 of the Code. The Company has not participated in
or cooperated with an international boycott within the meaning of
Section 999 of the Code. The Company has proper receipts,
within the meaning of Treasury regulation Section 1.905-2, for
any non-United States Tax that has been or in the future may be
claimed as a foreign tax credit for United States federal income
tax purposes.
(k) The
Company has not: (i) consented at any time under former
Section 341(f)(1) of the Code to have the provisions of former
Section 341(f)(2) of the Code apply to any disposition of any
of the assets of the Company; (ii) agreed, nor is it required,
to make any adjustment under Section 481(a) of the Code by
reason of a change in accounting method or otherwise; or
(iii) made any similar election or is required to apply any
similar rules under any comparable state, local or foreign Tax
provision.
(l) The
Company has not been a member of an affiliated group filing a
consolidated, combined, group or unitary income Tax Return for any
period for which the statute of limitations remains open. The
Company has no liability for the Taxes of any person (i) under
Treasury Regulation Section 1.1502-6 (or any similar provision
of state, local, or foreign law), (ii) as a transferee or
successor, (iii) by contract, or (iv) otherwise.
(m) The
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, shareholder or other
Third Party and has complied with all applicable information
reporting requirements.
(n) The
Company has not distributed the shares of stock of any corporation
in a transaction intended to satisfy the requirements of
Section 355 of the Code, and the Shares have not been
distributed in a transaction intended to satisfy the requirements
of Section 355 of the Code.
(o) The
Company has adequately disclosed on its Federal income Tax Returns
all positions taken therein that could give rise to a substantial
understatement of Federal income tax within the meaning of
Section 6662 of the Code. The Company has not participated in
any " reportable transaction " as defined under
Treasury Regulations Section 1.6011-4 or any similar foreign,
state or local law or regulation; nor is the Company required to
maintain a list pursuant to Section 6112 of the Code, any
Treasury Regulations promulgated thereunder, or any similar
foreign, state or local law or regulation.
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(p)
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The Company was
not a United States real property holding
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corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code. None of the
Shareholders is a foreign person subject to withholding under
Section 1445 of the Code and the regulations promulgated
thereunder, and at the Closing the Shareholders shall deliver to
Parent a certificate (the "FIRPTA Certificate" ) to that
effect which complies with the requirements of regulations
promulgated under Section 1445 of the Code.
(a) Except
as set forth on Schedule 5.8(a) hereto, (i) there
is no claim, action, arbitration, suit, litigation, investigation,
inquiry, review, demand, request for information or proceeding
(collectively, "Claims" ) pending against, or, to the
Knowledge of the Company, threatened against or affecting, the
Company or any of its properties or rights, at law or in equity,
before or by any court, arbitrator, panel or other Government
Authority and (ii) the Company is not operating under, or
subject to, any judgment, decree, writ, injunction, ruling, award,
stipulation, determination or order (collectively,
"Judgments" ) of any Government Authority.
Schedule 5.8(a) identifies each Claim and Judgment
disclosed thereon that is fully covered by an insurance
policy.
(b) The
business of the Company is being conducted in all material respects
in compliance with all Laws applicable to the Company and its
business and properties.
(c) The
Company owns or holds all Permits material to the conduct of its
business. The Company is in all material respects in compliance
with all Permits required by all applicable Laws.
Schedule 5.8(c) lists all Permits owned or held by the
Company. No event has occurred and is continuing which permits, or
after notice or lapse of time or both would permit, any
modification, revocation, non-renewal or termination of any Permit
held by the Company.
(d) The
Company has not received any notice asserting any noncompliance
with any Law or Permit. The Company has no Knowledge of any Law
proposed or under consideration that, if effective, individually or
in the aggregate, would have or is reasonably likely to have, a
Material Adverse Effect. No governmental, administrative or
judicial authority has indicated any intention to initiate any
investigation, inquiry or review involving the Company or any of
its properties or rights.
(a) The
Company does not own, nor has it ever owned, any real
property.
(b)
Schedule 5.9(b) lists as of the date of this Agreement
all Real Property Leases. The real property described on
Schedule 5.9(b) is referred to as the "Leased Real
Property . " Copies of all written (and summaries of all
oral) Real Property Leases have been provided to Parent prior to
the date of this Agreement.
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(c)
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All Leased Real
Property and its condition is suitable for its
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current use by the
Company.
(d) All
buildings, structures, improvements, fixtures, building systems and
equipment, and all components thereof, included in the Leased Real
Property are in good condition, ordinary wear and tear excepted and
are suitable in all material respects for their current use by the
Company.
(e) To
the Company's knowledge, there are adequate sanitary and storm
sewer, public water, gas, electrical, telephone and other utilities
and facilities at each of the Leased Real Properties, and the
Company has not received notice from any provider of such services
of any changes required to any facilities used in connection with
such utilities. The Company has no Knowledge of any pending or
threatened moratoriums or restrictions that are reasonably likely
to adversely affect the cost or availability of any public
utilities.
(f) The
Company enjoys peaceful and undisturbed possession of each Leased
Real Property.
(g) To
the Company's knowledge, there are no pending condemnation, eminent
domain, or any other taking by public authority with or without
payment of consideration therefor or similar actions with respect
to any of the Leased Real Properties, nor has any notice of such a
proposed condemnation been received by he Company.
(h) To
the Company's knowledge, the Company has the right to conduct its
business in each Leased Real Property for the remaining term of the
applicable Real Property Lease.
(i) With
respect to the Leased Real Property, all options to renew, rights
of first offer and rights of first refusal exercisable prior to the
date of this Agreement have been properly exercised.
(j) Prior
to the date of this Agreement, the Company has delivered to Parent
copies of all subleases (collectively, the "Subleases" )
entered into by the Company (all of which are listed on
Schedule 5.9(j) ). All Subleases are, and have been for
the terms thereof, in good standing and in full force and effect,
and all necessary consents with respect thereto have been
obtained.
5.10
Inventory . All inventories, net of reserves, reflected on
the Company Balance Sheet or arising since the Balance Sheet Date,
are currently marketable and are good and usable in connection with
the business of the Company as presently conducted. The value of
all inventory used or held for use by the Company that is obsolete,
slow moving, excess or of below-standard quality has been written
down to net realizable value or adequate reserves have been
provided therefor. The values at which such inventories are carried
are in accordance with GAAP consistently applied. The amount and
mix of items in the inventories of supplies, in process and
finished products are consistent with the business practice of the
Company.
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5.11
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Intellectual Property
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(a)
Schedules 5.11(a)-1 to 4 list (1) all Domain Names of
which the Company is the registrant or of which a Third Party is
the registrant for the benefit of the Company (collectively, the
"Company Registered Domain Names" ); (2) all registered
Marks and pending applications for registration of Marks owned by
the Company (collectively, the "Company Registered Marks" );
(3) all Patents owned by the Company (collectively, the
"Company Patents" ); (4) all registered Copyrights and
all pending applications for registration of Copyrights by the
Company (collectively, the "Company Registered Copyrights"
and (5) all other Intellectual Property owned by the Company.
The Company Registered Domain Names, the Company Registered Marks,
Company Patents and the Company Registered Copyrights are referred
to herein as the "Company Registered IP . "
Schedule 5.11(a)-5 lists all other Company owned
intellectual property. Neither the Company Registered IP nor any
other Intellectual Property owned or, to the Knowledge of the
Company, used by the Company (the Company Registered IP, together
with all other Intellectual Property owned or used by the Company,
the "Company IP" ) infringes upon or misappropriates or
violates the Intellectual Property rights or the confidential and
proprietary information, including Trade Secrets, of any Third
Party. None of the Company IP has been the subject of a judicial
finding or opinion, nor has the Company received any written notice
or claim challenging the ownership, validity, registrability,
enforceability, use or licensed right to use any Intellectual
Property. No claim or notice has been asserted against the Company
in writing or, to the Knowledge of the Company, orally, that the
conduct of the business of the Company as currently conducted
infringes in any material respect upon or misappropriates the
Intellectual Property rights or the confidential and proprietary
information, including Trade Secrets, of any Third Party, in each
case, except with respect to claims or notices that have been fully
resolved. The Company has timely paid all filing, examination,
issuance, post registration and maintenance fees, annuities and the
like associated with or required with respect to the Company
Registered IP, and all documents, recordations and certificates
necessary to be filed by the Company to maintain the effectiveness
of the Company Registered IP have been filed with the relevant
patent, copyright, trademark or other authorities in the United
States or foreign jurisdictions, as the case may be, so that no
item required to be listed in Schedules 5.11(a)-1 to 4 , has
lapsed, expired or been abandoned or canceled other than in the
Ordinary Course.
(b) The
Company has used commercially reasonable efforts to protect its
rights and the secrecy of its confidential information and Trade
Secrets, including by requiring that all employees, consultants and
independent contractors who are involved in the creation of Company
IP enter into non-disclosure and invention assignment
agreements.
(c) The
Company owns all right, title and interest in and to the Company
IP, or has a valid license to use (if required), each other item of
Intellectual Property currently used by the Company in the business
of the Company and is entitled to use any such Company IP or other
Intellectual Property as currently used to the extent such use is
material to such business.
(d) There
are no claims asserted or threatened by the Company that a Third
Party infringes, misappropriates or otherwise violates any of the
Company IP.
(e) The
Company IP, together with the rights granted to the Company under
any " shrink-wrap " or " click-wrap "
license agreements relating to software desktop
applications, are sufficient for the
continued conduct of the business of the Company after the Closing
Date in the same manner as it was conducted prior to the Closing
Date in all material respects.
5.12
Insurance . Schedule 5.12 lists as of the date
of this Agreement all policies of title, property, fire, casualty,
liability, life, business interruption, product liability,
sprinkler and water damage, workmen's compensation, libel and
slander, and o
