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STOCK PURCHASE AGREEMENT
by and among
INNOVATIVE POWER SYSTEMS INC.,
THE STOCKHOLDERS OF INNOVATIVE POWER SYSTEMS
INC.,
QUALITY POWER SYSTEMS, INC.,
THE STOCKHOLDERS OF QUALITY POWER SYSTEMS,
INC.
and
FORTRESS INTERNATIONAL GROUP, INC.
Dated as of September 24, 2007
TABLE OF CONTENTS
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Page
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ARTICLE
I
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DEFINITIONS
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1
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1.1.
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Definitions
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1
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ARTICLE
II
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PURCHASE
AND SALE OF THE SHARES; ADJUSTMENT
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6
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2.1.
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Purchase
and Sale of the Shares.
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6
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2.2.
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Closing
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6
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2.3.
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Deliveries
and Payments at the Closing.
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6
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2.4.
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Purchase
Price Adjustment.
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7
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2.5.
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Earn-Out
Payments.
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9
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ARTICLE
III
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REPRESENTATIONS
AND WARRANTIES RELATING TO THE COMPANIES
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11
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3.1.
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Organization
and Standing
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11
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3.2.
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Authorization
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12
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3.3.
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Noncontravention
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12
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3.4.
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Consents
and Filings
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12
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3.5.
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Capital
Stock
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12
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3.6.
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Subsidiaries
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13
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3.7.
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Financial
Statements
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13
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3.8.
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Absence
of Undisclosed Liabilities
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13
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3.9.
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Absence
of Certain Changes
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13
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3.10.
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Litigation
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14
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3.11.
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Compliance
with Laws.
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14
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3.12.
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Material
Contracts.
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14
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3.13.
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Intellectual
Property.
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16
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3.14.
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Benefit
Plans.
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16
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3.15.
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Labor;
Employees.
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17
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3.16.
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Taxes
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17
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3.17.
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Environmental
Matters
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18
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3.18.
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Real
Property
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18
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3.19.
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Personal
Property
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18
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3.20.
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Sufficiency
of Assets
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18
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3.21.
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Insurance
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19
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3.22.
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Suppliers
and Customers
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19
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3.23.
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Bank
Accounts; Authorized Signatories
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19
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3.24.
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Brokers
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19
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3.25.
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Affiliate
Transactions
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19
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3.26.
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Books
and Records
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19
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3.27.
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Restrictions
on Business Activities
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19
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3.28.
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Certain
Business Practices
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19
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3.29.
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Takeover
Statutes
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20
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3.30.
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Disclosure
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20
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ARTICLE
IV
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REPRESENTATIONS
AND WARRANTIES RELATING TO THE SELLERS
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20
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4.1.
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Authorization
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20
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4.2.
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The
Shares
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20
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4.3.
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Consents
and Filings
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20
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4.4.
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Noncontravention
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21
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4.5.
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No
Legal Proceedings
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21
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4.6.
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Receipt
of Buyer Common Stock for Seller’s Own
Account
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21
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4.7.
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Accredited
Investor
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21
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4.8.
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Disclosure
of Information
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21
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4.9.
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Restricted
Securities
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21
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4.10.
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Legends
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21
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ARTICLE
V
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REPRESENTATIONS
AND WARRANTIES OF BUYER
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22
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5.1.
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Organization
and Existence
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22
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5.2.
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Authorization
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22
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5.3.
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Consents
and Filings
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22
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5.4.
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Noncontravention
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22
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5.5.
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No
Legal Proceedings
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22
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5.6.
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Valid
Issuance of Buyer Common Stock
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22
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5.7.
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Brokers
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23
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5.8.
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Disclosure
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23
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ARTICLE
VI
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COVENANTS
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23
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6.1.
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Conduct
of the Business
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23
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6.2.
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Access
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23
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6.3.
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Government
Filings
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24
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6.4.
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Further
Actions
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24
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6.5.
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Tax
Returns
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24
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6.6.
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No
Solicitation of Other Proposals.
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24
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6.7.
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Noncompetition
and Nonsolicitation.
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25
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6.8.
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Defined
Benefit Pension Plan
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26
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ARTICLE
VII
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CONDITIONS
TO CLOSING
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26
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7.1.
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Conditions
Precedent to Buyer’s Obligations
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26
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7.2.
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Conditions
Precedent to each Company’s and Seller’s
Obligations
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27
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ARTICLE
VIII
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INDEMNIFICATION
OBLIGATIONS
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28
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8.1.
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Survival
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28
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8.2.
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Sellers’
Indemnification Obligations
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28
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8.3.
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Buyer
IPSI and QPSI Indemnification Obligations
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28
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8.4.
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Notice
of Claim
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29
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8.5.
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Direct
Claims
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29
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8.6.
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Third
Party Claims
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29
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ARTICLE
IX
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TERMINATION,
AMENDMENT AND WAIVER
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30
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9.1.
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Termination
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30
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9.2.
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Effect
of Termination
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30
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ARTICLE
X
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MISCELLANEOUS
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30
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10.1.
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Expenses;
Transfer Taxes
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30
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10.2.
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Notices
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31
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10.3.
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Severability
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32
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10.4.
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Amendments
and Waivers
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32
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10.5.
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Counterparts
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33
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10.6.
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Entire
Agreement
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33
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10.7.
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No
Third Party Beneficiaries
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33
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10.8.
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Governing
Law
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33
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10.9.
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Consent
to Jurisdiction; Waiver of Jury Trial
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33
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10.10.
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Publicity
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34
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10.11.
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Assignment
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34
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10.12.
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Construction
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34
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STOCK PURCHASE AGREEMENT
This
STOCK PURCHASE AGREEMENT (this “
Agreement ”)
is made and entered into as of September 24, 2007 by and among
FORTRESS INTERNATIONAL GROUP, INC., a Delaware corporation
(“
Buyer ”),
INNOVATIVE POWER SYSTEMS INC., a Virginia corporation
(“
IPSI ”),
QUALITY POWER SYSTEMS, INC., a Delaware corporation (“
QPSI ”
and with IPSI, each a “
Company ”
and together, the “
Companies ”),
and the undersigned holders of the outstanding shares of capital
stock of each of IPSI and QPSI (each, a “
Seller ”
and, collectively, the “
Sellers ”).
RECITALS
A.
The
Sellers own all of the issued and outstanding shares of
capital stock of IPSI and QPSI (collectively, the
“
Shares ”),
with each Seller owning the number of Shares set forth on such
Seller’s signature page hereto.
B.
Buyer
desires to purchase the Shares from the Sellers, and the
Sellers desire to sell the Shares to Buyer, in each case on
the terms and subject to the conditions contained in this
Agreement.
NOW,
THEREFORE, in consideration of the mutual promises, covenants
and agreements herein contained, and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1.
Definitions .
As used in this Agreement, the following terms have the following
meanings:
“
Accounting Firm ”
has the meaning set forth in Section 2.4(b)(iii)
.
“
Adjusted Cash Consideration ”
has the meaning set forth in Section 2.4(c)
.
“
Affiliate ”
of any Person means any other Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or
is under common control with, such first Person.
“
Agreed Allocation ”
with respect to any Seller means the percentage set forth on
Schedule I attached hereto.
“
Agreement ”
has the meaning set forth in the preamble to this
Agreement.
“
Acquisition Proposal ”
has the meaning set forth in Section 6.6(a)
.
“
Business ”
has the meaning set forth in Section 6.7(b)
.
“
Business Day ”
means any day other than a Saturday or Sunday or any day banks in
the State of New York are authorized or required to be
closed.
“
Buyer ”
has the meaning set forth in the preamble to this
Agreement.
“
Buyer Common Stock ”
has the meaning set forth in Section 2.1(b)(iii)
.
“
Buyer Indemnified Parties ”
has the meaning set forth in Section 8.2
.
“
Buyer Parties ”
has the meaning set forth in Section 6.7(b)
.
“
Cash Consideration ”
has the meaning set forth in Section 2.1(b)(i)
.
“
Closing ”
has the meaning set forth in Section 2.2
.
“
Closing Date ”
has the meaning set forth in Section 2.2
.
“
Closing Date Amount ”
has the meaning set forth in Section 2.1(c)
.
“
Closing Working Capital ”
has the meaning set forth in Section 2.4(a)
.
“
Code ”
means the Internal Revenue Code of 1986, as amended from time to
time, and the rules and regulations promulgated
thereunder.
“
Company ”
and “
Companies ”
have the meanings set forth in the preamble to this
Agreement.
“
Company Plan ”
has the meaning set forth in Section 3.14(a)
.
“
Company Representatives ”
has the meaning set forth in Section 6.6(a)
.
“
Consent ”
has the meaning set forth in Section 3.4
.
“
Current Assets ”
has the meaning set forth in Section 2.4(d)
.
“
Current Liabilities ”
has the meaning set forth in Section 2.4(d)
.
“
Damages ”
means any and all claims, lawsuits, liabilities, losses, damages,
costs and expenses, including the reasonable fees and disbursements
of counsel (including fees of attorneys and paralegals, whether at
the pre-trial, trial, or appellate level, or in arbitration) and
all amounts reasonably paid in investigation, defense, or
settlement of any of the foregoing.
“
Direct Claim ”
has the meaning set forth in Section 8.4
.
“
Direct Claim Counter Notice ”
has the meaning set forth in Section 8.5
.
“
Earn-Out Payment ”
has the meaning set forth in Section 2.5.
“
Earn-Out Period ”
has the meaning set forth in Section 2.5.
“
Earn-Out Worksheet ”
has the meaning set forth in Section 2.5(a)
.
“
EBITDA ”
has the meaning set forth in Section 2.5(a)
.
“
Employment Agreement ”
has the meaning set forth in Section 2.3(b)(ii)
.
“
Encumbrance ”
means any charge, claim, lien, pledge, security interest, voting
agreement, option, right of first refusal, easement, servitude,
right of way, or other encumbrance or similar
restriction.
“
ERISA ”
has the meaning set forth in Section 3.14(a)
.
“
Filing ”
has the meaning set forth in Section 3.4
.
“
Financial Statements ”
has the meaning set forth in Section 3.7
.
“
GAAP ”
means United States generally accepted accounting
principles.
“
Governmental Entity ”
means any U.S. or foreign federal, state, provincial or local
governmental authority, court, government or self-regulatory
organization, commission, tribunal or organization or any
regulatory, administrative or other agency, or any political or
other subdivision, department or branch of any of the
foregoing.
“
Indemnifying Party ”
has the meaning set forth in Section 8.4
.
“
Intellectual Property ”
means all U.S. and foreign intellectual property rights, including
patents, inventions, technology, discoveries, processes, know-how,
trademarks, service marks, trade names, brand names, domain names,
corporate names, logos, copyrights, and copyrightable works
(including software and related items), and trade secrets, and all
registrations, applications, continuations, continuations-in-part,
divisions, provisionals, reissues, re-examinations and similar
protections relating thereto.
“
IPSI ”
has the meaning set forth in the preamble to this
Agreement.
“
IPSI Common Stock ”
means the common stock of IPSI, par value $0 per
share.
“
Knowledge ”
means the actual knowledge, after reasonable inquiry, of the
Sellers, and with respect to IPSI, Keith (Wayne) Byrd and Dan
Toland, and with respect to QPSI, Keith (Wayne) Byrd, Dan Toland,
and Judy Toland, after reasonable investigation by such
persons.
“
Law ”
means any domestic or foreign, federal, state, provincial or local
statute, law, ordinance, rule, administrative interpretation,
regulation, order, writ, injunction, directive, judgment, decree or
other requirement of any Governmental Entity.
“
Lease ”
has the meaning set forth in Section 3.18
.
“
Legal Proceeding ”
means any action, claim, lawsuit, arbitration, proceeding or
investigation.
“
Material Adverse Effect ”
means a material adverse effect on the business, assets, financial
condition, results of operations or prospects of the Companies and
the Subsidiaries, taken as a whole, other than events or changes
generally occurring in the businesses in which the Companies and
the Subsidiaries operate or in the economy in general.
“
Material Contract ”
means any contract or agreement required to be set forth on
Schedule
3.12(a) .
“
Noncompete Parties ”
has the meaning set forth in Section 6.7(a)
.
“
Note ”
has the meaning set forth in Section 2.1(b)(ii)
.
“
Notice of Claim ”
has the meaning set forth in Section 8.4
.
“
Notice of Disagreement ”
has the meaning set forth Section 2.4(b)
.
“
Parties ”
means the parties to this Agreement, and “
Party ”
means any of the Parties.
“
Permit ”
means any permit, licenses, registrations or other
authorization.
“
Permitted Encumbrances ”
means (i) liens for taxes, assessments and other governmental
charges not yet due and payable or, if due, (A) not delinquent or
(B) being contested in good faith by appropriate proceedings; (ii)
mechanics’, workmen’s, repairmen’s,
warehousemen’s, carriers’ or other liens arising or
incurred in the ordinary course of business; (iii) liens or title
retention arrangements arising under original purchase price
conditional sales contracts and equipment leases with third parties
entered into in the ordinary course of business; (iv) with respect
to real property, (A) easements, licenses, covenants, rights-of-way
and other similar restrictions, including, without limitation, any
other agreements or restrictions which would be shown by an
investigation of title to the extent and nature which a prudent
buyer of property in the relevant jurisdiction would carry out, (B)
any conditions that may be shown by survey, title report or
physical inspection (whether or not made) and (C) zoning, building
and other similar restrictions, so long as none of (A) or (B) or
(C) prevent the use of such real property substantially as
currently used by the Companies or any of the Subsidiaries or
materially affect the value of any such property.
“
Person ”
means any individual, corporation, limited liability company,
limited partnership, general partnership, joint venture, trust,
association, Governmental Entity or other organization or
entity.
“
Purchase Price ”
has the meaning set forth in Section 2.1(b)
.
“
QPSI ”
has the meaning set forth in the preamble to this
Agreement.
“
QPSI Common Stock ”
means the common stock of QPSI, par value $0 per
share.
“
Section 2.5(b) Accountants ”
has the meaning set forth in Section 2.5(b)
.
“
Section 2.5(b) Notice ”
has the meaning set forth in Section 2.5(b)
.
“
Securities Act ”
has the meaning set forth in Section 4.7
.
“
Seller ”
and “
Sellers ”
have the meanings set forth in the preamble to this
Agreement.
“
Seller’s Cash Consideration ”
with respect to any Seller means the dollar amount of Cash
Consideration equal to the product of (x) the aggregate Cash
Consideration payable pursuant to Section 2.1(b)(i)
multiplied
by (y) such Seller’s Agreed Allocation.
“
Seller Indemnified Parties ”
has the meaning set forth in Section 8.3.
“
Sellers’ Representative ”
has the meaning set forth in Section 2.5(a)
.
“
Seller’s Stock Consideration ”
with respect to any Seller means the number of shares of Buyer
Common Stock equal to the product of (x) the aggregate number of
shares of Buyer Common Stock issuable pursuant to Section
2.1(b)(iii)
multiplied
by (y) such Seller’s Agreed Allocation.
“
Shares ”
has the meaning set forth in the Recital A to this
Agreement.
“
Statement ”
has the meaning set forth in Section 2.4(a)
.
“
Subsidiaries ”
means the direct and indirect subsidiaries of IPSI and QPSI and
“
Subsidiary ”
means any of the Subsidiaries.
“
Tax ”
or “
Taxes ”
means all United States federal, state, local and foreign income,
profits, franchise, gross receipts, payroll, sales, employment,
use, property, real estate, excise, value added, estimated, stamp,
alternative or add-on minimum, environmental, withholding and any
other taxes, duties or assessments, together with all interest,
penalties and additions imposed with respect to such
amounts.
“
Tax Authority ”
means any domestic, foreign, federal, national, state, county or
municipal or other local government, any subdivision, agency,
commission or authority thereof, or any quasi-governmental body
exercising any taxing authority or any other authority exercising
Tax regulatory authority.
“
Tax Return ”
means any return, report, information return or other document
(including any related or supporting information) required to be
filed with any taxing authority with respect to Taxes, including
information returns, claims for refunds of Taxes and any amendments
or supplements to any of the foregoing.
“
Third Party Claim ”
has the meaning set forth in Section 8.4
.
“
Working Capital ”
has the meaning set forth in Section 2.4(d)
.
ARTICLE II
PURCHASE AND SALE OF THE SHARES; ADJUSTMENT
2.1.
Purchase and Sale of the Shares .
(a)
Subject to the terms and conditions hereof, at the Closing, each
Seller shall sell, transfer, assign and deliver to Buyer, and Buyer
shall purchase from each Seller, legal and beneficial ownership of
the Shares held by such Seller, free and clear of Encumbrances of
any kind.
(b)
The aggregate purchase price for the Shares (the “
Purchase Price ”)
shall consist of the following:
(i)
$1,550,000
in cash, subject to adjustment as provided herein (the
“
Cash Consideration ”);
(ii)
a
promissory note in the aggregate original principal amount of
$300,000, substantially in the form attached hereto as
Exhibit A (the
“
Note ”);
and
(iii)
that
number of fully paid, nonassessble shares of common stock of
Buyer, par value $0.001 per share (the “
Buyer Common Stock ”)
as shall be equal to $150,000, calculated based on the average of
the last reported sale prices per share of Buyer Common Stock on
the Nasdaq over the 20
consecutive
trading days ending on the trading day that is two trading days
prior to the Closing Date; and
(iv)
the
earn out amounts, if any, determined in accordance with the
provisions of Section 2.5
in
the event IPSI and QPSI achieve certain target
revenues.
(c)
The
Cash Consideration shall be increased by an amount equal to
the amount by which the Working Capital (as defined below) set
forth on the good
faith estimate prepared by Sellers (and reasonably
satisfactory to Buyer) and delivered to Buyer at least five
Business Days prior to the Closing Date exceeds Three Hundred
Thousand Dollars ($300,000.00), and shall be decreased by an
amount equal to the amount by which the Working Capital set
forth on the good faith estimate prepared by Sellers (and
reasonably satisfactory to Buyer) and delivered to Buyer at
least five Business Days prior to the Closing Date is less
than Three Hundred Thousand Dollars ($300,000.00) (the Cash
Consideration as so adjusted shall hereinafter be referred to
as the “Closing Date Amount”).
(d)
The
Purchase Price shall be allocated as follows: 70% of the
consideration for the purchase of IPSI and 30% of the
consideration for the purchase of QPSI. The Parties agree to
file their respective federal, state and local income tax
returns based on the above allocation and to indemnify the
other against any loss, liability, damage, penalty, interest
or expense (including reasonable attorney's fees) incurred by
reason of breach thereof.
2.2.
Closing .
The closing of the purchase and sale of the Shares (the
“
Closing ”)
will take place on the second Business Day following the
satisfaction or waiver of the conditions set forth in
Article VII ,
or at such other date as may be agreed to by the Parties (the date
on which the Closing actually occurs being referred to as the
“
Closing Date ”).
2.3.
Deliveries and Payments at the Closing .
(a)
At the Closing, Buyer shall deliver or cause to be
delivered:
(i)
to
the applicable Sellers, such Seller’s Cash Consideration
by wire transfer of immediately available funds to such
account or accounts as may be designated by such Seller in
writing no later than two Business Days prior to the Closing,
in each case against delivery by such Seller of the
certificates evidencing the Shares being sold by such Seller,
duly endorsed or accompanied by duly executed stock
powers;
(ii)
the Note referred to in Section 2.1(b)(ii)
;
(iii)
to
the applicable Sellers, certificates for the number of whole
shares of Buyer Common Stock representing each Seller’s
Stock Consideration;
(iv)
to each Company, the officer’s certificate referred to in
Section 7.2(c)
hereof;
and
(v)
such
other documents as Sellers may reasonably request to
demonstrate satisfaction of the conditions and compliance with
the covenants set forth in this Agreement.
(b)
At Closing, Sellers shall deliver or cause to be delivered to
Buyer:
(i)
a receipt for the payment of the Seller’s Cash
Consideration;
(ii)
Employment
Agreements, dated as of the Closing Date, executed by Keith
(Wayne) Byrd and Dan Toland and substantially in the form
of
Exhibit B attached
hereto (each an “
Employment Agreement ”);
(iii)
the
officer’s certificate referred to in Section
7.1(c)
hereof;
and
(iv)
such
other documents as Buyer may reasonably request to demonstrate
satisfaction of the conditions and compliance with the
covenants set forth in this Agreement.
2.4.
Purchase Price Adjustment .
(a)
Within
60 days after the Closing Date, Buyer shall prepare and
deliver to the Sellers an audited balance sheet of each
Company prepared in accordance with this Agreement, and to the
extent not inconsistent, GAAP, and a statement attached
thereto (the “
Statement ”),
certified by an officer of Buyer, setting forth Working Capital (as
defined in Section 2.4(d)
)
as of the close of business on the Closing Date (the “
Closing Working Capital ”).
(b)
During
the 45-day period following each Seller’s receipt of the
Statement, the Sellers and their accountants shall be
permitted to review the working papers of Buyer relating to
the Statement. The Statement shall become final and binding
upon the parties on the 45th day following delivery thereof,
unless the Sellers’ Representative gives written notice
of the Sellers’ disagreement with the Statement (a
“
Notice of Disagreement ”)
to Buyer prior to such date. Any Notice of Disagreement
shall:
(i)
specify in reasonable detail the nature of any disagreement so
asserted;
(ii)
only
include disagreements based on mathematical errors or based on
Closing Working Capital not being calculated in accordance
with this Section 2.4
;
and
(iii)
be
accompanied by a certificate of the Seller’s accountants
stating that they concur with each of the positions taken by
Sellers in the Notice of Disagreement.
If
a Notice of Disagreement is received by Buyer in a timely
manner, then the Statement (as revised in accordance with
Clause I or II below) shall become final and binding
upon the Sellers and Buyer on the earlier of (I) the date
the Sellers’ Representative and Buyer resolve in writing
any differences they have with respect to the matters
specified in the Notice of Disagreement or (II) the date
any disputed matters are finally resolved in writing by the
Accounting Firm (as defined below). During the 30-day period
following the delivery of a Notice of Disagreement, the
Sellers’ Representative and Buyer shall seek in good
faith to resolve in writing any differences that they may have
with respect to the matters specified in the Notice of
Disagreement. During such period Buyer and its accountants
shall have access to the working papers of the Seller’s
accountants prepared in connection with their certification of
the Notice of Disagreement. At the end of such 30-day period,
the Sellers and Buyer shall submit to an independent
accounting firm that has not had a previous relationship with
the Sellers or Buyer (the “
Accounting Firm ”)
for arbitration any and all matters that remain in dispute and that
were properly included in the Notice of Disagreement, in the form
of a written brief. The Accounting Firm shall be Reznick Fedder
& Silverman or, if such firm is unable or unwilling to act,
such other nationally recognized independent public accounting firm
as shall be agreed upon by the parties hereto in writing. The
Sellers and Buyer agree that judgment may be entered upon the
determination of the Accounting Firm in any court having
jurisdiction over the Party against which such determination is to
be enforced. The parties shall instruct the Accounting Firm to
render its decision as promptly as practicable but in no event
later than 60 days after its selection. The cost of any proceeding
(including the fees and expenses of the Accounting Firm and
reasonable attorney fees and expenses of the parties) pursuant to
this Section 2.4
shall
be borne by Buyer and the Sellers in inverse proportion as they may
prevail on matters resolved by the Accounting Firm, which
proportionate allocations shall also be determined by the
Accounting Firm at the time the determination of the Accounting
Firm is rendered on the merits of the matters submitted. The fees
and disbursements of the Sellers’ accountants incurred in
connection with their review of the Statement and certification of
any Notice of Disagreement shall be borne by the Sellers, and the
fees and disbursements of the accountants of Buyer incurred in
connection with their certification of the Statement and review of
any Notice of Disagreement shall be borne by Buyer.
(c)
The
Cash Consideration shall be increased by the amount by which
Closing Working Capital exceeds Three Hundred Thousand Dollars
($300,000.00) and decreased by the amount by which Closing
Working Capital is less than $300,000 (the Cash Consideration
as so adjusted shall hereinafter be referred to as the
“
Adjusted Cash Consideration ”).
If the Closing Date Amount (as defined in Section
2.1(c)
)
is more than the Adjusted Cash Consideration, Buyer shall, upon the
Statement becoming final and binding on the parties, be entitled to
set-off payment to Sellers from the Note to the extent of such
difference, and to the extent such difference exceeds the principal
amount of the Note, each Seller shall remit, within five Business
Days, such Seller’s Agreed Allocation of such difference
together with interest thereon at a rate equal to the rate of
interest from time to time announced publicly by Citibank, N.A., as
its prime rate, calculated on the basis of the actual number of
days elapsed divided by 365, from the Closing Date to the date of
payment. In
the event that any amount is due hereunder on any date when an
Earn-Out Payment would be payable, Buyer shall have the right to
set-off payment to Sellers with respect to such Earn-Out Payment to
the extent of any such amount that remains payable. If the Closing
Date Amount (as defined in Section 2.1(c)
)
is less than the Adjusted Cash Consideration, Buyer shall, upon the
Statement becoming final and binding on the parties, remit, within
five Business Days, such difference together with interest thereon
at a rate equal to the rate of interest from time to time announced
publicly by Citibank, N.A., as its prime rate, calculated on the
basis of the actual number of days elapsed divided by 365, from the
Closing Date to the date of payment.
(d)
The
term “
Working Capital ”
means Current Assets (as defined below) minus Current Liabilities
(as defined below). The terms “
Current Assets ”
and “
Current Liabilities ”
mean the consolidated current assets and consolidated current
liabilities, respectively, of each Company calculated in accordance
with generally accepted accounting principles (“
GAAP ”)
applied consistently throughout the periods involved. Without
limiting the generality of the foregoing, Current Liabilities will
include all accrued tax liabilities through the Closing
Date.
2.5.
Earn-Out Payments .
(a)
Delivery of Financial Information .
Within 90 days after the last Business Day of each Earn-Out Period
(as defined below), Buyer shall deliver to each Seller a work sheet
(the “
Earn-Out Worksheet ”)
prepared by Buyer’s independent public accountants or
Buyer’s Chief Financial Officer (or his designee), setting
forth Buyer’s determination of earnings of each Company
before interest, taxes, depreciation and amortization
(“
EBITDA ”)
and cash equal to Buyer’s determination of such
Seller’s Agreed Allocation of the Earn-Out Payments for said
Earn-Out Period. Subject to execution of a Non-Disclosure Agreement
in customary form, Sellers shall have the right, at Sellers’
expense, once during each Earn-Out Period, at reasonable times and
upon reasonable notice, to examine, and to have one representative,
who shall initially be Wilhelm Monroe & Gallagher (the
“
Sellers’ Representative ”)
examine, the books and records of the Companies to determine
whether the calculation and payment of the Earn-Out Payment are
being conducted in accordance with the provisions of this
Agreement.
(b)
Disputes Regarding Earn-Out Worksheet .
In the event that Sellers dispute any amounts reflected on any
Earn-Out Worksheet, Sellers’ Representative shall notify
Buyer in writing (such notice, a “
Section 2.5(b) Notice ”),
within 45 days after the delivery of the Earn-Out Worksheet,
setting forth the amount, nature and basis of the dispute. Within
the following 10 days, the parties shall use their reasonable best
efforts to resolve in good faith such dispute. Upon their failure
to do so, Sellers’ Representative and Buyer shall within 10
days from the end of such 10 day period jointly engage an
Independent Accountant (the “
Section 2.5(b) Accountants ”).
The Section 2.5(b) Accountants shall be engaged jointly by Buyer
and Sellers’ Representative to decide the dispute with
respect to the Earn-Out Worksheet within 30 days from its
appointment; such decision to be communicated to both parties in
writing. The decision of the Section 2.5(b) Accountants shall be
final and binding upon the parties and accordingly a declaratory
judgment by a court of competent jurisdiction may be entered in
accordance therewith. The fees and expenses of such accounting firm
shall be borne by one-half by Buyer and one-half by Sellers’
Representative.
(c)
Calculation of 2007 Earn-Out Payment .
The Earn-Out Payment (the “
2007 Earn-Out Payment ”)
for the period ending on December 31, 2007 (the “
2007 Earn-Out Period ”)
shall be determined as follows:
(i)
to
the extent EBITDA is less than or equal to $600,000, the 2007
Earn-Out Payment shall equal $0.00,
(ii)
to
the extent EBITDA is greater than $600,000, the 2007 Earn-Out
Payment shall equal $400,000 payable as follows: $200,000 in
cash and a promissory note in the aggregate original principal
amount of $200,000 substantially in the same form of the
Note.
(d)
Calculation of 2008 and 2009 Earn-Out Payments
.
The Earn-Out Payments for each twelve (12) month period ending on
December 31, 2008 and December 31 2009 (each such twelve-month
period individually, the “
2008 Earn-Out Period ”
or “
2009 Earn-Out Period, ”
as applicable) shall be determined as follows with respect to any
such Earn-Out Period:
(i)
to
the extent EBITDA is less than or equal to $450,000, the
Earn-Out Payment for each of the 2008 Earn-Out Period and 2009
Earn-Out Period, as applicable, shall equal
$0.00,
(ii)
to
the extent EBITDA is greater than $450,000, the Earn-Out
Payment for each of the 2008 Earn-Out Period and 2009 Earn-Out
Period, as applicable, shall equal $150,000 plus the sum of
(x) $1 for every dollar of EBITDA between $450,000 and
$600,000 and (y) 20% of every dollar of EBITDA above
$600,000.
(e)
Calculation of 2010 Earn-Out Payment .
In the event the 2007 Earn-Out Payment calculated in accordance
with Section 2.5(c) above equals $0.00, the Earn-Out Payment (the
“
2010 Earn-Out Payment ”)
for the twelve (12) month period ending on December 31, 2010 (the
“
2010 Earn-Out Period ”)
shall be determined as follows:
(i)
to
the extent EBITDA is less than or equal to $450,000, the 2010
Earn-Out Payment shall equal $0.00,
(ii)
to
the extent EBITDA is greater than $450,000, the 2010 Earn-Out
Payment shall equal $150,000 plus the sum of (x) $1 for every
dollar of EBITDA between $450,000 and $600,000 and (y) 20% of
every dollar of EBITDA above $600,000.
In
the event the 2007 Earn-Out Payment calculated in accordance
with Section 2.5(c) above is greater than $0.00, there shall
not be any Earn-Out Payment for the twelve (12) month period
ending on December 31, 2010.
(f)
Payment .
Subject to the provisions of Section 2.5(g)
,
Buyer shall deliver any Earn-Out Payment to Sellers based on each
Seller’s Agreed Allocation determined in accordance with
Section 2.4(c)
within
five Business Days of the Accountants final and binding
decision.
(g)
Right of Set-Off .
Buyer’s obligation to make the Earn-Out Payments is subject
to reduction or non-payment due to (i) any claim for Damages that a
Buyer Indemnified Party may have against Sellers in accordance with
Article VIII and (ii) any decrease in the Cash Consideration
pursuant to Section 2.4(c) in excess of the Note balances available
to be set-off. In the event that Buyer determines to exercise its
right of set-off pursuant to this Section 2.5
,
Buyer shall comply with the provisions of this Section
2.5
in
determining the Earn-Out Payment and shall pay the amount, if any,
by which the Earn-Out Payment exceeds the amount set-off by
Buyer.
(h)
Earn-Out Term .
During each of the Earn-Out Periods, Buyer shall operate IPSI and
QPSI in the ordinary course, reasonably consistent with past
practices of Sellers, and not change the operations of the
businesses in any material way that would have a Material Adverse
Effect on the Earn-Out Payments to Sellers hereunder, provided,
that Sellers acknowledge that Buyer may combine or convert the
Companies into divisions of Buyer or an Affiliate of
Buyer.
ARTICLE III
REPRESENTATIONS AND WARRANTIES RELATING TO THE
COMPANIES
The
Sellers and each Company jointly and severally represent and
warrant to Buyer as follows:
3.1.
Organization and Standing .
IPSI is a corporation, duly organized, validly existing and in good
standing under the Laws of the State of Virginia and has all
requisite power and authority to own, lease and operate its
properties and assets and to carry on its business as now being
conducted. QPSI is a corporation, duly organized, validly existing
and in good standing under the Laws of the State of Delaware and
has all requisite power and authority to own, lease and operate its
properties and assets and to carry on its business as now being
conducted. Each Subsidiary is duly organized, validly existing and
in good standing under the Laws of its jurisdiction of formation
and has all requisite corporate power and authority to own, lease
and operate its properties and assets and to carry on its business
as now being conducted. IPSI, QPSI and each Subsidiary is duly
licensed or qualified to do business and is in good standing in
each jurisdiction in which such qualification or licensing is
necessary because of the property and assets owned, leased or
operated by it or because of the nature of its business as now
being conducted, except for any failure to so qualify or be
licensed or in good standing that, individually or in the
aggregate, would not reasonably be expected to have a Material
Adverse Effect.
Schedule
3.1 lists
the jurisdictions in which IPSI, QPSI and each Subsidiary is
qualified to conduct business as a foreign corporation and the
jurisdictions of formation and foreign qualification for each
Subsidiary. IPSI and QPSI have made available to Buyer true,
complete and correct copies of the constitutive documents of each
Company and of each Subsidiary, in each case as amended to the date
of this Agreement, and have made available to Buyer each such
entity’s minute books and stock records. Neither IPSI, QPSI
nor any Subsidiary is in violation of any provision of its
respective certificate or articles of incorporation, by-laws or
similar constitutive document.
3.2.
Authorization .
The execution, delivery and performance by each of IPSI and QPSI of
this Agreement and the consummation by each of the transactions
contemplated hereby and thereby are within IPSI’s and
QPSI’s power and have been duly authorized by all necessary
action on the part of IPSI and QPSI. This Agreement constitutes
(assuming the due execution and delivery by each of the other
parties hereto) the legal, valid and binding obligation of IPSI and
QPSI enforceable against IPSI and QPSI in accordance with its
terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar Laws
relating to or affecting creditors’ rights generally and
general equitable principles (whether considered in a proceeding in
equity or at Law).
3.3.
Noncontravention .
Except as set forth in
Schedule
3.3 ,
the execution, delivery and performance of this Agreement and the
transactions contemplated hereby by IPSI and QPSI do not, and the
consummation by IPSI and QPSI of the transactions contemplated
hereby will not, (i) contravene or violate any material provision
of the organizational documents of IPSI, QPSI or any Subsidiary or
(ii) contravene or violate any material provision of, or result in
the termination or acceleration of, or entitle any party to
accelerate any obligation or indebtedness under, or result in the
imposition of any Encumbrance (other than a Permitted Encumbrance)
on IPSI, QPSI or any Subsidiary pursuant to any mortgage, lease,
franchise, license, permit, agreement, instrument, Law, order,
arbitration award, judgment or decree to which IPSI, QPSI or any
Subsidiary is a party or by which IPSI, QPSI or any Subsidiary is
bound.
3.4.
Consents and Filings .
No consent, approval, license, permit, order or authorization
(each, a “
Consent ”)
of, or registration, declaration or filing (each, a “
Filing ”)
with, any Governmental Entity is required for or in connection with
the execution and delivery of this Agreement by IPSI or QPSI or the
consummation by each of the transactions contemplated
hereby.
3.5.
Capital Stock .
The authorized capital stock of IPSI consists of 5,000 shares of
IPSI Common Stock, of which 300 shares of IPSI Common Stock are
outstanding as of the date hereof. Sellers own 100% of the issued
and outstanding shares of IPSI Common Stock. All of the issued and
outstanding shares of IPSI Common Stock are duly authorized,
validly issued, fully paid and nonassessable. The authorized
capital stock of QPSI consists of 1,000 shares of QPSI Common
Stock, of which 900 shares of QPSI Common Stock are outstanding as
of the date hereof. Sellers own 100% of the issued and outstanding
shares of QPSI Common Stock. All of the issued and outstanding
shares of QPSI Common Stock are duly authorized, validly issued,
fully paid and nonassessable. None of the Shares were issued in
violation of (i) any purchase option, right of first refusal,
preemptive, subscription or similar rights under any provision of
applicable Law, (ii) the organizational documents of IPSI or QPSI,
(iii) any agreement to which IPSI or QPSI is subject or by which it
is bound, or (iv) the Securities Act of 1933 or any state blue sky
laws. There are no outstanding warrants, options, rights,
agreements, convertible or exchangeable securities or other
commitments pursuant to which IPSI or QPSI is or may become
obligated to issue, sell, purchase, return or redeem any shares of
capital stock of IPSI or QPSI. There are no voting trusts or other
similar agreements with respect to the voting of the IPSI Common
Stock or the QPSI Common Stock.
3.6.
Subsidiaries .
Schedule
3.6 sets
forth a true and correct list of all of the Subsidiaries,
indicating for each Subsidiary (i) the authorized capital stock or
other ownership interests of such Subsidiary, (ii) the number and
kind of shares of capital stock or units of ownership interest of
such Subsidiary that are issued and outstanding, (iii) the owner or
owners of all of the issued and outstanding capital stock or other
ownership interests of such Subsidiary. Except for the
Subsidiaries, neither IPSI or QPSI owns, directly or indirectly,
any shares of or other ownership interest in any other
Person.
3.7.
Financial Statements .
Attached hereto as
Schedule
3.7 are
true and correct copies of the unaudited consolidated balance
sheets and income statements as of July 31, 2007 (collectively
“
Financial Statements ”).
The Financial Statements have been prepared in accordance with GAAP
consistently applied (except as may be indicated in the notes
thereto) during the periods involved and fairly present in all
material respects the consolidated financial position of IPSI and
QPSI as of the dates and for the periods presented
therein.
3.8.
Absence of Undisclosed Liabilities .
Except as set forth on
Schedule
3.8 ,
neither IPSI, QPSI nor any Subsidiary has any material liabilities
except liabilities (i) reflected on, accrued or reserved against in
the Financial Statements or the notes thereto or (ii) incurred in
the ordinary course of business since July 31, 2007.
3.9.
Absence of Certain Changes .
Since July 31, 2007, IPSI, QPSI and the Subsidiaries have operated
their respective businesses in the ordinary course, consistent with
past practice and there has not been any event or occurrence that
has had or could reasonably be expected to have a Material Adverse
Effect. Without limiting the scope of the foregoing, except as set
forth on
Schedule
3.9 :
(a)
Neither
IPSI, QPSI nor any Subsidiary has sold, transferred, disposed
of, or agreed to sell, transfer or dispose of, any material
assets other than in the ordinary course of
business;
(b)
Neither
IPSI, QPSI nor any Subsidiary has acquired any material assets
except in the ordinary course of business, nor acquired or
merged with any other business;
(c)
No
material tangible asset or property owned, leased or licensed
by IPSI, QPSI or any Subsidiary has been destroyed, damaged or
otherwise lost (whether or not covered by
insurance);
(d)
Neither
IPSI, QPSI nor any Subsidiary has increased the salary or
other compensation payable or to become payable to any of its
respective officers, directors, partners or employees or
obligated itself to pay any bonus or other additional salary
or compensation (including, without limitation, through any
deferred compensation, severance, retirement, change of
control, retention or similar agreement or arrangement) to any
such person other than in the ordinary course of business and
consistent with past practice;
(e)
Neither
IPSI, QPSI nor any Subsidiary has made any material change in
any pricing, marketing, purchasing, tax or accounting
practice, or made any material tax election or settled or
compromised any material income tax liability;
(f)
Neither
IPSI nor QPSI has made any declaration, setting aside or
payment of any dividend or other distribution with respect to
any shares of its capital stock, or any repurchase, redemption
or other acquisition of any outstanding shares of its capital
stock or other securities;
(g)
Neither
IPSI, QPSI nor any Subsidiary has made any material loan,
advance or capital contribution to or investment in any
Person;
(h)
Neither
IPSI, QPSI nor any Subsidiary has amended, rescinded or
terminated (and not renewed) any existing Material Contract or
arrangement and no such Material Contract or arrangement has
expired or terminated (and not been renewed) by its
terms;
(i)
Neither
IPSI, QPSI nor any Subsidiary has settled or compromised any
material Legal Proceeding; and
(j)
Neither
IPSI, QPSI nor any Subsidiary has entered into any commitment
(contingent or otherwise) to do any of the
foregoing.
3.10.
Litigation .
Except as set forth in
Schedule
3.10 ,
(i) there are no Legal Proceedings by or before any Governmental
Entity or arbitration tribunal pending, or to the Knowledge of IPSI
or QPSI, threatened, against IPSI, QPSI or any Subsidiary, and (ii)
no injunction, writ, temporary restraining order, decree or any
order of any nature has been issued by any court or other
Governmental Entity relating to IPSI, QPSI or any Subsidiary or
seeking or purporting to enjoin or restrain the execution, delivery
and performance by IPSI or QPSI of this Agreement or the
consummation of the transactions contemplated hereby.
3.11.
Compliance with Laws .
(a)
To
the best of Sellers’ Knowledge, IPSI, QPSI and each
Subsidiary conducts its business in material compliance with
all applicable Laws.
(b)
IPSI,
QPSI and each Subsidiary have all material Permits necessary
for the conduct of their respective businesses as presently
conducted, all of such Permits are valid and in full force and
effect and the Companies and the Subsidiaries, as applicable,
are in compliance with the terms of all of such Permits.
Except as set forth in
Schedule
3.11(b) ,
the consummation of the transactions contemplated by this Agreement
will not result in the non-renewal, revocation or termination of
any Permit.
3.12.
Material Contracts .
(a)
Set forth in
Schedule
3.12(a) is
a list of the following agreements in effect on the date of this
Agreement:
(i)
each
commitment or agreement (other than purchase orders and
similar agreements entered into in the ordinary course of
business) for the purchase of any materials, supplies, goods,
products, services or equipment or licensing of rights that
requires an annual expenditure by IPSI, QPSI and any
Subsidiary of more than $100,000 that cannot be terminated on
not more than ninety calendar days’ notice without
payment of any penalty;
(ii)
each
personal property under which IPSI, QPSI or any Subsidiary is
a lessee that requires annual payments of more than $100,000
that cannot be terminated on not more than ninety calendar
days’ notice without payment of any
penalty;
(iii)
any
partnership, joint venture or other similar agreement or
arrangement to which IPSI, QPSI or any Subsidiary is a
party;
(iv)
any
agreement relating to the merger or consolidation with, or
acquisition or disposition of the securities or all or
substantially all of the business or assets of, any other
Person;
(v)
any
agreement relating to indebtedness for
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