AGREEMENT AND PLAN OF MERGER

Exhibit 10.6

 

AGREEMENT AND PLAN OF MERGER

 

BY AND BETWEEN

 

MADISON RIVER TELEPHONE COMPANY, LLC

 

AND

 

GULF COAST SERVICES, INC.

 

May 9, 1999

 

AGREEMENT AND PLAN OF MERGER

 

AGREEMENT AND PLAN OF MERGER is made and entered into this 9th day of May, 1999 (the “Agreement Date”), by and between MADISON RIVER TELEPHONE COMPANY, LLC, a Delaware limited liability company (“Buyer”), and GULF COAST SERVICES. INC., an Alabama corporation (“GCSI”). Buyer and GCSI are hereinafter sometimes referred to, collectively, as the “Parties”.

 

This Agreement contemplates a transaction in which Buyer will acquire for cash all of the outstanding capital stock of GCSI through a reverse subsidiary merger of Transitory Subsidiary (as defined below) with and into GCSI.

 

NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows.

 

ARTICLE I

 

DEFINITIONS

 

“ 1999 Capital Budget ” means GCSI and its Subsidiaries’ 1999 Capital Budget attached hereto as Exhibit A.

 

“ 1999 Operating Budget ” means GCSI and its Subsidiaries’ 1999 Operating Budget attached hereto as Exhibit B.

 

“ Additional Merger Consideration ” means the sum of (i) the Capital Expenditures of GCSI made after the Agreement Date and on or prior to the Effective Time not to exceed $10,000,000 and (ii) the Incentive Payment.

 

“ Adjusted Long Term Debt ” means Long Term Debt less (i) the Employee Stock Ownership Plan loan guarantee, and (ii) cash and cash equivalents of GCSI and its Subsidiaries in excess of $1,500, 000, determined on a consolidated basis and in accordance with GAAP, consistently applied, as of the Effective Time.

 

“ Agreement ” means this Agreement and Plan of Merger.

 

“ Agreement Date ” has the meaning set forth in the preface above.

 

“ Alabama Business Corporation Act ” means the Alabama Business Corporation Act, as codified at ALA. CODE (S) 10-2B- 1.01 et seq. (1994 Repl.).

 

“ Articles of Merger ” has the meaning set forth in Section 2.4.

 

“ Audited Financial Statements ” has the meaning set forth in Section 3.5.

 

“ Benefit Plans ” has the meaning set forth in Section 3.20.

 

“ Business ” means all telecommunications related businesses conducted by GCSI and its Subsidiaries.

 

“ Buyer ” has the meaning set forth in the preface above.

 

“ Capital Expenditures of GCSI ” means amounts paid or disbursed by GCSI or any of its Subsidiaries in connection with or for use in fiber projects.

 

“ Closing ” has the meaning set forth in Section 2.3.

 

“ Closing Date ” has the meaning set forth in Section 2.3.

 

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

 

“ Confidential Information ” means any information concerning the Business, GCSI or its Subsidiaries that is not already generally available to the public.

 

“ Contracts ” has the meaning set forth in Section 3.16.

 

“ Co-Trustees ” has the meaning set forth in Section 7.2(a).

 

“ Court Confirmation ” has the meaning set forth in Section 7.2(a).

 

“ DigiPH ” the meaning set forth in Article IM The Parties acknowledge that DigiPH is not a Subsidiary of GCSI as defined in this Agreement.

 

“ DigiPH Stock ” has the meaning set forth in Article IX.

 

“ Disclosure Schedules ” has the meaning, set forth in Article HI.

 

“ Dissenting Share ” means any GCSI Share with respect to which the GCSI Stockholder of record has exercised his or her or its appraisal rights under the Alabama Business Corporation Act.

 

“ Effective Time ” has the meaning set forth in Section 2.5(a).

 

“ Environmental Law ” means any federal, state or local law (including statutes, regulations, ordinances, codes, rules, judicial opinions and other governmental restrictions and requirements) relating to the discharge of air pollutants, water pollutants, noise or odors, the processing of waste water or otherwise relating to the environment or hazardous or toxic substances.

 

“ Equipment ” has the meaning set forth in Section 3.9.

 

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

 

“ ESOP Trustees ” has the meaning set forth in Section 7.2(a).

 

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“ Financial Statements ” has the meaning set forth in Section 3.5.

 

“ FCC ” means the Federal Communications Commission.

 

“ Financing Commitments ” has the meaning set forth in Section 4.2.

 

“ GAAP ” means United States generally accepted accounting principles as in effect from time to time, subject to adjustments customary for the telecommunications industry and, with respect to Interim Financial Statements, year end and other consolidating adjustments.

 

“ GCSI ” has the meaning set forth in the preface above.

 

“ GCSI Share ” means a share of the issued and outstanding common stock, $1.00 par value per share, of GCSI.

 

“ GCSI Stockholder ” means any Person who or which is the holder of record of any GCSI Shares.

 

“ Governmental Entity ” means any government or subdivision thereof, whether domestic or foreign, or any administrative, governmental or regulatory authority, agency, department, division, commission, court, tribunal or body, whether domestic, foreign or multinational.

 

“ Hart-Scott-Rodino Act ” means the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended.

 

“ Hazardous Substance ” means any toxic or hazardous, substance that is regulated by or under the authority of any Environmental Law, including any petroleum products, asbestos or polychlorinated biphenyls.

 

“ Incentive Plan ” means a sum of up to $5,000,000 computed according to the following schedule:

 

 

For the purpose of this definition of Incentive Payment, a Lighted Sheath Mile shall mean a mile of fiber optic cable owned by, or subject to an IRU in the name of, GCSI or one of its Subsidiaries with respect to which all of the components listed on Exhibit C have been installed with respect to two or more strands and said strands are capable of transmitting and receiving data or other information at an OC 48 rate.

 

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“ Insurance Policies ” has the meaning set forth in Section 3.26.

 

“ Intellectual Property ” has the meaning set forth in Section 3.12(a).

 

“ Interim Financial Statements ” has the meaning set forth in Section 3.5.

 

“ Inventory ” has the meaning set forth in Section 3-11.

 

“ Knowledge of Buyer ” means the actual knowledge, without independent investigation, of the officers of Buyer listed on Exhibit D.

 

“ Knowledge of GCSI ” means the actual knowledge, without independent investigation, of the officers of GCSI listed on Exhibit E.

 

“ Leases ” has the meaning forth in Section 3.15.

 

“ Liens ” mean mortgages, deeds of trust, pledges, liens, encumbrances, charges or other security interests, other than (i) purchase money Liens and Liens securing rental payments under capital lease arrangements and CH) other Liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money.

 

“ Long Term Debt ” means Long Term Debt and Capital Lease Obligations, including the current portion, as reflected on the books and records of GCSI and its Subsidiaries, determined on a consolidated basis and in accordance with GAAP, consistently applied, as of the Effective Time; provided that Long Term Debt shall include the outstanding principal balance owed pursuant to lines of credit however reflected on said books, and records.

 

“ Material Adverse Effect ” means, with respect to Buyer or Transitory Subsidiary or GCSI, as the case may be, a material adverse effect on (i) the business, results of operations or financial condition of such party and its Subsidiaries taken as a whole, other than any such effect attributable to or resulting from (A) any change in law or any change in the rules or regulations of or interpretations of law by the FCC, state public utility commissions or other Governmental Entities, (B) any change in GAAP or regulatory accounting principles, (C) any action or omission of GCSI or Buyer or any Subsidiary of either of them taken with the express prior written consent of the other party hereto, or (D) any expenses incurred by such party where such expenses are contemplated by or reasonably incurred in connection with this Agreement or the transactions contemplated hereby, or (ii) the ability of such party and its Subsidiaries to consummate the transactions contemplated hereby.

 

“ Merger ” has the meaning set forth in Section 2.2.

 

“ Merger Consideration ” means the sum of (i) $310,000,000 reduced by (A) Adjusted Long Term Debt as of the Closing Date and (B) unexpended and unincurred capital budgeted items for fiber projects described in the 1999 Capital Budget as of the

 

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Closing Date, (ii) the sales price of the Non-Business Real Estate as provided in Section 6.10, and (iii) the sales price of the DigiPH Stock as provided in Article IX.

 

“ Millry ” has the meaning set forth in Article IX

 

“ Non-Business Real Estate ” has the meaning set forth in Section 6.10.

 

“ Ordinary Course of Business ” means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency).

 

“ Party ” has the meaning set forth in the preface above.

 

“ Paying Agent ” has the meaning set forth in Section 2.6(a).

 

“ Payment Fund ” has the meaning set forth in Section 2.6(b).

 

“ Permits ” has the meaning set forth in Section 3.23.

 

“ Permitted Liens ,” means (i) Liens for taxes, assessments or other governmental charges or levies not yet due, (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialsmen and other liens imposed by law and created in the Ordinary Course of Business, (iii) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the Ordinary Course of Business in connection with worker’s compensation, unemployment insurance or other types of social security, (iv) minor defects of title, easements, rights-of-way, restrictions and other similar charges or encumbrances not materially detracting from the value of the Real Property or interfering with the ordinary conduct of the Business, (v) Liens arising out of liabilities reflected on the Financial Statements, and (vi) those Liens, if any, listed on Schedule 3.8.

 

“ Person ” means an individual, partnership, corporation, limited liability company, association, joint stock company, trust, joint venture, unincorporated organization or Governmental Entity.

 

“ Real Property ” means any interest of whatever nature or kind, in real property owned by GCSI or its Subsidiaries or leased by GCSI or its Subsidiaries as lessee, other than the Non-Business Real Estate.

 

“ Requisite Stockholder Approval ” means the affirmative vote of the holders of two-thirds (2/3) of the GCSI Shares in favor of this Agreement and the Merger.

 

“ SEC ” means the Securities and Exchange Commission.

 

“ Securities Act ” means the Securities Act of 1933, as amended.

 

“ Securities Exchange Act ” means the Securities Exchange Act of 1934, as amended.

 

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“ Software ” means all material computer software used by GCSI or its Subsidiaries in the conduct of the Business.

 

“ Official Meeting ” has the meaning set forth in Section 6.3(a).

 

“ Stockholder Materials ” has the meaning set forth in Section 6.3(a).

 

“ Subsidiary ” means any corporation, partnership, limited liability company or other business entity with respect to which a specified Person (or a Subsidiary thereof) owns a majority of the ownership interests therein or has the power to vote or direct the voting of sufficient securities thereof to elect a majority of its directors or other persons performing similar functions.

 

“ Surviving Corporation ” has the meaning set forth in Section 2.2.

 

“ Surviving Obligations ” has the meaning set forth in Section 8.4.

 

“ Third-Party Consideration ” has the meaning set forth in Section 6.8.

 

“ Topping Fee ” the meaning set forth in Section 6.8.

 

“ Trademarks ” has the meaning set forth in Section .3.12(a).

 

“ Transitory Subsidiary ” mean an Alabama corporation to be formed by Buyer as provided in Section 2.1 which shall be merged with and into GCSI on and subject to the terms and conditions of this Agreement.

 

ARTICLE II

 

PLAN OF MERGER

 

2.1 Formation of Transitory Subsidiary . Buyer shall organize a wholly owned subsidiary corporation under the Alabama Business Corporation Act “Transitory Subsidiary”) to be merged with and into GCSI as set forth in Section 2.2. Transitory Subsidiary will be formed solely to facilitate solely the Merger and will conduct no business or activity it other than in connection with the Merger.

 

2.2 Merger . On and subject to the terms and conditions of this Agreement, Transitory Subsidiary will merge with and into GCSI (the “Merger”) at the Effective Time. GCSI shall be the corporation surviving the Merger (the “Surviving Corporation”).

 

2.3 Closing . The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place at the Magnolia Hotel, Foley, Alabama, or such other place as the Parties may mutually determine, commencing at 9:00 a.m. local time on such day as shall be mutually agreed to by the Parties following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated hereby (other than conditions with respect to actions the

 

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respective Parties will take at the Closing itself (the “Closing Date”); provided, however, that the Closing Date shall be no later than September 30, 1999.

 

2.4 Actions at Closing . At the Closing, (i) GCSI will deliver to Buyer the various certificates, instruments and documents referred to in Section 7.1, (ii) Buyer will deliver to GCSI the various certificates, instruments and documents referred to in Section 7.2, (iii) Buyer will cause Transitory Subsidiary to transfer the fund identified in clause (i)(A) of Section 2.6(b) to Paying Agent, (iv) GCSI shall transfer the funds identified in clause (i)(B) of Section 2.6(b) to Paying Agent, and (v) GCSI and Transitory Subsidiary shall cause Articles of Merger in form and substance reasonably satisfactory the Parties (the “Articles of Merger”) to be filed with the Secretary of State of the State of Alabama.

 

2.5 Effect of Merger .

 

(a) General . The Merger shall become effective at the time (the “Effective Time”) the Articles of Merger filed by GCSI and Transitory Subsidiary with the Secretary of State of the State of Alabama become effective. The Merger shall have the effect set forth in the Alabama Business Corporation Act. The Surviving Corporation may, at any time after the Effective Time, take any action (including executing and delivering any document) in the name and on behalf of either GCSI or Transitory Subsidiary in order to carry out and effectuate the transactions contemplated by this Agreement.

 

(b) Articles of Incorporation . The Articles of Incorporation of GCSI as in effect at the Effective Time shall be the Articles of Incorporation of the Surviving Corporation.

 

(c) Bylaws . The Bylaws of GCSI as in effect at the Effective Time shall be the Bylaws of the Surviving Corporation.

 

(d) Directors and Officers . The directors and officers of Transitory Subsidiary holding office at and as of the Effective Time shall be the directors and officers of the Surviving Corporation (retaining their respective positions and terms of office).

 

(e) Conversion of QQSI Shares . At and as of the Effective Time, (i) each GCSI Share (other than any Dissenting Share) shall be converted into the right to receive a pro rata share (based on the number of issued and outstanding GCSI Shares immediately before the Effective Time) of the Merger Consideration and the Additional Merger Consideration and (ii) each Dissenting Share shall be converted into the right to receive payment from the Surviving Corporation with respect thereto in accordance with the provisions of the Alabama Business Corporation Act. No GCSI Share shall be deemed to be outstanding or to have any rights other than those set forth above in this Section 2.5(e) after the Effective Time.

 

(f) Conversion of Capital Stock of Transitory Subsidiary . At and as of the Effective Time, each share of common stock, $0.01 par value per share, of

 

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Transitory Subsidiary shall be converted into one share of common stock, $1.00 par value per share, of the Surviving Corporation.

 

2.6 Procedure for Payment .

 

(a) Letter of Transmittal . Prior to the Closing, Buyer will cause Regions Bank (“Paying Agent”) to mail or otherwise deliver a letter of transmittal (with instructions for its use) in form and substance reasonably satisfactory to the Parties to each GCSI Stockholder for such GCSI Stockholder to use in surrendering the certificates which represented his, her or its GCSI Shares against payment of the Merger Consideration and the right to receive Additional Merger Consideration.

 

(b) Establishment of Payment Fund . Immediately prior to the Effective Time, (i) Buyer will cause Transitory Subsidiary transfer to Paying Agent pursuant to a paying agent agreement in form and substance reasonably satisfactory to the Parties, immediately available funds in amounts equal to (A) the Merger Consideration, less the portion thereof to be paid by GCSI pursuant to subclause (B) of this clause (i), and (B) the Additional Merger Consideration as estimated by GCSI, the computation of which has been reported to Buyer in writing at least two (2) business days prior to the Closing, and (ii) GCSI shall transfer to Paying Agent immediately available funds in an amount equal to the aggregate sales prices of the Non-Business Real Estate and the DigiPH Stock (collectively, the “Payment Fund”).

 

(c) Investment of Payment Fund . Buyer may cause Paying Agent to invest the cash included in the Payment Fund in one or more permitted Investments reasonably satisfactory to the Parties; provided, however, that the terms and conditions of the investments shall be such as to permit Paying Agent to make prompt payment of the Merger Consideration and the Additional Merger Consideration as necessary. Buyer may cause Paying Agent to pay over to the Surviving Corporation any net earnings with respect to the investments, and Buyer will cause the Surviving Corporation to replace promptly any portion of the Payment Fund which Paying Agent loses through investments. No interest will accrue or be paid to any holder of GCSI Shares.

 

(d) Payment of Merger Consideration . (i) Upon surrender to Paying Agent of the certificate(s) representing GCSI Shares (other than Dissenting Shares), Paying Agent shall pay to the GCSI Stockholder surrendering such certificate(s) a pro rata share (based on the number of issued and outstanding GCSI Shares immediately prior to The Effective Time) of the sum of (A) the Merger Consideration and (B) the estimated Capital Expenditures of GCSI made after the Agreement Date and on or prior to the Effective Time not to exceed $10,000,000.00, for each GCSI Share represented by the surrendered certificate(s), which amount shall be paid by Paying Agent within one (1) business day of its receipt of the surrendered certificate(s) by bank check or other immediately available funds, and (ii) upon receipt of a disbursement notice signed by Buyer and Marjorie Y. Snook, anticipated to be not later than fifteen (15) days after the Closing, the Paying Agent shall pay to each GCSI Stockholder that has previously surrendered.

 

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(e) Return of Unpaid Payment Fund . Buyer may cause Paying Agent to pay over to the Surviving Corporation any portion of the Payment Fund (including any earnings thereon) remaining unpaid one hundred eighty (180) days after the Effective Time, and thereafter all former GCSI Stockholders shall look to the Surviving Corporation for payment of the Merger Consideration and the Additional Merger Consideration (subject to abandoned property, escheat and other similar laws).

 

(f) Expenses of Paying Agent . Buyer shall cause the Surviving Corporation to pay all charges and expenses of Paying Agent.

 

2.7 Closing of Transfer Records . After the Effective Time, transfers of GCSI Shares outstanding prior to the Effective Time shall riot be made on the stock transfer books of the Surviving Corporation.

 

ARTICLE III

 

REPRESENTATIONS AND WARRANTIES OF GCSI

 

GCSI represents and warrants to Buyer that the statements contained in this Article III are correct and complete as of the Agreement Date and will be correct and complete as of the Closing Date (as though made them and as though the Closing Date were substituted for the Agreement Date throughout this Article III), except as set forth in the disclosure schedules identified in this Article III and to be delivered by GCSI to Buyer within thirty (30) days after the Agreement Date (the “Disclosure Schedules”). The numbering of the Disclosure Schedules will correspond to the numbered paragraphs contained in this Article III.

 

3.1 Organization, Qualification, and Corporate Power . GCSI is a corporation duly organized, validly existing and in good standing under the laws of the State of Alabama. Schedule 3.1 shall contain a list of GCSI’s Subsidiaries. Each Subsidiary of GCSI is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. GCSI and each of its Subsidiaries are duly authorized to conduct business and are in good standing under the laws of each jurisdiction in which the character and location of their respective properties or the nature of their respective businesses require qualification, except where the lack of such qualification would not have a Material Adverse Effect. GCSI and each of its Subsidiaries have full corporate power and authority to own their respective properties and to carry on that portion of the Business they presently are conducting.

 

3.2 Capitalization; Constituent Documents . The entire authorized capital of GCSI consists of 100,000 shares of common stock, S1.00 par value per share, 92,410 shares of which are issued and outstanding and constitute the GCSI Shares. All of the GCSI Shares have been duly authorized and are validly issued, fully paid and nonassessable. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other contracts or commitments that could require GCSI or any of its Subsidiaries to issue, sell or otherwise cause to become outstanding any of its capital stock. There are no outstanding or authorized stock

 

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appreciation, phantom stock, profit participation or similar rights with respect to GCSI or any of its Subsidiaries. True and complete copies of the Articles of Incorporation and all amendments thereto, the bylaws as amended and currently in force, all stock records and all corporate minute books and records of GCSI and each of its Subsidiaries have been furnished for inspection by Buyer. Such stock records accurately reflect all share transactions and the current stock ownership of GCSI and each of its Subsidiaries. The corporate minute books and records of GCSI and its Subsidiaries contain true and complete copies of all resolutions adopted by the stockholders or the board of directors of GCSI and its Subsidiaries, and any other action formally taken by GCSI and its Subsidiaries.

 

3.3 Authorization of Transaction . The execution, delivery and performance of this Agreement by GCSI has been duly authorized and approved by GCSI’s board of directors. GCSI has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder, provided, however, that GCSI cannot consummate the Merger unless and until it receives the Requisite Stockholder Approval. This Agreement constitutes the valid and legally binding obligation of GCSI, enforceable in accordance with its terms and conditions.

 

3.4 Noncontravention . Except as shall be set forth on Schedule 3.4, to the Knowledge of GCSI, neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any Governmental Entity to which any of GCSI or its Subsidiaries is subject or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice or consent under any agreement, contract, lease, license, instrument or other arrangement to which GCSI or any of its Subsidiaries is a party, by which GCSI or any of its Subsidiaries is bound or to which any of their assets are subject (or result in the imposition of any Lien upon any of their assets), except where the violation, conflict, breach, default acceleration, termination, modification, cancellation, failure to give notice or Lien would not have a Material Adverse Effect. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate any provision of the charter or bylaws (or similar governing documents) of GCSI or any of its Subsidiaries. To the Knowledge of GCSI, and other than in connection with (i) the provisions of the Hart-Scott-Rodino Act, the Alabama Business Corporation Act, the Securities Act, the Securities Exchange Act and state securities laws, (ii) the necessary notices to and approvals or consents, if any, of the FCC, and (iii) the necessary notices to and approvals and consents, if any, of state public utility commissions or similar state regulatory bodies pursuant to applicable state laws regulating the telephone, commercial mobile radio service or other telecommunications business, none of GCSI or its Subsidiaries are required to give notice to, file with or obtain authorization, consent or approval of any Governmental Entity in order for GCSI to perform its obligations under this Agreement, except where the failure to give such notice, to file or to obtain such authorization, consent or approval would not have a Material Adverse Effect.

 

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3.5 Financial Statements . GCSI has heretofore furnished or shall furnish Buyer with true and complete copies of (i) the audited, consolidated financial statements of GCSI and its Subsidiaries for fiscal years ended December 31, 1996, 1997 and 1998, consisting of the balance sheet at such dates and the related statements of income, stockholders’ equity and cash flow for said periods, opined upon by Ernst & Young, LLP, GCSI’s independent public accountants (the “Audited Financial Statement”), and (ii) the unaudited financial statements of GCSI and its Subsidiaries for the two month period ended February 28, 1999 (the “Interim Financial Statements”) (the Audited Financial Statements and the Interim Financial Statements are hereinafter referred to, collectively, as the “Financial Statements”). Except as disclosed therein, the Financial Statements present fairly, in all material respects, the financial position and operating results of GCSI and its Subsidiaries as of the dates, and during the periods, indicated therein, and were prepared in accordance with GAAP consistently applied during such periods. Notwithstanding the foregoing, the occurrence of any event or action, or the incurring of any claim or liability, that adversely affects the financial position or operating results of GCSI or its Subsidiaries as of the dates, and during the periods, covered by, and as presented in, the Financial Statements shall not constitute a breach of or an inaccuracy in this Section 3.5 if said event, action, claim or liability is the subject of or is covered by another Section within this Article III (e.g., litigation is the subject of and is covered by Section 3.19) and the occurrence or incurring thereof does not constitute a breach of or inaccuracy in such other Section.

 

3.6 Absence of Changes . Except as shall be set forth on Schedule 3.6 and as contemplated hereby, since February 28, 1999, (i) none of GCSI or its Subsidiaries have entered into any transaction that was not in the Ordinary Course of Business; (ii) except for sales of goods and services in the Ordinary Course of Business, the sale, or proposed sale, of the Non-Business Real. Estate and the sale or otherwise transfer, or proposed sale or other transfer, of the DigiPH Stock, there has been no sale, assignment, transfer, mortgage, pledge, encumbrance or lease of any material asset or property of GCSI or any of its Subsidiaries; (iii) there has been no declaration or payment of a dividend, or any other declaration, payment or distribution of any type or nature to GCSI Stockholders in respect of their GCSI Shares, whether in cash or property, and no purchase or redemption of any GCSI Share; (iv) there has been no declaration, payment or commitment for the payment, by GCSI or any of its Subsidiaries, of a bonus or other additional salary, compensation or benefit to any employee of GCSI or any of its Subsidiaries that was not in the Ordinary Course of Business; (v) there has been no release, compromise, waiver or cancellation of any material debt to, claim by, or right of GCSI or any of its Subsidiaries that was not in the Ordinary Course of Business; (vi) there have been no capital expenditures by GCSI or any of its Subsidiaries in excess of $100,000 for any single item, or $500,000 in the aggregate, that were not included in the 1999 GCSI capital or operating budgets; (vii) there has been no change in accounting methods or practices or revaluation of any asset of GCSI or any of its Subsidiaries (other than accounts receivable written down in the Ordinary Course of Business); (viii) there has been no material damage, destruction to or loss of, physical property adversely affecting the Business taken as a whole; (ix) there has been no material loan by GCSI or any of its Subsidiaries, or guaranty by GCSI or any of its Subsidiaries of any loan, to any employee of GCSI or any of its Subsidiaries; (x) none of GCSI or its Subsidiaries have

 

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ceased to transact business with any customer that, as of the date of such cessation, represented more than five percent (5%) of the annual gross revenues of GCSI; (xi) to the Knowledge of GCSI, there has been no amendment or termination of any material oral or written contract, agreement or license to which GCSI or any of its Subsidiaries is a party or by which any of them are bound, except in the Ordinary Course of Business, or except as expressly contemplated hereby; (xii) none of GCSI or its Subsidiaries have failed to satisfy any of its debts, obligations or liabilities related to the assets of GCSI as the same became due and payable (except for accounts payable which are paid in accordance with past practices and in the Ordinary Course of Business); and (xiii) there has been no agreement or commitment by GCSI or any of its Subsidiaries to do any of the foregoing.

 

3.7 Undisclosed Liabilities . To the Knowledge of GCSI, none of GCSI or its Subsidiaries has any debt, liability or obligation, whether accrued, absolute or otherwise, including any liability or obligation on account of taxes or any governmental charge or penalty, interest or fine, except (i) as shall be set forth on Schedule 3.7, (ii) debts, liabilities and obligations incurred in the Ordinary Course of Business after February 28, 1999, that would not have a Material Adverse Effect, (iii) liabilities reflected on the Financial Statements, and (iv) those debts, liabilities or obligations incurred as a result of the transactions contemplated hereby. Notwithstanding the foregoing, no debt, liability or obligation shall constitute a breach of or an inaccuracy in this Section 3.7 if said debt, liability or obligation is the subject of or is covered by another Section within this Article III (e.g., litigation is the subject of and is covered by Section 3.19) and the existence of said debt, liability or obligation does not constitute a breach of or inaccuracy in such other Section.

 

3.8 Title to Properties . Except as shall be set forth on Schedule 318, GCSI and each of its Subsidiaries has good and marketable title to all its real and tangible personal property and assets used in the Business, and good and valid title to its leasehold interests, in each case free and clear of any and all Liens other than Permitted Liens. The existence of mortgages, encumbrances and other Liens, other than those expressly set forth in this Agreement, shall not be objections to title, provided that properly executed instruments, in recordable form, necessary to satisfy the same are delivered to Buyer at Closing.

 

3.9 Equipment, etc. GCSI has heretofore furnished Buyer with a list of all items of tangible personal property (including computer hardware) used in the operation of the Business in the manner in which it is now operated by GCSI and its Subsidiaries (the “Equipment”), except for items of personal property having a net book value of less than $1,000. Except as shall be set forth on Schedule 3.9, the Equipment, in the aggregate, is in satisfactory condition and repair, ordinary wear and tear excepted, so as to operate the Business in the manner in which it is now operated by GCSI and its Subsidiaries.

 

3.10 Receivables . All of the trade receivables and notes receivable which are reflected on the Financial Statements or which arose subsequent to the date of the Interim Financial Statements, arose out of bona fide, arms-length transactions and, to the Knowledge of GCSI, all such receivables are good and collectible (or have been

 

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collected) in the Ordinary Course of Business in accordance with their terms, and at the aggregate recorded amounts thereof using normal collection practices, less the amount of applicable reserves for doubtful accounts and for allowances and discounts. To the Knowledge of GCSI, all such reserves, allowances and discounts were and are adequate.

 

3.11 Inventory . To the Knowledge of GCSI, all inventory of GCSI and its Subsidiaries which is held for sale or resale (the “Inventory”) consists of items of a quantity and quality historically useable and/or saleable in the Ordinary Course of Business, except for items of obsolete and slow-moving material and materials which are below standard quality, all of which have been written down on the Financial Statements to estimated net realizable value in accordance with GAAP.

 

3.12 Intellectual Property .

 

(a) List of Intellectual Property . Schedule 3.12 shall identify all of the following which are used in the Business or in which GCSI or any of its Subsidiaries claims any ownership rights: (i) all trademarks, service marks, trade names, trade dress and the like, including all common law marks (collectively, together with the associated goodwill of each, “Trademarks”) together with the information regarding all registrations and pending, applications to register any such rights; (ii) all patents or the pending applications to patent any technology or design; (iii) all copyrights and all registrations of and applications to register copyrights; and (iv) all licenses of rights in Trademarks, patents, copyrights and other intellectual property, whether to or by GCSI or any of its Subsidiaries. The rights required to be so identified, together with all licenses of rights in computer software and all proprietary know how and trade secrets which are material to GCSI, any of its Subsidiaries or the Business, are referred to herein collectively as the “ Intellectual Property .”

 

(b) Ownership of Intellectual Property . GCSI or one of its Subsidiaries is the owner of, or duly licensed to use the Intellectual Property, and the Intellectual Property exists and has been maintained in good standing. No third party has asserted ownership rights in any of the Intellectual Property (except to the extent that such Intellectual Property has been properly licensed to or by GCSI or one of its Subsidiaries). To the Knowledge of GCSI none of GCSI’s or its Subsidiaries’ use of the Intellectual Property infringes any right of any third party, nor is any third party infringing on GCSI’s or its Subsidiaries’ tights in the Intellectual Property.

 

(c) Computer Software . GCSI bas heretofore furnished Buyer with a list of all Software. GCSI or one of its Subsidiaries currently licenses, or otherwise has the legal right to use, all of the Software (including any upgrade alteration or enhancement with respect thereto), and to the Knowledge of GCSI, all of the Software is being used in compliance with applicable licenses or other agreements.

 

3.13 Year 2000 . G-CSI has developed a Year 2000 readiness assessment and remediation plan consisting of the following three (3) phases: (i) developing an inventory of systems and equipment that may be affected by the Year 2000 date change, (ii) assessment and (iii) remediation. The first phase has been completed and

 

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involved developing an inventory of all information technologies and non-information technologies systems, software and business infrastructure systems and equipment that may be affected by the Year 2000 date change. External parties, including customers, suppliers and service providers, with which GTCS1 interacts and which may have Year 2000 readiness issues were also identified. The second phase has also been completed and involved risk and impact assessment, selection of appropriate remediation methods and resource/cost assessment for compliance. This phase included contacting suppliers or manufacturers for information regarding their Year 2000 readiness, technical review of systems and compliance testing. The necessary actions