STOCK PURCHASE AGREEMENT

Exhibit 10.27

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (this “ Agreement ” ) is made effective as of the 30th day of June, 2004 by and among SOUTHERN GRAPHIC SYSTEMS, INC., a corporation duly organized and existing under the laws of the State of Kentucky ( “ Buyer ” ) , MOZAIC GROUP LTD., a corporation duly organized and existing under the laws of the State of Missouri (the “ Company ” ), and Mary Ann Gibson, an individual residing in the State of Florida ( “MAG” ).

This Agreement sets forth the terms and conditions upon which Buyer is purchasing and Company is selling newly-issued capital stock of the Company consisting of 8,565 shares of Voting Common Stock and 118,400 shares of Non-Voting Common Stock which equal 50.997% of each class of Voting Common Stock and Non-Voting Common Stock, respectively, of the Company (collectively, the “ Shares ” ).

In consideration of, and in reliance on, the mutual agreements, covenants, representations and warranties contained in this Agreement, Buyer, the Company and MAG agree as follows:

ARTICLE I

DEFINITIONS

As used in this Agreement, the terms below shall have the following meanings:

“ Arbitrating Accountant ” has the meaning given in Section 9.5(b)(i).

“ Affiliate ” means any Person, directly or indirectly, controlling, controlled by, or under common control with, the Company, Buyer or MAG. Without limiting the generality of the foregoing, a Person is considered to be in control of or to be controlled by another Person if such Person holds 50% or more of the outstanding voting equity interest in such other Person or such other Person holds 50% or more of its outstanding voting equity interest.

“ Agreement ” has the meaning given in the introductory paragraph.

“ Alcoa ” means Alcoa Inc., a Pennsylvania corporation.

“ ASC ” means Alcoa Securities Corporation, a Delaware corporation.

“ ASC Loan ” has the meaning given in Section 7.6.

“ ASC Loan Agreement ” has the meaning given in Section 7.6.

“ Amended and Restated Shareholders’ Agreement ” has the meaning given in Section 2.4.

“ Ancillary Agreements ” has the meaning given in Section 3.4.

“ Balance Sheet ” has the meaning given in Section 4.6.

“ Business ” means the business conducted by the Company which includes providing a full-suite of integrated services including brand architecture, comprehensive design solutions, interactive development, digital photography, imaging, dynamic publishing and workflow tools, large format digital printing, print management and complete outsourced capabilities to execute and produce direct response TV campaigns.

“ Business Day ” means any day other than Saturday, Sunday and any day which is a legal holiday or a day on which banking institutions in the United States are authorized by Law or other government action to close.

“ Buyer ” has the meaning given in the introductory paragraph.

“ Buyer Indemnitees ” has the meaning given in Section 10.1.

“ Closing ” means the taking of the actions described in Article III of this Agreement.

“ Closing Date ” means 11:59 PM EST on June 30, 2004, or such other date as may be mutually agreed by the parties in writing.

“ Closing Date Debt Amount ” has the meaning given in Section 9.5(a).

“ Closing Date Net Working Capital ” has the meaning given in Section 9.5(a).

“ Closing Date Statement ” has the meaning given in Section 9.5(b).

“ Code ” means the Internal Revenue Code of 1986, as amended. All references to the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments or any substitute or successor provisions thereto.

“ Company ” has the meaning given in the introductory paragraph.

“ Company Earn-Out Payment ” has the meaning given in Section 3.5.1(b).

“ Company IP ” has the meaning given in Section 4.13.

“ Company Shares ” has the meaning given in Section 4.1(a).

“ Confidential Information ” has the meaning given in Section 9.2.

 

2.

“ Current Maturities of Lone Term Debt ” means, with respect lo long term debt shown on the Financial Statements, principal payments due within 12 months following the date of the Financial Statements, excluding principal payments on subordinated debt.

“ Current Maturities of LT Debt ” means the same as the foregoing.

“ DCS Family Investments ” has the meaning given in Section 3.2(b).

“ DCS Real Estate ” has the meaning given in Section 8.12.

“ Dispute Period ” has the meaning given in Section 9.5(b).

“ Dispute ” has the meaning given in Section 9.5(b).

“ EBITDA ” shall mean the total revenue of the Company minus (i) the cost of goods sold and services provided, (ii) general administrative and selling expenses and (iii) research and development expenses. EBITDA will not include the effects of (i) depreciation and amortization, (ii) income taxes, and (iii) interest income or interest expense. EBITDA will not include income statement impact of Earnouts. The calculation and the amounts of EBITDA’s components will be determined in accordance with Alcoa’s accounting practices for its operating locations, with such modifications as are reasonably necessary to be consistent with Company’s Projections. Such modifications shall include, but not be limited to, percentage completion accounting for unbilled revenues pertaining to work-in-process.

“ Employee Arrangements ” has the meaning given in Section 4.19(a).

“ Employment A greements ” has the meaning given in Section 8.10.

“ Encumbrances ” means any mortgage, covenant, condition, restriction, option, lien (statutory or other), pledge, charge, easement, right-of-way, security interest, or other right or interest of third parties, but excluding any such Encumbrance as expressly provided in the Amended and Restated Shareholders’ Agreement.

“ Environmental Condition ” means: (i) the past or present release, spill, discharge, dispersal, leaching, emission, disposal or migration (as defined in any Environmental Law) into the indoor or outdoor environment (including, without limitation, ambient air, surface water, groundwater and surface or subsurface strata) or into or out of any property, and/or contamination with hazardous wastes, materials or substances, as defined by any applicable Environmental Law, including oil and petroleum products, radioactive, nuclear or source materials; or (ii) injury to health, public safety or the environment relating to activities of the Company.

“ Environmental Law ” means any and all laws concerning the protection of human health and the environment which include, but are not limited to, applicable common law, the Comprehensive Environmental Response, Compensation and Liability Act

 

3.

(“CERCLA”), 42 U.S.C. §§ 9601 et seq .; the Emergency Planning and Community Right-to-Know Act of 1960, 42 U.S.C. §§ 13101 et seq .; the Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C. §§ 6901, et seq .; the Federal Water Pollution Control Act, 33 U.S.C. §§ 1251 et seq ,; the Clean Air Act, 42 U.S.C. §§ 7401 et seq .; the Hazardous Materials Transportation Act, 49 U.S.C. §§ 1471 et seq .; the Toxic Substances Control Act, 15 U.S.C. §§ 2601 et seq .; Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”), 7 U.S.C. §§ 136 et seq .; the Occupational Safety and Health Act of 1970 (“OSHA”), 29 U.S.C. §§ 651-678; and the Safe Drinking Water Act, 42 U.S. §§ 300f through 300j, each, as they have been or will be amended from time to time, and the rules and regulations implementing such statutes or promulgated thereunder together with any and all federal, state, and local environmental laws, rules, ordinances, regulations or guidance similar or analogous to the above-listed laws.

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

“ Financial Statements ” has the meaning given in Section 4.6.

“ GAAP ” means generally accepted United States accounting principles.

“ Hazardous Substances ” means any material, substance, chemical or waste that is listed, defined or regulated as hazardous or toxic under applicable Environmental Law.

“ Indemnification Agreement ” has the meaning given in Section 10.4(d).

“ Indemnified Party ” has the meaning given in Section 10.5.

“ Indemnifying Party ” has the meaning given in Section 10.5.

“ Intellectual Property ” means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereon, and all patents, patent applications and patent disclosures, together with all reinsurances, continuation, continuations-in-part, divisions, revisions, extensions and re-examinations thereof, (b) all trademarks, service marks, trade dress, logos, tradenames, domain names, and corporate names, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (c) all copyrights and copyrightable works and all applications, registrations and renewals in connection therewith, (d) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, methods, schematics, technology, technical data, designs, drawings, flowcharts, block diagrams, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (e) all computer software (including data and related documentation), (f) all other proprietary rights, (g) all copies and tangible embodiments of any of the foregoing (in whatever form or medium), and (h) all licenses, sublicenses, agreements or permissions related to any of the foregoing.

 

4.

“ Inventors ” has the meaning given in Section 4.13.

“ Law ” means any applicable federal, state, provincial, local or foreign order, writ, injunction, decree, regulation, rule, ordinance, law, statute or code.

“ Liability for Tax ” has the meaning given in Section 10.1.

“ Letter of Intent ” means that certain Letter of Intent executed by Buyer and Company dated April 14, 2004.

“ Losses ” has the meaning given in Section 10.1.

“ MAG ” has the meaning given in the introductory paragraph.

“ MAG Loan ” has the meaning given in Section 8.12.

“ Net Working Capital ” means (i) the amount of “current assets” reflected in the Projections (defined below) as of a given date minus (ii) the amount of “current maturities of LT debt”, “accounts payable”, and “accrued expenses” reflected in the Projections as of the same date.

“ Non-Management Shareholders ” has the meaning given in Section 3.2(b).

“ Non-Voting Common Stock ” means Class B Common Stock.

“ NPL ” has the meaning given in Section 4.25(d).

“ Permits ” has the meaning given in Section 4.14.

“ Permitted Exceptions ” means (i) those exceptions to title to the assets of the Company listed on Schedule 4.10(b) and (ii) Encumbrances related to the line of credit and long term debt referred in the 12-31-03 Financial Statements and Projections.

“ Person ” means a natural person, a corporation, a partnership, a limited liability company, or any other legal entity.

“ Pre-existing Liabilities ” has the meaning given in Section 10.1.

“ Projections ” has the meaning given in Section 4.8.

“ Projected Debt Amount ” has the meaning given in Section 9.5(a).

“ Projected Net Working Capital ” has the meaning given in Section 9.5(a).

 

5.

“ Purchase Price ” has the meaning given in Section 2.2.

“ Related Parties ” has the meaning given in Section 4.21.

“ Returns ” means all returns, declarations, reports, statements and other documents required to be filed in respect of Taxes, and any claims for refunds of Taxes, including any amendments or supplements to any of the foregoing. The term “Return” means any one of the foregoing Returns.

“ Sales ” means the total sales of the Company calculated in accordance with Alcoa’s accounting policies, with such modifications as are reasonably necessary to be consistent with Company’s Projections.

“ Securities Act ” shall mean the Securities Act of 1933, as amended.

“ Seller Indemnitees ” has the meaning given in Section 10.2.

“ Shares ” has the meaning given in the second introductory paragraph.

“ Shareholder Earn-Out Payment ” has the meaning given in Section 3.5.1 (a).

“ Subsidiaries ” mean Mozaic Management, Inc. and 617 Front, Inc.

“ Tax ” or “ Taxes ” means any federal, state, local, foreign or other taxes including but not limited to income, corporation, gross receipts, profits, gains, capital stock, franchise, sales, use, transfer, payroll, personal property, real property, occupancy, alternative minimum, estimated or other tax, levy, impost, fee, imposition, assessment or similar charge, together with any additions to Tax or additional amounts, interest and penalty thereon.

“ Third Party Claim ” has the meaning given in Section 10.5.

“ Voting Common Stock ” means Class A Common Stock.

“ Year 1 ” has the meaning given in Section 3.5.1 (a)(i).

“ Year 2 ” has the meaning given in Section 3.5.1 (a)(ii).

“ 4-30-04 Financial Statements ” has the meaning given in Section 4.6.

“ 12-31-03 Financial Statements ” has the meaning given in Section 4.6.

 

6.

ARTICLE II

PURCHASE AND SALE OF SHARES

2.1 Purchase and Sale of Shares . On the Closing Date, subject to the terms and conditions of this Agreement, Company will issue and sell to Buyer and Buyer will purchase and acquire from Company, the Shares, free and clear of any and all Encumbrances. This sale and purchase transaction is subject to the conditions set forth in Article VII and VIII.

2.2 Purchase Price . The total purchase price for the Shares will be Two Million Dollars ($2,000,000) (the “ Purchase Price ”). At Closing, the Company will apply the Purchase Price amount it receives from Buyer to pay off subordinated debt totaling $2,000,000 in the aggregate (excluding the MAG Loan amount which will not be repaid at Closing).

2.3 Payment of Purchase Price . On the Closing Date, Buyer shall pay the Purchase Price to Company by wire transfer of immediately available funds to the following Summers, Compton, Wells & Hamburg, P.C. Trust Account for distribution to the subordinated debt holders:

 

2.4 Shareholder Agreement . Simultaneously with the purchase of the Shares hereunder, Buyer, Company, and all of the shareholders of the Company will amend and execute an amendment and restatement of the Shareholders’ Agreement dated August 14, 2003, substantially in the form attached hereto as Exhibit A (the “ Amended and Restated Shareholders’ Agreement ”).

ARTICLE III

CLOSING

3.1 Time; Location . Subject to the conditions contained herein, the Closing shall be held on the Closing Date at 9:00 a.m., local time, at the offices of Company’s attorney, Summers, Compton, Hamburg & Wells, 8909 Ladue Road, St. Louis, Missouri 63124, or at such other time and place as the parties shall agree.

3.2 Deliveries by the Company . At the Closing, the Company shall execute and deliver or cause to be executed and delivered the following:

 

(a)

Certificates evidencing the Shares, free and clear of any Encumbrances;

 

(b)

Releases signed by each of the non-management shareholders identified on Schedule 3.2 (b)  (the “ Non-Management Shareholders ”) who sold their shares to DCS Family Investments, LLC, a Missouri limited liability company (“ DCS

 

7.

Family Investments ” ) , controlled by MAG, substantially in the form attached hereto as Exhibit B .

 

(c)

Resignations of the individuals identified on Schedule 3.2(c) as members of the board of directors and as officers of the Company, effective as of the Closing Date;

 

(d)

A resolution of the Company’s board of directors, authorizing the consummation of the transaction contemplated in this Agreement;

 

(e)

All documents required to be delivered to Buyer pursuant to Article VIII;

 

(f)

Such additional instruments as Buyer may reasonably require in order to effectively vest title in the Shares.

 

(g)

A certificate executed by an officer of the Company representing that the representations and warranties of the Company in this Agreement were accurate when made and are accurate in all respects as of the Closing Date as if made on the Closing Date and that all covenants to be complied with by the Company has been complied with in all material respects;

 

(h)

Consents authorizing the election of the new board of directors and officers of the Company set forth in the Amended and Restated Shareholders’ Agreement;

 

(i)

An acknowledgment and representation by each shareholder of the Company, substantially in the form attached hereto as Exhibit C . which Buyer is relying upon in purchasing the Shares pursuant to this Agreement;

 

(j)

The Indemnification Agreements executed by MAG and her Affiliates; and

 

(k)

Correct and complete copies of (a) the governing documents (other than the bylaws) of the Company as of a date not more than 10 days prior to the Closing Date, certified by the Secretary of State of Missouri and the governing documents of the Subsidiaries, certified by the Secretary of the jurisdiction in which the Subsidiaries are incorporated, and (b) the bylaws of the Company and its Subsidiaries as of the Closing Date, certified by the Company’s Secretary; and

 

(l)

Certificates of the appropriate public officials dated not more than 10 days prior to the Closing Date to the effect that the (i) Company is a validly existing corporation in good standing in the State of Missouri and in each jurisdiction listed in Schedule 4.2 and (ii) Each Subsidiary is a validly existing corporation in good standing in the jurisdiction it is incorporated and each jurisdiction listed on Schedule 4.2.

3.3 Deliveries by the Buyer . At the Closing, Buyer shall execute and deliver or cause to be executed and delivered the following:

 

(a)

All documents required to be delivered to the Company pursuant to Article VII;

 

(b)

A certificate representing that each of Buyer’s representations and warranties in this Agreement were accurate when made and are accurate in all respects as of the Closing Date as if made on the Closing Date and that all covenants to be complied with by Buyer have been complied with in all material respects;

 

(c)

The Purchase Price;

 

8.

(d)

The ASC Loan proceeds in an amount of no more than $3.1 million which amount shall be used to pay off the Company’s line of credit at Enterprise Bank, St. Louis, Missouri;

 

(e)

Consents authorizing the election of the new board of directors and officers of the Company set forth in the Amended and Restated Shareholders’ Agreement; and

 

(f)

The certificate of Directors & Officers Liability Insurance for Company for wrongful acts or loss which occur as of or after the Closing Date.

3.4 Other Agreements to be Executed at Closing . At the Closing, the following additional agreements (the “ Ancillary Agreements ”) shall also be executed and delivered by the applicable parties:

 

(a)

The Employment Agreements;

 

(b)

The Amended and Restated Shareholders’ Agreement;

 

(c)

The ASC Loan Agreement; and

 

(d)

MAG Loan documentation.

3.5 Earn-Out .

3.5.1 Earn-Out Payment .

(a) Shareholder Earn-Out Payment . Buyer agrees to pay to the shareholders of the Company the following earn-out payments (each, a “ Shareholder Earn-Out Payment ”), if the applicable conditions are satisfied:

(i) $600,000 if the Sales equal or exceed $15,000,000 and EBITDA equals or exceeds $3,088,800 for the twelve-calendar month period beginning on the first day of the month first succeeding the month in which the Closing occurs (“ Year 1 ”); and

(ii) $800,000 if the Sales equal or exceed $25,000,000 and EBITDA equals or exceeds $6,682,000 for the twelve-calendar month period beginning on the first anniversary of the first day of Year 1 (“ Year 2 ”).

(b) Company Earn-Out Payment . Buyer agrees to pay to the Company an earn-out payment (the “ Company Earn-Out Payment ”) of $500,000 if the Sales equal or exceed $25,000,000 and EBITDA equals or exceeds $6,682,000 in Year 2.

 

9.

(c) Pro-rata . If the Company fails to satisfy the thresholds set forth in 3.5.1 (a)(i), 3.5.1(a)(ii) and/or 3.5.1(b) but Sales are at least 80% or more of the applicable Sales threshold and EBITDA is at least 90% or more of the applicable EBITDA threshold, a portion of the applicable Shareholder Earn-Out Payment or Company Earn-Out Payment will be paid in an amount equal to the applicable Shareholder Earn-Out Payment or Company Earn-Out Payment multiplied by the percentage that the actual EBITDA is of the threshold EBITDA for such time period. The following are examples of various calculations:

Example 1 :

If Sales are at least 80% of the applicable Sales threshold and the actual EBITDA equals 95% of the EBITDA threshold in Year 1, then the Shareholder Earn-Out Payment for Year 1 will be $570,000 ($600,000 x 95% = $570,000).

Example 2 :

If Sales equal 95% of the applicable Sales threshold and the actual EBITDA equals 90% of the EBITDA threshold in Year 1, then the Shareholder Earn-Out Payment for Year 1 will be $540,000 ($600,000 x 90% =$540,000).

Example 3 :

If Sales are at least 80% of the applicable Sales threshold and the actual EBITDA equals 85% of the EBITDA threshold in Year 1, then there is no Shareholder Earn-Out Payment for Year 1.

Example 4 :

If Sales equal 75% of the applicable Sales threshold and the actual EBITDA equals 90% of the EBITDA threshold in Year 1, then there is no Shareholder Earn-Out Payment for Year 1.

(d) Within 30 days following the last day of the twelve-calendar month period of the year to which the Shareholder Earn-Out Payment or Company Earn-out Payment relates, the Company will prepare and submit to Buyer a statement of calculation of Sales and EBITDA, certified by the Chief Financial Officer of the Company as true and correct in all material respects and calculated in accordance with this Agreement. Within 60 days following delivery of the Company’s statement of calculation of the Sales and EBITDA, Buyer will notify the Company of any objections to the Sales and EBITDA calculations, and the parties will reach agreement with regard to Buyer’s objections to the Sales and EBITDA calculations. During such 60 day period, during regular business hours and with prior notice, the Company will provide to Buyer, its Affiliates and its independent public accountants access to the financial books and records of the Company (including work papers and all relevant personnel) as may reasonably be required for preparation of any objections and to confirm compliance with this Section 3.5.1, including without limitation proper calculation of Sales and EBITDA in accordance with this Agreement. For purposes of determining whether the threshold for the Shareholder Earn-Out Payment and the Company Earn-Out Payment have been met Buyer and MAG will make such adjustments to the calculation of EBITDA as are reasonably appropriate to reflect what the EBITDA would have been had the Company remained an independent corporation.

(e) Each Shareholder Earn-Out Payment and Company Earn-out Payment required to be made pursuant to Section 3.5.1(a) and (b) will be due and payable within 90 days following the last day of the twelve-calendar month period to which the Shareholder Earn-Out Payment and Company Earn-out Payment relates. Each Shareholder Earn-Out Payment shall be paid pro rata to the shareholders of the Company (but not including the Buyer) of record as of the last day of the twelve-calendar month period for which the Shareholder Earn-Out Payment is being paid.

 

10.

All payments will be made by wire transfer to an account designated in writing by each shareholder of the Company (but not including the Buyer).

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company and MAG, jointly and severally, represents and warrants to Buyer as follows:

4.1 Capitalization: Title to Shares: Business .

(a) The authorized capital stock of the Company consists solely of (i) 100,000 shares of Voting Company Stock, $.10 par value per share, of which, prior to the issuance of the Shares, 8230 shares are currently issued and outstanding, (ii) 900,000 shares of Non-Voting Common Stock, $.10 par value per share, of which 113,770 shares are currently issued and outstanding (the “ Company Shares ” ). There are no other shares of capital stock authorized, issued or outstanding. The Company Shares are owned of record by the shareholders in the amount identified on Schedule 4.1(a) . All issued and outstanding capital stock of the Subsidiaries is owned of record by the Company. The Company Shares and all issued and outstanding capital stock of the Subsidiaries have been duly authorized and validly issued, are fully paid and non assessable. The Company Shares and all issued and outstanding capital stock of the Subsidiaries are, and the Shares, when issued at Closing will be, free and clear of all Encumbrances.

(b) The Shares, when issued at Closing, will represent 50.997% of the total issued and outstanding shares of each class of Voting Common Stock and Non-Voting Common Stock, respectively. When issued on the Closing Date, the Shares will be duly authorized, validly issued, fully paid and non-assessable.

(c) Except for those plans and agreements identified on Schedule 4.1(c) and except as expressly provided in the Amended and Restated Shareholders’ Agreement, there are no outstanding subscriptions, options, warrants, calls or rights of any kind to purchase or otherwise acquire, and no securities convertible into, capital stock of the Company or its Subsidiaries. The Company Shares have been issued to the shareholders of the Company, and the Shares will at Closing be issued to Buyer, in compliance with all applicable federal and state securities laws.

(e) The Company and the Subsidiaries do not conduct any business other than the Business.

4.2 Organization, Good Standing and Power . The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Missouri, and has all requisite corporate power and authority to conduct its Business as it is now being conducted, to own or use the properties and assets that it purports to own or use, and to perform its obligations. Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated. Each of the Company and its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing

 

11.

under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification, all of such states and jurisdictions being listed on Schedule 4.2 .

4.3 Authorization of Agreement and Enforceability . The Company and MAG has the power, authority and legal capacity to enter into this Agreement and the Ancillary Agreements to which each is a party and to perform all of their respective obligations hereunder and thereunder. The Company and MAG have taken all necessary action to authorize the execution and delivery of this Agreement and the Ancillary Agreements, the performance by them of all terms and conditions to be performed by them, and the consummation of the transactions contemplated hereby and thereby. This Agreement constitutes, and the Ancillary Agreements to which the Company and MAG are to become a party at the Closing, when executed and delivered by the Company and MAG, shall constitute at the Closing, legal, valid and binding obligations of the Company and MAG, enforceable against them in accordance with their terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting rights and remedies of creditors generally and to the exercise of judicial discretion in accordance with general principles of equity (whether applied by a court of law or equity).

4.4 No Violation . Except as disclosed on Schedule 4.4 , the execution, delivery and performance by the Company and MAG of this Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby will not (with or without the giving of notice or the lapse of time, or both) (i) result in a violation of any provision of the bylaws or articles of incorporation of the Company; (ii) result in a violation of any applicable law, statute, rule, regulation, judicial or administrative order, award, judgment or decree; (iii) contravene, conflict with, result in a breach of, or a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any term or provision of any contract, agreement, or instrument to which Company or MAG is a party; (iv) require any filing with, or permit, authorization, consent or approval of any Person; or (v) result in the creation of any Encumbrance upon the Shares or the assets of the Company, except for the ASC Loan.

4.5 Governmental Consents . No consent, approval or authorization of, or declaration, notification, filing or registration with, any United States governmental or regulatory authority is required to be made or obtained by Company or MAG in connection with the execution, delivery and performance of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby.

4.6 Financial Statements . The Company has delivered to Buyer true and correct copies of (i) the internal unaudited consolidated balance sheet of the Company and the Subsidiaries at December 31, 2003, and the related statements of operations and statements of cash flows for the period beginning May 1, 2003 and ending (the “ 12-31-03 Financial Statements ” ), and (ii) the internal unaudited consolidated balance sheet of the Company and the Subsidiaries at April 30, 2004, and the reviewed internal unaudited related income statement and cash flow statement for the fiscal year then ended (the “ 4-30-04 Financial Statement s” , and, together with the 12-31-03 Financial Statements, the “ Financial Statements ” ). True and correct copies of such Financial

 

12.

Statements are collectively attached hereto as Schedule 4.6 . The Financial Statements have been prepared in accordance with GAAP, except for the 12-31-03 Financial Statements, and the information contained in such Financial Statements is complete and accurate in all material respects, subject to normal fiscal year-end adjustments in the case of the 12-31-03 Financial Statements. The Financial Statements, including the related notes, present fairly in all material respects the financial position of the Company and the Subsidiaries at the dates indicated and the results of operations and cash flows of the Company and the Subsidiaries for the periods then ended. Unless the context indicates otherwise, references in this Agreement to “ Balance Sheet ” shall mean the balance sheet of the Company as of April 30, 2004.

4.7 Notes and Accounts Receivable . All notes and accounts receivable were reflected properly on the Balance Sheet and those outstanding as of the Closing Date are valid receivables for sales actually made or services actually performed by the Company, as the case may be, in the ordinary course of business consistent with past practice for goods sold and delivered or services performed. No portion of any account receivable is subject to any counterclaim, defense or set-off, or is otherwise in dispute. All notes and accounts receivable outstanding as of the Closing Date are collectible to the best of the knowledge of the Company and MAG in the ordinary course of business in amounts not less than the aggregate amount thereof.

4.8 Financial Projections . Company has delivered to Buyer financial projections for the year ending December 31, 2004 and December 31, 2005 (the “ Projections ” ), which were made in good faith with a reasonable basis. Such Projections are attached in Schedule 4.8 . As of the Closing Date, the Projections shall be deemed to apply to the 24-month period following Closing rather than to calendar years 2004 and 2005 and the Company represents that, as of the Closing Date, there is a good faith reasonable basis for the Projections as applied to such 24-month period. Company, MAG and SGS acknowledge that the Projections will be deemed to be modified post-closing as appropriate to reflect the fact that the $2,000,000 of subordinated debt has been paid off at Closing and that the ASC Loan has replaced the Enterprise Bank Credit Line.

4.9 Absence of Certain Changes or Events .

4.9.1 Actions Not Taken . Since December 31, 2003, the Company and its Subsidiaries have not:

(a) Waived any rights under, amended in any material respect or terminated any contract other than in the ordinary course of the business consistent with past practice;

(b) Suffered the occurrence of any events that have had or could have a material adverse effect on the Company’s operations, assets, liabilities, financial condition or the Business;

(c) Incurred any damage, destruction or casualty having a material adverse effect on the Company’s assets or the Business, whether or not covered by insurance;

(d) Sold, transferred, replaced or leased any assets or sold any inventory at a discount, except for transactions in the ordinary course of the business consistent with past

 

13.

practice and except that the Company will enter into additional equipment leases for $100,000 on or before July 30, 2004;

(e) Waived or released any material rights with respect to the Company’s assets or the Business;

(f) Transferred or granted any proprietary rights;

(g) Entered into any transaction or made any commitments other than in the ordinary course of the business consistent with past practice;

(h) Changed its methods of accounting;

(i) Changed the rate of compensation paid to anyone connected with the Business, except for those increases planned in the ordinary course of business consistent with past practices, or established any new pension or profit-sharing plan, deferred compensation agreement or employee benefit arrangement of any kind;

(j) Materially altered its conduct in its relations with suppliers or customers;

(k) Declared or paid any dividend or distributions to shareholders or awarded or paid any bonuses to management or employees (other than salaries payable in the ordinary course of business to Company’s shareholders);

(l) Increased the salary, wage or bonus of any employee of the Company except for a partial reinstatement of wages effective April 1, 2004, that were rolled back with management approval and employee consent in October 2003. The amount of the April wage increase averaged 13%, and the amount of the October 2003 roll back was approximately 25%;

(m) Changed the Projections, the basis for such Projections, the Business, operations, assets, liabilities or financial condition of the Company, that such change constitutes a material adverse change; and

(n) Agreed or committed to do any of the foregoing.

4.9.2 Actions Taken . Since December 31, 2005, the Company and its Subsidiaries have:

(a) Operated the Business in the usual, regular and ordinary manner as such Business was operated prior to December 31, 2003 and, to the extent consistent with such operation, used its best efforts to preserve the goodwill of the Business, kept the Business intact, and preserved its relationships with customers, suppliers and others having business dealings with the Company; and

 

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(b) Billed its customers and paid its suppliers in the usual, regular and ordinary manner, on a basis consistent with past practice.

4.10 Title to Assets; Absence of Encumbrances. Schedule 4.10 ( a) is a complete and accurate list of the assets of the Company and its Subsidiaries. Except as otherwise disclosed on Schedule 4.10(b) and subject to the Permitted Exceptions, the Company and its Subsidiaries has good and marketable title to, or, in the case of leased assets, has a valid leasehold interest in, all of the real and personal assets of the Business. All tangible assets and properties are in good operating condition and repair and are usable in the ordinary course of the business, consistent with past practice and conform to applicable laws relating to their construction, use and operation. The assets listed are sufficient for the continued conduct of the Business after the Closing in substantially the same manner as conducted prior to the Closing. Except as disclosed on Schedule 4.10(b) . all assets are free and clear of all Encumbrances other than Permitted Exceptions.

4.11 Contracts and Commitments . A complete and accurate list of all written or oral contracts, agreements and commitments of the Company and its Subsidiaries is identified on Schedule 4.11 . Company has provided Buyer with complete and accurate copies of all written contracts, agreements and commitments and descriptions of all oral contracts, agreements and commitments. The Company and its Subsidiaries are not in breach of any of the foregoing, and the Company and its Subsidiaries have not waived the future enforceability of any significant rights under any such contract, agreement or commitment. The Company does not have any knowledge that any other party has terminated, canceled, or substantially modified any such contracts nor threatened to take such actions, and the Company does not have any knowledge that any other party is in default under any such contracts. Other than as disclosed in the Financial Statements, the Company and its Subsidiaries have paid in full all amounts due under leases and all other written or oral contracts, agreements and commitments.

4.12 No Other Agreements . Except as disclosed on Schedule 4.12 , there is no outstanding option, right, agreement or other obligation pursuant to which any person or entity could claim a right to acquire in any way all or any part of, or interest in, the assets or stock of the Company or its Subsidiaries. No person possesses any rights which do or could commit or obligate the Company to issue additional shares of stock or other equity interests in the Company or its Subsidiaries.

4.13 Intellectual Property . Except as disclosed on Schedule 4.13 , the Company is the sole owner of, or a licensee under a valid license for, all items of Intellectual Property which are used in the Business as currently conducted (the “ Company IP ” ). Such items of Company IP that are registrations or applications are listed on Schedule 4.13 , and Schedule 4.13 also indicates those items of Company IP that are owned by, and those items licensed to, the Company. Except as disclosed on Schedule 4.13 , (a) the Company, and the Business are not in default (nor with the giving of notice or lapse of time or both would be in default) under any license or other grant to or from third parties to use any Company IP; (b) to the best of Company’s knowledge, such Company IP is not being infringed by any third party; (c) there arc no claims pending or, to the best of Company’s knowledge, threatened, that (i) the Business is in violation of, infringing

 

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upon, or in conflict with any such Intellectual Property rights of any third party, (including any claim that the Company, or the Business must license or refrain from using any intellectual property rights of third parties) or (ii) challenging the validity, enforceability, or ownership of any Company IP, and (d) the Company and the Business have taken all reasonable action to maintain and preserve the Company IP, including without limitation making all filings and all payments or all maintenance and similar fees for any Company IP listed on Schedule 4.13 , and obtaining valid and effective assignments from employees, former employees (or persons they currently intend to hire), independent contractors and former independent contractors (collectively, the “ Inventors ”) of all such Inventors’ rights in any Company IP developed by such Inventors. The Company owns or possesses adequate licenses or other valid rights to use all items of Intellectual Property utilized in the conduct of the Business in accordance with past practice, free and clear of all liens except Permitted Exceptions.

4.14 Permits . The Company and its Subsidiaries have and are in compliance with all necessary permits, licenses, registrations, orders, authorizations and approvals of applicable government authorities to operate the Business, including those required under any Environmental Law (collectively,