SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 26, 1999
TSI INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA
----------------------------------------------
(State or other jurisdiction of incorporation)
0-2958 41-0843524
- ------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
500 CARDIGAN ROAD, SHOREVIEW, MINNESOTA 55126
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 483-0900
--------------
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSTION OF ASSETS
Pursuant to the Agreement and Plan of Merger dated May 11, 1999, which is
attached hereto as an exhibit, Registrant, on June 1, 1999, purchased the stock
of Environmental Systems Corporation (a Tennessee Corporation). The closing took
place on May 26, 1999. Environmental Systems Corporation (ESC) specializes in
technology-based products and services relating to environmental monitoring,
power production, and waste management. In its fiscal year ended December 31,
1998, sales were approximately $22.9 million. ESC is headquartered in Knoxville,
Tennessee, with subsidiaries in eastern Europe and Asia.
The acquisition price of $25,000,000 was paid in cash. The consideration paid
was determined by arms-length negotiations between Registrant and Environmental
Systems Corporation. No prior relationships existed between Registrant and
Environmental Systems Corporation or their shareholders, directors, officers,
and associates. To finance the acquisition, the Registrant used its existing
cash along with bank financing of approximately $15,000,000 made available under
a credit agreement with U.S. Bank of Minneapolis, MN. The initial term of the
debt will be short-term with the ability to extend the term for periods not to
exceed five years. The interest rate on the debt is the lesser of either the
reference rate or approximately 1.2% over the CD rate or Eurodollar rate.
The acquisition will be accounted for by the purchase method of accounting. The
amount of the purchase price that exceeded the fair market value of identified
assets will be allocated to goodwill that will be amortized over twenty years.
Registrant intends to continue the business previously conducted by
Environmental Systems Corporation substantially similar as before Registrant's
acquisition.
The description contained in this 8-K and in the press release attached hereto
as Exhibit 99 does not purport to be complete and is qualified in its entirety
by reference to the Merger Agreement, a copy of which is attached hereto as
Exhibit 2 and is incorporated by reference herein.
ITEM 7. FINANCIAL STATEMENTS, PROFORMA FINANCIAL INFORMATION AND EXHIBITS
The following financial information is being filed in order to satisfy
the financial statement information requirement for this report.
(a) Financial Statements of Environmental Systems Corporation
(ESC)
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998
and 1997 (Audited) and March 31, 1999 (Unaudited)
Consolidated Statements of Income for the Years Ended
December 31, 1998 and 1997 (Audited) and for the
Three Months Ended March 31, 1999 and 1998
(Unaudited)
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1998 and 1997 (Audited)
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, and 1997 (Audited) and for
the Three Months Ended March 31, 1999 and 1998
(Unaudited)
Notes to Financial Statements
(b) Pro Forma Financial Information
2
<PAGE>
Description of the Unaudited Pro Forma Combined
Financial Information of ESC and TSI Incorporated.
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year Ended March 31, 1999,
including notes to pro forma statement of operations.
Unaudited Pro Forma Condensed Balance Sheet as of
March 31, 1999, including notes to pro forma balance
sheet.
(c) Exhibits
2 Agreement and Plan of Merger dated May 11, 1999, between TSI
Incorporated, TSI Tennessee, Inc. and Environmental Systems
Corporation.
23 Consent of Independent Auditors
99 Press release disclosing the execution of the merger agreement
Information contained herein may contain forward looking statements
that involve risks and uncertainties with respect to the fair value of
assets acquired, the amount of liabilities assumed, the allocation of
the purchase price to the tangible and intangible assets acquired, and
otherwise. These forward looking statements include the words
"believes", "expects", "anticipates" and similar expressions. These
forward looking statements involve certain risks and uncertainties,
including those related to general economic and business conditions,
changes in market conditions and competitive pressures. In addition,
the purchase price allocation includes preliminary estimates based upon
TSI's initial review of the assets and liabilities acquired. The final
allocation of the purchase price will be based in part on an
independent valuation. There can be no assurance that the final
purchase price allocation will be consistent with the allocation
reflected in the accompanying unaudited pro forma combined financial
information.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on behalf of the
undersigned thereunto duly authorized.
Dated: June 10, 1999
TSI INCORPORATED
By /s/ James E. Doubles
-------------------------------
James E. Doubles
Chief Executive Officer
4
<PAGE>
Item 7(a) Financial Statements of Business Acquired
Report of Independent Auditors
Board of Directors
Environmental Systems Corporation
We have audited the accompanying consolidated balance sheets of
Environmental Systems Corporation and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the
financial statements of ECM ECO Monitoring, a.s., or ECM ECO Monitoring
(Thailand) Co., Ltd., majority-owned subsidiaries, which statements
reflect total assets of $1,587,930 and $2,051,036 and total liabilities
of $777,830 and $1,259,574 as of December 31, 1998 and 1997,
respectively, and total revenues of $3,319,493 and $2,612,131
respectively, for the years then ended. Those statements were audited
by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for ECM ECO Monitoring,
a.s., and ECM ECO Monitoring (Thailand) Co., Ltd., is based solely on
the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Environmental
Systems Corporation and subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years
ended in conformity with generally accepted accounting principles.
/s/ Coulter & Justus, P.C.
February 25, 1999, except for
Note 11, as to which the
date is May 12, 1999
5
<PAGE>
ENVIRONMENTAL SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS (ALL #S ROUNDED TO NEAREST THOUSAND)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1999
-----------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,778,000 $ 3,978,000 $ 3,360,000
Trade accounts and notes receivable, less allowance
For uncollectible accounts of $607,000 in 1998
and $514,000 in 1997 and $607,000 in 1999 4,777,000 4,376,000 5,269,000
Other receivables 97,000 84,000
Refundable income taxes 107,000 - -
-
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,345,000 851,000 1,190,000
Total inventories 930,000 996,000 1,175,000
Deferred income taxes 390,000 367,000 390,000
Prepaid expenses and other current assets 29,000 42,000 176,000
------ ------ -------
Total current assets 10,453,000 10,694,000 11,560,000
---------- ---------- ----------
Property, Plant and Equipment
Land 651,000 651,000 651,000
Buildings and improvements 2,281,000 1,104,000 2,281,000
Technical equipment 2,670,000 2,397,000 2,756,000
Car and trucks 244,000 129,000 262,000
Office equipment 1,277,000 1,006,000 1,253,000
Leasehold improvements 32,000 30,000 27,000
Construction in progress 144,000 1,184,000 151,000
------- --------- -------
7,299,000 6,501,000 7,381,000
--------- --------- ---------
Less allowances for depreciation and amortization (2,436,000) (1,830,000) (2,558,000)
---------- ---------- ----------
Net property, plant and equipment 4,863,000 4,671,000 4,823,000
Note receivable 225,000 225,000 225,000
Other assets 156,000 410,000 125,000
------- ------- -------
Total assets $15,697,000 $16,000,000 $16,733,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,177,000 $ 1,339,000 $ 1,050,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 3,332,000 4,979,000 3,469,000
Accrued compensation 1,117,000 1,088,000 185,000
Income tax payable - 189,000 -
Other accrued expenses 276,000 340,000 1,671,000
Current portion of long-term debt 153,000 153,000 153,000
------- ------- -------
Total current liabilities 6,055,000 8,088,000 6,528,000
Other liabilities:
Deferred income taxes 160,000 207,000 160,000
Long-term debt, less current portion 1,840,000 2,032,000 1,840,000
Minority interests in subsidiaries 241,000 227,000 241,000
------- ------- -------
Total other liabilities 2,241,000 2,466,000 2,241,000
--------- --------- ---------
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total liabilities 8,296,000 10,554,000 8,769,000
--------- ---------- ---------
Shareholders' equity:
Common stock, no par value:
Authorized shares--5,000,000
Issued and outstanding shares--1,606,092 528,000 528,000 534,000
Retained earnings 7,010,000 5,084,000 7,567,000
Accumulated other comprehensive income--foreign
currency translation adjustments (137,000) (166,000) (137,000)
-------- -------- --------
Total shareholders' equity 7,401,000 5,446,000 7,964,000
--------- --------- ---------
Total liabilities and shareholders' equity $15,697,000 $16,000,000 $16,733,000
=========== =========== ===========
</TABLE>
ENVIRONMENTAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (ALL #s ROUNDED TO NEAREST THOUSAND)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
-----------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1998 1997 1999 1998
------------------------------------ ---------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Operating revenues $22,901,000 $19,372,000 $5,311,000 $4,959,000
Interest and other income 249,000 803,000 27,000 41,000
------------------------------------ ---------------------------------
Total revenues 23,150,000 20,175,000 5,338,000 5,000,000
Costs and expenses:
Operating 12,418,000 9,792,000 2,409,000 2,370,000
General and administrative 6,795,000 5,677,000 1,861,000 1,603,000
Research and development 961,000 870,000 225,000 209,000
------------------------------------ ---------------------------------
Total costs and expenses 20,174,000 16,339,000 4,495,000 4,182,000
------------------------------------ ---------------------------------
Income before income taxes and minority interest
in earnings of consolidated subsidiaries 2,976,000 3,836,000 843,000 818,000
Provision for income taxes 1,042,000 1,249,000 287,000 278,000
------------------------------------ ---------------------------------
Income before minority interest in earnings of
consolidated subsidiaries 1,934,000 2,587,000 556,000 540,000
Minority interest in earnings of consolidated (8,000) (36,000) - -
subsidiaries
-----------------------------------------------------------------------
Net income $ 1,926,000 $ 2,551,000 $ 556,000 $ 540,000
==================================== =================================
</TABLE>
7
<PAGE>
ENVIRONMENTAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (ALL #s ROUNDED TO NEAREST
THOUSAND)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $923,000 $5,529,000 $ (12,000) $6,440,000
Purchase and retirement of 1,395,463 shares
of common stock held by ESOP (395,000) (2,996,000) - (3,391,000)
Comprehensive income:
Net income - 2,551,000 - 2,551,000
Foreign currency translation adjustments - - (154,000) (154,000)
------------------
Net comprehensive income 2,397,000
------------------------------------------------------------------------
Balance at December 31, 1997 528,000 5,084,000 (167,000) 5,446,000
Comprehensive income:
Net income - 1,926,000 - 1,926,000
Foreign currency translation adjustments - - 30,000 30,000
------------------
Net comprehensive income 1,955,000
------------------------------------------------------------------------
Balance at December 31, 1998 $528,000 $7,010,000 $(137,000) $7,401,000
========================================================================
</TABLE>
ENVIRONMENTAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (ALL #s ROUNDED TO NEAREST THOUSAND)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31,
1998 1997 1999 1998
------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,926,000 $2,551,000 $556,000 $540,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 889,000 398,000 122,000 95,000
Provision for deferred income taxes (benefit) (70,000) (67,000) - -
Gain on sale of investment - (254,000) - -
(Gain) loss on disposal of equipment and improvements (1,000) 3,000 - -
Provision for losses on accounts receivable 108,000 85,000 - -
Changes in operating assets and liabilities, net of effects
of acquisition:
Receivables (535,000) (261,000) (289,000) 197,000
Refundable income taxes (107,000) -
Inventories 53,000 (297,000) (244,000) (279,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts (494,000) (390,000) 155,000 200,000
Other assets 22,000 (164,000) (116,000) 989,000
Trade accounts payable (150,000) 254,000 (127,000) (244,000)
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,649,000) (747,000) 137,000 (422,000)
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Accrued compensation 30,000 303,000 (932,000) 107,000
Income taxes payable (189,000) (127,000) - -
Minority interest in subsidiary 15,000 (31,000) - -
Other liabilities (66,000) 68,000 1,396,000 (906,000)
--------------------------------------------------------------------------
Net cash provided by (used in) operating activities (218,000) 1,325,000 658,000 277,000
FINANCING ACTIVITIES
Proceeds of stock options exercised - 6,000 -
Purchase of common stock held by ESOP - (3,391,000) - -
Principal payments on long-term debt (192,000) (115,000) - (46,000)
--------------------------------------------------------------------------
Net cash used in financing activities (192,000) (3,506,000) 6,000 (46,000)
INVESTING ACTIVITIES
Cash restricted for buildings 2,300,000 - -
Proceeds from sale of investment - 284,000 - -
Issuance of note receivable - (225,000) - -
Proceeds from sales of property, plant and equipment 4,000 65,000 - -
Purchases of property, plant and equipment (837,000) (3,205,000) (82,000) (221,000)
Purchase of Southern Testing Services, Inc. - (588,000) - -
--------------------------------------------------------------------------
Net cash used in investing activities (833,000) (1,370,000) (82,000) (221,000)
Effect of exchange rate changes on cash and
cash equivalents 43,000 (7,000) - -
--------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,200,000) (3,558,000) 582,000 10,000
Cash and cash equivalents at beginning of year 3,978,000 7,536,000 2,778,000 3,978,000
--------------------------------------------------------------------------
Cash and cash equivalents at end of year $2,778,000 $3,978,000 $3,360,000 $3,988,000
==========================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 118,000 $ 100,000
Income taxes 1,407,000 1,474,000
</TABLE>
Environmental Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Environmental Systems Corporation ("the Company") and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Net income (loss) from a majority-owned Slovakian
subsidiary, ECM ECO Monitoring, a.s. ("ECM"), included in the consolidated
statements of income totaled $63,000 for 1998 and $176,000 for 1997. Net loss
from a majority-owned subsidiary in Thailand, ECM ECO Monitoring (Thailand) Co.,
Ltd. ("ECM-Thailand"), included in the consolidated statement of income totaled
$(83,000) in 1998 and $(25,000) in 1997.
9
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
MINORITY INTEREST
Minority interest represents the minority shareholders' proportionate share of
the equity and the income or loss of certain consolidated subsidiaries,
primarily ECM and ECM-Thailand. The Company owns 70% of the outstanding shares
of ECM and 78.8% of the outstanding shares of ECM-Thailand. ECM also owns the
majority interest in certain other consolidated subsidiaries.
The Company also owns 100% of the outstanding shares of Waste Conversion
Systems, Inc. ("WCS"). During October 1997, WCS purchased 100% of the
outstanding shares of Southern Testing Services, Inc. ("STS"). This acquisition
was accounted for by the purchase method; therefore, results of STS operations
were included in the financial statements beginning on the date of acquisition.
The purchase price of $588,000 was allocated to accounts receivable of
$244,000, technical equipment of $644,000, liabilities assumed of $55,000 and
deferred income tax liabilities of $244,000.
FOREIGN CURRENCY TRANSLATION
In accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation," the financial statements of ECM and ECM-Thailand are
translated using exchange rates in effect at year-end for assets and liabilities
and average exchange rates during the year for results of operations. The
related translation adjustments are reported as a separate component of
shareholders' equity.
INDUSTRY
The Company is engaged in providing services and systems and in the design,
manufacturing and marketing of environmental monitoring devices for large
utilities and governmental agencies and, therefore, generally does not require
collateral for receivables.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements as of March 31, 1999 and for the
three months ended March 31, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included. Results for interim periods are not necessarily indicative of
results for the entire year.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. The Company computes depreciation
principally by the straight-line method over the estimated useful lives of the
assets.
REVENUES
The Company recognizes revenues from contracts under the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. This method is used because
management considers it to be the best available measure of progress on the
contracts. Because of inherent uncertainties in estimating costs, it is at least
reasonably possible that the estimates used will change within the near term.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor and supplies.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions
and estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
10
<PAGE>
The asset, "costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed. The
liability, "billings in excess of costs and estimated earnings on uncompleted
contracts," represents billings in excess of revenues recognized.
INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories
consisted of the following:
December 31, 1998 December 31, 1997
Supplies $213,000 $222,000
Work in Process 423,000 500,000
Finished Goods 294,000 274,000
------- --------
$930,000 $996,000
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
2. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-----------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for accounts receivable $196,000 $163,000
Vacation accruals 173,000 151,000
Warranty reserves 28,000 62,000
Other 89,000 75,000
-----------------------------------------
Total deferred tax assets 486,000 451,000
Deferred tax liabilities:
Tax over book depreciation 249,000 282,000
Prepaid expenses deducted for tax purposes 7,000 9,000
-----------------------------------------
Total deferred tax liabilities 256,000 291,000
-----------------------------------------
Net deferred tax assets, including $390,000 in 1998 and
$367,000 in 1997 classified as current
$230,000 $160,000
=========================================
</TABLE>
Significant components of the provision for income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------
<S> <C> <C>
Current:
Federal $1,045,000 $1,207,000
State 67,000 109,000
----------------------------------------
Total current 1,112,000 1,316,000
Deferred:
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
Federal (63,000) (60,000)
State (7,000) (7,000)
----------------------------------------
Total deferred (70,000) (67,000)
----------------------------------------
Total income tax expense $1,042,000 $1,249,000
========================================
</TABLE>
The reconciliation of income taxes computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------
<S> <C> <C>
Tax at U.S. statutory rates $1,012,000 $1,304,000
State income taxes, net of federal tax benefit 60,000 102,000
Difference in taxes on ECM and ECM-Thailand operations
10,000 (56,000)
Other (net) (39,000) (101,000)
----------------------------------------
Total income tax expense $1,042,000 $1,249,000
========================================
</TABLE>
Cumulative undistributed earnings of ECM amounted to approximately $424,000 and
$362,000 at December 31, 1998 and 1997, respectively. Those earnings are
considered to be indefinitely reinvested and, accordingly, no provision for U.S.
federal and state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the foreign country. Determination of
the amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
3. Stock Option Plan
The Company has a non-qualified stock option plan which provides for the
granting of options to key employees and non-employee directors of the Company.
The aggregate number of shares of common stock reserved for issuance under the
plan is 630,000 shares. The option price, number of shares, grant date and
vesting period are determined at the discretion of the Company's board of
directors. Options granted under the plan are exercisable for a period not to
exceed five years from the option grant date. The option price approximates the
fair value of the options at the grant date. A summary of option transactions
during 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
---------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1997 395,000 $1.54
Granted 60,000 $2.43
Canceled (30,000) $1.54
------------------------
Outstanding at December 31, 1997 425,000 $1.67
Granted 20,000 $3.50
------------------------
Outstanding at December 31, 1998 445,000 $1.75
========================
Exercisable at December 31, 1998 145,000 $1.60
========================
Available for issuance at December 31, 1998 35,000
========================
</TABLE>
A summary of options outstanding as of December 31, 1998, is as follows:
<TABLE>
<CAPTION>
EXERCISE NUMBER OF REMAINING NUMBER OF
PRICE SHARES OUTSTANDING LIFE SHARES EXERCISABLE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1.54 270,000 1.58 YEARS 135,000
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C>
$1.54 95,000 2.58 YEARS -
$2.43 60,000 3.42 YEARS 10,000
$3.50 20,000 4.83 YEARS -
-----------------------------
445,000
=============================
</TABLE>
4. Employee Stock Ownership Plan
During 1993, the Company established a leveraged employee stock ownership plan
(ESOP) that covered substantially all employees and bought 1,395,463 shares of
common stock from existing shareholders. The Company accrued annual
contributions to the ESOP equal to the ESOP's debt service, along with
additional amounts determined by the Board of Directors. During 1997, the
Company terminated the ESOP by purchasing and retiring the ESOP shares based on
an independent stock valuation. The value of participant accounts were then
transferred to the Company's profit sharing retirement plan.
5. Profit Sharing Retirement Plan
The Company has a profit sharing plan covering substantially all employees.
Under the terms of the Plan, the Company's contribution is determined each year
by the Board of Directors. Profit sharing contributions accrued totaled $64,000
in 1998 and $66,000 in 1997.
6. Leases
The Company leases office facilities and general storage facilities under
short-term operating leases. Net rent expense for all operating leases,
including facilities and short-term equipment leases, was as $128,000 in 1998
and $339,000 in 1997.
7. Notes Payable and Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------------------
<S> <C> <C> <C>
Industrial Revenue Bonds (Series 1996A and B) $1,993,000 $2,185,000
Less current portion 153,000 153,000
--------------------------------------------
Long-term portion $1,840,000 $2,032,000
============================================
</TABLE>
In December 1996, the Company entered into a loan agreement whereby the Company
received $2,300,000 of the proceeds of Industrial Revenue Bonds issued by the
Industrial Development Board of Knox County, Tennessee. $900,000 in tax-exempt
bonds (the "Series 1996 A Bonds") were used to finance the acquisition,
construction and equipping of a manufacturing facility. $1,400,000 in taxable
bonds (the "Series 1996 B Bonds") were for the purpose of acquiring the office
facility and constructing certain improvements. The Bonds were issued pursuant
to an Indenture of Trust between the Industrial Development Board and First
American National Bank, as Trustee. The loan agreement related to the Bonds is
collateralized by an irrevocable letter of credit issued by a bank ("the
Trustee") for $2,236,000 which expires in December 1999.
The Bonds are remarketed on a weekly basis and bear interest at a variable rate
which cannot exceed the lesser of 12% or the maximum rate allowed by law. The
rate was 4.2% and 5.4% as of December 31, 1998, for the Series 1996 A Bonds and
Series 1996 B Bonds, respectively. The Company has the option to convert to a
fixed interest rate until maturity of the Bonds at the lower of the maximum rate
allowed or at the rate determined by the remarketing agent in accordance
13
<PAGE>
with the Indenture of Trust. Conversion from the variable rate requires a
mandatory tender offer to all current holders of the Bonds.
During the variable rate period, any holder of the Bonds may, subject to the
terms of the Indenture of Trust, require the repurchase of all or a portion of
the Bonds at a price equal to the principal amount of the Bonds plus accrued
interest. The Indenture of Trust allows the Trustee to draw upon the letter of
credit for payment of any Bonds not remarketed. The interest rate on the letter
of credit draws is the bank's index rate plus 2%. The Reimbursement Agreement is
collateralized by the land and assignment of future construction.
The Bonds are also subject to optional redemptions at the direction of the
Company. Mandatory redemption is required upon determination of taxability or on
the termination date of the letter of credit at 100% plus accrued interest.
Prior to conversion to a fixed rate, the Bonds may be redeemed during the weekly
rate period on any adjustment date or on any conversion date at 100% of
principal plus accrued interest. If converted to a fixed rate, the Bonds may be
redeemed at redemption prices ranging from 100% to 102% of principal plus
accrued interest based upon the date of redemption. The Reimbursement Agreement
requires quarterly payments to a trust account with the Bank for the purpose of
making optional redemptions of the Bonds. The required future payments as of
December 31, 1998, are summarized as follows:
1999 $ 153,000
2000 153,000
2001 153,000
2002 153,000
2003 153,000
Thereafter 1,227,000
----------
$1,993,000
==========
The Reimbursement Agreement also requires the payments to the Trust account be
used to make optional redemptions of the Bonds at least annually in increments
of $100,000. Principal payments of $192,000 in 1998 and $115,000 in 1997 were
paid to the trust for the Series B Bonds which is held until the Trustee
authorizes redemption of the bonds. As these payments have been made, the debt
outstanding has been reduced accordingly.
As of December 31, 1998, the Company also has an unused $2,000,000 revolving
line of credit, which expires in June 2000, and an unused $500,000 equipment
line of credit, which expires in June 1999. Interest at the bank's base rate
less 0.82% is payable monthly on any portion of the lines of credit utilized. As
of December 31, 1998, $529,772 of the revolving line of credit secures unused
$530,000 letters of credit with a bank which expire on various dates through
November 1999. The lines of credit are covered under a loan agreement which
requires the Company to, among other things, meet certain financial covenants
and not pay any dividends.
Interest expense was $118,000 in 1998 and $100,000 in 1997.
8. Cash and Cash Equivalents
As of December 31, 1998, the Company has cash and cash equivalents on deposit
with financial institutions and cash funds as follows:
<TABLE>
<S> <C>
Insured (FDIC) $ 60,000
Uninsured:
Repurchase agreements 283,000
Collateralized by corporate debt securities held by the financial
institution in the financial institution's name 1,232,000
Collateralized by commercial paper held by the financial institution in the
Company's name 1,487,000
ECM cash funds 164,000
ECM-Thailand cash funds 162,000
-----------------------
$3,388,000
=======================
</TABLE>
14
<PAGE>
The carrying amounts disclosed in the table above represent the financial
institution balances as of December 31, 1998. The corresponding amount recorded
in the December 31, 1998, Consolidated Balance Sheet includes deposits in
transit and is net of outstanding checks.
9. Business Affiliations
The Company is involved in negotiations for future business affiliations with
certain other foreign companies; however, no formal commitments for the
consummation of any such affiliations exist.
10. Changes in Estimates
Revisions in contract profits are made in the year in which circumstances
requiring the revision become known. The effect of changes in estimates of
contract profits was to increase net income by approximately $210,000 in 1998
and $292,000 in 1997 from that which would have been reported had the revised
estimate been used as the basis of recognition of contract profits in the
preceding year.
11. Pending Acquisition
On May 12, 1999, the Company signed a definitive agreement to be acquired by TSI
Incorporated ("TSI") of Shoreview, Minnesota. The closing of the acquisition is
scheduled to take place by the end of May 1999 and is subject to successful
completion of additional due diligence. Upon the closing of the acquisition, the
Company will operate as a wholly-owned subsidiary of TSI.
15
<PAGE>
Item 7(b) Pro Forma Financial Information
Pro Forma Condensed Combined Statement of Earnings
Twelve Months Ended March 31, 1999
(Unaudited)
The following unaudited pro forma condensed combined statements of earnings
represents the results of operations of TSI Incorporated and Subsidiaries as if
Environmental Systems Corporation (ESC) had been acquired April 1, 1998, on a
purchase accounting basis. This information should be read in conjunction with
the financial statements of the Registrant and ESC and the related notes
incorporated herein and incorporated by reference.
The accompanying unaudited pro forma financial information is based on the
Company's preliminary review and does not give effect to all adjustments
required to allocate the purchase price. The pro forma financial information is
not intended to reflect actual results of operations had the purchase of ESC
been effective on the date indicated, and is not intended to be indicative of
future results.
(All amounts in thousands)
<TABLE>
<CAPTION>
Historical
-----------------------------------
TSI Environmental Pro Forma Pro Forma
Incorporated Systems Corp. Adjustments Combined
---------------- ------------- ------------------- ----------
<S> <C> <C> <C> <C>
Net sales $85,352 $23,942 $109,294
Cost of sales 37,158 13,131 50,289
Operating expenses 37,015 7,946 636 (a) 45,597
----------------------------------- ------------------------------------
Operating Income 11,179 2,865 (636) 13,408
Other income (expenses) 435 128 (1,310) (b) (747)
----------------------------------- ------------------------------------
Earnings before income taxes 11,614 2,993 (1,946) 12,661
Provision for income taxes 3,832 1,051 705 (c) 4,178
----------------------------------- ------------------------------------
Net Earnings $7,782 $1,942 $(1,241) $8,483
Basic earnings per share $0.69 $0.75
Diluted earnings per share $0.68 $0.74
Weighted average number of shares for
computation of basic earnings per share 11,317 11,317
Weighted average number of shares for
computation of dilutive earnings per share 11,482 11,482
</TABLE>
16
<PAGE>
Notes to Pro Forma Condensed Combined Statement of Earnings
(Dollars in thousands unless otherwise indicated)
(Unaudited)
The following describe the adjustments to the historical information of the
Registrant and ESC to give pro forma effect to the purchase of ESC.
(a) Reflects the following:
<TABLE>
<S> <C>
(1) Increased amortization of goodwill over 20 years
on a straight line basis 703
(2) Increased amortization of other intangibles for
periods between 10 and 15 years, straight line 133
(3) Increased depreciation resulting from the step-up of
property, plant and equipment, depreciated on a
straight line basis over 20 years 50
(4) Contractual reduction in salary expense (250)
-----
Total $636
</TABLE>
(b) Reflects a decrease in the Registrant's interest income estimated
at $350, and an increase in interest expense of approximately $960
resulting from the debt incurred to finance the acquisition. The
interest rate on the new debt of $15 million is assumed to be
6.4%. A change of 1/8% percent in the interest rate would result
in a change in interest expense and net income of $19 and $13
before and after taxes, respectively.
(c) Adjusts the effective income tax rate of the combined entity to
the Registrant's effective income tax Rate. Registrant expects its
effective tax rate to be higher in the future because a
significant portion of the purchase price (goodwill) will be
nondeductible for tax purposes.
17
<PAGE>
Pro Forma Condensed Balance Sheet
March 31, 1999
(Unaudited)
(All amounts in thousands)
<TABLE>
<CAPTION>
Historical
----------------------------------------
TSI Environmental Pro Forma Pro Forma
Incorporated Systems Corp. Adjustments Combined
------------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $13,437 $3,360 $(10,851) (a) $5,946
Accounts Receivable, net 14,462 5,503 19,965
Prepaid expense 308 141 449
Inventories 15,539 1,175 16,714
Income taxes receivable 0 0 2,210 (b) 2,210
Intangibles and other assets 9,201 1,867 14,659 (c) 25,727
Property, plant and equipment, net 8,021 4,823 1,000 (c) 13,844
------------------- ----------------
Total assets $60,968 $84,855
=================== ================
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses 5,338 6,461 11,799
Employee compensation 4,412 185 4,597
Taxes, other than income taxes 473 473
Income taxes payable 1,350 1,350
Long term debt and other liabilities 0 2,241 15,000 (d) 17,241
------------------- ----------------
Total Liabilities $11,573 $35,460
------------------- ----------------
Shareholders' Equity
Common shares 1,115 1,115
Additional paid in capital 11,409 11,409
Retained earnings 37,094 37,094
Equity adjustment from translation (223) (223)
------------------- ----------------
Total shareholders' equity $49,395 $49,395
------------------- ----------------
Total liabilities and shareholder's equity $60,968 $84,855
=================== ================
</TABLE>
Notes to Pro Forma Balance Sheet
(Dollars in thousands)
(Unaudited)
The accompanying unaudited pro forma financial information is based on the
Company's preliminary review and does not give effect to all adjustments
ultimately required to allocate the purchase price.
The following describe the adjustments to the historical information of the
Registrant and ESC to give pro forma effect to the purchase of ESC.
(a) Reflects the following transactions:
<TABLE>
<S> <C>
Purchase price paid with existing cash $(10,000)
Bonuses paid to employees and directors that exercised options, net
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
of cash received from such exercise (851)
-----
Total $(10,851)
========
</TABLE>
(b) Reflects the estimated income tax refunds due from the exercise of
ESC stock options prior to the acquisition.
(c) To reflect the excess of acquisition cost over the estimated fair
value of net assets acquired (goodwill). The purchase price,
purchase price allocation, and financing of the transaction are
summarized as follows:
<TABLE>
<S> <C>
Purchase paid as:
Cash $10,000
Proceeds from debt 15,000
------
Total purchase consideration $25,000
=======
Allocated to:
Historical book value of ESC's assets and liabilities
at March 31, 1999 $7,982
Pro forma adjustment due to options exercised:
Effect on cash (851)
Income tax refund 2,210
-----
Total allocated to ESC historical assets and liabilities $9,341
Step up of property, plant and equipment 1,000
Other intangible assets 1,500
Deferred taxes (900)
Goodwill 14,059
------
Total allocation $25,000
=======
</TABLE>
(d) Reflects the increased debt incurred to finance the acquisition.
Item 7(c) Exhibits
19
EXHIBIT 2
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
AGREEMENT, (hereinafter, together with the Exhibits annexed hereto the
"Agreement") made and entered into as of the 11th day of May, 1999, by and among
TSI INCORPORATED., a Minnesota corporation ("Purchaser"), TSI TENNESSEE, INC., a
Minnesota corporation and a wholly-owned subsidiary of Purchaser ("Newco"), and
ENVIRONMENTAL SYSTEMS CORPORATION, a Tennessee corporation (the "Company").
RECITALS
The Boards of Directors of Purchaser and Newco and the Board of
Directors of the Company, deeming it advisable for the mutual benefit of
Purchaser, Newco and the Company and their respective stockholders that
Purchaser acquire the Company by the merger of the Company and Newco under the
terms and conditions hereinafter set forth (the "Merger"), have approved this
Agreement and Plan of Merger (the "Agreement").
NOW, THEREFORE, in consideration of mutual covenants, agreements,
representations and warranties herein contained, the parties hereby agree that
the Company and Newco shall be merged and that the terms and conditions of the
Merger and the mode of carrying the same into effect shall be as follows:
SECTION 1. PLAN OF MERGER.
1.1 Actions to be Taken. Upon performance of all of the covenants and
obligations of the parties contained herein and upon fulfillment (or waiver) of
all of the conditions to the obligations of the parties contained herein, at the
Effective Time of the Merger (as hereinafter defined) and pursuant to the
Business Corporation Act of the State of Minnesota (the "MBCA") and the Business
Corporation Law of the State of Tennessee (the "BCL"), the following shall
occur:
(a) Newco shall be merged with and into the Company, which shall be
the surviving corporation (the "Surviving Corporation"). The separate existence
and corporate organization of Newco shall cease at the Effective Time of the
Merger, and thereupon the Company and Newco shall be a single corporation, the
name of which shall be Environmental Systems Corporation. The Company, as the
Surviving Corporation, shall succeed, insofar as permitted by law, to all of the
rights, assets, liabilities and obligations of Newco in accordance with the MBCA
and BCL.
(b) The Charter of Incorporation of the Company shall be and remain
the articles of incorporation of the Surviving Corporation until amended as
provided by law.
(c) The By-Laws of the Company shall be and remain the by-laws of
the Surviving Corporation until amended as provided by law.
<PAGE>
(d) Until changed in accordance with the charter of incorporation
and by-laws of the Surviving Corporation, James E. Doubles and Robert F.
Gallagher shall be the directors of the Surviving Corporation.
(e) Until changed in accordance with the charter of incorporation
and by-laws of the Surviving Corporation, the following persons shall be the
officers of the Surviving Corporation:
Name Office
---- ------
James E. Doubles Chairman and President
Robert F. Gallagher Vice President, CFO
Treasurer and
Assistant Secretary
Laura Cochrane Secretary
(f) As soon as practicable after the terms and conditions of this
Agreement have been satisfied, and upon consummation of the closing referred to
in Section 7 hereof (the "Closing"), articles of merger consistent with this
Agreement in the form prescribed by, and properly executed in accordance with,
the MBCA and the BCL, in form and substance satisfactory to the parties hereto
and providing for effectiveness of the Merger as provided below (the "Articles
of Merger"), shall be filed with the Secretary of State of the State of
Minnesota and the Secretary of State of the State of Tennessee. Provided that
the Closing hereunder is held on or before June 1, 1999, the Articles of Merger
shall specify that the Merger shall be effective as of 12:01 A.M., then current
time in Tennessee, June 1, 1999. As used in this Agreement, the "Effective Time
of the Merger" shall mean 12:01 A.M., then current time in Tennessee, June 1,
1999.
1.2 Common Stock of Surviving Corporation. Following the Effective Time
of the Merger, each of the issued and outstanding shares of common stock of
Newco shall, by virtue of the Merger and without any action on the part of
Purchaser be converted into outstanding shares of common stock of the Surviving
Corporation. Each share shall be fully paid and non-assessable.
1.3 Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
(a) The term "Company Common Stock" shall mean the Company's common
stock of no par value per share.
2
<PAGE>
(b) The term "Stockholder" shall mean a holder of the Company
Common Stock, and the term Stockholders shall refer to all of the holders of
stock of the Company.
(c) The term "Number of Outstanding Common Shares" shall be the
number of issued and outstanding shares of the Company Common Stock at the
Effective Time of the Merger.
(d) The term "Common Proportionate Share" shall, for each
outstanding share of Company Common Stock, be the number, expressed as a
decimal, obtained by dividing one (1) by the Number of Outstanding Common
Shares.
(e) Subject to reduction pursuant to Section 1.6, the term "Common
Closing Payment" shall mean $22,000,000, which is the amount which will be paid
by Purchaser at Closing for distribution to the holders of outstanding shares of
Company Common Stock after the Effective Time of Merger.
(f) The term "Escrow Payment" shall mean $3,000,000, which is the
amount which will be paid by Purchaser at Closing to U.S. Bank Trust, N.A.,
Minneapolis, Minnesota, as escrow agent (the "Escrow Agent") to be held in an
escrow account (the "Escrow Fund") in accordance with the terms of the Escrow
Agreement (the "Escrow Agreement") to be entered into between Purchaser, Agent
and the Escrow Agent in substantially the form attached hereto as Exhibit 1.3
(g).
(g) The term "Escrow Distributions" shall mean payments, if and to
the extent made, which are made out of the Escrow Fund for distribution to the
former Stockholders of the Company. However, if any Dissenting Common Shares
receive payments pursuant to the Appraisal Laws, as defined below, Purchaser
shall be entitled to receive that portion of the distributions from the Escrow
Fund which such Shares would have received had they not become Dissenting Common
Shares.
1.4 Cancellation or Conversion of Company Common Stock. As of the
Effective Time of the Merger, by virtue of the Merger and without any action on
the part of any shareholder of the Company:
(a) Treasury Shares. Any share of the Company Common Stock held in
the treasury of the Company, shall be canceled and retired. No cash, securities
or other consideration shall be paid or delivered in exchange for such Company
Common Stock under this Agreement.
(b) Conversion. Except as provided herein with respect to
Dissenting Shares (as hereinafter defined) and shares canceled pursuant to
Section 1.4(a) hereof, at the Effective Time of the Merger, each share of
Company Common Stock which is issued and outstanding shall be converted into the
right to receive cash payments as follows:
(i) An amount equal to the Common Proportionate Share
multiplied by the Common Closing Payment. This amount will be paid
after the Effective Time of Merger upon surrender of stock
certificates, as provided in Section 1.4(c) below, with payment to be
made within ten (10) days after receipt of the stock certificates.
3
<PAGE>
(ii) From each Escrow Distribution, if any, which is made, an
amount equal to the Common Proportionate Share multiplied by the Common
Stock Escrow Distribution, with payment to be subject to the
requirements of Section 1.4(c).
(Hereinafter the foregoing cash payments are sometimes
collectively referred to as the "Common Cash Conversion Amounts".)
(c) Surrender of Certificates. After the Effective Time of the
Merger, each holder of an outstanding certificate or certificates theretofore
representing shares of Company Common Stock converted pursuant to Section 1.4(b)
hereof ("Company Common Stock Certificates"), upon surrender thereof to
Purchaser as provided herein, shall be entitled to receive in exchange therefor
the amounts provided in Section 1.4(b), without interest.
Until so surrendered, each outstanding Company Common Stock
Certificate shall be deemed for all purposes to represent the Cash Conversion
Amounts for the shares represented by the Certificate.
To surrender a certificate, a holder must deliver the certificate
(or an Affidavit and Indemnity with respect to Lost, Stolen or Destroyed Stock
Certificates in the form attached as Exhibit 1.4(c)-1) and with any certificate
must deliver a transfer letter in the form attached as Exhibit 1.4(c)-2 under
which such holder will warrant good and marketable title thereto, free and clear
of all claims, liens, security interests, restrictions and encumbrances. Upon
such surrender and exchange of such Company Common Stock Certificates there
shall be paid to the record holders thereof the Common Cash Conversion Amount
for the shares of Company Common Stock, except that the amounts of any Escrow
Distribution shall be paid when, if and to the extent that Escrow Distributions
are made.
Whether or not a Company Common Stock Certificate is surrendered,
from and after the Effective Time of the Merger, such Certificate shall under no
circumstances evidence, represent or otherwise constitute any stock or other
interest whatsoever in the Company, the Surviving Corporation or any other
person, firm or corporation.
(d) Dissenters. The shares of Company Common Stock held by those
shareholders of the Company who have timely and properly exercised their
dissenters' rights in accordance with the provisions of the BCL applicable to
dissenters' rights (the "Appraisal Laws") are referred to herein as "Dissenting
Common Shares". Each Dissenting Common Share, the holder of which, as of the
Effective Time of the Merger, has not effectively withdrawn or lost his
dissenters' rights under the Appraisal Laws, shall not be converted into or
represent a right to receive the Cash Conversion Amounts in the Merger, but the
holder thereof shall be entitled only to such rights as are granted by the
Appraisal Laws. Each holder of Dissenting Common Shares who becomes entitled to
payment for his Company Common Stock pursuant to the provisions of the Appraisal
Laws shall receive payment therefor from the Surviving Corporation from funds
provided by Purchaser (but only after the amount thereof shall have been agreed
upon or finally determined pursuant to such provisions). If any holder of
Dissenting Common Shares shall effectively withdraw or lose his dissenters'
rights under the Appraisal Laws, such Dissenting
4
<PAGE>
Common Shares shall be converted into the right to receive the Common Cash
Conversion Amounts in accordance with the provisions hereof.
1.5 Options. Prior to the Effective Time of the Merger, all options,
warrants, or other rights to purchase or acquire shares of Company Common Stock
(hereinafter collectively "Options") which are outstanding and unexercised shall
be exercised, or if not exercised, canceled at no cost or expense to the Company
and without issuing any shares therefor, so that at the Effective Time of the
Merger there shall be no outstanding and unexercised outstanding Options with
respect to the Company Common Stock.
1.6 Certain Adjustments. The amounts of the Common Closing Payment are
subject to reduction in accordance with the following provisions:
(a) Expenses. Seller Expenses, as defined in Section 10.1(a)
hereof, may be invoiced to the Company by invoices delivered on or prior to the
Closing Date. The amount of such Seller Expenses thus invoiced on or prior to
the Closing Date shall be withheld from the Common Closing Payment and Purchaser
shall retain the amounts thus withheld. The Company shall pay Seller Expenses
with respect to which Purchaser has withheld amounts from the Common Closing
Payment. No other Seller Expenses shall be invoiced to or due from the Company
or Purchaser.
(b) Adjustment for Dissenters. If any Stockholders exercise their
rights under the Appraisal Laws, then there shall be withheld from the Common
Closing Payment the amounts which such dissenting Stockholders would have
received therefrom, and Purchaser shall retain said amounts.
Consistent with the foregoing, to the extent there are any Escrow
Distributions, the amounts which would otherwise have been paid to such
dissenting Stockholders had they not exercised their rights under the Appraisal
Laws, shall be paid to Purchaser.
1.7 Further Assurances. From time to time, on and after the Effective
Time of the Merger, as and when requested by Purchaser or its successors or
assigns, the proper officers and directors of the Company immediately before the
Effective Time of the Merger, the officers and directors of the Surviving
Corporation at the time of the request, or other proper officers or directors,
shall, at Purchaser's expense, and for and on behalf and in the name of the
Company, or otherwise, execute and deliver all such deeds, bills of sale,
assignments and other instruments and shall take or cause to be taken such
further or other reasonable actions as Purchaser or their respective successors
or assigns may deem necessary or desirable in order to confirm or record or
otherwise transfer to the Surviving Corporation title to and possession of all
the properties, rights, privileges, powers, franchises and immunities of the
Company and otherwise to carry out fully the provisions and purposes of this
Agreement.
1.8 Agent. Mark J. Margetts is hereby designated as the Agent ("Agent")
of the Stockholders to, from and after the Effective Time of Merger, represent
and act for and on behalf of the Stockholders on all matters arising under or
relating to this Agreement or the Escrow Agreement. In this connection, the
Agent is hereby authorized to enter into agreements, execute
5
<PAGE>
waivers, grant consents, enter into settlements and take all other actions to
represent the interests of the Stockholders under and in connection with this
Agreement and the Escrow Agreement. All such actions of the Agent shall be
binding upon and enforceable against the Stockholders and shall be binding and
enforceable under the Escrow Agreement.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
As used herein, the "Disclosure Letter" shall mean the Disclosure
Letter delivered by the Company to Purchaser. The Disclosure Letter shall
specifically refer to the warranty or warranties to which exceptions or matters
disclosed therein relate. To avoid repetitive listings, where exceptions or
matters are required to be listed by more than one section thereunder, they can
be listed in subsequent sections by cross-reference. Except for exceptions set
forth in reasonable detail in the Disclosure Letter and specifically referring
to the warranty or warranties to which the exception relates, the Company hereby
makes to Purchaser the representations and warranties contained in this Section
2 as of the date hereof and, except only as otherwise specifically provided
herein, as of the Closing Date as if made and agreed on said Date.
The representations and warranties are as follows:
2.1 Organization and Qualifications of the Company. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Tennessee with full corporate power and authority to own or
lease its properties and to conduct its business in the manner and in the places
where such properties are owned or leased or such business is currently
conducted or proposed to be conducted. The copies of the Company's Charter of
Incorporation as amended to date, certified by the Tennessee Secretary of State,
and of the Company's by-laws, as amended to date, certified by the Company's
Secretary, and heretofore delivered to Purchaser's counsel, are complete and
correct, and no amendments thereto are pending. The Company is not in violation
of any term of its Charter of Incorporation or by-laws. The Company is duly
qualified to do business as a foreign corporation in California, Alabama, New
Jersey, West Virginia, Maryland, Massachusetts and Louisiana, and it is not
required to be licensed or qualified to conduct its business or own its property
in any other jurisdiction.
2.2 Capital Stock of the Company: Beneficial Ownership.
(a) The authorized capital stock of the Company consists of
5,000,000 shares of Common Stock, no par value per share, of which, as of the
date hereof, 1,606,092 shares are duly and validly issued, outstanding, fully
paid and non-assessable and of which 3,393,908 shares are authorized but
unissued. 442,500 of the authorized but unissued shares are subject to options
which are outstanding as of the date hereof. No other classes of stock are
authorized.
(b) On the Closing Date there will be no outstanding options,
warrants, rights, commitments, preemptive rights or agreements of any kind for
the issuance or sale of, or outstanding securities convertible into, any
additional shares of capital stock of any class of the Company. There now are no
outstanding options, warrants, rights, commitments, preemptive rights or
agreements of any kind for the issuance or sale of, or outstanding securities
convertible into, any additional shares of capital stock of any class of the
Company, except for the options
6
<PAGE>
described in detail in the Disclosure Letter, including showing the holders and
amounts held (the "Outstanding Options").
(c) None of the Company's capital stock has been issued in
violation of any federal or state law. Except as set forth in the Disclosure
Letter, there are no voting trusts, voting agreements, proxies or other
agreements, instruments or undertakings with respect to the voting of the
Company Shares to which the Company or any of the Stockholders is a party.
(d) Schedule 1 attached hereto lists all of the Common Stockholders
of the Company showing the number of shares of Common Stock owned by each Common
Stockholder. The Stockholders listed on Schedule 1 together own all of the
issued and outstanding shares of common stock of the Company. Except as set
forth in the Disclosure Letter, each of the Stockholders owns of record, as
shown on the Company's stock record and, to the best knowledge of the Company,
beneficially, the Company Shares set forth opposite such Stockholder's name on
Schedule 1 hereto free and clear of any liens, restrictions or encumbrances.
(e) Effective on or before the Closing Date, the Company's Employee
Stock Purchase Plan, pursuant to which the Company facilitates sales of stock by
Stockholders of shares of stock of the Company shall be terminated, so that the
Company has no further liability or obligation thereunder.
2.3 Subsidiaries. Except for the subsidiaries described in the
Disclosure Letter, including both direct and indirect subsidiaries (hereinafter
the "Subsidiaries" and individually a "Subsidiary"), the Company does not have
any subsidiaries. Except for the shares of stock in the Subsidiaries, the
Company and each Subsidiary does not own any securities issued by any other
business organization or governmental authority, except United States, state,
and municipal government securities, bank certificates of deposit, or money
market accounts acquired as investments in the ordinary course of its business,
and, except as set forth in the Disclosure Letter, the Company and each
Subsidiary does not own or have any direct or indirect ownership interest in or
control over any other corporation, partnership, joint venture, or entity of any
kind.
Except as specified in the Disclosure Letter, all of the issued and
outstanding shares of stock of the Subsidiaries are owned by the Company, and
there are no outstanding options, warrants, rights, commitments, preemptive
rights or agreements of any kind for the issuance or sale of, or outstanding
securities convertible into, any additional shares of stock of any class of the
Subsidiaries.
Detailed information regarding the Subsidiaries is set forth in the
Disclosure Letter. Said information is true, complete and correct in all
material respects. As detailed in the Disclosure Letter, certain of the
Subsidiaries are incorporated under the laws of countries other than the United
States. Hereinafter said Subsidiaries incorporated under foreign laws are
sometimes referred to as the "Foreign Subsidiaries", and the Company and the
Subsidiaries are sometimes referred to as the "Company Group."
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2.4 Authority of the Company. The Company has full right, authority and
power to enter into this Agreement and each agreement, document and instrument
to be executed and delivered by the Company pursuant to this Agreement and to
carry out the transactions contemplated hereby or thereby. The execution,
delivery and performance by the Company of this Agreement and each such other
agreement, document and instrument have been duly authorized by all necessary
action of the Board of Directors of the Company and, subject to the approval of
this Agreement and the transactions contemplated hereby by the Stockholders in
accordance with the BCL and the Charter of Incorporation and by-laws of the
Company ("Stockholder Approval"), no other action on the part of the Company or
the Stockholders is required in connection therewith. This Agreement and each
agreement, document and instrument executed and delivered by the Company
pursuant to this Agreement constitutes, or when executed and delivered will
constitute, valid and binding obligations of the Company enforceable in
accordance with their terms. The execution, delivery and performance by the
Company of this Agreement and each such agreement, document and instrument:
(a) does not and will not violate any provision of the Charter of
Incorporation or by-laws of the Company;
(b) does not and will not violate any laws of the United States, or
any other country, or any state or other jurisdiction applicable to the Company
Group or require the Company Group to obtain any approval, consent or waiver of,
or make any filing with, any person or entity (governmental or otherwise) that
has not been obtained or made (other than Stockholder Approval); and
(c) does not and will not result in a breach of, constitute a
default under, accelerate any obligation under, or give rise to a right of
termination of any indenture or loan or credit agreement or any other material
agreement, contract, instrument, mortgage, lien, lease, permit, authorization,
order, writ, judgment, injunction, decree, determination or arbitration award to
which any member of the Company Group is a party or by which the property of the
Company Group is bound or affected, or result in the creation or imposition of
any mortgage, pledge, lien, security interest or other charge or encumbrance on
any of the Company Group's assets or the Company Shares.
2.5 Financial Statements and Liabilities.
(a) The Company has delivered to Purchaser the consolidated balance
sheets of the Company Group as of December 31, 1997 and December 31, 1998
(respectively, the "1997 Balance Sheet" and the "1998 Balance Sheet") and the
consolidated statements of income and retained earnings of the Company Group for
the fiscal years ending on said dates, audited and certified by Coulter &
Justus, P.C., certified public accountants (the "Annual Statements"), and the
consolidated Balance Sheet of the Company Group as of March 31, 1999, (the
"Interim Balance Sheet") and the consolidated statements of income and retained
earnings of the Company Group for the fiscal period ending on said date,
compiled by the Company (the "Interim Statements").
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The Annual Statements are in accordance with the books and records
of the Company Group in all material respects, and have been prepared in
accordance with generally accepted accounting principles consistently applied.
The Annual Statements fairly present the financial position and assets and
liabilities of the Company Group as of the dates indicated, and the results of
operations and changes in financial condition of the Company Group for the
periods then ended.
The Interim Statements are in accordance with the books and records
of the Company Group in all material respects, and have been prepared in
accordance with generally accepted accounting principles consistently applied,
subject, however, to normal year-end adjustments (none of which will be
material) and to the absence of footnotes. The Interim Statements fairly present
the financial position and assets and liabilities of the Company Group as of the
dates indicated and the results of operations and changes in financial condition
of the Company Group for the period then ended.
(b) As of the date of this Agreement, each member of the Company
Group is not subject to and does not have, and as of the Closing Date, each
member of the Company Group will not be subject to and will not have, any
material indebtedness, claim, obligation or liability of any kind or nature
whatsoever, whether absolute or contingent, liquidated or unliquidated, known or
unknown, due or to become due, accrued or unaccrued or otherwise (hereinafter
collectively "Liabilities"), except (i) as disclosed in the Interim Balance
Sheet, (ii) for such Liabilities that have arisen in the ordinary course of
business of the Company Group since the date of said Interim Balance Sheet, none
of which newly arisen Liabilities have a material adverse affect upon the
Company Group, its assets, business, or financial condition, and (iii) as
specifically disclosed in this Agreement or in the Disclosure Letter.
2.6 Real Estate. Except that the Company owns its headquarters facility
consisting of land and two buildings located in Knoxville, Tennessee (the
"Company Facility"), no member of the Company Group owns or has title to any
real estate. Except for the Company's ownership of the Company Facility, no
member of the Company Group has ever owned or had title to any real estate.
(a) Ownership of Company Facility. Company is the owner of good and
marketable fee title to the Company Facility free and clear of all Title Defects
(as hereinafter defined), except the title encumbrances set forth in the
Disclosure Letter ("Permitted Encumbrances"). "Title Defects" means and includes
any mortgage, deed of trust, lien, pledge, security interest, claim, lease,
charge, option, right of first refusal, easement, restrictive covenant,
encroachment or other survey defect or other encumbrance, restriction or
limitation of any kind except the Permitted Encumbrances.
(b) All Required Real Property Interests. The Company Facility and
the property leased by the Company pursuant to the Leases (as defined below)
includes all lands, buildings structures and other improvements required in
order to operate the business of the Company as currently operated.
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(c) No Options, etc. There are no options, rights of first refusal
or other contractual rights affecting the Company Facility or any part thereof
or interest therein. The Company is not a lessor, sublessor or grantor under any
lease, sublease, license or other instrument granting to another person any
right to the possession, use, occupancy or enjoyment of the Company Facility or
any part thereof or interest therein. No person or entity other than the Company
is in possession of or otherwise using the Company Facility or any part thereof.
(d) Condition and Operation of Improvements. Except as described in
the Disclosure Letter, all components of all buildings, structures and other
improvements, and all fixtures and systems included in the Company Facility
(collectively, the "Improvements"), including but not limited to the roofs and
structural elements of the buildings and the heating, ventilation and air
conditioning system; plumbing; electrical; mechanical; sewer system; septic tank
and septic system, if any; waste water, storm water and any other systems and
facilities included in the Company Facility, are in proper working order and
good condition. Except as described in the Disclosure Letter, all water, gas,
electrical, steam, compressed air, telephone, telecommunication, sanitary and
storm sewage lines and systems and other systems serving the Company Facility
are installed and operating and are sufficient to enable the Company Facility to
continue to be used and operated in the manner currently being used and
operated; and any so-called hook-up fees or other associated charges have been
fully paid. Each such utility or other service is provided by a public or
private utility or service company and enters the Company Facility from an
adjacent public street or pursuant to a valid private easement owned by the
supplier of such utility or other service. The Company Facility has direct,
unrestricted access through existing driveways or accessways to a public street
adjoining the Company Facility and no existing driveway or accessway or portion
thereof crosses or encroaches upon any other property or property interest not
included in the Company Facility. No Improvement or other portion of the Company
Facility is dependent for its access, operation or utility on any land,
building, structure or other improvement not included in the Company Facility.
(e) Copies of Plans The Company will deliver or make available to
Purchaser true and complete copies of all available engineering plans, site
plans, drawings, and as built plans and specifications which relate to the
Company Facility and/or the Improvements.
(f) Environmental Enforcement Activities The Company has not
received any notice (written or oral) from any governmental subdivision, agency,
board, commission, authority or any other entity, and has not become a party to
any legal or administrative action or proceeding, concerning or relating in any
way to the spill, release, discharge, transportation, disposal, storage or
presence of Hazardous Materials (as defined in Section 2.20 (c) hereof) in, at,
under, on, or concerning any part of the Company Facility or the Improvements,
including, without limitation, any pending or contemplated search or
investigation of the Company Facility or any part thereof with respect thereto.
Except as described in the Disclosure Letter, there are no above ground or
underground storage tanks, wells or septic systems on the Company Facility. Any
storage tanks disclosed in the Disclosure Letter have been registered with the
proper governmental authorities, if required by law, and are in compliance with
all laws, ordinances, rules and regulations applicable to them. There has been
no activity on the Company Facility which would subject any owner or operator
thereof to damages, penalties, injunctive relief or costs of remediation or
clean-up under any Environmental Laws (as defined in Section 2.20 (a)
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hereof). The Company has complied and caused the Company Facility to comply with
all Environmental Laws of all authorities having jurisdiction over the Company,
the Company Facility and/or the use by the Company of the Company Facility,
relating to any Hazardous Materials. Except as described in the Disclosure
Letter, the Company has not spilled, released, or discharged any Hazardous
Materials, upon any part of the Company Facility, whether or not such spill,
release or discharge was remediated. Nothing contained in this Section shall be
deemed to limit the representations and warranties contained in Section 20 (c)
hereof.
(g) Security Documents All notes, bonds, mortgages, deeds of trust,
collateral security documents and other documents executed and/or delivered by
the Company and/or other person or entity which affect the Company Facility are
described in the Disclosure Letter. True and complete copies of all such
documents have been delivered to Purchaser.
(h) Condemnation and Other Litigation There is no pending,
threatened or, to the best knowledge of the Company, contemplated condemnation
or eminent domain proceeding, or other litigation affecting the Company Facility
or any part thereof, and no pending or contemplated sale or other disposition of
the Company Facility or any portion thereof in lieu of condemnation or eminent
domain.
(i) Unrepaired Casualty No portion of the Company Facility has
suffered any damage by fire or other casualty which has not heretofore been
completely repaired and restored to at as good condition as prior to such
casualty.
(j) Encroachments Except as described in the Disclosure Letter, to
the best knowledge of the Company, there are no encroachments upon any part of
the Company Facility and no portion of any Improvement encroaches upon any
property which is not included within the Company Facility or upon the area of
any easement affecting the Company Facility.
* (k) Real Property Taxes All of the parcels of real estate included
in the Company Facility are assessed for real estate tax purposes separate from
any land or improvements which do not constitute a part of the Company Facility.
The Disclosure Letter specifies for each of the parcels included in the Company
Facility: the most recent assessed valuation for real property tax purposes and
the amount of all real property taxes (including all city, town, school, fire
district, garbage district and other special taxes and also including any
special assessments or conditional levies) due and payable in 1999; and whether
certiorari or protest proceedings have been instituted with respect to each such
parcel and, if so, whether the same are pending or have been adjudicated or
settled (and if adjudicated or settled, the terms of such judgment or
settlement. All levied or pending special assessments against the Company
Facility are set forth in the Disclosure Letter The assessment for all
Improvements as set forth in the Disclosure Letter reflects the current state of
completion and condition of the Improvements. There is no pending or, to the
best knowledge of the Company, contemplated reassessment of any parcel included
in the Company Facility.
* (l) Mechanics' Lien Matters The Company owes no money to any
architect, contractor, subcontractor or material supplier for labor or materials
performed, rendered or supplied to or in connection with any part of the Company
Facility or the Improvements. There
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is no work being done at or materials being supplied to any part of the Company
Facility or the Improvements.
(m) Environmental Reports All audits, reports, soil tests and other
documents of which the Company is aware which relate to the environmental
condition of the Company Facility are identified in the Disclosure Schedule. The
Company has delivered true and complete copies of all such audits, reports,
tests and other documents to Purchaser.
No member of the Company Group leases any real estate other than
pursuant to the leases described in the Disclosure Letter. Hereinafter, said
Leases are collectively referred to as the "Leases" and individually as a
"Lease."
A true and correct copy of each domestic Lease has been delivered to
Purchaser. In the case of Leases to which the Foreign Subsidiaries are a party
(the "Foreign Leases"), general descriptions of the primary terms of said Leases
are included in the Disclosure Letter, and copies of said Leases have been
delivered where readily available. Other than pursuant to the Leases, no member
of the Company Group has leased any other real estate during the past five
years. In the case of each Lease, the member of the Company Group, party to said
Lease, and to the best knowledge of the Company, the other party thereto, is not
in default under the Lease, and there is no fact (to the best knowledge of the
Company in the case of facts relating to the other party thereto) which, with
notice and/or the passage of time, would constitute such a default. The building
and structures leased pursuant to each Lease are in good condition, normal wear
and tear excepted, and the heating, air conditioning, plumbing and electrical
systems of such building and structures are in good operating order, ordinary
wear and tear excepted. No member of the Company Group has received notice that
the building and structures do not comply with municipal, state and federal
statutes, ordinances, rules and regulations applicable to the construction of
the buildings and structures and their actual use. The building and structures
comply in all material respects with said statutes, ordinances, rules and
regulations.
No consent is required under any of the Leases in connection with the
transactions contemplated by this Agreement.
In the case of the Foreign Leases, under the terms thereof there will
be no material difference between the rent and other charges shown in the
description of the Foreign Leases in the Disclosure Letter and the rents and
other charges payable under said Foreign Leases in future years other than as
may occur through normal escalation provisions in such Foreign Leases.
2.7 Leased Tangible Personal Property. No member of the Company Group
leases any personal property other than pursuant to (i) leases in the ordinary
course of business which expire on not more than 30 days notice by the member of
the Company Group party thereto without payment of any penalty or termination
payment, and (ii) leases ("Personal Property Leases") which are listed on the
Disclosure Letter. True and correct copies of the domestic Personal Property
Leases have been made available (including providing a copy thereof to be
retained by Purchaser) to Purchaser. In the case of Personal Property Leases to
which the Foreign Subsidiaries are a party ("Foreign Personal Property Leases")
general descriptions of the primary terms of said Leases are included in the
Disclosure Letter, and copies of said Leases
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have been delivered where readily available. In the case of each Personal
Property Lease, the member of the Company Group party thereto and, to the best
knowledge of the Company, the other parties thereto is not in material default
under any of the Personal Property Leases, and there is no fact (to the best
knowledge of the Company in the case of facts relating to the other party
thereto) which, with notice and/or passage of time, would constitute such a
default. No consent is required under the Personal Property Leases in connection
with the transactions contemplated by this Agreement.
In the case of each of the Foreign Personal Property Leases where the
property leased thereunder had an original cost of $20,000 (U.S) or more, there
is no material difference between the information reflected for said Leases on
the financial statements for the Foreign Subsidiaries which have been provided
to Purchaser, and the actual amount of rent and other charges under said Leases.
Furthermore, under the terms thereof there will be no material difference
between the rent and other charges reflectged for the Foreign Personal Property
Leases in said financial statements and the rents and other charges payable
under said Foreign Personal Property Leases in future years other than as may
occur through normal escalation provisions in such Foreign Personal Property
Leases.
2.8 Assets. To the best knowledge of the Company, all material items of
the equipment, furniture, computers, and other tangible personal property (other
than inventory) owned, leased or used by any member of the Company Group in its
business is in good condition, normal wear and tear excepted, and is in good
operating order. The Disclosure Letter attached hereto lists all furniture,
equipment, and other tangible personal property of any member of the Company
Group (other than inventory and supplies) having an original cost of $5,000 or
more. The Disclosure Letter also lists all equipment, furniture, computers and
other tangible personal property which (i) is used by any member of the Company
Group or which is located on the premises of any member of the Company Group and
(ii) which is not owned by the appropriate member of the Company Group, except
for items leased under Leases or Personal Property Leases elsewhere disclosed
herein and except for immaterial personal property of employees. Except for
sales of inventory and other dispositions of assets in the ordinary course of
business, since December 31, 1998, no material tangible assets (whatever their
original cost) have been transferred from the Company, whether by sale, dividend
or otherwise.
2.9 Taxes.
(a) The Company has paid or caused to be paid all federal, state,
local, foreign, and other taxes, including, without limitation, income taxes,
estimated taxes, alternative minimum taxes, excise taxes, sales taxes, use
taxes, value-added taxes, gross receipts taxes, franchise taxes, capital stock
taxes, employment and payroll-related taxes, withholding taxes, stamp taxes,
transfer taxes, windfall profit taxes, environmental taxes and property taxes,
whether or not measured in whole or in part by net income, and all deficiencies,
or other additions to tax, interest, fines and penalties (collectively,
"Taxes"), owed or required to be paid by any member of the Company Group through
the date hereof whether disputed or not, and will pay all Taxes required to be
paid by any member of the Company Group through the Closing Date.
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(b) The Company has in accordance with applicable law filed all
federal, state, local and foreign tax returns required to be filed by any member
of the Company Group through the date hereof, and all such returns correctly and
accurately set forth the amount of any Taxes or losses relating to the
applicable period. A list of all federal, state, local and foreign income tax
returns filed with respect to the Company Group for taxable periods ended on or
after December 31, 1993 is set forth in the Disclosure Letter, and said Letter
indicates those returns that have been audited or currently are the subject of
an audit. For each taxable period of the Company Group ended on or after
December 31, 1993, the Company has delivered to Purchaser correct and complete
copies of all federal, state, local and foreign income tax returns, examination
reports and statements of deficiencies assessed against or agreed to by the
Company.
(c) Neither the Internal Revenue Service (the "IRS") nor any other
governmental authority, domestic or foreign, is now asserting or, to the best
knowledge of the Company, threatening to assert, against the Company Group any
deficiency or claim for additional Taxes, or claim to reduce reported losses. No
claim has ever been made by an authority in a jurisdiction where any member of
the Company Group does not file reports and returns that any member of the
Company Group is or may be subject to taxation by that jurisdiction. There are
no security interests on any of the assets of any member of the Company Group
that arose in connection with any failure (or alleged failure) to pay any Taxes.
No member of the Company Group has ever entered into a closing agreement
pursuant to Section 7121 of the Internal Revenue Code of 1986, as amended (the
"Code"), or into a similar agreement under foreign law.
(d) Except as set forth in the Disclosure Letter, there has not
been any audit of any tax return filed by any member of the Company Group, no
such audit is in progress, and no member of the Company Group has been notified
by any tax authority that any such audit is contemplated or pending. Except as
set forth in the Disclosure Letter, no extension of time with respect to any
date on which a tax return was or is to be filed by any member of the Company
Group is in force, and no waiver or agreement by any member of the Company Group
is in force for the extension of time for the assessment or payment of any
Taxes.
(e) Except as set forth in the Disclosure letter, the Company and
each other member of the Company Group has never been (and has never had any
liability for unpaid Taxes because it once was) a member of an "affiliated
group" (as defined in Section 1504(a) of the Code). Except as set forth in the
Disclosure Letter, the Company and each other member of the Company Group has
never filed, and has never been required to file, a consolidated, combined or
unitary tax return with any other entity. Except for the Subsidiaries, and
except as set forth in the Disclosure Letter, the Company does not own and has
never owned a direct or indirect interest in any trust, partnership, corporation
or other entity. No member of the Company Group is a party to any tax sharing
agreement.
(f) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
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(g) The Interim Balance Sheet includes adequate provision for (i)
all Tax Liabilities incurred or accrued as of the date of said Balance Sheet by
any member of the Company Group, and (ii) any and all Tax Liabilities which may
hereafter be assessed or imposed on any member of the Company Group with respect
to time periods ending on or before said date.
(h) Each member of the Company Group has not made an election under
Section 341(f) of the Code, and does not have any other tax elections, federal
or state, in effect except as set forth on the Disclosure Letter.
2.10 Accounts. All accounts receivable of the Company Group reflected
in each of the 1998 Balance Sheet and the Interim Balance Sheet originated in
the ordinary course of its business, are valid, and are fully collectible and
not subject to any defense, counterclaim or setoff, except and only to the
extent of the reserve against accounts receivable reflected in each of said
Balance Sheets.
2.11 Inventory. All inventory in the Company Group's possession is
owned by the Company Group and has been recorded on its books and records, in
accordance with generally accepted accounting principles. All inventory
reflected in each of the 1998 Balance Sheet and the Interim Balance Sheet was
valued in accordance with generally accepted accounting principles. No inventory
in the Company Group's possession has been consigned to the Company Group.
2.12 Backlog. The Disclosure Letter attached hereto sets forth the
Company Group's backlog as of the date indicated therein. The Company Group's
backlog is fairly and accurately described in the Disclosure Letter, and all
items included in such backlog reflect bona fide orders to the Company Group
from customers of the Company Group. To the best knowledge of the Company, the
customers for such orders do not intend to cancel such orders.
2.13 Absence of Certain Changes. Except as disclosed in the Disclosure
Letter and except to the extent reflected in the Interim Statements, since
December 31, 1998 there has not been:
(a) any change in the financial condition, properties, assets,
liabilities, business or operations of the Company Group, which change by itself
or in conjunction with all other such changes, whether or not arising in the
ordinary course of business, has been materially adverse with respect to the
Company Group;
(b) any contingent liability incurred by any member of the Company
Group as guarantor or otherwise with respect to the obligations of others or any
cancellation of any material debt or claim owing to, or waiver of any material
right of, any member of the Company Group;
(c) any mortgage, encumbrance or lien placed on any of the
properties of any member of the Company Group;
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(d) any material obligation or liability of any nature, whether
accrued, absolute, contingent or otherwise, asserted or unasserted, known or
unknown (including, without limitation, liabilities for Taxes due or to become
due or contingent or potential liabilities relating to products or services
provided by any member of the Company Group or the conduct of the business of
the Company Group since December 31, 1998 regardless of whether claims in
respect thereof have been asserted), incurred by any member of the Company Group
other than obligations and liabilities incurred in the ordinary course of
business consistent with the terms of this Agreement (it being understood that
product or service liability claims shall not be deemed to be incurred in the
ordinary course of business);
(e) any purchase, sale or other disposition, or any agreement or
other arrangement for the purchase, sale or other disposition, of any of the
properties or assets of any member of the Company Group other than in the
ordinary course of business;
(f) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, assets or business
of the Company Group;
(g) (i) any declaration, setting aside or payment of any dividend
by the Company, or the making of any other distribution in respect of the
capital stock of the Company, or any direct or indirect redemption, purchase or
other acquisition by the Company of its own capital stock, or (ii) any of the
foregoing by any other member of the Company Group where the dividend,
distribution or proceeds of redemption, purchase or other acquisition were
received by anyone other than the Company;
(h) any labor trouble or dispute or claim of unfair labor practices
involving any member of the Company Group or any attempt or threat of an attempt
by a labor union to organize the employees of any member of the Company Group;
any change in the compensation payable or to become payable to any of the
officers, employees, agents or independent contractors of the Company Group
other than normal merit increases in accordance with its usual practices; or any
bonus payment or arrangement made to or with any of such officers, employees,
agents or independent contractors;
(i) any change with respect to the officers or management of any
member of the Company Group;
(j) any payment or discharge of a material lien or liability of any
member of the Company Group;
(k) any obligation or liability incurred by any member of the
Company Group to any of its officers, directors, stockholders or employees, or
any loans or advances made by any member of the Company Group to any of its
officers, directors, stockholders or employees, except normal compensation and
expense allowances payable to officers or employees;
(1) any change in accounting methods or practices, credit practices
or collection policies used by the Company Group;
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(m) any material amendment or termination of any material
contract, lease or license to which any member of the Company Group is a party
or by which it may be bound, other than in the ordinary course of business;
(n) any acquisition by any member of the Company Group of the
assets or capital stock of another business entity;
(o) any termination of any permit or license issued to any member
of the Company Group or to any of its employees or agents;
(p) to the best knowledge of the Company, any statute, order,
judgment, writ, injunction, decree, permit, rule or regulation of any court or
any governmental or regulatory body adopted or entered or proposed to be adopted
or entered which could reasonably be expected to adversely affect the property
or business of the Company Group;
(q) any event or occurrence affecting any member of the Company
Group, or its business or industry which could reasonably be expected to cause
an adverse change in any material respect affecting the Company Group's sales,
profitability or financial condition or to otherwise adversely affect the
Company Group;
(r) any contracts entered into with or (except for payment of
compensation in accordance with past practices and as disclosed to Purchaser),
any payments or transfers of property to any shareholder of the Company or to
any shareholder of the Subsidiaries other than the Company, any relatives of any
such shareholder, or any corporation, partnerships, limited liability companies
or other business entities controlled by any such shareholder or in which any
such shareholder has any significant equity interest;
(s) any other transaction entered into by any member of the
Company Group other than transactions in the ordinary course of business; or
(t) any agreement or understanding whether in writing or
otherwise, for any member of the Company Group to take any of the actions
specified in paragraphs (a) through (s) above.
2.14 Ordinary Course. Since December 31, 1998, the Company Group has
conducted its business only in the ordinary course and consistently with its
prior practices.
2.15 Banking Relations. All of the arrangements which the Company Group
has with any banking or financial institution are completely and accurately
described in the Disclosure Letter, indicating with respect to each of such
arrangements the type of arrangement maintained (such as checking account,
borrowing arrangements, safe deposit box, etc.) and the person or persons
authorized in respect thereof.
2.16 Intellectual Property.
(a) Except as described in the Disclosure Letter, the Company, or
another member of the Company Group where specified in the Disclosure Letter,
has exclusive
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ownership of, or exclusive license to use, all patents, patent rights, patent
applications, trademarks, trademark applications, service marks, service mark
applications, trade names, trade secrets, copyrights and other proprietary
rights (collectively, "Intellectual Property") used in the business of the
Company Group as presently conducted. Except as set forth in the Disclosure
Letter, all of the rights of the Company (or another member of the Company
Group) in such Intellectual Property are freely transferable. No proceedings
have been instituted, or are pending or, to the best knowledge of the Company,
threatened, which challenge the rights of the Company in respect thereof, and,
to the best knowledge of the Company, there are no claims or demands of any
other person pertaining to any of such Intellectual Property. Except as set
forth in the Disclosure Letter, the Company Group has the right to use free and
clear of claims or rights of other persons, all customer lists, designs,
manufacturing or other processes, computer software, systems, data compilations,
research results and other information required for or incident to its products
or its business as presently conducted.
(b) All patents, patent applications, trademarks, trademark
applications and registrations, and registered copyrights which are owned by or
licensed to the Company Group or used or to be used by the Company Group in its
business as presently conducted or contemplated, and all other items of
Intellectual Property which are material to the business or operations of the
Company Group, are listed in the Disclosure Letter. All of such patents, patent
applications, trademark registrations, trademark applications and registered
copyrights have been duly registered in, filed in or issued by the United States
Patent and Trademark Office, the United States Register of Copyrights, or the
corresponding offices of other jurisdictions as identified on the Disclosure
Letter, and have been properly maintained and renewed in accordance with all
applicable provisions of law and administrative regulations of the United States
and each such jurisdiction.
(c) Except as specified in the Disclosure Letter, where a member
of the Company Group has provided proprietary software to customers, the
customer has entered into a license agreement with the Company, or the memberof
the Company Group. Except as specified in the Disclosure Letter, all licenses or
other agreements under which the Company Group is granted rights in Intellectual
Property are listed in the Disclosure Letter. All said licenses or other
agreements are in full force and effect, there is no material default by any
party thereto, and, except as set forth on Disclosure Letter, all of the rights
of the Company Group thereunder are freely assignable. To the best knowledge of
the Company, the licensors under said licenses and other agreements have and had
all requisite power and authority to grant the rights purported to be conferred
thereby. True and complete copies of all such licenses or other agreements, and
any amendments thereto, have been delivered to Purchaser.
(d) All licenses or other agreements under which the Company Group
has granted rights to others in Intellectual Property owned or licensed by the
Company Group are listed in the Disclosure Letter. All of said licenses or other
agreements are in full force and effect, there is no material default by any
party thereto, and, except as set forth in the Disclosure Letter, all of the
rights of the Company Group thereunder are freely assignable. True and complete
copies of all such licenses or other agreements, and any amendments thereto,
have been provided to Purchaser.
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(e) To the best knowledge of the Company, the Company Group has
taken all material steps required in accordance with sound business practice to
establish and preserve its ownership of all material Intellectual Property
rights with respect to its products, services and technology. The Company Group
has required all professional and technical employees and other employees and
consultants having access to valuable non-public information of the Company
Group to execute agreements under which such employees and consultants are
required to convey to the Company Group ownership of all inventions, copyrights
and developments conceived or created by them in the course of their employment
and to maintain the confidentiality of all such information of the Company
Group; the Disclosure Letter lists any such employees and consultants who have
not executed such agreements. The Company Group has not made any such valuable,
non-public information of the Company Group available to any person other than
employees of the Company Group except pursuant to written agreements requiring
the recipients to maintain the confidentiality of such information and
appropriately restricting the use thereof. To the best knowledge of the Company,
no third party is infringing on any Intellectual Property rights of the Company
Group.
(f) The present business, activities and products of the Company
Group do not infringe any Intellectual Property of any other person. No
proceeding charging the Company Group with infringement of any adversely held
Intellectual Property or any opposition to registration has been filed or is, to
the best knowledge of the Company, threatened to be filed. The Company Group is
not making unauthorized use of any confidential information or trade secrets of
any person, including without limitation, to the best knowledge of the Company,
any former employer of any past or present employee of the Company Group. Except
(i) as set forth in the Disclosure Letter, and (ii) for nondisclosure agreements
signed by employees with customers, which were executed in the normal course of
business and which the Company is in compliance with in all material respects,
neither the Company Group nor, to the best knowledge of the Company, any of its
employees have any agreements or arrangements with any persons other than
members of the Company Group related to confidential information or trade
secrets of such persons or restricting any such employee's ability to engage in
business activities of any nature. The activities of its employees on behalf of
the Company Group do not violate any such agreements or arrangements known to
the Company.
2.17 Contracts.
(a) The Disclosure Letter attached hereto lists, and the Company
has made available (including providing a copy as requested) to Purchaser, true
and complete copies of, all of the following contracts or other obligations to
which any member of the Company Group is a party or by which it is bound:
(i) Employment agreements and any other contracts with or loans
to any of the Company Group's shareholders, officers, directors,
employees, consultants, salesmen, distributors or sales
representatives;
(ii) Any employee benefit plan made available to any of its
employees;
(iii) Any collective bargaining agreement;
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(iv) Any contracts with customers, together with lists of all
such contracts, including those which have been completed which impose
any material liabilities upon, or reasonably could be expected to
result in any material liabilities against, the Company Group.
(v) Any deeds of trust, mortgages, conditional sales contracts,
security agreements, pledge agreements, trust receipts, or any other
agreements or arrangements whereby any assets of the Company Group are
subject to a lien, encumbrance, charge or other restriction;
(vi) Any loan agreements, letters of credit or lines of credit;
(vii) Any contracts restricting any member of the Company Group
from doing business in any areas or in any way limiting competition and
any contracts, including without limitation contracts with suppliers,
which limit, restrict or transfer rights to any technology utilized or
developed by the Company Group or which establish rights of a supplier
or customer to a particular product marketed or being developed by the
Company Group, excluding the license implied in any sale of product;
for each such contract, the Disclosure Letter briefly describes the
restrictions or limitations contained in the contract;
(viii) Other than purchase orders issued in the ordinary course
of business, any contracts calling for aggregate payments in excess of
$10,000 and which are not terminable without cost or liability on
notice of 90 days or less;
(ix) Any joint venture, partnership, limited liability company
or limited partnership agreement;
(x) Any guarantees of the obligations of any other party
(including other members of the Company Group) except those resulting
from the endorsement of customer checks deposited for collection;
(xi) Any other contracts which may have a material impact on
the Company Group's assets, results of operations or financial
condition or which may impact the Stockholders' ability to perform
their obligations hereunder; and
(xii) Any commitments to enter into any of the types of
contracts and obligations referred to in this Section 2.17.
The member of the Company Group party thereto has not received
notice of any material default under any such contracts, obligations or
commitments, is not in material default under any such contracts, obligations or
commitments, and there are no facts (to the best knowledge of the Company in the
case of facts relating to the other party thereto) which, with notice and/or the
passage of time, would constitute such a default. To the best knowledge of the
Company, no other party to such contracts, obligations or commitments is in
material default and there are no facts which, with notice and/or the passage of
time, would constitute such a default.
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No consent is required under the contracts, obligations and commitments referred
to in this Section in connection with the transactions contemplated by this
Agreement.
(b) Purchase Commitments. None of the purchase commitments of the
Company Group is substantially in excess of the normal, ordinary, and usual
requirements of the Company Group's business or was made at any price
substantially in excess of then-current market price.
(c) Bids and Contracts. The Disclosure Letter lists, and the
Company has previously delivered to Purchaser, true and complete copies of, all
outstanding bids, proposals to perform services for customers, or unfilled
orders quoting prices.
2.18 Suppliers and Customers. The Disclosure Letter lists all suppliers
to the Company Group who are significant to the Company Group, including without
limitation (i) all suppliers who have supplied products and/or services to the
Company Group in the 15-month period beginning January 1, 1998, where the total
consideration payable to the supplier exceeded $5,000, and (ii) suppliers who
are a sole source (i.e., a supplier who could not be replaced on reasonably
equivalent terms by another supplier) for a special and/or critical product
supplied by them. The Disclosure Letter also lists all open ended purchase
orders which exist on the date hereof or which will exist as of the Closing
Date. For these purposes, open-ended purchase orders shall mean purchase orders
or other contractual arrangements providing for extended deliveries by the
supplier, multiple deliveries by the supplier, or which provide for purchases of
quantities significantly in excess of those required in the normal course of
business of the Company Group.
To the best knowledge of the Company, none of the current customers or
suppliers of the Company Group intends to terminate or change significantly its
relationship with the Company Group, whether as a result of the Merger or
otherwise.
2.19 Litigation. There are no legal, administrative, arbitration or
other proceedings or claims pending or, to the best knowledge of the Company,
threatened against any member of the Company Group, nor is any member of the
Company Group subject to any existing judgments. To the best knowledge of the
Company, there is no reasonable basis for any such proceeding or claim against
any member of the Company Group. No member of the Company Group is operating
under or subject to, or in default with respect to, any order, writ, injunction
or decree of any court or federal, state, municipal or other governmental
department, commission, board, agency or instrumentality, domestic or foreign.
2.20 Compliance with Applicable Laws; Environmental Matters.
(a) Laws. Each member of the Company Group, its operations, assets
and all real property now or previously operated, used or leased by, to or for
said member, (but only the portion thereof actually operated, used or leased by,
to or for the Company) (the "Company Group Real Property"), including, without
limitation, The Company Facility and all real property subject to the Leases,
are in compliance with all foreign, federal, state, county, and municipal laws,
ordinances, regulations, rules, reporting requirements, judgments, orders,
decrees and
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requirements of common law applicable to the conduct and business of the Company
Group and to the assets owned, used or occupied by it (collectively referred to
hereinafter as the "General Laws"), including without limitation all applicable
foreign, federal, state, county and municipal laws, ordinances, regulations,
rules, reporting requirements, judgments, orders, decrees and requirements of
common law concerning or relating to the protection of health and the
environment (collectively referred to hereinafter as the "Environmental Laws").
No member of the Company Group has received any notice of violation, citation,
complaint, request for information, order, directive, compliance schedule or
other similar enforcement order, or any other notice from any administrative or
governmental agency or entity, indicating that either it or the Company Group
Real Property were not or currently are not in compliance in all material
respects with all Environmental Laws and General Laws, and to the best knowledge
of the Company, no such item is threatened.
Without limiting the generality of the foregoing, the Company
Facility and its continued use, occupancy and operation as currently used,
occupied and operated does not constitute a nonconforming use under any General
Law and the continued existence, use, occupancy and operation of each
Improvement, and the right and ability to repair and/or rebuild such Improvement
in the event of casualty, is not dependent on any special permit, exception,
approval or variance. To the best knowledge of the Company, there is no pending
or anticipated change in any General Laws which would have a material adverse
effect upon the ownership, alteration, use, occupancy or operation of the
Company Facility or any portion thereof, or upon the reconstruction of any
Improvement in the event of a casualty. No dispute currently exists with any
governmental authority having jurisdiction over the Company Facility with
respect to any General Law or the application thereof to any part of the Company
Facility.
(b) Environmental Laws. All businesses and operations of the
Company Group and the Company Group Real Property are in compliance in all
material respects with any: (i) judgments, orders, decrees, awards or
directives, of any court, arbitrator or administrative or governmental agency or
entity binding any member of the Company Group and concerning compliance with
the Environmental Laws; and (ii) consent decrees, administrative orders,
settlement agreements or other settlement documents entered into by any member
of the Company Group with any administrative or governmental agency or entity
concerning compliance with the Environmental Laws.
(c) Hazardous Materials; Storage Tanks. All assets owned, leased
or licensed by the Company Group, including without limitation, the Company
Group Real Property, are free of all materials designated as hazardous
substances, wastes, hazardous materials, pollutants or contaminants under any
Environmental Laws (collectively, "Hazardous Materials") other than Hazardous
Materials which are properly stored and licensed as required by applicable law,
and are free of physical conditions which violate any Environmental Laws.
Without limiting the generality of the foregoing, the term "Hazardous Materials"
includes asbestos and related substances, polychlorinated biphenyls, and
gasoline, kerosene and all other petroleum products. No Hazardous Materials used
or generated by any member of the Company Group have been treated, stored,
transported or disposed of in violation of any Environmental Laws; and all
Hazardous Materials which have been utilized in the business or operation of the
Company Group or which have been removed, released, discharged or emitted by any
member of the
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Company Group from the Company Group Real Property were and are documented,
transported and disposed of in compliance with all Environmental Laws in all
material respects.
(d) Licenses and Permits. The Disclosure Letter lists material
permits, licenses and other authorizations issued by administrative or
governmental agencies or entities under the General Laws and the Environmental
Laws or otherwise required for the conduct of the Company Group's business as
presently conducted which are held by the Company Group or, with respect to the
Company Group's business or assets, by its employees or agents ("Licenses and
Permits"). The Licenses and Permits include all such permits which are necessary
to the Company Group's business and operations as presently conducted and the
Company Group is and has been in compliance in all material respects with the
terms and conditions of the Licenses and Permits. Under the General Laws and the
Environmental Laws and the Licenses and Permits, the consummation of the
transactions contemplated by this Agreement do not and will not: (i) affect the
validity of the Licenses and Permits; or (ii) require the consent of any
governmental authority or third party. The Company has not received or been
informed by a third party of the receipt by it of any notice from or the taking
of any action by any governmental authority having jurisdiction over the Company
Group's business or operations threatening a suspension, revocation,
modification or cancellation of any License or Permit.
2.21 Insurance. The physical properties and assets of the Company Group
are insured to the extent disclosed in the Disclosure Letter attached hereto and
all such insurance policies and arrangements are disclosed in said Letter. Said
insurance policies and arrangements are in full force and effect, all premiums
with respect thereto are currently paid, and the Company Group is in compliance
in all material respects with the terms thereof. Said insurance is adequate and
customary for the business engaged in by the Company Group and is sufficient for
compliance by the Company Group with all requirements of law and all agreements
and leases to which the Company is a party. The Company has not received or been
informed by a third party of the receipt by it of any notice from or the taking
of any action by any issuer of any policy of insurance or arrangement to the
Company Group threatening a suspension, revocation, modification or cancellation
of any such policy of insurance or arrangement.
2.22 Powers of Attorney. No member of the Company Group has any
outstanding power of attorney.
2.23 Finder's Fee. The Company Group has not incurred or become liable
for any broker's commission or finder's fee relating to or in connection with
the transactions contemplated by this Agreement.
2.24 Burdensome Agreements. Except as disclosed in the Disclosure
Letter, the Company Group is not subject to or bound by any agreement, judgment,
decree or order which could reasonably be expected to materially and adversely
affect its business or prospects, its condition, financial or otherwise, or any
of its assets or properties.
2.25 Corporate Records; Copies of Documents. The corporate record books
of the Company and the Subsidiaries accurately record all corporate action taken
by their respective stockholders and board of directors and committees. The
copies of the corporate records and
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stock records of the Company and the Subsidiaries, as delivered to Purchaser for
review, are true and complete copies of the originals of such documents. The
Company has made available to Purchaser and its counsel true and correct copies
of all documents referred to in this Section or in the Disclosure Letter
delivered to Purchaser pursuant to this Agreement.
2.26 Transactions with Directors, Officers, Employees and Affiliates.
Excluding cash dividends to Stockholders and cash salaries, benefits and
expenses paid to Stockholders who are also employees of the Company, all of
which are listed on the Disclosure Letter, there have been no transactions since
January 1, 1996, between any member of the Company Group and any director,
officer, employee or affiliate (as defined in Rule 405 promulgated by the SEC)
of the Company, except on an arm's length basis in accordance with normal
business practices. Since said date, none of the officers, directors, employees
or affiliates of the Company Group, or any member of the immediate family of any
such persons, has been a director or officer of, or has had a material interest
in, any firm, corporation, association or business enterprise which during such
period has been a material supplier, customer or sales agent of the Company
Group or has competed to a material extent with the Company Group.
2.27 ERISA and Employment Matters.
(a) Except as set forth in the Disclosure Letter, no employee of
any member of the Company Group has a written or oral agreement (or an assurance
pursuant to any employee manual) which would preclude such member from
terminating such employee's employment at any time with no obligation to make
any payment except wages and accrued benefits to the date of termination. Each
member of the Company Group does not have any policy, practice, plan, or program
of paying severance pay or any form of severance compensation in connection with
the termination of employment. Each member of the Company Group has not engaged
in any discriminatory hiring or employment practices nor have any employment
discrimination complaints been filed against the Company Group with any state or
federal agency. Each member of the Company Group has not been threatened by any
former employee with any suit alleging wrongful termination or other claim and
there are no material grounds for such a suit.
The Company has made available (including providing a copy thereof
to be retained by Purchaser) to Purchaser (i) all employment manuals utilized by
any member of the Company Group within the past three (3) years, (ii) copies of
any determination letters (or similar documents) received by any member of the
Company Group from the Internal Revenue Service or any other governmental
authority with respect to any employee benefit plan, together with a copy of the
most recent submission for a determination letter by each member of the Company
Group for each employee benefit plan maintained by it, (iii) copies of any
summary plan descriptions or summaries of material modifications relating to any
employee benefit plan (as defined in Section 3(3) of ERISA) that have been
prepared or distributed in the past three (3) years.
(b) There are no present or former employees, directors or
independent contractors of any member of the Company Group entitled to (i)
pension benefits that are "unfunded" as defined under ERISA or (ii) any pension
benefit or welfare benefit to be paid after termination of employment other than
pursuant to the Company's 401(K) Plan (the "Plan") or as
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otherwise required by law. Except with respect to continuation coverage under
group health plans pursuant to Section 4980B of the Internal Revenue Code of
1986, as amended (the "Code") or state law, and except with respect to
continuation coverage under group life insurance plans pursuant to state law, no
other welfare benefits (whether or not pursuant to any plan or benefit
arrangement that is subject to the Employee Retirement Income and Security Act
("ERISA")) whatsoever are payable to any present or former Company employees
after termination of employment or to any present or former directors or
independent contractors after cessation of service to the Company Group
(including, but not limited to, any post-retirement medical or death benefits,
any severance benefits or any disability benefits).
(c) There are no arrangements or contracts with any director,
officer, employee or independent contractor of any member of the Company Group
that require any deferred compensation, retirement or welfare benefits to be
paid or provided following termination of services, except as may occur under
the Plan.
(d) Each "employee welfare benefit plan" (as defined in Section
3(1) of ERISA) of each member of the Company Group is either funded through
insurance or is unfunded for purposes of ERISA. There are no reserves, assets,
surplus or prepaid premiums under any such plan, the Company Group is not in
material default under any such plan, and all such plans are in compliance in
all material respects with all applicable laws (including, but not limited to,
ERISA, the Code, the Age Discrimination in Employment Act of 1967, the Americans
with Disabilities Act, and the Health Insurance Portability and Accountability
Act of 1996) since such laws became effective in respect to such plans.
(e) Each of any "employee welfare benefit plan" (as defined above)
maintained by any member of the Company Group, any fiduciary thereof and the
Company Group is not subject to any liability (other than normal liabilities and
expenses associated with maintenance of such plan or arrangement as an ongoing
benefit plan or arrangement) under ERISA or the Code or any other applicable
law.
(f) The Plan, any fiduciary thereof and the Company are not
subject to any liability (other than normal liabilities and expenses associated
with maintenance of such plan or arrangement as an ongoing benefit plan or
arrangement) under ERISA or the Code or any other applicable law. The Plan has
been administered in compliance in all material respects with its terms and with
the applicable provisions of ERISA, the Code and all other federal, state and
other applicable laws, rules and regulations (including, without limitation, any
funding, filing, terminating, reporting, disclosure and fiduciary obligations
and any prohibited transaction restrictions). The Plan meets the requirements of
the Code and ERISA in all material respects, and has from its inception
satisfied such requirements in all material respects.
(g) Except for the Plan and any other employee benefit plans
identified in the Disclosure Letter, each member of the Company Group neither
maintains, nor has it ever maintained or ever been obligated to contribute to,
(i) a multiemployer plan within the meaning of Section 3(37) of ERISA, or (ii)
any employee benefit plan within the meaning of Section 3(3) of ERISA.
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(h) There are and there have been no inquiries, proceedings,
claims or suits pending or, to the best knowledge of the Company, threatened by
any governmental agency or authority or by any participant or beneficiary
against the Company, the Plan or any other employee benefit plan maintained by
any member of the Company Group, or any fiduciary of the Plan or of any other
employee benefit plan maintained by any member of the Company Group, with
respect to the operation of the Plan or such other benefit plans, other than
routine claims for benefits.
(i) The consummation of the transactions contemplated by this
Agreement will not, alone or together with any other event, (i) entitle any
employee of any member of the Company Group to a bonus, severance pay or any
other payment, or (ii) accelerate the time of payment or vesting, or increase
the amount of, compensation due to any such employee.
(j) The Company Group has no obligation for (i) any long-term
disability benefits to or for any of its employees who become disabled prior to
the Closing Date (including any individual who is disabled but has not satisfied
any applicable waiting period) and (ii) any life insurance benefits promised,
due and/or payable to or for any of its employees who die prior to the Closing
Date.
(k) The Company previously maintained an Employee Stock Ownership
Plan (the "ESOP"). The ESOP was terminated April 11, 1997. The ESOP was
terminated in compliance with applicable law, and in connection with the
termination, the Company obtained a favorable determination letter from the
Internal Revenue Service. The Company has no further liability or obligation
with respect to the ESOP or its termination or the stock transactions entered
into in connection with the ESOP's termination.
(l) In the case of employee benefit plans, if any, maintained by
the Foreign Subsidiaries, including both plans similar to pension, profit
sharing or 401(K) plans under United States law and plans similar to employee
welfare benefit plans under United States law (collectively, the "Foreign
Plans"), (i) the financial statements for the Foreign Subsidiaries fully and
fairly reflect any liabilities associated with the Foreign Plans, including but
not limited to the liabilities for underfunding or the like; and (ii) under the
terms of the Foreign Plans, except for normal escalations in cost related to
either the cost of living or adding additional employees, there will be no
material increases in the cost of operating the Foreign Plans than those
reflected in the financial statements for the Foreign Subsidiaries.
2.28 List of Directors and Officers. The Disclosure Letter contains a
true and complete list of all current directors and officers of the Company and
each Subsidiary. In addition, the Disclosure Letter contains a list of all
employees and consultants of the Company and each Subsidiary who, individually,
have received or are scheduled to receive compensation from the Company for the
fiscal year ended December 31, 1998 or the fiscal year ending December 31, 1999.
In each case the Disclosure Letter includes the current job title and aggregate
annual compensation of each such individual.
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2.29 Employees; Labor Matters.
(a) The Disclosure Letter specifies the number of full-time
employees and part-time employees employed by each member of the Company Group.
Each member of the Company Group generally enjoys good employer-employee
relationships. No member of the Company Group is delinquent in payments to any
of its employees for any wages, salaries, commissions, bonuses, or other direct
compensation for any services performed for it to the date hereof or amounts
required to be reimbursed to such employees.
(b) Each member of the Company Group is in compliance in all
material respects with all applicable laws and regulations respecting labor,
employment, fair employment practices, work place safety and health, terms and
conditions of employment, and wages and hours. There are no charges of
employment discrimination or unfair labor practices, nor are there any strikes,
slowdowns, stoppages of work, or any other concerted interference with normal
operations existing, pending, or, to the best knowledge of the Company,
threatened against or involving any member of the Company Group. No question
concerning representation exists respecting any group of employees of any member
of the Company Group. There are no grievances, complaints, or charges that have
been filed against the Company under any dispute resolution procedure
(including, but not limited to, any proceedings under any dispute resolution
procedure under any collective bargaining agreement) that are outstanding, or
that were outstanding during the preceding three (3) years, and no arbitration
or similar proceeding is pending and no claim therefor has been asserted. No
collective bargaining agreement is in effect or is currently being or is about
to be negotiated by any member of the Company Group. The Company has not
received information to indicate that any of the employment policies or
practices of any member of the Company Group is currently being audited or
investigated by any federal, state, local or foreign government agency.
(c) To the best knowledge of the Company, each employee of the
Company Group is not a party to any non-competition, trade secret or
confidentiality agreement with any party other than the Company Group.
2.30 Transfer of Shares. No holder of stock of the Company has at any
time transferred any of such stock to any employee of the Company Group, which
transfer constituted or could be viewed as compensation for services rendered to
the Company by said employee.
2.31 Stock Repurchase. Except as set forth in its Disclosure Letter,
the Company has not redeemed or repurchased any of its capital stock.
2.32 Industrial Revenue Bonds. Except as set forth in the Disclosure
Letter, no member of the Company Group is indebted under any industrial revenue
bonds.
2.33 Products and Warranties. The Disclosure Letter describes or
specifically references all warranties made by any member of the Company Group
with respect to products sold or leased during the last five (5) years. Except
for warranty experience consistent with the Company's past experience and
disclosed in the Annual Statements and the Interim Statements, to the best
knowledge of the Company, all products sold or leased by any member of the
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Company Group during the last three (3) years complied with the Company's
standard warranties applicable thereto and with all requirements in the
agreements of sale applicable to such products. Except as listed on the
Disclosure Letter, there has been no departure in any material respect by any
member of the Company Group from such standard warranties in connection with the
products sold in the last three (3) years.
Except as set forth in the Disclosure Letter, there have been no
product liability claims made against any member of the Company Group of any
kind. None of the products sold or leased by any member of the Company Group on
or before the Effective Time of Merger, contains any defect or other condition
which will result in any material product liability or similar claim against any
member of the Company Group.
To the best knowledge of the Company, the products currently sold by
the Company Group comply with the specifications applicable thereto, and there
are no material defects in such products.
During the last five (5) years, the Company Group has not had any
product recalls or any other unusual expenses or problems associated with
products sold (hereinafter "Product Events"). The Company will promptly advise
Purchaser of any Product Events which occur from the date hereof through the
Effective Time of the Merger.
2.34 Warranty Expense. The term of the warranty issued by the Company
Group with respect to products shipped by it prior to the Effective Time of the
Merger is not longer than one (1) year from the date on which any such product
was shipped, subject to the occasional extension of said warranty period by
executives of the Company.
The expense, expressed as a percentage of revenues, incurred by
Purchaser and the Surviving Corporation in satisfying warranty obligations of
the Company Group with respect to products shipped by the Company Group prior to
the Effective Time of the Merger will not, in the aggregate, exceed by more than
fifty percent (50%), the average annual warranty cost, expressed as a percentage
of revenues, incurred during calendar years 1997 and 1998. For these purposes,
returns for non-warranty reasons shall not be treated as warranty expenses.
2.35 Authority Relative to Agreements; Enforceability. Common
Stockholders owning 51% of the shares of the Company Common Stock on the
applicable record date will have the power to approve the Merger on behalf of
the Company. . Mark J. Margetts, Thomas B. Carlson, and Ronald V. Webb, who are
the three largest shareholders of the Company, will vote their shares of stock
in favor of the Merger, and have delivered their written agreement to this
effect to the Company and Purchaser.
The execution, delivery and performance of this Agreement are within
the legal capacity and power of the Company; have been duly authorized by all
requisite corporate action on the part of the Company, other than Stockholder
Approval; except as set forth in the Disclosure Letter, require the approval or
consent of no other persons, entities or agencies, and will neither violate nor
constitute a default under, nor create a lien or breach under, nor result in the
acceleration of performance or right to accelerate performance under (whether or
not after the
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giving of notice or lapse of time or both), the terms of the Charter of
Incorporation and bylaws of the Company or any Subsidiary, or of any agreement,
obligation or commitment binding upon the Company or any Subsidiary.
This Agreement is a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
2.36 Disclosure. The representations, warranties and statements
contained in this Agreement and in the agreements, certificates, exhibits,
documents and schedules delivered by the Company or the Stockholders pursuant to
this Agreement to Purchaser do not contain any untrue statement of a material
fact, and, when taken together, do not omit to state a material fact required to
be stated therein or necessary in order to make such representations, warranties
or statements not misleading in light of the circumstances under which they were
made. To the best knowledge of the Company, there are no facts which presently
have, or could reasonably be expected in the future to have, a material adverse
affect on the business, properties, prospects, operations or condition of the
Company Group which have not been specifically disclosed herein or in the
Disclosure Letter other than general economic conditions affecting the
industries in which the Company Group operates.
SECTION 3. COVENANTS OF THE COMPANY.
3.1 Making of Covenants and Agreements. The Company hereby makes the
covenants and agreements set forth in this Section 3.
3.2 Conduct of Business. Between the date of this Agreement and the
Closing Date, the Company Group, and each member thereof, will:
(a) conduct its business only in the ordinary course and refrain
from changing or introducing any method of management or operations except in
the ordinary course of business and consistent with prior practices;
(b) refrain from making any purchase, sale or disposition of any
asset or property other than in the ordinary course of business and from
mortgaging, pledging, subjecting to a lien or otherwise encumbering any of its
properties or assets;
(c) refrain from incurring any contingent liability as a guarantor
or otherwise with respect to the obligations of others, and from incurring any
other obligations or liabilities except in the ordinary course of business;
(d) refrain from making any change or incurring any obligation to
make a change in its Charter of Incorporation, by-laws or authorized or issued
capital stock;
(e) except as set forth in the Disclosure Letter, refrain from
declaring, setting aside or paying any dividend or other transfer of property to
any Stockholder (in the case of Subsidiaries, to any stockholder other than the
Company) other than payment of regular compensation -- not bonuses -- to
Stockholders who are employees of the Company, making any
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other distribution in respect of its capital stock, or making any direct or
indirect redemption, purchase or other acquisition of its capital stock;
(f) refrain from making any change in the compensation payable or
to become payable to any of its officers, employees, agents or independent
contractors;
(g) refrain from prepaying any loans (if any) from its
stockholders, officers or directors or making any change in its borrowing
arrangements;
(h) use its best efforts to prevent any change with respect to its
management and supervisory personnel and banking arrangements;
(i) use its best efforts to keep intact its business organization,
to keep available its present officers and employees and to preserve the
goodwill of all suppliers, customers, independent contractors and others having
business relations with it;
(j) have in effect and maintain at all times all insurance of the
kind, in the amount and with the insurers set forth in the Disclosure Letter or
equivalent insurance with any substitute insurers approved in writing by
Purchaser;
(k) refrain from entering into any contract or agreement relating
to capital expenditures or with respect to the construction of tenant
improvements with respect to any Leased Real Property;
(l) fully and correctly perform its obligations under its
agreements with customers, maintain good relationships with its customers, and
continue to diligently pursue new customers;
(m) refrain from entering into or making any change in the Plan,
except as required to conform to applicable law, or materially amend or
terminate any other existing employee benefit plan, or adopt any new employee
benefit plan;
(n) not acquire control or ownership of any other corporation,
association, joint venture, partnership, limited liability company, business
trust or other business entity, or acquire control or ownership of all or a
substantial portion of the assets of the foregoing, or enter into any agreement
providing for any of the foregoing;
(o) except in the ordinary course of business, not enter into or
agree to enter into any transaction, or incur or discharge any obligation or
liability, material to the business of the Company or any Subsidiary;
(p) except as set forth in the Disclosure Letter, not enter into
any contracts with and not make (except for payment of normal compensation --
not bonuses -- in accordance with past practices and as disclosed in the
Disclosure Letter), any payments or transfer property to any shareholder of the
Company (or in the case of the Subsidiaries to any shareholder other than the
Company), relatives of any shareholder, or any corporation, partnerships,
limited
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liability companies or other business entities controlled by any shareholder or
in which any shareholder has any significant equity interest;
(q) not enter into any material licensing arrangement or other
contract;
(r) not settle any pending litigation in a manner that is
materially adverse to the Company or commence any material litigation;
(s) not take any action which will prevent any of its warranties
and representations herein from being true in all material respects as of the
Closing Date; and
(t) permit Purchaser and its representatives to have full access
to all of the Company Group's and Stockholders' representatives, independent
contractors, suppliers, and customers, and cause such representatives,
independent contractors, suppliers, and customers to cooperate fully with
Purchaser and Purchaser's representatives in connection with Purchaser's due
diligence review of the Company Group's business, properties, assets, records,
tax returns, contracts and documents.
3.3 Authorization from Others. Prior to the Closing Date, the Company
will use its best efforts to obtain all authorizations, consents and permits of
others required to permit the consummation by the Stockholders and the Company
of the transactions contemplated by this Agreement.
3.4 Notice of Default. Promptly upon the occurrence of, or promptly
upon the Company becoming aware of the impending or threatened occurrence of,
any event which would cause or constitute a breach or default, or would have
caused or constituted a breach or default had such event occurred or been known
to the Company prior to the date hereof, of any of the representations,
warranties or covenants of the Company contained in or referred to in this
Agreement or in the Disclosure Letter or any Schedule or Exhibit referred to in
this Agreement, the Company shall give detailed written notice thereof to
Purchaser, and the Company shall use its best efforts to prevent or promptly
remedy the same.
3.5 Consummation of Agreement. The Company shall use its best efforts
to perform and fulfill all conditions and obligations on its or their part to be
performed and fulfilled under this Agreement, to the end that the transactions
contemplated by this Agreement shall be fully carried out. To this end, the
Company will obtain prior to the Closing all necessary authorizations or
approvals of its stockholders and Board of Directors.
3.6 Cooperation of the Company. The Company shall cooperate with all
reasonable requests of Purchaser and Purchaser's counsel in connection with the
consummation of the transactions contemplated hereby.
3.7 No Negotiations; Notification of Takeover Proposal and Other
Matters. The Company shall promptly advise Purchaser orally and in writing of
any "takeover proposal" or of any proposal, or inquiry reasonably likely to
result in a proposal, which the Company has reason to believe is or may lead to
any "takeover proposal". For purposes of this Agreement, the term "takeover
proposal" shall mean any proposal for a merger or other business combination
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involving the Company or any Subsidiary, or for the acquisition of a substantial
equity interest in the Company or any Subsidiary, a substantial portion of the
assets of the Company or any Subsidiary or a product line or line of business of
the Company or any Subsidiary, other than as contemplated by this Agreement. The
Company shall promptly advise Purchaser orally and in writing of the receipt by
the Company or any Subsidiary of any notification submitted to the Company any
purchase or proposed purchase of any securities of the Company by any person.
Each member of the Company Group shall not, directly or indirectly,
whether through its officers, directors, Stockholders, agents, representatives,
or otherwise, engage in any discussions or negotiations with, or provide any
information to, any person or entity making, proposing to make or believed to be
contemplating a takeover proposal to the Company.
3.8 Confidentiality; No Trading. The Company agrees that each of the
Company, the Subsidiaries and the Company's and Subsidiaries' officers,
directors, Stockholders, and Representatives will hold in strict confidence, and
will not use, any confidential or proprietary data or information obtained from
Purchaser with respect to its business or financial condition except for the
purpose of evaluating, negotiating and completing the transaction contemplated
hereby. Information generally known in Purchaser's industry or which has been
disclosed to the Company by third parties which have a right to do so shall not
be deemed confidential or proprietary information for purposes of this
Agreement. If the transaction contemplated by this Agreement is not consummated,
the Company will return to Purchaser (or certify that they have destroyed) all
copies of such data and information, including but not limited to financial
information, customer lists, business and corporate records, worksheets, test
reports, tax returns, lists, memoranda, and other documents prepared by or made
available to the Company in connection with the transaction.
The Company and each Subsidiary will abide by and will require its
employees, Stockholders, agents and representatives to abide by, applicable
securities and insider trading laws which may restrict persons with material
non-public information about Purchaser, or any matters involving or affecting
the transactions addressed herein, from purchasing or selling securities of
Purchaser or from communicating such information to any other person under
circumstances in which it is reasonably foreseeable that such person is likely
to purchase or sell securities.
3.9 Escrow Agreement. Agent shall execute and deliver the Escrow
Agreement, substantially in the form attached hereto as Exhibit 1.3(l).
3.10 Access to Records and Properties. Purchaser may, prior to the
Closing Date, through its employees, agents and representatives, make or cause
to be made a detailed review of the business and financial condition of the
Company Group and make or cause to be made such investigation as it deems
necessary or advisable of the properties, assets, businesses, books and records
each member of the Company Group. The Company agrees to assist Purchaser in
conducting such review and investigation and will provide, and will cause its or
their representatives and independent public accountants to provide, Purchaser
and its employees, agents and representatives full access to, and complete
information concerning, all aspects of the businesses of the Company Group,
including their respective books, records (including tax
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returns filed or in preparation), projections, personnel and premises, and any
documents (including any documents filed on a confidential basis) included in
any report filed with any governmental agency, but excluding the audit work
papers and other records of its independent public accountants.
Neither any investigation by Purchaser nor the receipt by Purchaser of
any data or information from the Company nor any knowledge acquired by Purchaser
shall affect the right of Purchaser to terminate this Agreement as provided in
Section 8 hereof or qualify, limit or otherwise restrict any representation or
warranty made by the Company hereunder.
3.11 Shareholder Meeting. The Company shall call a special meeting of
its Stockholders to be held as soon as practicable for the purpose of voting
upon the transactions contemplated by this Agreement. In connection with calling
such meeting, the Company shall provide proxy materials and other disclosure
materials which fully and fairly describe this Agreement and the transactions
and payments to be made under or in connection with this Agreement, and which
make all other required or appropriate disclosures, so that all Stockholders can
make a fully informed decision when they vote upon the transactions contemplated
by this Agreement. The Company shall afford to Purchaser the opportunity to
review and comment upon said disclosure materials before they are sent to the
Stockholders.
3.12 Notification Regarding Dissenters' Shares. The Company shall give
Purchaser (i) prompt notice of any notice of intent to demand fair value for any
shares of Company Common Stock, withdrawals of such notices, and any other
instruments served pursuant to the Appraisal Laws and received by the Company,
and (ii) the opportunity to direct any negotiations and proceedings with respect
to demands for fair value for shares of Company Common Stock under the Appraisal
Laws. The Company shall not, without the prior written consent of Purchaser,
voluntarily make any payment with respect to any demands for fair value of
shares of Company Common Stock or offer to settle or settle any such demands.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
4.1 Organization of Purchaser. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota with full corporate power and authority to own or lease its properties
and to conduct its business in the manner and in the places where such
properties are owned or leased or such business is conducted by it.
4.2 Authority of Purchaser. Purchaser has full right, authority and
power to enter into this Agreement and each agreement, document and instrument
to be executed and delivered by Purchaser pursuant to this Agreement and to
carry out the transactions contemplated hereby. The execution, delivery and
performance by Purchaser of this Agreement and each such other agreement,
document and instrument have been duly authorized by all necessary corporate
action of Purchaser and no other action on the part of Purchaser is required in
connection therewith. This Agreement and each other agreement, document and
instrument executed and delivered by Purchaser pursuant to this Agreement
constitute, or when executed and delivered will constitute, valid and binding
obligations of Purchaser enforceable in accordance with their terms. The
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execution, delivery and performance by Purchaser of this Agreement and each such
agreement, document and instrument:
(a) do not and will not violate any provision of the Articles of
Incorporation or Bylaws of Purchaser;
(b) do not and will not violate any laws, rules, or regulations of
the United States or of any state or any other jurisdiction applicable to
Purchaser or require Purchaser to obtain any approval, consent, or waiver of, or
make any filing with, any person or entity (governmental or otherwise) which has
not been obtained or made; and
(c) do not and will not result in a breach of, constitute a
default under, accelerate any obligation under, or give rise to a right of
termination of any indenture, loan, or credit agreement, or any other agreement,
mortgage, lease, permit, order, judgment, or decree to which Purchaser is a
party and which is material to the business and financial condition of Purchaser
and its affiliated organizations on a consolidated basis.
4.3 Litigation. There is no litigation pending or, to its knowledge,
threatened against Purchaser which would prevent or hinder the consummation of
the transactions contemplated by this Agreement.
4.4 Finder's Fee. Purchaser has not incurred or become liable for any
broker's commission or finder's fee relating to or in connection with the
transactions contemplated by this Agreement.
SECTION 5. COVENANTS OF PURCHASER.
5.1 Making of Covenants and Agreement. Purchaser hereby makes the
covenants and agreements set forth in this Section 5.
5.2 Cooperation of Purchaser. Purchaser shall cooperate with all
reasonable requests of the Company and its counsel in connection with the
consummation of the transactions contemplated hereby.
5.3 Confidentiality. Purchaser agrees that, unless and until the
Closing has been consummated, Purchaser and its officers, directors, and
representatives will hold in strict confidence, and will not use any
confidential or proprietary data or information obtained from the Company with
respect to the business or financial condition of the Company except for the
purpose of evaluating, negotiating and completing the transaction contemplated
hereby. Information generally known in the industries of the Company or which
has been disclosed to Purchaser by third parties which have a right to do so
shall not be deemed confidential or proprietary information for purposes of this
agreement. If the transaction contemplated by this Agreement is not consummated,
Purchaser will return to the Company (or certify that it has destroyed) all
copies of such data and information, including but not limited to financial
information, customer lists, business and corporate records, worksheets, test
reports, tax returns, lists, memoranda, and other documents prepared by or made
available to Purchaser in connection with the transaction.
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5.4 Escrow Agreement. Purchaser shall execute and deliver the Escrow
Agreement, substantially in the form attached hereto as Exhibit 1.3 (l).
SECTION 6. CONDITIONS.
6.1 Conditions to the Obligations of Purchaser. The obligation of
Purchaser to consummate this Agreement and the transactions contemplated hereby
are subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent:
(a) Representations; Warranties; Covenants. Each of the
representations and warranties of the Company contained in Section 2 shall be
true and correct as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing; and the Company shall, on or before the
Closing, have performed all of its obligations hereunder which by the terms
hereof are to be performed on or before the Closing.
(b) No Material Change. There shall have been no material adverse
change in the financial condition, prospects, properties, assets, liabilities,
business or operations of the Company since the date hereof, whether or not in
the ordinary course of business.
(c) Certificate from Officer. The Company shall have delivered to
Purchaser a certificate of the Company's President dated as of the Closing to
the effect that the statements with respect to the Company set forth in
paragraph (a) and (b) above in this Section 6.1 are true and correct.
(d) Escrow Agreement. Each of the Company, Agent and the Escrow
Agent shall have executed and delivered the Escrow Agreement, substantially in
the form attached hereto as Exhibit 1.3(l).
(e) Employees. Purchaser shall have received indications
satisfactory to Purchaser that all employees significant to the business of the
Company intend to continue their employment with the Company after the closing
of this Agreement.
(f) Opinion of Counsel. On the Closing Date, Purchaser shall have
received from G. Philip Anderson, P.C., counsel for the Company, an opinion as
of said date, in the form attached hereto as Exhibit 6.1(f).
(g) No Litigation. There shall have been no determination by
Purchaser, acting in good faith, that the consummation of the transactions
contemplated by this Agreement has become inadvisable or impracticable by reason
of the institution or threat by any person or any federal, state or other
governmental authority of litigation, proceedings or other action against
Purchaser, the Company or any Stockholder or any material adverse change in the
laws or regulations applicable to the Company or any Subsidiary.
(h) Consents. The Company shall have made all filings with and
notifications of governmental authorities, regulatory agencies and other
entities required to be made by the Company in connection with the execution and
delivery of this Agreement, the performance of the transactions contemplated
hereby and the continued operation of the business of the
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Company by Purchaser subsequent to the Closing; and the Company and Purchaser
shall have received all authorizations, waivers, consents and permits, in form
and substance reasonably satisfactory to Purchaser, from all third parties,
including, without limitation, applicable governmental authorities, regulatory
agencies, lessors, lenders and contract parties, required to permit the
continuation of the business of the Company and the consummation of the
transactions contemplated by this Agreement, and to avoid a breach, default,
termination, acceleration or modification of any indenture, loan or credit
agreement or any other agreement, contract, instrument, mortgage, lien, lease,
permit, authorization, order, writ, judgment, injunction, decree, determination
or arbitration award as a result of, or in connection with, the execution and
performance of this Agreement.
(i) Employment. Purchaser or the Company shall have entered into,
on terms reasonably acceptable to Purchaser, employment agreements with Mark J.
Margetts, Thomas B. Carlson, Ronald O. Webb, in the forms for each set forth on
Exhibit 6.1(i) to the Disclosure Letter (the "Employment Agreements");
(j) Customers. No significant customer of the Company shall have
terminated or have given notice of termination of its agreement or agreements
with the Company, and Purchaser, through customer visits, shall have received
indications reasonably satisfactory to Purchaser that each such customer intends
to continue doing business with the Company under the ownership of Purchaser in
a manner reasonably comparable to past experience.
(k) Resignations. The Company shall have delivered to Purchaser
the resignations of all of the Directors of the Company and of the officers of
the Company as may be requested by Purchaser, such resignations to be effective
at the Closing.
(l) Releases. The Company shall have delivered to Purchaser
general releases signed by each of the Stockholders and by each officer and
Director of the Company of all claims -- except as provided in the release --
which any of them have against the Company, in the form attached here to as
Exhibit 6.1(l).
(m) Non-Compete. Mark J. Margetts, Thomas B. Carlson, and Ronald
O. Webb shall have executed and delivered Non-Compete Agreements in the form of
Exhibit 6.1(m) to the Disclosure Letter (the "Non-Competes").
(n) Due Diligence. The results of Purchaser's due diligence
investigation of the Company shall be satisfactory to Purchaser, in its sole
discretion; provided, however, that, unless otherwise agreed in writing between
Purchaser and the Company, Purchaser shall deliver notice of its intention not
to close pursuant to this condition by noon, eastern daylight time on May 21,
1999. If said notice is not delivered, then this condition shall be void and of
no force and effect.
(o) Board Approval. Purchaser's Board of Directors shall have
approved this Agreement and the consummation of the transactions contemplated
hereby; provided, however, that, unless otherwise agreed in writing between
Purchaser and the Company, Purchaser shall deliver notice of its intention not
to close pursuant to this condition by noon, eastern daylight
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time on May 21, 1999. If said notice is not delivered, then this condition shall
be void and of no force and effect.
(p) Approvals. The approval of the shareholders of the Company
shall have been obtained.
(q) Dissenting Shares. As of the Closing Date, no more than seven
and one-half percent (7.5%) of the issued and outstanding shares of Company
Common Stock shall be eligible for treatment as Dissenting Shares hereunder.
(r) The consolidated net worth of the Company Group as of March 31,
1999, determined in accordance with generally accepted accounting principles
consistently applied (the "March 31 Net Worth"), must equal or exceed
$7,900,000.
(s) The Purchaser shall have obtained, at the expense of Purchaser,
an extended coverage owner's policy of title insurance (ALTA 1992 Form) ("Title
Policy") in the amount of $1,430,000 for one parcel of the Company Facility, and
in the amount of $1,215,000 for the other parcel in the Company Facility, naming
the Company as the insured covering the Company Facility. The Title Policy shall
be issued with the with the exceptions for matters which would be disclosed by a
current survey (provided that a survey is reasonably obtainable prior to
Closing), mechanics' and material suppliers' liens, parties in possession or
other so called "standard exceptions" deleted, and shall contain exceptions only
for Permitted Encumbrances. The Title Policy shall include a non-imputation
endorsement insuring that the issuer of the Title Policy will not deny its
liability thereunder on the ground that the Company had knowledge of any matter
solely be reason of notice thereof imputed to it through any person who is an
officer or director of the Company prior to Closing by operation of law, whether
or not such person continues as an officer or director after Closing.
The Company, at the expense of Purchaser shall promptly order a
commitment for the Title Policy and, at least two (2) days prior to the date of
Closing, deliver it and copies of all exception documents referred to therein to
Purchaser. If reasonably obtainable prior to Closing, the Company, at the
expense of Purchaser also shall promptly obtain and, at least two (2) days prior
to the date of Closing, deliver to Purchaser a currently dated "as built" survey
of the Company Facility, prepared by a Tennessee registered land surveyor and
certified to the Company, Purchaser and the title insurance company, showing the
exact location, legal description, area and boundary lines of the Company
Facility, the location of all Improvements, the nature and location of all
easements and encroachments from or onto the Company Facility, the nature and
location of all utilities on and/or serving the Company Facility and all means
of ingress to and egress from the Company Facility (the "Survey"). The Survey
shall be certified to meet the Minimum Detail Standards adopted in 1997 by
ALTA/ASCM for Class A urban surveys, and shall include Items 1, 2, 3, 4, 6, 7a
and b, 8, 9, 10, 11, 13, 14, 15 and 16 thereto. The Survey shall be prepared by
a surveyor reasonably acceptable to Purchaser.
6.2 Conditions to Obligations of the Company. The obligation of the
Company to consummate this Agreement and the transactions contemplated hereby is
subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent:
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(a) Representations; Warranties; Covenants. Each of the
representations and warranties of Purchaser contained in Section 4 shall be true
and correct in all material respects as though made on and as of the Closing;
Purchaser shall, on or before the Closing, have performed all of its obligations
hereunder which by the terms hereof are to be performed on or before the
Closing; and Purchaser shall have delivered to the Company and the Stockholders
a certificate of the President of Purchaser dated on the Closing to such effect.
(b) Escrow Agreement. Purchaser shall have executed and delivered
the Escrow Agreement, substantially in the form attached hereto as Exhibit 1.3
(l).
(c) Agreements. Purchaser shall have executed and delivered the
Employment Agreements and the Non-Competes.
SECTION 7. CLOSING; CLOSING DATE.
Unless this Agreement shall have been terminated and the Merger herein
contemplated shall have been abandoned pursuant to a provision of Section 8
hereof and subject to compliance with the conditions hereto, a closing (the
"Closing") will be held on May 26, 1999, or on such other date which is mutually
acceptable to Purchaser and the Company at the offices of the Company,
commencing at 10:00 A.M. At such time and place, the documents referred to in
Section 6 hereof will be exchanged by the parties and, immediately thereafter,
the Articles of Merger will be filed by Newco and the Company with the
Secretaries of State of the State of Minnesota and the State of Tennessee;
provided, however, that if any of the conditions provided for in Section 6
hereof shall not have been met or waived by the date on which the Closing is
otherwise scheduled, then, subject to Section 8.1(d) hereof, the party to this
Agreement which is unable to meet such condition or conditions shall be entitled
(provided that such party is acting in good faith) to postpone the Closing for a
reasonable period of time by notice to the other parties until such condition or
conditions shall have been met (which such notifying party will seek to cause to
happen at the earliest practicable date) or waived. The date on which the
Closing occurs is herein referred to as the Closing Date.
As provided in Section 1.1 hereof, the Articles of Merger will provide
that the effective date of the Merger shall be 12:01 A.M., then current time in
Tennessee, June 1, 1999.
SECTION 8. TERMINATION.
8.1 Termination and Abandonment. This Agreement may be terminated and
the Merger may be abandoned before the Effective Time of the Merger,
notwithstanding any approval and adoption of this Agreement by the shareholders
of the Company or Newco:
(a) by the mutual consent of the Board of Directors of Purchaser
and the Company; or
(b) by Purchaser or the Company, if the shareholders of the
Company fail to approve the Merger at the meeting of such shareholders called to
vote upon the Merger; or
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(c) by Purchaser if there has been a material misrepresentation or
material breach on the part of the Company in the representations, warranties or
covenants of the Company set forth herein, or if there has been any material
failure on the part of the Company to comply with its obligations hereunder, or
by the Company if there has been a material misrepresentation or material breach
on the part of Purchaser or Newco in the representations, warranties or
covenants of Purchaser or Newco set forth herein, or if there has been any
material failure on the part of Purchaser or Newco to comply with their
obligations hereunder; or
(d) by the Board of Directors of either the Company or Purchaser,
at its discretion, if the Merger is not effective by June 30, 1999, except that
a party whose breach of this Agreement has caused a delay in the consummation of
the Merger shall not be entitled to terminate this Agreement pursuant to this
Section 8.1(d).
8.2 Termination Procedures. The power of termination provided for by
this Section 8 may be exercised for Purchaser or the Company only by its
respective President and will be effective only after written notice thereof,
signed on behalf of the party for which it is given by its President or
Vice-President or other duly authorized officer, in the case of Purchaser, or
its President in the case of the Company, shall have been given to the other. If
this Agreement is terminated in accordance with this Section 8, then the Merger
shall be abandoned without further action by the Company, Purchaser and Newco.
8.3 Liability Upon Termination. In the event of termination and
abandonment of the Merger pursuant to this Section 8, no party hereto shall have
any liability or further obligation to any other party hereto except a party
that is in material breach of its representations, warranties or covenants
hereunder shall be liable for damages incurred by the other parties hereto to
the extent that such damages are proximately caused by such breach.
8.4 Effect of Termination. All obligations of the parties hereunder
shall cease upon any termination pursuant to Section 8.1, provided, however,
that (a) the provisions of this Section 8, Section 3.8 (Confidentiality),
Section 5.3 (Confidentiality), Section 10.1, and Section 10.2 hereof shall
survive any termination of this Agreement; (b) nothing herein shall relieve any
party from any liability for a material error or omission in any of its
representations or warranties contained herein or a material failure to comply
with any of its covenants, conditions or agreements contained herein, and (c)
any party may proceed as further set forth in Section 8.5 below.
8.5 Right to Proceed. Anything in this Agreement to the contrary
notwithstanding, if any of the conditions specified in Section 6.1 hereof have
not been fulfilled, Purchaser shall have the right to proceed with the
transactions contemplated hereby without waiving any of its rights hereunder,
and if any of the conditions specified in Section 6.2 hereof have not been
fulfilled, the Company shall have the right to proceed with the transactions
contemplated hereby without waiving any of its rights hereunder.
8.6 Waiver. The Company may extend the time for the performance of any
of the obligations or other acts of Purchaser hereunder, waive any inaccuracies
in the representations and warranties of Purchaser contained herein or in any
document delivered pursuant hereto, or
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waive compliance by Purchaser with any of the agreements or conditions contained
herein. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by the Company. Purchaser may extend the time for
the performance of any of the obligations or other acts of the Company
hereunder, waive any inaccuracies in the representations and warranties of the
Company contained herein or in any document delivered pursuant hereto, or waive
compliance by the Company with any of the agreements or conditions contained
herein. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by Purchaser.
SECTION 9. INDEMNIFICATION.
9.1 Survival of Warranties.
(a) Each of the representations, warranties, agreements, covenants
and obligations herein or in any Schedule, Exhibit, certificate, agreement,
document, or financial statement delivered by any party to the other party
incident to the transactions contemplated hereby are material, shall be deemed
to have been relied upon by the other party and shall survive the Closing
regardless of any investigation and shall not merge in the performance of any
obligation by either party hereto.
(b) If any representation, warranty, covenant, or agreement of any
party in this Agreement or any Schedule, Exhibit, certificate, agreement,
document, or statement delivered pursuant hereto is qualified by materiality,
material adverse effect, or words of similar import (collectively, "Materiality
Conditions"), then such representation, warranty, covenant or agreement shall
not be considered breached until such Materiality Condition has been satisfied.
However, once the Materiality Conditions have been satisfied, so that a claim
can be made, the amount of any claim for indemnification under this Section 9
shall be determined without regard to such Materiality Conditions.
9.2 Indemnification by the Company and Through Escrow. Subject to the
limitations set forth below, the Company hereby agrees that, notwithstanding the
Closing, the delivery of instruments of conveyance, and regardless of any
investigation at any time made by or on behalf of any party hereto or of any
information any party hereto may have in respect thereof, it will save,
indemnify and hold Purchaser, its directors, officers, employees and agents and,
after Closing, the Surviving Corporation, its directors, officers, employees and
agents (hereinafter, collectively, "the Indemnitees") harmless from and against
any and all liabilities, losses, damages, claims, deficiencies, costs and
expenses (including, without limitation, reasonable attorney fees and other
costs and expenses incident to any suit, action or proceeding) arising out of or
resulting from, and will pay to the Indemnitees the amount of damages suffered
thereby together with any amount which they or any of them may pay or become
obligated to pay on account of:
(a) the breach or inaccuracy of any warranty or representation by
the Company herein;
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(b) any breach or failure to perform by the Company of any
material term, provision, covenant or condition hereunder;
(c) the failure by the Company to state or disclose a material
fact herein necessary in order to make the facts herein stated or disclosed not
misleading;
(d) any act performed, transaction entered into or state of facts
suffered to exist by the Company in violation of the terms of this Agreement;
and
(e) all Liabilities of the Company Group arising before the
Closing Date (whether absolute, accrued, contingent or otherwise), except for
(i) such Liabilities as are specifically reflected in the Interim Balance Sheet,
(ii) such Liabilities which arise in the ordinary course of business after the
date of such Interim Balance Sheet none of which such newly arisen Liabilities
shall have a material adverse effect on the Company, and (iii) such Liabilities
that are specifically disclosed herein or in the Disclosure Letter.
In the event of any claim by Indemnitees under this Section 9.2,
Indemnitees shall be entitled to exercise all remedies provided by law and/or
equity with respect thereto; provided that, after the Closing, all claims by
Indemnitees for monetary damages shall be made under the Escrow Agreement, with
the Company and the Surviving Corporation to have no further liability with
respect thereto.
If the Closing hereunder is held, the Company and the Surviving
Corporation will have no liability with respect to indemnification claims by the
Indemnitees. Rather all claims will be satisfied from the Escrow Fund in
accordance with the Escrow Agreement.
9.3 Procedure for Claims. Wherever the Indemnitees, or any of them,
have a claim for indemnification, they shall deliver notice of such claim to the
Agent specifying the claim and describing it in reasonable detail.
9.4 Limitations on Indemnification. Provided there has been no knowing
and intentional misrepresentation of a material fact, and no knowing and
intentional omission of facts or information necessary to make a representation
or warranty not materially misleading, by the Company, the indemnification
obligations of the Company are subject to each of the following limitations,
understandings or qualifications:
(a) Each of the representations and warranties made by the Company
in this Agreement shall survive for a period of two (2) years after the Closing
Date. After the expiration date of any representations and warranties no claim
for indemnification based on such representations and warranties may be asserted
by the Indemnitees, except that claims first asserted in writing with reasonable
detail before the expiration date may be pursued until they are finally
resolved.
(b) In the case of claims by Indemnitees for indemnification under
Section 9.2(a):
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(i) where a claim for indemnification relates to the Foreign
Subsidiaries or matters or activities of the Foreign Subsidiaries, no
claims can be made unless and until the amount of damages incurred by
the Indemnitees, in the aggregate for all such claims asserted, exceeds
$50,000; but once such amount is exceeded, Indemnitees may recover
indemnifiable damages relating to the Foreign Subsidiaries and
activities and matters relating thereto, back to dollar one;
(ii) in the case of all other claims by Indemnitees for
indemnification under Section 9.2(a) (that is, all claims other than
those relating to the Foreign Subsidiaries addressed in part (i)
above), no claims can be made unless and until the amount of damages
incurred by the Indemnitees, in the aggregate for all claims asserted,
exceeds $100,000; but once such amount is exceeded, Indemnitees may
recover indemnifiable damages back to dollar one.
In applying the foregoing provisions, it is understood that each of part (i) and
(ii) operates separately, so that the amount of claims governed by part (i) will
not count towards the threshold for claims in part (ii) and, correspondingly,
the amount of claims under part (ii) will not count towards the threshold for
claims under part (i). In the event that there is a claim which relates both to
the Foreign Subsidiaries and matters and activities thereto, and to the matters
subject to part (ii), then the amount of such claim shall be allocated, on a
reasonable basis, between parts (i) and (ii).
(c) Prior to Closing, all claims for indemnification by
Indemnitees shall be made against the Company. After Closing, all claims for
indemnification by the Indemnitees shall be made against and shall be satisfied
from the Escrow Fund in accordance with the Escrow Agreement.
9.5 Indemnification by Purchaser. Subject to the limitations set forth
below, Purchaser hereby agrees that, notwithstanding the Closing, the delivery
of instruments of conveyance, and regardless of any investigation at any time
made by or on behalf of any party hereto or of any information any party hereto
may have in respect thereof, it will indemnify and hold the Company -- but only
up until Closing --, and the Stockholders, harmless from and against any and all
liabilities, losses, damages, claims, deficiencies, costs and expenses
(including, without limitation, reasonable attorney fees and other costs and
expenses incident to any suit, action or proceeding) arising out of or resulting
from and will pay to the Indemnitees the amount of damages suffered thereby
together with any amount which they or any of them may pay or become obligated
to pay on account of:
(a) the breach or inaccuracy of any warranty or representation by
Purchaser herein;
(b) any breach or failure to perform by Purchaser of any material
term, provision, or covenant or condition hereunder;
(c) the failure by Purchaser to state or disclose a material fact
herein necessary in order to make the facts herein stated or disclosed not
misleading; and
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<PAGE>
(d) any act performed, transaction entered into or state of facts
suffered to exist by Purchaser in violation of the terms of this Agreement.
In the event of any claim by the Company or the Stockholders under this
Section 9.5, the Company and Stockholders, as applicable, shall be entitled to
exercise all remedies provided by law and/or equity with respect thereto.
If the Closing hereunder is held, the Company shall no longer benefit
from the foregoing indemnification.
9.6 Procedure for Claims. Wherever the Company or Stockholders have a
claim for indemnification, it shall deliver notice of such claim to Purchaser
specifying the claim and describing it in reasonable detail.
9.7 Limitation on Indemnification. Provided there has been no knowing
and intentional misrepresentation of a material fact, and no knowing and
intentional omission of facts or information necessary to make a representation
or warranty not materially misleading, by Purchaser the indemnification
obligations of Purchaser are subject to each of the following limitation,
understandings or qualifications:
(a) Each of the representations and warranties made by the
Purchaser in this Agreement shall survive for a period of two (2) years after
the Closing Date. After the expiration date of any representations and
warranties, no claim for indemnification based on such representations and
warranties may be asserted, except that claims first asserted in writing with
reasonable detail before the expiration date may be pursued until they are
finally resolved.
(b) No claim by the Company or Stockholders for indemnification
can be made unless and until the amount of damages incurred by the Company or
Stockholders, in the aggregate for all claims asserted, exceeds $100,000, but
once such amount has been exceeded, the Company or Stockholders may recover
indemnifiable damages back to dollar one.
9.8 Notice; Defense of Claims.
(a) The party which is entitled to indemnification hereunder (for
purposes of this Section 9.8, the "Indemnified Party") may make claims for
indemnification hereunder by giving written notice thereof to the party required
to indemnify (for purposes of this Section 9.8, the "Indemnifying Party") within
the period in which indemnification claims can be made hereunder. If
indemnification is sought for a claim or liability asserted by a third party,
the Indemnified Party shall also give written notice thereof to the Indemnifying
Party promptly after it receives notice of the claim or liability being
asserted, but the failure to do so, or any delay in doing so, shall not relieve
the Indemnifying Party from any liability, unless, and then only to the extent
that, the rights and remedies of the Indemnifying Party are prejudiced as a
result of the failure to give, or delay in giving, such notice. Such notice
shall summarize the bases for the claim for indemnification and any claim or
liability being asserted by a third party. Within 30 days after receiving such
notice, the Indemnifying Party shall give written notice to the Indemnified
Party stating whether it disputes the claim for indemnification and whether it
will
43
<PAGE>
defend against any third party claim or liability at its own cost and expense.
If the Indemnifying Party fails to give notice that it disputes an
indemnification claim within 30 days after receipt of notice thereof, it shall
be deemed to have accepted and agreed to the claim, which shall become
immediately due and payable.
(b) The Indemnifying Party shall be entitled to direct the defense
against a third party claim or litigation with counsel selected by it (subject
to the consent of the Indemnified Party, which consent shall not be unreasonably
withheld) as long as the Indemnifying Party is conducting a good faith and
diligent defense. Notwithstanding the foregoing, the obligations of the
Indemnifying Party hereunder as to such third party claim or litigation shall
include taking all steps necessary in the defense, settlement, or compromise of
such claim or litigation and holding the Indemnified Party harmless from and
against any and all damages, liabilities, losses and expenses (including,
without limitation, reasonable fees of counsel) of any kind or nature whatsoever
(whether or not arising out of third-party claims and including all amounts paid
in investigation, defense or settlement of the foregoing) caused by or arising
out of any settlement or compromise approved by the Indemnifying Party or any
judgment in connection with such claim or litigation. The Indemnifying Party
shall not, in the defense of such third party claim or any litigation resulting
therefrom, consent to entry of any judgment (other than a judgment of dismissal
on the merits without costs) except with the written consent of the Indemnified
Party, or enter into any settlement or compromise (except with the written
consent of the Indemnified Party) which does not include as an unconditional
term thereof the giving by the claimant or the plaintiff to the Indemnified
Party a full release from all liability in respect of such claim or litigation.
The Indemnified Party shall at all times have the right to fully participate in
the defense of a third party claim or liability at its own expense directly or
through counsel; provided, however, that if the named parties to the action or
proceeding include both the Indemnifying Party and the Indemnified Party and the
Indemnified Party is advised that representation of both parties by the same
counsel would be inappropriate under applicable standards of professional
conduct, the Indemnified Party may engage separate counsel at the expense of the
Indemnifying Party.
(c) If the Indemnifying Party shall not give notice of its intent
to dispute and defend a third party claim or liability or litigation resulting
therefrom after receipt of notice from the Indemnified Party, or if such good
faith and diligent defense is not being or ceases to be conducted by the
Indemnifying Party, the Indemnified Party shall have the right, at the expense
of the Indemnifying Party, to undertake the defense of such claim or liability
in such manner as it deems appropriate (with counsel selected by the Indemnified
Party), and to compromise or settle such claim or litigation on such terms as it
may deem appropriate, exercising reasonable business judgment.
(d) The Indemnifying Party shall promptly reimburse the
Indemnified Party for the amount of any settlement or compromise in connection
with, or any judgment rendered with respect to, any claim by a third party in
such litigation and for all damages, liabilities, losses and expenses
(including, without limitation, reasonable fees of counsel) of any kind or
nature whatsoever (whether or not arising out of third-party claims and
including all amounts paid in investigation, defense or settlement of the
foregoing) incurred by the Indemnified Party in
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connection with the defense against such claim or litigation, whether or not
resulting from, arising out of, or incurred with respect to, the act of a third
party.
(e) If the third party claim or liability is one that by its
nature cannot be defended solely by the Indemnifying Party, the Indemnified
Party shall make available such information and assistance in connection
therewith as the Indemnifying Party may reasonably request and shall cooperate
with the Indemnifying Party in such defense at the expense of the Indemnifying
Party.
SECTION 10. MISCELLANEOUS.
10.1 Fees and Expenses.
(a) Each of the parties will bear its own expenses in connection
with the negotiation and the consummation of the transactions contemplated by
this Agreement, and no expenses of the Company or the Stockholders relating in
any way to the purchase and sale of the Company Shares hereunder and the
transactions contemplated hereby, including, without limitation, brokerage,
legal, accounting or other professional expenses of the Company or any
Stockholder (collectively, the "Seller Expenses"), shall be charged to or paid
by the Company or Purchaser; provided only, however, that Seller Expenses may be
paid as provided in Section 1.6(a). The foregoing shall not limit, however, any
party's right to include expenses in any claim for damages against any other
party who breaches any legally binding provision of this Agreement.
(b) Each Stockholder will pay all costs, if any, incurred, whether
at or subsequent to the Closing, in connection with the transfer of the Company
Shares owned by such Stockholder to Purchaser as contemplated by this Agreement,
including without limitation, all transfer taxes and charges applicable to such
transfer, and all costs of obtaining permits, waivers, registrations or consents
with respect to any assets, rights or contracts of the Company.
10.2 Governing Law. This Agreement shall be construed under and
governed by the internal laws of the State of Tennessee without regard to its
conflict of laws provisions.
10.3 Notices. Any notice, request, demand or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been given if delivered or sent by facsimile transmission, upon receipt, or if
sent by registered or certified mail, upon the sooner of the date on which
receipt is acknowledged or the expiration of three days after deposit in United
States post office facilities properly addressed with postage prepaid. All
notices to a party will be sent to the addresses set forth below or to such
other address or person as such party may designate by notice to each other
party hereunder:
TO PURCHASER: TSI Incorporated
- ------------- 500 Cardigan Road
St. Paul, MN 55164
Attn: President
Facsimile: (651) 483-1220
45
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With a copy to: John E. Brower, Esq.
Gray, Plant, Mooty, Mooty & Bennett
3400 City Center
33 South Sixth Street
Minneapolis, MN 55402-3796
Facsimile: (612) 333-0066
TO COMPANY: Environmental Systems Corporation
- ----------- 200 Tech Center Drive
Knoxville, TN 37912
Attn: Mark J. Margetts
With a copy to: G. Philip Anderson, Esq.
Anderson and Rankin
100 Winners Circle, Suite 150
Brentwood, NJ 37027
TO THE STOCKHOLDERS: Mark J. Margetts,
as Agent for the Stockholders
3633 Topside Road
Knoxville, TN 37920
With a copy to: G. Philip Anderson, Esq.
Anderson and Rankin
100 Winners Circle, Suite 150
Brentwood, NJ 37027
Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
10.4 Entire Agreement. This Agreement, including the Disclosure Letter,
the Schedules and Exhibits referred to herein and the other writings
specifically identified herein or contemplated hereby, is complete, reflects the
entire agreement of the parties with respect to its subject matter, and
supersedes all previous written or oral negotiations, commitments and writings,
including, without limitation, the Memo of Understanding, dated April 7, 1999,
between the parties hereto in respect of the transactions contemplated herein,
which Letter of Intent shall be completely superseded by the representations,
warranties, and covenants of the parties and the other terms and conditions
contained herein.
10.5 Assignability; Binding Effect. This Agreement shall only be
assignable by Purchaser to a corporation or partnership controlling, controlled
by or under common control
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<PAGE>
with Purchaser upon written notice to the Company, and such assignment shall not
relieve Purchaser of any liability hereunder. This Agreement may not be assigned
by the Company without the prior written consent of Purchaser. This Agreement
shall be binding upon and enforceable by, and shall inure to the benefit of, the
parties hereto and their respective successors and permitted assigns.
10.6 Captions and Gender. The captions in this Agreement are for
convenience of reference only and shall not affect the construction or
interpretation of any term or provision hereof. The use in this Agreement of the
masculine pronoun in reference to a party hereto shall be deemed to include the
feminine or neuter, as the context may require.
10.7 Execution in Counterparts. For the convenience of the parties and
to facilitate execution, this Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same document.
10.8 Amendments. This Agreement may not be amended or modified, nor may
compliance with any condition or covenant set forth herein be waived, except by
a writing duly and validly executed by each party hereto, or in the case of a
waiver, the party waiving compliance.
10.9 Publicity and Disclosures. Purchaser will issue a press release
relating this Agreement promptly after its execution. Except as and to the
extent required by law, and except for such press release, without the prior
written consent of the other party, neither Purchaser, the Company, nor any
Stockholder shall, and each shall direct its representatives not to, directly or
indirectly, make any public comment, statement, or communication with respect to
the transactions between the parties or any of the terms, conditions, or other
aspects of the transactions contemplated herein or any confidential information,
except (i) to such of their respective representatives as need to know such
information for the purpose of evaluating or otherwise effecting the
transactions contemplated herein, or (ii) to the employees of the Company in
connection with the Closing. If a party is required by law to make any such
disclosure, it shall first provide to the other party the content of the
proposed disclosure, the reasons that such disclosure is required by law, and
the time and place that such disclosure will be made.
Except as otherwise required by law or the rules of the National
Association of Securities Dealers, Inc., and except for Purchaser's press
release, so long as this Agreement is in effect, neither Purchaser nor the
Company shall issue or cause the publication of any press release with respect
to the transactions contemplated by this Agreement without the consent of the
other party, which consent shall not be unreasonably withheld or delayed.
10.10 No Third Party Rights. Except as otherwise provided in this
Agreement, nothing herein expressed or implied is intended, nor shall be
construed, to confer upon or give any person, firm or corporation, other than
Purchaser and the Company and their respective security holders, any rights or
remedies under or by reason of this Agreement.
10.11 Consent to Jurisdiction. Each of the parties hereby consents to
personal jurisdiction, service of process and venue in the federal or state
courts of Tennessee for any
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claim, suit or proceeding arising under this Agreement, or in the case of a
third party claim subject to indemnification hereunder, in the court where such
claim is brought.
10.12 Schedules and Exhibits. This Agreement shall be deemed to have
incorporated by reference the Disclosure Letter and all Schedules and Exhibits
referred to herein to the same extent as if such Schedules and Exhibits were
fully set forth herein.
10.13 Arbitration. In the event of any controversy, claim or dispute
arising out of this Agreement or the transactions contemplated hereby, said
controversy, claim or dispute (hereinafter a "Matter") shall be settled by
binding arbitration before a single arbitrator in Cincinnati, Ohio, in
accordance with the rules and procedures then obtaining of the American
Arbitration Association, and the award by the arbitrator shall be final and
binding and may be enforced in any court having jurisdiction. The parties shall
make available to the arbitrator all books, records and other information
requested by the arbitrator. The arbitrator may, in his discretion, and as a
cost of arbitration, employ experts to assist it in making its determination.
Each party shall have access during normal business hours to such books, records
and other data as is reasonably necessary to analyze the Matter in dispute with
the right to copy any of the same at its expense. In any such arbitration, the
prevailing party shall be entitled to recover, in addition to the basic award of
the arbitrator, its reasonable costs and expenses of the arbitration, including
reasonable attorneys' fees. Where each party prevails in matters contested in
the arbitration, such costs and expenses shall be borne in such proportion as
the arbitrator may determine, consistent with the principal that the prevailing
party should recover its costs and expenses of arbitration.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
PURCHASER:
----------
TSI INCORPORATED.
By /s/James E. Doubles
-------------------------------------------
Name: James E. Doubles
Title: Chairman, President & CEO
NEWCO:
-----
TSI TENNNESSEE, INC.
By /s/James E. Doubles
-------------------------------------------
Name: James E. Doubles
Title: Chairman, President & CEO
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COMPANY:
-------
ENVIRONMENTAL SYSTEMS CORPORATION
By: /s/ Mark J. Margetts
-------------------------------------------
Name: Mark J. Margetts
Title: President & CEO
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SCHEDULES AND EXHIBITS
----------------------
Schedules
- ---------
1--Common Stockholders
Exhibits
- --------
1.3 (g)--Escrow Agreement
1.4 (c)-1--Affidavit and Indemnity
1.4 (c)-2--Transfer Letter
6.1 (f)--Opinion of Counsel
6.1 (l)--Releases
50
Exhibit 23 Consent of Independent Auditors
We consent to the use of our report dated February 25, 1999, except for Note 11,
as to which the date is May 12, 1999, with respect to the consolidated financial
statements of Environmental Systems Corporation and subsidiaries for the years
ended December 31, 1998 and 1997, included in the Form 8-K of TSI Incorporated
filed June 10, 1999.
/s/ Coulter & Justus, P.C.
June 8, 1999
Exhibit 99 News Release Robert F. Gallagher, CFO
(651) 490-2756
TSI ACQUIRES ENVIRONMENTAL SYSTEMS CORPORATION
May 26, 1999
TSI Incorporated, Shoreview, Minnesota announced today that it has successfully
completed the due diligence process and has acquired the stock, assets and
operations of Environmental Systems Corporation. ESC, located in Knoxville,
Tennessee, posted net sales of $23 million and net earnings of $1.9 million for
the year ended December 31, 1998. TSI announced its intent to acquire ESC in an
all-cash transaction on May 11. ESC will continue to operate at its present
location as a wholly owned subsidiary of TSI, and the management team will
remain intact, reporting to James Doubles, TSI's Chairman and CEO.
Doubles said, "I am extremely pleased that the acquisition of Environmental
Systems Corporation, our largest to date, went so well and I welcome all ESC
employees to the TSI family. I am also pleased that ESC's management team will
remain and help TSI and ESC grow together. Both organizations have strong
technology bases and successful track records. This combination allows us to
leverage that technology in key areas. Most notably, we gain a much stronger
presence in the outdoor environmental monitoring market which offers excellent
potential for the future."
This press release contains forward-looking statements that involve a number of
risks and uncertainties. Important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements
include: uncertainties relating to competition and technological change,
setbacks in product development programs, slower-than-anticipated customer
acceptance of new products, delays or cancellation of government procurements,
dependence on certain key industries, and risk associated with the company's
acquisition strategy and international operations.
TSI is a diversified, worldwide leader in providing measuring instruments for
two major market areas: the safety, comfort and health of people; and
productivity and quality improvement. The company's common stock is traded on
the national over-the-counter market under the Nasdaq symbol TSII. For more
information, visit the company's web site at www.tsi.com.
