AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

 

Execution Copy

 

 

AGREEMENT AND PLAN OF MERGER

 

by and among

 

II-VI INCORPORATED and II-VI ACQUISITION CO.

 

and

 

MARLOW INDUSTRIES, INC. and its SHAREHOLDERS

 

 

TABLE OF CONTENTS

 

 

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ii

 

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AGREEMENT AND PLAN OF MERGER

 

THIS AGREEMENT dated as of the 10th day of December 2004,

 

BY AND AMONG

 

II-VI INCORPORATED, a Pennsylvania corporation (“ II-VI ”), and II-VI ACQUISITION CO., a Texas corporation (“ Merger Sub ”) (collectively referred to as the “ Acquiring Companies ”),

 

AND

 

MARLOW INDUSTRIES, INC., a Texas corporation (“ Marlow ”), and RAYMOND MARLOW, ELIZABETH MARLOW, THE MARLOW CO., LTD., a Texas limited partnership, MARSHALL J. DOKE, JR., JOHN L. and DEBRA NELSON, DAVID R. and JUDY M. MARLOW, ROBERT D. PECK, GEORGE E. WARE, FRANCES A. MATTINGLY, WILLIAM L. KOLANDER, DWAYNE FRIESEN, JAMES L. and BETTY MATTHEWS, CHRISTIAN H. WITZKE III, JAMES L. BIERSCHENK, MICHAEL D. GILLEY, PAMELA J. JENNETT, DWIGHT A. JOHNSON, HYLAN B. LYON, JR., LEONARD J. RECINE, PETER B. TOWNSEND, BARRY E. NICKERSON, JEFFREY W. SHARP and STANLEY W. THOMAS (collectively, the “ Shareholders ”) (Marlow and the Shareholders are hereinafter sometimes referred to collectively as the “ Sellers ”).

 

W I T N E S S E T H:

 

WHEREAS , Marlow and its Subsidiaries (as defined below) are engaged in the design, development, manufacture and sale of products utilizing thermoelectric technology (the “ Business ”);

 

WHEREAS , II-VI is interested in acquiring Marlow;

 

WHEREAS , Merger Sub is a wholly owned subsidiary of II-VI; and

 

WHEREAS , the respective boards of directors of II-VI, Merger Sub and Marlow have approved the acquisition of Marlow by Merger Sub through a merger (the “ Merger ”) and deem it advisable and in the best interests of their respective shareholders to consummate the Merger of Merger Sub with and into Marlow on the terms and conditions set forth herein.

 

NOW, THEREFORE , in consideration of the representations, warranties, covenants, agreements and conditions contained herein, and intending to be legally bound hereby, the parties agree as follows:

 

ARTICLE I

DEFINITIONS

 

1.1 Definitions . For purposes of this Agreement, the following terms have the meanings specified in this Section 1.1:

 

“ Accounts Receivable ” shall have the meaning set forth in Section 4.23.

 

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“ Adjusted Working Capital ” shall have the meaning set forth in Section 3.7(a).

 

“ Adjusted Working Capital Decrease ” shall have the meaning set forth in Section 3.7(c).

 

“ Adjusted Working Capital Escrow Balance ” means $500,000 less the amount of the Adjusted Working Capital Decrease, if any, paid from the Escrow Amount; provided, however, that the Adjusted Working Capital Escrow Balance shall not be less than zero.

 

“ Adjusted Working Capital Increase ” shall have the meaning set forth in Section 3.7(d).

 

“ Affiliate ” means a Person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, a Party. For the purpose of this definition, the term “ control ” with respect to a Person that is not a natural person means the power to direct the management or policies of such Person, directly or indirectly, through the ownership of more than fifty percent (50%) of a class of voting securities, by Contract or otherwise.

 

“ Articles of Merger ” means the Articles of Merger delivered to the Texas Secretary of State pursuant to Article 5.04 of the Texas Act.

 

“ Base Amount ” shall have the meaning set forth in Section 3.7(c).

 

“ Benefit Plans ” means all “employee benefit plans” (as defined in Section 3(3) of ERISA), bonus, incentive, deferred compensation, stock or stock option plans or arrangements, severance, change-in-control and other employee fringe benefit plans or arrangements, whether oral or written, under which any employee or former employee of Marlow or any Subsidiary has any present or future right to benefits or under which Marlow or any Subsidiary has any liability for present or future payment of benefits.

 

“Cash Equivalent Transfer” shall have the meaning set forth in Section 3.2(a)(ii).

 

“ Certificates ” shall have the meaning set forth in Section 3.3.

 

“ Closing ” shall have the meaning set forth in Section 2.1(b).

 

“ Closing Compensation Liabilities ” means the compensation paid to various employees of Marlow as of the date of Closing in accordance with the bonus program described in a certificate delivered to the Acquiring Companies on the date of this Agreement, which bonus program shall be acceptable to the Acquiring Companies.

 

“ Closing Date ” shall have the meaning set forth in Section 2.1(b).

 

“ Code ” means the Internal Revenue Code of 1986, as amended.

 

“ Contract ” means, with respect to any Person, any arrangement, agreement, indenture, undertaking, debt instrument, loan, mortgage, letter of credit, instrument, lease, understanding or

 

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other commitment, oral or written, to which such Person or any of its Subsidiaries is a party or by which any of them is bound or to which any of their properties is subject.

 

“ Copyrights ” means all copyrights, copyrightable works, and applications for registration thereof, including all rights of authorship, use, publication, reproduction, distribution, performance transformation, moral rights and rights of ownership of copyrightable works, and all rights to register and obtain renewals and extensions of registrations, together with all other interests accruing thereby.

 

“ Deferred Acquisition Costs ” means the amount owed by Marlow to Locke Liddell in connection with an unsuccessful sale of Marlow and which is set forth as a current liability of Marlow in the Financial Statements.

 

“ Dissenting Holder ” shall have the meaning set forth in Section 3.6(a).

 

“ Dissenting Shares ” means any shares of Marlow Stock for which the shareholder has asserted dissenters rights under the provisions of Section 5.12 of the Texas Act and who has performed every act required up to the time involved for the assertion of those rights.

 

“Domestic Bank Account Funds” shall have the meaning set forth in Section 3.2(a)(i).

 

“ Effective Time ” shall have the meaning set forth in Section 2.1(c).

 

“ Environmental Condition ” shall have the meaning set forth in Section 4.15(a).

 

“Environmental Escrow Deposit” shall have the meaning set forth in Section 9.6(a).

 

“ Environmental Law ” means any Law relating in any way to the protection of the environment or natural resources, pollution, human health or safety or the use, treatment, storage, disposal, arrangement for disposal, transportation, reclamation, management, handling or release or threat of release of any Hazardous Substances.

 

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended.

 

“ Escrow Agent ” means J.P. Morgan Trust Company, National Association.

 

“ Escrow Agreement ” shall have the meaning set forth in Section 3.2(d).

 

“ Escrow Amount ” shall have the meaning set forth in Section 3.2(d).

 

“ Escrow Share Amount ” means the amount, if any, distributed to the holders of Marlow Stock on a per share basis in accordance with the terms of the Escrow Agreement.

 

“ Exhibits ” means the exhibits which are attached hereto and which are incorporated herein by reference.

 

“ Financial Statements ” shall have the meaning set forth in Section 4.8.

 

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“ GAAP ” means generally accepted accounting principles accepted in the United States of America as in effect from time to time.

 

“ General Escrow Deposit ” shall have the meaning set forth in Section 9.6(b).

 

“ Governmental Authority ” means any court, commission, regulatory agency, administrative agency, self-regulatory organization or any other federal, state or local governmental authority or instrumentality.

 

“ Hazardous Substances ” means any pollutant, contaminant, industrial waste, hazardous waste, polychlorinated biphenyls, radioactive materials, toxic or hazardous substances.

 

“ Indemnitee ” shall have the meaning set forth in Section 9.4.

 

“ Indemnitor ” shall have the meaning set forth in Section 9.4.

 

“ Initial Consideration ” shall have the meaning set forth in Section 3.1.

 

“ International Bank Account Funds ” shall have the meaning set forth in Section 3.2(a)(ii).

 

“ IRS ” means the Internal Revenue Service.

 

“ Issued Patents ” means all issued patents, reissued or reexamined patents, revivals of patents, utility models, certificates of invention, registrations of patents and extensions thereof, regardless of country or formal name, issued by the United States Patent and Trademark Office and any other applicable Governmental Authority.

 

“ Knowledge ” means (i) with respect to an individual, the knowledge of the individual after making such diligent inquiry as may be reasonable under the circumstances; and (ii) with respect to Marlow or any of its Subsidiaries, the knowledge of the following executive officers and directors of Marlow and its Subsidiaries after making such diligent inquiry as may be reasonable under the circumstances: Raymond Marlow, Robert D. Peck, Barry E. Nickerson, Hylon B. Lyon, David Marlow, Pamela J. Jennett, Kevin MacGibbon, Jack Hunt and Pete Townsend.

 

“Known Environmental Condition” shall have the meaning set forth in the Remediation Agreement.

 

“ Law ” means any applicable statute, law, ordinance, regulation, rule, ruling, order, restriction, requirement, writ, injunction, decree or other official act of or by any Governmental Authority.

 

“Leased Personal Property” means the personal property leased by Marlow or any of its Subsidiaries and set forth on Schedule 4.18(a).

 

“ Leased Real Property ” means the real property leased by Marlow or any of its Subsidiaries and set forth on Schedule 4.18(b).

 

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“ Lien ” means any charge, mortgage, pledge, security interest, restriction, claim, lien, or encumbrance of any kind.

 

“ Locke Liddell ” means Locke Liddell & Sapp LLP.

 

“ Marlow Cash ” means (i) the cash and cash equivalents of Marlow as of the close of business on November 28, 2004, and (ii) any proceeds received from the exercise of Marlow Stock Options and the cash received from the repayment of the Raymond Marlow Debt at or prior to the Closing.

 

“ Marlow Closing Expenditures ” shall have the meaning set forth in Section 3.2(a)(i).

 

“ Marlow Debt ” means the amounts due and payable, including principal, interest and any satisfaction fees or expenses, under the following: (i) the Equipment Note dated July 11, 2000 between Marlow and Bank One Leasing Corporation; (ii) the Equipment Note dated December 28, 2000 between Marlow and Bank One Leasing Corporation; (iii) the Equipment Note dated July 13, 2001 between Marlow and Bank One Leasing Corporation; (iv) the Equipment Note dated December 10, 2001 between Marlow and Bank One Leasing Corporation; (v) the Note dated May 30, 2002 between Marlow and National Machine Tool Financial Corporation (as assigned to TCF Leasing, Inc. on or about June 12, 2002); (vi) the Note dated July 3, 2002 between Marlow and National Machine Tool Financial Corporation (as assigned to TCF Leasing, Inc. on or about September 9, 2002); (vii) the Credit Agreement dated August 30, 2002 between Marlow and Bank One, N.A., as amended by the Amendment to Credit Agreement by and between Marlow and Bank One, N.A. dated June 15, 2003, and the Second Amendment to Credit Agreement by and between Marlow and Bank One, N.A. dated June 30, 2004; and (viii) any other long term debt and other long term liabilities, including interest, fees, premiums and penalties, if any, outstanding immediately prior to the Closing Date.

 

“ Marlow Stock ” means the common stock of Marlow.

 

“ Marlow Stock Option Plans ” mean (i) the 1988 Employee Stock Option Plan of Marlow; (ii) the 1999 Employee Stock Option Plan of Marlow; (iii) the 1988 Board Stock Option Plan of Marlow; and (iv) the 1999 Board Stock Option Plan of Marlow.

 

“ Marlow Stock Options ” mean any Rights granted under or pursuant to a Marlow Stock Option Plan.

 

“ Marlow Tax Benefit ” means an amount equal to 50% of the excess of the deemed tax benefit from the payment of the Closing Compensation Liabilities over the payroll and other similar taxes incurred by Marlow in connection with the payment of such amount. The deemed tax benefit, will be equal to 34% of the Closing Compensation Liabilities.

 

“ Marlow Transaction Expenses ” means the obligations of Marlow in connection with the negotiation and delivery of this Agreement and the consummation of the transactions contemplated herein, including the fees of the Seller’s Broker, excluding any such amounts paid prior to the Closing Date.

 

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“ Material Adverse Effect ” means (i) with respect to Marlow, any effect that, individually or in the aggregate, is both material and adverse to the financial condition, results of operations, assets or business of Marlow and its Subsidiaries, or (ii) a material adverse effect on the ability of the Parties to consummate the transactions contemplated by this Agreement.

 

“ Material Contract ” shall mean the following Contracts to which Marlow or any of its Subsidiaries is a party or otherwise bound or to which their assets or properties may be affected:

 

(i) each Contract which involves the performance of services or delivery of goods or materials to Marlow or any Subsidiary of an amount or value in excess of $50,000;

 

(ii) each Contract not entered into in the ordinary course of business and that involves expenditures or receipts of Marlow or any Subsidiary in excess of $50,000;

 

(iii) each Contract affecting the ownership of, leasing of, title to, use of, or any fee title, leasehold or other interest in, any real or personal property;

 

(iv) each Contract with respect to Proprietary Rights, including license agreements and agreements with current or former employees, consultants, or contractors regarding the appropriation or the non-disclosure of any of the Proprietary Rights;

 

(v) each collective bargaining agreement and any other Contract to or with any labor union or other employee representative of a group of employees;

 

(vi) each joint venture, partnership, and other any Contract (however named) involving a sharing of profits, losses, costs, or liabilities by Marlow or any Subsidiary with any other Person;

 

(vii) each Contract containing covenants that in any way purport to restrict the business activity of Marlow or any Subsidiary or limit the freedom of Marlow or any Subsidiary to engage in any line of business or to compete with any Person;

 

(viii) each Contract providing for payments to or by any person or entity based on sales, purchases, or profits, other than direct payments for goods;

 

(ix) each power of attorney of Marlow or any Subsidiary that is currently effective and outstanding;

 

(x) each Contract for capital expenditures in excess of $50,000;

 

(xi) each written warranty, guaranty, and or other similar undertaking with respect to contractual performance extended by Marlow or any Subsidiary other than those in the ordinary course of business;

 

(xii) each Contract with a Governmental Authority;

 

(xiii) each Benefit Plan; and

 

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(xiv) each amendment, supplement, and modification (whether oral or written) in respect of any of the foregoing.

 

“ Merger ” has the meaning set forth in the Preamble.

 

“ Merger Consideration ” shall have the meaning set forth in Section 3.1.

 

“ Merger Sub ” means II-VI Acquisition Co., a Texas corporation.

 

“ Miscellaneous Expense Fund” shall have the meaning set forth in Section 3.7(a)(13).

 

“ Necessary Consents ” means the consents or approvals set forth on Schedule 4.5, 4.6 and 4.20.

 

“ Negotiated Deferred Acquisition Costs ” means the amount of $500,000.

 

“ Net Initial Consideration ” shall have the meaning set forth in Section 3.2(b).

 

“ Parties ” means II-VI, Merger Sub, Marlow and the Shareholders.

 

“Party ” means any one of the Parties.

 

“ Patent Applications ” means all published or unpublished nonprovisional and provisional patent applications, reexamination proceedings, invention disclosures and records of invention.

 

“ Patents ” shall mean the Issued Patents and the Patent Applications.

 

“ Person ” means a corporation, an association, a partnership, a limited liability company, an organization, a business, an individual, a government or a subdivision thereof or a governmental agency.

 

“ Plan Sponsor ” means CitiStreet Associates, L.L.C.

 

“ Pre-Closing Period ” means all tax periods the last day of which ends on or prior to November 28, 2004.

 

“ Proprietary Rights ” means any: (a)(i) Issued Patents, (ii) Patent Applications, (iii) Trademarks, fictitious business names and domain name registrations, (iv) Copyrights, (v) Trade Secrets, (vi) all other ideas, inventions, processes, designs, manufacturing and operating specifications, technical data, and other intangible assets, intellectual properties and rights (whether or not appropriate steps have been taken to protect, under applicable law, such other intangible assets, properties or rights); or (b) any right to use or exploit any of the foregoing.

 

“ Raymond Marlow Debt ” means the amount of indebtedness of Raymond Marlow to Marlow, including principal and interest, in the amount of $186,770 which is set forth as a non-current asset of Marlow in the Financial Statements.

 

“ Real Property ” shall have the meaning set forth in Section 4.17.

 

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“ Remediation ” shall have the meaning set forth in the Remediation Agreement.

 

“ Remediation Agreement ” shall mean the agreement set forth as Exhibit “G”.

 

“ Rights ” means, with respect to any Person, securities or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire, or any options, calls or commitments relating to, or any stock appreciation right or other instrument the value of which is determined in whole or in part by reference to the market price or value of, shares of capital stock of such Person.

 

“ Sellers ” mean Marlow and the Shareholders.

 

“ Seller’s Broker ” shall have the meaning set forth in Section 4.26.

 

“ Schedules ” means the disclosure schedules attached hereto which are incorporated herein by reference.

 

“ Several ” or “ Severally ” or similar terms shall mean, with respect to any applicable obligation, that such obligation is limited as to each Person so obligated in the proportion by which such Person’s shares of Marlow Stock immediately prior to the Effective Time bears to the total number of outstanding shares of Marlow Stock immediately prior to the Effective Time. For example, if a Shareholder holds 10% of the outstanding Marlow Stock immediately prior to the Effective Time, such Shareholder’s liability with respect to a $100,000 obligation of the Shareholders that is Several would be $10,000.

 

“ Shareholder Representative ” shall mean Raymond Marlow and, in his absence, resignation, or lack of competence, Elizabeth Marlow and, in the absence, resignation or lack of competence of both the foregoing Persons, then David Marlow; provided, however, that any such Person may resign as Shareholder Representative by delivering a notice of resignation to II-VI and the Shareholders.

 

“ Shareholders ” shall mean those individuals set forth in the Preamble and being the holders of all of the issued and outstanding shares of Marlow Stock as of the date of this Agreement.

 

“ Statement of Adjusted Working Capital ” shall have the meaning set forth in Section 3.7(a).

 

“Stock Option Exercise Funds” shall have the meaning set forth in Section 3.2(a)(ii).

 

“ Stock Repurchase Agreement ” shall mean the Stock Repurchase Agreement between Marlow and Elizabeth Griot Peterson relating to the purchase by Marlow of the shares of Marlow Stock owned by Ms. Peterson.

 

“ Subsidiary ” or “ Subsidiaries ” of a Person means any corporation or other entity, the securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other governing body.

 

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“ Surviving Corporation ” means Marlow after consummation of the Merger.

 

“ Tax Return ” shall have the meaning set forth in Section 4.12.

 

“ Taxes ” means all taxes, charges, fees, levies or other assessments, however denominated, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, goods and services, capital, transfer, franchise, profits, license, withholding, payroll, employment, employer health, excise, estimated, severance, stamp, occupation, property or other taxes, custom duties, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority whether arising before, on or after the Closing Date.

 

“ Texas Act ” shall mean the Texas Business Corporations Act.

 

“ Trade Secrets ” means all product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, research and development, manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code), computer software and database technologies, systems, structures and architectures (and related processes, formulae, composition, improvements, devices, know-how, inventions, discoveries, concepts, ideas, designs, methods and information), and any other information, however documented, that is a trade secret within the meaning of the applicable trade-secret protection law.

 

“ Trademarks ” means all (i) trademarks, service marks, marks, logos, insignias, designs, names or other symbols, (ii) applications for registration of trademarks, service marks, marks, logos, insignias, designs, names or other symbols, and (iii) trademarks, service marks, marks, logos, insignias, designs, names or other symbols for which registrations has been obtained.

 

1.2 Interpretation . Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” Whenever this Agreement shall require a Party to take an action, such requirement shall be deemed to constitute an undertaking by such Party to cause its Subsidiaries, and to use commercially reasonable efforts to cause its other Affiliates, to take appropriate action in connection therewith. The headings in this Agreement are intended solely for the convenience of reference and shall be given no effect in the construction or interpretation of this Agreement.

 

ARTICLE II

THE MERGER

 

2.1 The Merger .

 

(a) Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time, Merger Sub shall be merged with and into Marlow in accordance with the Texas Act, whereupon the separate existence of Merger Sub shall cease, and Marlow shall continue as the Surviving Corporation. The corporate existence of the Surviving Corporation shall continue unimpaired and unaffected by the Merger.

 

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(b) Upon the terms and subject to the conditions of this Agreement, the closing of the Merger (the “ Closing ”) shall take place at 10:00 a.m. on December 10, 2004, except as may be otherwise extended pursuant to this Section 2.1(b) or Section 6.2(b) below (the “ Closing Date ”), at the offices of Sherrard, German & Kelly, P.C. 28 ^th Floor, Two PNC Plaza, Pittsburgh, PA 15222, or at such other time, date or place as agreed to in writing by the parties hereto. In the event the Closing does not occur on the Closing Date, then either Party may declare time to be of the essence by giving written notice to the other Parties. The notice will state that time is of the essence and fix the date of Closing, including the time, date and place of the Closing. The date fixed may not be earlier than fifteen (15) days or later than thirty (30) days following the effective date of the notice.

 

(c) Upon the Closing, Merger Sub and Marlow will file the Articles of Merger with the Secretary of State of the State of Texas and make all other filings or recordings required by the Texas Act in connection with the Merger. The Merger shall become effective upon the filing of the Articles of Merger with the Secretary of State of the State of Texas or at such later time as mutually agreed by II-VI, Merger Sub and Marlow and specified in the Articles of Merger (the “ Effective Time ”).

 

(d) Except as expressly set forth in Article II and Article III hereof, the Merger shall have the effects set forth in Section 5.06 of the Texas Act with all right, title and interest to all real estate and other property owned by Marlow or Merger Sub being vested in, and all liabilities and obligations of Marlow or Merger Sub being allocated to, the Surviving Corporation.

 

2.2 Articles of Incorporation; Bylaws . The articles of incorporation and bylaws of Merger Sub at the Effective Time shall be the articles of incorporation and bylaws of the Surviving Corporation until amended in accordance with applicable Law, except that the name of the Surviving Corporation shall be Marlow Industries, Inc.

 

2.3 Directors and Officers . From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with the Texas Act and the articles of incorporation and bylaws of the Surviving Corporation, (a) the directors of Merger Sub at the Effective Time shall be the directors of the Surviving Corporation, and (b) the officers of Merger Sub at the Effective Time shall be the officers of the Surviving Corporation.

 

ARTICLE III

CONSIDERATION; CONVERSION OF SHARES

 

3.1 Merger Consideration . Upon the terms and subject to the conditions of this Agreement, the total consideration payable by II-VI in exchange for the surrender of all of the issued and outstanding shares of Marlow Stock and Rights, if any, as of the Effective Time shall be (in addition to any Adjusted Working Capital Increase) Thirty Million Eight Hundred Fifty Thousand Dollars and No/100 ($30,850,000), which shall be allocated among the holders of Marlow Stock and Rights as follows: each share of Marlow Stock issued and outstanding immediately prior to the Effective Time (other than treasury shares and Dissenter Shares, if any) shall become and be converted at the Effective Time into the right to receive:

 

(i) an amount equal to the Net Initial Consideration;

 

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(ii) the Adjusted Working Capital Increase, if any; and

 

(iii) the Escrow Share Amount, not to exceed $4.035 per share.

 

The Initial Consideration, the Adjusted Working Capital Increase and the Escrow Share Amount shall collectively be referred to herein as the “ Merger Consideration ”. Notwithstanding anything to the contrary in this Section 3.1, the right to Merger Consideration shall be subject to the Adjusted Working Capital Decrease, if any, pursuant to Section 3.7.

 

3.2 Payment of Merger Consideration . The aggregate Merger Consideration shall be payable as follows:

 

(a) Application of Funds Prior to Payment of Initial Consideration .

 

(i) Marlow will use cash available in its domestic bank accounts at Closing (“ Domestic Bank Account Funds ”) to satisfy Marlow Debt, Closing Compensation Liabilities, Marlow Transaction Expenses and the Negotiated Deferred Acquisition Costs and the amounts payable by the Company pursuant to the Stock Repurchase Agreement (together, the “ Marlow Closing Expenditures ”) until all Domestic Bank Account Funds are fully depleted in partial satisfaction of the Marlow Closing Expenditures.

 

(ii) II-VI will furnish additional cash to Marlow’s domestic bank accounts at Closing equivalent to the amount of cash in Marlow’s international bank accounts on November 28, 2004 (“ International Bank Account Funds ”), as well as additional cash equivalent to all checks received by Marlow for the exercise of options immediately prior to Closing (the “ Stock Option Exercise Funds ”), and Marlow will use the International Bank Account Funds and Stock Option Exercise Funds (collectively, the “ Cash Equivalent Transfer ”) to satisfy the Marlow Closing Expenditures to the full extent of the Cash Equivalent Transfer.

 

(iii) After the expenditure by Marlow of the Domestic Bank Account Funds and the Cash Equivalent Transfer, the unsatisfied amount of the Marlow Closing Expenditures remaining will be deducted from the Initial Consideration, as set forth below.

 

(b) Initial Consideration . An amount equal to $27,807,500 (the “ Initial Consideration ”) shall be delivered by II-VI and applied as follows:

 

(i) an amount equal to the Marlow Closing Expenditures remaining after the application of funds as set forth in Section 3.2(a) shall be applied to the satisfaction in full of such remaining Marlow Closing Expenditures; and

 

(ii) the balance of the Initial Consideration (on a per share basis, the “ Net Initial Consideration ”) shall be paid to the holders of the Marlow Stock

 

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entitled to the Merger Consideration in immediately available funds in accordance with Section 3.3.

 

(c) Adjusted Working Capital Increase . II-VI shall pay the aggregate Adjusted Working Capital Increase, if any, in immediately available funds in accordance with Section 3.7(d) of this Agreement.

 

(d) Escrow Amount . At Closing, II-VI shall pay the amount of Three Million Forty-Two Thousand Five Hundred Dollars ($3,042,500) (the “ Escrow Amount ”) in immediately available funds to the Escrow Agent to hold in escrow in accordance with Section 9.6 of this Agreement and with the terms and conditions of the escrow agreement attached hereto as Exhibit “A” (the “ Escrow Agreement ”).

 

3.3 Surrender and Exchange of Certificates . At the Closing, each holder of a certificate representing outstanding shares of Marlow Stock (the “ Certificates ”) shall surrender to II-VI the Certificates, duly endorsed in blank or in a form appropriate for transfer, in exchange for the Net Initial Consideration for each share of Marlow Stock. After the Closing Date and until the Certificates are properly surrendered, each Certificate shall represent only a right to receive the Merger Consideration, subject to the adjustments herein, without interest.

 

3.4 Shares of Merger Sub . Each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be unchanged and shall remain issued and outstanding as one share of common stock of the Surviving Corporation.

 

3.5 No Further Ownership Rights . The Merger Consideration paid in exchange for the Marlow Stock in accordance with the terms of this Agreement shall be deemed to have been issued and paid in full satisfaction of all rights pertaining to the shares of Marlow Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Marlow Stock that were outstanding immediately prior to the Closing Date. Each share of Marlow Stock held as treasury stock immediately prior to the Closing Date shall be canceled and retired at the Closing Date and no Merger Consideration shall be issued in exchange for such treasury shares.

 

3.6 Dissenting Shares .

 

(a) Notwithstanding any provision of this Agreement to the contrary, any issued and outstanding shares of Marlow Stock held by a person who has perfected his right to dissent in accordance with the Texas Act (a “ Dissenting Holder ”) and as of the Effective Time has neither effectively withdrawn nor lost the right to dissent, shall not be converted into or represent a right to receive Merger Consideration pursuant to Section 3.1 but such Dissenting Holder shall be entitled only to such rights granted by the Texas Act.

 

(b) Notwithstanding the provisions of Section 3.6(a), if any Dissenting Holder shall withdraw or lose the dissenter rights, then as of the Closing Date or the occurrence of the withdrawal or loss of dissenter rights, whichever occurs later, such shares of Marlow Stock automatically shall be converted into and represent only the right to

 

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receive Merger Consideration as provided in this Article III, without interest, upon surrender of the Certificate representing such shares.

 

(c) Sellers shall give the Acquiring Companies: (i) prompt notice of any written demands for dissenter rights, or withdrawals of such demands, and any other related instruments served pursuant to the Texas Act, and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for dissenter rights under the Texas Act. Marlow shall not voluntarily make any payment with respect to any demands for dissenter rights and shall not, except with the prior written consent of the Acquiring Companies, settle or offer to settle any such demands.

 

3.7 Post-Closing Adjustment . The parties agree that the aggregate Merger Consideration shall be adjusted as follows:

 

(a) Within thirty (30) days after the Closing, II-VI shall prepare a statement (the “ Statement of Adjusted Working Capital ”) of the Adjusted Working Capital of Marlow as of the close of business on November 28, 2004. The Sellers agree to cooperate and assist II-VI in the preparation of the statement upon the request of II-VI. For purposes of this Agreement, “ Adjusted Working Capital ” shall mean the current assets less current liabilities of Marlow as of the close of business on November 28, 2004 subject to the following adjustments:

 

1. The Marlow Cash shall be excluded to the extent it is distributed to the Shareholders or used to pay any of the Marlow Closing Expenditures (but included to the extent not distributed, or included as a negative to the extent the distribution of cash other than cash from the Initial Consideration exceeds the Marlow Cash); provided, in no event shall the International Bank Account Funds or the Stock Option Exercise Funds be included in the calculation of Adjusted Working Capital;

 

2. All Marlow Debt shall be excluded.

 

3. Deferred income taxes shall be calculated without giving effect to any payroll or income tax increase or tax liability decrease resulting from the payment of the Closing Compensation Liabilities or the exercise of the Marlow Stock Options;

 

4. Accrued salaries and wages, other accrued liabilities (including any payroll taxes) and current income taxes shall be calculated without giving effect to any payroll or income tax increase or tax liability resulting from the payment of the Closing Compensation Liabilities or the exercise of the Marlow Stock Options;

 

5. Notwithstanding the payment of Deferred Acquisition Costs immediately prior to or concurrently with Closing, current assets shall include deferred acquisition costs of $75,000 and current liabilities shall include Deferred Acquisition Costs in the amount of $1,113,772;

 

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6. Current liabilities shall not include any increase in current income taxes as a result of the payment of the Deferred Acquisition Costs;

 

7. Adjusted Working Capital shall be increased by the Marlow Tax Benefit;

 

8. Adjusted Working Capital shall be increased by an amount equal to 50% of the excess of the Deferred Acquisition Costs over the Negotiated Deferred Acquisition Costs; and

 

9. Adjusted Working Capital shall be decreased by the amount of the Raymond Marlow Debt.

 

10. If the amount of International Bank Account Funds exceeds $769,282, the Adjusted Working Capital shall be increased by the amount of the International Bank Account Funds minus $769,282. If the amount of International Bank Account Funds is less than $769,282, the Adjusted Working Capital shall be decreased by $769,282 minus the amount of the International Bank Account Funds.

 

11. Adjusted Working Capital shall be decreased by the amount of the Stock Option Exercise Funds which are dishonored or returned for insufficient funds.

 

12. Adjusted Working Capital shall be decreased by the amount of any Marlow Closing Expenditures required to be paid hereunder which are not paid at Closing in accordance with the terms of this Agreement.

 

13. The parties acknowledge that at Closing the amount of $130,000 is being paid from the Initial Consideration to Marlow for payment of miscellaneous Marlow Transaction Expenses, including the environmental consultant of the Sellers, legal fees of Baker Botts, L.L.P., the premium payment for the tail insurance required pursuant to this Agreement, and other miscellaneous expenses (the “ Miscellaneous Expense Fund ”). Adjusted Working Capital shall be increased by the amount of the Miscellaneous Expense Fund remaining on the date of determination of the Adjusted Working Capital. In no event shall II-VI or the Surviving Corporation be liable for any miscellaneous Marlow Transactional Expenses in excess of the Miscellaneous Expense Fund or any costs or expenses of the Shareholders for any post-Closing matters.

 

Except for the adjustment set forth in this Section 3.7(a), the Statement of Adjusted Working Capital shall be calculated in the same manner and using the same methods as the calculation of adjusted working capital dated August 1, 2004, a copy of which is attached as Exhibit “B” for purposes of example. Notwithstanding the actual date of Closing, for purposes of the Statement of Adjusted Working Capital, the exercise of the Marlow Stock Options and payment of the Closing Compensation Liabilities shall be deemed to be made as of the close of business of November 28, 2004. The Sellers covenant and agree that the International Bank

 

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Account Funds and the Stock Option Exercise Funds shall not be distributed or used to pay Marlow Closing Expenditures and shall be available as cash or cash equivalents to the Surviving Corporation immediately following the Closing.

 

(b) II-VI shall give the Shareholder Representative notice of the Statement of Adjusted Working Capital and the Shareholder Representative shall have fifteen (15) days after notice of the Statement of Adjusted Working Capital to object in writing. If the Shareholder Representative objects to the Statement of Adjusted Working Capital, the written objection must specify the disputed items or amounts. II-VI and the Shareholder Representative shall use their good faith efforts to reach agreement on the disputed items or amounts in order to determine Adjusted Working Capital. If II-VI and the Shareholder Representative have not reached an agreement within fifteen (15) days of the objection notice from the Shareholder Representative, either Person may submit the dispute to arbitration in accordance with Section 11.9 of this Agreement. The determination of Adjusted Working Capital rendered by arbitration shall be final and binding upon the Parties.

 

(c) If the Adjusted Working Capital of Marlow is less than Four Million Two Hundred Ten Thousand Three Hundred Forty-Seven Dollars ($4,210,347) (the “ Base Amount ”), the aggregate Merger Consideration shall be reduced by the difference between the Base Amount and the Adjusted Working Capital (the “ Adjusted Working Capital Decrease ”). Any Adjusted Working Capital Decrease shall be paid to II-VI within ten (10) business days of the final determination of Adjusted Working Capital from the Escrow Amount. Notwithstanding the forgoing, in the event that the Adjusted Working Capital Decrease exceeds $500,000, II-VI at its option shall be paid such excess from the Escrow Amount or shall have a direct claim against the Shareholders for the amount of Adjusted Working Capital Decrease exceeding $500,000.

 

(d) If the Adjusted Working Capital of Marlow is greater than the Base Amount, the aggregate Merger Consideration shall be increased by the difference between the Adjusted Working Capital and the Base Amount (on a per share basis, the “ Adjusted Working Capital Increase ”). In such event, within twenty business (20) days of the final determination of Adjusted Working Capital II-VI shall pay to the Shareholder Representative for the benefit of the holders of shares of Marlow Stock entitled to Net Initial Consideration an amount equal to the Adjusted Working Capital Increase for each share of Marlow Stock held by such holder.

 

3.8 Withholding Rights . II-VI shall be entitled to deduct and withhold from the Merger Consideration any amounts it is required to deduct and withhold with respect to the making of such payment under any Law. To the extent that amounts are so deducted and withheld and paid to the appropriate Governmental Authority, the deducted and withheld amounts shall be treated for purposes of this Agreement as having been paid to such holder of Marlow Stock for which such deduction or withholding was made.

 

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SELLERS

 

Each of Marlow (prior to the Effective Time) and the Shareholders hereby represent and warrant to the Acquiring Companies, which representation and warranty shall be Several as among the Shareholders, as follows:

 

4.1 Organization and Qualification . Marlow is a corporation duly organized, validly existing and in good standing in the State of Texas and has all requisite power and authority to own and operate the Business as it is now being conducted, to own or use the properties and assets that it purports to own or use. Marlow is duly qualified to do business as a foreign corporation and is in good standing under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification.

 

4.2 Authority and Enforceability .

 

(a) Marlow has all requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Subject only to the approval of the requisite number of holders of Marlow Stock, the execution and delivery by Marlow of this Agreement and the consummation by Marlow of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Marlow. This Agreement constitutes a valid and binding obligation of Marlow, enforceable against it in accordance with its terms, except as may be limited by (i) bankruptcy, insolvency, moratorium and other similar laws affecting or relating to creditors’ rights generally, or (ii) general principles of equity.

 

(b) Each Shareholder has the requisite power and authority to execute and deliver this Agreement and to perform the Shareholder’s obligations hereunder. This Agreement constitutes a valid and binding obligation of each Shareholder, enforceable against the Shareholder in accordance with its terms, except as may be limited by (i) bankruptcy, insolvency, moratorium and other similar laws affecting or relating to creditors’ rights generally, or (ii) general principles of equity.

 

4.3 Capitalization . The authorized capital stock of Marlow consists of 1,000,000 shares of common stock, par value $0.10 per share, of which 753,900 shares are issued and outstanding as of the date of this Agreement. Schedule 4.3 sets forth a true and correct list of (i) all issued and outstanding shares of Marlow Stock as of the date of this Agreement including the name and current address of the holder of such Marlow Stock and the number of shares of Marlow Stock held by such Person, and (ii) all shares of Marlow Stock which are issuable and reserved for issuance upon the exercise of Marlow Stock Options or other Rights as of the date of this Agreement including the name and current address of the holder of Marlow Stock Options or other Rights and the exercise price of Marlow Stock Options or other Rights. No Marlow Stock is held in the treasury of Marlow. All issued and outstanding shares of Marlow Stock have been duly authorized and validly issued and are fully paid and nonassessable, and are not subject to or issued in violation of any preemptive rights. Except as set forth on Schedule 4.3, there are no shares of Marlow Stock authorized or reserved for issuance and Marlow does

 

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not have any Rights outstanding with respect to its capital stock, and Marlow does not have any commitments to authorize, issue or sell any of its capital stock or Rights, except pursuant to this Agreement. Each Shareholder owns and has good and valid title to the Marlow Stock which the Shareholder purports to own free and clear of all Liens.

 

4.4 Subsidiaries .

 

(a) Schedule 4.4(a) sets forth: (i) the name of each Subsidiary; (ii) the number and type of outstanding equity securities of each Subsidiary and a list of the holders thereof; (iii) the jurisdiction of organization and the principal place of business of each Subsidiary; (iv) the names of the officers and directors of each Subsidiary; and (v) where appropriate, the jurisdictions in which each Subsidiary is qualified or holds licenses to do business as a foreign corporation or other entity.

 

(b) Except as set forth on Schedule 4.4(b), (i) no equity securities of any Subsidiary of Marlow are or may become required to be issued (other than to Marlow or its Subsidiaries) by reason of any Rights, (ii) there are no Contracts by which any of such Subsidiaries is or may be bound to sell or otherwise transfer any equity securities of any such Subsidiaries (other than to Marlow or its Subsidiaries), (iii) there are no Contracts relating to Marlow’s rights to vote or to dispose of such securities (other than to Marlow or its Subsidiaries), and (iv) all the equity securities of each Subsidiary held by Marlow or its Subsidiaries are fully paid and nonassessable and are owned by Seller or its Subsidiaries free and clear of any Liens.

 

(c) Marlow has set forth on Schedule 4.4(c) a list of all equity securities or similar interests of any Person, or any interest in a partnership or joint venture of any kind owned beneficially, directly or indirectly by it and Marlow has provided to the Acquiring Companies all material information or agreements pertaining to such interests.

 

(d) Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each Subsidiary is duly qualified to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its business or the ownership or leasing of its properties requires such qualification. Each Subsidiary has all requisite power and authority to carry on the business in which it is engaged and to own and use the properties owned and used by it.

 

4.5 Consents and Approvals . Except as set forth on Schedule 4.5 and except for the Articles of Merger to be filed with the State of Texas, the execution, delivery, or performance by Sellers of this Agreement, and the consummation of the Merger and the transactions contemplated herein by Sellers, do not require the consent or approval of, or registration or filing with, (i) any Governmental Authority; or (ii) any other Person.

 

4.6 Non-Contravention . Except as set forth on Schedule 4.6, the execution and delivery by Marlow of this Agreement and the consummation by Marlow of the transactions contemplated hereby will not (i) conflict with or violate any provision of the articles of incorporation or bylaws of Marlow or the articles of incorporation, charter, bylaws or other organizational document of any Subsidiary, (ii) conflict with, result in a breach of, constitute

 

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(with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any Person the right to terminate, modify or cancel, or require any notice, consent or waiver under, any Material Contract or instrument to which Marlow or any Subsidiary is a party or by which Marlow or any Subsidiary is bound or to which its properties or assets are subject, (iii) result in the imposition of any Lien on any asset of Marlow or any Subsidiary, or (iv) violate any Law.

 

4.7 Stock and Minute Books . The books of account, minute books, stock books, and other records of Marlow and its Subsidiaries, all of which have been made available to the Acquiring Companies, are complete and correct in all material respects and have been maintained in accordance with sound business practices. The minute books of Marlow and its Subsidiaries contain accurate and complete records of all meetings held of, and corporate action taken by, the stockholders, the Boards of Directors, and committees of the Boards of Directors of Marlow and its Subsidiaries. At the Closing, all of those books and records will be in the possession of Marlow.

 

4.8 Financial Statements . Marlow has provided to the Acquiring Companies true and correct copies of its audited consolidated financial statements for the fiscal years ended January 27, 2002, January 26, 2003 and February 1, 2004, and unaudited statements of operations and balance sheet as of August 1, 2004 for Marlow and the Subsidiaries (collectively, the “Financial Statements”). The Financial Statements: (i) were prepared in accordance with GAAP, subject to normal year-end adjustments and the addition of footnotes and other presentation items in the case of the unaudited statements; (ii) are consistent with each other; (iii) are true, correct and complete; and (iv) present fairly and accurately the financial position, assets and liabilities and results of operation of Marlow and its Subsidiaries as of the dates and periods indicated thereon.

 

4.9 Absence of Certain Changes or Events . Since August 1, 2004, and except as set forth on Schedule 4.9, Marlow and the Subsidiaries have conducted their Business in the ordinary course consistent with past practices and there have not been:

 

(i) any event, fact or circumstance that, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect with respect to Marlow or any of its Subsidiaries;

 

(ii) any material damage, destruction or casualty loss, whether covered by insurance or not, affecting the Business or the assets and property of the Business;

 

(iii) except in the ordinary course, (a) any increase in the rate or terms of compensation payable or to become payable by Marlow to its directors, officers or employees, or (b) any increase in the ra