ASSET PURCHASE AGREEMENT
by and among
Leap Group, Inc.
Rayco Group, Inc.
Xxxx Xxxxxxxxxx,
Xxxx Xxxxxxxxxx
and
Y.A.R. Communications, Inc.
Dated April 15, 1997
TABLE OF CONTENTS
Page
----
1. SALE AND PURCHASE OF THE PURCHASED ASSETS.............................. 1
1.1 Purchased Assets.................................................. 1
1.2 Excluded Assets................................................... 2
1.3 Purchase Price.................................................... 3
1.4 Escrowed Funds.................................................... 3
1.5 Closing........................................................... 3
1.6 Closing Deliveries................................................ 3
1.7 Earn Out.......................................................... 5
1.8 Accounting Procedures............................................. 9
1.9 Third Party Consents.............................................. 11
2. ASSUMPTIONS OF LIABILITIES AND CONTRACTS............................... 11
2.1 Assumed Liabilities............................................... 11
2.2 Excluded Liabilities.............................................. 12
3. REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE SHAREHOLDERS............................... 12
3.1 Organization and Good Standing.................................... 13
3.2 Authority; No Conflict............................................ 13
3.3 Financial Statements.............................................. 14
3.4 Books and Records................................................. 14
3.5 Title to Properties; Encumbrances................................. 15
3.6 Condition and Sufficiency of Assets............................... 15
3.7 Accounts Receivable............................................... 15
3.8 Work in Process................................................... 16
3.9 No Undisclosed Liabilities........................................ 16
3.10 Taxes............................................................. 16
3.11 No Material Adverse Change........................................ 18
3.12 Employee Benefits................................................. 18
3.13 Compliance with Legal Requirements; Governmental Authorizations... 21
3.14 Legal Proceedings; Orders......................................... 22
3.15 Absence of Certain Changes and Events............................. 23
3.16 Contracts; No Defaults............................................ 25
3.17 Insurance......................................................... 27
3.18 Environmental Matters............................................. 27
3.19 Employees......................................................... 28
3.20 Labor Disputes; Compliance........................................ 29
3.21 Intangible Property............................................... 29
3.22 Certain Payments.................................................. 30
3.23 Bank Accounts..................................................... 30
i
Page
----
3.24 Disclosure........................................................ 31
3.25 Relationships with Related Persons................................ 31
3.26 Client Relationships.............................................. 31
3.27 Suppliers......................................................... 31
3.28 Tangible Net Worth................................................ 31
4. REPRESENTATIONS AND WARRANTIES OF BUYER................................ 32
4.1 Organization and Good Standing.................................... 32
4.2 Authority; No Conflict............................................ 32
4.3 Certain Proceedings............................................... 32
5. ADDITIONAL AGREEMENTS.................................................. 33
5.1 Tax Distributions................................................. 33
5.2 Noncompetition and Nondisclosure.................................. 34
5.3 Allocation of Purchase Price...................................... 36
5.4 Y.A.R. Name....................................................... 37
5.5 Agreements Regarding Employees After Closing...................... 37
5.6 Management of Buyer During the Applicable Term.................... 37
5.7 Transfer Tax Compliance........................................... 39
5.8 Sales Tax Liability............................................... 39
5.9 Successor Employer................................................ 39
5.10 Assumption of 401(k) Plan......................................... 39
5.11 Board Representation.............................................. 40
5.12 Stock Options..................................................... 40
6. INDEMNIFICATION; REMEDIES.............................................. 40
6.1 Survival.......................................................... 40
6.2 Indemnification of Buyer.......................................... 41
6.3 Indemnification of the Company.................................... 42
6.4 Indemnification Procedure for Third Party Claims.................. 43
6.5 Escrowed Amount; Right of Set-Off................................. 45
6.6 Sole Remedy....................................................... 45
6.7 Treatment......................................................... 45
7. DEFINITIONS............................................................ 45
7.1 Definitions....................................................... 45
"Applicable Contract"............................................. 45
"Best Efforts".................................................... 45
"Breach".......................................................... 45
"Closing Date".................................................... 46
"Code"............................................................ 46
"Consent"......................................................... 46
ii
Page
----
"Contemplated Transactions"....................................... 46
"Contract"........................................................ 46
"Disclosure Letter"............................................... 46
"Encumbrance"..................................................... 46
"ERISA"........................................................... 46
"Facilities"...................................................... 46
"GAAP"............................................................ 47
"Governmental Authorization"...................................... 47
"Governmental Body"............................................... 47
"IRS"............................................................. 47
"knowledge"....................................................... 47
"Legal Requirement"............................................... 47
"Order"........................................................... 48
"Ordinary Course of Business"..................................... 48
"Organizational Documents"........................................ 48
"Person".......................................................... 48
"Proceeding"...................................................... 48
"Related Person".................................................. 48
"Representative".................................................. 49
"Securities Act".................................................. 49
"Threatened"...................................................... 49
8. GENERAL PROVISIONS..................................................... 49
8.1 Expenses.......................................................... 49
8.2 Notices........................................................... 49
8.3 Further Assurances................................................ 50
8.4 Waiver............................................................ 50
8.5 Entire Agreement and Modification................................. 50
8.6 Assignments, Successors, and No Third-Party Rights................ 50
8.7 Severability...................................................... 51
8.8 Section Headings, Construction.................................... 51
8.9 Governing Law..................................................... 51
8.10 Counterparts...................................................... 51
8.11 No Strict Construction............................................ 51
iii
Exhibit 10.1
ASSET PURCHASE AGREEMENT
------------------------
This Asset Purchase Agreement (this "Agreement") dated April 15, 1997 by
and among Leap Group, Inc., a Delaware corporation ("Parent"), Rayco Group,
Inc., a Delaware corporation and wholly owned subsidiary of Parent ("Buyer"),
Xxxx Xxxxxxxxxx ("Xxxx") and Xxxx Xxxxxxxxxx ("Yuri," and together with "Xxxx,"
the "Shareholders") and Y.A.R. Communications, Inc., a New York corporation (the
"Company"). Capitalized terms that are not otherwise defined in the body of this
Agreement are defined in Section 7 herein.
The Company desires to sell to Buyer, and Buyer desires to purchase from
the Company, substantially all of the assets of the Company which are used in or
arise out of the conduct of the Company's multi-lingual communications and
advertising services business as it is presently conducted, including, without
limitation, the Company's branch office located in Russia (the "Russian
Operation") (the "Business"), and Buyer will assume the Assumed Liabilities (as
defined below) in connection with the Business, all for the consideration and
upon the terms set forth in this Agreement.
The parties, intending to be legally bound, agree as follows:
1. SALE AND PURCHASE OF THE PURCHASED ASSETS.
1.1 Purchased Assets. On the terms and subject to the conditions
hereinafter set forth, at the Closing, the Company shall sell, convey, transfer,
assign and deliver to Buyer, free and clear of all Encumbrances (except as
disclosed in Part 3.5 of the Disclosure Letter), and Buyer shall purchase from
the Company, all of the Company's right, title and interest in and to all of its
property and assets which are used in or arise out of the conduct of the
Business or are considered to be assets of the Company in connection with the
Business as of the Closing Date, wherever located (collectively, the "Purchased
Assets"), including, but not limited to, the following:
(a) All fixed assets, fixtures, equipment (including computer
hardware and software), machinery, tools, vehicles (whether or not
registered under motor vehicle registration laws), furniture, office
furniture and equipment, plans, specifications, leasehold improvements and
other similar personal property of the Company used in the conduct of the
Business (collectively, the "Tangible Personal Property");
(b) All inventory of the Company, including without limitation, raw
materials, work-in-process and finished goods (collectively, the
"Inventory");
(c) All cash, cash equivalents, investments, accounts receivable,
notes, bonds or other evidences of indebtedness of any Person held by the
Company;
(d) All deposits and other prepaid assets and expenses of the
Company, and all uniforms, equipment, office, operating, factory, marketing
and other supplies of the Company;
(e) All Contracts of the Company in connection with the Business,
including, without limitation, those Contracts specifically disclosed in
Part 3.16 of the Disclosure Letter, all of which are being assigned to and
assumed by Buyer (each an "Assigned Contract" and collectively, "Assigned
Contracts"), including, without limitation, any agreements containing any
restrictive covenants (i.e. noncompetition and nonsolicitation);
(f) Any and all trademarks, trademark registrations and trademark
applications, trade-names, logos, copyrights, patents and patent
applications, patent and other licenses thereof, patent disclosures and
inventions (whether or not patentable and whether or not reduced to
practice), know-how, trade secrets, lists of past and present customers,
potential customers, recorded knowledge, business plans, performance
standards, catalogues, research data, analyses and computer software and
programs, sales data, sales and advertising materials, scheduling and
service methods, sales and service manuals and all other proprietary,
confidential and other similar information (in whatever form or medium)
relating to the conduct of the Business;
(g) All records, files, documents and papers of the Company,
including but not limited to, financial statements, journals, ledgers,
correspondence, customer records, employment records (for current employees
only) and books of account and excluding all tax records, records
maintained by the Company's accountants and attorneys and records relating
to Excluded Assets (as defined in Section 1.2) and Excluded Liabilities (as
defined in Section 3.2);
(h) All permits, franchises, licenses, approvals and authorizations
by or of any Government Entities or other Persons required for the conduct
of the Business or in connection with ownership of the Purchased Assets;
(i) All causes of action, claims, rights of recovery and set-off of
every kind and character pertaining or relating to the Purchased Assets,
including all insurance, warranty and condemnation proceeds received after
the Closing Date with respect to damage, destruction or loss of any
Purchased Assets;
(j) The name "Y.A.R. Communications, Inc." and all combinations and
variations thereof, and any other names utilized in the Business, together
with all goodwill associated therewith and with the Business; and
(k) the Scheduled Plans specifically disclosed in Part 3.12 of the
Disclosure Letter.
1.2 Excluded Assets. Notwithstanding the foregoing, the following assets
of the Company shall be retained by the Company and are not included in the
Purchased Assets and not sold or transferred to Buyer hereunder (the "Excluded
Assets"):
2
(a) The formal corporate records and corporate seal of the Company,
including any records having exclusively to do with the corporate
organization of the Company;
(b) The Company's rights pursuant to or under this Agreement,
including the payments made and to be made to the Company hereunder;
(c) The tax records, tax returns and all related work papers of the
Company; and
(d) Loan receivables from the Shareholders existing as of the
Closing.
1.3 Purchase Price. The purchase price (the "Purchase Price") for the
Purchased Assets will be $20,000,000 payable to the Company in cash at the
Closing, subject to Section 1.4 below plus the Earn Out;
1.4 Escrowed Funds. Of the total Purchase Price to be delivered at the
Closing to the Company by the Buyer, $3,000,000 shall be placed into an escrow
account (the "Escrowed Amount") by Buyer pursuant to the terms of an escrow
agreement to be entered into by the parties in order to secure the Company's and
the Shareholder's indemnification obligations under Section 6.2, in the form
attached hereto as Exhibit 1.4 (the "Escrow Agreement").
1.5 Closing. The purchase and sale (the "Closing") provided for in this
Agreement will take place simultaneously with the execution and delivery of this
Agreement at the offices of Xxxxxx Xxxxxx & Xxxxx, counsel to Buyer, at 000 Xxxx
Xxxxxx Xxxxxx, Xxxxx 0000, Xxxxxxx, Xxxxxxxx, at 10:00 a.m. (local time) on
April 15, 1997, or as the parties may otherwise agree.
1.6 Closing Deliveries. At the Closing:
(a) The Company and the Shareholders shall deliver to Buyer ("Company
Closing Documents"):
(i) the Escrow Agreement, executed by the Company and the
Shareholders;
(ii) an employment agreement in the form of Exhibit
1.6(a)(ii), executed by Xxxx Xxxxxxxxxx (the "Xxxx Employment
Agreement");
(iii) an employment agreement in the form of Exhibit
1.6(a)(iii), executed by Xxxx Xxxxxxxxxx (the "Yuri Employment
Agreement") (the Xxxx Employment Agreement and the Yuri Employment
Agreement are sometimes referred to herein together as the "Employment
Agreements");
3
(iv) noncompetition agreements executed by each of Yuri and
Xxxx on the one hand and the Parent and Buyer on the other hand, in
the form of Exhibit 1.6(a)(iv) (the "Noncompetition Agreements");
(v) a letter from the Company's lender confirming that all of
the Company's outstanding indebtedness has been paid in full prior to
the Closing and UCC termination statements releasing all liens on the
Company's assets held by such lender;
(vi) a Good Standing Certificate for the Company from all
states in which the Company is authorized to do business;
(vii) copies of resolutions of the board of directors of the
Company and of its stockholders, certified by the Company's corporate
secretary as having been duly adopted and being in current force and
effect, authorizing the transactions and documents contemplated by
this Agreement;
(viii) releases of all liens (and appropriate executed UCC
termination statements) existing as of the Closing, except equipment
leasing liens in favor of Chase Equipment Leasing, Inc.;
(ix) an estoppel certificate in the form attached hereto as
Exhibit 1.6(a)(ix) from each of the Company's landlords;
(x) copy of the Company's Articles of Incorporation and all
amendments thereto (including an executed amendment to be filed upon
the Closing changing the Company's name), certified by the Secretary
of State of New York, and a copy of the Company's By-laws, and all
amendments thereto, certified by the Secretary of the Company;
(xi) a legal opinion in the form of Exhibit 1.6(a)(xi) issued
to the Buyer and Parent by Xxxxx & Xxxxxxx, special counsel to the
Company and the Shareholders; and
(xii) a consent issued to Parent and Buyer from the Company's
independent accounting firm consenting to the use by Parent and Buyer
of the Company's audited financial statements for all previous years
(and attached opinions to such audited financial statements).
(b) Buyer shall deliver to the Company and the Shareholders ("Buyer's
Closing Documents"):
(i) bank cashier's checks or certified checks payable to the
Company, or wire transfers to accounts specified, in writing, by the
Company, in an amount
4
equal to the Purchase Price to be delivered at the Closing, net of the
Escrowed Amount;
(ii) the Escrow Agreement, executed by Parent and Buyer;
(iii) the Employment Agreements, executed by Parent and Buyer;
(iv) the Noncompetition Agreements, executed by Parent and
Buyer;
(v) a certified copy of resolutions adopted by Buyer's and
Parent's Board of Directors authorizing execution of this Agreement
and consummation of the Contemplated Transactions; and
(vi) a legal opinion in the form of Exhibit 1.6(b)(vi) issued
to the Company and the Shareholders by Xxxxxx Xxxxxx & Zavis, counsel
to the Buyer and the Parent.
(c) Buyer on the one hand, the Company and the Shareholders on the
other hand, shall also deliver to the other party such other documents,
instruments, certificates, and opinions as may be required by this
Agreement or as otherwise necessary to consummate the Contemplated
Transactions, including, without limitation, conveyance documents and
assumption agreements.
1.7 EARN OUT.
(a) In addition to the Purchase Price to be delivered at the Closing
as set forth in Section 1.3, so long as (A) the Company has not breached
the terms of Section 5.2 hereof or (B) neither of the Shareholders have
breached the terms of their respective Noncompetition Agreements, Buyer
will pay to the Company additional consideration for the Purchased Assets
(the "Earn Out") which amount shall be equal to fifty percent (50%) of the
excess, if any, of the Annual Net Income Target (defined below) for each
such year during the Applicable Term (defined below); provided, however,
the Earn Out shall only become due and payable if the Annual Revenue Target
for such year is met or exceeded.
(b) As used in this Section 1.7, (i) "Applicable Term" means each of
calendar year 1997, 1998 and 1999 only; and (ii) "Annual Net Income
Targets" are as follows:
Year Annual Net Income Targets
---- -------------------------
1997 $3,937,500
1998 $4,725,000
1999 $5,670,000
5
(c) As used in this Section 1.7, "Annual Revenue Targets" are as
follows:
Year Annual Revenue Targets
---- ----------------------
1997 $22,500,000
1998 $27,000,000
1999 $32,400,000
(d) As used in this Section 1.7, the term "Annual Net Income", for
each relevant period during the Applicable Term shall mean the net income
of Buyer before provision for all Federal, state and local income taxes for
such period, determined in accordance with GAAP; provided, however, the
Annual Net Income for calendar year 1997 shall mean the sum of (A) the
Annual Net Income of the Company from January 1, 1997 through and including
the Closing Date and (B) the Annual Net Income of the Buyer after the
Closing Date through and including December 31, 1997 and provided further
that in making the determination of the Annual Net Income during the
Applicable Term;
(i) there shall be no charge against income for any payment
or accrual of any component of the Purchase Price (including, without
limitation any write-off, amortization, depreciation or imputed
interest charges) which are in excess of the charges against income
which would have otherwise been accrued for or expensed by the Company
had the Contemplated Transaction not been consummated;
(ii) intercompany management or other overhead charges and
fees between Parent and its subsidiaries (the "Parent Group"), on the
one hand, and Buyer, on the other hand, shall not be treated as an
expense or other charge;
(iii) for any service rendered to Buyer by a member of the
Parent Group, Buyer shall be charged at the rate agreed to by such
Parent Group member and the Buyer's Chief Executive Officer; all
charges permitted by this clause (iii) shall be treated as an expense;
provided, however, if such agreement is not reached, such expenses
included in the calculation of the Earn Out will not be in excess of
similar expenses incurred by the Company on an annual basis prior to
the Closing, it being agreed that Buyer shall not be required to use
any such service to the extent such service specifically relates to
the servicing of a particular client of the Buyer and such client
specifically objects to the rendering of such service;
(iv) any Losses (as defined in Section 6.2) of the Buyer
Indemnified Parties (as defined in Section 6.2) which give rise to an
indemnity payment pursuant to the indemnification provisions of
Section 6.2 below, to the extent assumed by the Company or one or more
of the Shareholders or to the extent one or more of the Shareholders
have reimbursed (by offset or otherwise) the Buyer
6
Indemnified Parties or which does not give the Buyer Indemnified Party
the right to an indemnity payment because it falls within the Basket
Threshold referred to in Section 6.1(b), shall not be treated as an
expense, and there shall be excluded from income any amount received
by the Buyer Indemnified Parties pursuant thereto;
(v) any indemnity payments made by a Buyer Indemnified Party
to any Company Indemnified Party (as defined in Section 6.3) shall not
be treated as an expense;
(vi) interest on loans to Buyer to finance any Purchase Price
or indemnity payments hereunder shall not be charged as an expense;
(vii) expenses of the Buyer or the Company prior to or after
the Closing incurred in connection with the negotiation, preparation
and execution of this Agreement and the other documents to be
delivered at the Closing hereunder (including, without limitation, the
fees and disbursements of their attorneys, accountants and tax
advisors, any brokers or finder fees), shall not be treated as an
expense;
(viii) the fees and expenses of the Accountants (defined in
Section 1.8) in preparing the Annual Determination (defined in Section
1.8) and performing the related audit shall not be treated as an
expense; and
(ix) any costs and expenses incurred by Buyer in contesting
any Annual Determination or in pursuing any indemnity claim under
Section 6.2 shall not be treated as an expense.
(e) As used in this Section 1.7, the term Annual Revenues for each
relevant period during the Applicable Term shall mean the commissions and
fees and other revenues earned by Buyer during each year of the Applicable
Term, determined in accordance with GAAP; provided, however, the Annual
Revenues for calendar year 1997 shall mean the sum of (A) the Annual
Revenues of the Company from January 1, 1997 through and including the
Closing Date and (B) the Annual Revenues of the Buyer after the Closing
Date through and including December 31, 1997.
(f) The Earn Out for each calendar year during the Applicable Term
will be paid within fifteen days after the Annual Determination for such
calendar year has been delivered to the Company by Parent. In the event
that the Shareholders raise objections to the Earn Out calculation set
forth in the Annual Determination and the procedures set forth in Section
1.8 below are initiated, the payment of the Earn Out shall be made within
five business days after final determination of the Annual Determination
shall have become binding on the parties as provided in Section 1.8 below.
In the event (i) the Shareholders dispute the Annual Determination
initially delivered to them, (ii) the Buyer
7
withholds the payment of the Earn Out set forth in the initial Annual
Determination, the Buyer agrees to pay the Company interest on the total
amount of the unpaid Earn Out due it, at an annualized rate equal to the
Buyer's then existing borrowing rate, for the period when the Earn Out
payment became initially due and payable and the date the Earn Out payment
is ultimately made by the Buyer.
(g) In the event that Parent or the board of directors of Buyer
requires Buyer to resign an account (the "Resigned Account") because the
servicing of such account conflicts with the servicing or potential
servicing by Parent or one of Parent's affiliates of another account,
Annual Net Income and Annual Revenues of Buyer shall be adjusted for the
remainder of the Applicable Term depending upon the calendar year in which
such resignation occurs, as follows:
(i) Annual Net Income for the calendar year in which such
resignation occurred (the "Resignation Year") shall be adjusted by (A)
adding thereto an amount equal to a pro rata share of the Presumed
Annual Profit (as hereinafter defined) of such Resigned Account, which
pro rata share shall be determined by multiplying the Presumed Annual
Profit by a fraction (the "Resignation Year Fraction"), the numerator
of which is the number of days remaining in the Resignation Year after
the date that Buyer's resignation becomes effective (the "Resignation
Date") with respect to such Resigned Account and the denominator of
which is 365, and (B) subtracting any New Account Presumed Profit;
(ii) Annual Net Income for the calendar year immediately
following the Resignation Year (the "Second Year") shall be adjusted
by (A) adding thereto an amount equal to the pro rata share of the
Presumed Annual Profit of such Resigned Account, which pro rata share
shall be determined by multiplying the Presumed Annual Profit by a
fraction (the "Second Year Fraction"), the numerator of which is the
lesser of (x) 365 and (y) the number of days (if any) remaining in the
Applicable Term, and the denominator of which is 365, and (B)
subtracting any New Account Presumed Profit;
(iii) Annual Net Income for the second calendar year following
the Resignation Year (the "Third Year") shall be adjusted by (A)
adding thereto an amount equal to a pro rata share of the Presumed
Annual Profit, which pro rata share shall be determined by multiplying
the Presumed Annual Profit by a fraction (the "Third Year Fraction"),
the numerator of which is the number of days (if any) remaining in the
Applicable Term and the denominator of which is 365, and (B)
subtracting any New Account Presumed Profit;
(iv) Annual Revenues for the Resignation Year shall be
adjusted by (A) adding thereto an amount equal to the pro rata share
of the Presumed Annual Revenues (as hereinafter defined) of such
Resigned Account, which pro rata share shall be determined by
multiplying the Presumed Annual Revenues by the
8
Resignation Year Fraction and (B) subtracting any New Annual Revenues
(as hereinafter defined);
(v) Annual Revenues for the Second Year shall be adjusted by
(A) adding thereto an amount equal to the pro rata share of the
Presumed Annual Revenues of such Resigned Account, which pro rata
share shall be determined by multiplying the Presumed Annual Revenues
by the Second Year Fraction and (B) subtracting any New Annual
Revenues; and
(vi) Annual Revenues for the Third Year shall be adjusted by
(A) adding thereto an amount equal to the pro rata share of the
Presumed Annual Revenues of such Resigned Account, which pro rata
share shall be determined by multiplying the Presumed Annual Revenues
by the Third Year Fraction and (B) subtracting any New Annual
Revenues.
(h) As used in this Section 1.7(g), the following terms shall have
the following meanings:
(i) "Presumed Annual Revenues" shall mean the total
commission and fees and other revenues earned by Buyer which were
solely attributable to a Resigned Account during the twelve month
period immediately preceding the Resignation Date.
(ii) "Presumed Annual Profit" shall mean the amount determined
by multiplying the Presumed Annual Revenues times the pre-tax profit
margin of the Buyer (or the Company if such determination is being
made prior to the end of the first calendar year of the Applicable
Term), as reflected on its latest audited financial statements
("Profit Margin").
(iii) "New Annual Revenues" for each relevant period during the
Applicable Term shall mean the commissions and fees and other revenues
earned by Buyer, solely attributable to new accounts obtained by Buyer
through an introduction by Parent or one of Parent's affiliates.
(iv) "New Account Presumed Profit" shall mean the amount
determined by multiplying the New Annual Revenues times the Profit
Margin.
1.8 Accounting Procedures.
(a) For each calendar year during the Applicable Term, Xxxxxx
Xxxxxxxx LLP, or the independent accounting firm then auditing the books
and records of Parent (the "Accountants"), shall prepare a report
containing an audited balance sheet of the Buyer and a related audited
statement of income of the Buyer (and the Company for the period beginning
January 1, 1997 and ending on the Closing Date) for the calendar year
9
then ended, prepared in accordance with GAAP, together with a statement of
the Accountants based upon such report and stating that it was prepared in
accordance with this Agreement and setting forth for the period under
examination the calculation of the Earn Out payment (including the
calculation of Annual Net Income and Annual Revenues) and all other
adjustments required to be made to such audited financial statements in
order to make the calculations required under Section 1.7 (the "Annual
Determination"). A copy of each such Annual Determination shall be
delivered to the Shareholders not later than 120 days after the end of the
calendar year following the year to which such Annual Determination
relates.
(b) If the Shareholders do not agree that any Annual Determination
correctly states the Earn Out calculation for the year under examination,
the Shareholders shall promptly (but not later than 20 days after the
delivery to the Shareholders of such Annual Determination) give written
notice to Parent of any disagreement thereto (in reasonable detail
describing the nature and amount of the disagreement asserted). The
Shareholders shall be entitled to engage separate legal counsel and
accountants at the sole cost and expense of the Shareholders to represent
them in connection with the review of any Annual Determination. If the
Shareholders and Parent reconcile such disagreement, the Annual
Determination shall be adjusted accordingly and shall thereupon become
final, binding and conclusive upon all of the parties hereto and
enforceable in a court of law. If the Shareholders and Parent are unable to
reconcile such disagreement in writing within 20 days after written notice
of such disagreement is delivered to Parent, the items in dispute shall be
submitted to the New York office of a mutually acceptable accounting firm
selected from among the six largest accounting firms in the United States
in terms of gross revenues (the "Independent Auditors") for final
determination, and the Annual Determination shall be deemed adjusted in
accordance with the determination of the Independent Auditors and shall
become binding, final and conclusive upon all of the parties hereto and
enforceable in a court of law. The Independent Auditors shall consider only
the items in dispute and shall be instructed to act within 20 days (or such
longer period as the Shareholders and Parent may agree in writing) to
resolve all items in dispute. If the Shareholders do not give notice of any
disagreement within 20 days after the delivery of an Annual Determination
or if the Shareholders give written notification of their acceptance of an
Annual Determination prior to the end of such 20 day period, such Annual
Determination shall thereupon become binding, final and conclusive upon all
the parties hereto and enforceable in a court of law.
(c) In the event the Independent Auditors are for any reason unable
or unwilling to perform the services required of it under this Section,
then Parent and the Shareholders agree to select another accounting firm
from among the six largest accounting firms in the United States in terms
of gross revenues to perform the services to be performed under this
Section by the Independent Auditors. If Parent and the Shareholders fail to
select another accounting firm within seven days after it is determined
that the Independent Auditors will not perform the services required,
either Parent or the Shareholders may request the American Arbitration
Association in New
10
York to appoint an independent firm of certified public accountants of
recognized national standing to perform the services required under this
Section by the Independent Auditors. For purposes of this Section the term
"Independent Auditors" shall include such other accounting firm chosen in
accordance with this clause (c).
(d) The Independent Auditors shall determine the party (i.e. Parent
or the Shareholders, as the case may be) whose asserted position as to the
amount of Earn Out for the calendar year under examination before the
Independent Auditors is furthest from the determination of the Earn Out by
the Independent Auditors, which non-prevailing party shall pay the fees and
expenses of the Independent Auditors.
(e) The books and records of Buyer and the Company shall be made
available during normal business hours upon reasonable advance notice at
the principal office of Buyer, to the parties, the Accountants and the
Independent Auditors to the extent required to determine the calculations
required under Section 1.7. Buyer shall make arrangements to make
available to the other parties and their representatives (including their
auditors) all work papers of the accounting firm that audited the financial
statements under examination.
1.9 Third Party Consents. In the event the Closing is consummated and all
required consents to the assignment by third parties for the Contracts of the
Company assumed by Buyer hereunder are not received as of the Closing, anything
in this Agreement to the contrary notwithstanding, in the event an assignment or
purported assignment to Buyer of any Contracts of the Company, or any claim,
right or benefit arising thereunder or resulting therefrom, without the consent
of other parties thereto, would constitute a breach thereof or would not result
in Buyer receiving all of the rights of the Company thereunder, such Contract
shall be deemed not to have been assigned by the Company to the Buyer (provided,
however, the obligations under such Contracts shall be deemed to have been
assumed by Buyer, as between Buyer and Seller). In those circumstances, Buyer
shall be deemed to have waived the requirement to obtain such consents prior to
the Closing; provided, however, (i) if requested by Buyer, the Company and the
Shareholders will use their best efforts to obtain any such consent and (ii) if
such consent is not obtained and is required to effectively assign a Contract to
Buyer, the Company and the Shareholders will fully cooperate with Buyer in any
reasonable arrangement to provide Buyer with the full claims, rights and
benefits under any such Contract, including enforcement at the cost and for the
benefit of Buyer of any and all rights of the Company, as the case may be,
against a third party thereto arising out of the breach or cancellation by such
third party or otherwise, and any amount received by the Company in respect
thereof shall be held for and immediately paid over to Buyer.
2. ASSUMPTIONS OF LIABILITIES AND CONTRACTS.
2.1 Assumed Liabilities. As of the Closing Date, except as otherwise
agreed to herein, Buyer will assume and thereafter pay and fully satisfy when
due, (i) all liabilities and obligations under any Assigned Contract and (ii)
all other liabilities of the Company in
11
connection with the Business (whether or not specifically disclosed in the
Disclosure Letter) (all such liabilities and obligations to be assumed by Buyer
hereunder shall be referred to herein as the "Assumed Liabilities"); provided,
however, in no event will Buyer's assumption of the Assumed Liabilities, in any
manner, limit, waive or restrict Buyer's right to indemnification by the Company
and the Shareholders pursuant to Section 6.2 below; it being the understanding
and acknowledgement of the parties that Buyer is relying solely on the
disclosures set forth in the Disclosure Letter to determine the liabilities and
obligations of the Company that are being assumed hereunder.
2.2 Excluded Liabilities. Notwithstanding anything to the contrary
contained in this Agreement or any agreement, document, certificate or
instrument being delivered pursuant to this Agreement (collectively, the
"Transaction Documents"), and regardless of whether such debt, liability or
obligation is disclosed in this Agreement, in any of the Transaction Documents,
in the Disclosure Letter or on any Schedule or Exhibit hereto or thereto, Buyer
shall not assume or agree to pay, perform or discharge or in any manner be
responsible for any Excluded Liabilities. As used herein, the term "Excluded
Liabilities" means:
(i) any liability or obligation of the Company or the
Shareholders arising out of or in connection with the negotiation and
preparation of this Agreement and consummation and performance of the
transactions contemplated hereby, including without limitation, legal
and accounting fees (including those associated with the preparation
of the audited financial statements referred to in Section 3.3),
brokerage commissions, finder's fees or similar fees or commissions,
and income or other Tax liability so arising;
(ii) any liability or obligation of the Company to the
Shareholders, including, without limitation any obligation distribute
to its shareholders or any other Person all or any part of the
Purchase Price;
(iii) any liability or obligation of the Company arising
from the failure of the Company to perform or discharge any of its
agreements contained herein;
(iv) any obligation of the Company for Taxes (except as
otherwise specifically provided for in Section 5.8); or
(v) any liability or obligation of the Company incurred by or
accruing to the Company after the Closing Date.
3. REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE SHAREHOLDERS
The Company and each of the Shareholders, jointly and severally, represent
and warrant to Buyer as follows:
12
3.1 Organization and Good Standing.
(a) The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the State of New York, with full
corporate power and authority to conduct its business as it is now being
conducted, to own, hold under lease, or otherwise possess or use the
properties and assets that it purports to own, hold under lease, or
otherwise possess or use, and to perform all its obligations under the
contracts to which it is a party or by which it is bound. Part 3.1(a) of
the Disclosure Letter sets forth all other jurisdictions in which the
Company is authorized to do business. The Company is duly qualified to do
business as a foreign corporation and is in good standing under the laws of
each state or other jurisdiction in which such qualification is required by
virtue of the nature of the activities conducted by it, except for those
jurisdictions in which a failure by the Company to be qualified and in good
standing can in the aggregate be corrected without material cost or expense
by the Company.
(b) The Company has delivered to Buyer copies of the Organizational
Documents of the Company, as currently in effect.
(c) Part 3.1(c) of the Disclosure Letter contains a complete and
accurate list of the current shareholders, directors and officers of the
Company.
3.2 Authority; No Conflict.
(a) This Agreement, the Escrow Agreement and the Noncompetition
Agreements constitute the legal, valid, and binding obligation of the
Company and the Shareholders to which each is a party, enforceable against
each of them in accordance with their terms, except as such enforcement may
be limited by bankruptcy, insolvency, moratorium, reorganization, or
similar laws affecting creditor's rights generally and by general equitable
principles (whether considered in a proceeding at equity or at law) and
implied covenants of good faith and fair dealing. The Company and the
Shareholders have the absolute and unrestricted right, power, authority,
and capacity to execute and deliver this Agreement and the Company's
Closing Documents and to perform their respective obligations under this
Agreement and the Company's Closing Documents.
(b) Except as set forth in Part 3.2 of the Disclosure Letter, neither
the execution and delivery of this Agreement or any other documents
executed by either of the Company or the Shareholders in connection
herewith, nor the consummation or performance of any of the Contemplated
Transactions will, directly or indirectly:
(i) contravene, conflict with, or result in (with or without
notice or lapse of time) a violation or breach of (A) any provision of
the Organizational Documents of the Company, (B) any resolution
adopted by the board of directors or the shareholders of the Company,
(C) any Legal Requirement or any Order to which the Company, the
Shareholders, or any of the assets owned or used by
13
them, may be subject, or give any Governmental Body or other Person
the right (with or without notice or lapse of time) to challenge any
of the Contemplated Transactions or to exercise any remedy or obtain
any relief under any such Legal Requirement or Order; (D) any of the
terms or requirements of, or give any Governmental Body the right
(with or without notice or lapse of time) to revoke, withdraw,
suspend, cancel, terminate, or modify, any Governmental Authorization
that is held by the Company or that otherwise relates to the business
of, or any of the assets owned or used by, the Company, or (E) any
provision of, or give any Person the right (with or without notice or
lapse of time) to declare a default or exercise any remedy under, or
to accelerate the maturity or performance of, or to cancel, terminate,
or modify, any Applicable Contract;
(ii) cause any of the assets owned by the Company to be
reassessed or revalued by any taxing authority or other Governmental
Body; or
(iii) result in (with or without notice or lapse of time) the
imposition or creation of any Encumbrance upon or with respect to any
of the assets owned or used by the Company.
Except as set forth in Part 3.2 of the Disclosure Letter and subject to the
terms of Section 1.9 hereof, the Company is not and will not be required to give
any notice to or obtain any Consent from any Person in connection with the
execution and delivery of this Agreement or the consummation or performance of
any of the Contemplated Transactions including, without limitation, assigning
the Assigned Contracts to Buyer.
3.3 Financial Statements. Part 3.3 of the Disclosure Letter sets forth:
audited financial statements of the Company for the fiscal years ended December
31, 1994, 1995 and 1996 (the audited balance sheet at December 31, 1996 shall be
referred to herein as the "Balance Sheet")(collectively, the "Financial
Statements"). The Financial Statements are correct and complete and fairly
present the financial condition, results of operations and cashflows of the
Company as at the respective dates thereof and for the periods therein referred
to, all in accordance with GAAP (except that the unaudited financial statements
fail to include the necessary footnote disclosure that are otherwise required
under GAAP). The Financial Statements reflect the consistent application of
GAAP throughout the periods involved. No financial statements of any Person are
required by GAAP to be consolidated with the financial statements of the
Company.
3.4 Books and Records. The books of account, minute books, stock record
books, and other records of the Company, all of which have been made available
to Buyer, are complete and correct. At the Closing, all of those books and
records will be in the possession of the Company. All of the issued and
outstanding shares of capital stock of the Company are held solely by Xxxx and
Yuri.
14
3.5 Title to Properties; Encumbrances. The Company does not own any real
property. Part 3.5 of the Disclosure Letter contains a complete and accurate
list of all leaseholds or other interests in real property currently or
previously owned by the Company. The Company has good and valid title to all
the properties and assets (whether real, personal, or mixed and whether tangible
or intangible) reflected as owned in the books and records of the Company,
including the Purchased Assets, the Intangible Property, all of the properties
and assets reflected in the Balance Sheet (except for personal property sold
since the date of the Balance Sheet in the Ordinary Course of Business) and all
of the properties and assets purchased or otherwise acquired by the Company
since the date of the Balance Sheet (except for supplies, inventory, and
personal property acquired and sold since the date of the Balance Sheet in the
Ordinary Course of Business). Except as set forth in Part 3.5 of the Disclosure
Letter, all properties and assets owned by the Company are free and clear of all
Encumbrances.
3.6 Condition and Sufficiency of Assets. Except for the Excluded Assets,
the Purchased Assets constitute all of the property and assets of the Company,
other than assets sold or disposed in the ordinary course of business. The
Company has the right to convey, and upon consummation of the transactions which
are the subject of this Agreement, Buyer will be vested with good and valid
title to the Purchased Assets or enforceable leasehold interests in or valid
rights under contract to use the Purchased Assets (subject to receipt of any
required third party consents, the obtaining of all of such consents as of
Closing having been waived by the Parent and Buyer), free and clear of all
Encumbrances, except as set forth in Part 3.5 of the Disclosure Letter. The
equipment and other tangible personal property used by the Company in the
conduct of its business, and to the knowledge of the Company and the
Shareholders (without inquiry), the heating, ventilation, mechanical,
electrical, sewer, sprinkler and air-conditioning systems at the facilities
leased by the Company which leases are set forth in Part 3.16 of the Disclosure
Letter, are in good operating condition and repair, are adequate in all material
respects for the uses to which they are being put, and are not in need of
maintenance or repairs, except for ordinary, routine maintenance and repairs
that are immaterial in amount. The Purchased Assets are sufficient for Buyer to
effect the continued conduct of Business after the Closing in substantially the
same manner as conducted prior to the Closing.
3.7 Accounts Receivable. All accounts receivable of the Company existing
as of the Closing Date on the accounting records of the Company as of the
Closing Date (collectively, the "Accounts Receivable") represent or will
represent valid obligations arising from sales actually made or services
actually performed in the Ordinary Course of Business and are collectible in the
Ordinary Course of Business (subject to the reserves set forth on the accounting
records of the Company which reserves represent approximately the same
percentage, on a historical basis, of the total accounts receivable balance).
There is no contest, claim, or right of set-off, other than returns in the
Ordinary Course of Business, in any agreement with any maker of an Accounts
Receivable relating to the amount or validity of such Accounts Receivable. Part
3.7 of the Disclosure Letter contains a complete and accurate list of all
Accounts Receivable as of April 1, 1997 which list sets forth the aging of such
Accounts Receivable.
15
3.8 Work in Process. All work-in-process of the Company existing as of
the Closing, whether or not reflected in the Balance Sheet, is billable and
collectible at the Company's usual and customary rates and carries the Company's
usual and customary profitability margin.
3.9 No Undisclosed Liabilities. Except as set forth in Part 3.9 of the
Disclosure Letter, the Company has no liabilities or obligations of any kind or
nature (whether absolute, accrued, contingent, or otherwise) after the Closing
in connection with the transactions contemplated hereunder, other than (i)
liabilities or obligations reflected or reserved against in the Balance Sheet,
(ii) current liabilities for trade payables incurred in the Ordinary Course of
Business since the date of the Balance Sheet and (iii) obligations under
executory contracts that are set forth in the Disclosure Letter or that are not
required to be so set forth which are to be performed after the date hereof in
the Ordinary Course of Business, none of which liabilities or obligations with
respect to (i), (ii) and (iii) above result directly or indirectly from a breach
of contract (other than the failure to obtain consents for Assigned Contracts),
breach of warranty, tort, infringement or lawsuit. Additionally, except as set
forth on Part 3.9 of the Disclosure Letter (which liabilities are all incurred
in the Ordinary Course of Business) and except for any undisclosed liabilities
incurred in the Ordinary Course of Business, which taken as a whole are
immaterial to the operation of the Business, there are no liabilities (of any
kind or nature, whether absolute, accrued, contingent, or otherwise) of the
Company in connection with the Russian Operation.
3.10 Taxes.
(a) For the purposes of this Agreement, "Tax" or "Taxes" refers to
any and all federal, state, local and foreign taxes, assessments and other
governmental charges, duties, impositions and liabilities relating to
taxes, including taxes based upon or measured by gross receipts income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with
respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts and
including any liability for taxes of a predecessor entity.
(b) The Company has timely filed all federal, state, local and
foreign returns, estimates, information statements and reports ("Returns")
relating to Taxes required to be filed by the Company. With respect to all
Taxes imposed on the Company for which the Company is or could be liable,
whether to taxing authorities or to other persons or entities (as, for
example, under tax allocation agreements), with respect to all taxable
periods or portions of periods ending on or before the Closing Date, all
applicable laws and agreements have been fully complied with, and all such
Taxes required to be paid by the Company to taxing authorities or others on
or before the date hereof have been paid.
16
(c) The Company as of the Closing Date will have withheld with
respect to its employees all federal and state income taxes, FICA, FUTA and
other Taxes required to be withheld.
(d) The Company has not been delinquent in the payment of any Tax nor
is there any Tax deficiency outstanding, proposed or assessed against the
Company. The Company has not executed or requested any waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
(e) No audit or other examination of any Return of the Company is
presently in progress, nor has the Company been notified of any request for
such an audit or other examination.
(f) The Company has no liability for unpaid federal, state, local or
foreign Taxes which have not been accrued for or reserved on the Balance
Sheet, whether asserted or unasserted, contingent or otherwise. There are
no liens for Taxes on the assets of the Company other than Taxes not yet
due and payable.
(g) None of the Company's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(h) There is no contract, agreement, plan or arrangement, including
but not limited to the provisions of this Agreement, covering any employee
or former employee of the Company that, individually or collectively, could
give rise to the payment of any amount that would not be deductible to the
Company pursuant to Sections 280G, 404 or 162 of the Code.
(i) The Company has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to
any disposition of a subsection (f) asset (as defined in Section 341(f)(4)
of the Code) owned by the Company.
(j) The Company is not, and has not been at any time, a "United
States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
(k) The Company is not a party to or bound by any tax indemnity, tax
sharing or tax allocation agreements.
(l) The Company has never been a member of an affiliated group of
corporations within the meaning of Sections 1504 of the Code.
(m) None of the assets of the Company is property that the Company is
required to treat as being owned by any other person pursuant to the "safe
harbor lease" provisions of former Section 168(f)(8) of the Code.
17
(n) None of the assets of the Company directly or indirectly secures
any debt the interest on which is tax-exempt under Section 103(a) of the
Code.
(o) The Company has not agreed to make nor is it required to make
before the Closing Date any adjustment under Section 481(a) of the Code by
reason of a change in accounting method or otherwise.
(p) The Company has not participated in and will not participate in
an international boycott within the meaning of Section 999 of the Code.
(q) Other than the Russian Operation, the Company does not have and
has never had a permanent establishment in any foreign country, as defined
in any applicable tax treaty or convention between the United States and
such foreign country.
(r) Except as set forth in Part 3.10(r) of the Disclosure Letter, the
Company is not a party to any joint venture, partnership, or other
arrangement or contract that could be treated as a partnership for federal
income tax purposes.
(s) The Company has been a valid S corporation (pursuant to the rules
set forth in the Code) at all times since its inception.
3.11 No Material Adverse Change. Since the date of the Balance Sheet,
there has not been any material adverse change in the business, operations,
properties, assets, (to the knowledge of the Company or the Shareholders, the
client relations of the Company) or condition of the Company or any event,
condition, or contingency that, to the knowledge of the Company or the
Shareholders, is likely to result in such a material adverse change, and to the
knowledge of the Company and the Shareholders, no such material adverse change
is likely to occur as a result of the consummation of the Contemplated
Transaction.
3.12 Employee Benefits.
(a) Except as is listed in Part 3.12(a) of the Disclosure Letter or
as could not result in the Buyer having any material liability, neither the
Company nor any current or former Plan Affiliate of the Company has at any
time maintained, sponsored, adopted, made contributions to, obligated
itself or had any liability with respect to: any "employee pension benefit
plan" (as such term is defined in Section 3(2) of ERISA); any "employee
welfare benefit plan" (as such term is defined in Section 3(1) of ERISA);
any collective bargaining agreement, personnel policy (including vacation
time, holiday pay, service awards, bonus programs, moving expense
reimbursement programs and sick leave) or material fringe benefit; any
severance agreement or plan or any medical, life or disability benefit; any
excess benefit plan, bonus or incentive plan (including stock options,
restricted stock, stock bonus or deferred bonus plans), top hat plan or
deferred compensation plan, salary reduction agreement, change-of-control
agreement, employment agreement, consulting agreement; or any other benefit
plan, policy,
18
program, arrangement, agreement or contract, with respect to any employee,
former employee, director, independent contractor, or any beneficiary or
dependent thereof (all such plans, policies, programs, arrangements,
agreements and contracts, including but not limited to those that are set
forth in Part 3.12(a) of the Disclosure Letter, are referred to in this
Agreement as "Scheduled Plans").
(b) The Company has delivered to Buyer a complete and accurate copy,
as of the Closing, of each written Scheduled Plan, together with a copy of
audited financial statements, actuarial reports and Form 5500 Annual
Reports (including required schedules), if any, for the three (3) most
recent plan years, the most recent IRS determination letter or IRS
recognition of exemption; any other letter, ruling or notice issued by any
Governmental Authority with respect to each such plan which may result in
material liability, a copy of each trust agreement, insurance contract or
other funding vehicle, if any, with respect to each such plan, the most
recent PBGC Form 1 with respect to each such plan, if any, the current
summary plan description or summary of material modifications with respect
to each such plan, and a copy or description of each other general
explanation or written or oral communication which describes any material
term of any such plan that has not previously been disclosed to Buyer
pursuant to this Section or as could not result in a liability to the
Buyer.
(c) Each Scheduled Plan (i) has been and currently complies in form
and in operation in all material respects with the applicable requirements
of ERISA and the Code, and any other Legal Requirements; (ii) has been and
is operated and administered in material compliance with its terms (except
as otherwise required by law); and (iii) where appropriate, has received a
favorable determination letter or recognition of exemption from the
Internal Revenue Service.
(d) with respect to each Scheduled Plan, there are no claims or other
Proceedings pending or Threatened with respect to the assets thereof (other
than routine claims for benefits), and to the Company's or the
Shareholders' knowledge, there are no facts which could reasonably be
expected to give rise to any liability, claim or other Proceeding against
any Scheduled Plan, any fiduciary or plan administrator or other person
dealing with any Scheduled Plan or the assets of any such plan.
(e) with respect to each Company Employee Benefit Plan, to the
Company's or the Shareholders' knowledge no person: (i) has entered into
any "prohibited transaction," as such term is defined in ERISA or the Code;
(ii) has breached a fiduciary obligation or violated Sections 402, 403,
405, 503, 510 or 511 of ERISA; or (iii) has any liability for any failure
to act or comply in connection with the administration or investment of the
assets of such plans, or (iv) engaged in any transaction or otherwise acted
with respect to such plans in such a manner which could subject Buyer, or
any fiduciary or plan administrator or any other person dealing with any
such plan, to liability under Sections 409 or 502 of ERISA or Sections 4972
or 4976 through 4980B of the Code.
19
(f) neither the Company nor any current or former Company Plan
Affiliate has at any time participated in, made contributions to or had any
other liability with respect to any Scheduled Plan which is a "multi-
employer plan" as defined in Section 4001 of ERISA, a "multi-employer plan"
within the meaning of Section 3(37) of ERISA, a "multiple employer plan"
within the meaning of Section 413(c) of the Code or a "multiple employer
welfare arrangement" within the meaning of Section 3(40) of ERISA.
(g) Except as set forth in Part 3.12(a) Disclosure Letter, neither
the Company nor any current or former Company Plan Affiliate has at any
time maintained, contributed to or obligated itself or otherwise had any
liability with respect to any funded or unfunded employee welfare plan,
whether or not terminated, which provides medical, health, life insurance
or other welfare type benefits for current or future retirees or current or
future former employees, their spouses or dependents or any other persons
(except for limited continued medical benefit coverage for former
employees, their spouses and other dependents as required to be provided
under Section 4980B of the Code and Part 6 of Subtitle B of Title I of
ERISA and the accompanying proposed regulations or state continuation
coverage laws ("COBRA")).
(h) no Scheduled Plan has incurred an "accumulated funding
deficiency" as such term is defined in Section 302 of ERISA or Section 412
of the Code, whether or not waived, or has posted or is required to provide
security under Code Section 401(a)(29) or Section 307 of ERISA; no event
has occurred which has or could result in the imposition of a lien under
Code Section 412 or Section 302 of ERISA, nor has any liability to the
Pension Benefit Guaranty Corporation (the "PBGC") (except for payment of
premiums) been incurred or reportable event within the meaning of Section
4043 of ERISA occurred with respect to any such plan; and the PBGC has not
threatened or taken steps to institute the termination of any such plan;
(i) the requirements of COBRA have been satisfied in all material
respects with respect to each Scheduled Plan.
(j) all contributions, payments, premiums, expenses, reimbursements
or accruals for all periods ending prior to or as of the Closing for each
Scheduled Plan (including periods from the first day of the then current
plan year to the Closing) shall have been made or accrued on the Company
financial statements, and each such plan otherwise neither has nor could
have any unfunded liability which is not reflected on the Company financial
statements which are required to be recorded in accordance with GAAP. Any
contribution made or accrued with respect to any Scheduled Plan is fully
deductible by the Company.
(k) As used in this Agreement, with respect to any person ("First
Person") the term "Plan Affiliate" shall mean any other person or entity
with whom the First Person constitutes or has constituted all or part of a
controlled group, or which would be treated or has been treated with the
First Person as under common control or whose employees
20
would be treated or have been treated as employed by the First Person,
under Section 414 of the Code and any regulations, administrative rulings
and case law interpreting the foregoing.
3.13 Compliance with Legal Requirements; Governmental Authorizations.
(a) Except as set forth in Part 3.13(a) of the Disclosure Letter:
(i) the Company is, and at all times has been, in
compliance in all material respects with each Legal Requirement that
is or was applicable to it or to the conduct or operation of its
business or the ownership or use of any of its assets;
(ii) no event has occurred or, to the knowledge of the
Company or the Shareholders, circumstance exists that would reasonably
be expected to constitute or result in (with or without notice or
lapse of time) a violation by the Company of, or a failure on the part
of the Company to comply with, any Legal Requirement; and
(iii) the Company has not received any notice or other
communication (whether oral or written) from any Governmental Body or
any other Person regarding, and the Company is not aware of, any
actual, alleged, possible, or potential violation of, or failure to
comply with, any Legal Requirement, or any obligation on the part of
the Company to undertake, or to bear all or any portion of the cost
of, any remedial action of any nature.
(b) Part 3.13(b) of the Disclosure Letter contains a complete and
accurate list of each Governmental Authorization that is held by the
Company or that otherwise relates to the Business, or to any of the assets
owned or used by the Company. Each Governmental Authorization listed or
required to be listed in Part 3.13(b) of the Disclosure Letter is valid and
in full force and effect. Except as set forth in Part 3.13(b) of the
Disclosure Letter:
(i) the Company is, and at all times has been, in
compliance in all material respects with all of the terms and
requirements of each Governmental Authorization identified or required
to be identified in Part 3.13(b) of the Disclosure Letter;
(ii) no event has occurred or circumstance exists that may
(with or without notice or lapse of time) (A) constitute or result
directly or indirectly in a violation of or a failure to comply with
any term or requirement of any Governmental Authorization listed or
required to be listed in Part 3.13(b) of the Disclosure Letter, or (B)
result directly or indirectly in the revocation,
21
withdrawal, suspension, cancellation, or termination of, or any
modification to, any Governmental Authorization listed or required to
be listed in Part 3.13(b) of the Disclosure Letter;
(iii) the Company has not received any notice or other
communication (whether oral or written) from any Governmental Body or
any other Person regarding (A) any actual, alleged, possible, or
potential violation of or failure to comply with any term or
requirement of any Governmental Authorization, or (B) any actual,
proposed, possible, or potential revocation, withdrawal, suspension,
cancellation, termination of, or modification to any Governmental
Authorization; and
(iv) all applications required to have been filed for the
renewal of the Governmental Authorizations listed or required to be
listed in Part 3.13(b) of the Disclosure Letter have been duly filed
on a timely basis with the appropriate Governmental Bodies, and all
other filings required to have been made with respect to such
Governmental Authorizations have been duly made on a timely basis with
the appropriate Governmental Bodies.
The Governmental Authorizations listed in Part 3.13(b) of the Disclosure Letter
collectively constitute all of the Governmental Authorizations necessary to
permit the Company to lawfully conduct and operate its business in the manner
they currently conduct and operate such businesses and to permit the Company to
own and use its assets in the manner in which it currently owns and uses such
assets.
3.14 Legal Proceedings; Orders.
(a) Except as set forth in Part 3.14 of the Disclosure Letter, there
is no pending Proceeding:
(i) that has been commenced by or against the Company, the
Shareholders (relating to the Business) or that otherwise relates to
or may affect the Business, or any of the assets owned or used by the
Company; or
(ii) that has been commenced by or against the Company or
the Shareholders, that challenges, or that may have the effect of
preventing, delaying, making illegal, or otherwise interfering with,
any of the Contemplated Transactions.
To the knowledge of the Company and the Shareholders, (1) no such
Proceeding has been Threatened, and (2) no event has occurred or
circumstance exists that may give rise to or serve as a reasonable basis
for the commencement of any such Proceeding. The Company has delivered to
Buyer copies of all pleadings, correspondence, and other documents relating
to each Proceeding listed in Part 3.14 of the Disclosure Letter. The
22
Proceedings listed in Part 3.14 of the Disclosure Letter will not interfere
in any material respect with, or result in costs, expenses or damages
exceeding $20,000, in the aggregate to, the Business, operations, assets,
condition, or prospects of the Company. Also listed in Part 3.14 of the
Disclosure Letter are all Proceedings commenced or, to the knowledge of the
Company and the Shareholders, Threatened by or against the Company within
the last three years, and a description of the outcome thereof.
(b) Except as set forth in Part 3.14 of the Disclosure Letter:
(i) there is no Order to which the Company, or any of the
assets owned or used by the Company, is subject;
(ii) no shareholder of the Company is subject to any Order
that relates to the business of, or any of the assets owned or used by
the Company; and
(iii) no officer, director, or to the knowledge of the
Company or the Shareholders, no agent, or employee of the Company is
subject to any Order that prohibits such officer, director, agent, or
employee from engaging in or continuing any conduct, activity, or
practice relating to the business of the Company.
(c) Except as set forth in Part 3.14 of the Disclosure Letter:
(i) the Company is, and at all times has been, in full
compliance with all of the terms and requirements of each Order to
which it, or any of the assets owned or used by it, is or has been
subject;
(ii) no event has occurred or circumstance exists that may
constitute or result in (with or without notice or lapse of time) a
violation of or failure to comply with any term or requirement of any
Order to which the Company, or any of the assets owned or used by the
Company, is subject; and
(iii) the Company has not received any notice or other
communication (whether oral or written) from any Governmental Body or
any other Person regarding any actual, alleged, possible, or potential
violation of, or failure to comply with, any term or requirement of
any Order to which the Company, or any of the assets owned or used by
the Company, is or has been subject.
3.15 Absence of Certain Changes and Events. Except as set forth in Part
3.15 of the Disclosure Letter, since January 1, 1997, the Company has conducted
its business only in the Ordinary Course of Business and there has not been any:
(i) payment by the Company of any bonuses or compensation
other than regular salary payments, or increase in the salaries, or
payment on any debt
23
of the Company, to any stockholder, director, officer, or employee, or
entry into any employment, severance, or similar Contract with any
director, officer, or employee;
(ii) adoption of, or increase in the payments to or
benefits under, any profit sharing, bonus, deferred compensation,
savings, insurance, pension, retirement, or other employee benefit
plan for or with any employees of the Company;
(iii) damage to or destruction or loss of any asset or
property of the Company, whether or not covered by insurance,
materially and adversely affecting the properties, assets, business,
financial condition, or prospects of the Company;
(iv) entry into, termination of, or receipt of notice of
termination of (A) any joint venture, credit, or similar agreement, or
(B) any Contract or transaction involving a total remaining commitment
by the Company of at least $25,000;
(v) loan or advance by the Company to any Person other
than sales to customers on credit in the Ordinary Course of Business,
or discharge or satisfaction of any liability exceeding $25,000,
except in the Ordinary Course of Business;
(vi) sale (other than sales of supplies or equipment in the
Ordinary Course of Business), lease, or other disposition of any asset
or property of the Company or mortgage, pledge, or imposition of any
Encumbrance on any material asset or property of the Company,
including the sale, lease, or other disposition of any of the
Intangible Property;
(vii) cancellation or waiver of any claims or rights with a
value to the Company in excess of $25,000;
(viii) material change in the accounting methods used by the
Company;
(ix) agreement, whether oral or written, by the Company to
do any of the foregoing set forth in (i) through (viii);
(x) liability incurred outside of the Ordinary Course of
Business; or
(xi) material diminution in the value of any asset material
to the Business.
24
3.16 Contracts; No Defaults.
(a) Part 3.16 of the Disclosure Letter contains a complete and
accurate list of all Applicable Contracts described in (i) through (xv)
below. In addition, the Company has delivered to Buyer true and complete
copies (or forms thereof, where form agreements are used; provided that any
and all deviations or changes to the forms in any individual case are
described in Part 3.16 of the Disclosure Letter), of all Applicable
Contracts described in (i) through (xv) below.
(i) each Contract that involves performance of services or
delivery of goods or materials by the Company of an amount or value in
excess of $25,000;
(ii) each Contract that involves performance of services or
delivery of goods or materials to the Company of an amount or value in
excess of $25,000;
(iii) each Contract relating to the borrowing of money, the
guaranty of another Person's borrowing of money, or the creation of an
Encumbrance on the assets of the Company;
(iv) each Contract not in the Ordinary Course of Business
involving expenditures or receipts of the Company in excess of $25,000
or providing for an express undertaking by the Company to be
responsible for consequential damages;
(v) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other Contract
affecting the ownership of, leasing of, title to, use of, or any
leasehold or other interest in, any real property or personal property
with a remaining commitment of $25,000, in any one case;
(vi) each licensing agreement (regardless of whether the
Company is licensor or licensee), maintenance or support agreement,
escrow agreement, or other Contract with respect to the use of any
Intangible Property, including agreements with current or former
employees, consultants, and contractors regarding the development,
appropriation or the non-disclosure any Intangible Property of the
Company;
(vii) each Contract with employees, officers, and directors,
and Contracts with any labor union or other employee representative of
a group of employees relating to wages, hours, and other conditions of
employment, and each agreement providing for the Company to indemnify
any Person;
(viii) each Contract of which the Company or the
Shareholders have knowledge and to which any employee, consultant, or
contractor of the Company is bound that in any manner purports to (A)
restrict such employee's,
25
consultant's, or contractor's freedom to engage in any line of
business or activity or to compete with any other Person, or (B)
assign to any other Person such employee's, consultant's, or
contractor's rights to any copyright, software, invention,
improvement, or discovery;
(ix) each joint venture, partnership, and other Contract
(however named) involving a sharing of profits, losses, costs, or
liabilities by the Company with any other Person;
(x) each Contract containing covenants that in any way
purport to restrict the Company's business activity or limit the
freedom of the Company to engage in any line of business or to compete
with any Person;
(xi) each Contract providing for payments to or by any
Person based on sales, purchases, or profits, including distribution,
reseller and sales representative agreements, other than direct
payments for goods by end users of Company products;
(xii) each power of attorney that is currently effective and
outstanding;
(xiii) each Contract for capital expenditures in excess of
$25,000;
(xiv) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by the
Company; and
(xv) each amendment, supplement, and modification (whether
oral or written) in respect of any of the foregoing.
The parties agree that (i) commitments to media and production expenses
which are fully reimbursable from clients and (ii) estimates or purchase
orders given in the Ordinary Course Of Business relating to the execution
of projects, do not have to be set forth on Part 3.16 of the Disclosure
Letter.
(b) Except as set forth in Part 3.16 or Part 3.2 of the Disclosure
Letter, all of the Contracts listed or required to be listed in Part 3.16
of the Disclosure Letter are in full force and effect and are valid and
enforceable in accordance with their terms, and no event has occurred or
circumstance exists that would give the Company or to the knowledge of the
Company or the Shareholders any other Person the right (with or without
notice or lapse of time) to declare a default or exercise any remedy under,
or to accelerate the maturity or performance of, or to cancel, terminate,
or modify, any such Contract. Without giving effect to this Agreement and
the transactions contemplated hereby, immediately preceding the Closing,
the Company has not caused a default to occur under any Contract material
to the Business.
26
(c) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate amounts of $25,000 or more, paid or
payable to the Company under current or completed Contracts with any
Person, and no such Person has made written demand for such renegotiation.
3.17 Insurance. Part 3.17 of the Disclosure Letter contains a complete and
accurate list of all insurance policies (including "self-insurance" programs)
now maintained by the Company (the "Insurance Policies") and all general
liability policies maintained by the Company during the past three years with
respect to the Company's business or assets and all claims (other than usual and
customary claims for health care benefits) made under any such current or prior
insurance policies. The Insurance Policies are in full force and effect, the
Company is not in default under any Insurance Policy, and no claim for coverage
under any Insurance Policy has been denied. The Company covenants and agrees
that all of the Insurance Policies will be maintained by the Company in full
force and effect through and including the Closing Date. To the knowledge of the
Company and the Shareholders, the Insurance Policies are reasonably prudent and
adequate for the operation of the Business.
3.18 Environmental Matters.
(a) The Company has never generated, transported, treated, stored,
disposed of or otherwise handled any Hazardous Materials (as defined below)
at any site, location or facility in connection with its business, its
assets or its leased premises ("Leased Premises") and no such Hazardous
Materials are present on, in or under the Leased Premises used in
connection with the operation of the Company's business, and to the
knowledge of the Company and the Shareholders, such property does not
contain (including without limitation, containment by means of any
underground storage tank) any Hazardous Materials in violation of any
applicable Environmental and Safety Requirement (as defined below). To the
knowledge of the Company, there are no underground storage tanks on the
Leased Premises.
(b) The Company (i) is in compliance, in all material respects, with
all applicable Environmental and Safety Requirements, and (ii) except as
set forth on Part 3.13(a) of the Disclosure Letter, possesses all required
permits, licenses, certifications and approvals and has filed all notices
or applications required thereby or pertaining thereto which are material
to the operation of the Business.
(c) The Company has never been subject to, or received any notice
(written or oral) of, any private, administrative or judicial inquiry,
investigation, order or action, or any notice (written or oral) of any
intended or threatened private, administrative, or judicial inquiry,
investigation, order or action relating to the presence or alleged presence
of Hazardous Materials in, under or upon the Leased Premises, and, to the
knowledge of the Company or the Shareholders, there is no reasonable basis
for any such inquiry, investigation, order, action or notice; and there are
no pending or, to the knowledge of the Company or the Shareholders,
threatened investigations, actions, orders or
27
proceedings (or notices of potential investigations, actions,
orders or proceedings) from any governmental agency or any other
entity regarding any matter relating to Environmental and Safety
Requirements.
(d) To the knowledge of the Company and the Shareholders,
no facts, events or conditions with respect to the past or
present operations or facilities of the Company exist which could
reasonably be expected to interfere with or prevent continued
compliance with, or could give rise to any common law or
statutory liability or otherwise form the basis of any claim,
action, suit, proceedings, hearing or investigation against or
involving the Company, its assets or properties or the Leased
Premises under any Environmental and Safety Requirement or
related common law theories based on any such fact, event or
circumstance, including, without limitation, liability for
investigation costs, cleanup costs, personal injury or property
damage.
(e) For purposes of this Agreement, "Environmental and
Safety Requirements" means all federal, state and local statutes,
laws, rules, regulations, codes, ordinances, orders, standards,
permits, licenses, actions, policies and requirements (including
consent decrees, judicial decisions and administrative orders)
relating to protection, preservation or conservation of the
environment and public or worker health and safety, all as
amended, hereafter amended or reauthorized. For purposes of this
Agreement, "Hazardous Materials" means (i) hazardous substances,
as defined by the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. (S)9601 et seq.; (ii)
hazardous wastes as defined by the Resource Conservation and
Recovery Act, 42 U.S.C. (S)6901 et seq.; (iii) petroleum,
including without limitation, crude oil or any fraction thereof
which is liquid at standard conditions of temperature and
pressure (60 degrees Fahrenheit and 14.7 pounds per square inch
absolute); (iv) any radioactive material, including, without
limitation, any source, special nuclear, or by-product material
as defined in 42 U.S.C. (S)2011 et seq.; (v) asbestos in any form
or condition; (vi) polychlorinated biphenyls; and (vii) any other
material, substance or waste to which liability or standards of
conduct may be imposed under any Environmental and Safety
Requirements.
3.19 Employees. Part 3.19 of the Disclosure Letter contains a complete and
accurate list of the following information for each employee of the Company,
including each employee on leave of absence or layoff status: name; job title;
current compensation paid or payable (and any change in compensation since
January 1, 1996 for employees with an annual salary in excess of $75,000);
vacation accrued; and service credited for purposes of vesting and eligibility
to participate under the Company's pension, retirement, profit-sharing, thrift-
savings, deferred compensation, stock bonus, stock option, cash bonus, employee
stock ownership (including investment credit or payroll stock ownership),
severance pay, insurance, medical, welfare, or vacation plan, other Scheduled
Plans, or any other employee benefit plan. To the knowledge of the Company or
the Shareholders (without inquiry), no former or current employee or current or
former officer or director of the Company is a party to, or is otherwise bound
by, any agreement or arrangement, including any confidentiality, non-
competition, or proprietary rights
28
agreement, between such employee or officer or director and any other Person
("Proprietary Rights Agreement") that in any way adversely affected, affects, or
will affect (i) the performance of his duties as an employee or officer or
director of the Company, or (ii) the ability of the Company to conduct its
business including any Proprietary Rights Agreement with the Company by any such
employee or director. Neither the Company or the Shareholders have any reason to
believe (without inquiry) that any director, officer, or other employee of the
Company intends to terminate his or her employment with the Company (or refuse
employment with the Buyer, as the case may be), as a result of the Contemplated
Transaction or otherwise.
3.20 Labor Disputes; Compliance. Except as set forth in Part 3.20 of the
Disclosure Letter, the Company has never been a party to any collective
bargaining or other labor Contract. There has never been, there is not presently
pending or existing, and to the knowledge of the Company or the Shareholders,
there is not Threatened, any strike, slowdown, picketing, work stoppage, labor
arbitration, or proceeding in respect of the grievance of any employee,
application or complaint filed by an employee or union with the National Labor
Relations Board or any comparable Governmental Body, organizational activity, or
other labor dispute against or affecting the Company (including without
limitation the Screen Actors Guild or AFTRA), and no application for
certification of a collective bargaining agent is pending or, to the knowledge
of the Company or the Shareholders, is Threatened. No event has occurred or, to
the knowledge of the Company or the Shareholders, circumstance exists that could
provide any reasonable basis for any work stoppage or other labor dispute. There
is no lockout of any employees by the Company, and no such action is
contemplated by the Company. The Company has complied in all material respects
with all Legal Requirements, and except as set forth in Part 3.20 of the
Disclosure Letter, there is no allegation, charge or complaint or Proceeding
pending or, to the knowledge of the Company or the Shareholders (without
inquiry), Threatened against the Company or any of its officers, directors or
employees, relating to employment, equal employment opportunity, discrimination,
harassment, immigration, wages, hours, benefits, collective bargaining, the
payment of social security and similar taxes, occupational safety and health,
and plant closing, and neither the Company nor the Shareholders have knowledge
of any reasonable basis for any such allegation, charge, complaint, or
Proceeding.
3.21 Intangible Property.
(a) Part 3.21(a) of the Disclosure Letter sets forth a true, correct
and complete list of each patent, trademark, trade name, service xxxx,
brand xxxx, brand name, industrial design and copyright owned or used in
business by the Company (except for "off the shelf" computer software
licenses purchased at retail by the Company), as well as all registrations
thereof and pending applications therefor, and each license or other
contract relating thereto (collectively with any other intellectual
property owned or used in the business by the Company, and all of the
goodwill associated therewith, the "Intangible Property") and indicates,
with respect to each item of Intangible Property listed thereon, the owner
thereof and, if applicable, the name of the licensor and licensee thereof
and the terms of such license or other contract relating thereto. Except as
set
29
forth in Part 3.21(a) of the Disclosure Letter, each of the foregoing items
of Intangible Property are owned free and clear of any and all Encumbrances
and the Company has not received any notice to the effect that any other
entity has any claim of ownership with respect thereto. To the knowledge
of the Company and the Shareholders, the use of the Intangible Property, or
any other intellectual property owned or licensed by another Person which
is used by the Company in connection with the Business, does not conflict
with, infringe upon, violate or interfere with or constitute an
appropriation of any right, title, interest or goodwill, including, without
limitation, any intellectual property right, patent, trademark, trade name,
service xxxx, brand xxxx, brand name, computer program, industrial design,
copyright or any pending application therefor of any other person or
entity. Except as set forth in Part 3.21(a) of the Disclosure Letter, no
claims have been made, and the Company has not received any notice, nor
does the Company or the Shareholders have any knowledge of any reasonable
basis for any claims, that any of the Intangible Property is invalid,
conflicts with the asserted rights of other entities, or has been used or
enforced (or has failed to be used or enforced) in a manner that would
result in the abandonment, cancellation or unenforceability of any item of
the Intangible Property. The term Intangible Property shall not include to
any intellectual property provided to the Company by a client of the
Company which intellectual property is owned or licensed by such client and
used by the Company in the Ordinary Course of Business pursuant to such
client's request in the course of rendering services to such client (i.e.
use of a client's tradename or trademark).
(b) To the knowledge of the Company and the Shareholders, the Company
possesses all Intangible Property material to the Business, including,
without limitation, all know-how, formulae and other proprietary and trade
rights and trade secrets, necessary for the conduct of the Business as now
conducted. The Company has not taken or failed to take any action that
would result in the forfeiture or relinquishment of any such Intangible
Property used in the conduct of the Business as now conducted.
3.22 Certain Payments. Neither the Company, the Shareholders or
directors, nor to the knowledge of the Company or the Shareholders, any officer,
agent, or employee of the Company or any other Person associated with or acting
for or on behalf of the Company, has directly or indirectly (a) made any
contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other
payment to any Person, private or public, regardless of form, whether in money,
property, or services (i) to obtain favorable treatment in securing business,
(ii) to pay for favorable treatment for business secured, (iii) to obtain
special concessions or for special concessions already obtained, for or in
respect of the Company or any Person affiliated with the Company, or (iv) in
violation of any Legal Requirements, or (b) established or maintained any fund
or asset that has not been recorded in the books and records of the Company.
3.23 Bank Accounts. Part 3.23 of the Disclosure Letter contains a
complete and accurate list of each bank or other financial institution at which
the Company has an account or safe deposit box, the number of each such account
or box, and the names of all persons authorized to draw on such accounts or to
have access to such boxes.
30
3.24 Disclosure. To the knowledge of the Company or the Shareholders, no
representation or warranty of the Company or the Shareholders in this Agreement
and no statement in the Disclosure Letter omits to state a material fact
necessary to make the statements herein or therein, in light of the
circumstances in which they were made, not misleading.
3.25 Relationships with Related Persons. Neither the Company, the
Shareholders nor, to the knowledge of the Company or the Shareholders, any other
Related Person of the Company has any interest in any property (whether real,
personal, or mixed and whether tangible or intangible) used in or pertaining to
the Business. Neither the Company, the Shareholders, nor any other Related
Person of the Company owns, of record or as a beneficial owner, an equity
interest or any other financial or profit interest in any Person that has (i)
had business dealings or a material financial interest in any transaction with
the Company, or (ii) engaged in competition with the Company with respect to any
line of products or services of the Company (a "Competing Business") in any
market presently served by such the Company except for less than one percent of
the outstanding capital stock of any Competing Business that is publicly traded
on any recognized exchange or in the over-the-counter market. Except as set
forth in Part 3.16 of the Disclosure Letter, neither the Company, the
Shareholders nor, to the knowledge of the Company or the Shareholders, any other
Related Person of the Company is a party to any Contract with, or has any claim
or right against, the Company. All money owed by the Company to Related Persons
(other than for salary) are for bona fide debts.
3.26 Client Relationships. Set forth in Part 3.26 of the Disclosure
Letter is a true and complete list of the Company's top twenty (20) client
accounts for the past two (2) fiscal years (including, but not limited to,
AT&T), measured by gross revenues in each year (the "Major Customers"), and the
key Company employees which manage the account, including the account manager
and the creative team assigned to each such account. In the last twelve months,
no Major Customer has canceled or otherwise terminated, or, to the knowledge of
the Company or the Shareholders, Threatened to cancel or otherwise terminate,
its relationship with the Company, or reduced, or Threatened to reduce, its
business with the Company. The Company has not received any written or oral
notice and has no knowledge that any Major Customer intends to cancel or
otherwise modify its relationship with Company (and, after the Closing, the
Buyer) on account of the Contemplated Transaction or otherwise.
3.27 Suppliers. Set forth in Part 3.27 of the Disclosure Letter is an
accurate and complete list of the top ten (10) Company's vendors (by dollar
volume of sales during fiscal year 1996). No vendor has canceled or otherwise
terminated, modified or, to the Company's or the Shareholders' knowledge,
threatened to cancel or otherwise terminate, or to modify, its relationship with
the Business on account of the Contemplated Transaction or otherwise.
3.28 Tangible Net Worth. The Company and the Shareholders represent and
warrant that the Company has not distributed in excess of $475,000 to the
Shareholders (other than for reimbursable expenses and pursuant to the benefits
provided to the Shareholders as employees of the Company in the Ordinary Course
of Business) from January 1, 1997 through and including the Closing Date.
31
4. REPRESENTATIONS AND WARRANTIES OF BUYER AND PARENT
Buyer and Parent hereby, jointly and severally, represent and warrant to
the Company and the Shareholders as follows:
4.1 Organization and Good Standing. Buyer and Parent are corporations
duly incorporated, validly existing, and in good standing under the laws of the
State of Delaware, its state of incorporation.
4.2 Authority; No Conflict.
(a) This Agreement, the Escrow Agreement and the Noncompetition
Agreements constitute the legal, valid, and binding obligation of Buyer and
Parent, enforceable against them in accordance with its terms, except as
such enforcement may be limited by bankruptcy, insolvency, moratorium,
reorganization, or similar laws affecting creditor's rights generally and
by general equitable principles (whether considered in a proceeding at
equity or at law) and implied covenants of good faith and fair dealing.
Buyer and the Parent each has the absolute and unrestricted right, power,
and authority to execute and deliver this Agreement and Buyer's Closing
Documents and to perform its obligations under this Agreement and Buyer's
Closing Documents.
(b) Neither the execution and delivery of this Agreement and Buyer's
Closing Documents by Buyer nor the consummation or performance of any of
the Contemplated Transactions by Buyer will give any Person the right to
prevent, delay, or otherwise interfere with any of the Contemplated
Transactions pursuant to: (i) any provision of Buyer's Organizational
Documents; (ii) any resolution adopted by the board of directors or the
stockholders of Buyer; (iii) any Legal Requirement or Order to which Buyer
may be subject; or (iv) any Contract to which Buyer is a party or by which
Buyer may be bound. Buyer is not required to give any notice to or obtain
any Consent from any Person in connection with the execution and delivery
of this Agreement by Buyer or the consummation or performance of any of the
Contemplated Transactions by Buyer.
(c) The execution and delivery of this Agreement and the Buyer's
Closing Documents by each of Parent and Buyer and the consummation of the
transactions contemplated hereby have been duly authorized by all required
corporate action on behalf of each of Parent and Buyer.
4.3 Certain Proceedings. There is no pending Proceeding that has been
commenced against Buyer and that challenges, or may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions. To Buyer's knowledge, no such Proceeding has been
Threatened.
32
5. ADDITIONAL AGREEMENTS
5.1 Tax Distributions.
(a) The parties agree that as soon as practicable following the
Closing, Xxxx, Xxxx & Post, Certified Public Accountants (the "Company
Accountants") will determine the amount of (i) the excess of (A) items of
income (including nonseparately computed income) over (B) items of loss or
deduction (including nonseparately computed loss), all within the meaning
of Section 1366(a) of the Code, of the Company for the period extending
from January 1, 1997 through the Closing Date (such excess being the "S
Corporation Taxable Income") (computed on the assumption that the Company
closed its books on the Closing Date) and (ii) the (A) face amount of the
accounts receivable, (B) the amount of work in process, and (C) the amount
of prepaid expenses all as existing on the Closing Date on the accounting
records of the Company, less all payables and other accruals assumed by
Buyer hereunder, the payment of which would give rise to a tax deduction in
the year of payment (the "Other Taxable Income").
(b) Upon the sole determination by the Company Accountants (the
"Company Accountant Determination") of (A) the S Corporation Taxable
Income, the Buyer agrees to pay the Company, subject to 5.1(c) below, the
amount of the additional federal, state, and/or local tax liability that
both Shareholders and/or the Company will incur for their respective 1997
taxable years over the amount such parties would have incurred in such
taxable years had the S Corporation Taxable Income been $0 and (B) the
Other Taxable Income, the Buyer agrees to pay the Company, subject to
5.1(c) below, the excess of (i) the amount of the additional federal,
state, and/or local tax liability that both Shareholders and/or the Company
would have incurred for their respective 1997 taxable years had such Other
Taxable Income constituted ordinary income for federal, state, and local
tax purposes incurred for such tax purposes by the Company on the Closing
Date less (ii) $150,000.
(c) In the event Xxxxxx Xxxxxxxx L.L.P. (the "Buyer Accountants") do
not agree with the Company Accountant Determination (i) Buyer and Buyer
Accountants shall notify the Company and the Company Accountants (but not
later than 10 business days after delivery of the Company Accountant
Determination to Buyer and Buyer Accountants), (ii) the Buyer or Parent
shall immediately following delivery of such notice referred to in (i)
above pay to the Company the amount determined by the Buyer Accountants to
be due to the Company (the "Undisputed Amount") and (iii) any disputed
amount shall be submitted to the New York office of Ernst & Young, L.L.P.
("E&Y") who shall review all appropriate records and make a final
determination (the "Final Determination") as to whether all or any portion
of the disputed amount should be due to the Company under Sections 5(a) and
(b) above. Such Final Determination shall be final and binding on the
parties and enforceable in a court of competent jurisdiction. If the Final
Determination is more than the Undisputed Amount, such shortfall of the
Undisputed Amount (the "Shortfall") shall be paid immediately by the Buyer
or Parent
33
to the Company. In addition, the Buyer or Parent shall also pay to the
Company interest (based on an annualized interest rate equal to Parent's
then existing borrowing rate) on the Shortfall for the period beginning on
the date the Undisputed Amount was paid through the date the Final
Determination is paid. The fees and/or expenses of E&Y shall be borne by
(i) the Shareholders if a Shortfall fails to exist and (ii) the Buyer or
Parent if a Shortfall is determined to exist. The Shareholders agree to
cooperate, in good faith, with the Buyer and Parent and provide the Buyer
Accountants and E&Y with all necessary documentation and information
necessary to resolve the matters set forth above.
(d) The Shareholders agree, however, that upon (A) the exercise of
any of the options, if any, held by them to purchase the Parent's common
stock and (B) the subsequent sale of such common stock, each Shareholder
shall immediately pay to Buyer 50% of the proceeds of such sale up to, but
not exceeding, an amount equal to the difference of (i) 50% of the amount
paid by the Buyer to the Seller pursuant to the second sentence of
paragraph (b), above, of this Section 5.1 in respect of the Other Taxable
Income less (ii) all amounts previously paid by the Shareholders to the
Buyer pursuant to this sentence.
(e) The parties agree that they will cooperate with each other in
providing the necessary documentation to calculate the amounts due to the
Company, and the corresponding repayment upon exercise of the options,
pursuant to this Section 5.1.
5.2 Noncompetition and Nondisclosure.
(a) (i) The Company acknowledges that (A) the Company is one of
the limited number of Persons who are intimately familiar with the
Business; (B) the Company has grown and developed the Business and (C)
the Business is currently conducted throughout the world.
(ii) Accordingly, the Company covenants and agrees that it
will not Compete with the Business, for a period of thirty six (36)
successive months following the Closing (the "Term"). As used herein,
the term "Compete with the Business" shall mean to directly or
indirectly: (A) engage in the Business (or a business that provides
the same or substitute products or services offered by or available
from Buyer) anywhere the Company has conducted (or where the Buyer
will conduct) the Business; (B) solicit any Person who is a customer
of the Company (which customers will become customers of the Buyer
upon the Closing) immediately preceding the Closing or who becomes a
customer of the Buyer at any time after the Closing or during the
twenty-four (24) month period immediately prior to any such
solicitation (a "Customer"), for the purpose of marketing, selling or
providing to any Customer any services or products offered by or
available from the Buyer at the time of such solicitation or otherwise
seek to influence or alter any Customer's relationship with the Buyer,
(C) employ or
34
engage, recruit or solicit for employment or engagement, any person
who is or 1becomes employed or engaged by the Buyer, the Parent or any
of their affiliates during the Term or during the eighteen-month
period preceding the Term or otherwise seek to influence or alter any
such employee's relationship with the Buyer, Parent or their
respective affiliates (including those Company employees hired by
Buyer).
(iii) Nothing in this Section 5.2 shall prevent the Company
from owning not more than an aggregate of two percent (2%) of the
publicly traded equity securities of any competing enterprise (so long
as it has no power to manage, operate, advise, consult with or control
the competing enterprise and no power, alone or in conjunction with
other affiliated parties, to select a director, general partner, or
similar governing official of the competing enterprise).
(iv) The Company acknowledge that the foregoing restrictions
placed upon it are necessary and reasonable in scope and duration to
adequately protect the Buyer's interests, the goodwill of Buyer and
the Business (including the goodwill purchased by Buyer hereunder),
and are a material inducement to Buyer to execute, deliver and perform
its obligations arising under or pursuant to the transactions
contemplated by this Agreement or the Transaction Documents.
(b) (i) The Company recognizes and acknowledges that certain
knowledge and information which the Company and its officers,
directors and shareholders have acquired or developed relating to the
Business, including its pricing and quotation techniques, costs,
developments, activities or products of the Business or the business
affairs of any person or entity doing business with the Business, such
as, but not limited to, customer and supplier lists, cost and selling
and service prices for specific vendor, customers' needs and
requirements, and all inventions, ideas, discoveries, creations,
developments, improvements, patents, patent applications, know how,
technology, designs and processes so acquired (collectively,
"Confidential Information") will be the valuable property of Buyer as
a result of the consummation of the transactions contemplated by this
Agreement and the Transaction Documents and, following the Closing,
shall be held by the Company (and its affiliates, officers, directors
and shareholders) in confidence and trust for the sole benefit of
Buyer.
(ii) The Company (and each of its directors) agrees (and
shall use its best efforts to cause each of its officers and
employees) not to use, disclose, divulge or publish, in any manner
whatsoever, without the prior written consent of Buyer at any time
during the Term hereof or thereafter, any Confidential Information;
provided, however, that Confidential Information shall not include (a)
information which is known to the public (other than as a result of a
violation of this covenant) or in the public domain or (b) information
which such party is required to disclose pursuant to law or order of a
court having jurisdiction over
35
such party (provided that such party offers Buyer a reasonable
opportunity to obtain an appropriate protective order or
administrative relief against disclosure of such Confidential
Information).
(iii) All memoranda, notes, lists, records and other
documents or papers (and all copies thereof), including such items
stored in computer memories, or microfiche or by any other means, made
or compiled by or on behalf of the Company, and copies of records made
by or made available to the Company relating to the Business of Buyer
are and shall be Buyer's property and shall be delivered to Buyer
promptly upon the request of Buyer.
(c) Rights and Remedies Upon Breach. Upon a breach, or threatened
breach, of any of the provisions of Sections 5.2(a) or 5.2(b) (the
"Restrictive Covenants"), Parent and Buyer shall have the right and remedy
to have the Restrictive Covenants specifically enforced by any court of
competent jurisdiction, without the necessity of posting a bond, it being
agreed that any breach or threatened breach of the Restrictive Covenants
would cause irreparable injury to Parent and Buyer and that money damages
would not provide an adequate remedy to Parent and Buyer. Parent and Buyer
shall also have any other rights and remedies available to Parent and Buyer
under law or in equity.
(d) Severability of Covenants. The parties hereto acknowledge and
agree that the Restrictive Covenants are reasonable and valid in
geographical and temporal scope and in all other respects and are necessary
for the protection of legitimate, protectible interests acquired by Parent
and Buyer hereunder.
5.3 Allocation of Purchase Price. Within 30 days after the Closing, the
Company and Buyer will, in good faith, agree to an allocation of the Purchase
Price in accordance with Section 1060 of the Code. For this purpose, the
parties hereto agree that the fair market value of, and the Purchase Price
allocable to, the tangible personal property of the Company is equal to the book
value of such property net of depreciation as reflected on the Balance Sheet,
appropriately adjusted to reflect changes since the Balance Sheet Date. The
parties further agree that the $17 million in cash paid at Closing to the
Company will be allocated first to receivables, other current assets, and the
tangible assets to the extent of the aggregate value thereof, and thereafter to
goodwill or other intangible assets, and that the deferred purchase price
represented by the Escrow and Earn Out shall be allocated to goodwill or other
capital assets. The Company and Buyer will report the allocation of the
Purchase Price in a manner entirely consistent with such agreement in all tax
returns and forms (including without limitation, Form 8594 filed with Parent's
and the Company's respective federal income tax returns for the taxable year
that includes the Closing Date) and in the course of any tax audit, tax review
or tax litigation relating thereto. The Company and Buyer shall cooperate with
each other to prepare the Forms 8594 in the manner required by this Section 5.3.
The Company and Buyer shall each deliver to the other a copy of the Form 8594 it
files with its respective federal income tax return.
36
5.4 Y.A.R. Name. At the Closing, the Company shall execute, and deliver
copies to Buyer of, all documents necessary to change its corporate name to a
name dissimilar to "Y.A.R. Communications" and promptly thereafter the Company
agrees to file all such documents with the appropriate Persons and Governmental
Bodies.
5.5 Agreements Regarding Employees After Closing.
(a) Other than as may be provided in the Employment Agreements, Buyer
shall offer employment to all employees of the Company effective as of the
Closing Date (including those employees who are on vacation, temporary lay-
off, leave of absence, sick leave or short- or long-term disability) on
economic terms substantially equivalent to the terms of their employment
with the Company immediately prior to the Closing (such personnel who
accept such employment, the "Affected Employees"). In addition, from and
after the Closing Date until otherwise determined by the Board of Directors
of Buyer in its sole discretion, Buyer shall use all reasonable efforts to
provide the Affected Employees with substantially similar health, welfare
and other employee benefits as provided by the Company to such employees
immediately prior to the Closing Date. In the event any employee of the
Company fails to accept the employment offered by Buyer, all liabilities
associated with the termination of any such employee's employment with the
Company (including, without limitation, severance benefits) shall be borne
by the Company and the Shareholders, and shall not be assumed by Buyer. All
Affected Employees shall be subject to all rules, regulations, requirements
and policies applicable to all new hires of Buyer. Notwithstanding anything
to the contrary contained herein, in no event will the terms of this
Section 5.5 (i) deem any employee of the Company to be a third party
beneficiary hereunder, (ii) create an employment contract between Buyer
and/or any of its affiliates and any of the Company's employees (including
the Affected Employees) or (iii) require or obligate Buyer to keep any
Affected Employee in its employ for any period of time under any specific
terms.
(b) The Buyer shall recognize under its employee benefit plans,
programs, arrangements and policies, in which an Affected Employee will
participate, the service credited to the Affected Employee as of the
Closing Date for purposes of any waiting period, eligibility conditions and
benefits.
5.6 Management of Buyer During the Applicable Term.
(a) Buyer and Parent agree that from and after the Closing Date
through the end of the Applicable Term, Parent shall cause: (i) the
operations of Buyer to be conducted and managed as a separate subsidiary,
which will be authorized to conduct the Business in substantially the same
manner as the operations of the Company were conducted prior to the Closing
Date; (ii) the Board of Directors of Buyer to consist of at least five
directors; and (iii) each Shareholder to be elected to the Board of
Directors of the Buyer and to remain a director of Buyer as long as such
Shareholder is a full-time employee of Buyer, provided that if either
Shareholder ceases to be a director of Buyer,
37
the other Shareholder shall have the right to designate a replacement
director, which replacement director must be a full-time employee of Buyer
and reasonably acceptable to the Chief Executive Officer of Parent.
(b) Parent and Buyer agree that, from and after the Closing Date
through at least the end of the Applicable Term, the By-Laws of Buyer will
be as set forth in Exhibit 5.6 hereto, and that such By-Laws shall not be
amended or repealed during the Applicable Term without the consent of the
Shareholders, which consent shall not be unreasonably withheld, conditioned
or delayed.
(c) During the Applicable Term, the Buyer and Parent shall establish
and agree on an annual operating budget for Buyer (the "Budget") for each
calendar year. The parties hereto agree that during the Applicable Term, so
long as the actual operating results of Buyer are not diverging in any
material manner from the Budget without the prior written consent of the
Chief Executive Officer of Buyer (which consent shall not be unreasonably
withheld, conditioned or delayed), neither Parent nor the Board of
Directors of Buyer will require Buyer (i) to hire or fire any of its staff
employees, (ii) to change, in any material manner, the base salaries or
bonus structure provided by Buyer to its employees, (iii) to terminate its
relationship with any client of Buyer that represented in excess of $7
million in revenue to Buyer for the previous twelve month period and (iv)
to provide services to any client.
(d) In the event Parent desires to consummate a sale of the Business
to an unaffiliated third party purchaser, whether by way of a sale of
assets, stock, merger, consolidation or other transaction, the following is
agreed to:
(i) such third party purchaser will assume all of the
obligations of Parent and Buyer set forth in Section 1.7 above (the
"Earn Out Obligations") and, in such case, all of Parent's and Buyer's
obligations under Section 1.7 shall automatically terminate.
(ii) if such third party purchaser fails to assume the Earn
Out Obligations in connection with such sale, the Parent and the
Shareholders shall discuss, in good faith, and agree on an amount to
be paid to the Company to fulfill and terminate the Earn Out
Obligations. If the Parent and the Shareholders are unable to agree on
such amount, the Parent and Shareholders shall promptly agree on and
retain an independent nationally recognized investment banking firm to
determine the amount of the Earn Out Obligations to be paid to the
Company. The determination of the Earn Out Obligation to be paid
(whether by agreement between the Parent and the Shareholders or the
determination by such investment banking firm) shall (i) be binding,
final and conclusive upon the parties and enforceable in a court of
law and (ii) consider all historical and prospective financial and
other information, all appropriate facts and circumstances existing at
the time of such determination and present value discounts. Any
payment of
38
the Earn Out Obligations shall be made promptly upon the receipt by
the Parent of the proceeds from the sale of the Business to such third
party purchaser.
(e) Without limiting the terms and conditions set forth in this
Section 5.6, the Shareholders agree, understand and acknowledge that Buyer
will be operated as a wholly-owned subsidiary of Parent and, in connection
therewith, the Parent and the Board of Directors of Buyer shall have all
power, authority and control over Buyer, without restriction, as provided
under all applicable laws in order to fulfill their fiduciary duties;
provided, however, the Parent agrees that it will inform, and consult with,
the Chief Executive Officer of Buyer prior to implementing (or causing the
Board of Directors of Buyer to implement) any material change to the
business or operations of Buyer.
5.7 Transfer Tax Compliance. The Company and Buyer shall comply with
Section 14.15 of the New York State Tax Law relating to the New York State Real
Property Transfer Tax and Chapter 21, Title 11 of the Administrative Code of the
City of New York relating the New York City Real Property Transfer Tax and any
similar taxes of other applicable jurisdictions (all such taxes collectively,
the "Transfer Taxes"). For such purposes, the Company and the Buyer agree that
the leasehold interests of the Company have no value and that no portion of the
Purchase Price is allocable thereto. At the Closing, the Company shall deliver
and cause to be filed all returns required to be filed in connection with the
Transfer Taxes. The Transfer Taxes and the costs and expenses incurred by
Parent, Buyer, the Company or the Shareholders as a result of a dispute with any
Governmental Body in connection with the Transfer Taxes, shall be the sole
responsibility of the Company and the Shareholders.
5.8 Sales Tax Liability. Buyer and the Company shall use their reasonable
best efforts to obtain all necessary sales tax exemptions and take all such
other action as may be necessary or advisable to cause the transfer of the
Purchased Assets to Buyer not to be subject to sales tax. To the extent that,
despite all such actions, the transfer of any Purchased Assets to the Buyer
gives rise to sales tax liability or other transfer, purchase or recordation
documentary tax and fees (collectively, "Sales Taxes"), the Buyer shall promptly
pay such Sales Taxes to the appropriate tax authorities and any costs and
expenses incurred by Parent, Buyer, the Company or the Shareholders as a result
of a dispute with any Governmental Body in connection with the Sales Taxes,
shall be the sole responsibility of the Parent and Buyer.
5.9 Successor Employer. Buyer agrees that it shall elect treatment as a
"successor employer" for withholding tax purposes with respect to the 1997
calendar year.
5.10 Assumption of 401(k) Plan. Effective as of the Closing Date, the
Company shall assign and Buyer shall assume and accept, all rights, obligations,
responsibilities and duties as the employer under the Company's existing 401(k)
plan and Buyer and the Company shall execute any and all documents necessary to
effectuate such assumption as of the Closing Date; provided, however, Buyer
may, in its sole discretion, (A) terminate or amend such 401(k) plan or (B)
transfer all of Buyer's employees' (including the Affected Employees) 401(k)
plan
39
accounts into any profit sharing plans that may be offered, from time to time,
by Parent to the employees of Parent.
5.11 Board Representation. Immediately after the Closing, the Parent
shall hold a Special Meeting of the Board of Directors and recommend the
election of Yuri as a director of Parent, effective immediately. Further, Parent
agrees to nominate Yuri as part of management's slate of directors in each
subsequent election of directors provided Yuri is a full-time employee of Buyer
at the time of such election.
5.12 Stock Options. Immediately after the Closing, Parent shall issue
1,000,000 options to purchase Parent's common stock to certain Affected
Employees, effective as of the Closing, in the amounts set forth in Part 5.12 of
the Disclosure Letter. Such options shall be issued in accordance with the
terms and conditions set forth in Parent's standard employee stock option plan
(the "Plan"). The options issued to Yuri and Xxxx shall be issued pursuant to a
stock option agreement in the form of Exhibit 5.12(i) attached hereto. The
options issued to all of the other Affected Employees shall be issued pursuant
to a stock option agreement in the form of Exhibit 5.12(ii) attached hereto.
6. INDEMNIFICATION; REMEDIES
6.1 Survival.
(a) The representations and warranties in this Agreement and any
other certificate or document delivered pursuant to this Agreement will
survive the Closing until the one year anniversary of the Closing Date (the
"Sunset Period"), except that (a) the representations and warranties in
Sections 3.10, 3.12 and 3.28 will survive until all applicable statutes of
limitation (including extensions of such statutes) have elapsed, and (b)
the representations and warranties in Section 3.5 concerning title to the
Purchased Assets shall survive indefinitely. Notwithstanding the foregoing,
a representation and warranty shall continue in effect in the event a claim
for breach thereof has been made prior to the expiration of the Sunset
Period and shall survive until such claim is fully resolved. The right to
indemnification, reimbursement, or other remedy based on such
representations and warranties will not be affected by any investigation
conducted by Buyer.
(b) Notwithstanding anything to the contrary set forth in this
Agreement but subject to the terms set forth in Section 6.1(d), neither the
Company nor the Shareholders shall be liable hereunder to a Buyer
Indemnified Party as a result of any misrepresentation or Breach of any
representation or warranty contained in this Agreement unless, and not
until, the aggregate amount of all Losses incurred by all Buyer Indemnified
Parties (in the aggregate) as a result of any such misrepresentations or
Breaches under this Agreement exceeds $200,000 (the "Basket Threshold"), in
which case the Company and the Shareholders shall only be liable for Losses
in excess of $200,000.
40
(c) Notwithstanding anything to the contrary set forth in this
Agreement, but subject to the terms set forth in Section 6.1(d), following
the Closing, the aggregate liability of the Company and the Shareholders to
the Buyer Indemnified Parties for breaches of the representations or
warranties set forth herein shall not exceed, in the aggregate, $10,000,000
(the "Cap").
(d) Each of the limitations set forth in subparagraphs (a), (b) and
(c) above (including, without limitation, the Sunset Period, the Cap and
the Basket Threshold) shall in no event apply to any Losses incurred by a
Buyer Indemnified Party which relate, directly or indirectly, to (i) any
fraudulent acts committed by the Company or the Shareholders (including,
without limitation, fraud in connection with the Contemplated Transaction
and any fraudulent acts by any officer, director, employee, agent or
shareholder of the Company), (ii) any breach or misrepresentations of the
representations and warranties contained in Sections 3.10(b), 3.28 and
Section 3.5 concerning title to the Purchased Assets, (iii) an
indemnification obligation under Sections 6.2(b) or 6.2(d) or (iv) the
Company's and Shareholder's obligations set forth in Section 8.1 below to
pay for their own expenses in connection with the Contemplated
Transactions.
6.2 Indemnification of Buyer. From and after the Closing, the Company and
each of the Shareholders jointly and severally, on behalf of themselves and any
of their respective successors and assigns, hereby agree to indemnify Buyer and
its affiliates, shareholders, directors, partners, officers, employees, agents,
representatives and successors, permitted assigns of Buyer and their respective
affiliates (the "Buyer Indemnified Parties") and save and hold them harmless
from and against and pay on behalf of or reimburse the Buyer Indemnified Parties
as and when incurred for any and all liabilities, demands, claims, actions,
causes of action, assessments, losses, costs, damages, deficiencies, taxes,
fines or expenses (whether or not arising out of third party claims), including,
without limitation, interest, penalties, reasonable attorneys' fees and all
amounts paid in investigation, defense or settlement of any of the foregoing
(collectively, "Losses"), which any Buyer Indemnified Party may suffer, sustain
or become subject to, in connection with, incident to, resulting from or arising
out of or in any way relating to or by virtue of:
(a) any misrepresentation or breach of a representation or warranty
made herein by the Company and/or the Shareholders;
(b) any nonfulfillment or breach of any covenant or agreement on the
part of the Company or the Shareholders under this Agreement (including the
Escrow Agreement);
(c) any action, demand, proceeding, investigation or claim by any
third party (including any Governmental Body) against or affecting any
Buyer Indemnified Party which, if successful, would give rise to or
evidence the existence of or relate to a misrepresentation or breach of any
of the representations, warranties, agreements or covenants of the Company
or the Shareholders set forth in this Agreement; or
41
(d) any liability or obligation or any assertion against a Buyer
Indemnified Party, arising out of or relating, directly or indirectly, to
any Excluded Liability.
The rights of the Buyer Indemnified Parties to indemnification under part (b) or
(d) of this Section 6.2 shall apply notwithstanding that the matter in question
may be the subject of, excluded from or beyond the scope of any representation
or warranty of the Company or the Shareholders in this Agreement.
6.3 Indemnification of the Company. Each of Buyer and Parent, jointly and
severally, on behalf of itself and its successors and assigns, hereby agrees to
indemnify the Company and its affiliates, shareholders, directors, partners,
officers, employees, agents, representatives, successors and permitted assigns
of the Company and its respective affiliates (the "Company Indemnified Parties")
and save and hold each of them harmless from and against and pay on behalf of or
reimburse the Company Indemnified Party as and when incurred for any and all
Losses which a Company Indemnified Party may suffer, sustain or became subject
to, in connection with, incident to resulting from or arising out of or in any
way relating to or by virtue of:
(a) any misrepresentation or breach of a representation or warranty
made herein by Buyer or Parent;
(b) any non-fulfillment or breach of any covenant or agreement on the
part of Buyer or Parent under this Agreement (including the Escrow
Agreement);
(c) any action, demand, proceeding, investigation or claim by any
third party (including governmental agencies) against or affecting a
Company Indemnified Party which, if successful, would give rise to or
evidence the existence of or relate to a misrepresentation or breach of any
of the representations, warranties, agreements or covenants of Buyer or
Parent set forth in this Agreement; or
(d) any liability or obligation or any assertion against a Company
Indemnified Party arising out of Buyer's or Parent's failure to pay,
satisfy or discharge the Assumed Liabilities.
Notwithstanding anything to the contrary contained in this Agreement or in any
other document, certificate, agreement or otherwise, in the event an
indemnification obligation of the Company or the Shareholders arises pursuant to
this Agreement, which is final and non-appealable, the Buyer's and Parent's
obligations to indemnify a Company Indemnified Party hereunder (whether pursuant
to subparagraph (d) above or any other provision of this Section 6.3) shall not
be applicable and be deemed null and void with respect to such matters.
The rights of the Company Indemnified Parties to indemnification under part (b)
or (d) of this Section 6.3 shall apply notwithstanding that the matter in
question may be the subject of,
42
excluded from or beyond the scope of any representation or warranty of the Buyer
or the Parent in this Agreement.
6.4 Indemnification Procedure for Third Party Claims. In the event that
subsequent to the Closing any person or entity entitled to indemnification under
this Agreement (an "Indemnified Party") asserts a claim for indemnification or
receives notice of the assertion of any claim or of the commencement of any
action or proceeding by any entity who is not a party to this Agreement or an
affiliate of a party to this Agreement (including, but not limited to any
domestic or foreign court or Governmental Body, federal, state or local) (a
"Third Party Claim") against such Indemnified Party, against which a party to
this Agreement is required to provide indemnification under this Agreement (an
"Indemnifying Party"), the Indemnified Party shall give written notice together
with a statement of any available information (other than privileged
information) regarding such claim to the Indemnifying Party within thirty (30)
business days after learning of such claim (or within such shorter time as may
be necessary to give the Indemnifying Party a reasonable opportunity to respond
to such claim). The Indemnifying Party shall have the right, upon written
notice to the Indemnified Party (the "Defense Notice") within fifteen days (15)
after receipt from the Indemnified Party of notice of such claim, which notice
by the Indemnifying Party shall specify the counsel it will appoint to defend
such claim ("Defense Counsel"), to conduct at its expense the defense against
such claim in its own name, or if necessary in the name of the Indemnified
Party; provided, however, that the Indemnified Party shall have the right to
approve the Defense Counsel, which approval shall not be unreasonably withheld
or delayed, and in the event the Indemnifying Party and the Indemnified Party
cannot agree upon such counsel within ten (10) days after the Defense Notice is
provided, then the Indemnifying Party shall propose an alternate Defense
Counsel, which shall be subject again to the Indemnified Party's approval which
approval shall not be unreasonably withheld or delayed. If the parties still
fail to agree on the Defense Counsel, then, at such time, they shall mutually
agree in good faith on a procedure to determine the Defense Counsel.
(a) In the event that the Indemnifying Party shall fail to give the
Defense Notice within said 15 day period, it shall be deemed to have
elected not to conduct the defense of the subject claim, and in such event
the Indemnified Party shall have the right to conduct the defense in good
faith and to compromise and settle the claim in good faith without prior
consent of the Indemnifying Party and the Indemnifying Party will be liable
for all reasonable costs, expenses, settlement amounts or other Losses paid
or incurred in connection therewith.
(b) In the event that the Indemnifying Party does deliver a Defense
Notice and thereby elects to conduct the defense of the subject claim, the
Indemnifying Party shall be entitled to have the exclusive control over
said defense settlement of the subject claim and the Indemnified Party will
cooperate with and make available to the Indemnifying Party such
assistance and materials as it may reasonably request, all at the expense
of the Indemnifying Party, and the Indemnified Party shall have the right
at its expense to participate in the defense assisted by counsel of its own
choosing. In such an event, the
43
Indemnifying Party will not settle the subject claim without the prior
written consent of the Indemnified Party, which consent will not be
unreasonably withheld or delayed.
(c) Without the prior written consent of the Indemnified Party, the
Indemnifying Party will not enter into any settlement of any Third Party
Claim or cease to defend against such claim, if pursuant to or as a result
of such settlement or cessation, (i) injunctive relief or specific
performance would be imposed against the Indemnified Party, or (ii) such
settlement or cessation would lead to liability or create any financial or
other obligation on the part of the Indemnified Party for which the
Indemnified Party is not entitled to indemnification hereunder.
(d) If an Indemnified Party refuses to consent to a bona fide offer
of settlement which provides for a full release of the Parent, Buyer and
its affiliates and solely for a monetary payment which the Indemnifying
Party wishes to accept, the Indemnified Party may continue to pursue such
matter, free of any participation by the Indemnifying Party, at the sole
expense of the Indemnified Party. In such event, the obligation of the
Indemnifying Party shall be limited to the amount of the offer of
settlement which the Indemnified Party refused to accept plus the costs and
expenses of the Indemnified Party incurred prior to the date the
Indemnifying Party notified the Indemnified Party of the offer of
settlement.
(e) Notwithstanding paragraph (b) above, the Indemnifying Party shall
not be entitled to control, but may participate in, and the Indemnified
Party shall be entitled to have sole control over, the defense or
settlement of any claim (i) that seeks a temporary restraining order, a
preliminary or permanent injunction or specific performance against the
Indemnified Party, (ii) to the extent such claim involves criminal
allegations against the Indemnified Party, (iii) that if unsuccessful,
would set a precedent that would materially interfere with, or have a
material adverse effect on, the business or financial condition of the
Indemnified Party, or (iv) to the extent such claim imposes liability on
the part of the Indemnified Party for which the Indemnified Party is not
entitled to indemnification hereunder (including, without limitation, a
liability which may exceed the Cap). In such an event, the Indemnifying
Party will still have all of its obligations hereunder provided that the
Indemnified Party will not settle the subject claim without the prior
written consent of the Indemnifying Party, which consent will not be
unreasonably withheld.
(f) Any final judgment entered or settlement agreed upon in the
manner provided herein shall be binding upon the Indemnifying Party, and
shall conclusively be deemed to be an obligation with respect to which the
Indemnified Party is entitled to prompt indemnification hereunder.
(g) A failure by an Indemnified Party to give timely, complete or
accurate notice as provided in this Section 6.4 will not affect the rights
or obligations of any party hereunder except and only to the extent that,
as a result of such failure, any party entitled
44
to receive such notice was deprived of its right to recover any payment
under its applicable insurance coverage or was otherwise directly and
materially damaged as a result of such failure to give timely notice.
6.5 Escrowed Amount; Right of Set-Off. In the event an indemnification
obligation of the Company or the Shareholders arise under Section 6.2 above and
such indemnification obligation is not paid, in full, on demand, Buyer or
Parent, on a non-exclusive basis, shall be entitled to (i) first, remove such
amounts owed from escrow, pursuant to the Escrow Agreement, and (ii) second,
set-off, on a dollar for dollar basis, any amounts then owed by Buyer to the
Company or the Shareholders pursuant to Section 1.7 hereof. In the event (A)
the Buyer or Parent exercises the right of set off pursuant to (ii) above and
(B) a court of competent jurisdiction issues a final, non-appealable order that
Buyer or Parent inappropriately exercised such right due to the failure of an
indemnification obligation to exist in connection with the exercise of such set
off right, Buyer and Parent agree to pay to the Company (x) the amount
previously set off by Buyer or Parent pursuant to (ii) above and (y) interest on
the amount set off, calculated at the Buyer's then existing annual borrowing
rate, for the period beginning on the date of such set off through and including
the date of such payment.
6.6 Sole Remedy. The liability of each of the parties hereto with respect
to any matter set forth in Sections 6.2 or 6.3, as the case may be, shall be
limited by the terms and to the extent set forth in this Article VI, and no
party will have any claim, right or remedy under this Agreement except for
indemnification as provided in this Article VIII; provided, however this Section
6.6 shall in no event apply to any equitable remedies available to any party or
liabilities related to any fraudulent claims.
6.7 Treatment. Any indemnity payments by an Indemnifying Party to an
Indemnified Party under this Article VI shall be treated by the parties as an
adjustment to the Purchase Price.
7. DEFINITIONS.
7.1 Definitions. For purposes of this Agreement, the following terms have
the meanings specified:
"Applicable Contract" -- any Contract (a) under which the Company has or
may acquire any rights, (b) under which the Company has or may become subject to
any obligation or liability, or (c) by which the Company or any of the assets
owned or used by the Company is or may become bound.
"Best Efforts" -- the efforts that a prudent Person desirous of achieving
a result would use in similar circumstances to ensure that such result is
achieved as expeditiously as possible.
"Breach" -- a "Breach" of a representation, warranty, covenant, obligation,
or other provision of this Agreement will be deemed to have occurred if there is
or has been (a) any
45
inaccuracy in or breach of, or any failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision, or (b) any
claim (by any Person) or other occurrence or circumstance that is or was
inconsistent with such representation, warranty, covenant, obligation, or other
provision, and the term "Breach" means any such inaccuracy, breach, failure,
claim, occurrence, or circumstance.
"Closing Date" -- the date and time as of which the Closing actually takes
place.
"Code" -- the Internal Revenue Code of 1986, as amended, or any successor
law, and regulations issued by the IRS pursuant to the Internal Revenue Code or
any successor law.
"Consent" -- any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"Contemplated Transactions" -- all of the transactions contemplated by this
Agreement, including:
(i) the Closing hereunder;
(ii) the sale of the Purchased Assets by the Company to Buyer
and the assumption, by Buyer, of the Assumed Liabilities;
(iii) the execution, delivery, and performance of the
Company's Closing Documents and Buyer's Closing Documents; and
(iv) the performance by Buyer and the Company of their
respective covenants and obligations under this Agreement.
"Contract" -- any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"Disclosure Letter" -- the disclosure letter delivered by the Company to
Buyer concurrently with the execution and delivery of this Agreement.
"Encumbrance" -- any claim, lien, pledge, charge, security interest,
equitable interest, option, right of first refusal or preemptive right,
condition, or other restriction of any kind, including any restriction on use,
voting (in the case of any security), transfer, receipt of income, or exercise
of any other attribute of ownership.
"ERISA" -- the Employee Retirement Income Security Act of 1974, as amended,
or any successor law.
"Facilities" -- any real property, leaseholds, or other interests currently
or formerly owned or operated by the Company (or any predecessor Person) and any
buildings, plants, or
46
structures currently or formerly owned, leased, or operated by the Company (or
any predecessor Person).
"GAAP" -- generally accepted United States accounting principles,
consistently applied from year to year.
"Governmental Authorization" -- any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"Governmental Body" -- any:
(i) nation, state, county, city, town, village, district, or
other jurisdiction of any nature;
(ii) federal, state, local, municipal, foreign, or other
government;
(iii) governmental or quasi-governmental authority of any
nature (including any governmental agency, branch, department,
official, or other entity and any court or other tribunal);
(iv) multi-national organization or body; or
(v) body exercising, or entitled or purporting to exercise,
any administrative, executive, judicial, legislative, police,
regulatory, or taxing authority or power of any nature.
"IRS" -- the United States Internal Revenue Service.
"knowledge" -- where any representation and warranty contained in this
Agreement is expressly qualified by reference to the best knowledge, information
and belief of the Company and the Shareholders, such term shall be limited to
the knowledge of the Shareholders, Xxxx Xxxxx, Xxxxx Xxxxx and Xxx Xxx or such
knowledge that would have been discovered by such individuals after reasonable
due inquiry of Persons who may reasonably have knowledge of such matters.
"Legal Requirement" -- any federal, state, local, municipal, foreign, or
other constitution, ordinance, regulation, code, statute, treaty, or other law
adopted, enacted, implemented, or promulgated by or under the authority of any
Governmental Body or by the eligible voters of any jurisdiction, and any
agreement, approval, consent, injunction, judgment, license, order, or permit by
or with any Governmental Body or to which the Company is a party or by which the
Company is bound.
47
"Order" -- any award, injunction, judgment, order, ruling, subpoena, or
verdict or other decision entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business" -- an action taken by a Person will be deemed
to have been taken in the "Ordinary Course of Business" only if:
(i) such action is consistent with the past practices of such
Person and is taken in the ordinary course of the normal day-to-day
operations of such Person;
(ii) such action is not required to be authorized by the board
of directors of such Person (or by any Person or group of Persons
exercising similar authority) and does not require any other separate
or special authorization of any nature; and
(iii) such action is similar in nature and magnitude to
actions customarily taken, without any separate or special
authorization, in the ordinary course of the normal day-to-day
operations of other Persons that are in the same line of business as
such Person.
"Organizational Documents" -- (i) the articles or certificate of
incorporation and the bylaws of a corporation; (ii) any charter or similar
document adopted or filed in connection with the creation, formation, or
organization of a Person; and (iii) any amendment to any of the foregoing.
"Person" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, or other entity or
Governmental Body.
"Proceeding" -- any suit, litigation, arbitration, hearing, audit,
investigation, or other action (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.
"Related Person" -- with respect to a particular individual:
(i) each other member of such individual's Family; and
(ii) any Person that is directly or indirectly controlled by
any one or more members of such individual's Family.
With respect to a specified Person other than an individual:
48
(i) any Person that, directly or indirectly, controls, is
controlled by, or is under common control with such specified Person;
and
(ii) each Person that serves as a director, executive officer,
general partner, executor, or trustee of such specified Person (or in
a similar capacity);
For purposes of this definition, the "Family" of an individual includes (i) such
individual, (ii) the individual's spouse and former spouses, (iii) any lineal
ancestor or lineal descendant of the individual, or (iv) a trust for the benefit
of the foregoing. A Person will be deemed to control another Person, for
purposes of this definition, if the first Person possesses, directly or
indirectly, the power to direct, or cause the direction of, the management
policies of the second Person, (x) through the ownership of voting securities,
(y) through common directors, trustees or officers, or (z) by contract or
otherwise.
"Representative" -- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"Securities Act" -- the Securities Act of 1933, 15 U.S.C. (S) 77a et seq.,
as amended, or any successor law.
"Threatened" -- a claim, Proceeding, dispute, action, or other matter will
be deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing), or
if any other event has occurred or any other circumstances exists, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
8. GENERAL PROVISIONS
8.1 Expenses. The Shareholders (and not the Company), on the one hand,
and Buyer and the Parent, on the other, will each bear their own expenses
incurred in connection with the Contemplated Transactions, and the Shareholders
shall pay any legal, accounting, broker or other expenses which may be incurred
in connection with the Contemplated Transactions. All such expenses shall be
Excluded Liabilities and no such expenses should be paid out of any assets of
the Company. Notwithstanding the above, the parties agree that all fees and
expenses of Xxxx, Xxxx & Xxxx incurred by the Company in connection with
auditing the financial statements of the Company for the years ending December
31, 1994, 1995 and 1996 shall be paid by the Buyer.
8.2 Notices. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given (a) when delivered by hand; (b) when sent by telecopier, provided that a
copy is mailed by U.S. certified mail, return receipt requested; (c) three days
after sent by Certified U.S. Mail, return receipt
49
requested; or (d) one day after deposit with a nationally recognized overnight
delivery service, in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
The Company or the Shareholders: with a copy to:
Attn: Y.A.R. Communications, Inc. Xxxxx and Xxxxxxx
000 Xxxxx Xxxxxx 0000 Xxxxxxxx
Xxx Xxxx, Xxx Xxxx 00000 Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx Xxxxxxxxxx Attention: Xxxxxxx X. Xxxxxxx, Esq.
Xxxx Xxxxxxxxxx Telecopy No. (000) 000-0000
Telecopy No. (000) 000-0000
Buyer: with a copy to:
The Leap Group, Inc. Xxxxxx Xxxxxx & Xxxxx
00 Xxxx Xxxxxxx Xxxxxx 000 Xxxx Xxxxxx Xxxxxx
Xxxxxxx, Xxxxxxxx 00000 Suite 1600
Attention: Chief Financial Officer Xxxxxxx, Xxxxxxxx 00000-0000
Telecopy No. (000) 000-0000 Attention: Xxxxxxx X. Xxxxx, Esq.
Xxxx X. Xxxxxxxx, Esq.
Telecopy No. (000) 000-0000
8.3 Further Assurances. The parties agree (a) to furnish upon request to
each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of the
Contemplated Transactions.
8.4 Waiver. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege.
8.5 Entire Agreement and Modification. This Agreement supersedes all prior
oral or written agreements between the parties with respect to its subject
matter and constitutes (along with the documents referred to in this Agreement
or required to effect the Contemplated Transactions) as a complete and exclusive
statement of the terms of the agreement between the parties with respect to its
subject matter. This Agreement may not be amended except by a written agreement
executed by the party to be charged with the amendment.
8.6 Assignments, Successors, and No Third-Party Rights. Neither party may
assign any of its rights under this Agreement without the prior consent of the
other parties
50
except that Buyer may assign any of its rights under this Agreement to any
direct or indirect wholly-owned subsidiary of Parent. Subject to the preceding
sentence, this Agreement will apply to, be binding in all respects upon, and
inure to the benefit of the successors and permitted assigns of the parties.
Nothing expressed or referred to in this Agreement will be construed to give any
Person other than the parties to this Agreement any legal or equitable right,
remedy, or claim under or with respect to this Agreement or any provision of
this Agreement.
8.7 Severability. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
8.8 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Sections" refer to the corresponding
Sections of this Agreement. All words used in this Agreement will be construed
to be of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words or
terms. In the event of any inconsistency between the statements in the body of
this Agreement and those in the Disclosure Letter (other than an exception
expressly set forth as such in the Disclosure Letter with respect to a
specifically identified representation or warranty), the statements in the body
of this Agreement will control.
8.9 Governing Law. This Agreement will be governed by and construed under
the laws of the State of New York without regard to conflicts of laws
principles.
8.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
8.11 No Strict Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction will be applied against any party.
51
IN WITNESS WHEREOF, the parties have executed this Asset Purchase Agreement
as of the date first written above.
BUYER: THE COMPANY:
RAYCO GROUP, INC. Y.A.R. COMMUNICATIONS, INC.
By: /s/ Xxxxx Xxxxxx By: /s/ Xxxx Xxxxxxxxxx
---------------- -------------------
Its: Secretary Its: President
--------- ---------
PARENT:
LEAP GROUP, INC. THE SHAREHOLDERS:
By: /s/ R. Xxxxxx Xxxxxxxxxx /s/ Xxxx Xxxxxxxxxx
--- ------------------------ -------------------
Xxxx Xxxxxxxxxx, individually
Its: Chief Executive Officer
-----------------------
/s/ Xxxx Xxxxxxxxxx
-------------------
Xxxx Xxxxxxxxxx, individually
52
