SECURITIES PURCHASE AGREEMENT

Exhibit 10.16

 

 

SECURITIES PURCHASE AGREEMENT

 

between

 

GORDON BIERSCH BREWERY RESTAURANT GROUP, INC.,

a Tennessee corporation

 

and

 

HANCOCK PARK CAPITAL II, L.P.,

a Delaware limited partnership

 

 

Dated as of October 27, 2004

 

 

EXHIBITS

 

 

i.

 

ii.

 

iii.

 

iv.

EXECUTION VERSION

 

SECURITIES PURCHASE AGREEMENT

 

T HIS S ECURITIES P URCHASE A GREEMENT is made and entered into as of October 27, 2004, by and between Hancock Park Capital II, L.P., a Delaware limited partnership ( “Investor” ), and Gordon Biersch Brewery Restaurant Group, Inc., a Tennessee corporation (the “Company” ). Capitalized terms used in this Agreement are defined herein and in Exhibit A .

 

R ECITALS

 

W HEREAS , the Company owns and operates brewery restaurants (the “Restaurants”) located in, among other places, Tempe, Arizona; Burbank, Palo Alto, Pasadena, San Diego, San Francisco and San Jose, California; Broomfield, Colorado; Washington, DC; Atlantic Beach, Jacksonville, Miami, St. Augustine and Walt Disney World Resort, Florida; two locations in Atlanta, Georgia; Honolulu, Hawaii; New Orleans, Louisiana; Las Vegas, Nevada; Charlotte, North Carolina; Columbus, Ohio; Chattanooga, Nashville and Memphis, Tennessee; and Seattle, Washington.

 

W HEREAS , the Company desires to issue, and the Investor desires to acquire, stock of the Company as herein described, on the terms and conditions hereinafter set forth.

 

W HEREAS , this Agreement has been approved by the board of directors of the Company.

 

NOW THEREFORE, in consideration of the foregoing and the respective covenants, agreements and representations and warranties set forth herein, the parties to this Agreement, intending to be legally bound, agree as follows:

 

A GREEMENT

 

1.	D ESCRIPTION OF T RANSACTION

 

1.1 Authorization of Securities. The Company has authorized the issuance and sale of a number of shares of its Series A Convertible Preferred Stock, no par value per share ( “Series A Preferred Stock” ), equal to 80% of the outstanding capital stock of the Company as of the Closing, with all shares issuable upon exercise or conversion of Company Options counted as outstanding for purposes of such calculation (the “Purchase Shares” ), for sale to the Investor pursuant to this Agreement.

 

1.2 Sale and Issuance of Series A Preferred Stock.

 

(a) The Company shall adopt and file with the Secretary of State of the State of Tennessee on or before the Closing the Amended and Restated Charter of the Company in the form attached as Exhibit E hereto (the “Amended Charter”).

 

(b) Upon the terms and subject to the conditions of this Agreement, the Company agrees to sell to Investor and Investor agrees to purchase from the Company, at the Closing on the Closing Date, the Purchase Shares, for which Investor shall pay the Company an

aggregate of $15,000,000 or such greater aggregate amount as the Investor may elect to pay therefor in its sole discretion (the “Required Payment” ).

 

1.3 Closing.

 

(a) The consummation of the transactions contemplated by this Agreement (the “Closing” ) shall take place at the offices of Paul, Hastings, Janofsky & Walker LLP, 515 South Flower Street, 25th Floor, Los Angeles, California, at 10:00 a.m. on a date to be agreed upon between the Company and Investor which shall not be more than three business days after the date on which the last of the conditions set forth in Section 6 and Section 7 (other than conditions which by their terms must be satisfied as of the Closing Date) has been satisfied, but in no event later than October 28, 2004, except as may be agreed between the Company and Investor. The date on which the Closing actually takes place is referred to in this Agreement as the “Closing Date.”

 

(b) At the Closing the Company shall deliver to Investor:

 

(i) instruments or certificates representing the Series A Preferred Stock being purchased by Investor; and

 

(ii) a copy of the Amended Charter as filed with the Secretary of State of the State of Tennessee.

 

(c) At the Closing Investor shall deliver to the Company by wire transfer of immediately available funds the amount of the Required Payment.

 

(d) At the Closing, the parties shall make all such deliveries as are contemplated by Section 6.8 and Section 7.3 of this Agreement.

 

2.	R EPRESENTATIONS AND W ARRANTIES OF THE C OMPANY

 

Except as set forth on a correspondingly numbered section of the Company Disclosure Schedule, the Company represents and warrants, as of the date hereof and as of the Closing Date, as follows:

 

2.1 Due Organization; Subsidiaries; Etc.

 

(a) The Company has no Subsidiaries except for the Entities identified in Part 2.1(a) of the Company Disclosure Schedule. The Company and each of its Subsidiaries is a corporation duly organized validly existing and in good standing under the laws of the jurisdiction of its incorporation (each of which is set forth in Part 2.1(a) of the Company Disclosure Schedule) and has all necessary corporate power and authority: (i) to conduct its business in the manner in which its business is currently being conducted; (ii) to own and use its assets in the manner in which its assets are currently owned and used; and (iii) to materially perform its obligations under all Company Contracts.

 

(b) The Company and each of its Subsidiaries has not conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed

 

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name, trade name or other name, except as set forth in Part 2.1(b) of the Company Disclosure Schedule.

 

(c) The Company and each of its Subsidiaries is not and has not been required to be qualified, authorized, registered or licensed to do business as a foreign corporation in any jurisdiction other than the jurisdictions identified in Part 2.1(c) of the Company Disclosure Schedule. The Company and each of its Subsidiaries is in good standing as a foreign corporation in each of the jurisdictions identified in Part 2.1(c) of the Company Disclosure Schedule.

 

(d) Part2.1(d) of the Company Disclosure Schedule accurately sets forth (i) the names of the members of the board of directors of the Company and each of its Subsidiaries, (ii) the names of the members of each committee of the Company’s and each of its Subsidiaries’ board of directors, and (iii) the names and titles of the Company’s and each of its Subsidiaries’ officers.

 

(e) Neither the Company nor any of its Subsidiaries owns any controlling interest in any Entity and, except for the financial interests identified in Part 2.1 (e) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries has owned, beneficially or otherwise, within the previous five years, any shares or other securities of, or any direct or indirect equity or other financial interest in, any Entity. Except as set forth in Part 2.1 (e) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries has agreed or is obligated to make any future investment in or capital contribution to any Entity. Neither the Company nor any of its Subsidiaries has guaranteed or is responsible or liable for any obligation of any of the Entities in which it owns or has owned any equity or other financial interest. None of the Company, any of its Subsidiaries or any of their respective shareholders has ever approved, or commenced any proceeding or made any election contemplating, the dissolution or liquidation of the Company’s or any of its Subsidiaries’ business or affairs.

 

2.2 Charter and Bylaws; Records. The Company has delivered to Investor accurate and complete copies of: (1) the charter (or its equivalent) and bylaws (or operating agreement, as applicable), including all amendments thereto, of the Company and each of its Subsidiaries; (2) the stock records (or other equity ownership records, as applicable) of the Company and each of its Subsidiaries; and (3) the minutes and other records of the meetings and other proceedings (including any actions taken by written consent or otherwise without a meeting) of the shareholders (or general partner or members or partners, as applicable) of the Company and each of its Subsidiaries, the board of directors (or general partner or managers, as applicable) of the Company and each of its Subsidiaries and all committees of the board of directors (or general partner or managers, as applicable) of the Company and each of its Subsidiaries (the items described in (1), (2) and (3) above, collectively, the “Company Constituent Documents” ). There have been no formal meetings or other proceedings of the shareholders of the Company, the board of directors (or general partner or managers, as applicable) of the Company or its Subsidiaries or any committee of the board of directors (or general partner or managers, as applicable) of the Company or its Subsidiaries that are not fully reflected in the Company Constituent Documents. There has not been any violation of the Company Constituent Documents, and neither the Company nor any of its Subsidiaries has taken any action that is inconsistent in any material respect with the Company Constituent Documents. The Company Constituent Documents, books of account and other records of the Company and each of its

 

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Subsidiaries are accurate, up-to-date and complete in all material respects, and have been maintained in material compliance with Legal Requirements and in accordance with prudent business practices. The Company and each of its Subsidiaries has in place, and has at all times had in place, an adequate and appropriate system of internal controls customarily maintained by comparable Entities, and, except as set forth in Part 2.2 of the Company Disclosure Schedule, since January 2000 there has been no material violation of such system of internal controls.

 

2.3 Capitalization, Etc.

 

(a) The authorized capital stock of the Company consists of: (i) 800,000 shares, no par value, of common stock, of which 500,000 have been designated “Class A Voting Common Stock,” of which 156,486 shares have been issued and are outstanding as of the date of this Agreement; and of which 100,000 have been designated “Class B Voting Common Stock,” of which 79,830 shares have been issued and are outstanding as of the date of this Agreement; and of which 100,000 have been designated “Class C Voting Common Stock,” of which 53,220 shares have been issued and are outstanding as of the date of this Agreement; and of which 100,000 have been designated “Class D Voting Common Stock,” of which 28,292 shares have been issued and are outstanding as of the date of this Agreement; and (ii) 100,000 shares of preferred stock, no par value, of which none are issued and outstanding as of the date of this Agreement. Each share of the Class B Voting Common Stock, the Class C Voting Common Stock, and the Class D Voting Common Stock is convertible into one share of Class A Voting Common Stock in accordance with the Company’s charter. The Company has reserved sufficient shares of Class A Voting Common Stock for issuance upon conversion of all the Class B Voting Common Stock, Class C Voting Common Stock, and Class D Voting Common Stock. All of the outstanding shares of Company Common Stock have been duly authorized and validly issued, and are fully paid and non-assessable. All outstanding shares of Company Common Stock and all outstanding Company Options have been issued and granted in material compliance with (i) all applicable securities laws and other applicable Legal Requirements, and (ii) all requirements set forth in the Company Constituent Documents and applicable Company Contracts. Except as set forth in Part 2.3(a) of the Company Disclosure Schedule, there are no repurchase options which are held by the Company and to which any shares of capital stock of the Company are subject.

 

(b) The Company has reserved (i) 64,710 shares of Company Common Stock for issuance under the Company Stock Option Plans, of which options to purchase 34,697 shares of Company Common Stock are outstanding as of the date of this Agreement and all of such options are for the purchase of Class A Voting Common Stock, (ii) has reserved 40,802 shares of Company Common Stock for issuance under a warrant issued to the Subordinated Debt Holder, and (iii) has reserved 12,000 shares of Company Common Stock for issuance under options granted other than under the Company Stock Option Plans and all of such options are for the purchase of Class A Voting Common Stock. Part 2.3(b) of the Company Disclosure Schedule accurately sets forth, with respect to each Company Option outstanding as of the date hereof (whether vested or unvested): (i) the name of the holder of such Company Option; (ii) the total number of shares of Company Common Stock that are subject to such Company Option and the number of shares of Company Common Stock with respect to which such Company Option is immediately exercisable; (iii) the date on which such Company Option was granted and the term of such Company Option; (iv) the vesting schedule for such Company Option; (v) the exercise

 

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price per share of Company Common Stock purchasable under such Company Option; and (vi) whether such Company Option has been designated an “incentive stock option” as defined in Section 422 of the Code. Except for Company Options granted pursuant to the Company Stock Option Plans and set forth on Part 2.3(b) of the Company Disclosure Schedule, there is no: (i) outstanding subscription, option, call, warrant or right (whether or not currently exercisable) to acquire any shares of capital stock or other securities of the Company; (ii) outstanding security, instrument or obligation that is or may become convertible into or exchangeable for any shares of capital stock or other securities of the Company; (iii) Contract under which the Company is or may become obligated to sell or otherwise issue any shares of its capital stock or any other securities of the Company; or (iv) condition or circumstance that may give rise to or provide a basis for the assertion of a claim by any Person to the effect that such Person is entitled to acquire or receive any shares of capital stock or other securities of the Company (clauses (i) through (iv) above, collectively “Company Rights” ). Except as set forth on Part 2.3(b) of the Company Disclosure Schedule, the Company has not issued any debt securities which grant the holder thereof any right to vote on, or veto, any actions by the Company.

 

(c) All of the outstanding shares of capital stock of the Subsidiaries of the Company have been duly authorized and are validly issued, are fully paid and nonassessable and are owned beneficially and of record by the Company, and, except as set forth on Part 2.3(c) of the Company Disclosure Schedule, are free and clear of any Encumbrances.

 

(d) Since the date of the Balance Sheet, except as set forth in Part 2.3(d) of the Company Disclosure Schedule, the Company has not repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities of the Company. All securities reacquired by the Company were reacquired in compliance with (i) the applicable provisions of the Tennessee Business Corporation Act (the “TBCA” ) and all other applicable Legal Requirements, and (ii) all requirements set forth in applicable restricted stock purchase agreements and other applicable Contracts.

 

2.4 Financial Statements.

 

(a) The Company has delivered to Investor the following financial statements and notes (collectively, the “Company Financial Statements” ):

 

(i) The audited consolidated balance sheets of the Company as of December 29, 2002 and December 28, 2003 (the “Balance Sheet” ), and the related audited consolidated statements of operations, consolidated statements of shareholders’ equity and consolidated statements of cash flows of the Company for the periods then ended, together with the notes thereto and the reports and opinions of Ernst & Young LLP relating thereto; and

 

(ii) the unaudited consolidated balance sheet of the Company as of August 22, 2004, (the “Unaudited Interim Balance Sheet” ) and the related unaudited consolidated statement of operations, unaudited consolidated statement of shareholders’ equity and unaudited consolidated statement of cash flows of the Company for the eight months then ended.

 

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(b) The Company Financial Statements present fairly in all material respects the consolidated financial position of the Company as of the respective dates thereof and the consolidated results of operations and cash flows of the Company for the periods covered thereby. The Company Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered (“GAAP” ) (except that the financial statements referred to in Section 2.4(a)(ii) do not contain footnotes and are subject to normal and recurring year-end audit adjustments, which will not, individually or in the aggregate, be material).

 

2.5 Absence of Changes. Since the date of the Balance Sheet, except as set forth in Part 2.5 of the Company Disclosure Schedule:

 

(a) there has not been any Material Adverse Effect, and no event has occurred that will, or could reasonably be expected to, have such a Material Adverse Effect;

 

(b) there has not been any material loss, damage or destruction to, or any material interruption in the use of, any of the assets of the Company and its Subsidiaries (whether or not covered by insurance);

 

(c) the Company has not declared, accrued, set aside or paid any dividend or made any other distribution in respect of any shares of capital stock of the Company, and has not repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities of the Company;

 

(d) the Company has not sold, issued or authorized the issuance of (i) any capital stock or other securities of the Company (except for Company Common Stock issued upon the exercise of outstanding Company Options); or (ii) any Company Rights (except for Company Options and other instruments described in Part 2.3(b) of the Company Disclosure Schedule);

 

(e) the Company has not amended or waived any of its rights under, or permitted the acceleration of vesting under (i) any provision of any Company Stock Option Plan, (ii) any provision of any Company Contract evidencing any outstanding Company Option, or (iii) any restricted stock purchase agreement;

 

(f) there has been no amendment to the charter or bylaws of the Company or any of its Subsidiaries, and the Company has not effected or been a party to any Acquisition Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;

 

(g) the Company has not formed any Subsidiary or acquired any equity interest or other interest in any other Entity;

 

(h) the Company has not made any capital expenditure which, when added to all other capital expenditures made on behalf of the Company since the date of the Balance Sheet, exceeds $50,000;

 

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(i) except in the ordinary course of business and consistent with past practice, the Company has not (i) entered into or permitted any of the assets owned or used by it to become bound by any Contract that is or would constitute a material Contract, or (ii) amended or prematurely terminated, or waived any right or remedy under, any such Contract;

 

(j) the Company has not (i) acquired, leased or licensed any right or other asset from any other Person, (ii) sold or otherwise disposed of, or leased or licensed, any right or other asset to any other Person, or (iii) waived or relinquished any right, except for immaterial rights or other immaterial assets acquired, leased, licensed or disposed of in the ordinary course of business and consistent with the Company’s past practices;

 

(k) the Company has not written off as uncollectible, or established any extraordinary reserve with respect to, any account receivable or other indebtedness;

 

(l) the Company has not made any pledge of any of its assets or otherwise permitted any of its assets to become subject to any Encumbrance, except for pledges of immaterial assets made in the ordinary course of business and consistent with the Company’s past practices;

 

(m) the Company has not (i) lent money to any Person (other than pursuant to routine travel advances made to employees in the ordinary course of business and consistent with the Company’s past practice), or (ii) incurred or guaranteed any indebtedness for borrowed money;

 

(n) the Company has not (i) established or adopted any employee benefit plan, (ii) paid any bonus or made any profit-sharing or similar payment to, or increased the amount of the wages, salary, commissions, fringe benefits or other compensation or remuneration payable to, any of its directors, officers or employees, or (iii) hired any new employee, except, in the cases of clauses (ii) and (iii) above, in the ordinary course of business consistent with past practice;

 

(o) the Company has not changed any of its methods of accounting or accounting practices in any respect;

 

(p) the Company has not made any Tax election;

 

(q) the Company has not threatened, commenced or settled any Legal Proceeding;

 

(r) the Company has not entered into any transaction or taken any other action outside the ordinary course of business or inconsistent with its past practices, other than entering into this Agreement and the agreements and transactions contemplated hereby; and

 

(s) the Company has not agreed to take, or committed to take, any of the actions referred to in clauses “(c)” through “(r)” above.

 

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2.6 Title to Assets.

 

(a) Neither the Company nor any of its Subsidiaries owns any real property or any Structures.

 

(b) Except as set forth on Part 2.6(b) of the Company Disclosure Schedule, the Company and its Subsidiaries have, and immediately prior to the Closing will have, good, valid and marketable title in fee simple to all personal property reflected on the Unaudited Interim Balance Sheet as owned by the Company and its Subsidiaries and all personal property acquired by the Company and its Subsidiaries since the date of the Unaudited Interim Balance Sheet (other than personal property held by the Company and its Subsidiaries as lessee under a personal property lease), in each case free and clear of all Encumbrances except Permitted Encumbrances.

 

(c) Part 2.6(c) of the Company Disclosure Schedule contains a list of all tangible personal property having a cost or fair market value in excess of $5,000 owned by the Company and its Subsidiaries (other than personal property held by the Company and its Subsidiaries as lessee under a personal property lease).

 

(d) Part 2.6(d) of the Company Disclosure Schedule contains a list of all real property leases, including for the Leased Real Property, real or personal property licenses, and personal property leases under which the Company or any of its Subsidiaries is the lessee or licensee, together with (i) the location and nature of each of the leased or licensed properties, (ii) the termination date of each such lease or license, (iii) the name of the lessor or licensor, (iv) all rental and other payments made or required to be made for the Company’s fiscal years ending December 28, 2003 and December 26, 2004, and (v) the date and amount of the next permitted cost-of-living increase in each such lease or license. All leases and licenses pursuant to which the Company or any of its Subsidiaries leases or licenses from others real or personal property are, with respect to the Company or any of its Subsidiaries, and are, to the knowledge of the Company with respect to the other parties thereto, valid, subsisting in full force and effect in accordance with their respective terms, except as may be limited by the Enforceability Exception, and are, in each case, free and clear of all Encumbrances (other than Encumbrances in favor of the lessor or licensor and Encumbrances in favor of the Senior Lender), and there is not, under any real property lease, personal property lease or license, any existing default or event of default by the Company or any of its Subsidiaries (or event that, with notice or passage of time, or both, would constitute a default, or would constitute a basis of force majeure or other claim of excusable delay or nonperformance). The Company and its Subsidiaries have peaceful and undisturbed possession of all real property that they currently occupy or in their possession through real property leases. To the knowledge of the Company, except as set forth on Part 2.6(d) of the Company Disclosure Schedule no certificate of occupancy is required to be obtained from any Governmental Body with respect to the real property occupied or leased by the Company and its Subsidiaries. To the knowledge of the Company, the buildings, improvements and fixtures located on the real property that the Company and its Subsidiaries are occupying or leasing are (x) in compliance in all material respects with all applicable zoning, health and safety and occupancy and other use municipal ordinances and Legal Requirements, (y) in good condition and repair, subject only to ordinary wear and tear, and (z) suitable and appropriate for use in the business as presently conducted and as proposed to be conducted by

 

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the Company and its Subsidiaries. True and complete copies of all real property leases, real or personal property licenses, and personal property leases listed on Part 2.6(d) of the Company Disclosure Schedule have been delivered to Investor heretofore, as well as copies of any title reports, surveys or environmental reports or audits prepared by or for the Company and its Subsidiaries relating to any Leased Real Property. Except as set forth in Part 2.6(d) of the Company Disclosure Schedule, no such lease or license will require the consent of the lessor or licensor to or as a result of the consummation of the transactions contemplated by this Agreement. For purposes of this Agreement, a “lease” shall include a sublease.

 

(e) All personal property owned by the Company and its Subsidiaries and all personal property held by the Company and its Subsidiaries pursuant to personal property leases is in satisfactory operating condition and repair, subject only to ordinary wear and tear. The Leased Real Property, the personal property described in Section 2.6(c) and the personal property held by the Company and its Subsidiaries pursuant to the leases and licenses described in Part 2.6(d) of the Company Disclosure Schedule comprise all of the Leased Real Property and personal property having a cost or fair market value in excess of $5,000 used in the conduct of business of the Company.

 

2.7 Bank Accounts; Receivables; Inventory.

 

(a) Part 2.7(a) of the Company Disclosure Schedule provides accurate information with respect to each account maintained by or for the benefit of the Company and each of its Subsidiaries at any bank or other financial institution including the name of the bank or financial institution, the account number and the authorized signatories.

 

(b) All accounts receivable of the Company and its Subsidiaries reflected in the Unaudited Interim Balance Sheet and all accounts receivable of the Company and its Subsidiaries that have arisen since the date of the Unaudited Interim Balance Sheet (except such accounts receivable as have been collected since such dates) are valid and enforceable claims, and the goods and services sold and delivered that gave rise to such accounts were sold and delivered by the Company and its Subsidiaries in the ordinary course consistent with past practice. Such accounts receivable are subject to no valid defense, offset or counterclaim and are fully collectible within ninety (90) days after the Closing Date, except to the extent of the allowance for doubtful accounts reflected on the Unaudited Interim Balance Sheet.

 

(c) All inventories of raw materials set forth or reflected in the Unaudited Interim Balance Sheet (other than items that are obsolete or of below-standard quality, all of which have been written off or written down to net realizable value on the Unaudited Interim Balance Sheet), or acquired by the Company or its Subsidiaries since the date of the Unaudited Interim Balance Sheet, consist of a quality and quantity usable in the ordinary course of business. The value at which inventories are carried on the Unaudited Interim Balance Sheet reflects the normal inventory valuation policy of the Company or its Subsidiaries, on a basis consistent with that of the preceding period, of stating inventory at its cost. The Company has no work-in- process or finished goods inventories.

 

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2.8 Indebtedness.

 

(a) Neither the Company nor any of its Subsidiaries has any liability or obligation for Indebtedness other than as set forth oh Part 2.8(a) of the Company Disclosure Schedule, and true and complete copies of all instruments and documents evidencing, creating, securing or otherwise relating to such Indebtedness have been delivered to Investor heretofore. Except as described in Part 2.8(a) of the Company Disclosure Schedule, no event has occurred and no condition has become known to the Company (including the transactions contemplated hereby) that constitutes or, with notice or passage of time, or both, would constitute a default or a basis of force majeure or other claim of accelerated or increased rights, termination, excusable delay or nonperformance by the Company or its Subsidiaries or any other Person under any instrument or document relating to or evidencing Indebtedness that would entitle any Person to require the Company or its Subsidiaries to pay any portion of the principal amount of such Indebtedness prior to the scheduled maturity thereof. Except as set forth in Part 2.8(a) of the Company Disclosure Schedule, no instrument or document evidencing, creating, securing or otherwise relating to Indebtedness will require the consent of any Person to or as a result of the consummation of the transactions contemplated by this Agreement.

 

(b) As of the Closing Date, except as set forth on Part 2.8(b) of the Company Disclosure Schedule, the Company will not have any liability or obligation for Indebtedness with respect to any of the Company’s or its Subsidiaries’ assets or the Company business and none of the Company’s or its Subsidiaries’ assets will be subject to any Encumbrances (except Permitted Encumbrances).

 

(c) Part 2.8(c) of the Company Disclosure Schedule contains a list and brief description of all agreements or instruments pursuant to which the Company’s or its Subsidiaries’ directors, employees or shareholders, or any other Person, have guaranteed any Indebtedness of the Company or its Subsidiaries (the “Guaranties” ). True and complete copies of all Guaranties have been previously delivered to Investor.

 

2.9 Intellectual Property.

 

(a) Part 2.9(a) of the Company Disclosure Schedule accurately identifies and describes each proprietary product or service developed, manufactured, marketed, or sold by the Company or any of its Subsidiaries, including products or services currently under development by the Company or any of its Subsidiaries.

 

(b) Part 2.9(b) of the Company Disclosure Schedule accurately identifies (i) each item of Registered IP in which the Company or any of its Subsidiaries has or purports to have an ownership interest of any nature (whether exclusively, jointly with another Person, or otherwise); (ii) the jurisdiction in which such item of Registered IP has been registered or filed and the applicable registration or serial number; (iii) any other Person that has an ownership interest in such item of Registered IP and the nature of such ownership interest; and (iv) each product or service identified in Part 2.9(a) of the Company Disclosure Schedule that embodies, utilizes, or is based upon or derived from (or, with respect to products and services under development, that is expected to embody, utilize, or be based upon or derived from) such item of Registered IP. The Company will provide, upon request by the Investor, complete and accurate

 

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copies of all applications, correspondence, and other material documents related to each such item of Registered IP.

 

(c) Part 2.9(c) of the Company Disclosure Schedule accurately identifies (i) all Intellectual Property Rights licensed to or utilized by the Company or any of its Subsidiaries (other than any non-customized Software that (A) is so licensed solely in executable or object code form pursuant to a non-exclusive, internal use Software license, (B) is not incorporated into, or used directly in the development, manufacturing, or distribution of, any of the Company’s or its Subsidiaries’ products or services, and (C) is generally available through consumer retail channels on standard terms for less than $5,000 ( “Non-Customized Software” )); (ii) the corresponding Contract or Contracts pursuant to which such Intellectual Property Rights are licensed to the Company or any of its Subsidiaries; and (iii) whether the license or licenses granted to the Company or any of its Subsidiaries are exclusive or non-exclusive.

 

(d) Part 2.9(d) of the Company Disclosure Schedule accurately identifies each Contract pursuant to which any Person has been granted any license under, or otherwise has received or acquired any right (whether or not currently exercisable) or interest in, any Company IP. Except as set forth on Part 2.9(d) of the Company Disclosure Schedule, the Company and its Subsidiaries are not bound by, and no Company IP is subject to, any Contract containing any covenant or other provision that in any way limits or restricts the ability of the Company or any of its Subsidiaries to use, exploit, assert, or enforce any Company IP for any purpose anywhere in the world.

 

(e) The Company has provided to the Investor a complete and accurate copy of each standard form of Company IP Contract used by the Company or any of its Subsidiaries, including each standard form of (i) end user license agreement; (ii) development agreement; (iii) distributor or reseller agreement; (iv) employee agreement containing intellectual property assignment or license of Intellectual Property Rights or any confidentiality provision; (v) consulting or independent contractor agreement containing intellectual property assignment or license of Intellectual Property Rights or any confidentiality provision; and (vi) confidentiality or nondisclosure agreement. Part 2.9(e) of the Disclosure Schedule accurately identifies each Company IP Contract that deviates in any material respect from the corresponding standard form agreement provided to the Investor.

 

(f) The Company and its Subsidiaries exclusively own all right, title, and interest to and in the Company IP (other than Intellectual Property Rights exclusively licensed to the Company or its Subsidiaries, as identified in Part 2.9(c) of the Company Disclosure Schedule) free and clear of all Encumbrances (other than non-exclusive licenses granted pursuant to the Contracts listed in Part 2.9(d) of the Company Disclosure Schedule). To the Company’s knowledge, all Company IP that is exclusively licensed to the Company or its Subsidiaries is free and clear of all Encumbrances other than the applicable licensor’s interest.

 

(g) All Registered IP is valid, subsisting, and enforceable.

 

(h) To the Company’s knowledge, no Person has infringed, misappropriated, or otherwise violated, and no Person is currently infringing, misappropriating, or otherwise violating, any Company IP. Part 2.9(h) of the Company Disclosure Schedule accurately

 

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identifies (and the Company has provided to the Investor a complete and accurate copy of) each letter or other written or electronic communication or correspondence that has been sent or otherwise delivered in the last five years by or to the Company or any of its Subsidiaries or any representative of the Company or any of its Subsidiaries regarding any actual, alleged, or suspected infringement or misappropriation of any Company IP, and provides a brief description of the current status of the matter referred to in such letter, communication, or correspondence.

 

(i) Neither the execution, delivery, or performance of this Agreement (or any of the ancillary agreements) nor the consummation of any of the transactions contemplated by this Agreement (or any of the ancillary agreements) will, with or without notice or lapse of time, result in, or give any other Person the right or option to cause or declare, (i) a loss of, or Encumbrance on, any Company IP; (ii) a breach of any license agreement listed or required to be listed in Part 2.9(c) of the Company Disclosure Schedule; (iii) the release, disclosure, or delivery of any Company IP by or to any escrow agent or other Person; or (iv) the grant, assignment, or transfer to any other Person of any license or other right or interest under, to, or in any of the Company IP.

 

(j) To the knowledge of the Company, the Company and its Subsidiaries have not infringed (directly, by contribution, by inducement, or otherwise), misappropriated, or otherwise violated any Intellectual Property Right of any Person.

 

(k) No claim or Proceeding involving any Intellectual Property Right licensed to the Company or any of its Subsidiaries is pending or has been threatened, except for any such claim or Proceeding that, if adversely determined, would not adversely affect (i) the use or exploitation of such Intellectual Property Right by the Company or any of its Subsidiaries, or (ii) the manufacturing, distribution, or sale of any product or service being developed, offered, manufactured, distributed, or sold by the Company or any of its Subsidiaries.

 

(l) Part 2.9(l) of the Company Disclosure Schedule accurately identifies and describes (i) all Software (other than Non-Customized Software) that is licensed to the Company, or developed, distributed or otherwise utilized by the Company in the conduct of its present or anticipated business and operations, and that comprises, includes or otherwise incorporates, whether in whole or in part, any Software code, component, module or other Software that is subject to an open source Software license (including, by way of example but not of limitation, the GNU, GPL, LGPL, BSD, MIT, PHP, Apache, Mozilla and Creative Commons licenses) or owned by a third party, (ii) the business, operation, product or service in which such open source or third party Software identified in Part 2.9(l) is utilized or licensed by the Company, and (iii) the corresponding Contract pursuant to which the Company obtains the right to use or license each such open source or third party Software identified in Part 2.9(l).

 

2.10 Contracts.

 

(a) Part 2.10(a) of the Company Disclosure Schedule identifies each Company Contract, including:

 

(i) each Company Contract relating to the employment of, or the performance of services by, any Person, including any employee, consultant or independent contractor;

 

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(ii) each Company Contract relating to the acquisition, transfer, use, development, sharing or license of any technology or any Intellectual Property Rights;

 

(iii) each Company Contract imposing any restriction on the Company’s or any of its Subsidiaries’ right or ability (A) to compete with any other Person, (B) to acquire any product or other asset or any services from any other Person, to sell any product or other asset to, or perform any services for, any other Person or to transact business or deal in any other manner with any other Person, or (C) develop or distribute any technology;

 

(iv) each Company Contract creating or involving any agency relationship, distribution arrangement or franchise relationship;

 

(v) each Company Contract relating to the acquisition, issuance or transfer of any securities;

 

(vi) each Company Contract relating to the creation of any Encumbrance with respect to any asset of the Company;

 

(vii) each Company Contract involving or incorporating any guaranty, any pledge, any performance or completion bond, any indemnity or any surety arrangement;

 

(viii) each Company Contract creating or relating to any partnership or joint venture or any sharing of revenues, profits, losses, costs or liabilities;

 

(ix) each Company Contract relating to the purchase or sale of any product or other asset by or to, or the performance of any services by or for, any Related Party (as defined in Section 2.18);

 

(x) each Company Contract constituting or relating to a Government Contract or Government Bid;

 

(xi) any other Company Contract that was entered into outside the ordinary course of business or was inconsistent with the Company’s past practices;

 

(xii) any other Company Contract that has a term of more than 60 days and that may not be terminated by the Company or any of its Subsidiaries (without penalty) within 60 days after the delivery of a termination notice by the Company or any of its Subsidiaries and requires payment in excess of $25,000 per annum; and

 

(xiii) any other Company Contract that contemplates or involves (A) the payment or delivery of cash or other consideration in an amount or having a value in excess of $25,000 in the aggregate, or (B) the purchase or sale of any product, or performance of services by or to the Company or any of its Subsidiaries having a value in excess of $25,000 in the aggregate.

 

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(b) The Company has delivered to Investor accurate and complete copies of all written Company Contracts. Part 2.10(b) of the Company Disclosure Schedule provides an accurate description of the terms of each Company Contract that is material to the business and not in written form. Each Company Contract is valid and in full force and effect and is enforceable by the Company or any of its Subsidiaries in accordance with its terms except as may be limited by the Enforceability Exception, and after the Closing will continue to be legal, valid, binding and enforceable on identical terms except as may be limited by the Enforceability Exception. The consummation of the transactions contemplated hereby shall not (either alone or upon the occurrence of additional acts or events) result in any payment or payments becoming due from the Company or any of its Subsidiaries, or any of its Affiliates to any Person or give any Person the right to terminate or alter the provisions of any Company Contract.

 

(c) The Company has not materially violated or breached, or committed any material default under, any Company Contract, and, to the knowledge of the Company, no other Person has materially violated or breached, or committed any material default under, any Company Contract.

 

(d) Except as set forth on Part 2.10(d) of the Company Disclosure Schedule, no event has occurred, and, to the Company’s knowledge, no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, (A) result in a violation or breach of any of the provisions of any Company Contract, (B) give any Person the right to declare a default or exercise any remedy under any Company Contract, (C) give any Person the right to accelerate the maturity or performance of any Company Contract, or (D) give any Person the right to cancel, terminate or modify any Company Contract.

 

(e) The Company has not received any written notice or other written communication regarding any actual or possible violation or breach of, or default under, any Company Contract.

 

(f) The Company has not waived any of its material rights under any Company Contract.

 

(g) No Person is renegotiating, or has a right pursuant to the terms of any Company Contract to renegotiate, any amount paid or payable to the Company under any Company Contract or any other material term or provision of any Company Contract.

 

(h) The Company Contracts collectively and materially constitute all of the Contracts necessary to enable the Company and its Subsidiaries to conduct its business in the manner in which its business is currently being conducted.

 

(i) Part 2.10(i) of the Company Disclosure Schedule provides an accurate and complete list of all Consents required under any Company Contract to consummate the transactions contemplated by this Agreement.

 

2.11 Liabilities; Fees, Costs and Expenses.

 

(a) Neither the Company nor any of its Subsidiaries has incurred contingent or other liabilities of any nature, either matured or unmatured, except for: (i) liabilities identified

 

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as such in the “liabilities” column of the Unaudited Interim Balance Sheet; (ii) accounts payable, accrued salaries or other liabilities that have been incurred by the Company or any of its Subsidiaries in the ordinary course of business and consistent with the Company’s past practices since the date of the Unaudited Interim Balance Sheet; (iii) liabilities under the Company Contracts listed in Part 2.10(a) of the Company Disclosure Schedule; and (iv) the liabilities identified in Part 2.11(a) of the Company Disclosure Schedule.

 

(b) The total amount of all fees, costs and expenses (including any attorney’s, accountant’s, financial advisor’s or finder’s fees) incurred by or for the benefit of the Company or any of its Subsidiaries in connection with (a) the due diligence conducted by the Company with respect to the transactions contemplated by this Agreement, (b) the negotiation, preparation and review of this Agreement (including the Company Disclosure Schedule) and all agreements, certificates, opinions and other instruments and documents delivered or to be delivered in connection with the transactions contemplated by this Agreement, (c) the preparation and submission of any filing or notice required to be made or given in connection with any of the transactions contemplated by this Agreement, (d) the obtaining of any Consent required to be obtained in connection with any transactions contemplated hereby and (e) any other Transaction Expenses, do not in the aggregate exceed $1,200,000.

 

2.12 Compliance with Legal Requirements. The Company and each of its Subsidiaries is, and at all times since January 2000 has been, in material compliance with all applicable Legal Requirements. Since January 2000, except as set forth in Part 2.12 of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries has received any notice or other communication from any Governmental Body regarding any actual or possible violation of, or failure to comply with, any Legal Requirement.

 

2.13 Governmental Authorizations. Part 2.13 of the Company Disclosure Schedule identifies each material Governmental Authorization held by the Company or any of its Subsidiaries, and the Company has delivered to Investor accurate and complete copies of all Governmental Authorizations identified in Part 2.13 of the Company Disclosure Schedule. The Governmental Authorizations identified in Part 2.13 of the Company Disclosure Schedule are valid and in full force and effect, and collectively constitute all material Governmental Authorizations necessary to enable the Company to conduct its business in the manner in which its business is currently being conducted. The Company and each of its Subsidiaries is in compliance with the terms and requirements of the respective Governmental Authorizations identified in Part 2.13 of the Company Disclosure Schedule. Since January 2000, except as set forth on Part 2.13 of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries has received any notice or other communication from any Governmental Body regarding (a) any actual or possible violation of or failure to comply with any term or requirement of any Governmental Authorization, or (b) any actual or possible revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization.

 

2.14 Tax Matters.

 

(a) All Tax Returns required to be filed by or on behalf of the Company with any Governmental Body with respect to any taxable period ending on or before the Closing Date

 

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(the “Company Returns” ) (i) have been or will be filed on or before the applicable due date (including any extensions of such due date), and (ii) have been, or will be when filed, accurately and completely prepared in all material respects in compliance with all applicable Legal Requirements. All amounts shown on the Company Returns to be due on or before the Closing Date have been or will be paid on or before the Closing Date. The Company has delivered to Investor accurate and complete copies of all Company Returns filed which have been requested by Investor.

 

(b) The Company Financial Statements fully accrue all actual and contingent liabilities for unpaid Taxes with respect to all periods through the dates thereof in accordance with GAAP. The Company will establish, in the ordinary course of business and consistent with its past practices, reserves adequate for the payment of all unpaid Taxes through the Closing Date, and the Company will disclose the dollar amount of such reserves to Investor on or prior to the Closing Date.

 

(c) Except as set forth in Part 2.14(c) of the Company Disclosure Schedule, no Company Return relating to income Taxes has been audited by any Governmental Body. The Company has delivered to Investor accurate and complete copies of all audit reports and similar documents (to which the Company has access) relating to the Company Returns. No extension or waiver of the limitation period applicable to any of the Company Returns has been granted (by the Company or any other Person), and no such extension or waiver has been requested from the Company.

 

(d) No Legal Proceeding is pending or, to the Company’s knowledge, has been threatened against or with respect to the Company or any of its Subsidiaries in respect of any Tax. There are no unsatisfied liabilities for Taxes (including liabilities for interest, additions to tax and penalties thereon and related expenses) with respect to any notice of deficiency or similar document received by the Company or any of its Subsidiaries with respect to any Tax (other than liabilities for Taxes asserted under any such notice of deficiency or similar document which are being contested in good faith by the Company or any of its Subsidiaries and with respect to which appropriate reserves for payment have been established). There are no liens for Taxes upon any of the assets of the Company or any of its Subsidiaries except liens for current Taxes not yet due and payable. Neither the Company nor any of its Subsidiaries has entered into or become bound by any agreement or consent pursuant to Section 341(f) of the Code. The Company has not been, and the Company will not be, required to include any adjustment in taxable income for any tax period (or portion thereof) pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions or events occurring, or accounting methods employed, prior to the Closing.

 

(e) There is no agreement, plan, arrangement or other Contract covering any employee or independent contractor or former employee or independent contractor of the Company or any of its Subsidiaries that, considered individually or considered collectively with any other such Contracts, will, or could reasonably be expected to, give rise directly or indirectly to the payment of any amount that would not be deductible pursuant to Section 280G or Section 162 of the Code.

 

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(f) The company has not been a member of any “Affiliated Group” (as defined in Section 1504(a) of the Code) or any combined, consolidated or unitary group, and the Company has no liability for Taxes of any other Person under Treasury Regulation 1.1502-6 or similar provisions. Neither the Company nor any of its Subsidiaries is or has ever been, a party to or bound by any tax indemnity agreement, tax sharing agreement, tax allocation agreement or similar Contract.

 

2.15 Employee and Labor Matters; Benefit Plans.

 

(a) Part 2.15(a) of the Company Disclosure Schedule identifies each “employee benefit plan” within the meaning of Section 3(3) of ERISA and each other employee benefit plan, program or arrangement at any time maintained, sponsored or contributed to (or required to be contributed to) by the Company or its Subsidiaries or with respect to which the Company or its Subsidiaries has any liability or potential liability including, but not limited to, Welfare Plans (as defined below), Pension Plans (as defined below), salary, bonus, deferred compensation, incentive compensation, stock purchase, stock option, severance pay, termination pay, hospitalization, medical, life or other insurance, supplemental unemployment benefits, profit-sharing, pension or retirement plan, program or agreement (collectively, the “Plans” ). The Company has taken all commercially reasonable efforts to ensure that every employee of the Company and its Subsidiaries ( “Employee” ) (whether such Employee is a United States citizen or otherwise) is legally authorized to work for the Company and its Subsidiaries in the United States.

 

(b) Except as listed on Part 2.15(b) of the Company Disclosure Schedule, neither the Company nor any of its Subsidiaries maintains, sponsors or contributes to, or has any actual or potential liability with respect to, or has ever maintained, sponsored or contributed to (i) any employee pension benefit plan (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), whether or not excluded from coverage under any portion of ERISA) (a “Pension Plan”); or (ii) a multiemployer plan (as defined in Section 3(37) of ERISA, whether or not excluded from coverage under any portion of ERISA).

 

(c) The Company and its Subsidiaries maintain, sponsor or contribute only to those employee welfare benefit plans (as defined in Section 3(1) of ERISA, whether or not excluded from coverage under any portion of ERISA) for the benefit of Employees or former Employees that are described in Part 2.15(c) of the Company Disclosure Schedule (the “Welfare Pl