MERGER AGREEMENT
MERGER
AGREEMENT, dated December 8, 2006 (this “Agreement”), by and among Argyle
Security Acquisition Corp., a Delaware corporation (“Parent”), ISI Security
Group, Inc., a Delaware corporation (“Acquisition Corp.”), ISI Detention
Contracting Group, Inc., a Delaware corporation, d/b/a “ISI Security Group” (the
“Company”).
W
I T N E
S S E T H :
WHEREAS,
the Company is in the business of providing security solutions for detention
facilities and for commercial, industrial and governmental customers (the
“Business”);
WHEREAS,
Xxxxxxx Xxxxx Mezzanine Capital Fund III, L.P. (“Xxxxx”) is converting
$10,000,000 in aggregate principal amount of its outstanding $15,951,609
promissory note (the “Note”) into shares of the Company’s Class A preferred
stock, par value $.0001 per share (the “Company Preferred Stock”) pursuant to a
Note Conversion Agreement, the form of which is attached hereto as Exhibit
A
(the “Note Conversion Agreement”), with the balance of the Note being
represented by a new $5,951,609 promissory note (the “New Note”) and note
purchase agreement, the terms of which shall be agreed upon by Xxxxx, Parent,
Acquisition Corp. and the Company, prior to the Closing;
WHEREAS,
Parent owns all of the issued and outstanding shares of equity securities of
Acquisition Corp.;
WHEREAS,
Parent and Acquisition Corp. desire that Acquisition Corp. merge with and into
the Company and, to realize the benefits thereof, the Company also desires
that
Acquisition Corp. merge with and into the Company upon the terms and subject
to
the conditions set forth herein and in accordance with the General Corporation
Law of the State of Delaware, and that the Company Preferred Stock and the
outstanding shares of common stock, par value $.0001 per share, of the Company
(“Company Common Stock”), and any securities of the Company convertible into
Company Common Stock or Company Preferred Stock, excluding any such shares
held
in the treasury of the Company, be converted upon such merger (the “Merger”)
into the right to receive the Merger Consideration as is provided herein;
and
NOW,
THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE
I
DEFINITIONS
1.1.
Definitions.
The
following terms, as used herein, have the following meanings:
“2005
Financial Statements” are the Company’s Balance Sheet, Statement of Cash Flows
and Statement of Operations prepared as of and for the year ended December
31,
2005 in accordance with GAAP.
“2006
EBITDA” means the Company’s earnings before interest, taxes, depreciation and
amortization as calculated from the 2006 Financial Statements.
“2006
Financial Statements” are the Company’s Balance Sheet, Statement of Cash Flows
and Statement of Operations prepared as of and for the year ended December
31,
2006 in accordance with GAAP.
“2/28
Backlog” means the backlog of contracts and other work of the Company and all
Subsidiaries, as calculated consistent with the past practices of the Company
and the Subsidiaries, pursuant to the Work in Process Report of Company for
the
period ending February 28, 2007.
“Accounts
Receivable” has the meaning set forth in Section 3.11.
“Acquisition
Corp.” has the meaning set forth in the Preamble.
“Act”
has
the meaning set forth in Section 8.5.
“Action”
means any action, suit, investigation, hearing or proceeding, including any
audit for taxes or otherwise.
“Additional
Agreements” means each of the Lock-up Agreements, the Life Insurance Agreements,
the Amended and Restated Lease Agreements, and the StarCo Termination Agreement.
“Adjusted
EBITDA” means the Company’s earnings before interest, taxes, depreciation and
amortization, for the year ending December 31, 2006, as calculated in the 2006
Financial Statements, plus normalization adjustments of $900,000 and such
additional normalization adjustments as may be agreed upon by the parties.
“Affiliate”
means, with respect to any Person, any Person directly or indirectly
controlling, controlled by, or under common control with such other Person.
With
respect to any natural person, the term Affiliate shall also include any member
of said person’s immediate family, any family limited partnership, limited
liability company or other entity for said person and any trust, voting or
otherwise, of which said person is a trustee or of which said person or any
of
said person’s immediate family is a beneficiary.
“Agreement”
has the meaning set forth in the Preamble.
“Amended
and Restated Lease Agreement” means the lease agreements between the Surviving
Corporation and the owner of the SA Offices (Green Wing Management,
Ltd.),
2
which
will be negotiated and entered into immediately prior to the Effective Time.
The
terms of the Amended and Restated Lease Agreements will include:
• |
a
term of twelve years beginning on the Effective
Date
|
• |
a
recalculation of the rental rate every three years. At the end of
each
three-year term, there will be an independent appraisal which will
be used
as the basis for determining the lease payments during the next three-year
term, to be calculated as follows: (a) if the new appraisal is more
than
the current appraisal, the lease will be at a discount of 10% to
the
market rate (b) if the new appraisal is less than the last appraisal
by
less than 10%, the lease will be at the same rate as is applicable
on the
previous three year agreement or (c) if the new appraisal is lower
than
the applicable appraisal by more than 10%, the lease will be at the
market
rate. In other words, if the new appraisal is lower than the immediately
prior appraisal, the new lease will be the lower of the current lease
or
market rate. For example, assuming current market appraisal at $100
( i.e.
lease is $90 (at a 10% discount including the 10%
discount)):
|
o |
if
the new appraisal were $115, the new lease rate would be 90% of $115
i.e.
$103.5
|
o |
if
the new appraisal were $105, the new lease rate would be 90% of $105
i.e.
$94.50
|
o |
if
the new appraisal were $95, the lease rate would remain at $90 because
90%
of $95 ($85.5) is less than the current lease
|
o |
if
the new appraisal is $85, then the new lease rate would be $85 because
the
market rate is less than the current lease
|
• |
Prior
to the Effective Date, the lease will be adjusted by an independent
appraiser to 10% below market value or the current lease rate, whichever
is greater.
|
• |
The
Parent will have the right, at the Parent’s sole discretion, to purchase
from the leasehold owner(s) the underlying real properties at market
rates
(to be agreed by an independent evaluation at that time); provided
that
such market rates cannot be below the value determined in the last
appraisal prior to the Effective Date. The Parent shall also have
a right
of first refusal to purchase the real property, should such property
ever
be offered for sale.
|
“Arbitrator”
has the meaning set forth in Section 12.1(b).
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“Authority”
shall mean any governmental, regulatory or administrative body, agency or
authority, any court or judicial authority, any arbitrator, or any public,
private or industry regulatory authority, whether international, national,
Federal, state or local.
“Benefits
Arrangement” has the meaning set forth in Section 3.25.
“Xxxxx”
has the meaning set forth in the Recitals.
“Books
and Records” means all books and records, ledgers, employee records, customer
lists, files, correspondence, and other records of every kind (whether written,
electronic, or otherwise embodied) owned or used by the Company or in which
the
Company’s assets, business, or transactions are otherwise reflected.
“Business”
has the meaning set forth in the Recitals.
“Business
Day” means any day other than a Saturday, Sunday or a legal holiday on which
commercial banking institutions in Texas are not open for business.
“Xxxx
Note” means the promissory note owed by the Company and payable to Xxx Xxxx,
dated November 1, 2005, in the original principal amount of $32,469.00.
“Cash
Consideration” has the meaning set forth in Section 2.6(c).
“Certificate
of Merger” has the meaning set forth in Section 2.3.
“Charter
Documents” has the meaning set forth in Section 3.3.
“Closing”
has the meaning set forth in Section 2.9.
“Closing
Date” has the meaning set forth in Section 2.9.
“Code”
means the Internal Revenue Code of 1986, as amended.
“Company”
has the meaning set forth in the Preamble. Unless the context otherwise
requires, when used in this Agreement, the term “Company” means the Company and
all of its Subsidiaries.
“Company
Common Stock” has the meaning set forth in the Recitals.
“Company
Consent” has the meaning set forth in Section 3.9.
“Company
Indemnitees” has the meaning set forth in Section 11.3.
“Company
Preferred Stock” has the meaning set forth in the Recitals.
“Company
Plan” has the meaning set forth in Section 3.25.
4
“Company
Securities” means, collectively, the Company Common Stock, the Company Preferred
Stock and the Company Warrant.
“Company
Warrant” means the Common Stock Purchase Warrant to purchase 52.4532 shares of
Company Common Stock issued to Xxxxxxx Xxxxx Mezzanine Capital Fund III, L.P.
by
the Company dated October 22, 2004.
“Completed
Contracts” has the meaning set forth in the definition of StarCo Termination
Agreement.
“Constituent
Corporations” has the meaning set forth in Section 2.1(a).
“Contracts”
has the meaning set forth in Section 3.19.
“Contracts
in Progress” has the meaning set forth in the definition of StarCo Termination
Agreement.
“Current
Company Plans” has the meaning set forth in Section 3.25.
“Customer”
has the meaning set forth in Section 7.2(b) “December Balance Sheet” has the
meaning set forth in Section 3.10(a).
“Effective
Time” has the meaning set forth in Section 2.4.
“Effectiveness
Period” has the meaning set forth in Section 8.5.
“Employment
Agreements” mean the agreements to be negotiated by the Surviving Corporation
and the Parent and each of the persons listed on Schedule 8.7. These Employment
Agreements of Xxx Xxxxxxxxxx, Xxx Xxxx and Xxx Xxxxx will provide for a term
of
not less than two years and the Employment Agreement of Xxxx XxXxxxxx will
be
for a term of not less than five years. The Employment Agreements of Xxx
Xxxxxxxxxx and Xxx Xxxx will require the Surviving Corporation and Parent to
agree, as a part of the consideration to Xxx Xxxxxxxxxx and Xxx Xxxx, that
each
of them shall serve as a full voting member of the Board of Directors of
Surviving Corporation, so long as they are employees of Surviving Corporation.
“Enhanced
Cash Consideration” has the meaning set forth in Section 2.6(b) “ERISA” means
the Employment Retirement Income Security Act of 1974.
“ERISA
Affiliate” has the meaning set forth in Section 3.25.
“ERISA
Affiliate Plan” has the meaning set forth in Section 3.25.
“Exchange
Act” means the Securities Exchange Act of 1934.
5
“Exchange
Act Filings” means filings under the Exchange Act made by the Parent prior to
the Closing Date.
“Financial
Statements” has the meaning set forth in Section 3.10(a).
“GAAP”
means U.S. generally accepted accounting principles, consistently applied and
interpreted, and shall not mean SEC GAAP.
“Indebtedness”
includes with respect to any Person, (a) all obligations of such Person for
borrowed money, or with respect to deposits or advances of any kind (including
amounts by reason of overdrafts and amounts owed by reason of letter of credit
reimbursement agreements) including with respect thereto, all interests, fees
and costs, (b) all obligations of such Person evidenced by bonds, debentures,
notes, liens, mortgages or similar instruments, (c) all obligations of such
Person under conditional sale or other title retention agreements relating
to
property purchased by such Person, (d) all obligations of such Person issued
or
assumed as the deferred purchase price of property or services (other than
accounts payable to creditors for goods and services incurred in the ordinary
course of business), (e) all Indebtedness of others secured by (or for which
the
holder of such Indebtedness has an existing right, contingent or otherwise,
to
be secured by) any lien or security interest on property owned or acquired
by
such Person, whether or not the obligations secured thereby have been assumed,
(f) all obligations of such Person under leases required to be accounted for
as
capital leases under GAAP, and (g) all guarantees by such Person.
“Indemnification
Notice” has the meaning set forth in Section 11.5(a).
“Indemnified
Parties” has the meaning set forth in Section 11.5.
“Indemnifying
Party” has the meaning set forth in Section 11.5(a).
“Individual
Indemnitees” has the meaning set forth in Section 11.4.
“Insurance
Agreements” means the agreements to be negotiated and entered into immediately
prior to the Effective Time by Parent and each of Xxx Xxxxxxxxxx and Xxx Xxxx
relating to the respective obligation of Xxx Xxxxxxxxxx and Xxx Xxxx to maintain
their existing key man life insurance policies in a form to be agreed upon
prior
to Closing. It is understood that the key man life insurance policies will
be
maintained with benefits not less than those in place as of the date of this
Agreement until such time as the Lock-Up Agreements terminate. It is understood
that the Surviving Corporation will pay the premiums for Xxx Xxxx’x policy.
“Intellectual
Property” means any and all of the following: (A) U.S., international and
foreign patents, patent applications and statutory invention registrations;
(B)
trademarks, licenses, inventions, service marks, trade names, trade dress,
slogans, logos and Internet domain names, including registrations and
applications for registration thereof; (C) copyrights, including registrations
and applications for registration thereof, and copyrightable materials; (D)
trade secrets, know-how and similar confidential and proprietary information;
(E) the additional names listed on Schedule 3.7 and all derivations thereof;
(F)
u.r.l.s, Internet domain names and
6
Websites;
and (G) any other type of Intellectual Property right, and all embodiments
and
fixations thereof and related documentation, registrations and franchises and
all additions, improvements and accessions thereto, in each case which is owned
or licensed or filed by the Company or any Subsidiary or used or held for use
in
the Business, whether registered or unregistered or domestic or foreign.
“Law”
means any domestic or foreign Federal, state, municipality or local law,
statute, ordinance, code, rule or regulation or common law.
“Leases”
has the meaning set forth in Section 3.14.
“Licensed
Intellectual Property” has the meaning set forth in section 3.16(c).
“Lien”
means, with respect to any asset, any mortgage, lien, pledge, charge, security
interest or encumbrance of any kind in respect of such asset, including any
agreement to give any of the foregoing and any conditional sale and including
any voting agreement or proxy.
“Lock-Up
Agreements” means each of the Lock-Up Agreements between (A) Parent and each of
the Company’s stockholders (other than Xxxxx) in the form attached hereto as
Exhibit
B1
and (B)
Parent and Xxxxx in the form attached hereto as Exhibit
B2.
“Loss(es)”
has the meaning set forth in Section 11.1.
“Material
Adverse Change” means a material adverse change in the business, assets,
condition (financial or otherwise), liabilities, results of operations or
prospects of the Business individually or as a whole; provided,
however,
without
prejudicing whether any other matter qualifies as a Material Adverse Change,
any
matter outside the ordinary course of business individually or in the aggregate
involving a loss or payment in excess of $100,000 shall constitute a Material
Adverse Change, per se.
“Material
Adverse Effect” means a material adverse effect on the business, assets,
condition (financial or otherwise), liabilities, results of operations or
prospects of the Business individually or as a whole; provided, however,
without
prejudicing whether any other matter qualifies as a Material Adverse Effect,
any
matter outside the ordinary course of business individually or in the aggregate
involving a loss or payment in excess of $100,000 shall constitute a Material
Adverse Effect, per se.
“Merger”
has the meaning set forth in the Recitals.
“Merger
Consideration” has the meaning set forth in Section 2.6(a).
“Money
Laundering Laws” has the meaning set forth in Section 3.33.
“Multiemployer
Plans” has the meaning set forth in Section 3.25.
“New
Note” has the meaning set forth in the Recitals.
7
“Note”
has the meaning set forth in the Recitals.
“Note
Conversion Agreement” has the meaning set forth in the Recitals.
“Offices”
has the meaning set forth in Section 3.1.
“Order”
means any decree, order, judgment, writ, award, injunction, rule or consent
of
or by an Authority.
“Outside
Closing Date” has the meaning set forth in Section 13.1.
“Owned
Intellectual Property” has the meaning set forth in Section 3.16(a).
“Parent”
has the meaning set forth in the Preamble.
“Parent’s
Accountants” has the meaning set forth in Section 2.7.
“Parent
Charter Documents” has the meaning set forth in Section 5.9.
“Parent
Common Stock” means the Common Stock, $.0001 par value per share, of
Parent.
“Parent
Financial Statements” has the meaning set forth in Section 5.11(a).
“PBGC”
has the meaning set forth in Section 3.25.
“Permits”
has the meaning set forth in Section 3.20.
“Person”
means an individual, a corporation, a partnership, a limited liability company,
an association, a trust or other entity or organization, including a government,
domestic or foreign, or political subdivision thereof, the Company or an agency
or instrumentality thereof.
“Plan”
has the meaning set forth in Section 3.25.
“Proceeding”
has the meaning set forth in Section 3.27(b).
“Real
Property” means, collectively, all real properties and interests therein
(including the right to use), together with all buildings, fixtures, trade
fixtures, plant and other improvements located thereon or attached thereto;
all
rights arising out of use thereof (including air, water, oil and mineral
rights); and all subleases, franchises, licenses, permits, easements and
rights-of-way which are appurtenant thereto.
“Rebate
Obligations” has the meaning set forth in Section 3.29(c).
8
“Reg
D”
has the meaning set forth in Section 4.5(a).
“Registrable
Securities” has the meaning set forth in Section 8.5.
“Restriction
Period” has the meaning set forth in Section 7.2(a).
“Restrictive
Covenants” has the meaning set forth in Section 7.4.
“SA
Offices” means those offices and facilities of the Company included within the
term “Offices” as defined in Section 3.1, that are located, or will be located
in San Antonio, Texas and are leased by the Company or the Subsidiaries from
Green Wing Management, Ltd.
“SEC”
means the Securities and Exchange Commission.
“September
Balance Sheet” has the meaning set forth in Section 3.10(a).
“Standard
Stock Consideration” has the meaning set forth in Section 2.6(a)(i).
“StarCo”
has the meaning set forth in Section 9.2(j).
“StarCo
Termination Agreement” means the agreement to be negotiated and entered into
immediately prior to the Effective Time by the Company and StarCo terminating
StarCo’s relationship with the Company in a form to be agreed upon by the
Company and Xxxxx prior to Closing. Pursuant to the StarCo Termination
Agreement, (i) the Company will agree to pay the account payable balance owed
StarCo on the Closing Date (in an amount no greater than $2 million), (ii)
for
claims alleged against the Surviving Corporation or StarCo arising from bonded
contracts where the contract has been paid in full as of the Closing Date
(“Completed Contracts”), the Company will agree to defend all of such claims,
pay any proven claims, and perform any required work to satisfy any proven
claims, (iii) the Surviving Corporation will have the right of reimbursement
for
all costs and damages incurred in settling, resolving, or paying any claims
that
exceed $250,000 per incident from StarCo and its Affiliates, (iv) StarCo will
agree to remain in existence until the end of the contractual warranty period
for any Completed Contract, (v) for any claim against the Surviving Corporation
or StarCo on any contract of the Company that has not been paid in full as
of
the Closing Date (“Contracts in Progress”), the Surviving Corporation will agree
to be wholly responsible for the defense, resolution and payment of such claims,
and agree to indemnify and defend StarCo from such claims, (vi) the Company
will
agree to indemnify Xxx Xxxxxxxxxx and Xxx Xxxx from their personal guarantees
(and those of their spouses) of any bonding obligation on any Contract in
Progress, and (vii) the Parent and Acquisition Corp. will agree to provide
their
own line of bonding capacity for the Surviving Corporation after the Closing
Date, without the guarantees of Xxx Xxxxxxxxxx or Xxx Xxxx.
“Software”
has the meaning set forth in Section 3.16(b).
“Stock
Consideration” has the meaning set forth in Section 2.6(a).
9
“Stockholder’s
Securities” means, with respect to a stockholder of the Company, the Company
Common Stock and/or the Company Preferred Stock owned by any such stockholder
of
the Company, including those set forth on Schedule
I
hereto.
“Subsidiary”
or “Subsidiaries” means one of the Company’s subsidiaries or all of the
Company’s subsidiaries, as applicable.
“Surviving
Corporation” has the meaning set forth in Section 2.1(a).
“Tangible
Assets” means all tangible personal property and interests therein, including
inventory, machinery, computers and accessories, furniture, office equipment,
communications equipment, vehicles, and other tangible property (collectively,
the “Tangible Assets”).
“Tax”
has
the meaning set forth in Section 3.27(c).
“Tax
Liability” has the meaning set forth in Section 3.27(b).
“Tax
Return” has the meaning set forth in Section 3.27(c).
“Third
Party Accountant” has the meaning set forth in Section 2.7(b).
“Third
Party Claim” has the meaning set forth in Section 11.5(a).
“UCC”
shall mean the Uniform Commercial Code of the State of Texas, or any
corresponding or succeeding provisions of Laws of the State of Texas,
or any
corresponding or succeeding provisions of Laws, in each case as the same may
have been and hereafter may be adopted, supplemented, modified, amended,
restated or replaced from time to time.
“Website(s)”
shall mean all of the internet domain names for the Company set forth on
Schedule 3.16(a).
“Xxxxxxxxxx
Note” means the promissory note owed by the Company and payable to Xxx
Xxxxxxxxxx, dated November 1, 2005, in the original principal amount of
$65,922.00.
ARTICLE
II
PURCHASE
AND SALE
2.1. The
Merger.
(a)
At
the Effective Time, (i) the separate existence of Acquisition
Corp.
will
cease and Acquisition Corp. will be merged with and into the Company
(Acquisition Corp. and the Company are sometimes referred to herein as the
“Constituent Corporations”; with respect to periods after the Effective Time,
the Company is sometimes referred to herein as the “Surviving Corporation”);
(ii) the Certificate of Incorporation of Acquisition Corp. in
10
effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation; and (iii) the By-laws of Acquisition
Corp. as in effect immediately prior to the Effective Time shall be the By-laws
of the Surviving Corporation.
(b)
At
and after the Effective Time, title to all property owned by each of the
Constituent Corporations shall vest in the Surviving Corporation without
reversion or impairment, and the Surviving Corporation shall automatically
assume all of the liabilities of each Constituent Corporation.
(c)
Immediately after the Effective Time, Parent shall elect no more than five
persons to the Board of Directors of the Surviving Corporation (which persons
will constitute the entire Board of Directors of the Surviving Corporation).
Neither Parent nor the Surviving Corporation is under any obligation to maintain
any person in any such position, except that Xxx Xxxxxxxxxx and Xxx Xxxx shall
be elected to the Board of Directors of the Surviving Corporation.
(d)
Immediately after the Effective Time, Parent shall cause the Board of Directors
of the Surviving Corporation to name the following persons as officers of the
Surviving Corporation in the positions indicated, provided however, neither
Parent nor the Surviving Corporation is under any obligation to maintain any
person in any such position, except as may be required in the Employment
Agreements of Xxx Xxxxxxxxxx and Xxx Xxxx.
(i) |
Xxx
Xxxxxxxxxx - Chief Executive Officer and
Secretary
|
(ii) |
Xxx
Xxxx - President
|
(iii) |
such
other persons as the Board of Directors of the Surviving Corporation
shall
designate.
|
2.2. (This
section intentionally left blank)
2.3. Certificate
of Merger.
As soon
as practicable following fulfillment or waiver
of
the conditions specified in Article IX hereof, and provided that this Agreement
has not been terminated and abandoned pursuant to Article XIII hereof, the
Company and Acquisition Corp. will cause the Certificate of Merger (the
“Certificate of Merger”) to be executed and filed with the Delaware Secretary of
State as provided in the Delaware General Corporation Law.
2.4.
Effective
Time of the Merger.
The
Merger shall become effective at 11:59 p.m. on the day of the filing of the
Certificate of Merger with the Delaware Secretary of State or at such other
date
or time thereafter as the parties may agree. The date and time of such
effectiveness is herein sometimes referred to as the “Effective Time”.
2.5.
Effect
on Capital Stock; Exchange Procedures.
11
(a)
As of
the Effective Time, by virtue of the Merger and without any action on the part
of the holders of any Company Securities or the holders of capital stock of
Acquisition Corp.:
(i)
Each
issued share of the Company Common Stock and Company Preferred Stock outstanding
prior to the Effective Time shall be converted into the right to receive a
portion of the Merger Consideration as defined in Section 2.6. The Company
Warrant shall be converted into the right to receive a portion of the Merger
Consideration as defined in Section 2.6. All of the Company Securities
outstanding prior to the Effective Time shall be cancelled, and each holder
of a
certificate or agreement representing any of the Company Securities shall
thereafter cease to have any rights with respect to the Company Securities
except the right to receive the Merger Consideration pursuant to the terms
hereof. Any shares of the Company Securities held as treasury shares by the
Company shall be canceled and not be converted into the right to receive any
consideration.
(ii)
Each
issued and outstanding share of the capital stock of Acquisition Corp. shall
automatically, and without any action on the part of the holder thereof, become
a share of Company Common Stock.
(b)
As
soon as practicable after the Effective Time, each holder of Company Securities
prior to the Effective Time will surrender the certificates or agreements
representing the Company Securities to the Parent. Upon the surrender of all
the
Company Securities owned by a stockholder or the holder of the Company Warrant
of the Company, such Person shall promptly receive from Parent the portion
of
the Merger Consideration which such Person is entitled to receive pursuant
to
Sections 2.6.
(c)
If
the Merger Consideration (or any portion thereof) to be paid to any stockholder
of the Company or the holder of the Company Warrant is to be delivered to any
person other than the person in whose name the Company Securities are
registered, it shall be a condition to such exchange that the Company Securities
so surrendered shall be properly endorsed or otherwise in proper form for
transfer and the person requesting such exchange shall (i) establish to the
satisfaction of the Parent the propriety of such transfer and (ii) (x) pay
any
transfer or other taxes required by reason of the payment of such consideration
to a person other than the registered holder of the Company Securities
surrendered, or (y) establish to the satisfaction of the Parent that such tax
has been paid or is not applicable.
(d)
If
any certificate representing Company Securities outstanding prior to the
Effective Time has been lost, stolen or destroyed, Parent shall issue the
applicable Merger Consideration deliverable in respect thereof upon (i) the
making of an affidavit of that fact by the person claiming such certificate
to
be lost, stolen or destroyed and (ii) if required by the Parent, the posting
by
such person of a bond in such reasonable amount as the Parent may direct as
indemnity against any claim that may be made against it with respect to such
certificate.
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(e)
From
and after the Effective Time, no transfer of any securities of Acquisition
Corp.
outstanding prior to the Effective Time shall be made on the stock transfer
books of Acquisition Corp.
2.6.
Merger
Consideration.
The
aggregate consideration that the Company’s stockholders and the holder of the
Company Warrant will be entitled to receive by virtue of the Merger shall be
the
sum of the cash and Parent Common Stock set forth below (as applicable, the
“Merger Consideration”).
(a)
If,
at the time of the Closing, (i) the 2/28 Backlog is less than $80,000,000,
or
(ii) the 2/28 Backlog is greater than $80,000,000 but the Adjusted EBITDA of
the
Company is less than $4,500,000, then, subject to the right of the Parent to
terminate the Merger Agreement pursuant to Article 13, the Merger Consideration
shall consist of:
(i)
$16,300,000 in cash (the “Standard Cash Consideration”); and
(ii)
1,180,000 shares of Parent Common Stock (the “Stock Consideration”).
(b)
If at
the time of the Closing the Adjusted EBITDA of the Company is $4,500,000 or
greater, and the amount of the 2/28 Backlog is $80,000,000 or greater, then
the
Merger Consideration shall consist of:
(i) |
$18,200,000
in cash (the “Enhanced Cash Consideration”);
and
|
(ii) |
the
Stock Consideration
|
(c)
The
terms Standard Cash Consideration and Enhanced Cash Consideration are
collectively referred to herein as “Cash Consideration”.
2.7.
Procedure
to Establish Adjusted EBITDA.
(a)
By
February 15, 2007, the Company will provide the Parent with the 2006 Financial
Statements and a calculation (with reasonably sufficient detail to allow the
Parent to analyze the calculation) of the Company’s Adjusted EBITDA for the
calendar year ended December 31, 2006.
(b)
If
Parent seeks to propose any change or modification in the Company’s calculation
of Adjusted EBITDA and/or the 2006 Financial Statements, Parent must do so
in a
writing delivered to Company, setting forth in reasonable detail (i) the changes
or modifications proposed, (ii) the rationale and evidence justifying the
proposed change or modifications, and (iii) if applicable, the provisions of
U.S. GAAP (not SEC. GAAP) that clearly and specifically require the proposed
change or modifications, within 10 days of receiving such calculation of
Adjusted EBITDA and the 2006 Financial Statements. If Company, within 10 days
of
receiving the proposed changes or modifications of Parent, does not notify
Parent in writing that Company has agreed to the changes or modifications in
the
Company’s calculation of Adjusted EBITDA and/or the 2006 Financial Statements
proposed
13
by
Parent, then, if within 10 days thereafter, the independent accountants
regularly employed by the Parent (the “Parent’s Accountants”) and the
independent accountants for the Company (the “Company’s Accountants”) are unable
to agree upon the Adjusted EBITDA calculations or the 2006 Financial Statements,
the Parent’s Accountants and the Company’s Accountants shall provide their
calculations of Adjusted EBITDA and the 2006 Financial Statements to a
third-party independent accountant (the “Third Party Accountant”) familiar with
businesses similar to the Business and mutually agreed upon by the Parent’s
Accountants and the Company’s Accountants, who shall make a determination as to
the Company’s Adjusted EBITDA as of the Closing Date. If the Parent’s
Accountants and the Company’s Accountants cannot agree upon the Third Party
Accountant, then the Third Party Accountant will be Pricewaterhouse
Coopers.
(c)
The
calculation of Adjusted EBITDA as of the Closing Date submitted to Parent by
Company, shall be deemed to be irrevocably incontestable and binding upon Parent
and Acquisition Corp. unless, as to the issues raised by Parent and submitted
for resolution, the Third Party Accountant shall, prior to determination of
any
other substantive issue, make a finding that, based on standards generally
acceptable in the accounting industry, there was no reasonable basis pursuant
to
U.S. GAAP (not S.E.C. GAAP) for the calculation of Adjusted EBITDA or the 2006
Financial Statements by Company’s Accountant. If the Third Party Accountant does
not make such a finding as required herein, the fees of the Third Party
Accountant shall be the sole responsibility of Parent. If the Third Party
Accountant makes such a finding, the expenses for the Third Party Accountant
shall be paid for by the party whose calculation of Adjusted EBITDA was most
different from the calculation of such Third Party Accountant, as determined
by
such Third Party Accountant as reasonable.
2.8.
Procedure
to Establish 2/28 Backlog
(a)
By
March 21, 2007, the Company will provide the Parent with a calculation of the
Company’s 2/28 Backlog. If Parent seeks to propose any change or modification in
the Company’s calculation of 2/28 Backlog, Parent must do so in a writing
delivered to Company, setting forth in reasonable detail (i) the changes or
modifications proposed, and (ii) the rationale and evidence justifying the
Parent’s assertion that the Company’s calculation of 2/28 Backlog does not
comply with the Company’s past practices. If Company, within 10 days of
receiving the proposed changes or modifications of Parent, does not notify
Parent in writing that Company has agreed to the changes or modifications in
the
Company’s calculation of 2/28 Backlog, the Parent and the Company shall
negotiate in good faith the amount of the 2/28 Backlog.
2.9.
Payment
of the Merger Consideration.
(a)
If at
the time of the Closing, (i) the 2/28 Backlog is less than $80,000,000, or
(ii)
the 2/28 Backlog is greater than $80,000,000 but the Adjusted EBITDA of the
Company is less than $4,500,000, then, subject to the right of the Parent to
terminate the Merger Agreement pursuant to Article 13, the Merger Consideration
shall be payable by Acquisition Corp. and Parent as follows, in the following
priorities:
14
(i)
First, Xxxxx, as the holder of all of the Company Preferred Stock, will be
entitled to receive a portion of the Cash Consideration in an aggregate amount
equal to $10,000,000.00.
(ii)
Second, but only if the Xxxxxxxxxx Note and the Xxxx Note are still outstanding
as of the Closing Date, the holders of the Xxxxxxxxxx Note and the Xxxx Note,
constituting long term debt of the Company, will be paid in full their
respective principal balances due, in an aggregate amount equal to $98,391.00.
(iii)
Third, the holders of Company Common Stock will be entitled to receive (i)
$5,307,189 (or $5,405,580 if the Xxxxxxxxxx Note and the Xxxx Note are not
still
outstanding as of immediately prior to the Closing Date), to be distributed
according to Schedule 2.9 attached hereto and (ii) 739,712 shares of Parent
Common Stock , to be distributed according to Schedule 2.9 attached hereto.
(iv)
Fourth, the holder of the Company Warrant will be entitled
to
receive (i) 440,288 shares of Parent Common Stock
and (ii)
$894,420
(b)
If at
the time of the Closing the Adjusted EBITDA of the Company is $4,500,000.00
or
greater, and the amount of the 2/28 Backlog is $80,000,000.00 or more, then
the
Enhanced Cash Consideration shall be distributed as follows, in the following
priorities:
(i)
First, Xxxxx, as the holder of all of the Company Preferred Stock, will be
entitled to receive a portion of the Cash Consideration in an aggregate amount
equal to $10,000,000.
(ii)
Second, but only if the Xxxxxxxxxx Note and the Xxxx Note are still outstanding
as of the Closing Date, the holders of the Xxxxxxxxxx Note and the Xxxx Note,
constituting long term debt of the Company, will be paid in full their
respective principal balances due, in an aggregate amount equal to $98,391.00.
(iii)
Third, the holders of Company Common Stock will be entitled to receive (i)
$6,655,529 (or $6,753,920 if the Xxxxxxxxxx Note and the Xxxx Note are not
still
outstanding as of immediately prior to the Closing Date), to be distributed
according to Schedule 2.9 attached hereto and (ii) 739,712 shares of Parent
Common Stock , to be distributed according to Schedule 2.9 attached hereto.
(iv)
Fourth, the holder of the Company Warrant will be entitled to receive (i)
440,288 shares of Parent Common Stock and (ii) $1,446,080.
2.10.
Closing.
Subject
to the satisfaction or waiver of the conditions set forth in Article IX, the
closing (the “Closing”) of the Merger hereunder shall take place at the offices
of Xxxxxx & Xxxx LLP in Austin, Texas, or at such other date, time or place
as Parent,
15
Acquisition
Corp. and the Company may agree (the date and time at which the Closing is
actually held being the “Closing Date”). In addition to those obligations set
forth in Article IX, at the Closing:
(a)
Parent shall deliver the Merger Consideration in accordance with Section 2.6;
and
(b)
Each
of the stockholders of the Company and the holder of the Company Warrant will
deliver to Parent certificates representing the stockholder’s Company Securities
or the Company Warrant, as applicable, duly endorsed, together with any other
documents that are necessary to transfer to Parent good title to all of the
Company Securities, free and clear of any and all Liens.
2.11.
No
Further Transfers; Lost, Stolen or Destroyed
Certificates.
The
Merger Consideration paid pursuant to the Merger upon the surrender for exchange
of shares of Company Securities in accordance with the terms hereof shall be
deemed to have been paid in full satisfaction of all rights pertaining to such
shares of Company Securities, and upon and after the Effective Time, no transfer
of the shares of Company Securities outstanding prior to the Effective Time
shall be made on the stock transfer books of the Surviving Corporation. If,
after the Effective Time, certificates are presented to the Surviving
Corporation for any reason, they shall be cancelled and exchanged as provided
in
this Article II.
2.12.
Effect
of the Merger; Parent Name Change.
Upon
and after the Effective Time: (a) the shares of the Company shall be converted
as provided in this Agreement; (b) the former holders of such shares will be
entitled only to the rights provided in this Agreement, the Additional
Agreements and to the rights provided under Delaware General Corporation Law;
and (c) the Merger shall otherwise have the effect provided under the applicable
laws of the state of Delaware. Subsequent to the Effective Time, the Parent
shall change its name from “Argyle Security Acquisition Corp.” to “Argyle
Security, Inc.”, or such other name as is legally available.
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
The
Company hereby represents and warrants to Parent and Acquisition Corp. that
the
statements contained in this Article III are true and correct, except as set
forth in the disclosure schedule attached hereto (the “Company Disclosure
Schedule”). The Company Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
III, and the disclosure in any paragraph shall qualify the corresponding
paragraph in this Article III; provided,
however,
that
any item disclosed under any paragraph of the Company Disclosure Schedule shall
be deemed to be disclosed with respect to every other applicable paragraph
if
the disclosure in respect to such paragraph of the Company Disclosure Schedule
is sufficient to reasonably inform the reader of the Company
Disclosure
16
Schedule
of the information required to be disclosed in respect of other paragraphs
of
the Company Disclosure Schedule. Any reference in this Article III to an
agreement being “enforceable” shall be deemed to be qualified to the extent such
enforceability is subject to (i) laws of general application relating to
bankruptcy, insolvency, moratorium and the relief of debtors, and (ii) the
availability of specific performance, injunctive relief and other equitable
remedies. The Company Disclosure Schedule refers to sources of data,
documentation and information that are too voluminous to attach to this
Agreement, and all such data, documentation and information so referenced are
irrevocably deemed to be incorporated by reference herein for all purposes
as if
set forth verbatim herein.
3.1.
Corporate
Existence and Power.
The
Company (and not its Subsidiaries) is a corporation duly formed, validly
existing and in good standing under and by virtue of the Laws of the State
of
Delaware. The Company has all power and authority, corporate and otherwise,
and
all governmental licenses, franchises, permits, authorizations, consents and
approvals required to own and operate its properties and assets and to carry
on
its business as now conducted and as proposed to be conducted, except where
failure would not have a Material Adverse Effect. Each Subsidiary is duly
formed, validly existing and in good standing under and by virtue of the laws
of
the State of its organization. Each such Subsidiary has all power and authority,
corporate and otherwise, and all governmental licenses, franchises, permits,
authorizations, consents and approvals required to own and operate its
properties and assets and to carry on its business as now conducted and as
proposed to be conducted, except where failure would not have a Material Adverse
Effect. Schedule 3.1(a) sets forth each jurisdiction where the Company and
each
of its Subsidiaries is qualified to do business as a foreign
corporation.
The
only
offices, warehouses or business locations of the Company and each Subsidiary
are
listed on Schedule 3.1(b) (the “Offices”) Neither the Company nor any Subsidiary
has taken any action, adopted any plan, or made any agreement in respect of
any
merger, consolidation, sale of all or substantially all of its respective
assets, reorganization, recapitalization, dissolution or liquidation, except
as
explicitly set forth in this Agreement.
3.2.
Corporate
Authorization.
The
execution, delivery and performance by the Company of this Agreement and each
of
the other Additional Agreements to which the Company is named as a party and
the
consummation by the Company of the transactions contemplated hereby and thereby
are within the corporate powers of the Company and have been duly authorized
by
all necessary action on the part of the Company. This Agreement constitutes,
and, upon their execution and delivery, each of the Additional Agreements to
which the Company is named as a party will constitute, a valid and legally
binding agreement of the Company, enforceable against the Company in accordance
with their respective terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, or (ii) rules
of law governing specific performance, injunctive relief or other equitable
remedies.
3.3.
Charter
Documents; Legality.
The
Company has previously delivered to
Parent
true and complete copies of its Certificate of Incorporation and By-Laws, minute
books and stock books (the “Charter Documents”), as in effect or constituted on
the date hereof. The execution, delivery, and performance by the Company of
this
Agreement and any Additional Agreement to which the Company is to be a party
has
not violated and will not
17
violate,
and the consummation by the Company of the transactions contemplated hereby
or
thereby will not violate, any of the Charter Documents or any law.
3.4.
Subsidiaries.
Schedule 3.4 sets forth each of the Company’s Subsidiaries. The Company has
previously delivered to Parent true and complete copies of the Charter Documents
for each Subsidiary, as in effect or constituted on the date hereof. The Company
is not a party to any agreement relating to the formation of any joint venture,
association or other Person.
3.5.
Capitalization
and Ownership.
Schedule 3.5 sets forth, with respect to the Company and each Subsidiary, (i)
such company’s authorized capital, (ii) the number of such company’s securities
that are outstanding, (iii) each stockholder owning such company’s securities
and the number of shares of such securities owned by such security holder and
(iv) each security convertible into or exercisable or exchangeable for such
company’s securities, the number and type of securities such security is
convertible into, the exercise or conversion price of such security and the
holder of such security. Except as set forth on Schedule 3.5, no Person other
than the stockholders or the Company owns any securities of the Company or
the
Subsidiaries. Except as set forth on Schedule 3.5, there is no Contract that
requires or under any circumstance would require the Company or any Subsidiary
to issue, or grant any right to acquire, any securities of the Company or any
Subsidiary, or any security or instrument exercisable or exchangeable for or
convertible into, the capital stock or membership interest of the Company or
any
Subsidiary or to merge, consolidate, dissolve, liquidate, restructure or
recapitalize the Company or any Subsidiary. The Company Securities and the
securities of each Subsidiary (i) have been duly authorized and validly issued
and are fully paid and nonassessable, and the shares of Company Preferred Stock
issued to Xxxxx in exchange for $10,000,000 of the Note will, upon such
exchange, be validly issued, fully paid and nonassessable, and (ii) were issued
in compliance with all applicable federal and state securities laws.
3.6.
Affiliates.
Other
than the stockholders listed on Schedule 3.5, the Company is not controlled
by
any Person and the Company is not in control of any other Person other than
the
Subsidiaries. Schedule 3.6 lists each Contract, arrangement, or understanding
to
which the Company, on the one hand, and any of its stockholders or any Affiliate
of any of its stockholders, on the other hand, are parties. Except as disclosed
in Schedule 3.6, none of the Company’s stockholders or any Affiliate of any of
the Company’s stockholders (i) own, directly or indirectly, in whole or in part,
any tangible or intangible property (including Intellectual Property rights)
that the Company or any Subsidiary uses or the use of which is necessary for
the
conduct of the Business, or (ii) have engaged in any transaction with the
Company or any Subsidiary.
3.7.
Assumed
Names.
Schedule 3.7 is a complete and correct list of all assumed or “doing business
as” names currently or formerly used by the Company or any Subsidiary, including
names on any Websites, except for immaterial names no longer used. Neither
the
Company nor any Subsidiary has used any name other than the names listed on
Schedule 3.7 to conduct its business, except for immaterial names no longer
used. The Company and each Subsidiary have filed appropriate “doing business as”
certificates in all
18
applicable
jurisdictions. Except as indicated on Schedule 3.7, all Websites are in good
working order.
3.8.
Governmental
Authorization.
None of
the execution, delivery or performance by the Company of this Agreement or
any
Additional Agreement requires any consent, approval, license or other action
by
or in respect of, or registration, declaration or filing with, any Authority.
3.9.
Consents.
The
Contracts listed on Schedule 3.9 are the only material agreements, commitments,
arrangements, contracts or other instruments binding upon the Company, any
Subsidiary or any of their respective properties requiring a consent, approval,
authorization, order or other action of or filing with any Person as a result
of
the execution, delivery or performance of this Agreement or any of the
Additional Agreements to which the Company is named as a party or the
consummation of the transactions contemplated hereby or thereby (each of the
foregoing, a “Company Consent”).
3.10.
Financial
Statements.
(a)
Attached hereto as Schedule 3.10(a) are audited consolidated balance sheets
of
the Company as of December 31, 2004 and December 31, 2005, and the related
consolidated statements of operations, stockholders’ deficit and cash flows for
each of the years in the three-year period ended December 31, 2005, and an
unaudited balance sheet of the Company as of September 30, 2006 and the related
statements of operations, stockholders’ deficit and cash flows for the period
ending September 30, 2006 (collectively, the “Financial Statements”). The
balance sheet contained in the Financial Statements as of December 31, 2005
is
referred to herein as the “December Balance Sheet”. The balance sheet contained
in the Financial Statements as of September 30, 2006 is referred to herein
as
the “September Balance Sheet”. The Financial Statements (i) were prepared from
the Books and Records; (ii) except a lack of footnotes with regard to September
30, 2006 financials and except as set forth on Schedule 3.10(a), were prepared
in accordance with GAAP; (iii) fairly and accurately present the Company’s
financial condition and the results of its operations as of their respective
dates and for the periods then ended; (iv) contain and reflect all necessary
adjustments and accruals for a fair presentation of the Company’s financial
condition as of their dates; and (v) contain and reflect adequate provisions
for
all reasonably anticipated liabilities for all material income, property, sales,
payroll or other Taxes applicable to the Company with respect to the periods
then ended. The Company has heretofore delivered to Parent complete and accurate
copies of all “management letters” received by it from the Company’s accountants
and all responses during the last three years by lawyers engaged by the Company
to inquiries from the Company’s accountant or any predecessor accountants.
(b)
Except as specifically disclosed, reflected or fully reserved against on the
September Balance Sheet and for liabilities and obligations of a similar nature
and in similar amounts incurred in the ordinary course of business since the
date of the September Balance Sheet and except as set forth on Schedule 3.10(b),
there are no liabilities, debts or obligations of any nature (whether accrued,
absolute, contingent, liquidated or unliquidated, unasserted or otherwise)
relating to the Company. All debts and liabilities, fixed or
19
contingent,
which should be included under GAAP on an accrual basis on the September Balance
Sheets are included therein.
(c)
The
December Balance Sheet and September Balance Sheet accurately reflect the
outstanding Indebtedness of the Company as of the dates thereof. Except for
liabilities and obligations of a similar nature and in similar amounts incurred
in the ordinary course of business since the date of the September Balance
Sheet
as set forth on the September Balance Sheet and Schedule 3.10(b), the Company
does not have any Indebtedness.
(d)
All
forecasts, presentations or projections relating to the future results of
operations of the Company were based upon reasonable assumptions and were
prepared in good faith by the Company.
(e)
(This
Section intentionally left blank)
(f)
All
Books and Records of the Company have been properly and accurately kept and
completed in all material respects, and there are no material inaccuracies
or
discrepancies of any kind contained or reflected therein. The Company has none
of its records, systems controls, data or information recorded, stored,
maintained, operated or otherwise wholly or partly dependent on or held by
any
means (including any mechanical, electronic or photographic process, whether
computerized or not) which (including all means of access thereto and therefrom)
is not under the exclusive ownership (excluding licensed software programs)
and
direct control of the Company and which is not located at the Offices or at
locations set forth on Schedule 3.10(f).
3.11.
Accounts
Receivable.
Schedule 3.11(a) sets forth as of a date within three days of the date hereof
all accounts, notes and other receivables, whether or not accrued, and whether
or not billed, of the Company, in accordance with GAAP (“Accounts Receivable”).
Except as set forth in Schedule 3.11(b), all Accounts Receivable represent
bona
fide revenues of the Company pursuant to the Business and are fully collectible,
net of any reserves shown on the September Balance Sheet. Except as set forth
on
Schedule 3.11(b), all accounts and notes receivable reflected on the December
Balance Sheet, or arising since December 31, 2005, have been collected, or
are
and to the knowledge of the Company will be good and collectible, in each case
at the aggregate recorded amounts thereof without right of recourse, defense,
deduction, return of goods, counterclaim, offset, or set off on the part of
the
obligor.
3.12. Books
and Records.
(a)
The
Books and Records accurately and fairly, in reasonable detail, reflect
the Company’s transactions and dispositions of assets. The Company maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that:
(i)
transactions are executed in accordance with management’s authorization;
20
(ii)
access to assets is permitted only in accordance with management’s
authorization; and
(iii)
recorded assets are compared with existing assets at reasonable intervals,
and
appropriate action is taken with respect to any differences.
(b)
The
Company has heretofore made all of its Books and Records available to Parent
for
its inspection and has heretofore delivered to Parent complete and accurate
copies of documents referred to in the Schedules as Parent has requested. All
Contracts, documents, and other papers or copies thereof delivered to Parent
by
or on behalf of the Company in connection with this Agreement and the
transactions contemplated herein are accurate, complete, and authentic.
(c)
Schedule 3.12(c) is a complete and correct list of all savings, checking,
brokerage or other accounts pursuant to which the Company has cash or securities
on deposit and such list indicates the signatories on each account.
3.13. Absence
of Certain Changes.
(a)
Except as set forth in Schedule 3.13(a), since December 31, 2005, the
Company
and each Subsidiary has conducted its respective business in the ordinary
course
of business consistent with past practices, and with respect to the conduct
of
business by Company and each Subsidiary outside the ordinary course of
business,
there has not been:
(i)
any
Material Adverse Change or any event, occurrence, development or state of
circumstances or facts which could reasonably be expected to result individually
or in the aggregate in a Material Adverse Effect on the Company’s ability to
consummate the transactions contemplated herein or upon the value to Parent
or
Acquisition Corp. of the transactions contemplated hereby;
(ii)
any
transaction, contract, agreement or other instrument entered into, or commitment
made, by the Company or any Subsidiary relating to the Business or any
relinquishment by the Company or any Subsidiary of any Contract or other right,
in either case other than transactions and commitments in the ordinary course
of
business consistent in all respects, including kind and amount, with past
practices and those contemplated by this Agreement;
(iii)
any
increase of bonus, salary or other compensation paid of more than 20% for any
employee making an annual salary of greater than $80,000 or in excess of $16,000
in the aggregate on an annual basis for any single employee, or change in the
bonus or profit sharing policies of the Company;
(iv)
any
capital expenditure except in the ordinary course of business consistent with
past practice;
21
(v)
any
sale, lease, license or other disposition of any of its assets except (a)
pursuant to existing Contracts or commitments disclosed herein and (b) sales
of
products or inventory in the ordinary course of business consistent with past
practice;
(vi)
acceptance of any returns except in the ordinary course of business, consistent
with past practice;
(vii) any
material default under any term or provision of any Contract;
(viii) a
material increase in the amount of Indebtedness;
(ix) the
incurrence of Liens on any of its assets, other than in the ordinary
course of business, consistent with past practice;
(x)
any
material damage, destruction or loss of property related to any of its assets
not covered by insurance;
(xi)
any
delay, acceleration or cancellation of any receivables or indebtedness owed
to
it or write-off or additional reserves made with respect to the same, other
than
in the ordinary course of business, consistent with past practice;
(xii)
any
merger or consolidation with or acquisition of any other Person;
(xiii) the
lapse
of any insurance policy protecting its assets;
(xiv) any
change in its accounting principles or methods or write down of
the
value of any inventory or assets;
(xv) any
change in location where it conducts business;
(xvi) any
extension of any loans other than travel or other expense advances
to employees in the ordinary course of business consistent with past practice
exceeding $5,000 individually or $50,000 in the aggregate;
(xvii)
any increase or reduction in the prices of products sold except in the ordinary
course of business consistent with past practice;
(xviii)
any agreement to change any practices or terms, including payment terms, with
respect to customers or suppliers;
(xix)
any
change in hiring practices for employees, consultants or advisors;
22
(xx) any
dividend or distribution to the Company’s stockholders; or
(xxi) any
agreement to do any of the foregoing.
(b)
Except as set forth on Schedule 3.13(a) and actions taken in good faith to
invest in the Company’s business, since December 31, 2005, through and including
the Closing Date, neither the Company nor any Subsidiary has taken any action
nor has any of them had any event occur which would have violated any covenants
of the Company set forth in Article VI hereof.
3.14.
Real
Property.
(a)
Neither the Company nor any Subsidiary owns any Real Property. The Company
has
delivered to Parent true, correct, and complete copies of the leases and all
amendments thereto for the properties listed on Schedule 3.14(a) (the “Leases”).
The Leases, together with all amendments, are listed in Schedule 3.14(a) and
are
valid and enforceable by the Company or the Subsidiary which is a party to
such
lease against the other parties thereto. Neither the Company nor any Subsidiary
has breached or violated and is not in default under any of the Leases or any
local zoning ordinance, the breach or violation of which could individually
or
in the aggregate have a Material Adverse Effect, and no notice from any Person
has been received by the Company or any Subsidiary or served upon the Company,
any Subsidiary claiming any violation of any Lease or any local zoning
ordinance. Neither the Company nor any Subsidiary has other leases for Real
Property except as set forth on Schedule 3.14(a).
(b)
Neither the Company nor any Subsidiary has experienced any material interruption
in the delivery of adequate quantities of any utilities (including electricity,
natural gas, potable water, water for cooling or similar purposes and fuel
oil)
or other public services (including sanitary and industrial sewer service)
required by the Company or any Subsidiary in the operation of the Business.
3.15. Tangible
Personal Property.
(a)
Each
piece of Tangible Assets is in operating condition and repair and functions
in accordance with its intended use (ordinary wear and tear excepted),
has been
properly maintained, and is suitable for its present uses. Schedule 3.15(a)
sets
forth a complete and correct list of the Tangible Assets owned by the Company
or
any Subsidiary, setting forth a description of such property and its location,
as of a date within three days of the Closing Date.
(b)
The
Company or one of the Subsidiaries has, and upon consummation of the
transactions contemplated hereby will continue to have, good, valid and
marketable title in and to each piece of Tangible Assets listed on Schedule
3.15(a) hereto, free and clear of all Liens, except as set forth on Schedule
3.15(b).
23
(c)
The
Company or one of the Subsidiaries has good title to, or a valid leasehold
or
license interest in, all its respective properties and assets (whether tangible
or intangible), free and clear of all Liens. The personal and other properties
and assets owned by the Company or any Subsidiary or leased or licensed by
the
Company or any Subsidiary from a third party constitute all such properties
and
assets which are necessary to the Business as presently conducted and as
presently proposed to be conducted.
(d)
The
materials and supplies included in the inventory of the Company or any
Subsidiary as of the Closing Date will be (i) substantially equivalent in
quality and quantity, subject to seasonality, to the materials and supplies,
and
additions thereto, generally included in such inventory in the past; and (ii)
valued in accordance with GAAP and applied on a basis consistent with that
used
in the Financial Statements.
(e)
Except as indicated on Schedule 3.15(a), all Tangible Assets except for vehicles
that are being used in the Business are located at the Offices.
3.16.
Intellectual
Property.
(a)
Schedule 3.16(a) sets forth a true and complete list of all Intellectual
Property owned by the Company or any Subsidiary and used or held for use by
or
otherwise material to the Business (the “Owned Intellectual Property”).
(b)
Schedule 3.16(b) sets forth a true and complete list of all material computer
software developed in whole or in part by or on behalf of the Company or any
Subsidiary, including such developed computer software and databases that are
operated or used by the Company or any Subsidiary on its Websites and used
or
held for use by or otherwise material to the business (collectively,
“Software”). Except for the software (including prepackaged third party
software) listed on Schedule 3.16(c), the Software is the only computer software
that is used or held for use by or otherwise material to the Business.
(c)
Schedule 3.16(c) sets forth a true and complete list of all licenses,
sublicenses and other agreements pertaining to Intellectual Property or Software
to which the Company is a party in each case which are valid and used or held
for use by or otherwise material to the Business (collectively, “Licensed
Intellectual Property”).
(d)
Neither the Company’s nor any Subsidiary’s ownership and use in the ordinary
course of the Owned Intellectual Property and the use of the Software and
Licensed Intellectual Property does not infringe upon or misappropriate the
valid Intellectual Property rights, privacy rights or other right of any third
party.
(e)
Except as set forth in Schedule 3.16(f), the Company or a Subsidiary is the
owner of the entire and unencumbered right, title and interest in and to each
item of Owned Intellectual Property, and the Company or a Subsidiary is entitled
to use, and is using in the Business, the Owned Intellectual Property, Software
and Licensed Intellectual Property in the ordinary course.
24
(f)
Except for the Intellectual Property listed on Schedule 3.16(f) the Owned
Intellectual Property, Software and the Licensed Intellectual Property include
all of the Intellectual Property used in the ordinary day-to-day conduct of
the
Business, and there are no other items of Intellectual Property, Software or
Licensed Intellectual Property that are material to such ordinary day-to-day
conduct of the Business. The Company’s rights in the Owned Intellectual Property
and, to the knowledge of the Company or any Subsidiary, the Company’s rights in
the Licensed Intellectual Property, are subsisting, valid and enforceable,
and
have not been adjudged invalid or unenforceable in whole or part.
(g)
To
the knowledge of the Company, no Person is engaged in any activity that
infringes upon the Owned Intellectual Property, the Licensed Intellectual
Property or the Software. Neither the Company nor any Subsidiary has granted
any
license or other right currently outstanding to any third party with respect
to
the Owned Intellectual Property, Licensed Intellectual Property or Software,
except for (i) licenses issued in
the
ordinary course, and (ii) those licenses set forth in Schedule
3.16(g).
The
consummation of the transactions contemplated by this Agreement will not result
in the termination or impairment of any of the Owned Intellectual Property,
Licensed Intellectual Property or Software.
(h)
Neither the Company nor or any Subsidiary has exported the Software outside
the
U.S. or Canada. No rights in the Software have been transferred by the Company
to any third party except to the customers of the Company to whom the Company
has licensed such Software in the ordinary course.
(i)
The
Company or a Subsidiary has the right to use all software development tools,
library functions, compilers and other third party software that is material
to
the Business or that is required to operate or, where modification is essential
to the use of the Software, to modify the Software.
(j)
The
Company and each Subsidiary has taken reasonable steps to maintain the
confidentiality of its trade secrets and other confidential Intellectual
Property and to the Company’s knowledge, (i) there has been no misappropriation
of any material trade secrets or other material confidential Intellectual
Property of the Company or any Subsidiary by any Person; (ii) no employee,
independent contractor or agent of the Company or any Subsidiary has
misappropriated any trade secrets of any other Person in the course of his
performance as an employee, independent contractor or agent; and (iii) no
employee, independent contractor or agent of the Company or any Subsidiary
is in
default or breach of any term of any employment agreement, non-disclosure
agreement, non-compete obligation, assignment of invention agreement or similar
agreement or contract relating in any way to the protection, ownership,
development, use or transfer of Intellectual Property, other than those which
individually or in the aggregate would not have a Material Adverse Effect.
3.17. Relationships
With Customers, Suppliers, Etc..
(a)
Schedule 3.17(a) identifies during the nine months ended September 30,
2006
and the fiscal year ended December 31, 2005, respectively (i) the 10
largest
25
customers
of the Company and each Subsidiary in the aggregate and the amount of revenues
accounted for by such customer during each such period and (ii) the 5 largest
suppliers (other than attorneys, accountants and office leases) of the Company
and each Subsidiary in the aggregate and the amount of expense accounted for
by
such supplier during each such period.
(b)
Schedule 3.17(b) sets forth (i) all prepayments, pre-billed invoices and
deposits that have been received by the Company or any Subsidiary as of the
date
hereof from customers for products to be shipped, or services to be performed,
after the Closing Date, and (ii) with respect to each such prepayment,
pre-billed invoice or deposit, (A) the party and contract credited, (B) the
date
received or invoiced, (C) the products and/or services to be delivered, and
(D)
the conditions for the return of such prepayment, pre-billed invoice or deposit.
All such prepayments, pre-billed invoices and deposits are properly accrued
for
on the Financial Statements, in accordance with GAAP applied on a consistent
basis with the past practice of the Company.
(c)
Schedule 3.17(c) sets forth all purchases (other than attorneys, accountants
and
office leases) since December 31, 2005, with a cost of in excess of $50,000
for
any single item or series of related items.
(d)
Except as set forth on Schedule 3.17(d), since December 31, 2005: (i) there
has
not been any termination of the business relationship of the Company or any
Subsidiary with any material licensee, customer or supplier, other than in
the
ordinary course of business where a contract has been concluded with a customer
with no subsequent follow-on business or with a supplier due to the supplier’s
products being either (A) no longer available or (B) no longer applicable to
the
Company’s ongoing business; (ii) to the knowledge of the Company, there has not
been any threatened termination or withholding of payments by, or any material
dispute with, any material licensee, customer or supplier; and (iii) neither
the
Company nor any Subsidiary has received any notice or been informed that any
such event described in (a) or (b) above will occur in the future, either as
a
result of the consummation of the transactions contemplated by this Agreement
or
otherwise. Except as set forth on Schedule 3.17(d), neither the Company nor
any
Subsidiary is currently in any dispute over any terms of any contract or
agreement to which the Company or any Subsidiary and any material licensee,
customer or supplier is a party.
3.18.
Litigation.
Except
as set forth in Schedule 3.18, there is no Action pending against, or to the
knowledge of the Company, threatened against or affecting the Company or any
Subsidiary, any of their respective officers or directors, any stockholder
of
the Company, where such Action relates directly or indirectly to the business
of
the Company or such stockholder’s ownership interest in the Company, the
business of the Company or any Subsidiary, or any Contract before any court
or
arbitrator or any governmental body, agency or official or which in any manner
challenges or seeks to prevent, enjoin, alter or delay the transactions
contemplated hereby. There are no outstanding judgments against the Company
or
any Subsidiary. Neither the Company nor any Subsidiary is now, nor have they
been in the past five years, subject to any proceeding with the Federal Trade
Commission or the Equal Employment Opportunity Commission or any comparable
body
of any state or political subdivision.
26
3.19. Contracts.
(a)
Except as disclosed on Schedule 3.19(a), each contract to which the Company
or any Subsidiary is a party (“Contract”) is a valid and binding agreement, and
is in full force and effect, except where a failure would not have a Material
Adverse Effect and neither the Company nor any Subsidiary, as applicable,
nor,
to the knowledge of the Company, any other party thereto, is in breach or
default (whether with or without the passage of time or the giving of notice
or
both) under any material terms of any such Contract. Except as disclosed
on
Schedule 3.19(a), neither the Company nor any Subsidiary has assigned,
delegated, or otherwise transferred any of its rights or obligations with
respect to any material Contracts, or granted any power of attorney with
respect
thereto. The Company and each Subsidiary has made available to Parent an
original or a true and correct fully executed copy of each material Contract.
(b)
Schedule 3.19(b) lists each material Contract (other than the Charter Documents)
of the Company and each Subsidiary, including:
(i)
any
Contract pursuant to which the Company or any Subsidiary is required to pay,
has
paid or is entitled to receive or has received an amount in excess of $100,000
during the current fiscal year or any one of the two preceding fiscal years
(other than purchase orders for Inventory entered into in the ordinary course
of
business (excluding however any such purchase orders which are open for
purchases in excess of $100,000. The Parties hereto have agreed that delivery
of
Company’s “Work in Process Report”, in the format previously disclosed to Parent
shall constitute full compliance with this Section 3.19(b)(i).
(ii)
all
forms of standard employment contracts and sales representatives contracts,
as
well as any such contracts that deviate materially from the standard form,
together with a list of employees and sales representatives that are parties
to
such contracts;
(iii)
all
material sales, agency, factoring, commission and distribution contracts;
(iv)
all
joint venture, strategic alliance, limited liability company and partnership
agreements;
(v)
all
documents relating to any significant acquisitions or dispositions of assets
(other than of dispositions of Inventory in the ordinary course of business);
(vi)
all
material licensing agreements, including agreements licensing Intellectual
Property rights, other than “shrink wrap” licenses;
27
(vii)
all
material secrecy, confidentiality and nondisclosure agreements restricting
the
conduct of the Company or any Subsidiary;
(viii)
all material Contracts relating to patents, trademarks, service marks, trade
names, brands, copyrights, trade secrets and other Intellectual Property
rights;
(ix)
all
material guarantees, terms and conditions, privacy policies, indemnification
arrangements and other hold harmless arrangements made or provided by the
Company or any Subsidiary;
(x) all
material Website hosting contracts or agreements;
(xi) all
Contracts or agreements with or pertaining to the Company or ny
Subsidiary to which any of its stockholders or any Affiliate of any of its
stockholders is a party;
(xii)
all
agreements relating to real property, including any real property lease,
sublease, or space sharing, license or occupancy agreement, whether the Company
is granted or granting rights thereunder to occupy or use any premises;
(xiii) all
material agreements relating to Tangible Assets; and
(xiv) all
material agreements relating to outstanding Indebtedness.
(c)
Except as disclosed on Schedule 3.19(c), the Company is in compliance with
all
material covenants, including all financial covenants, in all notes, indentures,
bonds and other instruments or agreements evidencing any
Indebtedness.
3.20.
Licenses
and Permits.
Schedule 3.20 is a complete and correct list of each material license,
franchise, permit, order or approval or other similar authorization affecting,
or relating in any way to, the Business, together with the name of the
government agency or entity issuing the same (the “Permits”). Such Permits are
valid and in full force and effect and, assuming the related Company Consents,
if any, have been obtained prior to the Closing Date, none of the Permits will,
assuming the related Company Consents have been obtained or waived prior to
the
Closing Date, be terminated or impaired or become terminable as a result of
the
transactions contemplated hereby. The Company or any Subsidiary has all Permits
necessary to operate the Business other than those Permits whose absence
individually or in the aggregate would not cause a Material Adverse Effect.
3.21.
Compliance
with Laws.
Neither
the Company nor any Subsidiary, to their knowledge, is in violation of, has
not
violated, is not under investigation with respect to, nor have they been
threatened to be charged with or given notice of, any violation or alleged
violation of, any Law or Order, nor does the Company or any Subsidiary have
knowledge of any reasonable basis for any such charge.
28
3.22.
Pre-payments.
Except
as set forth on Schedule 3.22, Neither the Company nor any Subsidiary has
received any material payments with respect to any services to be rendered
or
goods to be provided after the Closing.
3.23.
Employees.
Schedule 3.23 sets forth a true and complete list of the names, titles, annual
salaries or wage rates and other compensation, vacation and fringe benefits,
medical costs incurred on employee clams for the last twelve months that the
Company has been made aware of, work permits, visas, and office location of
all
employees of the Company and each Subsidiary, indicating for which entity the
employee is employed, part-time and full-time employment and all changes in
salaries and wage rates per employee since January 1, 2006. Except as disclosed
on Schedule 3.23, neither the Company nor any Subsidiary has promised any
employee, consultant or agent of the Company that he or she will be employed
by
or receive any particular benefits from the Parent or Acquisition Corp. on
or
after the Closing. Schedule 3.23 sets forth a true and complete list of the
names, addresses and titles of the directors and officers of the Company and
each Subsidiary.
3.24.
Compliance
with Labor Laws and Agreements.
To the
best of its knowledge, the Company has substantially complied with all
applicable Laws and Orders relating to employment or labor other than those
Laws
and Orders with which it could fail to comply, either individually or in the
aggregate, without causing a Material Adverse Effect. Except as set forth on
Schedule 3.24, no present or former employee, officer or director of the Company
or any Subsidiary has, or will have at the Closing Date, any claim against
the
Surviving Corporation for any matter including for wages, salary, vacation,
severance, or sick pay except for the same incurred in the ordinary course
of
business for the last payroll period prior to the Closing Date. Except as set
forth on Schedule 3.24, to the knowledge of the Company, there is no:
(a) unfair
labor practice complaint against the Company or any Subsidiary pending before
the National Labor Relations Board or any state or local agency;
(b) pending
labor strike or other material labor trouble affecting the Company or any
Subsidiary;
(c) material
labor grievance pending against the Company or any Subsidiary;
(d) pending
representation question respecting the employees of the Company or any
Subsidiary; or
(e) pending
arbitration proceeding arising out of or under any collective bargaining
agreement to which the Company or any Subsidiary is a party.
In
addition, to the Company’s knowledge: (i) none of the matters specified in
clauses (a) through (e) above is threatened against the Company or any
subsidiary; (ii) no union organizing activities have taken place with respect
to
the Company or any Subsidiary; and (iii)
29
no
basis
exists for which a claim may be made under any collective bargaining agreement
to which the Company or any Subsidiary is a party.
3.25.
Pension
and Benefit Plans.
Except
as set forth on Schedule 3.25, neither the Company nor any Subsidiary is
individually or jointly and severally liable, and, to the knowledge of the
Company, neither the Company’s nor Subsidiary’s officers and employees are
liable for any liability arising under ERISA, the Code or any other law or
regulation, relating to: (1) an employee benefit plan, within the meaning of
Section 3(3) of ERISA (a “Plan”), covering or formerly covering any present or
former employee of the Company or any Subsidiary (a “Company Plan”); (2) a Plan
not described in clause (1) covering or formerly covering any present or former
employee of a Person which, together with the Company or any Subsidiary, are
treated as a single employer under Code Section 414 (such Person hereinafter
being referred to as an “ERISA Affiliate” and such Plan hereinafter being
referred to as an “ERISA Affiliate Plan”); or (3) an employee benefit plan or
arrangement, other than an ERISA Plan, maintained by the Company or any
Subsidiary providing benefits to some or all their employees or directors,
including, but not limited to, stock option, stock appreciation, equity
incentive and deferred compensation plans and arrangements (a “Benefits
Arrangement”), which (in all cases) is not fully and accurately reflected in the
Company’s most recent Financial Statements or on Schedule 3.25. No Company Plan
or ERISA Affiliate Plan has incurred any “accumulated funding deficiency” as
that term is defined in Section 412 of the Code (whether or not waived) and,
with respect to each Company Plan and ERISA Affiliate Plan, the accumulated
benefit obligation of the Plan does not exceed the fair market value of the
assets of such Plan based upon actuarial assumptions which are reasonable in
the
aggregate. The Company Plans and Benefits Arrangements have been maintained
and
administered in all respects in compliance with all applicable laws, rules
and
regulations and the applicable plan documents except where any individual
failure to comply would not have a Material Adverse Effect. The Company Plans
which are intended to be qualified under Code Section 401(a) have received
a
determination, opinion, or notification letter from the IRS that the Plan
satisfies the requirements of the Code, has not been amended since receiving
such letter (other than by the adoption of amendments required by the IRS)
and
nothing has occurred with respect thereto which could reasonably be expected
to
result in the loss of such qualification. Except as set forth on Schedule 3.25
hereto, (i) neither the Company nor any Subsidiary has received written or
oral
notice of any Claims pending (other than routine benefit claims) or, to the
knowledge of the Company, threatened, relating to the Company Plans or Benefits
Arrangement; (ii) neither the Company nor any Subsidiary has received written
or
oral notice from any Governmental Entity, including the IRS, the Department
of
Labor and the Pension Benefit Guaranty Corporation (“PBGC”), that such
Governmental Entity has initiated an examination, audit or investigation of
a
Company Plan or Benefits Arrangement which has not been completed; (iii) neither
the Company nor any Subsidiary has received written or oral notice of, no event
has occurred and, to the Company’s knowledge, there does not now exist any
condition or set of circumstances, that could subject the Company or any
Subsidiary to any material liability arising under the Code, ERISA or any other
applicable legal requirement or under any indemnity Agreement to which the
Company or any Subsidiary is a party, excluding liability for routine benefit
claims and funding obligations payable in the ordinary course; (iv) to the
knowledge of the Company, the transactions contemplated by the Transaction
Documents will not result in a reportable event, within the meaning of ERISA
Section 4043, other than a
30
reportable
event with respect to which the ERISA Section 4043 reportable event notice
requirement has been waived or the PBGC has announced that it will not apply
a
penalty for failure to satisfy the reportable event notice requirement; (v)
the
transactions contemplated by the Additional Agreements to which the Company
is
named as a party will not result in a liability for severance or termination
pay
or result in increased or accelerated employee benefits becoming payable to
any
of the employees of the Company or any Subsidiary pursuant to the terms of
any
Contract; (vi) all contributions to Company Plans and Benefit Arrangements
(including both employee and employer contributions) which are required to
have
been made, whether by virtue of the terms of the particular plan or arrangement
or by operation of law, have been made by the due date thereof (including all
applicable extensions) and all contributions which are not yet due but which
relate to periods which began prior to the date hereof have either been paid
or
have been reflected by the Company as an accrued liability on the Books and
Records or are set forth on Schedule 3.25 hereto; (vii) neither the Company
nor
any Subsidiary maintains any plan or arrangement which provides for retiree
health or other retiree welfare benefits, except as required by COBRA; (viii)
neither the Company nor any Subsidiary currently participates in or in the
past
participated in a multiemployer plan, within the meaning of Section 3(37) or
4001(a)(3) of ERISA (a “Multiemployer Plan”); and (ix) neither the Company nor
any Subsidiary is under an obligation (express or implied) to modify the Company
Plan or Benefit Arrangement. Schedule 3.25 contains a complete list of all
Company Plans currently maintained by the Company or any Subsidiary or in which
the Company or any Subsidiary currently participates (“Current Company Plans”)
and all Benefit Arrangements in which the Company or any Subsidiary
participates. With respect to each Current Company Plan, the Company has
delivered to the Parent a correct and complete copy of (1) the Plan document,
(2) if applicable, the summary plan description, (3) if applicable, the most
recent Annual Report (Form 5500 series) and accompanying Schedules, (4) if
applicable, the most recent certified financial statements, and (5) if
applicable, the most recent actuarial valuation report. With respect to each
Benefit Arrangement, the Company has delivered to the Parent a correct and
complete copy of each applicable plan document, arrangement and/or summary
description.
3.26.
Employment
Matters.
Schedule 3.26 sets forth a true and complete list of every employment agreement,
commission agreement, employee group or executive medical, life, or disability
insurance plan, and each incentive, bonus, profit sharing, retirement, deferred
compensation, equity, phantom equity, option, equity purchase, equity
appreciation right or severance plan of the Company or any Subsidiary now in
effect or under which the Company or any Subsidiary has or might have any
obligation, or any understanding between the Company or any Subsidiary and
any
employee concerning the terms of such employee’s employment that do not apply to
such company’s employees generally.
3.27. Tax
Matters.
(a)
Compliance
Generally.
Except
as
set forth on Schedule 3.27(a), the Company
has (i) duly and timely filed all Tax Returns required to be filed by the
Company on or prior to the Effective Time, which Tax Returns are true,
correct
and complete, and (ii) duly and timely paid all Taxes due and payable in
respect
of all periods up to and including the date which includes the Effective
Time or
has made adequate provision on its books and
31
records
and Financial Statements in accordance with GAAP for any such Tax which is
not
due on or before such time. The Company has compiled with all applicable law
relating to the reporting, payment, collection and withholding of Taxes and
has
duly and timely withheld or collected, paid over and reported all Taxes required
to be withheld or collected by the Company on or before the date hereof.
(b)
No
Audit.
Except
as set forth on Schedule 3.27(b), (i) no Taxing authority has asserted in
writing any adjustment that could result in an additional Tax for which the
Company is or may be liable or that could result in a Lien on any of its assets
which has not been fully paid or adequately provided for on the in the Financial
Statements (collectively, “Tax Liability”), or which adjustment, if asserted in
another period, would result in any Tax Liability, (ii) there is not pending
any
audit, examination, investigation, dispute, proceeding or claim (collectively,
“Proceeding”) relating to any Tax Liability, (iii) no statute of limitations
with respect to any Tax has been waived or extended (unless the period to which
it has been waived or extended has expired), (iv) there is no outstanding power
of attorney authorizing anyone to act on behalf of the Company in connection
with any Tax Liability, Tax Return or Proceeding relating to any Tax, (v) there
is not outstanding any closing agreement, ruling request, request to consent
to
change a method of accounting, subpoena or request for information with or
by
any Taxing authority with respect to the Company, its income, assets or
business, or any Tax Liability, (vi) the Company is not and has never been
a
party to any Tax sharing or Tax allocation agreement, arrangement or
understanding; and (vii) the Company is not and has never been included in
any
consolidated, combined or unitary Tax Return.
(c)
Taxes
and Tax Return Defined.
For
purposes of this Agreement, “Tax” shall mean all federal, state, local and
foreign tax, charge, fee, levy, deficiency or other assessment of whatever
kind
or nature (including without limitation, any net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, unemployment, excise, estimated, severance,
stamp, occupation, real property, personal property, intangible property,
occupancy, recording, minimum, environmental and windfall profits tax), together
with any interest, penalty, addition to tax or additional amount imposed by
any
federal, state, local or foreign Taxing authority. For purposes of this
Agreement, “Tax Return” includes any return, declaration, report, claim for
refund or credit, information return or statement, and any amendment thereto,
including without limitation any consolidated, combined or unitary return or
other document (including any related or supporting information or schedule),
filed or required to be filed with any federal, state, local or foreign
governmental entity or agency in connection with the determination, assessment,
collection or payment of Taxes.
3.28.
Fees.
Except
as set forth on Schedule 3.28, there is no investment banker, broker, finder,
restructuring or other intermediary that has been retained by or is authorized
to act on behalf of the Company, any Subsidiary, any of the Company’s
stockholders or the holder of the Company Warrant or any of their respective
Affiliates who might be entitled to any fee or commission from either
Acquisition Corp., the Surviving Corporation, Parent or any of its Affiliates
upon consummation of the transactions contemplated by this Agreement.
The
32
amount
of
any fee owed to any Person and the party obligated to pay such fee is listed
on
Schedule 3.28 opposite such Person’s name.
3.29. Business
Operations; Servers.
(a)
The
Company and each Subsidiary owns all of its servers and other computer
equipment (other than webservers) necessary to operate its Business as
conducted
as of the date hereof and as such Business will be conducted as of the
Closing.
(b)
Parent has been furnished with complete and correct copies of the standard
terms
and conditions of sale, if any, of each of the products of the Company and
each
Subsidiary. Except as set forth on Schedule 3.29(b) or as required by law,
no
product manufactured, sold or delivered by the Company or any Subsidiary is
subject to any guaranty, warranty or other indemnity, express or implied, beyond
such standard terms and conditions. Any warranty reserve reflected in the
Financial Statements is in accordance with GAAP.
(c)
Except in the ordinary course of business or as set forth on Schedule 3.29(c),
neither the Company nor any Subsidiary has entered into, or offered to enter
into, any written agreement, Contract or other arrangement with respect to
the
Business pursuant to which the Company or any Subsidiary is or will be obligated
to make any rebates, discounts, promotional allowances or similar payments
or
arrangements to any customer (“Rebate Obligations”). All Rebate Obligations
listed on Schedule 3.29(c) and all ordinary course Rebate Obligations are
reflected in the 2005 Financial Statements in accordance with GAAP.
(d)
Except as set forth in Schedule 3.29(d), neither the Company nor any Subsidiary
has experienced any returns of its products since December 31, 2005 other than
returns in the ordinary course of business. All product returns listed on
Schedule 3.29(d) are reflected on the 2005 Financial Statements in accordance
with GAAP.
3.30.
Powers
of Attorney and Suretyships.
Except
as set forth on Schedule 3.30, neither the Company nor any Subsidiary has any
general or special powers of attorney outstanding (whether as grantor or grantee
thereof) or any obligation or liability (whether actual, accrued, accruing,
contingent, or otherwise) as guarantor, surety, co-signer, endorser, co-maker,
indemnitor or otherwise in respect of the obligation of any Person, excluding
ordinary course of business indemnity obligations.
3.31.
Other
Information.
Neither
this Agreement, nor any of the documents or other information made available
to
Parent or its Affiliates, attorneys, accountants, agents or representatives
pursuant hereto or in connection with Parent’s due diligence review of the
Business or the transactions contemplated by this Agreement contains or will
contain any untrue statement of a material fact or omits or will omit to state
a
material fact necessary in order to make the statements contained therein not
misleading.
33
3.32.
Certain
Business Practices.
To the
Company’s knowledge, neither the Company, nor any Subsidiary, nor any director,
officer, agent or employee of the Company or any Subsidiary (in their capacities
as such) has (i) used any funds for unlawful contributions, gifts, entertainment
or other unlawful expenses relating to political activity, (ii) made any
unlawful payment to foreign or domestic government officials or employees,
to
foreign or domestic political parties or campaigns or violated any provision
of
the Foreign Corrupt Practices Act of 1977 to the extent applicable to the
Company or any Subsidiary or (iii) made any other unlawful payment. Neither
the
Company, nor any Subsidiary, nor any director, officer, agent or employee of
the
Company or any Subsidiary (nor any Person acting on behalf of any of the
foregoing, but solely in his or her capacity as a director, officer, employee
or
agent of the Company) has, since January 1, 2000, directly or indirectly, given
or agreed to give any gift or similar benefit in any material amount to any
customer, supplier, governmental employee or other Person who is or may be
in a
position to help or hinder the Company or any Subsidiary or assist the Company
or any Subsidiary in connection with any actual or proposed transaction, which,
if not given could reasonably be expected to have had an adverse effect on
the
Company or any Subsidiary, or which, if not continued in the future, could
reasonably be expected to adversely affect the business or prospects of the
Company or any Subsidiary or that could reasonably be expected to subject the
Company to penalty in any private or governmental litigation or proceeding.
3.33.
Money
Laundering Laws.
To the
knowledge of Company, there is no material violation of the laundering statutes
of the States in which the Company or the Subsidiaries do business, applicable
to the Business, and the Laws of the United States applicable to the Business,
the rules and regulations thereunder and any related or similar rules,
regulations or guidelines, issued, administered or enforced by any governmental
authority (collectively, the “Money Laundering Laws”) that are applicable to the
Business, and no criminal or material civil Action involving the Company or
any
Subsidiary with respect to the Money Laundering Laws is pending or, to the
knowledge of the Company, threatened.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES TO BE MADE BY THE COMPANY’S STOCKHOLDERS
The
Company hereby agrees that, at the Closing, each of its stockholders and the
holder of the Company Warrant shall, severally and not jointly, represent to
Acquisition Corp. and the Parent that the following statements are true and
correct. Any reference in this Article IV to an agreement being “enforceable”
shall be deemed to be qualified to the extent such enforceability is subject
to
(i) laws of general application relating to bankruptcy, insolvency, moratorium
and the relief of debtors, and (ii) the availability of specific performance,
injunctive relief and other equitable remedies.
34
4.1.Ownership
of Stock; Authority.
(a)
The
stockholder or holder of the Company Warrant has good and marketable title
to
the Stockholder’s Securities or the Company Warrant, as applicable, free and
clear of any and all Liens.
(b)
The
stockholder or the holder of the Company Warrant has full legal capacity, power
and authority to execute and deliver the agreements to which such Person is
a
party, to perform such Person’s obligations thereunder and to consummate the
transactions contemplated thereby. The agreements to which each such Person
is
named as a party will be duly executed and delivered by each Person and, upon
their execution and delivery will be, valid and legally binding obligations
of
each Person, enforceable against each Person in accordance with their respective
terms.
(c)
Neither the execution and delivery by the stockholder or the holder of the
Company Warrant of any or all of the agreements to which such Person is a party,
nor the consummation by such Person of the transaction contemplated thereby,
will (i) conflict with, result in a breach of, constitute (with or without
due
notice or lapse of time or both) a default under, or require any notice, consent
or waiver under, any instrument, contract, agreement or arrangement to which
such Person is a party or by which such Person is bound, or (ii) result in
the
imposition of any Lien upon such Person’s Company Securities.
4.2.
Approvals.
Except
as contemplated by this Agreement, including without limitation Section 3.2,
no
consent, approval, waiver, authorization or novation will be required to be
obtained by the stockholder or the holder of the Company Warrant, as applicable,
from, and no notice or filing is required to be given by such Person to or
made
by any Person with, any Authority or other Person in connection with the
execution, delivery and performance by such Person of the agreements executed
at
Closing.
4.3.
Non-Contravention.
The
execution, delivery and performance by the stockholder or the holder of the
Company Warrant, as applicable, of the agreements executed at Closing, and
the
consummation of the transaction will not (a) violate any provision of the
articles of incorporation, bylaws or other organizational documents of such
Person if it is not a natural person, or (b) violate or result in a breach
of or
constitute a default under any Law, judgment, injunction, Order, decree or
other
restriction of any Authority to which such Person, or such Person’s Company
Securities, is subject.
4.4.
Litigation
and Claims.
There
is no civil, criminal or administrative action, suit, demand, claim, hearing,
proceeding or disclosed investigation pending or threatened against such
stockholder or the holder of the Company Warrant and such Person is not subject
to any Order, writ, judgment, award, injunction or decree of any Authority
of
competent jurisdiction or any arbitrator that would prevent consummation of
the
transaction or materially impair the ability of such Person to perform its
obligations under the agreements executed at Closing.
4.5.
Investment
Representations.
The
stockholder and the holder of the Company Warrant, as applicable, will make
the
representations in either Section 4.5(a) or 4.5(b):
35
(a) Accredited
Investor
(i)
Such
Person is an “accredited investor” as such term is defined inRule
501
of Regulation D (“Reg. D”) promulgated under the Act. Such Person acknowledges
that Parent has the right to require evidence of such Person’s status as an
accredited investor, if necessary.
(ii)
Such
Person acknowledges that such Person has prior investment experience, including
investments in non-listed and non-registered securities, or has employed the
services of an investment advisory, attorney or accountant to evaluate the
merits and risks of such an investment on its behalf, and such Person represents
that such Person understands the highly speculative nature of an investment
in
Parent Common Stock which may result in the loss of the total amount of such
investment.
(iii)
Such Person has adequate means of providing for such Person’s current needs and
possible personal contingencies, and each Person has no need, and anticipates
no
need in the foreseeable future, for liquidity in such Person’s investment in the
Parent Common Stock. Such Person is able to bear the economic risks of this
investment and, consequently, without limiting the generality of the foregoing,
each Person is able to hold the Parent Common Stock for an indefinite period
of
time and has a sufficient net worth to sustain a loss of the entire investment
in the event such loss should occur.
(iv)
Such
Person has not made an overall commitment to investments which are not readily
marketable that are disproportionate to such Person’s net worth, and such
Person’s investment in the Parent Common Stock will not cause such overall
commitment to become excessive.
(v)
Such
Person acknowledges that this offering of Parent Common Stock has not been
reviewed by the SEC because this is intended to be a non-public offering
pursuant to Section 4(2) of the Act and Rule 506 under Regulation D of the
Act.
Each Person acknowledges that it is not acquiring the Parent Common Stock as
a
result of any general solicitation or advertising. The Parent Common Stock
will
be received by each Person for such Person’s own account, for investment and not
for distribution or resale to others.
(vi)
Except as otherwise set forth in Article V, Parent has not and is not making
any
representations or warranties to such Persons or providing any advice or
information to such Persons.
(vii)
Such Person understands and consents to the placement of a legend on any
certificate or other document evidencing Parent Common Stock stating that such
Parent Common Stock has not been registered under the Act and setting forth
or
referring to the restrictions on transferability and sale thereof. Each
certificate evidencing the shares shall bear the legends set forth below, or
legends
36
substantially
equivalent thereto, together with any other legends that may be required by
federal or state securities laws at the time of the issuance of the Parent
Common Stock:
THE
SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL (I) REGISTERED
UNDER THE ACT OR (II) THE ISSUER OF THE SHARES (THE “ISSUER”) HAS RECEIVED AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE
ACT.
(b) Non-accredited
Investor
(i)
Such
Person acknowledges that such Person has prior investmentexperience,
including investments in non-listed and non-registered securities, or has
employed the services of an investment advisor, attorney or accountant
to
evaluate the merits and risks of such an investment on its behalf, and
such
Person represents that such Person understands the highly speculative nature
of
an investment in Parent Common Stock which may result in the loss of the
total
amount of such investment.
(ii)
Such
Person has adequate means of providing for such Person’s current needs and
possible personal contingencies, and each Person has no need, and anticipates
no
need in the foreseeable future, for liquidity in such Person’s investment in the
Parent Common Stock. Such Person is able to bear the economic risks of this
investment and, consequently, without limiting the generality of the foregoing,
each Person is able to hold the Parent Common Stock for an indefinite period
of
time and has a sufficient net worth to sustain a loss of the entire investment
in the event such loss should occur.
(iii)
Such Person has not made an overall commitment to investments which are not
readily marketable that are disproportionate to such Person’s net worth, and
such Person’s investment in the Parent Common Stock will not cause such overall
commitment to become excessive.
(iv)
Parent has made available to such Person a copy of its (i) Annual Report on
Form
10-K for the year ended December 31, 2005, (ii) Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2006, June 30, 2006 and September 30, 2006,
and
(iii) the proxy statement distributed to the Parent’s stockholders in connection
with the Special Meeting of Stockholders to be held in connection with the
approval of the transactions contemplated by this Agreement.
37
(v)
Such
Person had the opportunity to (a) ask questions and receive answers from the
management of the Parent concerning the Parent and an investment in the Parent
Common Stock, and (b) obtain additional information as necessary to verify
the
accuracy of the information furnished to such Person by the Parent.
(vi)
Except as otherwise set forth in Article V, Parent has not and is not making
any
representations or warranties to such Persons or providing any advice or
information to such Persons.
(vii)
Such Person acknowledges that this offering of Parent Common Stock has not
been
reviewed by the SEC because this is intended to be a non-public offering
pursuant to Section 4(2) of the Act and Rule 506 under Regulation D of the
Act.
Each Person acknowledges that it is not acquiring the Parent Common Stock as
a
result of any general solicitation or advertising. The Parent Common Stock
will
be received by each Person for such Person’s own account, for investment and not
for distribution or resale to others.
(viii)
Such Person understands and consents to the placement of a legend on any
certificate or other document evidencing Parent Common Stock stating that such
Parent Common Stock has not been registered under the Act and setting forth
or
referring to the restrictions on transferability and sale thereof. Each
certificate evidencing the shares shall bear the legends set forth below, or
legends substantially equivalent thereto, together with any other legends that
may be required by federal or state securities laws at the time of the issuance
of the Parent Common Stock:
THE
SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL (I) REGISTERED
UNDER THE ACT OR (II) THE ISSUER OF THE SHARES (THE “ISSUER”) HAS RECEIVED AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE
ACT.
4.6.
Assumption
of Risk of Price Changes in Parent Common Stock.
Such
Person acknowledges that from the date of the Merger Agreement such Person
assumed the risk related to any diminution in the market price of the Stock
Consideration.
38
ARTICLE
V
REPRESENTATIONS
AND WARRANTIES OF PARENT
Parent
represents and warrants to the Company that the statements contained in this
Article V are true and correct, except as set forth in the disclosure schedule
attached hereto (the “Parent Disclosure Schedule”). The Parent Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered and
lettered paragraphs contained in this Article V, and the disclosure in any
paragraph shall qualify the corresponding paragraph in this Article V;
provided,
however,
that
any item disclosed under any paragraph of the Parent Disclosure Schedule shall
be deemed to be disclosed with respect to every other applicable paragraph
if
the disclosure in respect to such paragraph of the Parent Disclosure Schedule
is
sufficient to reasonably inform the reader of the Parent Disclosure Schedule
of
the information required to be disclosed in respect of other paragraphs of
the
Parent Disclosure Schedule. Any reference in this Article V to an agreement
being “enforceable” shall be deemed to be qualified to the extent such
enforceability is subject to (i) laws of general application relating to
bankruptcy, insolvency, moratorium and the relief of debtors, and (ii) the
availability of specific performance, injunctive relief and other equitable
remedies.
5.1.
Due
Incorporation.
Parent
is a corporation duly organized, validly existing and in good standing under
the
Laws of the State of Delaware. Except as set forth on Schedule 5.1, the Parent
is not qualified to do business as a foreign corporation in any jurisdiction,
and there is no jurisdiction in which the character of the property owned or
leased by the Parent or the nature of its activities make qualification of
the
Parent in any such jurisdiction necessary, except where the failure to so
qualify would have a Material Adverse Effect. Acquisition Corp. is a corporation
duly organized, validly existing and in good standing under the Laws of the
State of Delaware. Parent has all requisite power and authority, corporate
and
otherwise, and all governmental licenses, franchises, permits, authorizations,
consents and approvals required to own, lease, and operate its assets,
properties and businesses and to carry on its business as now conducted on
the
date hereof. Acquisition Corp. has not conducted any business to date and has
only engaged in certain activities relating to its organization. Parent has
not
adopted any plan, or made any agreement in respect of any merger, consolidation,
sale of all or substantially all of its assets, reorganization,
recapitalization, dissolution or liquidation.
5.2.
Corporate
Authorization.
Except
for a vote of the stockholders of the Parent to approve the transaction
contemplated by this Agreement, and provided that fewer than 20% of Parent’s
public stockholders exercise their conversion rights (as specified in the
Parent’s Certificate of Incorporation), the execution, delivery and performance
by Parent and Acquisition Corp. of this Agreement and each of the other
Additional Agreements to which either is a party and the consummation by Parent
and Acquisition Corp. of the transactions contemplated hereby and thereby are
within the corporate powers of Parent and Acquisition Corp. and have been duly
authorized by all necessary corporate action on the part of Parent and
Acquisition Corp. This Agreement constitutes, and upon their execution and
delivery, each of the Additional Agreements to which Parent or Acquisition
Corp.
is named as a party will constitute, the valid and legally binding agreement
of
Parent or Acquisition Corp., as applicable, enforceable against each in
accordance with their respective terms.
5.3.
Governmental
Authorization.
None of
the execution, delivery or performance by Parent or Acquisition Corp. of this
Agreement or any Additional Agreement requires any consent, approval, license
or
other action by or in respect of, or registration,
39
declaration
or filing with, any Authority by Parent or Acquisition Corp., except for filing
a Form D with the SEC and applicable state authorities and a registration
statement upon exercise of the Company’s stockholders of their registration
rights pursuant to the terms of this Agreement.
5.4.
No
Violation.
Provided that Parent presents the transactions contemplated by this Agreement
to
its stockholders for approval and such stockholders approve the transaction
with
fewer than 20% of the public stockholders exercising their conversion rights
with respect to such transaction (as specified in the Parent’s Certificate of
Incorporation), neither the execution and delivery of this Agreement nor any
Additional Agreement to be executed by Parent or Acquisition Corp. hereunder
nor
the consummation of the transactions contemplated herein and therein will (a)
violate any provision of Parent’s or Acquisition Corp.’s Certificate of
Incorporation, By-laws or other charter documents; (b) violate any Laws or
Orders to which either Parent or Acquisition Corp. or their property is subject,
or (c) violate the provisions of any material agreement or other material
instrument binding upon or benefiting Parent or Acquisition Corp.
5.5.
Consents.
Except
for a vote of the stockholders of the Parent to approve the transaction
contemplated by this Agreement, and provided that fewer than 20% of Parent’s
public stockholders exercise their conversion rights (as specified in the
Parent’s Certificate of Incorporation), there are no agreements, commitments,
arrangements, contracts or other instruments binding upon Parent or Acquisition
Corp. or any of their properties requiring a consent, approval, authorization,
order or other action of or filing with any Person as a result of the execution,
delivery and performance of this Agreement or any of the Additional Agreements
to which Parent or Acquisition Corp. is named as a party or the consummation
of
the transactions contemplated hereby or thereby. Parent’s and Acquisition
Corp.’s Boards of Directors have approved this Agreement and Parent’s Board has
approved its submission to Parent’s stockholders for approval. Each of the
current officers and directors of the Parent has agreed to vote the shares
of
Parent Common Stock owned by them in the following manner:: with respect to
the
shares of Parent Common Stock acquired by them prior to the private placement
described in the Parent’s prospectus from its initial public offering, each of
the current officers and directors of the Parent will vote such shares in
accordance with the majority of the shares of common stock voted by the public
stockholders; with respect to the shares of Parent Common Stock acquired by
them
in the private placement described in the Parent’s prospectus from its initial
public offering, each of the current officers and directors of the Parent will
vote such shares in favor of the transactions contemplated by this Agreement.
5.6.
Litigation.
There
is no action, suit, investigation, hearing or proceeding pending against, or
to
the best knowledge of Parent, threatened against or affecting, Parent, any
of
its officers or directors, or the business of Parent, before any court or
arbitrator or any governmental body, agency or official which if adversely
determined against Parent, has or could reasonably be expected to have a
material adverse effect on the business, assets, condition (financial or
otherwise), liabilities, results or operations or prospects of Parent, or which
in any manner challenges or seeks to prevent, enjoin, alter or delay the
transactions contemplated hereby. There are no outstanding judgments against
Parent.
40
5.7.
Issuance
of Parent Common Stock.
Upon
issuance and delivery of the Parent Common Stock pursuant to Sections 2.5
through 2.8 of this Agreement, the Parent Common Stock will be duly authorized
and validly issued, fully paid and nonassessable, free and clear of all Liens,
other than (i) restrictions arising from applicable securities laws and the
Lock-Up Agreements, and (ii) any Lien created by or through the Company’s
stockholders. The issuance and sale of the Parent Common Stock pursuant hereto
will not be subject to or give rise to any preemptive rights or rights of first
refusal.
5.8.
Fees.
Except
as set forth on Schedule 5.8, there is no investment banker, broker, finder,
restructuring or other intermediary that has been retained by or is authorized
to act on behalf of the Parent or Acquisition Corp. or any of their respective
Affiliates who might be entitled to any fee or commission from either
Acquisition Corp., the Surviving Corporation, Parent or any of its Affiliates
upon consummation of the transactions contemplated by this Agreement. Parent
agrees to reimburse Company at the Closing for the incremental fees that Company
becomes obligated to pay as a result of the transactions contemplated by this
Agreement. The amount of any fee owed to any Person listed on Schedule 5.8
is
listed opposite such Person’s name. Each party acknowledges that Xxxxxxxx
Capital Advisors has been engaged by the Parent as an advisor.
5.9.
Charter
Documents; Legality.
Parent
has previously delivered to the Company true and complete copies of its and
Acquisitions Corp.’s Certificates of Incorporation and By-Laws (the “Parent
Charter Documents”), as in effect or constituted on the date hereof. Provided
that Parent presents the transactions contemplated by this Agreement to its
stockholders for approval and such stockholders approve the transaction and
fewer than 20% of such stockholders exercise their conversion rights with
respect to such transaction (as specified in the Parent’s Certificate of
Incorporation), the execution, delivery, and performance by Parent and
Acquisition Corp. of this Agreement and any Additional Agreement to which Parent
or Acquisition Corp. is to be a party has not violated and will not violate,
and
the consummation by Parent and Acquisition Corp. of the transactions
contemplated hereby or thereby will not violate any of the Parent Charter
Documents or any Law.
5.10.
Capitalization
and Ownership of the Parent.
Schedule 5.10 sets forth, with respect to the Parent and Acquisition Corp.,
(i)
their authorized capital, (ii) the number of their securities that are
outstanding, and (iii) the number of securities convertible into or exercisable
or exchangeable for their securities. Except as set forth in Schedule 5.10,
there is no Contract that requires or under any circumstance would require
Parent or Acquisition Corp. to issue, or grant any right to acquire, any
securities of the Parent or Acquisition Corp., or any security or instrument
exercisable or exchangeable for or convertible into, the capital stock or
membership interest of Parent or Acquisition Corp. or to merge, consolidate,
dissolve, liquidate, restructure, or recapitalize the Parent or Acquisition
Corp.
5.11.
Financial
Statements.
(a)
Parent has filed with the SEC true and correct copies of the audited
consolidated balance sheets of Parent and its consolidated subsidiaries as
of
December 31, 2005, and the related consolidated statements of operations,
comprehensive loss and
41
stockholders’
equity and cash flows for the year then ended, including footnotes thereto,
audited by Xxxxxxxxx Xxxxx Xxxxxxx LLP, registered independent public
accountants and an interim balance sheet of Parent and its consolidated
subsidiaries as of September 30, 2006, and the related consolidated statements
of operations, comprehensive loss and stockholders’ equity and cash flows for
the year then ended, including footnotes thereto, reviewed by Ernst&
Young LLP, registered independent public accountants (the “Parent Financial
Statements”). The Parent Financial Statements (i) were prepared in accordance
with GAAP; (ii) fairly and accurately present the Parent’s financial condition
and the results of its operations as of their respective dates and for the
periods then ended, in all material respects; (iii) contain and reflect all
necessary adjustments and accruals for a fair presentation of the Parent’s
financial condition as of their dates, in all material respects; and (iv)
contain and reflect adequate provisions for all reasonably anticipated
liabilities for all material income, property, sales, payroll or other Taxes
applicable to the Parent with respect to the periods then ended. The Parent
has
heretofore delivered to the Company complete and accurate copies of all
“management letters” received by it from the Parent’s accountants and all
responses during the last three years by lawyers engaged by the Parent to
inquiries from the Parent’s accountant or any predecessor accountants.
(b)
Except as specifically disclosed or as reflected in the Exchange Act Filings,
reflected or fully reserved against in the Parent Financial Statements and
for
liabilities and obligations of a similar nature and in similar amounts incurred
in the ordinary course of business since the date of the Parent Financial
Statements, there are no liabilities, debts or obligations of any nature
(whether accrued, absolute, contingent, liquidated or unliquidated, unasserted
or otherwise) relating to the Parent or Acquisition Corp. All debts and
liabilities, fixed or contingent, which should be included under GAAP on an
accrual basis on the Parent Financial Statements are included therein.
(c)
As of
the Closing Date there will have been no Material Adverse Change to the assets
of the Parent that are being held in trust for the benefit of the
Parent.
5.12.
Other
Information.
Neither
this Agreement nor any of the documents filed by the Parent with the SEC, nor
any other documents or other information made available to the Company, its
stockholders or their Affiliates, attorneys, accountants, agents or
representatives pursuant hereto or in connection with the Company’s and the
stockholders’ due diligence review of the business of the Parent or the
transactions contemplated by this Agreement contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements contained therein not misleading.
To
the best knowledge of the Parent, the Parent has provided the Company with
all
material information regarding its business.
5.13.
Compliance
with Laws.
The
Parent is not in violation of, has not violated, and to the knowledge of Parent,
is not under investigation with respect to nor has Parent been threatened to
be
charged with or given notice of, any violation or alleged violation of, any
Law
or Order, nor is there any basis for any such charge.
42
5.14.
Money
Laundering Laws.
The
operations of the Parent are and have been conducted at all times in compliance
with Money Laundering Laws and no Action involving the Parent with respect
to
the Money Laundering Laws is pending or, to the knowledge of the Parent,
threatened.
5.15.
Acquisition
Corp.
Acquisition Corp. was incorporated in the State of Delaware on November 30,
2006. Acquisition Corp. has no operations (and will have none through the
Closing Date) and no liabilities, debts or obligations of any nature (whether
accrued, absolute, contingent, liquidated or unliquidated, unasserted or
otherwise) except those incurred in connection with this Agreement and all
of
the transactions contemplated hereby.
5.16. Completion
of Due Diligence.
(a)
To
the knowledge of Parent, prior to the execution of this Agreement, and
for a
period of time deemed by Parent to be reasonably sufficient, Parent and, to
the
extent requested by Parent, all of its representatives, agents, attorneys and
advisors have: (i) had prompt, free and unfettered access to all of the Books
and Records of the Company and all of the Subsidiaries; (ii) had free and
unfettered access to the executives of the Company for interviews and
consultations; (iii) conducted a complete and thorough due diligence
investigation into the Business of the Company and the financial and operational
activities of the Company for a period of time deemed to be acceptable to
Parent; (iv) upon request to Company, been promptly provided with copies
(digital and/or hard copy) of any and all documents relating to the Company
that
have been requested; (v) received prompt responses to all questions and requests
submitted to the Company; (vi) conducted all interviews with the executives
and
other employees of Company and the Subsidiaries that Parent deemed advisable;
(vii) been promptly provided with reasonable access to the offices and
properties of the Company; (viii) been promptly furnished such information
relating to the Business as they reasonably requested; (ix) received prompt,
and
courteous cooperation in their investigation of the Business from the employees,
(x) had reasonable access to the counsel, accountants and representatives of
the
Company and each Subsidiary; and (xi) had full and complete access to the data,
information and documentation available in the ISI - Argyle Data Room (a copy
of
which is included on the ISI - Argyle Data Room Due Diligence CD attached hereto
as Exhibit C).
ARTICLE
VI
COVENANTS
OF THE COMPANY PENDING CLOSING
The
Company covenants and agrees that:
6.1.
Conduct
of the Business.
From
the
date hereof through the Closing Date, the Company and each Subsidiary shall
conduct the Business only in the ordinary course (including the payment of
accounts payable and the collection of accounts receivable), consistent with
past practices, and shall not enter into any transactions outside the ordinary
course of business without the prior written consent of Parent, and use its
commercially
43
reasonable
efforts to preserve intact the Company’s business relationships with employees,
suppliers, customers and other third parties with whom, or with which,
management of the Company deems it advisable to maintain such relationships.
The
parties hereto agree that, without limitation, it shall be within the meaning
of
“ordinary course of business” as used in this ARTICLE VI, for the Company or any
Subsidiary to enter into any contract that is reasonably expected by the Company
to generate “sales” for the Company or any Subsidiary, consistent with past
practice, and to issue purchase orders, and/or otherwise purchase goods,
equipment, supplies, services and other things (of any and every nature) that
the Company will include within “cost of goods sold” of the Company or any
Subsidiary, consistent with past practice. The foregoing sentence shall not
be
deemed or construed to be a limitation upon the definition of “usual course of
business”. Without limiting the generality of the foregoing, neither the Company
nor any Subsidiary shall be obligated to seek the prior written consent of
the
Parent, from the date hereof until the Closing Date, unless, outside the
ordinary course of business, Company seeks to:
(a)
amend, waive any provision of, terminate prior to its scheduled expiration
date,
or otherwise compromise in any way, any Contract (including contracts described
in clause (b) below), or any other right or asset;
(b)
except as contemplated by this Agreement, enter into any contract, agreement,
lease, license or commitment, which:
(i) is
with
respect to real property,
(ii) extends
for a term of one year or more;
(c)
except as contemplated by this Agreement, enter into any contract, purchase
or
other obligation that is not within the ordinary course of
business;
(d)
make
any capital expenditures in excess of $250,000 (individually or in the
aggregate);
(e)
sell,
lease, license or otherwise dispose of any assets or assets covered by any
Contract except (i) pursuant to existing contracts or commitments disclosed
herein and (ii) sales of inventory in the ordinary course of business consistent
with past practice;
(f)
except for payments to StarCo, pay, declare or promise to pay any dividends
or
other distributions with respect to its capital stock, or pay, declare or
promise to pay any other payments to any of the Company’s stockholders or any
Affiliate of the Company;
(g)
authorize any salary increase of more than 20% for any employee making an annual
salary of greater than $80,000 or in excess of $16,000 in the aggregate on
an
annual basis with respect to any single employee or change the bonus or profit
sharing policies of the Company;
44
(h)
except for Indebtedness listed on Schedule 6.1(h) obtain or suffer to exist
any
Indebtedness in excess of $100,000 in the aggregate;
(i)
suffer or incur any Lien on any asset except for Liens existing as of the date
hereof as set forth on Schedule 3.15(b);
(j)
allow
insurance coverage in less than the amounts and types usual in the ordinary
course of the Company’s business with respect to any material damage,
destruction or loss of property related to any material assets;
(k)
delay, accelerate or cancel any receivables or Indebtedness or write-off or
make
further reserves against the same, except in the ordinary course of business;
(l)
merge
or consolidate with or acquire any other Person or be acquired by any other
Person;
(m)
except as required in accordance with GAAP, make any change in its accounting
principles or methods or write down the value of any inventory or assets;
(n) change
the place of business of the Company or any Subsidiary;
(o) extend
any loans to any Person, other than travel or other expense advances
to employees in the ordinary course of business;
(p) issue,
redeem or repurchase any shares of its capital stock;
(q) effect
or
agree to any changes in shipping practices, terms or rates;
(r) reduce
the prices of products sold from Inventory for customers except in
the
ordinary course of business;
(s)
effect or agree to any change in any practices or terms, including payment
terms, with respect to customers or suppliers;
(t)
make
or rescind any election related to Taxes, file any amended income Tax Return
or
make any changes in its methods of Tax accounting; or
(u)
agree
to do any of the foregoing.
The
Company will not (i) take or agree to take any action that might make any
representation or warranty of the Company hereunder inaccurate in any respect
at, or as of any time prior to, the Closing Date or (ii) omit to take, or agree
to omit to take, any action necessary to prevent any such representation or
warranty from being inaccurate in any respect at any such time.
Nothing
herein shall be deemed to require the Company or any Subsidiary to request
the
approval or consent of Parent for the interviewing, hiring, training,
assignment, evaluation,
45
control,
management, compensation, promotion, or termination of employees in the ordinary
course of business of Company or its Subsidiaries.
6.2.
Access
to Information
(a)
From
the date hereof until and including the Closing Date, the Company and each
Subsidiary shall (i) continue to give Parent, its counsel and other
representatives reasonable access to the offices, properties, Books and Records
of the Company; (ii) furnish to Parent, its counsel and other representatives
such information relating to the Business as such Persons may reasonably
request; and (iii) cause the employees, counsel, accountants and representatives
of the Company and each Subsidiary to cooperate with Parent in its investigation
of the Business; provided
that no
investigation pursuant to this Section 6.2 (or any investigation prior to the
date hereof) shall affect any representation or warranty given by the Company.
(b)
The
Company shall arrange for representatives of Parent to meet with or speak to
the
representatives of the three largest customers of the Company and each
Subsidiary.
6.3.
Notices
of Certain Events.
The
Company shall promptly notify Parent of:
(a)
any
notice or other communication from any Person alleging or raising the
possibility that the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement or that the transactions
contemplated by this Agreement might give rise to any claims or causes of action
or other rights by or on behalf of such Person or result in the loss of any
rights or privileges of the Company or any Subsidiary to any such Person;
(b)
any
notice or other communication from any Authority in connection with the
transactions contemplated by this Agreement;
(c)
any
actions, suits, claims, investigations or proceedings commenced or threatened
against, relating to or involving or otherwise affecting the Company, any
Subsidiary or the Business or that relate to the consummation of the
transactions contemplated by this Agreement; and
(d)
the
occurrence of any fact or circumstance which might make any representation
made
hereunder by the Company false in any respect or result in the omission or
the
failure to state a material fact necessary in order to make the statements
contained herein, in light of the circumstances under which made, not materially
misleading.
6.4. SEC
Filings.
(a)
The
Company acknowledges that:
46
(i)
the
Parent’s stockholders must approve the transactions contemplated by this
Agreement prior to the transactions contemplated hereby being consummated and
that, in connection with such approval, the Parent must call a special meeting
of its stockholders requiring Parent to prepare and file with the SEC a proxy
statement and proxy card;
(ii)
the
Parent will be required to file Quarterly and Annual reports that may be
required to contain information about the transactions contemplated by this
Agreement; and
(iii)
the
Parent will be required to file Current Reports on Form 8-K to announce the
transactions contemplated hereby and other significant events that may occur
in
connection with such transaction.
(b)
In
connection with any filing the Parent makes with the SEC which requires
information about the transactions contemplated by this Agreement to be
included, the Company will, and will use commercially reasonable efforts to
cause its stockholders to, in connection with the disclosure included in any
such filing or the responses provided to the SEC in connection with the SEC’s
comments to a filing, use their commercially reasonable efforts to (i) cooperate
with the Parent, (ii) respond to questions about the Company or the stockholders
required in any filing or requested by the SEC, and (iii) provide any
information requested by Parent or Parent’s representatives in connection with
any filing with the SEC.
6.5.
Note
Conversion.
The
Company will enter into and maintain in full force and effect the Note
Conversion Agreement and will issue the Company Preferred Stock and the New
Note
immediately prior to the Closing in accordance therewith.
6.6.
Opinion
of Company Counsel.
The
Company shall cause its counsel to issue an opinion to Parent that, to such
counsel’s knowledge, subject to customary qualifications, the information
relating to the Business and the risk factors relating to the Business included
in the Parent’s proxy/registration statement is true in all material respects
and does not fail to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, accurate and not misleading. The opinion described in
this
Section 6.6 will be in a form reasonably acceptable to counsel for the Company
and the Parent.
6.7.
Pre-Approved
Transactions. By
executing this Agreement, Parent and Acquisition Corp. consent to each of the
following leases, contracts, obligations, transactions, indebtedness and other
matters. At the Closing, Acquisition Corp. agrees to assume and fully perform
each and every duty or obligation imposed by the following matters, that remain
a duty or obligation of Company, as the date of Closing:
(a)
All
indebtedness owed to LaSalle Bank, currently in maximum aggregate principal
amount of $9,000,000.00.
47
(b)
All
reasonable fees, disbursements, costs and expenses to become due and owing
as a
result of the Merger Agreement, Additional Documents, and the Transactions
reasonably anticipated therein.
(c)
All
inter-company accounts receivable and accounts payable by, among, and between
Company and the Subsidiaries.
(d)
The
obligation of Company to become due and owing to StarCo for financial,
contracting and bonding advice and consultation in an amount of up to $310,000.
(e)
All
the leases listed in the Schedules to this Agreement between the Company and
the
Subsidiaries (as Lessee) and Green Wing Management, Ltd, (as Lessor) as amended
from time to time.
(f)
The
new lease which Company or a Subsidiary will enter into with Green Wing
Management, Ltd. for the long term lease of a 2-story building in San Antonio,
Texas, to be built specifically for Company, at Company’s request. The building
will be leased to Company upon terms substantially similar to the terms of
the
existing leases with Green Wing Management, Ltd., including but not limited
to a
rental rate to be equal to 90% of the current market value of the building
to be
re-calculated each 3 years.
(g)
All
Accounts Payable, and other obligations of the Company and the Subsidiaries
incurred in the ordinary course of business.
(h)
All
costs, indebtedness and expenses of the Company related to all leasehold
improvements that Company will make, at its sole cost and expense, in the
facilities currently being leased from Green Wing Management, Ltd., as
identified in the Schedules to this Agreement.
6.8.
Notice
and Approval Procedure.
(a)
Company shall provide Parent with a clear and concise summary of any contract,
agreement or other obligation that Company or any Subsidiary seeks to enter
into
(“Summary Contract”), for which prior written approval of the Parent is required
herein. The Summary Contract and the recommendation of the Company or the
relevant Subsidiary regarding said contract, agreement or obligation, shall
be
sent to the attention of Xxx Xxxxxx at xxxxxxx@xxxxxxxxxxxxxx.xxx. A separate
copy of such data shall be faxed to 210.828.7300. No other notice to the Parent
of a proposed contract, agreement or obligation is required for which prior
written approval of the Parent is required herein. In the event that Parent
does
not object in writing to the contract, agreement or obligation described in
the
Summary Contract within five (5) days after the date and time of the fax
transmission described above, as reflected on the facsimile transaction
confirmation to be retained by the Company, then the Parent shall be irrevocably
deemed to have approved, in writing, the proposed contract, agreement or
obligation described in the Summary Contract in all respects.
48
(b)
Parent shall be deemed to have not given its approval to a Summary Contract,
when notice of such rejection of approval is delivered by Parent to Xxx
Xxxxxxxxxx, by facsimile at 512.495.5613, or by such other notification method
as Parent and Company may agree in writing.
(c)
Company shall provide Parent with a clear and concise summary of any material
contract, agreement or other obligation that Company or any Subsidiary seeks
to
enter into (“Summary Contract”), whose subject matter exceeds $100,000 in value,
for which no prior written approval of the Parent is required herein. The
Summary Contract and the recommendation of the Company or the relevant
Subsidiary regarding said contract, agreement or obligation, shall be sent
to
the attention of Xxx Xxxxxx at xxxxxxx@xxxxxxxxxxxxxx.xxx. A separate copy
of
such data shall be faxed to 210.828.7300. No other notice to the Parent of
a
proposed contract, agreement, or obligation is required for which prior written
approval of the Parent is required herein.
ARTICLE
VII
COVENANTS
OF THE PARTIES
The
Parent and the Acquisition Corp., on the one hand, jointly and severally, and
the Company, on the other hand, covenant and agree with each other to the
following terms. The Company hereby agrees that, at the Closing, each of its
stockholders shall, severally and not jointly, agree to each of the following
with Acquisition Corp. and the Parent, provided, however, that in the event
that
the subject matter of the following provisions is contemplated in the Employment
Agreements, the provisions in the applicable Employment Agreements shall
prevail, and provided further, however, that Xxxxx will not enter into any
agreement relating to Sections 7.2 or 7.3.
7.1.
Confidentiality.
Except
as otherwise required by law, they shall not, without the prior written consent
of the other party, or a person authorized thereby, disclose to any other Person
or use (whether for itself or any other party) any confidential information
or
proprietary work product of Parent, Acquisition Corp., the Company or any
Subsidiary or any client of Parent, Acquisition Corp., the Company or any
Subsidiary. In the event a party believes that it is required to disclose any
such confidential information pursuant to applicable Laws, such party shall
give
timely written notice to the party whose confidential information is to be
disclosed so such party has an opportunity to obtain a protective order or
other
appropriate relief. Each of the parties hereto shall cooperate fully in any
such
action.
7.2. Non-Solicitation.
(a)
Each
party and its Affiliates may not, during the period beginning on the
Closing Date and ending two years after the Closing Date (the “Restriction
Period”), directly or indirectly through any other individual, person or entity,
employ, solicit or induce any individual who is, or was at any time during
the
period beginning on or after December 31, 2005 and through and after, the
Closing Date, an employee or consultant of the other party to terminate or
refrain from renewing or extending his or her employment by or consulting
relationship with such party or to become employed by or enter into a
consulting
49
relationship
with another party or any of its Affiliates or any other individual, person
or
entity.
(b)
Each
party and its Affiliates may not, during the Restriction Period, directly or
indirectly through any other individual, person or entity, solicit, persuade
or
induce any Customer or supplier to terminate, reduce or refrain from renewing
or
extending his, her or its contractual or other relationship with the other
party
or to become a customer or supplier of or enter into any contractual or other
relationship with another party or any of its Affiliates or any other
individual, person or entity, directly or indirectly, in regard to the sale
of
products or services similar or identical to those manufactured, marketed,
purchased or sold by the Company or any Subsidiary as of the Closing Date.
For
purposes hereof, “Customer” means any individual, person or entity which is or
was at any point in time during the two (2) year period prior to the Closing
Date a customer of the Company or any Subsidiary.
7.3.
Non-Competition.
During
the Restriction Period, no party shall (except on behalf of the Company or
any
of its Affiliates) directly or indirectly, in his, her and its own capacity
or
through one or more Affiliates, whether as owner, consultant, executive,
partner, member, manager, officer, director, venturer, or agent, or through
stock ownership, investment of capital, lending of money or property, or
rendering of services, or otherwise, engage in the Business.
7.4.
Reporting
and Compliance With Law.
From
the date hereof through the Closing Date, each party shall duly and timely
file
all Tax Returns required to be filed with Authorities, pay any and all Taxes
required by any Authority and duly observe and conform, in all material
respects, to all applicable Laws and Orders.
7.5.
Injunctive
Relief.
If
a
party breaches, or threatens to commit a breach of, any of the covenants set
forth in Section 6.2, 7.1, or Section 14.4 (the “Restrictive Covenants”), the
party against which such breach shall be committed or threatened shall have
the
following rights and remedies, which shall be in addition to, and not in lieu
of, any other rights and remedies available to such party by agreement
(including those set forth in Section 11.1 hereof), under law or in equity:
(a)
The
right and remedy to have the Restrictive Covenants specifically enforced by
any
court having equity jurisdiction, all without the need to post a bond or any
other security or to prove any amount of actual damage or that money damages
would not provide an adequate remedy, it being acknowledged and agreed that
any
such breach or threatened breach will cause irreparable injury and that monetary
damages will not provide adequate remedy; and
(b)
The
right and remedy to require such breaching party (i) to account for and pay
over
all compensation, profits, monies, accruals, increments or other benefits
derived or received by them or any associated party as the result of any such
breach; and (ii) to indemnify the aggrieved party against any other losses,
damages (including special and consequential damages), costs and expenses,
including actual attorneys fees and court costs,
50
which
may
be incurred by it and which result from or arise out of any such breach or
threatened breach.
ARTICLE
VIII
COVENANTS
OF ALL PARTIES HERETO
The
parties hereto, as applicable, covenant and agree that:
8.1.
Best
Efforts; Further Assurances.
Subject
to the terms and conditions of this Agreement, each party shall use its
commercially reasonable efforts to take, or cause to be taken, all actions
and
to do, or cause to be done, all things necessary or desirable under applicable
Laws to consummate and implement expeditiously the transactions contemplated
by
this Agreement. The parties hereto shall execute and deliver such other
documents, certificates, agreements and other writings and take such other
actions as may be necessary or desirable in order to consummate or implement
expeditiously the transactions contemplated by this Agreement.
8.2.
Confidentiality
of Transaction.
Any
information (except publicly available or freely usable material obtained from
another source) respecting any party or its Affiliates will be kept in strict
confidence by all other parties to this Agreement and their agents. Except
as
required by Law, neither the Company nor any of its Affiliates, directors,
officers, employees or agents will disclose the terms of the transactions
contemplated hereunder at any time, currently, or on or after the Closing,
regardless of whether the Closing takes place, except as necessary to their
attorneys, accountants and professional advisors, in which instance such persons
and any employees or agents of the Company shall be advised of the confidential
nature of the terms of the transaction and shall themselves be required by
the
Company to keep such information confidential. Except as required by Law, each
party shall retain all information obtained from the other and their lawyers
on
a confidential basis except as necessary to their attorneys, accountants and
professional advisors, in which instance such persons and any employees or
agents of such party shall be advised of the confidential nature of the terms
of
the transaction and shall themselves be required by such party to keep such
information confidential.
8.3.
Good
Faith Efforts to Obtain Consents.
Each
party agrees to use its commercially reasonable good faith efforts to obtain
each party’s respective required consents as promptly as practicable
hereafter.
8.4. Tax
Matters.
(a)
The
transactions contemplated by this Agreement will cause Acquisition
Corp to terminate effective as of the Effective Time. The Surviving Corporation
shall prepare and file, or cause to be prepared and filed, any and all Tax
Returns required to be filed by the Acquisition Corp. (after giving effect
to
any valid extensions of the due date for filing any such Tax Returns) on or
prior to the Closing Date that have not been prepared or filed on or before
the
Closing Date and all Tax Returns of Acquisition Corp. due on or
51
after
the
Closing Date. The Surviving Corporation shall timely pay (or cause to be timely
paid) all Taxes shown as due and owing by Acquisition Corp. on all such Tax
Returns.
(b)
The
Surviving Corporation will be liable for and will pay all applicable sales,
transfer, recording, deed, stamp and other similar Taxes resulting from the
consummation of the transactions contemplated by this Agreement.
(c)
At
the Effective Time, all Tax sharing, indemnity or allocation agreements or
arrangements (whether or not written), if any, to which Company is a party
will
terminate, and, after the date hereof, no Taxes or other amounts will be paid
or
reimbursed by Company under any such agreement or arrangement, regardless of the
taxable year or period for which such Taxes are imposed, and the provisions
of
this Section
5.14
will
govern thereafter.
8.5.
Registration.
Within
30 days of the Closing Date, the Parent shall prepare and file with the SEC,
at
its sole expense, a registration statement permitting the public offering and
sale of the number of shares of Parent Common Stock issued to the Company’s
stockholders pursuant to this Agreement and any securities issued in exchange
for or in replacement of such shares of Parent Common Stock, and any securities
issued by way of any stock split, reverse stock split, recapitalization, or
other similar transaction affecting such Parent Common Stock (collectively,
the
“Registrable Securities”). The Parent will use commercially reasonable efforts
to have the staff of the SEC declare such registration statement effective
as
soon as practicable after the Effective Time, but in no event later than 150
days after the Closing Date. The Parent will keep such registration effective
until, subject to the terms and provisions of this Agreement, the earlier of
the
date when (i) all the Registrable Securities covered by the registration
statement have been sold pursuant thereto or otherwise or (ii) the Registrable
Securities may be publicly sold without volume restrictions under Rule 144(k)
(or any similar provisions then in force) of the Securities Act of 1933 as
amended (the “Act”), as determined by the counsel to the Parent (collectively,
the “Effectiveness Period”). The registration statement shall be on any form the
Parent is eligible to use to register for resale the Registrable Securities.
The
Parent shall use commercially reasonable efforts to cause such registration
statement filed pursuant to this Section to become effective as soon as possible
following the Effective Time. Pursuant to the Lock-Up Agreements (a) between
Xxxxx and the Parent, Xxxxx may not, except as otherwise provided in the Lock-Up
Agreements, sell any shares of Parent Common Stock it receives pursuant to
this
Agreement for a period of six months from the Effective Time, and (b) between
the Parent and each stockholder of the Company other than Xxxxx, each such
stockholder may not, except as otherwise provided in the Lock-Up Agreements,
sell any shares of Parent Common Stock it receives pursuant to this Agreement
until such time as the original stockholders of the Parent are able to sell
their Shares or January 30, 2009, whichever is earlier.
8.6.
Procedures
on Registration.
If and
whenever the Parent is required by the provisions hereof or any Lock-Up
Agreements to effect the registration of any Registrable Securities under the
Act, the Parent will, at its sole cost and expense:
52
(a)
respond as promptly as commercially reasonable to any comments received from
the
SEC, and use its commercially reasonable efforts to cause such registration
statement to become effective as required herein or in the Lock-Up Agreements,
and promptly provide to the holders of Company Securities copies of all filings
and SEC letters of comment relating thereto provided that such letters do not
contain material non-public information, in which case such letters may be
redacted by the Parent;
(b)
furnish to each holder of Company Securities such number of copies of the
registration statement and the prospectus included therein as such holder
reasonably may request to facilitate the public sale or disposition of the
Registrable Securities covered by such registration statement;
(c)
use
its commercially reasonable efforts to register or qualify the Registrable
Securities of each of the holders of Company Securities covered by such
registration statement under the securities or “blue sky” laws of such
jurisdictions within the United States as such holder may reasonably request;
provided, however, that the Parent shall not for any such purpose be required
to
qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service
of
process in any such jurisdiction;
(d)
list
the Registrable Securities covered by such registration statement with any
securities exchange on which the Parent Common Stock is then listed;
(e)
immediately notify the holder of Company Securities at any time when a
prospectus relating thereto is required to be delivered under the Act of the
happening of any event of which the Parent has knowledge as a result of which
the prospectus contained in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing; and
(f)
immediately notify the holder of Company Securities of the effectiveness of
each
registration statement filed.
8.7.
Employment
Agreements.
Promptly after the Effective Time and the formation of a compensation committee
by Parent, Surviving Corporation and Parent will negotiate an Employment
Agreement in good faith with each person listed on Schedule 8.7. The Company
acknowledges agrees that such Employment Agreements will be subject to the
final
approval of the compensation committee of the Parent.
ARTICLE
IX
CONDITIONS
TO CLOSING AND DELIVERIES ON CLOSING
9.1.
Condition
to the Obligations of Parent, Acquisition Corp., and the
Company.
The
obligations of Parent, Acquisition Corp. and the Company to consummate the
Closing are subject to the satisfaction of all the following conditions:
53
(a)
No
provision of any applicable Law or Order shall prohibit or impose any condition
on the consummation of the Closing or limit in any material way Parent’s right
to control or operate Acquisition Corp., the Surviving Corporation or any
material portion of the Business.
(b)
There
shall not be pending or threatened any proceeding by a third-party to enjoin
or
otherwise restrict the consummation of the Closing.
(c)
Parent’s stockholders shall have approved the transaction and fewer than 20% of
the issued and outstanding shares of Parent Common Stock owned by Parent’s
public stockholders will have exercised their conversion rights (as specified
in
the Parent’s Certificate of Incorporation).
(d)
The
Closing contemplated herein is completed in all respects on or before July
1,
2007.
9.2.
Conditions
to Obligations of Parent and Acquisition Corp. In
addition to the terms and provisions of Section 9.1, the obligation of Parent
and Acquisition Corp. to consummate the Closing is subject to the satisfaction,
or the waiver at Parent’s and Acquisition Corp.’s sole and absolute discretion,
of all the following further conditions:
(a)
(i)
The Company shall have duly performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the Closing
Date; (ii) the representations and warranties of the Company contained in this
Agreement, the Additional Agreements to which the Company is named as a party
and in any certificate or other writing delivered by the Company pursuant
hereto, shall be true and correct at and as of the Closing Date, as if made
at
and as of such date; (iii) there shall have been no event, change or occurrence
which individually or together with any other event, change or occurrence,
could
reasonably be expected to constitute a Material Adverse Change or to have a
Material Adverse Effect; and (iv) Parent and Acquisition Corp. shall have
received a certificate signed by the President and Secretary of the Company
to
the effect set forth in clauses (i), (ii) and (iii) of this Section 9.2(a).
(b)
Parent shall have received (i) a certified copy of the certificate of
incorporation of the Company and each Subsidiary; (ii) copies of the By-Laws
of
the Company and each subsidiary as effective on the date hereof; (iii) copies
of
resolutions duly adopted by (A) the Board of Directors of the Company and (B)
by
the vote or consent of the Company’s stockholders, authorizing this Agreement
and the Additional Agreements (if necessary) and the transaction contemplated
hereby and thereby; (iv) a certificate of the Secretary of the Company
certifying each of the foregoing and as to signatures of the officer(s)
authorized to execute this Agreement and any certificate or document to be
delivered pursuant hereto, together with evidence of the incumbency of such
Secretary; and (v) a recent good standing certificate regarding the Company
from
the office of the Secretary of State of the State of Delaware, and each other
jurisdiction in which the Company is qualified to do business.
54
(c)
Parent or Acquisition Corp. shall have reasonably determined that, after Parent
or Acquisition Corp. has had the opportunity to meet or speak to representatives
of the three largest customers of the Company and each Subsidiary pursuant
to
Section 6.2, all such customers will continue the relationship such customer
had
with the Company.
(d)
Parent shall have received a copy of all material Company Consents (including
any required consents of the landlords under the Leases), in form and substance
reasonably satisfactory to Parent, and no such material Company Consent shall
have been revoked.
(e)
Except as set forth in Schedule 9.2(e), the Company shall have delivered to
Parent documents satisfactory to Parent to evidence the release of all Liens
on
any portion of the assets of the Company and the filing of appropriate UCC-3
Termination Statements.
(f)
The
Parent shall have received updated Schedules to this Agreement as of a date
within three business days of the Closing Date. Such updated Schedules shall
include the 2006 Financial Statements and any subsequent interim period that
would be required under GAAP.
(g)
Parent’s stockholders approve the transactions contemplated by this Agreement by
July 1, 2007.
(h)
Parent will have received an opinion of counsel to the Company in a form to
be
agreed upon prior to Closing.
(i)
Certificates representing all of the issued and outstanding shares of the
Company Securities as of the Effective Time and the Company Warrant shall be
presented at the Closing for cancellation, together with the original stock
ledgers and minute books of the Company.
(j)
The
Company will have agreed to pay no more than $2,000,000 to ISI*MCS, Ltd.
(“StarCo”), which will be in full satisfaction of the account payable of the
Company in favor of StarCo.
(k)
The
Surviving Corporation’s Director and Officer insurance policy shall include the
officers and directors of the Parent.
(l)
Adjusted EBITDA as calculated herein is equal to or greater than $4,500,000
and
2/28 Backlog is equal to or greater than $70,000,000.
9.3.
Conditions
to Obligations of the Company.
In
addition to the terms and provisions of Section 9.1, the obligation of the
Company to consummate the Closing is subject to the satisfaction, or the waiver
at the Company’s discretion, of all the following further conditions:
55
(a)
(i)
Parent and Acquisition Corp. shall have performed in all material respects
all
of their respective obligations hereunder required to be performed by it at
or
prior to the Closing Date; (ii) the representations and warranties of Parent
contained in this Agreement, the Additional Agreements and in any certificate
or
other writing delivered by Parent or Acquisition Corp. pursuant hereto,
disregarding all qualifications and expectations contained therein relating
to
materiality, shall be true and correct in all material respects at and as of
the
Closing Date, as if made at and as of such date; (iii) there shall have been
no
event, change or occurrence which individually or together with any other event,
change or occurrence, could reasonably be expected to have a Material Adverse
Effect, regardless of whether it involved a known risk, on the business, assets,
condition (financial or otherwise), liabilities, result of operations of
prospects of the Parent; and (iv) the Company shall have received a certificate
signed by an authorized officer of Parent and Acquisition Corp. to the foregoing
effect.
(b)
The
Company shall have received (i) a copy of the certificate of incorporation
of
each of Parent and Acquisition Corp.; (ii) copies of the bylaws of each of
Parent and Acquisition Corp. as effective on the date hereof; (iii) copies
of
resolutions duly adopted by the Board of Directors of the Company authorizing
this Agreement and the Additional Agreements (if necessary) and the transaction
contemplated hereby and thereby; (iv) a certificate of the Secretary or
Assistant Secretary of Parent and Acquisition Corp. certifying each of the
foregoing and as to signatures of the officer(s) authorized to execute this
Agreement and any certificate or document to be delivered pursuant hereto,
together with evidence of the incumbency of such Secretary or Assistant
Secretary; and (v) a recent good standing certificate regarding Parent and
Acquisition Corp. from the office of the Secretary of State of its respective
jurisdiction of organization and each other jurisdiction in which each of Parent
and Acquisition Corp. is qualified to do business.
(c)
The
stockholders of the Parent shall have approved an equity incentive plan that
will provide incentives to the members of the Company’s management team (as well
as members of the Parent’s management team) listed on Schedule 9.3(d) based on
the long term performance of the Surviving Corporation.
9.4.
Closing
Deliveries.
.
(a)
On
the Closing Date, each party hereto will execute each of the Additional
Agreements to which it is a party.
ARTICLE
X
RELIANCE
ON REPRESENTATIONS AND WARRANTIES
10.1.
Reliance
on Representations and Warranties of the Company.
Notwithstanding any right of Parent and Acquisition Corp. to fully investigate
the affairs of the Company and notwithstanding any knowledge of facts determined
or determinable by Parent
56
and
Acquisition Corp. pursuant to such investigation or right of investigation,
Parent and Acquisition Corp. shall have the right to rely fully upon the
representations, warranties, covenants and agreements of the Company contained
in this Agreement.
10.2.
Reliance
on Representations and Warranties of Parent and Acquisition Corp.
Notwithstanding
any right of the Company to fully investigate the affairs of Parent and
Acquisition Corp. and notwithstanding any knowledge of facts determined or
determinable by the Company pursuant to such investigation or right of
investigation, the Company shall have the right to rely fully upon the
representations, warranties, covenants and agreements of Parent and Acquisition
Corp. contained in this Agreement.
ARTICLE
XI
INDEMNIFICATION
11.1.
Definition.
As used
in this ARTICLE XI, the term “Loss” shall mean loss, payments, demand, penalty,
liability, judgment, damage, diminution in value, claim or out-of-pocket costs
and expenses (including actual costs of investigation and attorneys’ fees and
other costs and expenses) (all of the foregoing collectively,
“Losses”).
11.2. This
section intentionally left blank.
11.3. Indemnification
of Company and Stockholders.Parent
and Acquisition Corp.
hereby jointly and severally agree to indemnify and hold harmless each of the
Company and the holders of the Company Securities and their respective
Affiliates, and each of their respective directors, officers, employees,
shareholders, attorneys, agents and permitted assignees (the “Company
Indemnitees”) against and in respect of any Losses incurred, sustained or to be
incurred or sustained by the Company Indemnitees arising from (i) any breach,
inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment
of any of the representations, warranties and covenants of Parent or Acquisition
Corp. contained herein or in the Additional Agreements to which Parent or
Acquisition Corp. are named as a party or any certificate or other writing
delivered pursuant hereto, (ii) actions or inactions of the Surviving
Corporation with regard to the Business occurring after the Closing, provided
that the activities of the Company’s current stockholders have not caused or
resulted in such action or inaction, (iii) the Proxy Statement to be filed
by
Parent relating to this Agreement, or any other public disclosure relating
to
this Agreement or the transactions contemplated thereby, unless the Loss
indemnified pursuant to this subsection arises from a material misstatement
made
to the Parent by the Company or any Company Indemnitee to the Parent; and (iv)
any contract or agreement that the Company or a Subsidiary is a party, or is
obligated to perform, where: (y) said contract is the subject of a performance
or payment bond provided by StarCo and (z) said contract has not been fully
paid
as of the Closing Date.
11.4.
Indemnification
of Individual Indemnitees.
Parent
and Acquisition Corp. hereby jointly and severally agree to indemnify and hold
harmless Xxx Xxxxxxxxxx, individually, and Xxx Xxxx, individually, their
spouses, attorneys, agents and permitted
57
assignees
(the “Individual Indemnitees”) against and in respect of any Losses incurred,
sustained or to be incurred or sustained by the Individual Indemnitees arising
from:
(i)
any
contract or agreement which the Company or a Subsidiary is obligated to perform
in whole or in part, where
(w)
said
contract or agreement is the subject of a performance or payment bond provided
by StarCo and
(x)
said
contract has not been fully paid as of the date of Closing.
(ii)
guarantees by the Individual Indemnitees relating to any of the performance
or
payment bonds provided by StarCo on any contract or agreement which the Company
or a Subsidiary is obligated to perform in whole or in part, where
(y)
such
contract or agreement is the subject of a performance or payment bond provided
by StarCo and
(z)
said
contract has not been fully paid as of the date of Closing.
11.5.
Procedure.
The
following shall apply with respect to all claims by a Company Indemnitee or
an
Individual Indemnitee (collectively, “Indemnified Party”) for indemnification:
(a)
An
Indemnified Party shall give the Parent or Acquisition Corp., or the
Indemnification Agent, as applicable (either, “Indemnifying Parties”), prompt
notice (an “Indemnification Notice”) of any third-party claim, investigation,
action, suit, hearing or proceeding with respect to which such Indemnified
Party
seeks indemnification pursuant to Section 11.3 or 11.4 (a “Third Party Claim”),
which shall describe in reasonable detail the loss, liability or damage that
has
been or may be suffered by the Indemnified Party. The failure to give the
Indemnification Notice shall not impair any of the rights or benefits of such
Indemnified Party under Section 11.3 or 11.4, except to the extent such failure
materially and adversely affects the ability of the Indemnifying Parties to
defend such claim or to the limited extent the failure to give such notice
increases the amount of such liability.
(b)
In
the case of any Third Party Claims as to which indemnification is sought by
any
Indemnified Party, such Indemnified Party shall be entitled, at the sole expense
and liability of the Indemnifying Parties, to exercise full control of the
defense, compromise or settlement of any Third Party Claim unless the
Indemnifying Parties, within a reasonable time after the giving of an
Indemnification Notice by the Indemnified Party (but in any event within 10
days
thereafter), shall (i) deliver a written confirmation to such Indemnified Party
that the indemnification provisions of Section 11.3 or 11.4 are applicable
to
such claim, investigation, action, suit, hearing or proceeding and the
Indemnifying Parties will indemnify such Indemnified Party in respect of such
claim, investigation, action or proceeding pursuant to the terms of Section
11.3
or 11.4 and, notwithstanding anything to the
58
contrary,
shall do so without asserting any challenge, defense, or limitation on the
Indemnifying Parties liability for Losses, counterclaims or offsets, (ii) notify
such Indemnified Party in writing that the Indemnifying Parties is assuming
the
defense thereof, and (iii) retain legal counsel reasonably satisfactory to
such
Indemnified Party to conduct the defense of such Third Party Claim.
(c)
If
the Indemnifying Parties assume the defense of any such Third Party Claim then
the Indemnified Party shall cooperate with the Indemnifying Parties in any
manner reasonably requested in connection with the defense, compromise or
settlement thereof. If the Indemnifying Parties so assume the defense of any
such Third Party Claim the Indemnified Party shall have the right to employ
separate counsel and to participate in (but not control) the defense,
compromise, or settlement thereof, but the fees and expenses of such counsel
employed by the Indemnified Party shall be at the expense of such Indemnified
Party unless (i) the Indemnifying Parties have agreed to pay such fees and
expenses, or (ii) the named parties to any such Third Party Claim (including
any
impleaded parties) include an Indemnified Party and an Indemnifying Party and
such Indemnified Party shall have been advised by its counsel that there may
be
a conflict of interest between such Indemnified Party and the Indemnifying
Parties in the conduct of the defense thereof, and in any such case the
reasonable fees and expenses of such separate counsel shall be borne by the
Indemnifying Parties.
(d)
If
the Indemnifying Parties assume the defense of any Third Party Claim, the
Indemnified Party shall not pay, or permit to be paid, any part of any claim
or
demand arising from such asserted liability unless the Indemnifying Parties
withdraw from or fail to vigorously prosecute the defense of such asserted
liability, or unless a judgment is entered against the Indemnified Party for
such liability. If the Indemnifying Parties do not elect to defend, or if,
after
commencing or undertaking any such defense, the Indemnifying Parties fail to
prosecute or withdraw such defense, the Indemnified Party shall have the right
to undertake the defense or settlement thereof, solely at the Indemnifying
Parties’ expense. Notwithstanding anything to the contrary, the Indemnifying
Parties shall not be entitled to control, but may participate in, and the
Indemnified Party (at the expense of the Indemnifying Parties) shall be entitled
to have sole control over, the defense or settlement of (x) that part of any
Third Party Claim (i) that seeks a temporary restraining order, a preliminary
or
permanent injunction or specific performance against the Indemnified Party,
or
(ii) to the extent such Third Party Claim involves criminal allegations against
the Indemnified Party or (y) the entire Third Party Claim if such Third Party
Claim could impose liability upon the Indemnified Party in an amount which
is
greater than the amount as to which the Indemnified Party is entitled to
indemnification under this Agreement. In the event the Indemnified Party retains
control of the Third Party Claim, the Indemnified Party may, in its sole
discretion, settle the subject claim without the prior written consent of the
Indemnifying Party.
(e)
If
the Indemnified Party assumes the defense of any such Third Party Claim pursuant
to this Section 11.5 and proposes to settle the same prior to a final judgment
thereon or to forgo appeal with respect thereto, then the Indemnifying Parties
shall have no right to participate in the settlement, assume or reassume the
defense thereof or prosecute such appeal. Any such settlement by the Indemnified
Party shall, in each case, shall be at the
59
Indemnifying
Parties’ expense. The Indemnifying Parties shall not, without the prior written
consent of such Indemnified Party, settle or compromise or consent to entry
of
any judgment with respect to any such Third Party Claim (i) in which any relief
other than the payment of money damages is or may be sought against such
Indemnified Party or (ii) which does not include as an unconditional term
thereof, the giving by the claimant, person conducting such investigation or
initiating such hearing, plaintiff or petitioner to such Indemnified Party
a
release from all liability with respect to such Third Party Claim and all other
claims or causes of action (known or unknown) arising or which might arise
out
of the same facts.
11.6.
Periodic
Payments.
Any
indemnification required by Section 11.3 or 11.4 for costs, fees, disbursements
or expenses of any and every kind, by an Indemnified Party in connection with
investigating, preparing to defend or defending any claim, action, suit,
hearing, proceeding or investigation, shall be made by periodic payments by
the
Indemnifying Parties to each Indemnified Party during the course of the
investigation or defense, as and when bills are received or costs, disbursements
or expenses are incurred, and no later than ten (10) business days after demand
for such payments by the Indemnified Party.
11.7.
Insurance.
Any
indemnification payments hereunder shall only be reduced by any insurance
proceeds or other third party reimbursement actually received by the Indemnified
Party.
11.8.
Survival
of Indemnification Rights.
The
representations and warranties of the Company, the Parent and Acquisition Corp.
shall survive until the third anniversary of the Closing Date. The
indemnification to which any Indemnified Party is entitled from the Indemnifying
Parties pursuant to Section 11.3 or 11.4 for Losses shall be effective so long
as it is asserted prior to the fourth anniversary of the Closing Date in the
case of all representations and warranties of the Company and Parent
hereunder.
ARTICLE
XII
DISPUTE
RESOLUTION
12.1. Arbitration.
(a)
In
the event a dispute arises relating to this Agreement, the parties agree
to
meet to resolve their disputes in good faith. Any party may seek injunctive
relief, without the need to post a bond, pending the completion of arbitration
under this Agreement for any material breach or threatened material breach
of
any covenant contained herein.
(b)
If
after good faith negotiations the dispute is not resolved, the parties shall
promptly submit any dispute, claim, or controversy arising out of or relating
to
this Agreement, or any Additional Agreement (including with respect to the
meaning, effect, validity, termination, interpretation, performance, or
enforcement of this Agreement or any Additional Agreement) or any alleged breach
thereof (including any action in tort, contract, equity, or otherwise), to
binding arbitration before one arbitrator that is familiar with the Business
and
not an Affiliate of any party to this Agreement (“Arbitrator”). The
parties
60
agree
that binding arbitration shall be the sole means of resolving any dispute,
claim, or controversy arising out of or relating to this Agreement or any
Additional Agreement (including with respect to the meaning, effect, validity,
termination, interpretation, performance or enforcement of this Agreement or
any
Additional Agreement) or any alleged breach thereof (including any claim in
tort, contract, equity, or otherwise).
(c)
If
the parties cannot agree upon the Arbitrator, the Arbitrator shall be selected
by the Chief Administrative District Judge for the State Courts sitting in
San
Antonio, Texas, upon the request of either side. The Arbitrator shall be
selected within 30 days of request.
(d)
The
laws of the State of Texas shall apply to any arbitration hereunder. In any
arbitration hereunder, this Agreement and any agreement contemplated hereby
shall be governed by the laws of the State of Texas applicable to a contract
negotiated, signed, and wholly to be performed in the State of Texas, which
laws
the Arbitrator shall apply in rendering its decision. The Arbitrator shall
issue
a written decision, setting forth findings of fact and conclusions of law,
within sixty (60) days after the Arbitrator shall have been selected. The
Arbitrator shall have no authority to award punitive or other exemplary damages.
(e)
The
arbitration shall be held in the City of San Antonio, Texas in accordance with
and under the then-current provisions of the rules of the American Arbitration
Association, except as otherwise provided herein.
(f)
On
application to the Arbitrator, any party shall have rights to discovery to
the
same extent as would be provided under the Federal Rules of Civil Procedure,
and
the Federal Rules of Evidence shall apply to any arbitration under this
Agreement; provided, however, that the Arbitrator shall limit any discovery
or
evidence such that the Arbitrator’s decision shall be rendered within the period
referred to in Section 12.1(d).
(g)
The
Arbitrator may, at the Arbitrator’s discretion and at the expense of the party
who will bear the cost of the arbitration, employ experts to assist him in
the
Arbitrator’s determinations.
(h)
The
costs of the arbitration proceeding and any proceeding in court to confirm
any
arbitration award or to obtain relief as provided in Section 12.1, as applicable
(including actual attorneys’ fees and costs), shall be borne by the unsuccessful
party and shall be awarded as part of the Arbitrator’s decision, unless the
Arbitrator shall otherwise allocate such costs for the reasons set forth in
such
decision. The determination of the Arbitrator shall be final and binding upon
the parties and not subject to appeal.
(i)
Any
judgment upon any award rendered by the Arbitrator may be entered in and
enforced by any court of competent jurisdiction. The parties expressly consent
to the exclusive jurisdiction of the courts (Federal and state) in the City
of
Xxx Xxxxxxx, Xxxxxx xx Xxxxx, Xxxxx xx Xxxxx to enforce any award of the
Arbitrator or to render
61
any
provisional, temporary, or injunctive relief in connection with or in aid of
the
Arbitration. The parties expressly consent to the personal and subject matter
jurisdiction of the Arbitrator to arbitrate any and all matters to be submitted
to arbitration hereunder. None of the parties hereto shall challenge any
arbitration hereunder on the grounds that any party necessary to such
arbitration (including the parties hereto) shall have been absent from such
arbitration for any reason, including that such party shall have been the
subject of any bankruptcy, reorganization, or insolvency proceeding.
(j)
The
parties shall indemnify the Arbitrator and any experts employed by the
Arbitrator and hold them harmless from and against any claim or demand arising
out of any arbitration under this Agreement or any agreement contemplated
hereby, unless resulting from the willful misconduct of the person indemnified.
(k)
This
arbitration clause shall survive the termination of this Agreement and any
agreement contemplated hereby.
12.2.
Waiver
of Jury Trial; Exemplary Damages.
ALL
PARTIES HEREBY WAIVE THEIR RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY DISPUTE
ARISING UNDER THIS AGREEMENT OR ANY ADDITIONAL AGREEMENT. No party shall be
awarded punitive or other exemplary damages respecting any dispute arising
under
this Agreement or any Additional Agreement.
12.3.
Attorneys’
Fees.
The
unsuccessful party to any court or other proceeding (including any arbitration
proceeding pursuant to this Article XII) arising out of this Agreement that
is
not resolved by arbitration under Section 12.1 shall pay to the prevailing
party
all actual attorneys’ fees and costs actually incurred by the prevailing party,
in addition to any other relief to which it may be entitled. As used in this
Section 12.3 and elsewhere in this Agreement, “actual attorneys’ fees” means the
full and actual cost of any legal services actually performed in connection
with
the matter for which such fees are sought (including all reasonable expenses,
costs, and disbursements of such attorneys), calculated on the basis of the
usual fees charged by the attorneys performing such services.
ARTICLE
XIII
TERMINATION
13.1.
Termination
Without Default.
(a)
In
the event that the Closing of the transactions contemplated hereunder has not
occurred by July 1, 2007 (the “Outside Closing Date”), then Parent and
Acquisition Corp. on the one hand, and the Company on the other hand, shall
all
have the right, at its or their sole option, to terminate this Agreement without
liability or prejudice to any party. Such right may be exercised by Parent
and
Acquisition Corp., on the one hand, or the Company on the other, as the case
may
be, giving written notice to the other at any time prior to the Outside Closing
Date.
62
(b)
In
the event that Adjusted EBITDA as calculated herein is determined to be less
than $4,500,000 or the 2/28 Backlog is determined to be less than $70,000,000,
then Parent shall have the right, at its sole option, to terminate this
Agreement without liability or prejudice to any party. Such right may be
exercised by Parent giving written notice to the Company at any time prior
to
the Outside Closing Date.
13.2. Termination
Upon Default.
(a)
Parent and Acquisition Corp. may terminate this Agreement by givingnotice
to
the Company on or prior Closing, without prejudice to any rights or obligations
Parent and Acquisition Corp. may have, if the Company shall have materially
breached any representation or warranty or breached any agreement or covenant
contained herein or in any Additional Agreement to be performed prior to
Closing
and such breach shall not be cured within the earlier of the Outside Closing
Date and ten (10) business days following receipt by the Company of a notice
describing in reasonable detail the nature of such breach.
(b)
The
Company may terminate this Agreement by giving prior written notice to Parent
on
or prior to the Closing, without prejudice to any rights or obligations the
Company may have, if Parent or Acquisition Corp. shall have materially breached
any of its covenants, agreements, representations, and warranties contained
herein to be performed prior to Closing and such breach shall not be cured
within the earlier of the Outside Closing Date or ten (10) business days
following receipt by Parent of a notice describing in reasonable detail the
nature of such breach.
13.3.
Survival.
The
provisions of Article XI and Article XII and Sections 8.2 and 14.4 shall survive
any termination hereof pursuant to this Article XIII.
ARTICLE
XIV
MISCELLANEOUS
14.1.
Notices.
All
notices, requests, demands and other communications to any party hereunder
shall
be in writing and shall be given to such party at its address or telecopier
number set forth below, or such other address or telecopier number as such
party
may hereinafter specify by notice to each other party hereto:
if
to
Parent and Acquisition Corp., to:
000
Xxxxxxx Xxxxx, Xxxxx 000
Xxx
Xxxxxxx, XX 00000
Attn:
Xxx
Xxxxxx
Telecopy:
(000) 000-0000
63
with
a
copy
to:
Loeb
& Loeb LLP
000
Xxxx
Xxxxxx
Xxx
Xxxx,
Xxx Xxxx 00000
Attention:
Xxxxxxxx X. Xxxxxxxx
Telecopy:
000-000-0000
if
to the
Company:
ISI
Detention Contracting Group, Inc.
00000
Xxxxxxxx Xxxxx
Xxx
Xxxxxxx, Xxxxx 00000
Attention:
Xxx Xxxxxxxxxx
Telecopy:
210.495.5613
with
a
copy
to:
Xxxxxx
& Xxxx, LLP
000
Xxxxxxxx Xxx; Xxx. 000
Xxxxxx,
XX 00000
Attention:
Hull Xxxxxxxxxx
Telecopy
: 512.482.6859
with
an
additional copy to:
Xxxxxxx
Xxxxx Mezzanine Capital Fund III, L.P.
c/o
Merit
Capital Partners
Attention:
Xxxxx Xxxxx
000
Xxxx
Xxxxxxx Xxxxxx
Xxxxx
0000
Xxxxxxx,
Xxxxxxxx 00000
and
an
additional copy to:
Vedder,
Price, Xxxxxxx and Kammholz, P.C.
|
000
Xxxxx XxXxxxx Xxxxxx, Xxxxx 0000
|
Xxxxxxx,
XX 00000
|
Attention:
Xxxx Xxxxxxx
|
Telecopy:
(000) 000-0000
|
Each
such
notice, request or other communication shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the appropriate answer back is received or, (ii) if given by
certified mail, 72 hours after such communication is deposited in the mails
with
first class and certified postage prepaid, properly addressed or, (iii) if
given
by any other means, when delivered at the address specified herein.
64
14.2. Amendments;
No Waivers.
(a)
Any
provision of this Agreement may be amended or waived if, and only
if,
such amendment or waiver is in writing and signed, in the case of an amendment,
by each party hereto, or in the case of a waiver, by the party against whom
the
waiver is to be effective.
(b)
No
failure or delay by any party hereto in exercising any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. Except as specifically provided
otherwise herein, the rights and remedies herein provided shall be cumulative
and not exclusive of any rights or remedies provided by law.
14.3.
Ambiguities.
The
parties acknowledge that each party and its counsel has materially participated
in the drafting of this Agreement and consequently the rule of contract
interpretation that, and ambiguities if any in, the writing be construed against
the drafter, shall not apply.
14.4.
Publicity.
Except
as required by law, the parties agree that neither they nor their agents shall
issue any press release or make any other public disclosure concerning the
transactions contemplated hereunder without the prior approval of the other
party hereto.
14.5.
Successors
and Assigns.
The
provisions of this Agreement shall be binding upon and inure to the benefit
of
the parties hereto and their respective successors and assigns; provided,
that
(i) the Company may not assign, delegate or otherwise transfer any of its rights
or obligations under this Agreement without the prior written consent of Parent;
(ii) in the event Parent assigns its rights and obligations under this Agreement
to an Affiliate, Parent shall continue to remain liable for its obligations
hereunder; and (iii) Parent, the Surviving Corporation or Acquisition Corp.
may
assign any of its rights and benefits under this Agreement to secured lenders
of
Parent, the Surviving Corporation or Acquisition Corp. Except as specifically
set forth in clauses (ii) and (iii) above, neither Parent nor Acquisition Corp.
may assign, delegate or otherwise transfer any of its rights or obligations
under this Agreement without the prior written consent of the Company.
14.6.
Governing
Law; Jurisdiction.
This
Agreement has been entered into in the State of Texas. This Agreement shall
be
construed in accordance with and governed by the laws of the State of Texas,
without giving effect to the conflict of laws principles thereof. Solely to
the
extent that the Parties hereto are permitted by the terms of this Agreement
to
pursue litigation or other legal processes, the parties hereto hereby
irrevocably consent to the exclusive jurisdiction of the state, county and
federal courts sitting in the City of San Antonio, County of Bexar, State of
Texas in connection with any controversy or claim arising out of or relating
to
this Agreement, or the negotiation or breach thereof, and hereby waive any
claim
or defense that such forum is inconvenient or otherwise improper. Each party
hereby agrees that any such court shall have in personam jurisdiction over
it
and consents to service of process in any manner authorized by Texas law.
65
14.7.
Counterparts;
Effectiveness.
This
Agreement may be signed by facsimile signatures and in any number of
counterparts, each of which shall be an original and all of which shall be
deemed to be one and the same instrument, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
14.8.
Entire
Agreement.
This
Agreement, together with the Schedules and the Exhibits attached hereto,
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior agreements, understandings and
negotiations, both written and oral, among the parties with respect to the
subject matter of this Agreement. No representation, inducement, promise,
understanding, condition or warranty not set forth herein has been made or
relied upon by any party hereto. Neither this Agreement nor any provision hereof
is intended to confer upon any Person other than the parties hereto any rights
or remedies hereunder other than Indemnified Parties as set forth in ARTICLE
XI
hereof, which shall be third party beneficiaries hereof.
14.9.
Severability.
If
any
one or more provisions of this Agreement shall, for any reasons, be held to
be
invalid, illegal or unenforceable in any respect, such invalidity, illegality
or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
14.10.
Captions.
The
captions herein are included for convenience of reference only and shall be
ignored in the construction or interpretation hereof.
14.11.
Construction.
References in this Agreement to “Articles,” “Sections,” “Schedules” and
“Exhibits” shall
be
to the Articles, Sections, Schedules and Exhibits of
this
Agreement, unless otherwise specifically provided herein. All Schedules to
this
Agreement are incorporated herein by reference. Any use in this Agreement of
the
singular or plural, or the masculine, feminine or neuter gender, shall be deemed
to include the others, unless the context otherwise requires. The words
“herein”, “hereof” and “hereunder” and words of similar import, when used in
this Agreement, shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. The word “including” when used in this
Agreement shall mean “including without limitation”. Except as otherwise
specified in this Agreement, all references in this Agreement (a) to any
agreement, document, certificate or other written instrument shall be a
reference to such agreement, document, certificate or instrument, in each case
together with all exhibits, schedules, attachments and appendices thereto,
and
as amended, restated, supplemented or otherwise modified from time to time
in
accordance with the terms thereof; and (b) to any law, statute or regulation
shall be deemed references to such law, statute or regulation as the same may
be
supplemented, amended, consolidated, superseded or modified from time to
time.
[The
balance of this page is intentionally
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IN
WITNESS WHEREOF, Parent, Acquisition Corp. and the Company have caused this
Agreement to be duly executed by their respective authorized officers as of
the
day and year first above written.
ARGYLE
SECURITY ACQUISITION CORP
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By: | /s/ Xxx Xxxxxx | |
Name: Xxx Xxxxxx |
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Title: Co-Chief Executive Officer |
ISI SECURITY GROUP, INC. | ||
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By: | /s/ Xxx Xxxxxx | |
Name: Xxx Xxxxxx |
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Title: President |
ISI
DETENTION CONTRACTING GROUP, INC.
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By: | /s/ Xxx Xxxxxxxxxx | |
Name: Xxx Xxxxxxxxxx |
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Title: Chief Executive Officer |
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