MERGER
AGREEMENT
MERGER AGREEMENT, dated December 8, 2006 (this
“Agreement”), by and among Argyle Security Acquisition
Corp., a Delaware corporation (“Parent”), ISI Security
Group, Inc., a Delaware corporation (“Acquisition
Corp.”), ISI Detention Contracting Group, Inc., a Delaware
corporation, d/b/a “ISI Security Group” (the
“Company”).
W I T N E S S E T H :
WHEREAS, the Company is in the business of
providing security solutions for detention facilities and for
commercial, industrial and governmental customers (the
“Business”);
WHEREAS, William Blair Mezzanine Capital Fund
III, L.P. (“Blair”) is converting $10,000,000 in
aggregate principal amount of its outstanding $15,951,609
promissory note (the “Note”) into shares of the
Company’s Class A preferred stock, par value $.0001 per share
(the “Company Preferred Stock”) pursuant to a Note
Conversion Agreement, the form of which is attached hereto as
Exhibit A (the “Note Conversion Agreement”), with the
balance of the Note being represented by a new $5,951,609
promissory note (the “New Note”) and note purchase
agreement, the terms of which shall be agreed upon by Blair,
Parent, Acquisition Corp. and the Company, prior to the
Closing;
WHEREAS, Parent owns all of the issued and
outstanding shares of equity securities of Acquisition
Corp.;
WHEREAS, Parent and Acquisition Corp. desire
that Acquisition Corp. merge with and into the Company and, to
realize the benefits thereof, the Company also desires that
Acquisition Corp. merge with and into the Company upon the terms
and subject to the conditions set forth herein and in accordance
with the General Corporation Law of the State of Delaware, and that
the Company Preferred Stock and the outstanding shares of common
stock, par value $.0001 per share, of the Company (“Company
Common Stock”), and any securities of the Company convertible
into Company Common Stock or Company Preferred Stock, excluding any
such shares held in the treasury of the Company, be converted upon
such merger (the “Merger”) into the right to receive
the Merger Consideration as is provided herein; and
NOW, THEREFORE, in consideration of the
foregoing and the representations, warranties, covenants and
agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as
follows:
DEFINITIONS
1.1. Definitions . The
following terms, as used herein, have the following
meanings:
“2005 Financial Statements” are the
Company’s Balance Sheet, Statement of Cash Flows and
Statement of Operations prepared as of and for the year ended
December 31, 2005 in accordance with GAAP.
“2006 EBITDA” means the
Company’s earnings before interest, taxes, depreciation and
amortization as calculated from the 2006 Financial
Statements.
“2006 Financial Statements” are the
Company’s Balance Sheet, Statement of Cash Flows and
Statement of Operations prepared as of and for the year ended
December 31, 2006 in accordance with GAAP.
“2/28 Backlog” means the backlog of
contracts and other work of the Company and all Subsidiaries, as
calculated consistent with the past practices of the Company and
the Subsidiaries, pursuant to the Work in Process Report of Company
for the period ending February 28, 2007.
“Accounts Receivable” has the
meaning set forth in Section 3.11.
“Acquisition Corp.” has the meaning
set forth in the Preamble.
“Act” has the meaning set forth in
Section 8.5.
“Action” means any action, suit,
investigation, hearing or proceeding, including any audit for taxes
or otherwise.
“Additional Agreements” means each
of the Lock-up Agreements, the Life Insurance Agreements, the
Amended and Restated Lease Agreements, and the StarCo Termination
Agreement.
“Adjusted EBITDA” means the
Company’s earnings before interest, taxes, depreciation and
amortization, for the year ending December 31, 2006, as calculated
in the 2006 Financial Statements, plus normalization adjustments of
$900,000 and such additional normalization adjustments as may be
agreed upon by the parties.
“Affiliate” means, with respect to
any Person, any Person directly or indirectly controlling,
controlled by, or under common control with such other Person. With
respect to any natural person, the term Affiliate shall also
include any member of said person’s immediate family, any
family limited partnership, limited liability company or other
entity for said person and any trust, voting or otherwise, of which
said person is a trustee or of which said person or any of said
person’s immediate family is a beneficiary.
“Agreement” has the meaning set
forth in the Preamble.
“Amended and Restated Lease
Agreement” means the lease agreements between the Surviving
Corporation and the owner of the SA Offices (Green Wing Management,
Ltd.),
which will be
negotiated and entered into immediately prior to the Effective
Time. The terms of the Amended and Restated Lease Agreements will
include:
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a term of
twelve years beginning on the Effective Date
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a recalculation
of the rental rate every three years. At the end of each three-year
term, there will be an independent appraisal which will be used as
the basis for determining the lease payments during the next
three-year term, to be calculated as follows: (a) if the new
appraisal is more than the current appraisal, the lease will be at
a discount of 10% to the market rate (b) if the new appraisal is
less than the last appraisal by less than 10%, the lease will be at
the same rate as is applicable on the previous three year agreement
or (c) if the new appraisal is lower than the applicable appraisal
by more than 10%, the lease will be at the market rate. In other
words, if the new appraisal is lower than the immediately prior
appraisal, the new lease will be the lower of the current lease or
market rate. For example, assuming current market appraisal at $100
( i.e. lease is $90 (at a 10% discount including the 10%
discount)):
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if the new
appraisal were $115, the new lease rate would be 90% of $115 i.e.
$103.5
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if the new
appraisal were $105, the new lease rate would be 90% of $105 i.e.
$94.50
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if the new
appraisal were $95, the lease rate would remain at $90 because 90%
of $95 ($85.5) is less than the current lease
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if the new
appraisal is $85, then the new lease rate would be $85 because the
market rate is less than the current lease
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Prior to the
Effective Date, the lease will be adjusted by an independent
appraiser to 10% below market value or the current lease rate,
whichever is greater.
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The Parent will
have the right, at the Parent’s sole discretion, to purchase
from the leasehold owner(s) the underlying real properties at
market rates (to be agreed by an independent evaluation at that
time); provided that such market rates cannot be below the value
determined in the last appraisal prior to the Effective Date. The
Parent shall also have a right of first refusal to purchase the
real property, should such property ever be offered for
sale.
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“Arbitrator” has the meaning set
forth in Section 12.1(b).
“Authority” shall mean any
governmental, regulatory or administrative body, agency or
authority, any court or judicial authority, any arbitrator, or any
public, private or industry regulatory authority, whether
international, national, Federal, state or local.
“Benefits Arrangement” has the
meaning set forth in Section 3.25.
“Blair” has the meaning set forth in
the Recitals.
“Books and Records” means all books
and records, ledgers, employee records, customer lists, files,
correspondence, and other records of every kind (whether written,
electronic, or otherwise embodied) owned or used by the Company or
in which the Company’s assets, business, or transactions are
otherwise reflected.
“Business” has the meaning set forth
in the Recitals.
“Business Day” means any day other
than a Saturday, Sunday or a legal holiday on which commercial
banking institutions in Texas are not open for business.
“Carr Note” means the promissory
note owed by the Company and payable to Don Carr, dated November 1,
2005, in the original principal amount of $32,469.00.
“Cash
Consideration” has the meaning set forth in Section
2.6(c).
“Certificate of Merger” has the
meaning set forth in Section 2.3.
“Charter Documents” has the meaning
set forth in Section 3.3.
“Closing” has the meaning set forth
in Section 2.9.
“Closing
Date” has the meaning set forth in Section 2.9.
“Code” means the Internal Revenue
Code of 1986, as amended.
“Company” has the meaning set forth
in the Preamble. Unless the context otherwise requires, when used
in this Agreement, the term “Company” means the Company
and all of its Subsidiaries.
“Company
Common Stock” has the meaning set forth in the
Recitals.
“Company
Consent” has the meaning set forth in Section 3.9.
“Company Indemnitees” has the
meaning set forth in Section 11.3.
“Company
Preferred Stock” has the meaning set forth in the
Recitals.
“Company
Plan” has the meaning set forth in Section 3.25.
“Company Securities” means,
collectively, the Company Common Stock, the Company Preferred Stock
and the Company Warrant.
“Company Warrant” means the Common
Stock Purchase Warrant to purchase 52.4532 shares of Company Common
Stock issued to William Blair Mezzanine Capital Fund III, L.P. by
the Company dated October 22, 2004.
“Completed Contracts” has the
meaning set forth in the definition of StarCo Termination
Agreement.
“Constituent Corporations” has the
meaning set forth in Section 2.1(a).
“Contracts” has the meaning set
forth in Section 3.19.
“Contracts in Progress” has the
meaning set forth in the definition of StarCo Termination
Agreement.
“Current
Company Plans” has the meaning set forth in Section
3.25.
“Customer” has the meaning set forth
in Section 7.2(b) “December Balance Sheet” has the
meaning set forth in Section 3.10(a).
“Effective Time” has the meaning set
forth in Section 2.4.
“Effectiveness Period” has the
meaning set forth in Section 8.5.
“Employment Agreements” mean the
agreements to be negotiated by the Surviving Corporation and the
Parent and each of the persons listed on Schedule 8.7. These
Employment Agreements of Sam Youngblood, Don Carr and Tim Moxon
will provide for a term of not less than two years and the
Employment Agreement of Mark McDonald will be for a term of not
less than five years. The Employment Agreements of Sam Youngblood
and Don Carr will require the Surviving Corporation and Parent to
agree, as a part of the consideration to Sam Youngblood and Don
Carr, that each of them shall serve as a full voting member of the
Board of Directors of Surviving Corporation, so long as they are
employees of Surviving Corporation.
“Enhanced
Cash Consideration” has the meaning set forth in Section
2.6(b) “ERISA” means the Employment Retirement Income
Security Act of 1974.
“ERISA
Affiliate” has the meaning set forth in Section
3.25.
“ERISA
Affiliate Plan” has the meaning set forth in Section
3.25.
“Exchange
Act” means the Securities Exchange Act of 1934.
“Exchange Act Filings” means filings
under the Exchange Act made by the Parent prior to the Closing
Date.
“Financial Statements” has the
meaning set forth in Section 3.10(a).
“GAAP” means U.S. generally accepted
accounting principles, consistently applied and interpreted, and
shall not mean SEC GAAP.
“Indebtedness” includes with respect
to any Person, (a) all obligations of such Person for borrowed
money, or with respect to deposits or advances of any kind
(including amounts by reason of overdrafts and amounts owed by
reason of letter of credit reimbursement agreements) including with
respect thereto, all interests, fees and costs, (b) all obligations
of such Person evidenced by bonds, debentures, notes, liens,
mortgages or similar instruments, (c) all obligations of such
Person under conditional sale or other title retention agreements
relating to property purchased by such Person, (d) all obligations
of such Person issued or assumed as the deferred purchase price of
property or services (other than accounts payable to creditors for
goods and services incurred in the ordinary course of business),
(e) all Indebtedness of others secured by (or for which the holder
of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any lien or security interest on
property owned or acquired by such Person, whether or not the
obligations secured thereby have been assumed, (f) all obligations
of such Person under leases required to be accounted for as capital
leases under GAAP, and (g) all guarantees by such
Person.
“Indemnification Notice” has the
meaning set forth in Section 11.5(a).
“Indemnified Parties” has the
meaning set forth in Section 11.5.
“Indemnifying Party” has the meaning
set forth in Section 11.5(a).
“Individual Indemnitees” has the
meaning set forth in Section 11.4.
“Insurance Agreements” means the
agreements to be negotiated and entered into immediately prior to
the Effective Time by Parent and each of Sam Youngblood and Don
Carr relating to the respective obligation of Sam Youngblood and
Don Carr to maintain their existing key man life insurance policies
in a form to be agreed upon prior to Closing. It is understood that
the key man life insurance policies will be maintained with
benefits not less than those in place as of the date of this
Agreement until such time as the Lock-Up Agreements terminate. It
is understood that the Surviving Corporation will pay the premiums
for Don Carr’s policy.
“Intellectual Property” means any
and all of the following: (A) U.S., international and foreign
patents, patent applications and statutory invention registrations;
(B) trademarks, licenses, inventions, service marks, trade names,
trade dress, slogans, logos and Internet domain names, including
registrations and applications for registration thereof; (C)
copyrights, including registrations and applications for
registration thereof, and copyrightable materials; (D) trade
secrets, know-how and similar confidential and proprietary
information; (E) the additional names listed on Schedule 3.7 and
all derivations thereof; (F) u.r.l.s, Internet domain names
and
Websites; and
(G) any other type of Intellectual Property right, and all
embodiments and fixations thereof and related documentation,
registrations and franchises and all additions, improvements and
accessions thereto, in each case which is owned or licensed or
filed by the Company or any Subsidiary or used or held for use in
the Business, whether registered or unregistered or domestic or
foreign.
“Law” means any domestic or foreign
Federal, state, municipality or local law, statute, ordinance,
code, rule or regulation or common law.
“Leases” has the meaning set forth
in Section 3.14.
“Licensed
Intellectual Property” has the meaning set forth in section
3.16(c).
“Lien” means, with respect to any
asset, any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind in respect of such asset, including any
agreement to give any of the foregoing and any conditional sale and
including any voting agreement or proxy.
“Lock-Up Agreements” means each of
the Lock-Up Agreements between (A) Parent and each of the
Company’s stockholders (other than Blair) in the form
attached hereto as Exhibit B1 and (B) Parent and Blair in
the form attached hereto as Exhibit B2 .
“Loss(es)” has the meaning set forth
in Section 11.1.
“Material Adverse Change” means a
material adverse change in the business, assets, condition
(financial or otherwise), liabilities, results of operations or
prospects of the Business individually or as a whole;
provided , however , without prejudicing whether any
other matter qualifies as a Material Adverse Change, any matter
outside the ordinary course of business individually or in the
aggregate involving a loss or payment in excess of $100,000 shall
constitute a Material Adverse Change, per se.
“Material Adverse Effect” means a
material adverse effect on the business, assets, condition
(financial or otherwise), liabilities, results of operations or
prospects of the Business individually or as a whole;
provided, however , without prejudicing
whether any other matter qualifies as a Material Adverse Effect,
any matter outside the ordinary course of business individually or
in the aggregate involving a loss or payment in excess of $100,000
shall constitute a Material Adverse Effect, per se.
“Merger” has the meaning set forth
in the Recitals.
“Merger
Consideration” has the meaning set forth in Section
2.6(a).
“Money
Laundering Laws” has the meaning set forth in Section
3.33.
“Multiemployer Plans” has the
meaning set forth in Section 3.25.
“New
Note” has the meaning set forth in the Recitals.
“Note” has the meaning set forth in
the Recitals.
“Note
Conversion Agreement” has the meaning set forth in the
Recitals.
“Offices” has the meaning set forth
in Section 3.1.
“Order” means any decree, order,
judgment, writ, award, injunction, rule or consent of or by an
Authority.
“Outside Closing Date” has the
meaning set forth in Section 13.1.
“Owned
Intellectual Property” has the meaning set forth in Section
3.16(a).
“Parent” has the meaning set forth
in the Preamble.
“Parent’s Accountants” has the
meaning set forth in Section 2.7.
“Parent
Charter Documents” has the meaning set forth in Section
5.9.
“Parent
Common Stock” means the Common Stock, $.0001 par value per
share, of Parent.
“Parent
Financial Statements” has the meaning set forth in Section
5.11(a).
“PBGC” has the meaning set forth in
Section 3.25.
“Permits” has the meaning set forth
in Section 3.20.
“Person” means an individual, a
corporation, a partnership, a limited liability company, an
association, a trust or other entity or organization, including a
government, domestic or foreign, or political subdivision thereof,
the Company or an agency or instrumentality thereof.
“Plan” has the meaning set forth in
Section 3.25.
“Proceeding” has the meaning set
forth in Section 3.27(b).
“Real Property” means, collectively,
all real properties and interests therein (including the right to
use), together with all buildings, fixtures, trade fixtures, plant
and other improvements located thereon or attached thereto; all
rights arising out of use thereof (including air, water, oil and
mineral rights); and all subleases, franchises, licenses, permits,
easements and rights-of-way which are appurtenant
thereto.
“Rebate Obligations” has the meaning
set forth in Section 3.29(c).
“Reg
D” has the meaning set forth in Section 4.5(a).
“Registrable Securities” has the
meaning set forth in Section 8.5.
“Restriction Period” has the meaning
set forth in Section 7.2(a).
“Restrictive Covenants” has the
meaning set forth in Section 7.4.
“SA Offices” means those offices and
facilities of the Company included within the term
“Offices” as defined in Section 3.1, that are located,
or will be located in San Antonio, Texas and are leased by the
Company or the Subsidiaries from Green Wing Management,
Ltd.
“SEC” means the Securities and
Exchange Commission.
“September Balance Sheet” has the
meaning set forth in Section 3.10(a).
“Standard Stock Consideration” has
the meaning set forth in Section 2.6(a)(i).
“StarCo” has the meaning set forth
in Section 9.2(j).
“StarCo Termination Agreement” means
the agreement to be negotiated and entered into immediately prior
to the Effective Time by the Company and StarCo terminating
StarCo’s relationship with the Company in a form to be agreed
upon by the Company and Blair prior to Closing. Pursuant to the
StarCo Termination Agreement, (i) the Company will agree to pay the
account payable balance owed StarCo on the Closing Date (in an
amount no greater than $2 million), (ii) for claims alleged against
the Surviving Corporation or StarCo arising from bonded contracts
where the contract has been paid in full as of the Closing Date
(“Completed Contracts”), the Company will agree to
defend all of such claims, pay any proven claims, and perform any
required work to satisfy any proven claims, (iii) the Surviving
Corporation will have the right of reimbursement for all costs and
damages incurred in settling, resolving, or paying any claims that
exceed $250,000 per incident from StarCo and its Affiliates, (iv)
StarCo will agree to remain in existence until the end of the
contractual warranty period for any Completed Contract, (v) for any
claim against the Surviving Corporation or StarCo on any contract
of the Company that has not been paid in full as of the Closing
Date (“Contracts in Progress”), the Surviving
Corporation will agree to be wholly responsible for the defense,
resolution and payment of such claims, and agree to indemnify and
defend StarCo from such claims, (vi) the Company will agree to
indemnify Sam Youngblood and Don Carr from their personal
guarantees (and those of their spouses) of any bonding obligation
on any Contract in Progress, and (vii) the Parent and Acquisition
Corp. will agree to provide their own line of bonding capacity for
the Surviving Corporation after the Closing Date, without the
guarantees of Sam Youngblood or Don Carr.
“Software” has the meaning set forth
in Section 3.16(b).
“Stock
Consideration” has the meaning set forth in Section
2.6(a).
“Stockholder’s Securities”
means, with respect to a stockholder of the Company, the Company
Common Stock and/or the Company Preferred Stock owned by any such
stockholder of the Company, including those set forth on
Schedule I hereto.
“Subsidiary” or
“Subsidiaries” means one of the Company’s
subsidiaries or all of the Company’s subsidiaries, as
applicable.
“Surviving Corporation” has the
meaning set forth in Section 2.1(a).
“Tangible Assets” means all tangible
personal property and interests therein, including inventory,
machinery, computers and accessories, furniture, office equipment,
communications equipment, vehicles, and other tangible property
(collectively, the “Tangible Assets”).
“Tax” has the meaning set forth in
Section 3.27(c).
“Tax
Liability” has the meaning set forth in Section
3.27(b).
“Tax
Return” has the meaning set forth in Section
3.27(c).
“Third
Party Accountant” has the meaning set forth in Section
2.7(b).
“Third
Party Claim” has the meaning set forth in Section
11.5(a).
“UCC” shall mean the Uniform
Commercial Code of the State of Texas, or any corresponding or
succeeding provisions of Laws of the State of Texas
, or any corresponding or succeeding provisions of
Laws, in each case as the same may have been and hereafter may be
adopted, supplemented, modified, amended, restated or replaced from
time to time.
“Website(s)” shall mean all of the
internet domain names for the Company set forth on Schedule
3.16(a).
“Youngblood Note” means the
promissory note owed by the Company and payable to Sam Youngblood,
dated November 1, 2005, in the original principal amount of
$65,922.00.
ARTICLE II
PURCHASE AND SALE
(a) At the Effective Time, (i) the separate
existence of Acquisition Corp.
will cease and
Acquisition Corp. will be merged with and into the Company
(Acquisition Corp. and the Company are sometimes referred to herein
as the “Constituent Corporations”; with respect to
periods after the Effective Time, the Company is sometimes referred
to herein as the “Surviving Corporation”); (ii) the
Certificate of Incorporation of Acquisition Corp. in
effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation; and (iii) the By-laws
of Acquisition Corp. as in effect immediately prior to the
Effective Time shall be the By-laws of the Surviving
Corporation.
(b) At and after the Effective Time, title to
all property owned by each of the Constituent Corporations shall
vest in the Surviving Corporation without reversion or impairment,
and the Surviving Corporation shall automatically assume all of the
liabilities of each Constituent Corporation.
(c) Immediately after the Effective Time, Parent
shall elect no more than five persons to the Board of Directors of
the Surviving Corporation (which persons will constitute the entire
Board of Directors of the Surviving Corporation). Neither Parent
nor the Surviving Corporation is under any obligation to maintain
any person in any such position, except that Sam Youngblood and Don
Carr shall be elected to the Board of Directors of the Surviving
Corporation.
(d) Immediately after the Effective Time, Parent
shall cause the Board of Directors of the Surviving Corporation to
name the following persons as officers of the Surviving Corporation
in the positions indicated, provided however, neither Parent nor
the Surviving Corporation is under any obligation to maintain any
person in any such position, except as may be required in the
Employment Agreements of Sam Youngblood and Don Carr.
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(i)
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Sam Youngblood
- Chief Executive Officer and Secretary
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(iii)
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such other
persons as the Board of Directors of the Surviving Corporation
shall designate.
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2.2. (This section intentionally
left blank)
2.3. Certificate of
Merger . As soon as practicable following fulfillment
or waiver of the conditions specified in Article IX hereof, and
provided that this Agreement has not been terminated and abandoned
pursuant to Article XIII hereof, the Company and Acquisition Corp.
will cause the Certificate of Merger (the “Certificate of
Merger”) to be executed and filed with the Delaware Secretary
of State as provided in the Delaware General Corporation
Law.
2.4. Effective Time of the
Merger . The Merger shall become effective at 11:59
p.m. on the day of the filing of the Certificate of Merger with the
Delaware Secretary of State or at such other date or time
thereafter as the parties may agree. The date and time of such
effectiveness is herein sometimes referred to as the
“Effective Time”.
2.5.
Effect on Capital Stock; Exchange
Procedures .
(a) As of the Effective Time, by virtue of the
Merger and without any action on the part of the holders of any
Company Securities or the holders of capital stock of Acquisition
Corp.:
(i) Each issued share of the Company Common
Stock and Company Preferred Stock outstanding prior to the
Effective Time shall be converted into the right to receive a
portion of the Merger Consideration as defined in Section 2.6. The
Company Warrant shall be converted into the right to receive a
portion of the Merger Consideration as defined in Section 2.6. All
of the Company Securities outstanding prior to the Effective Time
shall be cancelled, and each holder of a certificate or agreement
representing any of the Company Securities shall thereafter cease
to have any rights with respect to the Company Securities except
the right to receive the Merger Consideration pursuant to the terms
hereof. Any shares of the Company Securities held as treasury
shares by the Company shall be canceled and not be converted into
the right to receive any consideration.
(ii) Each issued and outstanding share of the
capital stock of Acquisition Corp. shall automatically, and without
any action on the part of the holder thereof, become a share of
Company Common Stock.
(b) As soon as practicable after the Effective
Time, each holder of Company Securities prior to the Effective Time
will surrender the certificates or agreements representing the
Company Securities to the Parent. Upon the surrender of all the
Company Securities owned by a stockholder or the holder of the
Company Warrant of the Company, such Person shall promptly receive
from Parent the portion of the Merger Consideration which such
Person is entitled to receive pursuant to Sections 2.6.
(c) If the Merger Consideration (or any portion
thereof) to be paid to any stockholder of the Company or the holder
of the Company Warrant is to be delivered to any person other than
the person in whose name the Company Securities are registered, it
shall be a condition to such exchange that the Company Securities
so surrendered shall be properly endorsed or otherwise in proper
form for transfer and the person requesting such exchange shall (i)
establish to the satisfaction of the Parent the propriety of such
transfer and (ii) (x) pay any transfer or other taxes required by
reason of the payment of such consideration to a person other than
the registered holder of the Company Securities surrendered, or (y)
establish to the satisfaction of the Parent that such tax has been
paid or is not applicable.
(d) If any certificate representing Company
Securities outstanding prior to the Effective Time has been lost,
stolen or destroyed, Parent shall issue the applicable Merger
Consideration deliverable in respect thereof upon (i) the making of
an affidavit of that fact by the person claiming such certificate
to be lost, stolen or destroyed and (ii) if required by the Parent,
the posting by such person of a bond in such reasonable amount as
the Parent may direct as indemnity against any claim that may be
made against it with respect to such certificate.
(e) From and after the Effective Time, no
transfer of any securities of Acquisition Corp. outstanding prior
to the Effective Time shall be made on the stock transfer books of
Acquisition Corp.
2.6. Merger
Consideration . The aggregate consideration that the
Company’s stockholders and the holder of the Company Warrant
will be entitled to receive by virtue of the Merger shall be the
sum of the cash and Parent Common Stock set forth below (as
applicable, the “Merger Consideration”).
(a) If, at the time of the Closing, (i) the 2/28
Backlog is less than $80,000,000, or (ii) the 2/28 Backlog is
greater than $80,000,000 but the Adjusted EBITDA of the Company is
less than $4,500,000, then, subject to the right of the Parent to
terminate the Merger Agreement pursuant to Article 13, the Merger
Consideration shall consist of:
(i) $16,300,000
in cash (the “Standard Cash Consideration”);
and
(ii) 1,180,000 shares of Parent Common Stock
(the “Stock Consideration”).
(b) If at the time of the Closing the Adjusted
EBITDA of the Company is $4,500,000 or greater, and the amount of
the 2/28 Backlog is $80,000,000 or greater, then the Merger
Consideration shall consist of:
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(i)
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$18,200,000 in
cash (the “Enhanced Cash Consideration”);
and
|
(c) The terms Standard Cash Consideration and
Enhanced Cash Consideration are collectively referred to herein as
“Cash Consideration”.
2.7.
Procedure to Establish Adjusted EBITDA
.
(a) By February 15, 2007, the Company will
provide the Parent with the 2006 Financial Statements and a
calculation (with reasonably sufficient detail to allow the Parent
to analyze the calculation) of the Company’s Adjusted EBITDA
for the calendar year ended December 31, 2006.
(b) If Parent seeks to propose any change or
modification in the Company’s calculation of Adjusted EBITDA
and/or the 2006 Financial Statements, Parent must do so in a
writing delivered to Company, setting forth in reasonable detail
(i) the changes or modifications proposed, (ii) the rationale and
evidence justifying the proposed change or modifications, and (iii)
if applicable, the provisions of U.S. GAAP (not SEC. GAAP) that
clearly and specifically require the proposed change or
modifications, within 10 days of receiving such calculation of
Adjusted EBITDA and the 2006 Financial Statements. If Company,
within 10 days of receiving the proposed changes or modifications
of Parent, does not notify Parent in writing that Company has
agreed to the changes or modifications in the Company’s
calculation of Adjusted EBITDA and/or the 2006 Financial Statements
proposed
by Parent,
then, if within 10 days thereafter, the independent accountants
regularly employed by the Parent (the “Parent’s
Accountants”) and the independent accountants for the Company
(the “Company’s Accountants”) are unable to agree
upon the Adjusted EBITDA calculations or the 2006 Financial
Statements, the Parent’s Accountants and the Company’s
Accountants shall provide their calculations of Adjusted EBITDA and
the 2006 Financial Statements to a third-party independent
accountant (the “Third Party Accountant”) familiar with
businesses similar to the Business and mutually agreed upon by the
Parent’s Accountants and the Company’s Accountants, who
shall make a determination as to the Company’s Adjusted
EBITDA as of the Closing Date. If the Parent’s Accountants
and the Company’s Accountants cannot agree upon the Third
Party Accountant, then the Third Party Accountant will be
Pricewaterhouse Coopers.
(c) The calculation of Adjusted EBITDA as of the
Closing Date submitted to Parent by Company, shall be deemed to be
irrevocably incontestable and binding upon Parent and Acquisition
Corp. unless, as to the issues raised by Parent and submitted for
resolution, the Third Party Accountant shall, prior to
determination of any other substantive issue, make a finding that,
based on standards generally acceptable in the accounting industry,
there was no reasonable basis pursuant to U.S. GAAP (not S.E.C.
GAAP) for the calculation of Adjusted EBITDA or the 2006 Financial
Statements by Company’s Accountant. If the Third Party
Accountant does not make such a finding as required herein, the
fees of the Third Party Accountant shall be the sole responsibility
of Parent. If the Third Party Accountant makes such a finding, the
expenses for the Third Party Accountant shall be paid for by the
party whose calculation of Adjusted EBITDA was most different from
the calculation of such Third Party Accountant, as determined by
such Third Party Accountant as reasonable.
2.8. Procedure to Establish 2/28
Backlog
(a) By March 21, 2007, the Company will provide
the Parent with a calculation of the Company’s 2/28 Backlog.
If Parent seeks to propose any change or modification in the
Company’s calculation of 2/28 Backlog, Parent must do so in a
writing delivered to Company, setting forth in reasonable detail
(i) the changes or modifications proposed, and (ii) the rationale
and evidence justifying the Parent’s assertion that the
Company’s calculation of 2/28 Backlog does not comply with
the Company’s past practices. If Company, within 10 days of
receiving the proposed changes or modifications of Parent, does not
notify Parent in writing that Company has agreed to the changes or
modifications in the Company’s calculation of 2/28 Backlog,
the Parent and the Company shall negotiate in good faith the amount
of the 2/28 Backlog.
2.9. Payment of the Merger
Consideration .
(a) If at the time of the Closing, (i) the 2/28
Backlog is less than $80,000,000, or (ii) the 2/28 Backlog is
greater than $80,000,000 but the Adjusted EBITDA of the Company is
less than $4,500,000, then, subject to the right of the Parent to
terminate the Merger Agreement pursuant to Article 13, the Merger
Consideration shall be payable by Acquisition Corp. and Parent as
follows, in the following priorities:
(i) First, Blair, as the holder of all of the
Company Preferred Stock, will be entitled to receive a portion of
the Cash Consideration in an aggregate amount equal to
$10,000,000.00.
(ii) Second, but only if the Youngblood Note and
the Carr Note are still outstanding as of the Closing Date, the
holders of the Youngblood Note and the Carr Note, constituting long
term debt of the Company, will be paid in full their respective
principal balances due, in an aggregate amount equal to
$98,391.00.
(iii) Third, the holders of Company Common Stock
will be entitled to receive (i) $5,307,189 (or $5,405,580 if the
Youngblood Note and the Carr Note are not still outstanding as of
immediately prior to the Closing Date), to be distributed according
to Schedule 2.9 attached hereto and (ii) 739,712 shares of Parent
Common Stock , to be distributed according to Schedule 2.9 attached
hereto.
(iv)
Fourth, the holder of the Company Warrant will be entitled to receive (i) 440,288 shares of Parent
Common Stock and (ii) $894,420
(b) If at the time of the Closing the Adjusted
EBITDA of the Company is $4,500,000.00 or greater, and the amount
of the 2/28 Backlog is $80,000,000.00 or more, then the Enhanced
Cash Consideration shall be distributed as follows, in the
following priorities:
(i) First, Blair, as the holder of all of the
Company Preferred Stock, will be entitled to receive a portion of
the Cash Consideration in an aggregate amount equal to
$10,000,000.
(ii) Second, but only if the Youngblood Note and
the Carr Note are still outstanding as of the Closing Date, the
holders of the Youngblood Note and the Carr Note, constituting long
term debt of the Company, will be paid in full their respective
principal balances due, in an aggregate amount equal to
$98,391.00.
(iii) Third, the holders of Company Common Stock
will be entitled to receive (i) $6,655,529 (or $6,753,920 if the
Youngblood Note and the Carr Note are not still outstanding as of
immediately prior to the Closing Date), to be distributed according
to Schedule 2.9 attached hereto and (ii) 739,712 shares of Parent
Common Stock , to be distributed according to Schedule 2.9 attached
hereto.
(iv) Fourth, the holder of the Company Warrant
will be entitled to receive (i) 440,288 shares of Parent Common
Stock and (ii) $1,446,080.
2.10. Closing . Subject
to the satisfaction or waiver of the conditions set forth in
Article IX, the closing (the “Closing”) of the Merger
hereunder shall take place at the offices of Hughes & Luce LLP
in Austin, Texas, or at such other date, time or place as
Parent,
Acquisition
Corp. and the Company may agree (the date and time at which the
Closing is actually held being the “Closing Date”). In
addition to those obligations set forth in Article IX, at the
Closing:
(a) Parent shall deliver the Merger
Consideration in accordance with Section 2.6; and
(b) Each of the stockholders of the Company and
the holder of the Company Warrant will deliver to Parent
certificates representing the stockholder’s Company
Securities or the Company Warrant, as applicable, duly endorsed,
together with any other documents that are necessary to transfer to
Parent good title to all of the Company Securities, free and clear
of any and all Liens.
2.11. No Further Transfers; Lost,
Stolen or Destroyed Certificates. The Merger
Consideration paid pursuant to the Merger upon the surrender for
exchange of shares of Company Securities in accordance with the
terms hereof shall be deemed to have been paid in full satisfaction
of all rights pertaining to such shares of Company Securities, and
upon and after the Effective Time, no transfer of the shares of
Company Securities outstanding prior to the Effective Time shall be
made on the stock transfer books of the Surviving Corporation. If,
after the Effective Time, certificates are presented to the
Surviving Corporation for any reason, they shall be cancelled and
exchanged as provided in this Article II.
2.12. Effect of the Merger; Parent
Name Change . Upon and after the Effective Time: (a)
the shares of the Company shall be converted as provided in this
Agreement; (b) the former holders of such shares will be entitled
only to the rights provided in this Agreement, the Additional
Agreements and to the rights provided under Delaware General
Corporation Law; and (c) the Merger shall otherwise have the effect
provided under the applicable laws of the state of Delaware.
Subsequent to the Effective Time, the Parent shall change its name
from “Argyle Security Acquisition Corp.” to
“Argyle Security, Inc.”, or such other name as is
legally available.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY
The Company hereby represents and warrants to
Parent and Acquisition Corp. that the statements contained in this
Article III are true and correct, except as set forth in the
disclosure schedule attached hereto (the “Company Disclosure
Schedule”). The Company Disclosure Schedule shall be arranged
in paragraphs corresponding to the numbered and lettered paragraphs
contained in this Article III, and the disclosure in any paragraph
shall qualify the corresponding paragraph in this Article III;
provided, however , that any item disclosed under any
paragraph of the Company Disclosure Schedule shall be deemed to be
disclosed with respect to every other applicable paragraph if the
disclosure in respect to such paragraph of the Company Disclosure
Schedule is sufficient to reasonably inform the reader of the
Company Disclosure
Schedule of the
information required to be disclosed in respect of other paragraphs
of the Company Disclosure Schedule. Any reference in this Article
III to an agreement being “enforceable” shall be deemed
to be qualified to the extent such enforceability is subject to (i)
laws of general application relating to bankruptcy, insolvency,
moratorium and the relief of debtors, and (ii) the availability of
specific performance, injunctive relief and other equitable
remedies. The Company Disclosure Schedule refers to sources of
data, documentation and information that are too voluminous to
attach to this Agreement, and all such data, documentation and
information so referenced are irrevocably deemed to be incorporated
by reference herein for all purposes as if set forth verbatim
herein.
3.1. Corporate Existence and
Power . The Company (and not its Subsidiaries) is a
corporation duly formed, validly existing and in good standing
under and by virtue of the Laws of the State of Delaware. The
Company has all power and authority, corporate and otherwise, and
all governmental licenses, franchises, permits, authorizations,
consents and approvals required to own and operate its properties
and assets and to carry on its business as now conducted and as
proposed to be conducted, except where failure would not have a
Material Adverse Effect. Each Subsidiary is duly formed, validly
existing and in good standing under and by virtue of the laws of
the State of its organization. Each such Subsidiary has all power
and authority, corporate and otherwise, and all governmental
licenses, franchises, permits, authorizations, consents and
approvals required to own and operate its properties and assets and
to carry on its business as now conducted and as proposed to be
conducted, except where failure would not have a Material Adverse
Effect. Schedule 3.1(a) sets forth each jurisdiction where the
Company and each of its Subsidiaries is qualified to do business as
a foreign corporation . The only offices, warehouses or
business locations of the Company and each Subsidiary are listed on
Schedule 3.1(b) (the “Offices”) Neither the Company nor
any Subsidiary has taken any action, adopted any plan, or made any
agreement in respect of any merger, consolidation, sale of all or
substantially all of its respective assets, reorganization,
recapitalization, dissolution or liquidation, except as explicitly
set forth in this Agreement.
3.2. Corporate Authorization
. The execution, delivery and performance by the Company
of this Agreement and each of the other Additional Agreements to
which the Company is named as a party and the consummation by the
Company of the transactions contemplated hereby and thereby are
within the corporate powers of the Company and have been duly
authorized by all necessary action on the part of the Company. This
Agreement constitutes, and, upon their execution and delivery, each
of the Additional Agreements to which the Company is named as a
party will constitute, a valid and legally binding agreement of the
Company, enforceable against the Company in accordance with their
respective terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, or
(ii) rules of law governing specific performance, injunctive
relief or other equitable remedies.
3.3. Charter Documents;
Legality . The Company has previously delivered to
Parent true and complete copies of its Certificate of Incorporation
and By-Laws, minute books and stock books (the “Charter
Documents”), as in effect or constituted on the date hereof.
The execution, delivery, and performance by the Company of this
Agreement and any Additional Agreement to which the Company is to
be a party has not violated and will not
violate, and
the consummation by the Company of the transactions contemplated
hereby or thereby will not violate, any of the Charter Documents or
any law.
3.4. Subsidiaries .
Schedule 3.4 sets forth each of the Company’s Subsidiaries.
The Company has previously delivered to Parent true and complete
copies of the Charter Documents for each Subsidiary, as in effect
or constituted on the date hereof. The Company is not a party to
any agreement relating to the formation of any joint venture,
association or other Person.
3.5. Capitalization and
Ownership . Schedule 3.5 sets forth, with respect to
the Company and each Subsidiary, (i) such company’s
authorized capital, (ii) the number of such company’s
securities that are outstanding, (iii) each stockholder owning such
company’s securities and the number of shares of such
securities owned by such security holder and (iv) each security
convertible into or exercisable or exchangeable for such
company’s securities, the number and type of securities such
security is convertible into, the exercise or conversion price of
such security and the holder of such security. Except as set forth
on Schedule 3.5, no Person other than the stockholders or the
Company owns any securities of the Company or the Subsidiaries.
Except as set forth on Schedule 3.5, there is no Contract that
requires or under any circumstance would require the Company or any
Subsidiary to issue, or grant any right to acquire, any securities
of the Company or any Subsidiary, or any security or instrument
exercisable or exchangeable for or convertible into, the capital
stock or membership interest of the Company or any Subsidiary or to
merge, consolidate, dissolve, liquidate, restructure or
recapitalize the Company or any Subsidiary. The Company Securities
and the securities of each Subsidiary (i) have been duly authorized
and validly issued and are fully paid and nonassessable, and the
shares of Company Preferred Stock issued to Blair in exchange for
$10,000,000 of the Note will, upon such exchange, be validly
issued, fully paid and nonassessable, and (ii) were issued in
compliance with all applicable federal and state securities
laws.
3.6. Affiliates . Other
than the stockholders listed on Schedule 3.5, the Company is not
controlled by any Person and the Company is not in control of any
other Person other than the Subsidiaries. Schedule 3.6 lists each
Contract, arrangement, or understanding to which the Company, on
the one hand, and any of its stockholders or any Affiliate of any
of its stockholders, on the other hand, are parties. Except as
disclosed in Schedule 3.6, none of the Company’s stockholders
or any Affiliate of any of the Company’s stockholders (i)
own, directly or indirectly, in whole or in part, any tangible or
intangible property (including Intellectual Property rights) that
the Company or any Subsidiary uses or the use of which is necessary
for the conduct of the Business, or (ii) have engaged in any
transaction with the Company or any Subsidiary.
3.7. Assumed Names .
Schedule 3.7 is a complete and correct list of all assumed or
“doing business as” names currently or formerly used by
the Company or any Subsidiary, including names on any Websites,
except for immaterial names no longer used. Neither the Company nor
any Subsidiary has used any name other than the names listed on
Schedule 3.7 to conduct its business, except for immaterial names
no longer used. The Company and each Subsidiary have filed
appropriate “doing business as” certificates in
all
applicable
jurisdictions. Except as indicated on Schedule 3.7, all Websites
are in good working order.
3.8. Governmental
Authorization . None of the execution, delivery or
performance by the Company of this Agreement or any Additional
Agreement requires any consent, approval, license or other action
by or in respect of, or registration, declaration or filing with,
any Authority.
3.9. Consents . The
Contracts listed on Schedule 3.9 are the only material agreements,
commitments, arrangements, contracts or other instruments binding
upon the Company, any Subsidiary or any of their respective
properties requiring a consent, approval, authorization, order or
other action of or filing with any Person as a result of the
execution, delivery or performance of this Agreement or any of the
Additional Agreements to which the Company is named as a party or
the consummation of the transactions contemplated hereby or thereby
(each of the foregoing, a “Company
Consent”).
3.10. Financial
Statements .
(a) Attached hereto as Schedule 3.10(a) are
audited consolidated balance sheets of the Company as of December
31, 2004 and December 31, 2005, and the related consolidated
statements of operations, stockholders’ deficit and cash
flows for each of the years in the three-year period ended December
31, 2005, and an unaudited balance sheet of the Company as of
September 30, 2006 and the related statements of operations,
stockholders’ deficit and cash flows for the period ending
September 30, 2006 (collectively, the “Financial
Statements”). The balance sheet contained in the Financial
Statements as of December 31, 2005 is referred to herein as the
“December Balance Sheet”. The balance sheet contained
in the Financial Statements as of September 30, 2006 is referred to
herein as the “September Balance Sheet”. The Financial
Statements (i) were prepared from the Books and Records; (ii)
except a lack of footnotes with regard to September 30, 2006
financials and except as set forth on Schedule 3.10(a), were
prepared in accordance with GAAP; (iii) fairly and accurately
present the Company’s financial condition and the results of
its operations as of their respective dates and for the periods
then ended; (iv) contain and reflect all necessary adjustments and
accruals for a fair presentation of the Company’s financial
condition as of their dates; and (v) contain and reflect adequate
provisions for all reasonably anticipated liabilities for all
material income, property, sales, payroll or other Taxes applicable
to the Company with respect to the periods then ended. The Company
has heretofore delivered to Parent complete and accurate copies of
all “management letters” received by it from the
Company’s accountants and all responses during the last three
years by lawyers engaged by the Company to inquiries from the
Company’s accountant or any predecessor
accountants.
(b) Except as specifically disclosed, reflected
or fully reserved against on the September Balance Sheet and for
liabilities and obligations of a similar nature and in similar
amounts incurred in the ordinary course of business since the date
of the September Balance Sheet and except as set forth on Schedule
3.10(b), there are no liabilities, debts or obligations of any
nature (whether accrued, absolute, contingent, liquidated or
unliquidated, unasserted or otherwise) relating to the Company. All
debts and liabilities, fixed or
contingent,
which should be included under GAAP on an accrual basis on the
September Balance Sheets are included therein.
(c) The December Balance Sheet and September
Balance Sheet accurately reflect the outstanding Indebtedness of
the Company as of the dates thereof. Except for liabilities and
obligations of a similar nature and in similar amounts incurred in
the ordinary course of business since the date of the September
Balance Sheet as set forth on the September Balance Sheet and
Schedule 3.10(b), the Company does not have any
Indebtedness.
(d) All forecasts, presentations or projections
relating to the future results of operations of the Company were
based upon reasonable assumptions and were prepared in good faith
by the Company.
(e) ( This Section intentionally left
blank )
(f) All Books and Records of the Company have
been properly and accurately kept and completed in all material
respects, and there are no material inaccuracies or discrepancies
of any kind contained or reflected therein. The Company has none of
its records, systems controls, data or information recorded,
stored, maintained, operated or otherwise wholly or partly
dependent on or held by any means (including any mechanical,
electronic or photographic process, whether computerized or not)
which (including all means of access thereto and therefrom) is not
under the exclusive ownership (excluding licensed software
programs) and direct control of the Company and which is not
located at the Offices or at locations set forth on Schedule
3.10(f).
3.11. Accounts
Receivable . Schedule 3.11(a) sets forth as of a date
within three days of the date hereof all accounts, notes and other
receivables, whether or not accrued, and whether or not billed, of
the Company, in accordance with GAAP (“Accounts
Receivable”). Except as set forth in Schedule 3.11(b), all
Accounts Receivable represent bona fide revenues of the Company
pursuant to the Business and are fully collectible, net of any
reserves shown on the September Balance Sheet. Except as set forth
on Schedule 3.11(b), all accounts and notes receivable reflected on
the December Balance Sheet, or arising since December 31, 2005,
have been collected, or are and to the knowledge of the Company
will be good and collectible, in each case at the aggregate
recorded amounts thereof without right of recourse, defense,
deduction, return of goods, counterclaim, offset, or set off on the
part of the obligor.
3.12. Books and
Records .
(a) The Books and Records accurately and fairly,
in reasonable detail, reflect the Company’s transactions and
dispositions of assets. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance
that:
(i) transactions are executed in accordance with
management’s authorization;
(ii) access to assets is permitted only in
accordance with management’s authorization; and
(iii) recorded assets are compared with existing
assets at reasonable intervals, and appropriate action is taken
with respect to any differences.
(b) The Company has heretofore made all of its
Books and Records available to Parent for its inspection and has
heretofore delivered to Parent complete and accurate copies of
documents referred to in the Schedules as Parent has requested. All
Contracts, documents, and other papers or copies thereof delivered
to Parent by or on behalf of the Company in connection with this
Agreement and the transactions contemplated herein are accurate,
complete, and authentic.
(c) Schedule 3.12(c) is a complete and correct
list of all savings, checking, brokerage or other accounts pursuant
to which the Company has cash or securities on deposit and such
list indicates the signatories on each account.
3.13. Absence of Certain
Changes .
(a) Except as set forth in Schedule 3.13(a),
since December 31, 2005, the Company and each Subsidiary has
conducted its respective business in the ordinary course of
business consistent with past practices, and with respect to the
conduct of business by Company and each Subsidiary outside the
ordinary course of business, there has not been:
(i) any Material Adverse Change or any event,
occurrence, development or state of circumstances or facts which
could reasonably be expected to result individually or in the
aggregate in a Material Adverse Effect on the Company’s
ability to consummate the transactions contemplated herein or upon
the value to Parent or Acquisition Corp. of the transactions
contemplated hereby ;
(ii) any transaction, contract, agreement or
other instrument entered into, or commitment made, by the Company
or any Subsidiary relating to the Business or any relinquishment by
the Company or any Subsidiary of any Contract or other right, in
either case other than transactions and commitments in the ordinary
course of business consistent in all respects, including kind and
amount, with past practices and those contemplated by this
Agreement;
(iii) any increase of bonus, salary or other
compensation paid of more than 20% for any employee making an
annual salary of greater than $80,000 or in excess of $16,000 in
the aggregate on an annual basis for any single employee, or change
in the bonus or profit sharing policies of the Company;
(iv) any capital expenditure except in the
ordinary course of business consistent with past
practice;
(v) any sale, lease, license or other
disposition of any of its assets except (a) pursuant to existing
Contracts or commitments disclosed herein and (b) sales of products
or inventory in the ordinary course of business consistent with
past practice;
(vi) acceptance of any returns except in the
ordinary course of business, consistent with past
practice;
(vii) any
material default under any term or provision of any
Contract;
(viii) a
material increase in the amount of Indebtedness;
(ix) the incurrence of Liens on any
of its assets, other than in the ordinary course of business,
consistent with past practice;
(x) any material damage, destruction or loss of
property related to any of its assets not covered by
insurance;
(xi) any delay, acceleration or cancellation of
any receivables or indebtedness owed to it or write-off or
additional reserves made with respect to the same, other than in
the ordinary course of business, consistent with past
practice;
(xii) any merger or consolidation with or
acquisition of any other Person;
(xiii) the lapse of any insurance
policy protecting its assets;
(xiv) any change in its accounting
principles or methods or write down of the value of any inventory
or assets;
(xv) any change in location where it
conducts business;
(xvi) any extension of any loans
other than travel or other expense advances to employees in the
ordinary course of business consistent with past practice exceeding
$5,000 individually or $50,000 in the aggregate;
(xvii) any increase or reduction in the prices
of products sold except in the ordinary course of business
consistent with past practice;
(xviii) any agreement to change any practices or
terms, including payment terms, with respect to customers or
suppliers;
(xix) any change in hiring practices for
employees, consultants or advisors;
(xx) any dividend or distribution to
the Company’s stockholders; or
(xxi) any agreement to do any of the
foregoing.
(b) Except as set forth on Schedule 3.13(a) and
actions taken in good faith to invest in the Company’s
business, since December 31, 2005, through and including the
Closing Date, neither the Company nor any Subsidiary has taken any
action nor has any of them had any event occur which would have
violated any covenants of the Company set forth in Article VI
hereof.
3.14. Real Property
.
(a) Neither the Company nor any Subsidiary owns
any Real Property. The Company has delivered to Parent true,
correct, and complete copies of the leases and all amendments
thereto for the properties listed on Schedule 3.14(a) (the
“Leases”). The Leases, together with all amendments,
are listed in Schedule 3.14(a) and are valid and enforceable by the
Company or the Subsidiary which is a party to such lease against
the other parties thereto. Neither the Company nor any Subsidiary
has breached or violated and is not in default under any of the
Leases or any local zoning ordinance, the breach or violation of
which could individually or in the aggregate have a Material
Adverse Effect, and no notice from any Person has been received by
the Company or any Subsidiary or served upon the Company, any
Subsidiary claiming any violation of any Lease or any local zoning
ordinance. Neither the Company nor any Subsidiary has other leases
for Real Property except as set forth on Schedule
3.14(a).
(b) Neither the Company nor any Subsidiary has
experienced any material interruption in the delivery of adequate
quantities of any utilities (including electricity, natural gas,
potable water, water for cooling or similar purposes and fuel oil)
or other public services (including sanitary and industrial sewer
service) required by the Company or any Subsidiary in the operation
of the Business.
3.15. Tangible Personal
Property .
(a) Each piece of Tangible Assets is in
operating condition and repair and functions in accordance with its
intended use (ordinary wear and tear excepted), has been properly
maintained, and is suitable for its present uses. Schedule 3.15(a)
sets forth a complete and correct list of the Tangible Assets owned
by the Company or any Subsidiary, setting forth a description of
such property and its location, as of a date within three days of
the Closing Date.
(b) The Company or one of the Subsidiaries has,
and upon consummation of the transactions contemplated hereby will
continue to have, good, valid and marketable title in and to each
piece of Tangible Assets listed on Schedule 3.15(a) hereto, free
and clear of all Liens, except as set forth on Schedule
3.15(b).
(c) The Company or one of the Subsidiaries has
good title to, or a valid leasehold or license interest in, all its
respective properties and assets (whether tangible or intangible),
free and clear of all Liens. The personal and other properties and
assets owned by the Company or any Subsidiary or leased or licensed
by the Company or any Subsidiary from a third party constitute all
such properties and assets which are necessary to the Business as
presently conducted and as presently proposed to be
conducted.
(d) The materials and supplies included in the
inventory of the Company or any Subsidiary as of the Closing Date
will be (i) substantially equivalent in quality and quantity,
subject to seasonality, to the materials and supplies, and
additions thereto, generally included in such inventory in the
past; and (ii) valued in accordance with GAAP and applied on a
basis consistent with that used in the Financial
Statements.
(e) Except as indicated on Schedule 3.15(a), all
Tangible Assets except for vehicles that are being used in the
Business are located at the Offices.
3.16.
Intellectual Property .
(a) Schedule 3.16(a) sets forth a true and
complete list of all Intellectual Property owned by the Company or
any Subsidiary and used or held for use by or otherwise material to
the Business (the “Owned Intellectual
Property”).
(b) Schedule 3.16(b) sets forth a true and
complete list of all material computer software developed in whole
or in part by or on behalf of the Company or any Subsidiary,
including such developed computer software and databases that are
operated or used by the Company or any Subsidiary on its Websites
and used or held for use by or otherwise material to the business
(collectively, “Software”). Except for the software
(including prepackaged third party software) listed on Schedule
3.16(c), the Software is the only computer software that is used or
held for use by or otherwise material to the Business.
(c) Schedule 3.16(c) sets forth a true and
complete list of all licenses, sublicenses and other agreements
pertaining to Intellectual Property or Software to which the
Company is a party in each case which are valid and used or held
for use by or otherwise material to the Business (collectively,
“Licensed Intellectual Property”).
(d) Neither the Company’s nor any
Subsidiary’s ownership and use in the ordinary course of the
Owned Intellectual Property and the use of the Software and
Licensed Intellectual Property does not infringe upon or
misappropriate the valid Intellectual Property rights, privacy
rights or other right of any third party.
(e) Except as set forth in Schedule 3.16(f), the
Company or a Subsidiary is the owner of the entire and unencumbered
right, title and interest in and to each item of Owned Intellectual
Property, and the Company or a Subsidiary is entitled to use, and
is using in the Business, the Owned Intellectual Property, Software
and Licensed Intellectual Property in the ordinary
course.
(f) Except for the Intellectual Property listed
on Schedule 3.16(f) the Owned Intellectual Property, Software and
the Licensed Intellectual Property include all of the Intellectual
Property used in the ordinary day-to-day conduct of the Business,
and there are no other items of Intellectual Property, Software or
Licensed Intellectual Property that are material to such ordinary
day-to-day conduct of the Business. The Company’s rights in
the Owned Intellectual Property and, to the knowledge of the
Company or any Subsidiary, the Company’s rights in the
Licensed Intellectual Property, are subsisting, valid and
enforceable, and have not been adjudged invalid or unenforceable in
whole or part.
(g) To the knowledge of the Company, no Person
is engaged in any activity that infringes upon the Owned
Intellectual Property, the Licensed Intellectual Property or the
Software. Neither the Company nor any Subsidiary has granted any
license or other right currently outstanding to any third party
with respect to the Owned Intellectual Property, Licensed
Intellectual Property or Software, except for (i) licenses issued
in the ordinary course, and (ii) those
licenses set forth in Schedule 3.16(g). The
consummation of the transactions contemplated by this Agreement
will not result in the termination or impairment of any of the
Owned Intellectual Property, Licensed Intellectual Property or
Software.
(h) Neither the Company nor or any Subsidiary
has exported the Software outside the U.S. or Canada. No rights in
the Software have been transferred by the Company to any third
party except to the customers of the Company to whom the Company
has licensed such Software in the ordinary course.
(i) The Company or a Subsidiary has the right to
use all software development tools, library functions, compilers
and other third party software that is material to the Business or
that is required to operate or, where modification is essential to
the use of the Software, to modify the Software.
(j) The Company and each Subsidiary has taken
reasonable steps to maintain the confidentiality of its trade
secrets and other confidential Intellectual Property and to the
Company’s knowledge, (i) there has been no misappropriation
of any material trade secrets or other material confidential
Intellectual Property of the Company or any Subsidiary by any
Person; (ii) no employee, independent contractor or agent of the
Company or any Subsidiary has misappropriated any trade secrets of
any other Person in the course of his performance as an employee,
independent contractor or agent; and (iii) no employee, independent
contractor or agent of the Company or any Subsidiary is in default
or breach of any term of any employment agreement, non-disclosure
agreement, non-compete obligation, assignment of invention
agreement or similar agreement or contract relating in any way to
the protection, ownership, development, use or transfer of
Intellectual Property, other than those which individually or in
the aggregate would not have a Material Adverse Effect.
3.17. Relationships With
Customers, Suppliers, Etc. .
(a) Schedule 3.17(a) identifies during the nine
months ended September 30, 2006 and the fiscal year ended December
31, 2005, respectively (i) the 10 largest
customers of
the Company and each Subsidiary in the aggregate and the amount of
revenues accounted for by such customer during each such period and
(ii) the 5 largest suppliers (other than attorneys, accountants and
office leases) of the Company and each Subsidiary in the aggregate
and the amount of expense accounted for by such supplier during
each such period.
(b) Schedule 3.17(b) sets forth (i) all
prepayments, pre-billed invoices and deposits that have been
received by the Company or any Subsidiary as of the date hereof
from customers for products to be shipped, or services to be
performed, after the Closing Date, and (ii) with respect to each
such prepayment, pre-billed invoice or deposit, (A) the party and
contract credited, (B) the date received or invoiced, (C) the
products and/or services to be delivered, and (D) the conditions
for the return of such prepayment, pre-billed invoice or deposit.
All such prepayments, pre-billed invoices and deposits are properly
accrued for on the Financial Statements, in accordance with GAAP
applied on a consistent basis with the past practice of the
Company.
(c) Schedule 3.17(c) sets forth all purchases
(other than attorneys, accountants and office leases) since
December 31, 2005, with a cost of in excess of $50,000 for any
single item or series of related items.
(d) Except as set forth on Schedule 3.17(d),
since December 31, 2005: (i) there has not been any termination of
the business relationship of the Company or any Subsidiary with any
material licensee, customer or supplier, other than in the ordinary
course of business where a contract has been concluded with a
customer with no subsequent follow-on business or with a supplier
due to the supplier’s products being either (A) no longer
available or (B) no longer applicable to the Company’s
ongoing business; (ii) to the knowledge of the Company, there has
not been any threatened termination or withholding of payments by,
or any material dispute with, any material licensee, customer or
supplier; and (iii) neither the Company nor any Subsidiary has
received any notice or been informed that any such event described
in (a) or (b) above will occur in the future, either as a result of
the consummation of the transactions contemplated by this Agreement
or otherwise. Except as set forth on Schedule 3.17(d), neither the
Company nor any Subsidiary is currently in any dispute over any
terms of any contract or agreement to which the Company or any
Subsidiary and any material licensee, customer or supplier is a
party.
3.18. Litigation .
Except as set forth in Schedule 3.18, there is no Action pending
against, or to the knowledge of the Company, threatened against or
affecting the Company or any Subsidiary, any of their respective
officers or directors, any stockholder of the Company, where such
Action relates directly or indirectly to the business of the
Company or such stockholder’s ownership interest in the
Company, the business of the Company or any Subsidiary, or any
Contract before any court or arbitrator or any governmental body,
agency or official or which in any manner challenges or seeks to
prevent, enjoin, alter or delay the transactions contemplated
hereby. There are no outstanding judgments against the Company or
any Subsidiary. Neither the Company nor any Subsidiary is now, nor
have they been in the past five years, subject to any proceeding
with the Federal Trade Commission or the Equal Employment
Opportunity Commission or any comparable body of any state or
political subdivision.
3.19.
Contracts .
(a) Except as disclosed on Schedule 3.19(a),
each contract to which the Company or any Subsidiary is a party
(“Contract”) is a valid and binding agreement, and is
in full force and effect, except where a failure would not have a
Material Adverse Effect and neither the Company nor any Subsidiary,
as applicable, nor, to the knowledge of the Company, any other
party thereto, is in breach or default (whether with or without the
passage of time or the giving of notice or both) under any material
terms of any such Contract. Except as disclosed on Schedule
3.19(a), neither the Company nor any Subsidiary has assigned,
delegated, or otherwise transferred any of its rights or
obligations with respect to any material Contracts, or granted any
power of attorney with respect thereto. The Company and each
Subsidiary has made available to Parent an original or a true and
correct fully executed copy of each material Contract.
(b) Schedule 3.19(b) lists each material
Contract (other than the Charter Documents) of the Company and each
Subsidiary, including:
(i) any Contract pursuant to which the Company
or any Subsidiary is required to pay, has paid or is entitled to
receive or has received an amount in excess of $100,000 during the
current fiscal year or any one of the two preceding fiscal years
(other than purchase orders for Inventory entered into in the
ordinary course of business (excluding however any such purchase
orders which are open for purchases in excess of $100,000. The
Parties hereto have agreed that delivery of Company’s
“Work in Process Report”, in the format previously
disclosed to Parent shall constitute full compliance with this
Section 3.19(b)(i).
(ii) all forms of standard employment contracts
and sales representatives contracts, as well as any such contracts
that deviate materially from the standard form, together with a
list of employees and sales representatives that are parties to
such contracts;
(iii) all material sales, agency, factoring,
commission and distribution contracts;
(iv) all joint venture, strategic alliance,
limited liability company and partnership agreements;
(v) all documents relating to any significant
acquisitions or dispositions of assets (other than of dispositions
of Inventory in the ordinary course of business);
(vi) all material licensing agreements,
including agreements licensing Intellectual Property rights, other
than “shrink wrap” licenses;
(vii) all material secrecy, confidentiality and
nondisclosure agreements restricting the conduct of the Company or
any Subsidiary;
(viii) all material Contracts relating to
patents, trademarks, service marks, trade names, brands,
copyrights, trade secrets and other Intellectual Property
rights;
(ix) all material guarantees, terms and
conditions, privacy policies, indemnification arrangements and
other hold harmless arrangements made or provided by the Company or
any Subsidiary;
(x) all material Website hosting
contracts or agreements;
(xi) all Contracts or agreements with
or pertaining to the Company or ny Subsidiary to which any of its
stockholders or any Affiliate of any of its stockholders is a
party;
(xii) all agreements relating to real property,
including any real property lease, sublease, or space sharing,
license or occupancy agreement, whether the Company is granted or
granting rights thereunder to occupy or use any
premises;
(xiii) all material agreements
relating to Tangible Assets; and
(xiv) all material agreements
relating to outstanding Indebtedness.
(c) Except as disclosed on Schedule 3.19(c), the
Company is in compliance with all material covenants, including all
financial covenants, in all notes, indentures, bonds and other
instruments or agreements evidencing any Indebtedness.
3.20. Licenses and
Permits . Schedule 3.20 is a complete and correct list
of each material license, franchise, permit, order or approval or
other similar authorization affecting, or relating in any way to,
the Business, together with the name of the government agency or
entity issuing the same (the “Permits”). Such Permits
are valid and in full force and effect and, assuming the related
Company Consents, if any, have been obtained prior to the Closing
Date, none of the Permits will, assuming the related Company
Consents have been obtained or waived prior to the Closing Date, be
terminated or impaired or become terminable as a result of the
transactions contemplated hereby. The Company or any Subsidiary
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