<PAGE>
As filed with the Securities and Exchange Commission on March 4, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
HOSPITALITY DESIGN & SUPPLY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 5099 94-3304637
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------
5719 Overland Avenue
Culver City, California 90230
(310) 253-9751
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Roger M. Laverty
Chief Executive Officer
Hospitality Design & Supply, Inc.
5179 Overland Avenue
Culver City, California 90230
(310) 253-9751
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Daniel J. Winnike, Esq. Thomas A. Bevilacqua, Esq.
John E. Stoner, Esq. Armando Castro, Esq.
Howard, Rice, Nemerovski, Canady, Brobeck, Phleger & Harrison LLP
Falk & Rabkin Two Embarcadero Place
A Professional Corporation 2200 Geng Road, Building 2
1755 Embarcadero Road, Suite 200 Palo Alto, California 94303
Palo Alto, California 94303 (650) 424-0160
(650) 842-8500
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered(1) per Share(2) Offering Price(2) Registration Fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value per
share............................. 7,187,500 $13.00 $93,437,500 $25,976
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1)Includes 937,500 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2)Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 4, 1999
[HDSI LOGO]
6,250,000 Shares
Common Stock
---------------
Hospitality Design & Supply, Inc. is offering 6,250,000 shares of its common
stock. This is Hospitality Design & Supply, Inc.'s initial public offering and
no public market currently exists for its shares. We intend to apply to have
the shares we are offering approved for quotation on the Nasdaq National Market
under the symbol "HDSI." We anticipate that the initial public offering price
will be between $11.00 and $13.00 per share.
---------------
Investing in the common stock we are offering involves risks.
See "Risk Factors" beginning on page 9.
---------------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price.............................................. $ $
Underwriting Discounts and Commissions............................. $ $
Proceeds to HDSI................................................... $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Hospitality Design & Supply, Inc. has granted the underwriters a 30-day
option to purchase up to an additional 937,500 shares of common stock to cover
over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the
shares of common stock to purchasers on , 1999
---------------
BancBoston Robertson Stephens
The Robinson-Humphrey Company
Thomas Weisel Partners LLC
The date of this prospectus is , 1999
<PAGE>
[GRAPHICS OF PRODUCTS AND FACILITIES APPEAR HERE]
INSIDE FRONT COVER: PICTURES DEPICTING THE FOLLOWING PRODUCTS AND FACILITIES:
PICTURE #1:
[COMMERCIAL KITCHEN INTERIOR INCLUDING COOKING EQUIPMENT, WORK
SPACES AND HOOD VENTILATION]
PICTURE #2:
[INTERIOR OF ECONOMY RESTAURANT FIXTURES, INC. INCLUDING GONDOLAS
STOCKED WITH RESTAURANT EQUIPMENT AND RELATED MERCHANDISE AND
SALES COUNTERS]
PICTURE # 3:
[EXTERIOR ELEVATION OF EAST BAY RESTAURANT SUPPLY, INC. SHOWING
SIGNAGE AND ACCESS]
2
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Until , 1999, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 15
The Company.............................................................. 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 21
Business................................................................. 41
Management............................................................... 47
Certain Transactions..................................................... 50
Principal Stockholders................................................... 53
Description of Capital Stock............................................. 54
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 58
Legal Matters............................................................ 59
Experts.................................................................. 59
Additional Information................................................... 59
Index to Financial Statements............................................ F-1
</TABLE>
---------------------
When we refer to "HDSI" in this prospectus, we mean Hospitality Design &
Supply, Inc. and its consolidated subsidiaries. Unless the context indicates
otherwise, references to HDSI assume the completion of the acquisitions of the
founding companies.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in the common stock we are offering. To
understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and the financial statements.
The Company
HDSI was formed in June 1998 to become a full-service national distributor
of foodservice equipment and supplies. We have entered into definitive
agreements to acquire the six founding foodservice equipment and supply
companies upon consummation of this offering. The founding companies have been
in business for periods ranging from 18 to 108 years. Upon the consummation of
this offering, we will be one of the largest providers of foodservice equipment
and supplies in the United States.
We believe that our size and presence in multiple markets will allow us to
offer larger regional and national customers value-added products and improved
service while still maintaining our focus on local customers. Our products and
services are used by all businesses that sell food and beverages, including
regional and national restaurant chains, independent restaurants, hotels,
businesses, schools, health care facilities, casinos, stadiums and prisons. In
1998, our pro forma combined net revenues were $129.7 million. Over the past
two years, the pro forma combined net revenues of the founding companies have
increased at a compound annual rate of approximately 13%.
We maintain over 10,000 stock-keeping units, commonly referred to as skus,
and serve more than 25,000 customers through a network of eleven facilities
located in four states. Our products include heavy equipment, such as ranges
and refrigeration units, as well as smaller disposable items, such as china,
glassware and silverware. Our revenues come from the sale of equipment and
supplies. More than 40% of these sales are replacement driven. We also offer a
full range of design, construction and installation services for restaurants
and other foodservice facilities. These services are commonly referred to in
the industry as contract work.
In 1998, the foodservice equipment and supply industry had revenues of $13
billion, while the entire foodservice industry had revenues of $351 billion.
Comprised of over 12,000 companies, the foodservice equipment and supply
industry is highly fragmented. We believe most of these companies are small,
owner operated companies with limited access to capital. According to recent
surveys by Foodservice Equipment and Supply magazine, the industry has grown at
5% per year over the last seven years.
Our goal is to become the largest national single-source distributor of
foodservice equipment and supplies in the United States. We intend to grow by:
. acquiring and integrating companies
. cross-selling between the founding companies to an expanded customer base
. expanding complementary products and services
. opening new cash and carry stores
. expanding alternative sales channels, including the Internet
Our management team includes executives with extensive experience in both
foodservice and consolidating industries. They will implement and pursue the
following operating strategies and efficiencies:
. utilizing volume purchasing to reduce product cost
. enhancing inventory management
. providing strong incentives to management
. maintaining a decentralized management structure with centralized
administration
. adopting best policies and procedures
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by HDSI.................... 6,250,000 shares
Common stock to be outstanding after this
offering...................................... 9,474,919 shares
Use of proceeds................................. To pay the cash portion of
the purchase price for the
founding companies and for
general corporate purposes,
including future
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol.......... HDSI
</TABLE>
Unless otherwise indicated, references to numbers and percentages of shares
of common stock assume that the underwriters' over-allotment option is not
exercised.
HDSI was incorporated in June 1998 in Delaware. Our executive offices are
located at 5719 Overland Avenue, Culver City, California 90230 and our
telephone number is (310) 253-9751.
5
<PAGE>
Summary Pro Forma Combined Financial Data
(In thousands, except shares and per share data)
We will complete the acquisitions of the founding companies simultaneously
with consummation of this offering. The following unaudited pro forma combined
statement of operations data present financial data for HDSI adjusted to give
effect to the acquisitions of the founding companies and consummation of this
offering and application of the net proceeds from the offering as if these
events occurred on January 1, 1998. The following financial data also gives
effect to pro forma adjustments described in "Notes to Unaudited Pro Forma
Combined Financial Statements" elsewhere in this prospectus. The unaudited pro
forma combined balance sheet data give effect to the acquisition of the
founding companies, to the sale of 134,120 shares of preferred stock in January
1999 and to this offering and the application of the estimated net proceeds
from the offering as if they occurred on December 31, 1998. The unaudited pro
forma data is not necessarily indicative of the results we would have obtained
had these events actually occurred on such date or of future results. See
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Unaudited Pro Forma Combined
Financial Statements and historical financial statements of the founding
companies, including, in each case, the notes thereto, appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Pro Forma
Combined
Year Ended
December 31, 1998
-----------------
<S> <C>
Statement of operations data:
Net revenue................................................... $ 129,700
Cost of revenue............................................... 104,885
----------
Gross profit.................................................. 24,815
Selling, general and administrative expenses.................. 20,117
Goodwill amortization......................................... 1,082
----------
Income from operations........................................ 3,616
Interest expense and other, net............................... (111)
----------
Income before income taxes.................................... 3,505
Income tax expense............................................ 1,605
----------
Net income.................................................... $ 1,900
==========
Basic net income per share ................................... $ 0.20
==========
Diluted net income per share.................................. $ 0.19
==========
Shares used in computing(1)
Basic net income per share................................... 9,474,919
==========
Diluted net income per share................................. 9,856,042
==========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Combined
At December 31,
1998
---------------
<S> <C>
Balance sheet data:
Working capital................................................. $ 36,870
Total assets.................................................... 103,239
Long-term obligations, excluding current installments........... 246
Stockholders' equity............................................ 81,952
</TABLE>
- --------
(1) Pro forma combined shares used in computing basic net income per share
includes (a) 1,639,375 shares issued in connection with the formation of
HDSI; (b) 316,474 shares on conversion of Series A Preferred Stock issued
to investors; (c) 1,269,070 shares to be issued to owners of the founding
companies in connection with the acquisitions of such companies; and
(d) 6,250,000 shares to be issued in this offering. Pro forma combined
shares used in computing diluted net income per share further includes
381,123 shares reflecting the incremental effect of options.
7
<PAGE>
Summary Individual Company Financial Data
(In thousands)
The following table presents summary income statement data for each of the
founding companies for each of their three most recent fiscal years. The
historical income statement data shown below do not give effect to the pro
forma adjustments related to contractually agreed upon reductions in salary,
bonuses and benefits of the owners of the founding companies, or any other pro
forma adjustments reflected in the Unaudited Pro Forma Combined Financial
Statements included elsewhere in this prospectus. The income statement data
presented below has been derived from audited financial statements for certain
of the founding companies for certain periods as reflected in the historical
financial statements of such founding companies included elsewhere in this
prospectus. The fiscal years presented for each of the founding companies end
on December 31, except for East Bay's fiscal year, which ends on September 30,
Curtis' fiscal year, which for 1996 ended on June 30, 1996, and Castino's
fiscal year for 1996 and 1997, which ended on March 31, 1997 and 1998,
respectively.
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Raygal:
Revenues............................................... $22,213 $33,678 $33,038
Income from operations................................. 557 1,853 1,725
East Bay:
Revenues............................................... $20,368 $23,681 $29,916
Income from operations................................. 153 321 564
Economy:
Revenues............................................... $16,676 $19,884 $22,703
Income from operations................................. 674 688 916
Curtis:
Revenues............................................... $22,839 $19,933 $20,279
Income from operations................................. 568 164 650
Bintz:
Revenues............................................... $12,600 $13,097 $17,835
Income from operations................................. 452 307 740
Castino:
Revenues............................................... $ 5,729 $ 5,921 $ 5,929
Income from operations................................. 134 109 17
</TABLE>
8
<PAGE>
RISK FACTORS
You should carefully consider the following risks and other information in
this prospectus before purchasing the common stock we are offering.
We Have Never Operated as a Combined Entity
HDSI was founded in June 1998 but has not conducted any operations or
generated any revenues. We have entered into definitive agreements to acquire
the founding companies simultaneously with the consummation of this offering.
To date, the founding companies have been operating as independent entities. We
may not be able to institute the necessary systems and procedures, including
accounting and financial reporting systems, to manage the founding companies as
a combined enterprise. Our management group has been assembled only recently
and may not be able to manage the combined entity or implement our operating
strategy and acquisition program effectively.
During the period from June 1998 (inception) through the consummation of
this offering, we incurred a loss because we had no revenues and incurred costs
relating to our organization, our search for acquisition candidates and our
development of the management team and infrastructure required to support our
anticipated growth. The Unaudited Pro Forma Combined Financial Statements
included elsewhere in this prospectus give effect to the acquisitions of the
founding companies, as more fully described in the notes to such statements.
Such pro forma results, however, are not necessarily indicative of the actual
results of operations that would have occurred had the acquisitions occurred at
the beginning of the period presented or of the results that may occur in the
future. We may not achieve profitability in the near term, if at all.
We May Be Unable to Integrate the Companies We Acquire
We may not be able to integrate the founding companies or any company that
we acquire after this offering without encountering substantial costs, delays
or other financial or operational difficulties. Some of the additional costs
that we might incur include restructuring charges associated with acquisitions
or other non-recurring charges associated with changes of control. Our
inability to successfully integrate the founding companies or any company that
we acquire after this offering could have a material adverse effect on our
financial condition and results of operations. Furthermore, acquisitions
(including the acquisitions of the founding companies) involve a number of
risks besides inability to integrate the acquired company effectively. These
risks include:
. failure of an acquired business to achieve expected results
. diversion of management's attention
. failure to retain key personnel, customers and suppliers of an acquired
business
. risks associated with unanticipated conditions, events or liabilities
We Will Need to Acquire Additional Companies to Keep Growing
One of our strategies is to increase revenues and the markets we serve
through the acquisition of additional foodservice equipment and supply
companies. We may not be able to identify suitable candidates for such
acquisitions or acquire them on acceptable terms. In addition, we may face
competition for acquisition candidates from other foodservice equipment and
supply companies. Some of these companies have greater financial resources than
we do and some are divisions of large public companies. Furthermore, as
consolidation in the industry continues, the prices for attractive acquisition
candidates may increase, and the future operating results of companies we
acquire may not justify their market prices. If we fail to acquire additional
businesses, our ability to grow in the future would be limited.
9
<PAGE>
We May Be Unable to Manage Our Growth Effectively
Our strategy is to grow internally and through acquisitions, but we may be
unable to manage our growth effectively. We expect to spend significant time
and resources evaluating and completing acquisitions and integrating the
companies we acquire. Our systems, procedures and controls may not be adequate
to support our operations as they expand. Any future growth will impose
significant added responsibilities on our senior management, including the need
to recruit and integrate new senior level managers and executives. If we are
unable to manage our growth effectively, or to attract and retain additional
qualified management, our financial condition and results of operations could
be adversely effected.
We May Be Unable to Obtain Funds for Future Acquisitions
We cannot readily predict the timing and success of our future acquisition
efforts and the associated capital requirements. If we do not have sufficient
cash to finance our acquisition program, our growth could be limited. Currently
we intend to finance future acquisitions by using a combination of common
stock, cash and debt. To the extent we issue shares of common stock to finance
future acquisitions, the interests of existing stockholders will be diluted. If
our common stock does not maintain a sufficient market value, or if potential
acquisition candidates are unwilling to accept common stock as part of their
consideration, we may be required to utilize more cash, if available, or debt.
Upon completion of this offering, we will have $26.7 million of net proceeds
remaining for future acquisitions and working capital after payment of the cash
portion of the purchase price for the founding companies and related expenses.
We may not be able to obtain the financing needed for our acquisition program
on acceptable terms. See "Risk Factors--Dependence on Acquisitions for Future
Growth" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Combined Liquidity and Capital Resources."
Our Strategy for Operating as a Combined Entity May Be Ineffective
Our strategy for operating HDSI as a combined entity might not be
effective. Key elements of our strategy include increasing the revenues and
improving the profitability of the founding companies and other companies that
we subsequently acquire. We intend to operate the founding companies and other
subsequently acquired businesses on a decentralized basis, with management of
each founding company retaining responsibility for day-to-day operations as
well as profitability and growth. If we fail to implement proper overall
business controls, or if management teams of acquired businesses are not
successful in adopting an integrated operating approach, this decentralized
operating strategy could result in inconsistent operating and financial
practices. This, in turn, could adversely affect our revenues and
profitability. Our ability to improve profitability will be affected by various
factors, including the costs associated with centralizing administrative
functions and our ability to benefit from the elimination of redundant assets
and operations and enhanced purchasing power. Many of these factors are beyond
our control, and our operating and internal growth strategies may not be
successful.
Our Quarterly Results May Fluctuate
Our quarterly results of operations may be subject to fluctuations as a
result of:
. timing and cost of acquisitions
. timing of inventory purchases
. timing and amount of rebates from suppliers
. fluctuations in consumer demand
. changes in our relationships with certain equipment suppliers
. extreme weather conditions
. general economic conditions
10
<PAGE>
As a result of these and other factors, our quarterly operating results are
subject to fluctuation, may not be indicative of the results to be expected for
the full year and are not necessarily meaningful as an indication of our future
performance. In addition, from time to time, our operating results may not meet
the expectations of securities analysts and investors. In such event, the
market price of our common stock could suddenly decline.
Our Business Depends on General Economic Conditions and on Factors that Affect
Our Industry as a Whole
Our results of operations will depend on factors affecting the foodservice
equipment and supply industry generally. Our revenues and earnings are
especially sensitive to events that affect the health of the restaurant
business. A number of factors could result in a temporary or longer-term
overall decline in demand for foodservice equipment and supply services,
including:
. a decline in consumer spending
. a decline in consumer confidence
. a decline in restaurant use
. a decline in the number of new restaurants being opened or remodeled
. higher unemployment
The occurrence of any of these events could have a material adverse effect
on our financial condition and results of operations.
We Will Have to Recognize Significant Accounting Charges When We Acquire
Companies
We expect that current accounting rules will require that we account for
acquisitions under the purchase method of accounting for the foreseeable
future. Acquisitions accounted for under the purchase method are likely to
generate goodwill, or other intangible assets. Goodwill generally represents
the difference between the purchase price of an acquired entity and the fair
value of the tangible and separately measurable intangible net assets of that
entity. Consequently, acquisitions of new businesses typically will result in
substantial amortization charges. Although non-cash in nature, such charges
could have a significant impact on our reported operating results. Acquisitions
also may force us to recognize significant one-time related charges. As a
result of the acquisitions of the founding companies, we will record annual
amortization expense for acquisition-related intangible assets of $1.1 million.
Taking into account these acquisitions, our pro forma as adjusted balance sheet
as of December 31, 1998 includes an amount designated as goodwill that
represents 41.9% of pro forma total assets and 52.8% of pro forma total
stockholders' equity.
Generally accepted accounting principles require that goodwill and all
other intangible assets be amortized by the asset holder over the period during
which the holder expects to derive benefit from the asset. With respect to the
goodwill recorded in connection with the acquisitions of the founding
companies, we have determined that period to be 40 years. It may be that we
have not accurately determined this amortization period. Further, if we fail to
recognize separately a material intangible asset having an actual benefit
period of less than 40 years, or if we have overestimated the benefit period
for certain material portions of the goodwill recorded in connection with the
acquisitions, then:
. earnings reported in periods immediately following the acquisitions will
be overstated
. in later years, we will be burdened by a continuing charge against
earnings without the associated benefit to income that generally has
been factored into the purchase price paid
If we conclude at any time that we have not accurately determined the
goodwill recorded in connection with the acquisitions of the founding
companies, this could result in a significant charge against our earnings.
11
<PAGE>
Our Industry Is Very Competitive
We are engaged in a highly fragmented and competitive industry. Competition
is based primarily on service, selection, location and price. We compete with a
large number of foodservice equipment and supply companies on a regional and
local basis. Some of these competitors have greater financial resources than us
and some are divisions of large public companies. We may also face competition
for acquisition candidates from such companies, some of which are also
attempting to consolidate different foodservice equipment and supply
businesses. Other smaller foodservice equipment and supply businesses may also
seek to effect acquisitions from time to time.
We Need to Create and Implement an Integrated Information Technology System
We need to create and implement an integrated information technology
system. Because HDSI was formed only recently, for some time after this
offering each of the founding companies will use its own accounting and
financial reporting systems. We are beginning the process of selecting and
implementing the systems required to consolidate accounting and financial
reporting activities at our headquarters in Culver City, California. We
anticipate that we will need to upgrade and expand our information technology
systems on an ongoing basis as we expand operations and complete further
acquisitions. We may encounter unexpected delays and costs in connection with
implementing such systems or such systems may not function in accordance with
our expectations when installed.
We Rely Heavily on Our Management Team
We will be highly dependent on the continuing efforts of our executive
officers and, due to our decentralized operating strategy, the senior
management of the founding companies. In addition, we are likely to depend on
the senior management of any significant business we acquire in the future. If
any of these persons, particularly Roger M. Laverty, our President and Chief
Executive Officer, John M. Richman, our Chairman of the Board, and James
Castleberry, our Executive Vice President and Chief Financial Officer, does not
continue in his or her management role until we are able to attract and retain
a qualified replacement, this could have a material adverse impact on our
financial condition and results of operations.
We Rely on Subcontractors to Do Contract Work
We rely on subcontractors to do a significant portion of our construction,
fabrication and installation work. We typically offer construction, fabrication
and installation services in conjunction with our design services. If we were
unable to offer all of these services, we would be less successful in obtaining
contract work. Furthermore, we frequently sell equipment and supplies to our
contract customers. Therefore, a decrease in our contract business would also
result in a decrease in our equipment and supply sales.
A significant portion of our revenues from design, construction,
fabrication and installation work are, and will continue to be, generated under
fixed price contracts. We must estimate the costs of completing a particular
project, and the cost of labor and materials may vary from our original
estimate. These variations and other risks inherent in performing fixed price
contracts may result in different revenue and gross profits from those we
originally estimated, which could result in reduced profitability or losses on
projects. Depending upon the size of a particular project, variations from
estimated contract costs could have a significant impact on our operating
results for any fiscal quarter or year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We Are Dependent on Our Suppliers
Certain types of foodservice equipment and supplies are available from only
a limited number of sources. If for any reason those sources became unavailable
to us, we may not be able to continue to sell such equipment unless an
alternative supplier is located. In addition, some of our customers may prefer
to purchase
12
<PAGE>
particular brands of equipment. An inability to obtain certain types of
equipment could adversely impact our sales and our relationship with customers
that require such equipment.
We Could Have Labor Problems if More of Our Employees Unionize
If more of our employees unionize, or if we acquire a company with
unionized employees, we could incur higher ongoing labor costs and could
experience a significant disruption of operations in the event of a strike or
other work stoppage. None our employees are subject to collective bargaining
agreements and most of the employees of the founding companies currently are
not subject to such agreements. Nevertheless, certain employees of the founding
companies are unionized and additional employees may unionize in the future.
Directors, Officers and Founding Company Shareholders Will Have Control of HDSI
Following our acquisitions of the founding companies and the consummation
of this offering, our executive officers and directors as well as former
stockholders of the founding companies will beneficially own approximately
31.0% of the outstanding shares of common stock (28.2% if the underwriters'
over-allotment option is exercised in full). If acting in concert, they will be
able to exercise substantial control over our affairs, to elect the entire
board of directors and to control the outcome of any matter submitted to a vote
of stockholders. See "Principal Stockholders."
We Have Included Certain Anti-Takeover Provisions in Our Charter Documents
We have included certain provisions in our charter documents that could
make it more difficult to effect a change of control of HDSI without the
consent of the board of directors. This could be the case even if a majority of
the stockholders are in favor of the proposed change in control. See
"Description of Capital Stock."
Substantial Proceeds of this Offering Are Payable to Affiliates of Founding
Companies
Of the net proceeds of this offering, $41.4 million will be paid as the
cash portion of the purchase price for the founding companies. Some of the
recipients of these funds will become members of our board of directors or
holders of more than 5% of our common stock. See "Principal Stockholders."
Members of Our Management Team Will Receive Substantial Benefits from this
Offering
As of March 1, 1999, members of our management team owned 1,670,872 shares
of common stock in aggregate. They acquired these shares for an aggregate
purchase price of $332,422, or an average of $0.20 per share. Upon consummation
of this offering, their shares will be worth approximately $20,050,464.
We May Need to Upgrade or Replace Our Computer Software Before 2000
Many currently installed computer systems and software products cannot
distinguish 21st century dates from 20th century dates. This inability to
distinguish 21st century dates from 20th century dates will cause system
failures or miscalculations if it is not corrected before the start of the year
2000. For businesses such as ours, such system failures or miscalculations
would result in a number of disruptions to operations, including temporary
inability to process transactions, send invoices or engage in similar normal
business activities. For this reason, we may need to upgrade or replace our
software and computer systems before the year 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Price of Our Common Stock May Fluctuate
Prior to this offering, there has been no public market for the common
stock. We intend to have our common stock listed for trading on the Nasdaq
National Market. The initial public offering price will be determined by
negotiations between the underwriters and us and may not be indicative of the
market price for
13
<PAGE>
the common stock after this offering. See "Underwriting" for a discussion of
the factors considered in determining the initial public offering price of the
common stock. We do not know the extent to which investor interest will lead to
the development of an active public market. Investors may not be able to resell
the common stock at or above the initial public offering price. Many factors
could cause the market price of the common stock to fluctuate substantially
including:
. future acquisitions by us
. variations in operating results
. loss of a key supplier or customer
. changes in activities of our competitors, either in their operations or
their acquisition programs
. changes in earnings estimates by securities analysts
These fluctuations, as well as general economic, political and market
conditions, may have a material adverse effect on the market price of the
common stock. See "Underwriting."
Significant Number of Shares Eligible for Future Sale May Decrease Stock Price
The market price of the common stock could drop as a result of sales of a
large number of shares of common stock in the market after this offering, or
the perception that such sales could occur. These factors could also make it
more difficult for us to raise funds through future offerings of common stock.
There will be 9,474,919 shares of common stock outstanding immediately
after this offering. All of the shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act of 1933, as amended, except for shares purchased by "affiliates" of HDSI,
as defined in Rule 144 under the Securities Act. The remaining 3,224,919 shares
of common stock that will be outstanding upon completion of this offering are
"restricted securities" as defined in Rule 144. These restricted securities may
be sold in the future without registration under the Securities Act to the
extent permitted under Rule 144, Rule 701 or an exemption under the Securities
Act. In connection with this offering, all holders of restricted securities
have agreed not to sell their shares without the prior written consent of
BancBoston Robertson Stephens for a period of 180 days after the date of this
prospectus. In addition, the former stockholders of the founding companies have
agreed not to sell their shares for a period of one year after the date of this
prospectus.
Upon consummation of this offering, 280,000 shares of common stock will be
issuable upon exercise of currently outstanding options, all of which will be
vested and will be subject to the lock-up agreements described above. See
"Shares Eligible for Future Sale."
14
<PAGE>
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
prospectus may include forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements may be
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in this prospectus generally. Forward-
looking statements are based on a variety of assumptions made by management
regarding future circumstances over which we have little or no control. A
number of important factors, including those identified under Risk Factors and
elsewhere in this prospectus, could cause our actual results to differ
materially from those depicted in forward-looking statements or financial
information.
15
<PAGE>
THE COMPANY
HDSI was formed in June 1998 to consolidate the six founding companies, all
of which distribute foodservice equipment and supplies. Upon consummation of
this offering, HDSI will acquire the founding companies, which had combined
1998 net revenue of $129.7 million. The founding companies maintain over 10,000
skus and serve more than 25,000 customers through a network of eleven
facilities located in four states. A brief description of each of the founding
companies is set forth below.
Raygal, Inc., headquartered in Irvine, California, was founded in 1971.
Raygal operates through one design and distribution facility. Raygal had 1998
net revenue of $33.0 million, and employed 45 people as of December 31, 1998.
Ygal Sonenshine, the President and founder of Raygal, will sign a three-year
employment agreement with HDSI upon consummation of this offering, pursuant to
which he will continue to manage Raygal's operations.
East Bay Restaurant Supply, Inc., headquartered in Oakland, California, was
founded in 1954. East Bay operates through one distribution facility and
warehouse and one sales office. East Bay had 1998 net revenue of $29.9 million,
and employed 73 people as of December 31, 1998. John Breznikar, who has been
President of East Bay since 1985, will sign a three-year employment agreement
with HDSI upon consummation of this offering, pursuant to which he will
continue to manage East Bay's operations and will help HDSI identify potential
acquisition candidates. Mr. Breznikar will also serve on HDSI's board of
directors. Mr. Breznikar is on the executive committee of Equipment
Distributors Inc., an industry buying group, and is a member of the Foodservice
Equipment Trade Association.
Economy Restaurant Fixtures, Inc., headquartered in San Francisco,
California, was founded in 1964. Economy operates through one distribution
facility, one warehouse and one sales office. Economy had 1998 net revenue of
$22.7 million, and employed 66 people as of December 31, 1998. Mike Weinstock
is the Chief Executive Officer and founder of Economy. Chuck Rothkopf is the
President of Economy and joined the company in 1976. Upon consummation of this
offering, Mr. Weinstock will sign a three-year employment agreement with HDSI,
pursuant to which, he will continue to manage Economy's operations, and
Mr. Rothkopf will sign a three-year consulting agreement with HDSI, pursuant to
which he will help HDSI identify potential acquisition candidates. Mr. Rothkopf
will also serve on HDSI's board of directors. Mr. Rothkopf is President of
Allied Buying Corporation, an industry buying group, and a member of its
executive committee and board of directors, and is also a member of the
Foodservice Equipment Trade Association.
Curtis Restaurant Equipment, headquartered in Eugene, Oregon, was founded
in 1963. Curtis operates through two distribution facilities. Curtis had 1998
net revenue of $20.3 million, and employed 42 people as of December 31, 1998.
Mike Curtis, the President and founder of Curtis, and Dan Curtis, the company's
Executive Vice President, each will sign a three-year employment agreement with
HDSI upon consummation of this offering, pursuant to which they will continue
to manage Curtis' operations.
Bintz Distributing Co., headquartered in Salt Lake City, Utah, was founded
in 1891. Bintz operates through one distribution and warehouse facility. Bintz
had 1998 net revenue of $17.8 million, and employed 40 people as of December
31, 1998. Bill Williams, who has served as President of Bintz since 1986, will
sign an 18-month employment agreement with HDSI upon consummation of this
offering, pursuant to which he will continue to manage Bintz's operations.
Castino Restaurant Equipment and Supply, Inc., headquartered in Santa Rosa,
California, was founded in 1974. Castino operates through one distribution
facility and one warehouse that is also used for used equipment sales. Castino
had 1998 net revenue of $5.9 million, and employed 22 people as of December 31,
1998. David Castino, the President and founder of Castino, will sign a three-
year employment agreement with HDSI upon consummation of this offering,
pursuant to which he will continue to manage Castino's operations.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to HDSI from the sale of the 6,250,000 shares of common
stock it is offering are estimated to be approximately $67.9 million ($78.4
million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $12.00 per share (which is the
midpoint of the estimated range of the initial public offering price) and after
deducting estimated underwriting discounts and commissions and offering
expenses. Of this amount, approximately $41.4 million will be used to pay the
cash portion of the purchase price for the founding companies, all of which
will be paid to former stockholders of the founding companies. The remaining
net proceeds will be used for general corporate purposes, which are expected to
include future acquisitions and working capital. Pending the foregoing uses,
the proceeds will be invested in short-term, investment-grade, interest-bearing
securities. While HDSI is continuously considering possible acquisition
prospects as part of its growth strategy, it presently has no agreements,
arrangements or other understandings to acquire any companies other than the
founding companies.
DIVIDEND POLICY
HDSI intends to retain all its earnings, if any, to finance the expansion
of its business, and does not anticipate paying any cash dividends on its
common stock in the foreseeable future. Any future dividends will be paid at
the discretion of the board of directors after taking into account various
factors, including, among other things, HDSI's financial condition, results of
operations, cash flows from operations, current and anticipated cash needs and
expansion plans, the income tax laws then in effect and the requirements of
Delaware law. In addition, HDSI's credit facility may restrict or prohibit
HDSI's ability to pay dividends.
17
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1998, (a) the actual
capitalization of HDSI and (b) the capitalization of HDSI on a pro forma
combined basis giving effect to the acquisitions of the founding companies and
the consummation of this offering and application of the estimated net proceeds
from the offering. This table should be read in conjunction with the Unaudited
Pro Forma Combined Financial Statements and notes to those statements appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------
Pro Forma
Actual Combined
--------- -----------
(In thousands)
<S> <C> <C> <C>
Short-term debt (including
current portion of long-
term debt).............. $ -- $ 3,772
========= ===========
Long-term debt (excluding
current portion)........ $ -- $ 203
--------- -----------
Stockholders' equity:
Preferred stock, $0.001
par value, 5,000,000
shares authorized;
182,354 issued and
outstanding; none issued
and outstanding on a pro
forma basis ............ -- --
Common stock, $0.001 par
value, 40,000,000 shares
authorized;
1,639,375 shares issued
and outstanding; and
9,474,919 shares
issued and outstanding
on a pro forma basis
(1)..................... 2 9
Additional paid-in
capital................. 781 81,995
Retained earnings
(accumulated deficit)... (52) (52)
--------- -----------
Total stockholders'
equity................ 731 81,952
--------- -----------
Total capitalization.... $ 731 $ 82,155
========= ===========
</TABLE>
- --------
(1) Excludes 747,487 shares of common stock issuable upon exercise of stock
options granted pursuant to HDSI's stock option plan that will be
outstanding upon consummation of this offering. Options to purchase 472,500
of these shares were outstanding at December 31, 1998.
18
<PAGE>
DILUTION
The deficit in pro forma combined net tangible book value of HDSI as of
December 31, 1998 was $29.2 million, or $9.06 per share of common stock, after
giving effect to the acquisitions of the founding companies. "Pro forma net
tangible book value" per share represents the amount of total tangible assets
of HDSI reduced by its total liabilities and divided by the total number of
shares of common stock outstanding after giving effect to the acquisitions of
the founding companies. After giving effect to the sale of the 6,250,000 shares
of common stock HDSI is offering at an assumed initial public offering price of
$12.00 per share, and after deducting estimated underwriting discounts and
commissions and offering expenses, pro forma net tangible book value of HDSI at
December 31, 1998 would have been approximately $38.7 million, or $4.08 per
share. This represents an immediate increase in net tangible book value of
$13.14 per share to existing stockholders and an immediate dilution of $7.92
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Net tangible book value per share before this offering.... $ (9.06)
Increase attributable to new investors.................... 13.14
-------
Pro forma net tangible book value per share after this
offering.................................................. 4.08
------
Dilution per share to new investors......................... $ 7.92
======
</TABLE>
The following table summarizes, as of the date of this prospectus, the
number of shares of common stock purchased from HDSI, the total consideration
paid to HDSI and the average price per share paid by existing stockholders
(after giving effect to the acquisitions of the founding companies) and by new
investors:
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Average
----------------- --------------------- Price
Number Percent Amount Percent Per Share
--------- ------- --------- ------- ---------
(In
thousands)
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 3,224,919 34.0 $(28,935)(1) (62.0) $ (8.97)
New investors.............. 6,250,000 66.0 75,000 162.0 12.00
--------- ----- -------- ------
Total.................... 9,474,919 100.0% $ 46,065 100.0%
========= ===== ======== ======
</TABLE>
- --------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the founding companies before pro forma
adjustments, reduced by the cash portion of the consideration payable to
the owners of the founding companies in connection with the acquisitions of
the founding companies.
19
<PAGE>
SELECTED FINANCIAL DATA
HDSI will consummate the acquisitions of the founding companies
simultaneously with the consummation of this offering. The following selected
historical financial data for HDSI as of December 31, 1998, and for the period
from June 17, 1998 (inception) to December 31, 1998, has been derived from the
audited financial statements of HDSI. The unaudited pro forma combined
statement of operations data for HDSI presents financial data for HDSI,
adjusted to give effect to the acquisitions of the founding companies and the
consummation of this offering and application of the estimated net proceeds
from the offering as if they occurred on January 1, 1998. The unaudited pro
forma combined balance sheet data for HDSI presents financial data for HDSI
giving effect to the acquisitions of the founding companies as if they occurred
on December 31, 1998. The unaudited pro forma combined balance sheet data also
gives effect to the sale of 134,120 shares of preferred stock in January 1999
and of the 6,250,000 shares of common stock HDSI is offering and application of
the estimated net proceeds from such offering as if they occurred on December
31, 1998. The following selected financial data is qualified by reference to,
and should be read in conjunction with, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the Unaudited Pro Forma
Combined Financial Statements of HDSI and historical financial statements of
the founding companies, including, in each case, the notes to these statements,
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Pro Forma
Actual Combined
----------------- -----------------
Period From
June 17, 1998
(inception) to Year Ended
December 31, 1998 December 31, 1998
----------------- -----------------
(In thousands, except
per share data)
<S> <C> <C>
Statement of Operations data
Net revenue............................... $ -- $ 129,700
Cost of revenue........................... -- 104,885
--------- ----------
Gross profit.............................. -- 24,815
Selling, general and administrative
expenses................................ 52 20,117 (1)
Goodwill amortization(2).................. -- 1,082
--------- ----------
Income (loss) from operations............. (52) 3,616
Interest expense and other, net........... -- (111)
--------- ----------
Income (loss) before income tax........... (52) 3,505
Income tax expense(3)..................... -- 1,605
--------- ----------
Net income (loss)......................... $ (52) $ 1,900
========= ==========
Basic net income (loss) per share......... $ 0.03 $ 0.20
========= ==========
Diluted net income (loss) per share....... $ 0.03 $ 0.19
========= ==========
Basic weighted average shares
outstanding............................. 1,639,375 (4) 9,474,919 (5)
========= ==========
Diluted weighted average shares
outstanding............................. 1,639,375 (4) 9,856,042 (5)
========= ==========
<CAPTION>
At December 31, 1998
-----------------------------------
Pro Forma
Actual Combined
----------------- -----------------
(In thousands)
<S> <C> <C>
Balance Sheet data
Working capital (deficit)................. $ (239) $ 36,870
Total assets.............................. 1,191 103,239
Long-term obligations, excluding current
installments............................ -- 246
Stockholders' equity...................... 731 81,952
</TABLE>
- --------
(1) Includes a reduction, net of corporate office executive salaries, of
$647,000 in the salaries, bonuses and benefits of the owners of the
Founding Companies and a net reduction in rent expense of $84,000 on
facilities leased from such owners, to which such owners have contractually
agreed.
(2) Consists of amortization, over a 40-year estimated life, of goodwill to be
recorded as a result of the acquisitions of the Founding Companies, which
is partially deductible for tax purposes.
(3) Assumes a corporate income tax rate of 40% and the partial deductibility of
goodwill.
(4) Represents the actual weighted average outstanding shares.
(5) Pro forma combined basic shares includes (a) 1,639,375 shares issued in
connection with the formation of HDSI; (b) 316,474 shares on conversion of
Series A Preferred Stock issued to investors; (c) 1,269,070 shares to be
issued to owners of the Founding Companies in connection with the
acquisitions of the Founding Companies; and (d) 6,250,000 of the shares to
be issued in this offering. Pro forma combined diluted shares further
includes 381,123 shares reflecting the incremental effect of options.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the founding companies' and HDSI's Financial Statements and the respective
notes to those statements, and "Selected Financial Data" appearing elsewhere
in this prospectus. The discussion in this prospectus contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of HDSI's plans, objectives, expectations and intentions. The
cautionary statements made in this prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this prospectus. HDSI's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors" as well as those discussed elsewhere
in this prospectus.
Introduction
HDSI's net revenue is derived from providing a wide range of products and
services to customers in the foodservice industry. HDSI sells a broad array of
foodservice equipment and supplies including heavy equipment, such as ranges
and refrigeration units, as well as smaller disposable items, such as china,
glass and silverware. HDSI also offers a full range of contract services for
restaurants and for foodservice facilities and custom kitchens in hotels,
arenas, convention centers, schools, casinos, businesses and prisons.
Revenue from the distribution and sale of foodservice equipment and
supplies is recognized when the risk of ownership transfers to the customer,
generally upon shipment. Revenues from construction contracts are recognized
by the percentage of completion method, measured by comparing the percentage
of costs incurred to date to total costs estimated for each contract.
Provisions for estimated losses on uncompleted contracts are made in the
period such losses become apparent. Contract revenue is recognized on a
percentage-of-completion basis. Net revenue is gross revenue net of discounts
and allowances.
Cost of revenue from the distribution and sale of foodservice equipment
and supplies represents the cost of purchased merchandise less applicable
discounts and rebates. Contract costs include all direct material,
subcontractor labor cost and indirect costs related to contract performance,
such as indirect labor. Selling, general and administrative expenses consist
primarily of occupancy costs compensation and benefits, fees for professional
services, depreciation of office equipment, advertising and other general
office expenses.
The founding companies have operated throughout the periods presented as
independent, privately owned entities, and their results of operations reflect
different tax structures (S Corporations or C Corporations) which have
influenced their historical level of owner compensation. Gross profit margins
and selling, general and administrative expenses as a percentage of net
revenue may not be comparable among the individual founding companies. The
owners of the founding companies have contractually agreed to certain
reductions in both their compensation and benefits and in certain cases lease
payments for their respective facilities in connection with the acquisitions
of the founding companies by HDSI. The aggregate amount of the compensation
differential, net of corporate office executive salaries, and the rent
differential, had they been in effect in 1998, was $647,000 and $84,000,
respectively, which have been reflected in the Pro Forma Combined Statement of
Operations.
HDSI anticipates that, following the acquisitions of the founding
companies, it may realize savings from:
. consolidation of insurance programs
. HDSI's ability to borrow at lower interest rates than the founding
companies
. coordination of purchasing from vendors to secure greater volume price
reductions
HDSI anticipates that these savings will be partially offset by costs
related to HDSI's new corporate management and by the costs associated with
being a public company. HDSI believes that neither these savings nor costs can
be quantified because the acquisitions have not occurred, and there have been
no combined operating results upon which to base any assumptions. As a result,
they have not been included in the financial information included elsewhere in
this prospectus.
21
<PAGE>
The acquisitions of the founding companies will be accounted for using the
purchase method of accounting. HDSI has been designated as the "accounting
acquirer" in the acquisitions. The purchase method of accounting requires that
companies record excess of the fair value of the consideration paid in an
acquisition over the fair value of the net assets acquired as "goodwill." Based
on management's preliminary analysis, it is anticipated that the historical
value of the assets and liabilities of the acquired companies, with the
exception of inventories, will approximate fair value and will result in
goodwill of approximately $43.3 million. This goodwill will be amortized over
its estimated useful life of 40 years as a non-cash charge to operating income.
Management has not identified any other material tangible or intangible assets
to which a portion of the purchase price could be reasonably allocated.
Combined Results of Operations--Founding Companies
The combined results of operations of the founding companies for the
periods presented do not represent combined results of operations presented in
accordance with generally accepted accounting principles, but are only a
summation of certain data from the statements of operations of the individual
founding companies on a historical basis. The combined results also exclude the
effect of certain adjustments and may not be comparable to, and may not be
indicative of, HDSI's post-combination results of operations because, among
other things:
. the founding companies were not under common control or management
during the periods presented
. the founding companies used different tax structures (S corporations or
C corporations) during the periods presented
. HDSI will incur incremental costs related to its new corporate
management and the costs attributable to being a public company
. HDSI will use the purchase method of accounting to record the
acquisitions of the founding companies, resulting in goodwill which will
be amortized over 40 years
. the combined results of operations data do not reflect the reduction in
salaries, bonuses and benefits of the owners of the founding companies
and the potential cost savings, synergies and efficiencies that may be
achieved through the integration of the operations of the founding
companies
The following table sets forth, for the years indicated, certain unaudited
combined results of operations data, and such data as a percentage of combined
net revenue, of the founding companies:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenue................ $100,425 100.0% $116,194 100.0% $129,700 100.0%
Cost of revenue............ 80,428 80.1 93,855 80.8 104,292 80.4
-------- ----- -------- ----- -------- -----
Gross profit............... 19,997 19.9 22,339 19.2 25,408 19.6
Selling, general, and
administrative expenses.. 17,459 17.4 18,897 16.2 20,848 16.1
-------- ----- -------- ----- -------- -----
Income from operations..... 2,538 2.5 3,442 3.0 4,560 3.5
Other expense, net......... (169) 0.1 (268) (0.2) (111) (0.1)
-------- ----- -------- ----- -------- -----
Income before income
taxes.................... 2,369 2.4 3,174 2.8 4,449 3.4
Income tax expense......... 294 0.3 196 0.2 484 0.3
-------- ----- -------- ----- -------- -----
Net income................. $ 2,075 2.1% $ 2,978 2.6% $ 3,965 3.1%
======== ===== ======== ===== ======== =====
</TABLE>
Combined Results of Operations for 1998 Compared to 1997
Net Revenue. Net revenue increased $13.5 million, or 11.6%, from $116.2
million in 1997 to $129.7 million in 1998. This increase was principally
attributable to increased revenues at East Bay, Bintz and Economy reflecting
aggressive sales and marketing and generally favorable economic conditions.
22
<PAGE>
Gross Profit. Gross profit increased $3.1 million, or 13.7%, from $22.3
million in 1997 to $25.4 million in 1998. As a percentage of net revenue,
gross profit increased from 19.2% in 1997 to 19.6% in 1998. The gross profit
percentage increase reflects purchasing efficiency and favorable product mix
at certain of the founding companies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.9 million, or 10.3% from $18.9 million in
1997 to $20.8 million in 1998. This increase was principally attributable to
increased advertising expenditures and sales costs to support the sales
growth. As a percentage of net revenue, such costs represented 16.2% in 1997
and 16.1% in 1998.
Other Expense, Net. Other expense, net, primarily interest expense offset
by miscellaneous income, decreased $157,000 from $268,000 in 1997 to $111,000
in 1998.
Income Tax Expense. Income tax expense increased $288,000 from $196,000 in
1997 to $484,000 in 1998. The effective tax rate increased from 6.2% in 1997
to 10.9% in 1998 reflecting higher income at companies taxed as C
corporations.
Net Income. Net income increased $987,000, or 33.2%, from $3.0 million in
1997 to $4.0 million in 1998. As a percentage of net revenue, net income was
2.6% in 1997 and 3.1% in 1998.
Combined Results of Operations for 1997 Compared to 1996
Net Revenue. Net revenue increased $15.8 million, or 15.7%, from $100.4
million in 1996 to $116.2 million in 1997. This increase was primarily
attributable to increased revenues at Raygal and, to a lesser extent, East
Bay, due to a strategic focus on securing larger projects and generally
favorable economic conditions.
Gross Profit. Gross profit increased $2.3 million, or 11.7%, from $20.0
million in 1996 to $22.3 million in 1997. As a percentage of net revenue,
gross profit decreased from 19.9% in 1996 to 19.2% in 1997 reflecting lower
margins on larger projects at certain of the founding companies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 8.2%, from $17.5 million in
1996 to $18.9 million in 1997 reflecting the higher sales level. As a
percentage of net revenue, such costs represented 17.4% in 1996 and 16.2% in
1997.
Other Expense, Net. Other expense, net, increased $99,000 from $169,000 in
1996 to $268,000 in 1997.
Income Tax Expense. Income tax expense decreased $98,000 from $294,000 in
1996 to $196,000 in 1997. The effective tax rate decreased from 12.4% in 1996
to 6.2% in 1997 reflecting higher income at companies taxed as S corporations.
Net Income. Net income increased $903,000, or 43.5%, from $2.1 million in
1996 to $3.0 million in 1997. As a percentage of net revenue, net income was
2.1% in 1996 and 2.6% in 1997.
Combined Liquidity and Capital Resources
Upon consummation of the acquisitions of the founding companies and this
offering and application of the estimated net proceeds from the offering
(estimated to be $67.9 million), HDSI will have, on a pro forma combined basis
as of December 31, 1998, approximately $27.2 million of cash and cash
equivalents, $37.4 million of working capital and $4.0 million of outstanding
indebtedness.
The founding companies generated $3.0 million of net cash from operating
activities during 1998, primarily at Raygal and Economy. Net cash used in
investing activities was $274,000 primarily relating to purchases of property
and equipment. Net cash used in financing activities was $2.6 million
consisting of
23
<PAGE>
distributions to stockholders of $3.2 million offset by net borrowings of
$734,000, principally from stockholders. At December 31, 1998, the founding
companies had working capital of $10.0 million and total debt (including debt
to stockholders) of $5.2 million, of which $4.8 million was classified as
current.
HDSI has initiated discussions with certain banks regarding establishment
of a credit facility enabling HDSI to borrow between $50.0 million and $75.0
million on a revolving basis upon consummation of this offering. HDSI
anticipates the credit facility will be used for acquisitions, capital
expenditures, refinancing of existing debt and general corporate purposes. HDSI
expects that the credit facility will contain customary covenants regarding
maintenance of certain financial ratios, restrictions on additional
indebtedness, and restrictions on liens, guarantees, advances and dividends.
HDSI believes that the proceeds from this offering together with its cash
flows from operating activities as well as available financing alternatives
will be sufficient to meet its 1999 cash requirements.
The founding companies spent an aggregate of $289,000 on purchases of
property and equipment in 1998. HDSI expects to make comparable expenditures in
the current year. Funds for such expenditures are expected to be generated from
earnings and related cash flow.
HDSI intends to pursue acquisition opportunities. HDSI expects to fund
future acquisitions as well as its ongoing liquidity needs through the issuance
of additional shares of common stock, borrowings, including the use of amounts
available under the credit facility, and cash flow from operations.
Year 2000 Compliance
The year 2000 issue in computers arises from the common industry practice
of using two digits to represent a date in computer software code and databases
to enhance processing time and save storage space. Therefore, when dates in the
year 2000 and before are indicated and computer programs read the date "00",
the computer may default to the year "1900" rather than the correct "2000".
This could result in incorrect calculations, faulty data and computer shut
downs, which could cause disruptions in operations.
HDSI and the founding companies are reviewing the risks of failure to
achieve year 2000 compliance with regard to their internal operations,
information systems and software applications and the impact on HDSI of its
outside vendors', lessees' and borrowers' ability to operate. HDSI and the
founding companies believe their internal operations, information systems and
software applications are likely to be compliant by November 1999.
HDSI has not yet developed a comprehensive contingency plan to address the
risk of operational problems and costs likely to result from a failure by HDSI
or by an outside vendor or business partner to address year 2000 readiness.
HDSI intends to develop a comprehensive contingency plan after the acquisitions
of the founding companies. The current year 2000 compliance plans are discussed
separately under each founding company's results of operations.
Presently, HDSI and the founding companies do not believe that effecting
year 2000 compliance will result in material investments, nor do HDSI and the
founding companies anticipate effecting year 2000 compliance will have material
adverse effects on their business operations or financial performance. There
can be no assurance, however, that failure to achieve year 2000 compliance will
not materially adversely affect HDSI and the founding company business.
Additionally, there can be no guarantee that year 2000 compliance issues not
yet identified or fully addressed will not materially affect HDSI and the
founding companies' operations or expose it to third party liability.
24
<PAGE>
Raygal Results of Operations
Raygal's primary business is designing and installing commercial kitchens
and interiors. Raygal has one facility located in Irvine, California.
The following table sets forth selected statement of operations data, and
such data as a percentage of net revenue, for the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenue...................... $22,213 100.0% $33,678 100.0% $33,038 100.0%
Cost of revenue.................. 19,229 86.5 29,623 88.0 28,793 87.2
------- ----- ------- ----- ------- -----
Gross profit..................... 2,984 13.4 4,055 12.0 4,245 12.8
Selling, general, and
administrative expenses........ 2,427 10.9 2,202 6.5 2,520 7.6
------- ----- ------- ----- ------- -----
Income from operations........... 557 2.5 1,853 5.5 1,725 5.2
Other income (expense), net...... 96 0.4 47 0.1 81 0.2
------- ----- ------- ----- ------- -----
Income before income taxes....... 653 2.9 1,900 5.6 1,806 5.5
Income tax expense............... 14 0.1 18 0.1 17 0.1
------- ----- ------- ----- ------- -----
Net income....................... $ 639 2.9% $ 1,882 5.6% $ 1,789 5.4%
======= ===== ======= ===== ======= =====
</TABLE>
Raygal Results for 1998 Compared to 1997
Net Revenue. Net revenue decreased $640,000 or 1.9%, from $33.7 million in
1997 to $33.0 million in 1998. This decrease in net revenue was primarily due
to delays in the construction schedules on several projects.
Gross Profit. Gross profit increased $190,000, or 4.7%, from $4.1 million
in 1997 to $4.2 million in 1998. As a percentage of net revenue, gross profit
increased from 12.0% in 1997 to 12.8% in 1998. The increase as a percentage of
net revenue was the result of negotiating more favorable terms from vendors and
suppliers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $318,000, or 14.4%, from $2.2 million in 1997
to $2.5 million in 1998. As a percentage of net revenue, selling, general and
administrative expenses increased from 6.5% in 1997 to 7.6% in 1998. The
increase as a percentage of net revenue was primarily due to an increase in
employees and a corresponding increase in payroll cost to support plans for
growth.
Other Income (Expense), Net. Other income (expense), net, increased
$34,000, or 72.3%, from $47,000 in 1997 to $81,000 in 1998. As a percentage of
net revenue, other income (expense), net, increased from 0.1% in 1997 to 0.2%
in 1998.
Income Tax Expense. Income tax expense as a percentage of net revenue
remained the same between 1997 and 1998. Raygal has elected to be taxed as a
Subchapter S Corporation for federal income tax purposes. Raygal's income
(whether distributed or not) has been subject to federal income tax as part of
the individual shareholder's tax returns. Accordingly, no provision for federal
income tax has been made in the financial statements.
Net Income. Net income decreased $93,000 or 4.9%, from $1.9 million in 1997
to $1.8 million in 1998. As a percentage of net revenue, net income decreased
from 5.6% in 1997 to 5.4% in 1998.
25
<PAGE>
Raygal Results for 1997 Compared to 1996
Net Revenue. Net revenue increased $11.5 million, or 51.6%, from $22.2
million in 1996 to $33.7 million in 1997. This increase in net revenue was
primarily due to a strategic focus on securing larger projects and increased
customer demand.
Gross Profit. Gross profit increased $1.1 million, or 35.9%, from
$3.0 million in 1996 to $4.1 million in 1997. As a percentage of net revenue,
gross profit decreased from 13.4% in 1996 to 12.0% in 1997. The decrease as a
percentage of net revenue was the result of lower margins on larger projects.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $225,000, or 9.3%, from $2.4 million in 1996
to $2.2 million in 1997. As a percentage of net revenue, selling, general and
administrative expenses decreased from 10.9% in 1996 to 6.5% in 1997. The
decrease as a percentage of net revenue was primarily due to the decrease in
payroll costs as the revenue mix of larger jobs requires less supervision.
Other Income (Expense), Net. Other income (expense), net, decreased
$49,000, or 51.0%, from $96,000 in 1996 to $47,000 in 1997. As a percentage of
net revenue, other income (expense), net, decreased from 0.4% in 1996 to 0.1%
in 1997. The decrease as a percentage of net revenue was primarily due to lower
interest income and a small loss on sale of assets.
Income Tax Expense. Income tax expense as a percentage of net revenue
remained the same between 1996 and 1997.
Net Income. Net income increased $1.2 million, or 194.5%, from $639,000 in
1996 to $1.9 million in 1997. As a percentage of net revenue, net income
increased from 2.9% in 1996 to 5.6% in 1997.
Raygal Liquidity and Capital Resources
Raygal's liquidity requirements consist primarily of working capital needs
to fund its growth, capital expenditures, and distributions to its
stockholders. Working capital decreased from $3.2 million as of December 31,
1997 to $2.9 million as of December 31, 1998.
Cash requirements were provided primarily from internally generated funds,
and to a lesser extent, availability under Raygal's credit facilities.
For the year ended December 31, 1998, cash provided by operating activities
was $2.2 million as compared to $452,000 of cash used in operating activities
for the year ended December 31, 1997. The primary sources of cash from
operating activities during 1998 included net income of $1.8 million, non-cash
charges of $108,000 for depreciation and amortization, and an increase of $1.4
million in accounts payable, partially offset by an increase in contracts
receivables and accrued liabilities.
Raygal's net cash used in investing activities in 1998 was $101,000,
consisting primarily of $85,000 in capital expenditures and $117,000 for the
issuance of a note receivables partially offset by the net proceeds from
maturities and sales of investments available for sale.
Raygal's net cash used in financing activities in 1998 and in 1997 was $2.1
million and $700,000, which represents amounts distributed to owners.
Raygal Year 2000 Compliance
Overview
In general, the year 2000 issue is related to computers and other systems
being unable to distinguish between the years 1900 and 2000 because they use
two digits, rather than four, to define the applicable year. Raygal is
addressing the issue in two areas: internal hardware and software systems and
third-party vendors/ suppliers and customers.
26
<PAGE>
Internal Hardware and Software
Raygal has analyzed its internal hardware and software systems for year
2000 readiness. The emphasis has been on computer systems used for the general
accounting function. Raygal believes its own internal operations, information
systems and software applications are likely to be compliant by November 1999
based upon reasonable assurance by vendors and Raygal's computer consultant.
Costs associated with this analysis have been minimal.
Third-party Vendors/Suppliers and Customers
The second issue Raygal is addressing is the year 2000 readiness of its
significant vendors/suppliers and customers, as it relates to computer systems
used by these parties for accounting, purchasing and sales. Raygal has
significant relationships with various vendors/suppliers (including financial
institutions and equipment suppliers) and certain customers. The failure of
any of these parties to achieve year 2000 readiness could have a material
effect on Raygal's business, results of operations or financial condition.
Analysis related to these parties will be conducted. Costs associated with
this analysis are anticipated to be minimal.
Should Raygal be unsuccessful in addressing the year 2000 readiness of
significant vendors/suppliers and customers, the associated risks have been
identified as follows:
. equipment from vendors may malfunction due to the product being non-year
2000 compliant
. vendors/suppliers may be unable to provide required equipment and
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
Contingency Plans
Raygal, as part of its year 2000 readiness plan, will be developing
contingency plans to minimize the above identified risks associated with non-
year 2000 readiness by any of its significant vendors/suppliers or customers
as follows:
. identifying alternate suppliers that are year 2000 compliant
. closely monitoring all accounts receivable agings
. being prepared to supply needed proof of delivery of duplicate copies of
invoices for customers
These contingency plans will be prepared. Completion of these plans is
targeted for the third quarter 1999.
No assurance can be given that Raygal will not be materially adversely
affected by year 2000 readiness issues. However, management is not currently
aware of any such conditions that would materially affect Raygal's business,
results of operations or financial condition.
Additionally, there can be no assurance that Raygal will not be the
subject of lawsuits regarding the failure of equipment in the event it is not
year 2000 compliant. Any year 2000 related suits could have a material effect
on Raygal's business, results of operations or financial condition, if the
suit is determined adversely to Raygal.
27
<PAGE>
EAST BAY RESULTS OF OPERATIONS
East Bay's primary business is the sale and distribution of equipment and
supplies to food service providers such as restaurants and hotels. East Bay
also performs contract services for food service providers. East Bay has two
facilities in Oakland, California and a sales office in Las Vegas, Nevada.
The following tables set forth selected statement of operations data, and
such data as a percentage of net revenue, for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, THREE MONTHS ENDED DECEMBER 31,
------------------------------------------- -------------------------------
1996 1997 1998 1997 1998
------------- ------------- ------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $20,368 100.0% $23,681 100.0% $29,916 100.0% $ 6,346 100.0% $ 8,084 100.0%
Cost of revenue......... 16,256 79.8 18,655 78.8 23,964 80.1 5,172 81.5 6,388 79.0
------- ----- ------- ----- ------- ----- -------- ------- -------- -------
Gross profit............ 4,112 20.2 5,026 21.2 5,952 19.9 1,174 18.5 1,696 21.0
Selling, general, and
administrative
expenses.............. 3,959 19.4 4,705 19.8 5,388 18.0 1,212 19.1 1,435 17.8
------- ----- ------- ----- ------- ----- -------- ------- -------- -------
Income from operations
(loss)................ 153 0.8 321 1.4 564 1.9 (38) (0.6) 261 3.2
Other income (expense),
net................... 72 0.4 69 0.3 55 0.2 (29) (0.5) (8) (0.1)
------- ----- ------- ----- ------- ----- -------- ------- -------- -------
Income before income
taxes................. 81 0.4 252 1.1 509 1.7 (67) (1.1) 253 3.1
Income tax expense...... 35 0.2 116 0.5 225 0.8 (30) (0.5) 107 1.3
------- ----- ------- ----- ------- ----- -------- ------- -------- -------
Net income (loss)....... $ 46 0.2% $ 136 0.6% $ 284 0.9% $ (37) (0.6)% $ 147 1.8%
======= ===== ======= ===== ======= ===== ======== ======= ======== =======
</TABLE>
East Bay Results--Results for Three Months Ended December 31, 1998 compared to
the Three Months Ended December 31, 1997
Net Revenue. Net revenue increased $1.7 million, or 27.4%, from $6.3 million
in 1997 to $8.1 million in 1998. The increase in revenue was primarily due to
aggressive sales and marketing efforts as East Bay added new installation and
design customers. Higher installation and design sales volume was partially
offset by discounts given to customers in attempts to generate additional
business.
Gross Profit. Gross profit increased $522,000 or 44.5%, from $1.2 million in
1997 to $1.7 million in 1998. As a percentage of net revenue, gross profit
increased from 18.5% in 1997 to 21.0% in 1998. The increase as a percentage of
net revenue was primarily the result of a more favorable product sales mix in
1998 and a general increase in sales prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $223,000, or 18.4%, from $1.2 million in 1997
to $1.4 million in 1998. As a percentage of net revenue, selling, general and
administrative expenses decreased from 19.1% in 1997 to 17.8% in 1998. The
decrease as a percent of sales was primarily due to a significant increase in
revenues over the prior year same quarter coupled with the fact that many
general and administrative expenses are relatively fixed.
Other Expense, Net. Other expense, net decreased $21,000 or 72.4% from
$29,000, in 1997 to $8,000 in 1998. As a percentage of net revenue, other
expense, net decreased from 0.5% in 1997 to 0.1% in 1998. Other expense
consists primarily of interest expense netted with interest income. The
decrease is primarily due to a loss on disposal, which was recognized in 1997.
Income Tax Expense. Income tax expense (benefit) increased $137,000 from
($30,000) in 1997 to $107,000 in 1998. As a percentage of net revenues, income
tax expense (benefit) increased from 0.5% in 1997 to 1.3% in 1998. As a
percentage of income before income taxes, the effective income tax rate
decreased from 44.8% in 1997 to 42.3% in 1998. This decrease was due to a
decrease in permanent items not deductible for tax return purposes.
28
<PAGE>
Net Income. Net income (loss) increased $184,000 from $(37,000) in 1997 to
$147,000 in 1998. As a percentage of net revenue, net income (loss) increased
from (0.6)% in 1997 to 1.8% in 1998.
East Bay Results for 1998 Compared to 1997
Net Revenue. Net revenue increased $6.2 million, or 26.3%, from $23.7
million in 1997 to $29.9 million in 1998. The increase in revenue was primarily
due to aggressive sales and marketing and the addition of new installation and
design customers. Higher installation and design sales volume was partially
offset by discounts given to customers to generate additional business. Cash
and carry sales increased as a result of advertising aimed at increasing the
general public's awareness of East Bay's retail store among retail shoppers at
large, in addition to commercial food service customers.
Gross Profit. Gross profit increased $926,000, or 18.4%, from $5.0 million
in 1997 to $6.0 million in 1998. As a percentage of net revenue, gross profit
decreased from 21.2% in 1997 to 19.9% in 1998. The decrease as a percentage of
net revenue was the result of discounting to certain customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $683,000, or 14.5%, from $4.7 million in 1997
to $5.4 million in 1998. As a percentage of net revenue, selling, general and
administrative expenses decreased from 19.8% in 1997 to 18.0% in 1998. East Bay
increased its advertising efforts by producing a greater number of product
catalogues and increasing its newspaper and magazine advertising during the
year. The overall increase in selling, general and administrative expenses was
also a result of the hiring of three additional out of state salespersons,
which lead to increased travel and delivery costs.
Other Expenses, Net. Other expense, net, decreased $14,000, or 20.3%, from
$69,000 in 1997 to $55,000 in 1998. As a percentage of revenue, other expense,
net, decreased from 0.3% in 1997 to 0.2% in 1998. Other expense consisted
primarily of interest expense netted with interest income.
Income Tax Expense. Income tax expense increased $109,000, or 94.0%, from
$116,000 in 1997 to $225,000 in 1998. The effective income tax rate decreased
from 46.0% in 1997 to 44.2% in 1998. This decrease was due primarily to a
decrease in items not deductible for tax return purposes.
Net Income. Net income increased $148,000, or 108.8%, from $136,000 in 1997
to $284,000 in 1998. As a percentage of net revenue, net income increased from
0.6% in 1997 to 0.9% in 1998.
East Bay Results for 1997 Compared to 1996
Net Revenue. Net revenue increased $3.3 million, or 16.3%, from $20.4
million in 1996 to $23.7 million in 1997. The increase in revenue was primarily
due to aggressive sales and marketing efforts as East Bay was able to capture
additional market share in both its installation and design and its cash and
carry sales. East Bay began to increase out of state sales in an effort to
broaden both its client and geographical base.
Gross Profit. Gross profit increased $914,000 or 22.2%, from $4.1 million
in 1996 to $5.0 million in 1997. As a percentage of net revenue, gross profit
increased from 20.2% in 1996 to 21.2% in 1997. The increase as a percentage of
net revenue was primarily the result of pricing increases and a slightly
different product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $746,000, or 18.8%, from $4.0 million in 1996
to $4.7 million in 1997. As a percentage of net revenue, selling, general and
administrative expenses increased from 19.4% in 1996 to 19.8% in 1997. The
increases were primarily due to aggressive advertising and marketing. An
increase in out of state contracts also lead to increased travel and delivery
expenses. Additionally, East Bay provided for several accounts receivable which
were deemed to be uncollectable.
29
<PAGE>
Other Expense, Net. Other expense, net, decreased $3,000, or 4.2%, from
$72,000 in 1996 to $69,000 in 1997. As a percentage of net revenue, other
expense, net, decreased from 0.4% in 1996 to 0.3% in 1997. Other expense
consists primarily of interest expense netted with interest income.
Income Tax Expense. Income tax expense increased $81,000, or 231.4%, from
$35,000 in 1996 to $116,000 in 1997. The effective income tax rate increased
from 43.2% in 1996 to 46.0% in 1997. This increase was due to an increase in
permanent items not deductible for tax return purposes.
Net Income. Net income increased $90,000, or 195.7%, from $46,000 in 1996
to $136,000 in 1997. As a percentage of net revenue, net income increased from
0.2% in 1996 to 0.6% in 1997.
East Bay Liquidity and Capital Resources
East Bay's financing needs are primarily to fund increases in accounts
receivable and inventories, resulting from its growth. Since September 30,
1995, East Bay's primary sources of capital have been a revolving line of
credit and various stockholder notes. Cash used in operating activities was
$776,000 for the three months ended December 31, 1998 versus cash provided of
$94,000 for the year ended September 30, 1998. Cash used in investing
activities was $34,000 for the three months ended December 31, 1998 and $74,000
for the year ended September 30, 1998 for purchases of equipment. Cash provided
by financing activities was $569,000 for the three months ended December 31,
1998 representing proceeds from borrowings under the line of credit net of
payment on loans from shareholders. For the year ended September 30, 1998, cash
provided by financing activities was $188,000 representing loans from
shareholders net of payments on borrowings under the line of credit. Working
capital at December 31, 1998 was $1.4 million compared to $1.3 million at
September 30, 1998.
East Bay Year 2000 Compliance
Overview
The year 2000 issue in computers arises from the common industry practice
of using two digits to represent a date in computer software code and databases
to enhance processing time and save storage space. Therefore, when dates in the
year 2000 are indicated and computer programs read the date "00", the computer
may default to the year "1900" rather than the correct "2000". This could
result in incorrect calculations, faulty data and computer shut down, which
could cause disruptions in operations.
Internal Hardware and Software
East Bay has reviewed the risks of failure to achieve year 2000 compliance
with regard to East Bay's own internal operations, information systems and
software applications and the impact on East Bay of its outside vendors',
lessees' and borrowers' ability to operate. East Bay believes its own internal
operations, information systems and software applications are year 2000
compliant based upon reasonable assurance by vendors and East Bay's internal
review of systems. As such, future expenditures, if any, related to year 2000
readiness are expected to be minimal.
Third-party Vendors/Suppliers and Customers
East Bay also recognizes that the year 2000 readiness of significant
vendors/suppliers and customers could significantly impact the ability of these
parties to operate. East Bay has significant relationships with various
vendors/suppliers (including financial institutions, product suppliers,
transportation providers and utilities, including communications and energy)
and certain customers. The failure of any of these parties to achieve year 2000
readiness could have a material effect on East Bay's business, results of
operations or financial condition. East Bay will continue to monitor for
indications of year 2000 readiness problems with key third parties throughout
1999. Costs associated with this monitoring are anticipated to be minimal.
30
<PAGE>
The risks East Bay has identified, associated with the year 2000 readiness
of significant vendors/suppliers and customers, are as follows:
. vendors/suppliers may be unable to provide required products and/or
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
. products from vendors may malfunction due to the product being non-year
2000 compliant
East Bay management has reviewed the risks associated with year 2000
readiness and believes it has reasonable alternatives should it encounter
adverse effects of year 2000 readiness. However, no assurance can be given that
East Bay will not be materially adversely affected by year 2000 readiness
issues. However, management is not currently aware of any such conditions that
would materially affect East Bay' business, results of operations or financial
condition.
Additionally, there can be no assurance that East Bay will not be the
subject of lawsuits if it or its vendors/suppliers or customers fail to be year
2000 compliant. Any year 2000 related suits could have a material effect on
East Bay's business, results of operations or financial condition, if the suit
is determined adversely to East Bay.
Contingency Plans
Although East Bay is still preparing a defined contingency plan, in the
event of a year 2000 issue, East Bay believes that it can rely upon manual
processes until a remedy is identified and implemented without a significant
business disruption.
Effecting year 2000 compliance has not resulted in material investments by
East Bay, nor does East Bay anticipate that the year 2000 will have material
adverse effects on its business operations or financial performance.
Economy Results of Operations
Economy's primary business is the sale and distribution of equipment and
supplies to food service providers, such as restaurants and hotels, primarily
through cash and carry sales. Economy also performs contract services for food
service providers. Economy has two facilities located in San Francisco,
California and one in Sacramento, California.
The following table sets forth selected statement of operations data, and
such data as a percentage of net revenue, for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998
------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Net revenue.................................. $19,884 100.0% $22,703 100.0%
Cost of revenue.............................. 14,082 70.8 15,976 70.4
------- ----- ------- -----
Gross profit................................. 5,802 29.1 6,727 29.6
Selling, general, and administrative
expenses................................... 5,114 25.7 5,811 25.6
------- ----- ------- -----
Income from operations....................... 688 3.5 916 4.0
Other income (expense), net.................. 24 0.1 75 0.3
------- ----- ------- -----
Income before income taxes................... 712 3.6 991 4.4
Income tax expense........................... 10 0.1 17 0.1
------- ----- ------- -----
Net income................................... $ 702 3.5% $ 974 4.3%
======= ===== ======= =====
</TABLE>
31
<PAGE>
Economy Results for 1998 Compared to 1997
Net Revenue. Net revenue increased $2.8 million, or 14.2%, from $19.9
million in 1997 to $22.7 million in 1998 primarily due to increased demand as a
result of increased advertising and customer awareness and the introduction of
a direct sales program.
Gross Profit. Gross profit increased $925,000, or 15.9%, from $5.8 million
in 1997 to $6.7 million in 1998. As a percentage of net revenue, gross profit
increased from 29.1% in 1997 to 29.6% in 1998 primarily as a result of enhanced
purchasing efficiency and mix of products sold.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $697,000, or 13.6%, from $5.1 million in 1997
to $5.8 million in 1998, primarily due to an increase in employees and a
corresponding increase in payroll costs. As a percentage of net revenue,
selling general and administrative expenses decreased slightly from 25.7% in
1997 to 25.6% in 1998.
Other Income (Expense), Net. Other income (expense), net, increased from
income of $24,000 in 1997 to income of $75,000 in 1998. Other income (expense),
net, increased primarily because of increased interest income resulting from
higher average cash balances throughout the year.
Income Tax Expense. Income tax expense increased $7,000 from $10,000 in
1997 to $17,000 in 1998, primarily as a result of increased net income. Economy
has elected to be taxed as a Subchapter S Corporation for federal income tax
purposes. Prior to its acquisition by HDSI, Economy's income (whether
distributed or not) will be subject to federal income tax as part of the
individual shareholder's tax returns. Accordingly, no provision for federal
income tax has been made in the financial statements.
Net Income. Net income increased $272,000 from $702,000 in 1997 to $974,000
in 1998. As a percentage of net revenue, net income increased from 3.5% in 1997
to 4.3% in 1998.
Economy Liquidity and Capital Resources
Economy's primary sources of capital have been from cash provided by
operating activities and, to a lesser extent, availability under its credit
facilities.
During the year ended December 31, 1998, cash provided by operating
activities was $1.4 million. The cash was generated from Economy's earnings and
increases in trade payables offset by increases in accounts receivable and
inventories. Cash used in investing activities was $22,000, which was used for
property and equipment additions. Cash flows used in financing activities was
$1.3 million, which was primarily used for distributions to stockholders and
financing activities.
Economy Year 2000 Compliance
Overview
The year 2000 issue in computers arises from the common industry practice
of using two digits to represent a date in computer software code and databases
to enhance processing time and save storage space. Therefore, when dates in the
year 2000 are indicated and computer programs read the date "00", the computer
may default to the year "1900" rather than the correct "2000". This could
result in incorrect calculations, faulty data and computer shut downs, which
could cause disruptions in operations.
Internal Hardware and Software
Economy is reviewing the risk of the year 2000 issue with regard to its own
internal operations, information systems and software applications and the
impact on Economy of its outside vendors', leasees' and borrowers' ability to
operate. Economy has identified that certain of its financial and operating
systems are not
32
<PAGE>
year 2000 compliant and is working with its software provider to upgrade to
compliant versions of its current systems. Economy believes its own internal
operations, information systems and software applications are likely to be
compliant before any significant issues arise based upon reasonable assurance
by its computer consultant and its own analysis of its risks.
Third-party Vendors/Suppliers and Customers
Economy also recognizes that the year 2000 readiness of significant
vendors/suppliers and customers could significantly impact the ability of these
parties to operate. Economy has significant relationships with various
vendors/suppliers (including financial institutions, product suppliers,
transportation providers and utilities, including communications and energy)
and certain customers. The failure of any of these parties to achieve year 2000
readiness could have a material effect on Economy's business, results of
operations or financial condition. However, Economy does not believe that a
year 2000 issue at any of its vendors will have a significant impact on its
operations. If a significant vendor issue arises, Economy is confident that it
can arrange alternative sourcing. Economy will continue to monitor for
indications of year 2000 readiness problems with key third parties throughout
1999. Costs associated with this monitoring are anticipated to be minimal.
The risks Economy has identified, associated with the year 2000 readiness
of significant vendors/suppliers and customers, are as follows:
. vendors/suppliers may be unable to provide required products and/or
services due to non-compliant hardware or software used in their
individual companies.
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
. products from vendors may malfunction due to the product being non-year
2000 compliant
Economy management has reviewed the risks associated with year 2000
readiness and believes it has reasonable alternatives should it encounter
adverse effects of year 2000 readiness. However, no assurance can be given that
Economy will not be materially adversely affected by year 2000 readiness
issues. However, management is not currently aware of any such conditions that
would materially affect Economy's business, results of operations or financial
condition.
Additionally, there can be no assurance that Economy will not be the
subject of lawsuits if it or its vendors/suppliers or customers fail to be year
2000 compliant. Any year 2000 related suits could have a material effect on
Economy's business, results of operations or financial condition, if the suit
is determined adversely to Economy.
Contingency Plans
Although Economy is still preparing a defined contingency plan, in the
event of a year 2000 issue, Economy believes that it can rely upon manual
processes until a remedy is identified and implemented without a significant
business disruption.
Presently, Economy does not believe that year 2000 compliance will result
in material investments by it, nor does Economy anticipate the year 2000 issue
will have material adverse effects on its business operations or financial
performance. There can be no assurance, however, that the year 2000 issue will
not adversely effect Economy and its business.
33
<PAGE>
Curtis Results of Operations
Curtis' primary business is the sale and distribution of equipment and
supplies to food service providers such as restaurants and hotels. Curtis has
two facilities located in Springfield, Oregon and Medford, Oregon.
The following table sets forth selected statement of operations data, and
such data as a percentage of net revenue, for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1998
-------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Net revenue................................ $19,933 100.0% $20,279 100.0%
Cost of revenue............................ 16,434 82.4 16,526 81.5
------- ----- ------- -----
Gross profit............................... 3,499 17.6 3,753 18.5
Selling, general, and administrative
expenses................................. 3,335 16.7 3,103 15.3
------- ----- ------- -----
Income from operations..................... 164 0.9 650 3.2
Other income (expense), net................ (133) (0.7) (94) (0.4)
------- ----- ------- -----
Income before income taxes................. 31 0.2 556 2.8
Income tax expense......................... 12 0.1 218 1.1
------- ----- ------- -----
Net income................................. $ 19 0.1% $ 338 1.7%
======= ===== ======= =====
</TABLE>
Curtis Results for 1998 Compared to 1997
Net Revenue. Net revenue increased $346,000, or 1.7%, from $20.0 million in
1997 to $20.3 million in 1998.
Gross Profit. Gross profit increased $254,000, or 7.3%, from $3.5 million
in 1997 to $3.8 million in 1998. As a percentage of net revenue, gross profit
increased from 17.6% in 1997 to 18.5% in 1998. The increase in gross profit was
primarily the result of increased purchasing efficiency in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $232,000, or 7.0%, from $3.3 million in 1997
to $3.1 million in 1998. As a percentage of net revenue, selling, general and
administrative expenses decreased from 16.7% in 1997 to 15.3% in 1998. The
decrease was primarily due to a reduction in accounts receivable write-offs in
1998.
Other Income (Expense), Net. Other income (expense), net, decreased to
$39,000, or 29.3% from $(133,000) in 1997 to $(94,000) in 1998. As a percentage
of net revenue, other expense, net, decreased from 0.7% in 1997 to 0.5% in
1998. The decrease was due primarily to a decrease in interest expense.
Income Tax Expense. Income tax expense increased $206,000 from $12,000 in
1997 to $218,000 in 1998 due to higher pretax income. The effective income tax
rate increased from 38.7% in 1997 to 39.2% in 1998.
Net Income. Net income increased $319,000, from $19,000 in 1997 to $338,000
in 1998. As a percentage of net revenue, net income increased from 0.1% in 1997
to 1.7% in 1998.
Curtis Liquidity and Capital Resources
Curtis' primary sources of capital have been from cash provided by
operating activities and, particularly in 1998, from bank borrowings.
During the year ended December 31, 1998, cash used in operating activities
was $1.0 million. Cash flow from earnings was offset by increases in accounts
receivable of $1.6 million. No significant cash was used in investing
activities in 1998. Cash flows from financing activities was $945,000,
consisting primarily of bank borrowing and collection of an outstanding note
receivable.
34
<PAGE>
Curtis believes that its cash flows from operating activities as well as
available financing alternatives will be sufficient to meet its 1999 cash
requirements.
Curtis Year 2000 Compliance
Overview
The year 2000 issue in computers arises from the common industry practice
of using two digits to represent a date in computer software code and databases
to enhance processing time and save storage space. Therefore, when dates in the
year 2000 are indicated and computer programs read the date "00", the computer
may default to the year "1900" rather than the correct "2000". This could
result in incorrect calculations, faulty data and computer shut downs, which
could cause disruptions in operations.
Internal Hardware and Software
Curtis has analyzed its internal hardware and software systems for year
2000 readiness. Curtis believes its own internal operations, information
systems and software applications are compliant. Future expenditures, if any,
related to year 2000 readiness are expected to be minimal.
Third-party Vendors/Suppliers and Customers
Curtis also recognizes that the year 2000 readiness of significant
vendors/suppliers and customers could significantly impact the ability of these
parties to operate. Curtis has significant relationships with various
vendors/suppliers (including financial institutions, product suppliers,
transportation providers and utilities, including communications and energy)
and certain customers. The failure of any of these parties to achieve year 2000
readiness could have a material effect on Curtis' business, results of
operations or financial condition. Curtis will continue to monitor for
indications of year 2000 readiness problems with key third parties throughout
1999. Costs associated with this monitoring are anticipated to be minimal.
The risks Curtis has identified, associated with the year 2000 readiness of
significant vendors/suppliers and customers, are as follows:
. vendors/suppliers may be unable to provide required products and/or
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
. products from vendors may malfunction due to the product being non-year
2000 compliant
Curtis management has reviewed the risks associated with year 2000
readiness and believes it has reasonable alternatives should it encounter
adverse effects of year 2000 readiness.
Contingency Plans
Although Curtis is still preparing a defined contingency plan, in the event
of a year 2000 issue, Curtis believes that it can rely on manual processes
until a remedy is identified and implemented without a significant business
disruption. However, no assurance can be given that Curtis will not be
materially adversely affected by year 2000 readiness issues. However,
management is not currently aware of any such conditions that would materially
affect Curtis' business, results of operations or financial condition.
Additionally, there can be no assurance that Curtis will not be the subject
of lawsuits if it or its vendors/suppliers or customers fail to be year 2000
compliant. Any year 2000 related suits could have a material effect on Curtis'
business, results of operations or financial condition, if the suit is
determined adversely to Curtis.
35
<PAGE>
Bintz Results of Operations
Bintz's primary business is the sale of restaurant equipment and supplies
to food service providers, such as restaurants and hotels. Bintz has one
facility located in Salt Lake City, Utah.
The following table sets forth selected statement of operations data, and
such data as a percentage of net revenue, for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1998
-------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Net revenue................................ $13,097 100.0% $17,835 100.0%
Cost of revenue............................ 10,719 81.8 14,647 82.1
------- ----- ------- -----
Gross profit............................... 2,378 18.2 3,188 17.9
Selling, general, and administrative
expenses................................. 2,071 15.8 2,448 13.7
------- ----- ------- -----
Income from operations..................... 307 2.3 740 4.1
Other income (expense), net................ (138) 1.1 (124) 0.7
------- ----- ------- -----
Income before income taxes................. 169 1.3 616 3.5
Income tax expense......................... 0.0 0.0 0.0 0.0
------- ----- ------- -----
Net income................................. $ 169 1.3% $ 616 3.5%
======= ===== ======= =====
</TABLE>
Bintz Results for 1998 Compared to 1997
Net Revenue. Net revenue increased $4.7 million, or 36.2%, from $13.1
million in 1997 to $17.8 million in 1998. The increase is primarily attributed
to an overall growth in the foodservice equipment and supply industry.
Additionally, during 1998, there was an increase in sales to the public segment
of the market.
Gross Profit. Gross profit increased $810,000 or 34.1%, from $2.4 million
in 1997 to $3.2 million in 1998. As a percentage of net revenue, gross profit
decreased from 18.2% in 1997 to 17.9% in 1998. The decrease was attributed to
the increase in sales to the public segment of the market. This segment is
highly competitive resulting in lower gross profit percentages.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $377,000, or 18.2%, from $2.1
million in 1997 to $2.4 million in 1998. The increase was attributed to an
increase in sales commissions. As a percentage of net revenue, selling, general
and administrative expenses decreased from 15.8% in 1997 to 13.7% in 1998,
primarily as a result of spreading fixed costs over a larger revenue base.
Other Income (Expense). Other income (expense), net, consists primarily of
interest expense. Interest expense decreased $14,000, or 10.1%, from ($138,000)
in 1997 to ($124,000) in 1998. The decrease was attributed to decreases in the
prime lending rate, which is used to determine Bintz's borrowing rate on its
line of credit and an overall lower outstanding balance on Bintz's line of
credit during the year.
Income Taxes. Bintz has elected S corporation status as defined by the
Internal Revenue Code, whereby Bintz is not subject to taxation for federal
purposes. Under the Internal Revenue Code provisions applicable to S
corporations and similar provisions of the state tax code for the states in
which Bintz operates, the stockholders report Bintz's taxable earnings or
losses in their personal federal and state income tax returns. Accordingly, no
provision for federal and state income taxes has been reflected in the
financial statements.
Net Income. Net income increased $447,000 or 264.5%, from $169,000 in 1997
to $616,000 in 1998. As a percentage of net revenue, net income increased from
1.3% in 1997 to 3.5% in 1998.
36
<PAGE>
Bintz Liquidity and Capital Resources
During 1998, Bintz generated $250,000 in cash from operating activities.
The primary components were decreases in inventory and prepaid expenses and
increases in accounts payable, offset by increased trade accounts receivable
and rebates receivable and decreases in customer deposits. Cash used in
investing activities was $41,000 in 1998 consisting of purchases of equipment.
Cash used in financing activities was $209,000 in 1998 consisting primarily of
distributions to shareholders and payments on the line of credit. At December
31, 1998, Bintz had working capital of $1.4 million.
The cash provided by operating activities was offset mainly by purchases of
property and equipment, payments on the line of credit and distributions to
stockholders.
Bintz Year 2000 Compliance
Overview
In general, the year 2000 issue relates to computers and other systems
being unable to distinguish between the years 1900 and 2000 because they use
two digits, rather than four, to define the applicable year. Bintz is
addressing the issue in two areas: internal hardware and software systems and
third-party vendors/ suppliers and customers.
Internal Hardware and Software
Bintz has analyzed its internal hardware and software systems for year 2000
readiness. The emphasis has been on computer systems used for accounting,
inventory, purchasing and sales. As of September 1, 1998, all of these critical
hardware and software systems have been tested and appear to be year 2000
compliant. Costs associated with this analysis have been minimal since most of
these costs were absorbed by the original vendor of the hardware and software.
Third-party Vendors/Suppliers and Customers
The second issue Bintz is addressing is the year 2000 readiness of its
significant vendors/suppliers and customers, as it relates to products the
company sells, as well as computer systems used by these parties for
accounting, inventory, manufacturing, purchasing and sales. Bintz has
significant relationships with various vendors/suppliers (including financial
institutions, product suppliers, transportation providers and utilities,
including communications and energy) and certain customers. The failure of any
of these parties to achieve year 2000 readiness could have a material effect on
Bintz's business, results of operations or financial condition. Analysis
related to these parties is being conducted via compliance letters. This
analysis will continue throughout the first half of 1999. Costs associated with
this analysis are anticipated to be minimal.
Should Bintz be unsuccessful in addressing the year 2000 readiness of
significant vendors/suppliers and customers, the risks the company has
identified are as follows:
. products from vendors may malfunction due to the product being non-year
2000 compliant
. vendors/suppliers may be unable to provide required products and/or
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
Contingency Plans
Blintz, as part of its year 2000 readiness plan, is developing contingency
plans to minimize the above identified risks associated with non-year 2000
readiness by any of its significant vendors/suppliers or customers as follows:
. identifying alternate suppliers that are year 2000 compliant
37
<PAGE>
. identifying alternate products that are year 2000 compliant
. closely monitoring all accounts receivable agings
. being prepared to supply needed proof of delivery of duplicate copies of
invoices for customers
These contingency plans are being prepared. Completion of these plans is
targeted for the third quarter of 1999.
No assurance can be given that Bintz will not be materially adversely
affected by year 2000 readiness issues. However, management is not currently
aware of any such conditions that would materially affect Bintz's business,
results of operations or financial condition.
Additionally, there can be no assurance that Bintz will not be the subject
of lawsuits regarding the failure of products it sells in the event they are
not year 2000 compliant. Any year 2000 related suits could have a material
affect on Bintz's business, results of operations or financial condition, if
the suit is determined adversely to Bintz.
Castino Results of Operations
Castino's primary business is the sale and distribution of equipment and
supplies to foodservice providers, such as restaurants and hotels, primarily
through cash and carry sales. Castino has two facilities located in Rohnert
Park, California.
The following table sets forth selected statement of operations data, and
such data as a percentage of net revenue, for the periods indicated:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, December 31,
1998 1998(1)
--------------- ------------
(In thousands) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue.................................. $ 5,921 100.0% $5,929 100,0%
Cost of revenue.............................. 4,342 73.3 4,386 74.0
------- ------ ------ -----
Gross profit................................. 1,579 26.7 1,543 26.0
Selling, general, and administrative
expenses................................... 1,470 24.8 1,526 25.7
------- ------ ------ -----
Income from operations....................... 109 1.8 17 0.3
Other income (expense), net.................. 1 0.0 6 0.1
------- ------ ------ -----
Income before income taxes................... 110 1.9 23 0.4
Income tax expense........................... 40 0.7 7 0.1
------- ------ ------ -----
Net income................................... $ 70 1.2% $ 16 0.3%
======= ====== ====== =====
</TABLE>
- --------
(1) Castino has a fiscal year end of March 31. The twelve month period ended
December 31, 1998 includes the audited results of operations for the nine
months ended December 31, 1998 and the unaudited results of operations for
the three months ended March 31, 1998, which are included in the fiscal
year ended March 31, 1998.
Castino Results for the Year Ended December 31, 1998 (unaudited) Compared to
the Year Ended March 31, 1998
Net Revenue. Net revenue was essentially unchanged for the periods
presented.
Gross Profit. Gross profit decreased $36,000, or 2.3%, from $1.6 million
in fiscal 1998 to $1.5 million in calendar 1998. As a percentage of net
revenue, gross profit decreased from 26.7% in fiscal 1998 to 26.0% in calendar
1998. The decrease as a percentage of net revenue was primarily the result of
an increase in product costs.
38
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $56,000. As a percentage of net revenue,
selling, general and administrative expenses increased from 24.8% in fiscal
1998 to 25.7% in calendar 1998. The increase was primarily due to the increase
in bonus, and profit sharing expenses.
Other Income, Net. Other income, net, increased $5,000 from $1,000 in
fiscal 1998 to $6,000 in calendar 1998.
Income Tax Expense. Income tax expense decreased $33,000 from $40,000 in
fiscal 1998 to $7,000 in calendar 1998. The effective tax rate has decreased
primarily as a result of permanent items and graduated tax rates.
Net Income. Net income decreased $54,000 from $70,000 in 1997 to $16,000 in
1998. As a percentage of net revenue, net income decreased from 1.2% in 1997 to
0.3% in 1998.
Castino Liquidity and Capital Resources
Castino's cash needs are primarily to fund its growth and purchases of
property and equipment, and distributions to its stockholder. Castino's primary
sources of capital have been from cash provided by operating activities and, to
a lesser extent, availability under its credit facilities.
During the nine month ended December 31, 1998, cash provided by operating
activities was $122,000. The cash was generated primarily from Castino's
earnings and decreases in inventories offset by increases in accounts payable
and other working capital. Cash used in investing activities was $90,000, which
was primarily used for property and equipment additions. Cash flows used in
financing activities were $31,000, which was primarily used for repayment of
long-term debt.
Castino believes that its cash flows from operating activities as well as
available financing alternatives will be sufficient to meet its 1999 cash
requirements.
Castino Year 2000 Compliance
Overview
The year 2000 issue in computers arises form the common industry practice
of using two digits to represent a date in computer software code and databases
to enhance processing time and save storage space. Therefore, when dates in the
year 2000 are indicated and computer programs read the date "00," the computer
may default to the year "1900" rather than the correct "2000." This could
result in incorrect calculations, faulty data and computer shut downs, which
could cause disruptions in operations.
Internal Hardware and Software
Castino is reviewing the risk of the year 2000 issue with regard to its own
internal operations, information systems and software applications and the
impact on Castino of its outside vendors', leasees' and borrowers' ability to
operate. Castino believes its own internal operations, information systems and
software applications are compliant now or are likely to be compliant before
any significant issues arise based upon reasonable assurance by its computer
consultant and its own analysis of its risks. Additionally, Castino does not
believe that a year 2000 issue at any of its vendors will have a significant
impact on its operations. If a significant vendor issue arises, Castino is
confident that it can arrange alternative sourcing.
Third-party Vendors/Suppliers and Customers
Castino also recognizes that the year 2000 readiness of significant
vendors/suppliers and customers could significantly impact the ability of these
parties to operate. Castino has significant relationships with various
39
<PAGE>
vendors/suppliers (including financial institutions, product suppliers,
transportation providers and utilities, including communications and energy)
and certain customers. The failure of any of these parties to achieve year 2000
readiness could have a material effect on Castino's business, results of
operations or financial condition. Castino will continue to monitor for
indications of year 2000 readiness problems with key third parties throughout
1999. Costs associated with this monitoring are anticipated to be minimal.
The risks Castino has identified, associated with the year 2000 readiness
of significant vendors/suppliers and customers, are as follows:
. vendors/suppliers may be unable to provide required products and/or
services due to non-compliant hardware or software used in their
individual companies
. payments from customers may be delayed due to non-compliant hardware or
software used in their individual companies
. products from vendors may malfunction due to the product being non-year
2000 compliant
Castino management has reviewed the risks associated with year 2000
readiness and believes it has reasonable alternatives should it encounter
adverse effects of year 2000 readiness. However, no assurance can be given that
Castino will not be materially adversely affected by year 2000 readiness
issues. However, management is not currently aware of any such conditions that
would materially affect Castino's business, results of operations or financial
condition.
Additionally, there can be no assurance that Castino will not be the
subject of lawsuits if it or its vendors/suppliers or customers fail to be year
2000 compliant. Any year 2000 related suits could have a material effect on
Castino's business, results of operations or financial condition, if the suit
is determined adversely to Castino.
Contingency Plans
Although Castino is still preparing a defined contingency plan and expects
to have a plan completed in the second half of the year, in the event of a year
2000 issue, Castino believes that it can rely upon manual processes until a
remedy is identified and implemented without a significant business disruption.
Presently, Castino does not believe that year 2000 compliance will result
in material investments by it, nor does Castino anticipate the year 2000 issue
will have material adverse effects on its business operations or financial
performance. There can be no assurance, however, that the year 2000 issue will
not adversely effect Castino and its business.
40
<PAGE>
BUSINESS
The Company
HDSI was formed in June 1998 to become a full-service national distributor
of foodservice equipment and supplies. It has entered into definitive
agreements to acquire the six founding companies. Upon consummation of this
offering and the acquisitions of the founding companies, HDSI will be one of
the largest foodservice equipment and supply companies in the United States.
The founding companies have been in business for periods ranging from 18 to 108
years. In 1998, HDSI's pro forma combined net revenues were $129.7 million.
Over the past two years, the pro forma combined net revenues of the founding
companies have increased at a compound annual rate of approximately 13%.
HDSI's goal is to become the largest national single-source provider of
foodservice equipment and supplies in the United States. HDSI maintains over
10,000 skus and serves more than 25,000 customers through a network of eleven
facilities located in four states. HDSI offers a wide range of products and
services to customers in the foodservice industry, including equipment and
supply sales and contract services. HDSI serves the entire spectrum of
businesses that sell food and beverages. Its customers include regional and
national restaurant chains independent restaurants, hotels, businesses,
schools, health care facilities, casinos, stadiums and prisons.
HDSI intends to offer its larger regional and national customers improved
service and an enhanced array of value-added products, services and resources,
while still maintaining a focus on local customers. Its products include heavy
equipment, such as ranges and refrigeration units, as well as smaller
disposable items, such as china, glass and silverware. HDSI also offers a full
range of contract services for restaurants and foodservice facilities. A
significant portion of HDSI's revenues in 1998 were attributable to replacement
sales. HDSI believes its replacement business is less cyclical and generates
higher margins than other parts of its business.
Industry Overview
HDSI competes in the foodservice equipment and supply industry, which was
comprised of over 12,000 companies and generated approximately $13 billion in
revenues in 1998. Participants in the distribution of foodservice equipment and
supplies offer one or more of the following products and services:
. foodservice equipment and supplies
. design, installation and construction of commercial kitchens and
restaurant and hotel interiors
. service and maintenance of foodservice equipment
. sales of used foodservice equipment
. rental of foodservice equipment
According to Foodservice Equipment & Supplies magazine, industry revenues have
grown at an average annual rate of 5% over the last seven years. An important
characteristic of the foodservice equipment and supply industry is that more
than 40% of sales are replacement driven.
The foodservice equipment and supply industry serves the foodservice
industry. Participants in the foodservice industry include chain and
independent restaurants, hotels, businesses, schools, health care facilities,
casinos, stadiums and prisons. The foodservice industry generated over $351
billion in revenue in 1998, or approximately 4% of the United States Gross
Domestic Product.
Sales of equipment and supplies account for the majority of revenue in the
foodservice equipment and supply industry. Foodservice equipment and supply
distributors sell through a number of channels, including direct sales, cash
and carry stores, catalogs, and the Internet. Such distributors typically carry
large volumes of inventory because their customers often buy based on immediate
need. As a result, a typical distributor maintains thousands of skus to meet
customer needs.
41
<PAGE>
Foodservice equipment and supply companies often provide contract services
in conjunction with product sales. An equipment and supply company doing
contract work for a foodservice facility will typically create the blueprints
and other construction documents for the facility. It will also select, supply
and install the equipment and supplies for the facility and will supervise
construction of the facility or provide construction support.
Strategy
HDSI's mission is to provide a broad array of high quality foodservice
equipment and supply services to meet the needs of foodservice providers
locally, regionally and nationwide. HDSI believes that the experience and
reputation of its management team will help HDSI implement these strategies
effectively and will make HDSI a more attractive acquiror to potential
acquisition candidates. HDSI also believes implementation of its internal
growth, operating and acquisition strategies will give it a competitive
advantage over other foodservice equipment and supply companies.
Capitalize on Management Team
HDSI's management team includes executives with significant experience
implementing acquisition programs and effectively integrating acquired
businesses. Roger M. Laverty, one of HDSI's founders and its President and
Chief Executive Officer, served as the Chief Executive Officer of Smart and
Final, Inc., a New York Stock Exchange listed distributor of restaurant
supplies, from 1994 to 1998. During his 19-year tenure at Smart and Final, the
company's annual revenues increased from $200 million to $1.6 billion and Mr.
Laverty oversaw the acquisition and integration of companies with combined
revenues totaling approximately $600 million.
John M. Richman, Chairman of HDSI's Board of Directors, served as Chairman
and Chief Executive Officer of Kraft, Inc. from 1979 to 1980 and from 1986 to
1989, and served as Chairman and Chief Executive Officer of Dart & Kraft, Inc.,
a company formed by the 1980 merger of Kraft, Inc. and Dart Industries, Inc.,
from 1980 to 1986. While at Dart & Kraft, Mr. Richman oversaw the acquisition
of Hobart, a leading foodservice equipment manufacturer and distributor. He was
also instrumental in the founding of Kraft Foodservice, a multibillion dollar
division of Kraft, Inc. that sold food and foodservice equipment to multi-unit
restaurant operators throughout the United States. When Kraft was acquired by
Philip Morris in 1989, Mr. Richman was named Vice Chairman of Philip Morris and
was responsible for integrating the food operations of Kraft, Inc. with those
of General Foods, Inc., which had been previously acquired by Philip Morris.
James Castleberry, HDSI's Chief Financial Officer, has over 25 years
experience in financial management. Mr. Castleberry served in various executive
positions for Wickes Companies, Inc., a multi-billion dollar diversified
company, from 1982 to 1992, and most recently served as the company's Vice
President and Comptroller. While at Wickes, he was involved in the acquisition
and integration of numerous companies. Mr. Castleberry most recently served as
Chief Operating Officer and Chief Financial Officer for BDK Holdings, Inc., a
producer and distributor of kitchen and bath textile products.
HDSI will also attempt to capitalize on the reputation of the founding
companies within the foodservice equipment and supply industry, as well as the
extensive network of relationships that the former owners of the founding
companies have formed within the industry. Chuck Rothkopf, the President of
Economy, and John Breznikar, the President of East Bay, both of whom will be
directors of HDSI, will be involved in helping HDSI identify potential
acquisition candidates.
Acquisition Strategies
Expand Within Existing Markets. HDSI intends to establish a strong regional
presence in the western United States, where the founding companies are
located. HDSI intends to strengthen its presence in this market by acquiring or
opening additional facilities. HDSI's expansion within this market will be
driven by:
. expanding its customer base
. expanding product and service offerings
. improving operating efficiencies through the consolidation of multiple
local operations
42
<PAGE>
Enter New Geographic Markets. HDSI will seek to enter new geographic
markets by acquiring established local firms with strong management teams and
customer relationships that can serve as platforms for further growth in such
markets. HDSI believes its presence in a number of markets will enhance its
ability to attract and serve customers throughout the United States.
Internal Growth Strategies
Become a National Single Source Provider. Currently, most of the
approximately 12,000 companies in the foodservice equipment and supply industry
are small, owner-operated businesses with limited access to the capital
required to offer a comprehensive range of products and services. HDSI offers
its customers a broad range of competitively priced foodservice equipment and
supplies as well as comprehensive contract services. In this highly fragmented
industry, HDSI believes its ability to provide its customers with a single
source solution for all of their equipment and supply needs is a key
competitive advantage that differentiates HDSI from its competitors. The broad
array of products and services offered by HDSI also positions it to capitalize
on its relationships with local, regional and national foodservice operators.
Cross-Sell to Expanded Customer Base. HDSI believes there are significant
opportunities for a national, full-line foodservice equipment and supply
company to generate greater revenue and profitability by providing a wider
range of services and serving a broader customer base than traditional industry
participants. By integrating extensive equipment and supply distribution
operations with broad contract capabilities, HDSI expects to capitalize on
cross-selling opportunities.
Expand Complementary Products and Services. HDSI believes there are a
number of opportunities to offer new products and services that will complement
its core business and help increase profitability. In particular, HDSI intends
to expand its equipment maintenance and repair services and to provide
customized stainless steel fabrication and millwork services directly, rather
than through subcontractors. HDSI also intends to pursue the development of a
private label category of products.
Open New Cash and Carry Stores. HDSI has extensive experience operating
cash and carry stores. Cash and carry stores focus on the replacement and
restocking needs of local customers. As a result, cash and carry customers tend
to be less price sensitive. HDSI will seek to capitalize on its cash and carry
expertise by opening new locations and expanding its presence in markets served
by its existing stores as well as adjacent markets. Each new store will be run
by a management team that is already established in that market or an adjacent
market.
Expand Alternative Sales Channels. HDSI intends to expand alternative sales
channels, particularly Internet and catalog sales. HDSI plans to develop a
consolidated website and establish a national presence on the Internet. The
founding companies also mailed over 200,000 catalogs in 1998. HDSI intends to
consolidate the customer lists of the founding companies and develop a company-
wide catalog. HDSI believes these selling channels will provide a significant
opportunity to increase its sales, particularly to retail consumers.
Operating Strategies and Efficiencies
Utilizing Volume Purchasing to Reduce Product Cost. HDSI intends use its
scale to secure volume price reductions and enhance national account and
private label packaging opportunities. HDSI's purchasing strategy will focus on
obtaining the lowest possible cost of goods for each item purchased. Initially,
information sharing among the founding companies will help HDSI identify
immediate opportunities for cost reductions.
Enhance Inventory Management. HDSI intends to implement a company wide
inventory management system that will allow HDSI to reduce lead time, increase
inventory turns, and reduce inventory levels. Major components of HDSI's
inventory management strategy include:
. refining HDSI's ability to forecast and analyze product movement to
allow more accurate determinations of ordering lead times, safety stock
requirements and appropriate service levels
43
<PAGE>
. using space allocation techniques to manage product display space and
maintain merchandising consistency
. forming strategic partnerships with key suppliers to create lower cost
distribution alternatives while maintaining existing service levels to
customers
. consolidating existing warehouse facilities
. establishing centralized distribution centers within each region HDSI
serves
Provide Strong Incentives to Management. Each of the founding companies as
well as the companies HDSI subsequently acquires typically will be operated by
the former management team of that company. HDSI intends to motivate these
managers and align their interests with those of HDSI by providing that a
portion of the consideration paid to such managers in connection with the
acquisition of their company will be in the form of common stock, and that a
portion of the compensation paid to such managers as employees of HDSI will be
in the form of options to purchase HDSI's common stock. See "Management--1998
Stock Option Plan."
Maintain Decentralized Management with Centralized Administration. HDSI's
organizational structure is designed to create decentralized regional and local
operating units, each of which will be responsible for its performance results.
HDSI's central administrative team will remain small and focus on identifying
and furthering HDSI's larger strategic objectives. In addition, this team will
administer certain key functions, such as financial planning and reporting,
treasury and risk management, to ensure consistency and reduce costs. HDSI
believes that the overhead associated with its central administrative team will
be offset by a corresponding reduction in costs at the operations level. Over
time, the team will assume responsibility for additional functions such as
purchasing, human resources, information systems, and legal.
Adopt Best Practices, Policies and Procedures. HDSI intends to evaluate the
operating policies and procedures of each of the founding companies to identify
the practices used by such companies that will best serve HDSI and its
customers. Each of the founding companies will adopt these "best practices."
For example, HDSI intends to identify the most effective merchandising and
store design formats among the founding companies and implement those formats
at each HDSI store. HDSI believes this company-wide adoption of best practices
will facilitate the integration of the founding companies. To further
facilitate this integration, HDSI intends to establish an executive committee,
comprised of a representative from each of the founding companies, that will
evaluate best practices and industry trends and opportunities.
Products and Services
To accommodate the diverse needs of its customers, HDSI offers a wide range
of products and services. HDSI maintains over 10,000 skus, including heavy
equipment, such as ranges and refrigeration units, as well as smaller
disposable items, such as china, glass and silverware. HDSI also resells used
equipment out of certain of its facilities. HDSI generally takes such equipment
in trade from customers who are purchasing new equipment, or sells the
equipment for such customers on a consignment basis. HDSI believes that
additional expansion opportunities exist in developing a private label category
of products.
HDSI offers a full range of contract services in conjunction with product
sales. When HDSI does contract work for a foodservice facility, it typically
will provide the following services, either directly or through subcontractors:
. create the blueprints and other construction documents for the facility
using state-of-the-art design and drafting equipment
. supply and install the equipment and supplies for the facility
. provide custom stainless steel items and millwork for the facility
. store all of the equipment and supplies for the facility in one of
HDSI's warehouses prior to construction and installation
. supervise construction of the facility or provide construction support
44
<PAGE>
Customers
In 1998, the founding companies provided foodservice equipment and supply
services to more than 25,000 customers, with no one customer accounting for
more than 10% of the founding companies' total revenues.
HDSI generally does not enter into long-term purchase and supply contracts
with its customers. HDSI intends to continue its emphasis on developing and
maintaining successful long-term relationships with its customers by providing
superior, high quality service in a professional manner.
Sales and Marketing
HDSI uses a variety of means to market and sell its products and services.
HDSI currently has a sales force of approximately 75 persons. All of the
founding companies utilize local advertising and marketing programs. In
addition, the founding companies mailed over 200,000 catalogs in 1998. Certain
of the founding companies offer a small number of products for sale over the
Internet, although sales to date have not been significant. HDSI intends to
focus on further developing these sales channels.
HDSI expects to continue to market its products and services to a broad
array of potential customers, with an emphasis on large regional and national
customers. While each of HDSI's operating units will be responsible for its own
sales and marketing efforts, the central administrative team will help
coordinate those efforts. HDSI intends to develop a consolidated website and
establish a national presence on the Internet. HDSI believes that its
commitment to consistent quality and service will enable it to develop and
maintain long-term relationships with its existing customers.
Suppliers
HDSI purchases foodservice equipment and supplies from over one thousand
different manufacturers and suppliers located throughout the world. HDSI
purchases such equipment and supplies directly from manufacturers and, to a
lesser extent, from authorized distributors. In deciding whether to purchase
equipment and supplies from a particular source, HDSI's purchasing employees
evaluate product specifications, quality, reliability of delivery, production
lead times and price. HDSI believes that it is not materially dependent on any
single supplier and that its relationships with its suppliers are good.
Although the foodservice equipment and supply manufacturing industry, in
which HDSI's suppliers are participants, is consolidating, it remains highly
fragmented. Following the acquisitions of the founding companies, HDSI believes
there will be fewer than a half dozen manufacturers larger than HDSI. HDSI
intends to review its supplier base and explore the extent to which its volume
of purchases will provide it with leverage to obtain more favorable prices and
service.
Many foodservice equipment and supply companies have formed cooperative
buying groups to obtain more favorable terms, such as price reductions and
rebates, from suppliers. Certain of the founding companies are currently
members of such buying groups.
Competition
The foodservice equipment and supply industry is intensely competitive.
Competition in the industry is based primarily on service, selection, location
and price. HDSI competes with a large number of equipment and supply businesses
on a regional and local basis, some of which may have greater financial
resources than HDSI and some of which are divisions of large public companies.
HDSI may also face competition for acquisition candidates from such
competitors, some of which have acquired foodservice equipment and supply
companies during the past decade.
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<PAGE>
HDSI believes that its strategy of becoming the leading national
foodservice equipment and supply distributor will enhance its competitive
position. HDSI also believes that the implementation of an enhanced management
information system and standardized operating procedures will provide it with
additional competitive advantages.
Technology and Management Information Systems
Each of the founding companies operates a limited management information
system that is used to purchase, monitor and allocate inventory throughout its
facilities. Most of these systems include computerized order entry, sales
analysis, inventory status, invoicing and payment, and bar code tracking
functions. All of these systems are designed to improve productivity for the
founding companies and their respective customers.
In developing internal company-wide systems following this offering, HDSI
expects to draw upon the best features of the existing systems currently in
use. HDSI plans to integrate the systems of the founding companies to operate
over a wide area network. This integrated system will be designed to allow each
warehouse and sales center to share information regarding sales activities,
credit approval, inventory level, stock balance, vendor returns, order
fulfillment and other performance measures. Each of the founding companies will
continue to use its existing system until the integrated system is completed.
Employees
As of December 31, 1998, the founding companies had 310 employees, 75 of
whom were employed in sales and marketing, and the remainder of whom were
employed in design, support and administrative positions. Some of the employees
of certain of the founding companies are represented by unions that have
entered into collective bargaining agreements with those founding companies.
HDSI believes that relations between each of the founding companies and their
respective employees are good.
Properties
The principal executive and administrative offices of HDSI are located in
Culver City, California. HDSI operates five distribution and sales facilities
and two warehouses in California, two distribution facilities in Oregon, one
distribution facility in Utah and one sales office in Nevada. These facilities
range in size from 1,500 square feet to 66,000 square feet. All of these
facilities are leased. The leases expire at various times between 1999 and
2009. When these leases expire, HDSI believes that suitable replacement space
will be available as required. Additional detail regarding certain of HDSI's
leases is contained herein under "Certain Transactions--Transactions Involving
Certain Directors and Principal Shareholders." HDSI believes that its current
facilities are adequate for its expected needs over the next several years.
However, HDSI may add new facilities as a result of acquisitions or due to
strategic expansions into new markets.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth information concerning HDSI's directors and
executive officers upon consummation of this offering:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <S> <C>
John M. Richman.................. 71 Chairman of the Board*
Roger M. Laverty................. 51 President, Chief Executive Officer and Director
James Castleberry................ 56 Executive Vice President and Chief Financial Officer
Donald S. Perkins................ 71 Director*
Cyrus F. Freidheim, Jr........... 63 Director*
Ross Berner...................... 33 Director
John Breznikar................... 49 Director*
Mark Levy........................ 52 Director*
Mark McKinney.................... 32 Director
Jerry K. Pearlman................ 61 Director*
Chuck Rothkopf................... 58 Director*
Kenneth W. Slutsky............... 45 Director*
</TABLE>
- --------
* To be elected to the board effective upon the consummation of this offering.
John M. Richman will become Chairman of HDSI's board of directors upon
consummation of this offering. Mr. Richman is the former Chairman and Chief
Executive Officer of Kraft, Inc. and has been Counsel to the law firm of
Wachtell, Lipton, Rosen & Katz since January 1990. He is a director of USX
Corporation and a trustee of Archstone Communities. Mr. Richman received his
B.A. from Yale University and his L.L.B. from Harvard Law School.
Roger M. Laverty, one of HDSI's founders, has served as HDSI's President
and Chief Executive Officer and as a member of the board of directors since
February 1999. Prior to joining HDSI, Mr. Laverty served as the President and
Chief Executive Officer of Smart and Final, a distributor of foodservice
equipment and supplies, from January 1994 to May 1998. He received his B.A.
from Stanford University and his J.D. from Stanford Law School.
James Castleberry has served as HDSI's Executive Vice President and Chief
Financial Officer since November 1998. Prior to joining HDSI, Mr. Castleberry
served as Senior Vice President and Chief Financial Officer of BDK Holdings,
Inc., a producer and distributor of kitchen and bath textile products, from
April 1992 to November 1998, and as Chief Operating Officer of BDK from January
1998 to November 1998. Mr. Castleberry is a Certified Public Accountant. He
received his B.S. from San Diego State University.
Donald S. Perkins will become a member of the board of directors upon
consummation of this offering. Mr. Perkins served as Chairman and Chief
Executive Officer of Jewel Companies, Inc., a national grocery chain, from 1970
to 1983. He is a director of AON Corporation, Cummins Engine Company, Inc.,
Lucent Technologies Inc., Nanophase Technologies Corporation and Ryerson Tull,
Inc. Mr. Perkins received his B.A. from Yale University and his M.B.A. from
Harvard Business School.
Cyrus F. Freidheim, Jr. will become a member of the board of directors upon
consummation of this offering. Mr. Freidheim has served as Vice-Chairman for
Booz-Allen & Hamilton, a strategic consulting firm, since 1966. He is a
director of Household International, Inc. and MicroAge, Inc., where he is also
a member of the compensation committee. Mr. Friedheim received his B.S. from
the University of Notre Dame and his M.S. from Carnegie Mellon University.
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<PAGE>
Ross Berner, one of HDSI's founders, has served as a member of the board of
directors since HDSI's inception. Mr. Berner was the co-founder of United Road
Services, Inc., a motor vehicle and equipment towing and transport company, and
served as the company's Co-Chief Acquisition Officer from July 1997 to May
1998. From November 1993 to December 1997, he served as Vice President, Equity
Sales and Trading, for Salomon Brothers, Inc. Mr. Berner received his B.A. from
Northwestern University and his M.B.A. from Columbia University.
John Breznikar will become a member of the board of directors upon
consummation of this offering. Mr. Breznikar has been the President of East Bay
Restaurant Supply, Inc. since 1985. He received his B.A. from Santa Clara
University.
Mark Levy will become a member of the board of directors upon consummation
of this offering. Mr. Levy has been Managing Partner of Alexander Capital
Group, a private equity investment fund, since June 1998. Mr. Levy was a co-
founder of Levy Restaurants, a foodservice organization that includes a network
of restaurants, a group that provides food service operations at sports and
entertainment facilities, and a consulting and advisory services group. He
served as Vice-Chairman of Levy Restaurants from 1978 to June 1998, and serves
as a director of Dave & Buster's, Inc. Mr. Levy received his B.A. from the
University of Missouri and his M.B.A. from Washington University.
Mark McKinney, one of HDSI's founders, has served as a member of the board
of directors since HDSI's inception. Mr. McKinney was the co-founder of United
Road Services, Inc., a motor vehicle and equipment towing and transport
company, and served as the company's Co-Chief Acquisition Officer from July
1997 to May 1998. He served as a portfolio manager for Berger Associates, a
mutual fund company, from December 1996 to September 1997, and as a portfolio
manager for Farmers Group, an insurance company, from April 1992 to December
1996. Mr. McKinney received his B.A. from UCLA and his M.B.A. from the
University of Southern California.
Jerry K. Pearlman will become a member of the board of directors upon
consummation of this offering. Mr. Pearlman served as Chairman and Chief
Executive Officer of Zenith Electronics Corporation, an electronics
manufacturer, from 1984 to 1995. He is a director of Smurfit-Stone Container
Corporation and Ryerson Tull, Inc. and serves on the compensation committee of
both of those entities. He received his A.B. from Princeton University and his
M.B.A. from Harvard Business School.
Chuck Rothkopf will become a member of the board of directors upon
consummation of this offering. Mr. Rothkopf is the President of Economy
Restaurant Fixtures, Inc. and has been with that company since 1976. Mr.
Rothkopf received his B.A. from Hofstra University.
Kenneth W. Slutsky will become a member of the board of directors upon
consummation of this offering. Mr. Slutsky has served as Vice-Chairman of
Candle Corporation, a provider of systems management software, since 1993. He
received his B.A. from Bowdoin College and his J.D. from the Emory University
School of Law.
Committees of the Board of Directors
The board of directors intends to establish an audit and finance committee
and a compensation and governance committee after this offering. The audit and
finance committee will:
. make recommendations to the board concerning the independent auditors
that conduct annual examinations of HDSI's accounts
. review the scope of HDSI's annual audit and meet periodically with the
independent auditors to review their findings and recommendations
. approve significant accounting policies or changes to existing policies
. periodically review HDSI's principal internal financial controls
. review HDSI's annual budget
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<PAGE>
The compensation and governance committee will review the compensation of
HDSI's executive officers and make recommendations regarding such compensation,
the election of officers and director nominations to the board of directors.
Compensation of Directors
Upon consummation of this offering, HDSI expects to grant each director who
is not an officer, employee or consultant of HDSI an option to purchase 20,000
shares of common stock at 90% of the initial public offering price. All
directors are reimbursed for expenses incurred in attending meetings of the
Board or committees thereof. HDSI has also granted Mr. Richman options to
purchase 107,500 common shares at an exercise price of $4.25 per share.
Executive Compensation; Employment Agreements
HDSI was incorporated in June 1998 and has not conducted any operations
other than activities related to the acquisitions of the founding companies and
this offering. HDSI's chief executive officer during 1998 did not receive any
compensation. Further, no executive officer received compensation in 1998 in
excess of $100,000. HDSI has entered into employment agreements with Mr.
Laverty and Mr. Castleberry, under which each executive is entitled to receive
a base salary and will be eligible to receive an annual performance bonus as
determined by the board of directors. Mr. Laverty's base salary is $200,000 and
Mr. Castleberry's is $175,000. Each employment agreement has an initial term of
three years, but may be terminated by either party prior to the end of such
term. The employment agreements also provide that if the executive is
terminated without cause, he will be paid a severance amount payable in
accordance with HDSI's regular pay schedule equal to his base salary for the
following periods: Mr. Laverty--for the remainder of the term of his employment
agreement; Mr. Castleberry--for one year.
1998 Stock Option Plan
HDSI's 1998 Stock Option Plan is intended to provide directors, officers,
employees and consultants of HDSI with an opportunity to invest in HDSI and to
advance the interests of HDSI and its stockholders by enabling HDSI to attract
and retain qualified personnel. The stock option plan provides for the grant of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and nonqualified stock options. The maximum
number of shares of common stock that may be subject to options granted under
the stock option plan may not exceed, in the aggregate, 1,000,000 shares.
Shares of common stock that are attributable to options that have expired or
been terminated, cancelled or forfeited shall be available for issuance in
connection with future grants. The compensation and governance committee will
administer the stock option plan and select the individuals who will receive
options and establish the terms and conditions of such options.
Upon consummation of this offering, HDSI will grant options to purchase an
aggregate of 274,987 shares (assuming an initial public offering price of
$12.00 per share) at an exercise price equal to 90% of the initial offering
price to employees of the founding companies. Upon consummation of this
offering, HDSI also expects to grant an aggregate of 100,000 shares to five of
its directors at an exercise price equal to 90% of the initial public offering
price. These options generally will vest over three years and will expire five
years from the date of grant. Options to purchase a total of 472,500 shares of
common stock have been granted to certain officers, directors, persons who have
agreed to serve as directors and consultants of HDSI. See "Certain
Transactions."
49
<PAGE>
CERTAIN TRANSACTIONS
Organization of the Company
In July 1998, in connection with its formation, HDSI issued and sold shares
of its common stock to directors, persons who have agreed to serve as
directors, officers and members of their immediate families in the following
amounts: (1) 107,500 shares to Mr. Richman for cash consideration of $500;
(2) 430,000 shares to Mr. Laverty for cash consideration of $2,000; (3) 537,500
shares to Mr. Berner for cash consideration of $2,500; (4) 537,500 shares to
Mr. McKinney for cash consideration of $2,500; and (5) 21,500 shares to
Scott Freidheim, the son of Cyrus F. Freidheim, Jr., for cash consideration of
$100. One-half of the shares purchased by Mr. Laverty are subject to repurchase
by HDSI if Mr. Laverty voluntarily terminates his employment with HDSI or is
terminated for cause prior to 18 months after the consummation of this
offering.
In September 1998 and January 1999, HDSI issued and sold an aggregate of
97,649 shares of its Series A Preferred Stock to certain officers, persons who
have agreed to serve as directors and members of their immediate families for
cash consideration of approximately $415,000.
Between July 1998 and November 1998, HDSI granted the following options to
purchase shares of its common stock to directors, persons who have agreed to
serve as directors and officers: (1) option to purchase 107,500 to Mr. Richman
at an exercise price of $4.25 per share; (2) option to purchase 215,000 shares
to Mr. Laverty at an exercise price of $0.01 per share; and (3) option to
purchase 130,000 shares to Mr. Castleberry at an exercise price of $4.25 per
share. All of the shares underlying Mr. Richman's option vested on the date the
option was granted. One hundred seven thousand five hundred of the shares
underlying Mr. Laverty's option will vest as of the filing of this registration
statement with the Securities and Exchange Commission, and the remaining
107,500 shares will vest in January 2001. Sixty-five thousand of the shares
underlying Mr. Castleberry's option will vest upon consummation of this
offering, and the remaining 65,000 shares will vest in May 2000.
Simultaneous with the consummation of this offering, each of the founding
companies will merge with or be acquired by HDSI or one of its subsidiaries.
The aggregate consideration to be paid by HDSI for the founding companies is
$41,413,157 in cash, 1,269,070 shares of common stock and the assumption of
approximately $4.0 million in outstanding indebtedness of the founding
companies.
The consummation of each acquisition is subject to customary conditions.
These conditions include, among other things, the continuing accuracy on the
closing date of the acquisitions of the founding companies of the
representations and warranties of the founding companies and the principal
shareholders thereof and of HDSI, the performance by each of the founding
companies, their shareholders and HDSI of all covenants included in the
agreements relating to the acquisitions of the founding companies, and the non-
existence of a material adverse change in the business, financial condition or
results of operations of the founding companies. There can be no assurance that
the conditions to closing of the acquisitions of the founding companies will be
satisfied or waived or that the acquisitions of the founding companies will be
consummated.
The following table sets forth the consideration to be paid by HDSI for
each founding company the total debt which would have been assumed by HDSI as
of December 31, 1998:
<TABLE>
<CAPTION>
Shares of Total
Name Common Stock Cash Debt
---- ------------ ------- ------
(In thousands)
<S> <C> <C> <C>
Raygal.......................................... 116,667 $12,600 $ 0
East Bay........................................ 263,021 9,469 60
Economy......................................... 343,678 10,826 135
Curtis.......................................... 270,833 3,250 1,980
Bintz........................................... 191,538 4,268 1,396
Castino......................................... 83,333 1,000 404
--------- ------- ------
Total......................................... 1,269,070 $41,413 $3,975
========= ======= ======
</TABLE>
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<PAGE>
In connection with the acquisitions and as consideration for their
interests in the founding companies, certain officers, persons who have agreed
to serve as directors, and holders of more than 5% of the outstanding shares of
common stock upon consummation of the acquisitions of the founding companies
will receive cash and shares of common stock as follows:
<TABLE>
<CAPTION>
Shares of
Name Common Stock Cash
---- ------------ --------------
(In thousands)
<S> <C> <C>
John Breznikar................................... 93,750 $3,375
Chuck Rothkopf................................... 171,839 5,413
Mike Weinstock................................... 171,839 5,413
</TABLE>
In addition, certain payments will be made by or to HDSI pursuant to the
acquisition agreements. Within 90 days of the completion of the acquisitions,
HDSI will pay to the shareholders of Economy, Messrs. Rothkopf and Weinstock,
an amount equal to the net income of Economy for the period January 1, 1999
through the completion date, less the amount of rebate income of Economy earned
during such period and included in its net income. On May 31, 2000, HDSI will
pay to the Economy shareholders the amount of rebates earned during such
preclosing period of 1999. HDSI is required to pay to a shareholder of Raygal
within 90 days of completion of the acquisitions the amount by which Raygal's
adjusted working capital balance exceeds a specified amount. Within the same 90
day period, HDSI is required to pay certain stockholders of East Bay, including
Mr. Breznikar, an amount equal to the net income of East Bay, after taxes, for
the period from October 1, 1998 to the completion of the acquisitions.
On or before March 31, 2000, the shareholders of Curtis are required to
repay certain amounts, not to exceed $650,000, to HDSI if the pre-tax earnings
attributable to the Curtis operations for 1999 are less than a specified
target. HDSI will hold back approximately $325,000 from the aggregate
consideration payable to the shareholder of Castino, a proportionate amount of
which will be paid to the Castino shareholder to the extent that pre-tax
earnings goals attributable to the Castino operations for the months March
through May, 1999 are satisfied.
Pursuant to the agreements entered into in connection with the acquisitions
of the founding companies, the shareholders of the founding companies have
agreed not to compete with HDSI in certain defined businesses for a period of
four years from the date of consummation of this offering.
The stockholders of certain of the founding companies, including certain of
the stockholders who will become directors or five percent stockholders of HDSI
following the acquisitions, have personally guaranteed debt that is being
assumed by HDSI. HDSI is required to obtain the release of these guaranties
within 90 days of the completion of the acquisitions.
Transactions Involving Certain Directors and Principal Shareholders
Economy's operating results for 1998 included approximately $450,000 of
rebates on products sold, which rebates Economy expects to receive in 1999 and
pay out to its shareholders as received. Economy will issue a note payable to
its shareholders in respect of any such accrued rebates that are not received
prior to the closing, which will require HDSI to pay out any of these rebates
received after the completion of the acquisitions. Economy had notes payable
from its shareholders of $119,000 at December 31, 1997, and in 1998 distributed
these notes, then having an aggregate balance of $115,000, to its shareholders.
Mr. Breznikar, through certain entities in which he is a partner or member,
as the case may be, leases three properties to East Bay in Oakland, California.
In addition, a partnership in which Mr. Breznikar is a partner leases certain
equipment to East Bay. In fiscal 1998, 1997 and 1996, East Bay made lease
payments in the aggregate amounts of $224,000, $193,000 and $193,000,
respectively, with respect to these real and personal property leases. HDSI
will lease the three real properties from those entities pursuant to two leases
to be entered into effective as of the closing providing for initial annual
lease payments in the aggregate of
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<PAGE>
approximately $358,000. In addition, HDSI will lease the equipment subject to
the equipment leases pursuant to a new lease with Mr. Breznikar's partnership
providing for initial annual lease payments of $85,000.
In February 1999, East Bay paid the outstanding balance of $175,000 on
notes payable to Mr. Breznikar.
HDSI is entering into employment agreements with Messrs. Breznikar and
Weinstock, and a consulting agreement with Mr. Rothkopf, in connection with
the acquisitions of their companies. HDSI will also enter into a consulting
agreement with Mr. Berner for the provision of consulting services in
connection with future acquisitions.
Company Policy
HDSI anticipates that there will be a minimal amount of future
transactions between HDSI and any of its directors, officers, employees or
affiliates, and that any such transaction will be approved in advance by a
majority of disinterested members of the board of directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of HDSI's common stock after giving effect to the issuance of shares
of common stock in connection with the acquisitions of the founding companies
and the conversion of all shares of Series A Preferred Stock upon consummation
of this offering for (1) each person who is known by HDSI to beneficially own
more than five percent (5%) of its outstanding shares of common stock, (2) each
of HDSI's directors and persons who have agreed to serve as directors, (3) each
executive officer of HDSI and (4) all directors, persons who have agreed to
serve as directors and executive officers as a group. Except as otherwise
indicated, HDSI believes that the beneficial owners of the securities listed
below, based on information provided by such owners, have sole investment and
voting power with respect to the common stock shown below as being beneficially
owned by them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
Percent
-----------------
Number of Before After
Name of Beneficial Owner Shares Offering Offering
- ------------------------ --------- -------- --------
<S> <C> <C> <C>
Roger M. Laverty(1)................................ 537,500 16.1% 5.6%
Ross Berner........................................ 533,500 16.5 5.6
Mark McKinney(2)................................... 523,400 16.2 5.5
John M. Richman(3)................................. 215,000 6.5 2.2
Chuck Rothkopf(4).................................. 171,839 5.3 1.8
Mike Weinstock..................................... 171,839 5.3 1.8
John Breznikar..................................... 134,927 4.2 1.4
James Castleberry(5)............................... 65,000 2.0 *
Donald S. Perkins.................................. 23,530 * *
Cyrus F. Freidheim, Jr............................. 11,765 * *
Mark Levy.......................................... 0 * *
Jerry K. Pearlman.................................. 0 * *
Kenneth W. Slutsky................................. 0 * *
All directors, persons who have agreed to serve as
directors and executive officers as a group
(12 persons)..................................... 2,216,461 63.2 22.7
</TABLE>
- --------
*Indicates beneficial ownership of less than one percent.
(1) Consists of 430,000 shares of common stock and an exercisable option to
purchase 107,500 shares.
(2) Consists of 518,700 shares of common stock held by Mr. McKinney, and 4,700
shares held by Jenna McKinney, Mr. McKinney's daughter.
(3) Consists of 107,500 shares of common stock and exercisable options to
purchase 107,500 shares.
(4) Consists of 171,839 shares of common stock held by The Rothkopf Revocable
Trust, of which Mr. Rothkopf is a trustee.
(5) Consists of exercisable options to purchase 65,000 shares of common stock.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
HDSI's authorized capital stock consists of 45,000,000 shares of capital
stock, consisting of 40,000,000 shares of common stock, $0.001 par value, and
5,000,000 shares of preferred stock, $0.001 par value. Upon consummation of the
acquisitions of the founding companies and this offering, there will be
9,474,919 shares of common stock and no shares of preferred stock outstanding.
The following discussion of the material features of the capital stock of HDSI
is intended as a summary only and is qualified in its entirety by reference to
HDSI's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws, which are included as exhibits to the registration statement
of which this prospectus is a part.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock
that may be issued, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available therefor. See "Dividend Policy." In
the event of a liquidation, dissolution or winding up of HDSI, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares of
preferred stock. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued upon completion of this offering will be fully paid
and non-assessable.
Preferred Stock
HDSI's board of directors has the authority, without action by the
stockholders, to designate and issue up to 5,000,000 shares of preferred stock
in one or more series and to designate the dividend rate, voting rights and
other rights, preferences and restrictions of each series, any or all of which
may exceed those of the common stock. HDSI has no present plans to issue any
shares of preferred stock.
One of the effects of undesignated preferred stock may be to enable the
board to discourage an attempt to obtain control of HDSI by means of a tender
offer, proxy contest, merger or otherwise and to protect the continuity of
HDSI's management. The issuance of shares of preferred stock may adversely
affect the rights of holders of common stock. For example, preferred stock
issued by HDSI may rank prior to the common stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of common stock. Accordingly, the issuance of shares
of preferred stock may discourage bids for the common stock or may otherwise
adversely affect the market price of the common stock.
Classified Board of Directors; Filling Vacancies
HDSI's Amended and Restated Certificate of Incorporation, as amended,
provides that the board shall be divided into three classes and that the number
of directors in each class shall be as nearly equal as is possible based upon
the number of directors constituting the entire board. The certificate
effectively provides that the term of office of the first class will expire at
the first annual meeting of stockholders following the date of this prospectus,
the term of office of the second class will expire at the second annual meeting
of stockholders following the date of the prospectus, and the term of office of
the third class will expire at the third annual meeting of stockholders
following the date of this prospectus. At each annual meeting of stockholders,
successors to directors of the class whose term expires at such meeting will be
elected to serve for three-year terms or until their successors are duly
elected and qualified.
54
<PAGE>
The classification of directors has the effect of making it more difficult
for stockholders to change the composition of the board. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the board. Such a delay may help to provide the board
with sufficient time to analyze an unsolicited proxy contest, a tender or
exchange offer or any other extraordinary corporate transaction.
Under Delaware law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. The Amended and Restated Certificate of
Incorporation does not override this provision. The certificate does provide
that, subject to the rights of any holders of preferred stock, newly created
directorships resulting from an increase in the authorized number of directors
or vacancies on the board resulting from death, resignation, retirement,
disqualification or removal of directors or any other cause may be filled only
by the board (and not by the stockholders, unless there are no directors in
office), provided that a quorum is then in office and present, or by a majority
of the directors then in office, if less than a quorum is then in office, or by
the sole remaining director. Accordingly, the board could prevent any
stockholder from enlarging the board and filling the new directorships with
such stockholder's own nominees.
The provisions of the Amended and Restated Certificate of Incorporation
described above may have the effect of discouraging a third party from
initiating a proxy contest, making a tender or exchange offer or otherwise
attempting to gain control of HDSI, or of attempting to change the composition
or policies of the board, even though such attempts might be beneficial to HDSI
or its stockholders. These provisions of the certificate could thus increase
the likelihood that incumbent directors will retain their positions.
Stockholder Meeting Provisions
The Amended and Restated Certificate of Incorporation and Bylaws provide
that (subject to the rights of any holders of preferred stock) only a majority
of the board or the Chief Executive Officer will be able to call a special
meeting of stockholders and, following this offering, stockholder action may be
taken only at a duly called and convened annual or special meeting of
stockholders and may not be taken by written consent. These provisions, taken
together, prevent stockholders from forcing consideration by the stockholders
of stockholder proposals over the opposition of the board, except at an annual
meeting.
The bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as director or to bring other business
before an annual meeting of stockholders. The notice procedure provides that,
subject to the rights of any holders of preferred stock, only persons who are
nominated by or at the direction of the board, any committee appointed by the
board or by a stockholder who has given timely written notice of such
nomination to the secretary of HDSI prior to the meeting at which directors are
to be elected will be eligible for election as directors of HDSI. The notice
procedure also provides that at an annual meeting only such business may be
conducted as has been brought before the meeting by, or at the direction of,
the board, any committee appointed by the board, or by a stockholder who has
given timely written notice to the secretary of HDSI of such stockholder's
intention to bring such business before such meeting. Under the notice
procedure, notice of stockholder nominations or proposals to be made at an
annual or special meeting must be received by HDSI not less than 75 days nor
more than 90 days prior to the scheduled date of the meeting (or, if less than
70 days' notice or prior public disclosure of the date of the meeting is given,
then no later than the 15th day following the earlier of the day such notice
was mailed or the day such public disclosure was made). These notices must
contain certain prescribed information.
The notice procedure affords the board an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals and, to the extent deemed appropriate by the board, to inform
stockholders about such matters, and also provides a more orderly procedure for
conducting annual meetings of stockholders.
55
<PAGE>
Although the Bylaws do not give the board any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action, the foregoing provisions may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal, regardless of whether consideration of such nominees or proposals
might be harmful or beneficial to HDSI and its stockholders.
Delaware Law
HDSI is a Delaware corporation and subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prevents
an "interested stockholder" (defined generally as a person owning 15% or more
of a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date on which such person became an interested stockholder, subject to
certain exceptions, such as the approval of such a business combination by the
board of directors and the holders of at least two-thirds of the outstanding
shares of voting stock not owned by the interested stockholder. The existence
of Section 203 would be expected to have an anti-takeover effect, possibly
inhibiting takeover attempts that might otherwise result in a premium over the
market price being paid for the shares of common stock held by stockholders.
Limitation of Liability and Indemnification Matters
Pursuant to the provisions of the Delaware General Corporation Law, HDSI
has adopted provisions in its Amended and Restated Certificate of Incorporation
that provide that directors of HDSI shall not be personally liable for monetary
damages to HDSI or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of:
. a breach of the director's duty of loyalty to HDSI or its stockholders
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
. an act related to an unlawful stock repurchase or payment of a dividend
under Section 174 of the Delaware General Corporation Law
. transactions from which the director derived an improper personal
benefit.
This limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission. Nevertheless, this charter
provision may have the effect of reducing the likelihood of derivative
litigation being instituted against members of the board and may discourage or
deter HDSI's stockholders or management from bringing a lawsuit against board
members for breaches of fiduciary duty, even though such an action, if
successful, might benefit HDSI and its stockholders.
HDSI's Bylaws require HDSI to indemnify its officers and directors and
permits HDSI to indemnify its other agents, by agreement or otherwise, to the
fullest extent permitted under Delaware law. HDSI intends to enter into
separate indemnification agreements with its directors and officers that may,
in some cases, be broader than the specific indemnification provisions
contained in the Delaware General Corporation Law. The indemnification
agreements may require HDSI, among other things, to indemnify such officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from
willful misconduct of a culpable nature), to advance the expenses incurred by
such officers and directors as a result of any proceeding against them as to
which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.
Transfer Agent
HDSI's transfer agent and registrar for its common stock is
.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the acquisitions of the founding companies and this
offering, 9,474,919 shares of common stock will be outstanding. The 6,250,000
shares of common stock HDSI is offering (other than shares purchased by
affiliates of HDSI) will be freely tradeable without restriction or further
registration under the Securities Act. The remaining shares may not be resold
except in transactions registered under the Securities Act, or pursuant to an
available exemption from such registration. HDSI and each of its officers,
directors, persons who have agreed to serve as directors and stockholders have
agreed, subject to certain exceptions described below, not to offer, pledge,
sell, contract to sell, or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock for a period of six months after
the date of this prospectus without the prior written consent of BancBoston
Robertson Stephens. In addition, the stockholders of the founding companies
have agreed not to offer, pledge, sell, contract to sell, or otherwise transfer
or dispose of, directly or indirectly, the shares they acquire in connection
with the acquisitions of the founding companies for a period of one year after
the date of this prospectus. During its lock-up period, HDSI will be permitted
to grant options to purchase shares of common stock pursuant to HDSI's stock
option plan, issue shares of common stock upon the exercise of options granted
pursuant to HDSI's stock option plan, and issue shares of common stock to
finance acquisitions.
During its lock-up period, HDSI has agreed not to file any registration
statement with respect to any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock without
BancBoston Robertson Stephens's prior written consent, except for the
registration of shares of common stock to be issued upon the exercise of stock
options under HDSI's stock option plan. After consummation of this offering,
options to purchase 747,487 shares of common stock will be outstanding and an
additional 252,513 shares of common stock will be reserved for issuance
pursuant to HDSI's stock option plan. HDSI intends to register under the
Securities Act all of the shares of common stock underlying such options.
HDSI has provided registration rights to certain of its stockholders
pursuant to which, such stockholders may sell their shares as part of any
registered public offering by HDSI, and may, under certain circumstances,
require that HDSI register their shares for a public offering.
No prediction can be made as to the effect, if any, that future sales of
shares of common stock, or the availability of shares for future sale, will
have on the market price of the common stock prevailing from time to time.
Sales of substantial amounts of common stock in the market after this offering
could adversely affect prevailing market prices for the common stock and could
adversely affect the trading price of such common stock and HDSI's ability to
raise additional capital in the future.
57
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., The Robinson-Humphrey Company, LLC and
Thomas Weisel Partners LLC (the "Representatives"), have severally agreed with
us, subject to the terms and conditions set forth in the underwriting
agreement, to purchase from us the number of shares of common stock set forth
opposite their names below. The underwriters are committed to purchase and pay
for all such shares if any are purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc.................................
The Robinson-Humphrey Company, LLC................................
Thomas Weisel Partners LLC........................................
---------
Total........................................................... 6,250,000
=========
</TABLE>
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public on the terms set forth on the
cover page of this prospectus. The underwriters may allow selected dealers a
concession of not more than $0.XX per share; and the underwriters may allow,
and such dealers may reallow, a concession of not more than $0.XX per share to
certain other dealers. After this offering, the initial public offering price
and other selling terms may be changed by the representatives. The common stock
is offered subject to receipt and acceptance by the underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
Over-allotment Option. We have granted to the underwriters an option,
exercisable for the 30-day period immediately following the date of this
prospectus, to purchase up to a maximum of 937,500 additional shares of common
stock to cover over-allotments, if any, at the same price per share as the
initial shares to be purchased by the underwriters. To the extent that the
underwriters exercise this over-allotment option, they will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-up Agreements. HDSI and each of its officers, directors, persons who
have agreed to serve as directors and stockholders have agreed, subject to
certain exceptions described below, not to offer, pledge, sell, contract to
sell, or otherwise transfer or dispose of, directly or indirectly, any shares
of common stock or any securities convertible into or exercisable or
exchangeable for common stock for a period of 180 days after the date of this
prospectus without the prior written consent of BancBoston Robertson Stephens
Inc. The restrictions described in the previous paragraph do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement
. the grant by HDSI of options to purchase shares of common stock pursuant
to HDSI's stock option plan or the exercise of an option or a warrant or
the conversion of a security outstanding on the date of this prospectus
which is described in the prospectus
. the issuance by HDSI of shares of common stock to finance acquisitions
In addition, the former stockholders of the founding companies have agreed
with us not to offer, pledge, sell, contract to sell, or otherwise transfer or
dispose of, directly or indirectly any of the shares they acquire in connection
with the acquisitions of the founding companies for a period of one year after
the date of this prospectus.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
Stabilization. The Representatives have advised us that, pursuant to
Regulation M under the Securities Act, certain persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or
58
<PAGE>
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of
the underwriters to reduce a short position incurred by the underwriters in
connection with this offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with this offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
the Representatives in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
Representatives have advised us that such transactions may be effected on the
Nasdaq National Market or otherwise, and, if commenced, may be discontinued at
any time.
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby will be determined through negotiations
between us and the Representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain of our financial
information, market valuations of other companies that we and the
Representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
LEGAL MATTERS
The legality of the common stock we are offering will be passed on by
Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation,
Palo Alto, California. Certain legal matters will be passed on for the
underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The financial statements of HDSI and each of the founding companies
included in this prospectus and elsewhere in this registration statement, to
the extent and for the periods indicated in their reports, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon Arthur
Andersen's authority as an expert in accounting and auditing in giving said
reports.
ADDITIONAL INFORMATION
HDSI has filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, with respect to the common
stock HDSI is offering for sale. This prospectus, which forms a part of the
registration statement, does not contain all of the information set forth in
the registration statement. For further information with respect to HDSI and
the common stock, reference is made to the registration statement. Statements
contained in this prospectus as to the contents of any contract or other
document are not necessarily complete, and, in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference to such exhibit. Copies of the registration statement may be
examined without charge at the Public Reference Section of the Securities and
Exchange Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
and the Commission's Regional Offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of all or any portion of the
registration statement can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
certain fees prescribed by the Commission. The Commission maintains a World
Wide Web site that contains registration statements, reports, proxy and
information statements and other information regarding registrants (including
HDSI) that file electronically with the Commission. The address of such World
Wide Web site is http://www.sec.gov.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
HOSPITALITY DESIGN & SUPPLY, INC. AND FOUNDING COMPANIES
Unaudited Pro Forma Combined Financial Statements--Basis of
Presentation......................................................... F-3
Unaudited Pro Forma Combined Balance Sheet............................. F-4
Unaudited Pro Forma Combined Statements of Operations.................. F-5
Notes to Unaudited Pro Forma Combined Financial Statements............. F-6
HOSPITALITY DESIGN & SUPPLY, INC.
Report of Independent Public Accountants............................... F-8
Balance Sheet.......................................................... F-9
Statement of Operations................................................ F-10
Statements of Stockholders' Equity..................................... F-11
Statement of Cash Flows................................................ F-12
Notes to Financial Statements.......................................... F-13
FOUNDING COMPANIES
RAYGAL, INC.
Report of Independent Public Accountants............................... F-17
Balance Sheets......................................................... F-18
Statements of Income................................................... F-19
Statements of Stockholders' Equity..................................... F-20
Statements of Cash Flows............................................... F-21
Notes to Financial Statements.......................................... F-22
EAST BAY RESTAURANT SUPPLY, INC.
Report of Independent Public Accountants............................... F-27
Balance Sheets as of September 30, 1998 and 1997....................... F-28
Statements of Income for the Years Ended September 30, 1998, 1997 and
1996................................................................. F-29
Statements of Stockholders' Equity for the Years Ended September 30,
1998, 1997 and 1996.................................................. F-30
Statements of Cash Flows for the Years Ended September 30, 1998, 1997
and 1996............................................................. F-31
Notes to Financial Statements.......................................... F-32
Report of Independent Public Accountants............................... F-37
Balance Sheets as of December 31, 1998 and 1997........................ F-38
Statements of Stockholders' Equity for the Three Months Ended December
31, 1998 and 1997.................................................... F-39
Statements of Cash Flows for the Three Months Ended December 31, 1998
and 1997............................................................. F-40
Notes to Financial Statements.......................................... F-41
ECONOMY RESTAURANT FIXTURES, INC.
Report of Independent Public Accountants............................... F-42
Balance Sheets......................................................... F-43
Statements of Income................................................... F-44
Statements of Stockholders' Equity..................................... F-45
Statements of Cash Flows............................................... F-46
Notes to Financial Statements.......................................... F-47
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
CURTIS RESTAURANT EQUIPMENT, INC.
Report of Independent Public Accountants................................ F-52
Balance Sheets.......................................................... F-53
Statements of Income.................................................... F-54
Statements of Stockholders' Equity...................................... F-55
Statements of Cash Flows................................................ F-56
Notes to Financial Statements........................................... F-57
BINTZ DISTRIBUTING CO.
Report of Independent Public Accountants................................ F-64
Balance Sheets.......................................................... F-65
Statements of Operations................................................ F-66
Statements of Stockholders' Equity...................................... F-67
Statements of Cash Flows................................................ F-68
Notes to Financial Statements........................................... F-69
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
Report of Independent Public Accountants................................ F-75
Balance Sheets.......................................................... F-76
Statements of Income.................................................... F-77
Statements of Stockholder's Equity...................................... F-78
Statements of Cash Flows................................................ F-79
Notes to Financial Statements........................................... F-81
</TABLE>
F-2
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
HDSI will consummate the acquisitions of the founding companies
simultaneously with consummation of this offering. All of the acquisitions will
be accounted for using the purchase method of accounting. Hospitality Design &
Supply has been identified as the accounting acquirer, in accordance with Staff
Accounting Bulletin ("SAB") 97 for financial statement presentation purposes
since its former common stockholders will have the largest portion of the
voting rights of the combined corporation.
The unaudited pro forma combined statement of operations gives effect to
the acquisitions of the founding companies and consummation of this offering as
if these events occurred on January 1, 1998. The unaudited pro forma combined
balance sheet gives effect to these transactions as if they occurred on
December 31, 1998.
To the extent the owners of the founding companies have contractually
agreed to reductions in salary, bonuses and benefits and rent, these reductions
have been reflected in the unaudited pro forma combined statements of
operations. With respect to other potential cost savings, Hospitality Design &
Supply has not and cannot quantify these savings until completion of the
acquisitions. It is anticipated that these savings will be offset in part by
costs related to Hospitality Design & Supply's new corporate management and by
the costs associated with being a public company. However, because these costs
cannot be quantified at this time, they have not been included in the unaudited
pro forma combined financial statements of the Company.
The pro forma adjustments are based on estimates, available information and
certain assumptions, and may be revised, as additional information becomes
available. The pro forma financial information does not purport to represent
what Hospitality Design & Supply's financial position or results of operations
would actually have been had such transactions occurred on these dates and are
not necessarily representative of Hospitality Design & Supply's financial
position or results of operations for any future period. Since the founding
companies were not under common control or management during the periods
presented, historical combined results may not be comparable to, or indicative
of, future performance. See "Risk Factors" included elsewhere herein. The
unaudited pro forma combined financial statements should be read in conjunction
with the other financial statements and notes thereto included elsewhere in the
this Prospectus.
F-3
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro
Acquisition Forma
HDSI Raygal East Bay Economy Curtis Bintz Castino Adjustments Combined
------ ------ -------- ------- ------ ------ ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash $ --
equivalents............ $ 211 $ 208 $ 258 $ 419 $ 28 $ 5 $ 25,580(a)(b)(c)(e) $ 26,709
Accounts receivable,
net.................... -- -- 4,044 2,380 4,754 2,892 556 -- 14,626
Contracts receivable.... -- 6,296 -- -- -- -- -- -- 6,296
Related party notes
receivable............. -- 117 -- -- -- -- -- (117)(e) --
Costs and estimated
earnings in excess of
billings............... -- 505 -- -- -- -- -- -- 505
Inventories............. -- -- 2,569 2,738 1,060 1,095 723 593 (c) 8,778
Deferred tax asset...... -- -- 195 -- -- -- 14 -- 209
Prepaid expenses and
other current assets... 980 544 59 84 44 15 42 (980)(d) 788
------ ------ ------ ------ ------ ------ ------ -------- --------
Total Current Assets.. 1,191 7,670 7,125 5,621 5,886 4,002 1,340 25,076 57,911
Property, plant and
equipment, net......... -- 262 268 204 241 338 156 -- 1,469
Related party notes
receivable............. -- -- -- -- -- -- 94 (94)(e) --
Goodwill, net........... -- -- -- -- -- -- -- 43,279 (c) 43,279
Deferred tax asset...... -- -- -- -- -- -- 37 -- 37
Other assets............ -- 81 247 44 159 -- 12 -- 543
------ ------ ------ ------ ------ ------ ------ -------- --------
Total Assets............ $1,191 $8,013 $7,640 $5,869 $6,286 $4,340 $1,639 $ 68,261 $103,239
====== ====== ====== ====== ====== ====== ====== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Short term borrowings... $ -- $ -- $ -- $ 100 $1,900 $1,375 $ 252 $ -- $ 3,627
Accounts payable........ -- 3,407 2,917 2,455 1,083 903 332 -- 11,097
Accrued liabilities..... 460 614 1,405 360 386 195 252 -- 3,672
Customer deposits....... -- -- 392 374 -- 125 227 -- 1,118
Deferred tax liability.. -- -- 3 -- 233 -- -- -- 236
Billings in excess of
costs and estimated
earnings............... -- 507 -- -- -- -- -- -- 507
Current portion of
related party notes
payable................ -- -- 1,050 -- -- -- -- (1,050)(e) --
Current portion of notes
payable................ -- -- 18 11 52 14 50 -- 145
Current portion of
obligations under
capital leases......... -- -- -- -- 16 7 -- -- 23
Other................... -- 241 -- -- 375 -- -- -- 616
------ ------ ------ ------ ------ ------ ------ -------- --------
Total Current
Liabilities.......... 460 4,769 5,785 3,300 4,045 2,619 1,113 (1,050) 21,041
Related party notes
payable................ -- -- -- -- -- 163 -- (163)(e) --
Notes payable, excluding
current portion........ -- -- 42 24 28 7 102 -- 203
Obligations under
capital leases,
excluding current
portion................ -- -- -- -- 40 3 -- -- 43
------ ------ ------ ------ ------ ------ ------ -------- --------
Total Liabilities....... 460 4,769 5,827 3,324 4,113 2,792 1,215 (1,213) 21,287
Stockholders' Equity
Preferred stock........ -- -- -- -- -- -- -- -- --
Common stock........... 2 10 90 5 58 350 4 (510)(b)(c) 9
Additional paid-in-
capital............... 781 -- -- -- -- -- -- 81,214 (a)(b)(c)(d) 81,995
Retained earnings
(accumulated
deficit).............. (52) 3,234 1,723 2,540 2,115 1,198 420 (11,230)(b) (52)
------ ------ ------ ------ ------ ------ ------ -------- --------
Total Stockholders'
Equity............... 731 3,244 1,813 2,545 2,173 1,548 424 69,474 81,952
------ ------ ------ ------ ------ ------ ------ -------- --------
Total Liabilities and
Stockholders' Equity... $1,191 $8,013 $7,640 $5,869 $6,286 $4,340 $1,639 $ 68,261 $103,239
====== ====== ====== ====== ====== ====== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined balance sheets.
F-4
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Year Ended December 31, 1998
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
East Acquisition Pro Forma
HDSI Raygal Bay Economy Curtis Bintz Castino Adjustments Combined
---- ------- ------- ------- ------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $-- $33,038 $29,916 $22,703 $20,279 $17,835 $5,929 $ -- $ 129,700
Cost of revenue......... -- 28,793 23,964 15,976 16,526 14,647 4,386 593 (a) 104,885
---- ------- ------- ------- ------- ------- ------ ------- ---------
Gross profit.......... -- 4,245 5,952 6,727 3,753 3,188 1,543 (593) 24,815
Selling, general and
administrative
expenses............... 52 2,520 5,388 5,811 3,103 2,448 1,526 (731)(b) 20,117
Goodwill amortization... -- -- -- -- -- -- -- 1,082 (c) 1,082
---- ------- ------- ------- ------- ------- ------ ------- ---------
Income (loss) from
operations............. (52) 1,725 564 916 650 740 17 (944) 3,616
Other income (expense)
Interest, net......... -- 42 (53) 29 (109) (125) (23) -- (239)
Other................. -- 39 (2) 46 15 1 29 -- 128
---- ------- ------- ------- ------- ------- ------ ------- ---------
Income (loss) before
income taxes........... (52) 1,806 509 991 556 616 23 (944) 3,505
Income taxes............ -- 17 225 17 218 -- 7 1,121 (d) 1,605
---- ------- ------- ------- ------- ------- ------ ------- ---------
Net income (loss)....... $(52) $ 1,789 $ 284 $ 974 $ 338 $ 616 $ 16 $(2,065) $ 1,900
==== ======= ======= ======= ======= ======= ====== ======= =========
Basic earnings per
share.................. $ 0.20
=========
Diluted earnings per
share.................. $ 0.19
=========
Basic weighted average
shares outstanding..... 9,474,919(e)
=========
Diluted weighted average
shares outstanding..... 9,856,042(e)
=========
</TABLE>
The accompanying notes are integral part of these unaudited pro forma combined
financial statements
F-5
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. General
Hospitality Design & Supply, Inc. (the "'Company"), was founded to become a
single-source provider of foodservice equipment and supplies to local, regional
and national customers in the hospitality industry. Hospitality Design & Supply
has conducted no operations to date and will acquire the founding companies
simultaneously with and as a condition to the consummation of this offering.
The historical financial statements reflect the financial position and
results of operations of the founding companies and were derived from the
respective financial statements of the founding companies included elsewhere
herein. The information included in these financial statements for the
individual founding companies is as of and for the year ended December 31, 1998
with the exception of East Bay for which the information is as of and for the
fiscal year ended September 30, 1998.
2. Acquisitions of Founding Companies
Simultaneously with and as condition to consummation of this offering,
Hospitality Design & Supply will acquire all of the founding companies. All of
the acquisitions will be accounted for using the purchase method of accounting
with Hospitality Design & Supply being treated, in accordance with SAB 97, as
the accounting acquirer since its former common shareholders will have the
largest portion of the voting rights of the combined corporation.
The following table sets forth the consideration to be paid in cash and in
shares of Common Stock to the stockholders of each of the founding companies
(without giving effect to any indebtedness of the founding companies that may
be assumed by the Company). For purposes of computing the estimated purchase
price for accounting purposes, the value of shares of Common Stock was
determined using an estimated fair value of $10.80 per share (or $13.7
million), which represents a discount of 10.0% from the assumed initial public
offering price of $12.00 per share due to restrictions on sale and
transferability of the shares issued. The total estimated purchase price of
$55.6 million for the acquisitions is based upon preliminary estimates and is
subject to certain price adjustments at and following closing of the
acquisitions. The Company believes that the final estimated purchase price will
not materially differ from the preliminary estimate.
<TABLE>
<CAPTION>
Shares of
Common Stock Cash
------------ --------------
(In thousands)
<S> <C> <C>
Raygal........................................... 116,667 $12,600
East Bay......................................... 263,021 9,469
Economy.......................................... 343,678 10,826
Curtis........................................... 270,833 3,250
Bintz............................................ 191,538 4,268
Castino.......................................... 83,333 1,000
--------- -------
1,269,070 $41,413
========= =======
</TABLE>
3. Unaudited Pro Forma Combined Balance Sheet Adjustments
(a) Reflects the sale of 134,120 shares of Preferred Stock in January
1999. All preferred shares convert on a share-for-share basis at the
consummation of the offering.
(b) Reflects cash proceeds of $67.9 million from the issuance of 6,250,000
shares of Hospitality Design & Supply Common Stock, net of estimated
offering costs of $7.1 million (based on the initial public offering
price of $12.00 per share) and elimination of the founding companies'
equity accounts. Offering costs consist primarily of underwriting
discounts and commissions, accounting fees, legal fees and printing
expenses. Acquisition costs consist primarily of legal fees.
F-6
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(Continued)
(c) Reflects the acquisition of the founding companies by Hospitality
Design & Supply for a total estimated purchase price of $55.6 million
consisting of $41.9 million in cash (including $500,000 in transaction
costs) and 1,269,070 shares of Common Stock valued at $10.80 per share
(or $13.7 million). The purchase price less the net assets acquired,
including an adjustment to inventories carried on a LIFO basis to fair
market value, results in excess purchase price of $43.3 million. Based
upon management's preliminary analysis, it is anticipated that the
historical value of the assets and liabilities of the acquired
companies' with the exception of the adjustments made for inventories,
will approximate fair value. Management has not identified any other
material tangible or intangible assets to which a portion of the
purchase price could be reasonably allocated. Subsequent to the
Offering, management intends to perform appraisals of all significant
tangible and intangible assets.
(d) Reflects charge to equity for financing costs deferred at December 31,
1998.
(e) Repayment of net balance of related party notes.
4. Unaudited Pro Forma Combined Statements of Operations Adjustments
(a) To reflect increased inventory value as of January 1, 1998.
(b) Includes a reduction, net of corporate office executive salaries, in
the compensation and benefits of the owners of the founding companies
of $647,000 and a net reduction in rent expense of $84,000 on
facilities leased from such owners, to which such owners have
contractually agreed.
(c) Reflects the amortization over a 40 year estimated life of goodwill to
be recorded as a result of the acquisitions, which will be partially
deductible for tax purposes.
(d) Reflects the incremental provision for federal and state income taxes
relating to all entities being combined at an estimated rate of 40.0%
applied to estimated taxable income.
(e) The number of shares used in the calculations of basic and diluted
earnings per share have been derived as follows:
<TABLE>
<CAPTION>
Pro Forma
Combined
---------
<S> <C>
Shares issued in connection with the formation of the Company... 1,639,375
Conversion of Series A Preferred Stock:
Outstanding at December 31, 1998.............................. 182,354
Issued in January 1999........................................ 134,120
Shares issued in this offering.................................. 6,250,000
Shares issued in connection with the acquisitions............... 1,269,070
---------
Basic shares estimated to be outstanding........................ 9,474,919
Incremental effect of options on shares outstanding............. 381,123
---------
Diluted shares estimated to be outstanding...................... 9,856,042
=========
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hospitality Design & Supply, Inc.:
We have audited the accompanying balance sheet of Hospitality Design &
Supply, Inc. as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the period from June 17, 1998
(inception) through December 31, 1998. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hospitality Design &
Supply, Inc. as of December 31, 1998 and the results of its operations and its
cash flows for the period from June 17, 1998 (inception) through December 31,
1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Los Angeles, California
February 20, 1999
F-8
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
(In
thousands,
except
share
and per
share
amounts)
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents.......................................... $ 211
Deferred offering costs............................................ 980
------
Total assets.................................................... $1,191
======
Current Liabilities:
Accrued liabilities................................................ $ 460
------
Total liabilities............................................... 460
------
Stockholders' Equity:
Series A Preferred Stock $0.001 par value:
Authorized--500,000 shares at December 31, 1998,
Issued--182,354 shares at December 31, 1998..................... --
Common stock, $0.001 par value:
Authorized--3,500,000 shares at December 31, 1998,
Issued--1,639,375 at December 31, 1998.......................... 2
Additional paid-in capital......................................... 781
Accumulated deficit................................................ (52)
------
Total Stockholders' Equity........................................... 731
------
Total Liabilities and Stockholders' Equity........................... $1,191
======
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of this balance sheet.
F-9
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
STATEMENT OF OPERATIONS
For the Period from June 17, 1998 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
(In thousands,
except share
and per share
amounts)
<S> <C>
Revenue.......................................................... $ --
General and administrative expenses.............................. (52)
----------
Net loss......................................................... $ (52)
==========
Basic loss per share............................................. $ (0.03)
==========
Diluted loss per share........................................... $ (0.03)
==========
Basic weighted average shares outstanding........................ 1,639,375
==========
Diluted weighted average shares outstanding...................... 1,639,375
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-10
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Period from June 17, 1998 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
Series A
Common Stock Preferred Stock Additional Total
---------------- ----------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------- ------ --------- ------- ---------- ----------- -------------
(In thousands, except shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Capitalization.. 1,639,375 $ 2 182,354 $ -- $781 $ -- $783
Net loss.............. -- -- -- -- -- (52) (52)
--------- --- --------- ------ ---- ---- ----
Balance: December 31,
1998.................. 1,639,375 $ 2 182,354 $ -- $781 $(52) $731
========= === ========= ====== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of this statement.
F-11
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
STATEMENT OF CASH FLOWS
For the Period from June 17, 1998 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Cash Flows From Operating Activities:
Net loss....................................................... $ (52)
-----
Net cash used operating activities.......................... (52)
-----
Cash Flows From Investing Activities:
Deferred offering costs........................................ (980)
Increase in accrued liabilities................................ 460
-----
Net cash used in investing activities....................... (520)
-----
Cash Flows From Financing Activities:
Proceeds from the issuance of stock............................ 783
-----
Net cash provided by financing activities...................... 783
-----
Net Increase in Cash and Cash Equivalents........................ 211
Cash and Cash Equivalents, at beginning of period................ --
-----
Cash and Cash Equivalents, at end of period...................... $ 211
=====
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest......................................... $ --
Cash paid for income taxes..................................... $ --
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Business and Organization
Hospitality Design & Supply, Inc., a Delaware corporation, (the "Company")
was formed in June 1998 to become a full-service national provider of
foodservice equipment, supplies and related services. The Company is in
negotiations to acquire six companies who will provide a wide range of products
and services to customers in the foodservice industry. These acquisitions are
contingent on and will occur simultaneously with the consummation of an initial
public offering (the "Offering") of its common stock. The Company intends to
continue to acquire similar companies to expand its national operations.
All of the Company's activities to date relate to the Offering and the
acquisitions. The Company is dependent on the Offering to execute the pending
acquisitions, however there is no assurance that the pending acquisitions
discussed below will be completed or that the Company will be able to generate
future operating revenue. The Company's future success is dependent upon a
number of factors which include, among other things, the ability to integrate
operations, obtain sufficient acquisition financing, successfully manage growth
and attract and retain quality management.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash And Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS
No. 109, an asset and liability approach is required. Such approach results in
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the financial statement and
income tax bases of assets and liabilities. As required by SFAS No. 109, the
Company has established a full valuation allowance against any income tax
carryforward benefits, because their realization is dependent on future
earnings. Consequently, no provision or benefit for federal income taxes has
been recorded in the statement of operations.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, allows the companies to choose between a new fair value-
based method of accounting for employee stock options or similar equity
instruments and the current intrinsic value-based method of accounting
prescribed in Accounting Principles Board Opinion No. 25 ("APB No. 25").
Companies electing to remain with the accounting in APB No. 25 must make pro
forma disclosure of net income and earnings per share as if the fair value
method of accounting had been applied. The Company applies the intrinsic value-
based method.
F-13
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other non-
owner changes in equity. Other than net loss, the Company has no comprehensive
income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company adopted SFAS No.
131 in 1998 and its adoption did not have a significant impact on the financial
statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted SFAS No. 132 in 1998 and its adoption did not have a
significant impact on the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in the year ending December 31, 2000. The Company believes that
adoption of SFAS No. 133 will not significantly affect the Company's financial
position, results of operations, or financial statement presentation.
3. Company Stock
a. Series A Preferred Stock:
In addition to common stock, the Company also issued 182,354 shares of
convertible Series A Preferred Stock (the "convertible preferred stock") at a
price of $4.25 per share (par value of $0.001 per share). 105,885 shares of the
above convertible preferred stock was issued to related parties. The holders of
the convertible preferred stock are entitled to receive, when, as and if
declared by the Board of Directors, non cumulative cash dividends at a rate of
$0.425 per annum. Each share of convertible preferred stock may be converted
into one share of common stock of the Company at the option of the holder. The
convertible preferred stock will automatically be converted into one share of
common stock of the Company upon the Offering.
b. Common Stock:
In connection with the organization and initial capitalization of
Hospitality Design & Supply, Inc., the Company issued 762,500 shares of common
stock, ($0.001 par value) for a price of $0.01 per share to directors,
officers, consultants, other related parties and future directors of the
Company. On September 4, 1998, the stockholders approved a 2.15 for one stock
split and at December 31, 1998, total common shares of the Company outstanding
were 1,639,375 after adjustment for the stock split.
F-14
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
c. Restricted Stock:
Included in the above common stock issued are 200,000 pre-split and 430,000
post-split shares of restricted stock acquired by the Chief Executive Officer
of the Company. These shares were purchased for $0.01 per share and have a par
value of $0.001 per share. The restricted shares vest fifty percent at the
Offering and fifty percent upon the completion of eighteen months of service
with the Company.
d. Loss per Share:
Loss per share was computed by dividing the net loss by the weighted
average number of shares outstanding, after giving effect to the stock-split
referred to above. The weighted average basic number of shares used in the
computation was 1,639,375.
4. Stock Option Plans
During 1998, the directors and shareholders of the Company approved the
Hospitality Design & Supply, Inc. 1998 Stock Option Plan (the "Plan"). The
purpose of the Plan is to attract and retain qualified directors, officers,
employees, independent contractors, consultants and advisors by providing them
with an opportunity to invest in the Company. The Plan currently provides for
the grant of options on a maximum of 500,000 shares of common stock of the
Company and the options have a term of 10 years.
As of December 31, 1998, 472,500 options had been granted to officers and
consultants of the Company. Vesting of options under the Plan is generally over
a three year period beginning on the date of the grant with certain exceptions
as follows. The 107,500 options granted to the Chairman of the Board during
1998 vested immediately. In addition, 345,000 options were granted to two of
the Company's officers, with 172,500 of these options vesting upon consummation
of the Offering. The remaining options for one of the officers vest at
18 months after consummation of the Offering and for the other officer at 18
months after the employment date.
Pursuant to the disclosure requirements of SFAS No. 123, the weighted
average fair value per share of options granted during the period from June 17,
1998 (inception) to December 31, 1998 was $0.64 as estimated using the Black-
Scholes option pricing model.
The following summarizes additional information regarding stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01................. 215,000 9.7 $0.01 -- $0.01
$4.25................. 257,500 9.7 4.25 107,500 4.25
------- --- ----- ------- -----
472,500 9.7 $2.32 107,500 $4.25
======= === ===== ======= =====
</TABLE>
Pro forma net earnings and earnings per share information, as required by
SFAS No. 123, has been determined as if the Company had accounted for employee
stock options under the fair value method prescribed under SFAS No. 123. The
fair value of these options was estimated at grant date using the Black-Scholes
option pricing model with the following assumptions for fiscal 1998: risk-free
interest rates of 5.5 percent; dividend yield of 0 percent; and expected option
life of 6.0 years. There was no expected volatility incorporated into the
assumptions as the Company was privately held at December 31, 1998.
F-15
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma net loss for the period from June 17, 1998 (inception)
through December 31, 1998 was $179,000 and the pro forma basic and diluted
loss per sharewas $0.11.
5. Earnings Per Share
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 requires the disclosure of
Basic and Diluted Earnings per Share (EPS). Basic EPS is calculated using
income available to common shareholders divided by the weighted average of
common shares outstanding during the year. Diluted EPS is similar to basic EPS
except that the weighted average of common shares outstanding is increased to
include the number of additional common shares that would have been
outstanding if the dilutive potential common shares, such as options and
convertible preferred stock, had been issued. The treasury stock method is
used to calculate dilutive shares which reduces the gross number of dilutive
shares by the number of shares purchasable from the proceeds of the options
assumed to be exercised. The computation of earnings per share in the
accompanying statement of operations has excluded 299,151 shares of
convertible preferred stock and stock options because they are antidilutive.
6. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company entered into a definitive
agreement to acquire the common stock of six companies (the "founding
companies") to be contingent on and effective simultaneously with the initial
public offering of the common stock of the Company. The acquisitions will be
effected through a combination of cash and common stock of the Company. The
Companies to be acquired are:
.Bintz Distributing Co.
.Castino Restaurant Equipment and Supply, Inc.
.Curtis Restaurant Equipment, Inc.
.East Bay Restaurant Supply, Inc.
.Economy Restaurant Fixtures, Inc.
.Raygal, Inc.
The aggregate consideration to acquire the founding companies is
approximately $41,413,000 in cash and 1,269,070 in shares of common stock.
During January 1999, the Company issued 134,120 shares of Series A
preferred stock at $4.25 per share.
The Company has initiated discussions with certain banks regarding
establishment of a credit facility, enabling the Company to borrow between
$50.0 million and $75.0 million on a revolving basis upon the consummation of
the initial public offering. The credit facility will be used for
acquisitions, capital expenditures, refinancing of existing debt of the
founding companies and general corporate purposes.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Raygal, Inc.:
We have audited the accompanying balance sheets of Raygal, Inc. (the
"Company") as of December 31, 1998 and 1997, and the related statements of
income, stockholders' equity, and cash flows for the three years in the period
ended December 31, 1998. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Raygal, Inc. as of December
31, 1998 and 1997, and the results of its operations and cash flows for the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Orange County, California
February 12, 1999
F-17
<PAGE>
RAYGAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands,
except share amounts)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 208 $ 211
Investments, available-for-sale.................... -- 102
Contracts receivable............................... 6,296 5,323
Note receivable.................................... 117 --
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 505 1,156
Prepaid expenses and other current assets.......... 544 648
------ ------
Total current assets............................ 7,670 7,440
------ ------
Property, Plant and Equipment:
Automobiles........................................ 71 127
Leasehold improvements............................. 479 420
Fixtures and equipment............................. 624 610
Less--Accumulated depreciation and amortization.... (912) (875)
------ ------
Net property, plant and equipment.................. 262 282
Other Assets......................................... 81 117
------ ------
Total Assets......................................... $8,013 $7,839
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $3,407 $1,994
Accrued liabilities................................ 614 1,636
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 507 613
Other current liabilities.......................... 241 27
------ ------
Total current liabilities....................... 4,769 4,270
------ ------
Commitments (Note 10)
Stockholders' Equity:
Common stock, $50 par value........................ 10 10
Authorized--2,000 shares at December 31, 1998 and
1997
Issued and outstanding--204 shares at December
31, 1998 and 1997
Retained earnings.................................. 3,234 3,558
Unrealized gain on investments available-for-
sale............................................. -- 1
------ ------
Total Stockholders' Equity........................... 3,244 3,569
------ ------
Total Liabilities and Stockholders' Equity........... $8,013 $7,839
====== ======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE>
RAYGAL, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net revenue............................................ $33,038 $33,678 $22,213
Cost of revenue........................................ 28,793 29,623 19,229
------- ------- -------
Gross profit......................................... 4,245 4,055 2,984
Selling, general and administrative expenses........... 2,520 2,202 2,427
------- ------- -------
Income from operations................................. 1,725 1,853 557
Other income (expense):
Interest, net........................................ 42 41 74
Other................................................ 39 6 22
------- ------- -------
Income before income taxes............................. 1,806 1,900 653
Income taxes........................................... 17 18 14
------- ------- -------
Net income............................................. $ 1,789 $ 1,882 $ 639
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
RAYGAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock
-------------
Total
Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
------ ------ -------- ------------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996.. 204 $10 $ 2,515 $(2) $ 2,523
Unrealized gain on
investments
available-for-sale.... -- -- -- 2 2
Net income.............. -- -- 639 -- 639
Owner distributions..... -- -- (778) -- (778)
--- --- ------- --- -------
Balance, December 31,
1996.................... 204 10 2,376 -- 2,386
Unrealized gain on
investments
available-for-sale.... -- -- -- 1 1
Net income.............. -- -- 1,882 -- 1,882
Owner distributions..... -- -- (700) -- (700)
--- --- ------- --- -------
Balance, December 31,
1997.................... 204 10 3,558 1 3,569
Realized gain on
maturity of
investments available-
for-sale.............. -- -- -- (1) (1)
Net income.............. -- -- 1,789 -- 1,789
Owner distributions..... -- -- (2,113) -- (2,113)
--- --- ------- --- -------
Balance, December 31,
1998.................... 204 $10 $ 3,234 $-- $ 3,244
=== === ======= === =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
RAYGAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.......................................... $ 1,789 $ 1,882 $ 639
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 108 91 58
Loss (gain) on sale of assets.................... (3) (3) 12
Changes in assets and liabilities:
Decrease (increase) in:
Contracts receivable............................... (973) (2,713) 551
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 651 (419) (339)
Prepaid expenses and other current assets.......... 104 (200) (22)
Other assets....................................... 36 (5) (26)
Increase (decrease) in:
Accounts payable................................... 1,413 598 43
Accrued liabilities................................ (1022) 700 364
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... (106) (405) 598
Other current liabilities.......................... 214 22 (86)
------- ------- -------
Net cash provided by (used in) operating
activities................................... 2,211 (452) 1,792
------- ------- -------
Cash Flows from Investing Activities:
Expenditures for property, plant & equipment........ (85) (128) (108)
Issuance of note receivable......................... (117) -- (120)
Repayments on notes receivable...................... -- -- 459
Purchases of investments available-for-sale......... (498) (598) (2,075)
Proceeds from maturities and sales of investments
available-for-sale................................ 599 1,090 1,619
------- ------- -------
Net cash provided by (used in) investing
activities................................... (101) 364 (225)
------- ------- -------
Cash Flows from Financing Activities:
Owner distributions................................. (2,113) (700) (778)
------- ------- -------
Net Increase (Decrease) in Cash and Cash Equivalents.. (3) (788) 789
Cash and Cash Equivalents, at beginning of period..... 211 999 210
------- ------- -------
Cash and Cash Equivalents, at end of period........... $ 208 $ 211 $ 999
======= ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest.............................. $ 3 $ 4 $ --
======= ======= =======
Cash paid for income taxes.......................... $ 7 $ 16 $ 3
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
1. Business and Organization
Raygal, Inc. (the "Company"), a California corporation, is engaged in the
business of designing and installing commercial kitchens and interiors
generally construction and equipment contracts. The Company provides design and
installation services in several states.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements:
Revenue Recognition and Cost Recognition
Revenues from construction contracts are recognized on the percentage-of-
completion method, measured by the percentage of costs incurred to date to
estimated total costs for each contract. Provisions for estimated losses on
uncompleted contracts are made in the period such losses become apparent.
Contract costs include all direct material, subcontractor labor costs and
those indirect costs related to contract performance, such as indirect labor.
Operating costs and unallocated equipment costs are charged to expense as
incurred. Changes in job performance, job conditions, 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.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents amounts billed in excess of
revenues recognized.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash And Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated or
amortized using the straight-line method. The estimated useful lives are as
follows:
<TABLE>
<S> <C>
Automobiles............................. 5 years
Leasehold improvements.................. Lesser of lease term or useful life
Fixtures and equipment.................. 3-7 years
</TABLE>
F-22
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is included in the income statement.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Comprehensive income is reported in the
accompanying statement of stockholders' equity.
Recent Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company adopted SFAS No.
131 in 1998 and its adoption did not have a significant impact on the financial
statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted SFAS No. 132 in 1998 and its adoption did not have a
significant impact on the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in the year ending December 31, 1999. The Company believes that
adoption of SFAS No. 133 will not significantly affect the Company's financial
position and results of operations.
Operating Cycle
Assets and liabilities related to construction and equipment contracts are
included in current assets and current liabilities in the accompanying balance
sheets as they will be liquidated in the normal course of contract completion
which may be more than one year.
Income Taxes
The Company has elected to be taxed under the Internal Revenue Code as an S
Corporation. Accordingly, taxable income of the Company will be allocated to
the stockholders, who are responsible for the payment of income taxes. No
provision for federal income tax is required in the financial statements.
California adopted the Federal S Corporation concept, but imposes a 1.5 percent
tax on the earnings of an S Corporation which is reflected in the provision for
state income taxes. The Company accounts for income taxes under the provisions
of SFAS No. 109.
F-23
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Most of the Company's business activity is with contractors and owners
associated with restaurants, educational facilities and institutional clients.
During 1998, the Company had one customer that individually represented greater
than ten percent of sales. During 1997, the Company had two customers that
represented greater than 27 percent of sales. During 1996, the Company had two
customers that represented 25 percent and 11 percent of sales.
As of December 31, 1998, the Company had one customer who represented 32
percent of total contracts receivable. As of December 31, 1997, the Company had
two customers who represented 16 percent and 11 percent of total contracts
receivable.
3. Investments Available-for-Sale
There were no investments available-for-sale as of December 31, 1998.
Investments available-for-sale as of December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------
Yield at Gross Gross
December 31, Amortized Unrealized Unrealized Estimated
Type 1997 Cost Gains Losses Fair Value
---- ------------ --------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
U.S. Government
Obligations........... 5.00% $101 $ 1 $-- $102
---- --- --- ----
Total................... $101 $ 1 $-- $102
==== === === ====
</TABLE>
4. Contracts Receivable
Contracts receivable consist of billed receivables and earned amounts
retained by customers ("retention") pending satisfactory completion of the
applicable contracts. Contracts receivable consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Contracts Receivable:
Current.......................................... $4,897 $4,221
Retention........................................ 1,399 1,102
------ ------
Total............................................. $6,296 $5,323
====== ======
</TABLE>
5. Note Receivable
In May 1998, the Company entered into a note receivable agreement with an
employee. The note was in the amount of $110,000 with interest of 9.5 percent
due October 31, 1998 which was extended through December 31, 1998. Total
receivable and interest outstanding at December 31, 1998 was $117,000. The note
was partially paid and amended on January 1, 1999 in the amount of $77,000 with
an annual interest rate of 5.5 percent. This amendment expires on December 31,
1999.
F-24
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consists of the
following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Costs and estimated earnings on uncompleted
contracts...................................... $ 21,295 $ 21,573
Less: billings on uncompleted contracts.......... (21,297) (21,030)
-------- --------
$ (2) $ 543
======== ========
Included in the accompanying balance sheets under
the following captions:
Costs and estimated earnings in excess of
Billings on uncompleted contracts.............. $ 505 $ 1,156
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. (507) (613)
-------- --------
$ (2) $ 543
======== ========
</TABLE>
7. Phantom Stock Agreements
During 1995, the Company entered into Phantom Stock Agreements with certain
officers. Under the terms of each agreement, the Company is obligated to
purchase some or all of the Phantom Shares (the "Shares") for a defined
purchase price solely upon the sale or transfer of any of the Company's common
shares. The Company's obligation to purchase the shares is also contingent upon
the existence of certain conditions as set forth in each officer's employment
agreement.
8. Retirement Plan
During 1997, the Company adopted the Raygal Design Associates, Inc. 401(k)
Plan (the "Plan"). The purpose of the Plan is to provide retirement benefits to
all eligible employees. All employees of the Company become eligible for
participation after one year of service. Employees may contribute up to a
maximum of $4,000 per year. The Company will contribute to the Plan an amount
of matching contributions up to a specified maximum. Pension expense under this
Plan for the year ended December 31, 1998 and 1997 was $40,850 and $25,000,
respectively.
9. Line of Credit
In April, 1997, the Company entered into a revolving line of credit
agreement (amended in November 1998) with a commercial bank to borrow up to $3
million. Interest is due monthly at the bank's reference rate (7.75%
December 31, 1998).
Borrowings under the line of credit are secured by substantially all of the
Company's assets and are guaranteed by a stockholder. The agreement expires in
April 1999 and any extensions or renewal thereof will be subject to the bank's
review and approval. There were no borrowings outstanding under this agreement
as of December 31,1998.
F-25
<PAGE>
RAYGAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Related-Party Transactions
The Company rents its corporate facility from the stockholder under a
three-year noncancellable lease agreement which expired on December 31, 1997.
The lease agreement has been renewed for an additional six years. Future
minimum lease payments required under this lease at December 31, 1998 are as
follows (amounts in thousands):
<TABLE>
<S> <C>
1999................................................................. $ 340
2000................................................................. 340
2001................................................................. 357
2002................................................................. 357
2003................................................................. 357
------
Total future minimum lease payments.................................. $1,751
======
</TABLE>
Rent expense on this facility for each of the three years ended December
31, 1998, 1997 and 1996 amounted to approximately $340,000, $323,000 and
$296,000, respectively.
11. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's stockholders entered into a
definitive agreement to sell the Company to Hospitality Design & Supply, Inc.
The sale transaction, effected through a combination of cash and common stock
of Hospital Design & Supply, Inc., is contingent and effective upon the initial
public offering of the common stock of Hospitality Design & Supply, Inc. The
anticipated selling price of the Company exceeds its net assets as of December
31, 1998.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To East Bay Restaurant Supply, Inc.:
We have audited the accompanying balance sheets of East Bay Restaurant
Supply, Inc. as of September 30, 1998 and 1997 and the related statements of
income, stockholders' equity, and cash flows for the three years during the
period ended September 30, 1998. 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 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of East Bay Restaurant Supply,
Inc. as of September 30, 1998 and 1997 and the results of its operations and
its cash flows for the three years during the period ended September 30, 1998
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California,
January 15, 1999
F-27
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
BALANCE SHEETS--SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(In thousands,
except share amounts)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................ $ 258 $ 50
Accounts receivable, less allowance for doubtful
accounts of $225 and
$114 in 1998 and 1997, respectively................ 4,044 3,093
Inventories, net..................................... 2,569 2,287
Prepaid expenses and other........................... 59 124
Current deferred tax asset, net...................... 195 1
---------- ----------
Total current assets.............................. 7,125 5,555
---------- ----------
Property and Equipment:
Leasehold improvements............................... 271 271
Fixtures and equipment............................... 267 295
Vehicles............................................. 269 238
---------- ----------
807 804
Less: Accumulated depreciation...................... (539) (538)
---------- ----------
Net property and equipment........................ 268 266
---------- ----------
Other Assets:
Cash surrender value of life insurance, net of loans
of $66 in 1998 and 1997............................ 202 186
Other................................................ 45 46
---------- ----------
247 232
---------- ----------
Total assets...................................... $ 7,640 $ 6,053
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 2,917 $ 2,954
Customer deposits.................................... 392 202
Accrued liabilities.................................. 1,405 446
Borrowings under revolving line of credit............ -- 600
Current portion of other notes payable............... 18 27
Subordinated notes payable to stockholders and
former stockholders................................ 1,050 267
Current deferred tax liability....................... 3 --
---------- ----------
Total current liabilities......................... 5,785 4,496
---------- ----------
Notes Payable, net of current portion.................. 42 28
---------- ----------
Commitments and Contingencies (Notes 5 and 8)
Stockholders' Equity:
Common stock, $20 par value:
Class A--10,000 shares authorized; 4,500 shares
issued and outstanding at September 30, 1998 and
1997.............................................. 90 90
Class B--2,500 shares authorized; 0 shares issued
and outstanding at September 30, 1998 and 1997.... -- --
Retained earnings.................................... 1,723 1,439
---------- ----------
Total stockholders' equity........................ 1,813 1,529
---------- ----------
Total liabilities and stockholders' equity........ $ 7,640 $ 6,053
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF INCOME
For the Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net revenue......................................... $29,916 $23,681 $20,368
Cost of revenue..................................... 23,964 18,655 16,256
------- ------- -------
Gross profit...................................... 5,952 5,026 4,112
Selling, general and administrative expenses........ 5,388 4,705 3,959
------- ------- -------
Income from operations............................ 564 321 153
------- ------- -------
Other income (expense):
Interest income..................................... 34 12 25
Interest expense.................................... (87) (81) (99)
Other............................................... (2) -- 2
------- ------- -------
Other expense..................................... (55) (69) (72)
------- ------- -------
Income before income taxes........................ 509 252 81
Income taxes........................................ 225 116 35
------- ------- -------
Net income.......................................... $ 284 $ 136 $ 46
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
Balance, September 30, 1995............... 4,500 $90 $1,257 $1,347
Net income.............................. -- -- 46 46
----- --- ------ ------
Balance, September 30, 1996............... 4,500 90 1,303 1,393
Net income.............................. -- -- 136 136
----- --- ------ ------
Balance, September 30, 1997............... 4,500 90 1,439 1,529
Net income.............................. -- -- 284 284
----- --- ------ ------
Balance, September 30, 1998............... 4,500 $90 $1,723 $1,813
===== === ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income............................................. $ 284 $ 136 $ 46
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation........................................ 72 67 51
Changes in assets and liabilities:
Accounts receivable............................... (951) (425) (22)
Inventories....................................... (282) 446 (869)
Prepaid expenses and other........................ 65 (65) 136
Deferred tax assets............................... (193) 12 16
Accounts payable.................................. (37) 186 348
Accrued liabilities............................... 959 217 (15)
Customer deposits................................. 190 (357) 130
Deferred tax liabilities.......................... 3 -- --
Other............................................. (16) (14) (1)
----- ----- -----
Net cash provided by (used in) operating
activities.................................... 94 203 (180)
----- ----- -----
Cash Flows from Investing Activities:
Expenditures for property and equipment................ (74) (22) (65)
----- ----- -----
Cash Flows from Financing Activities:
Net proceeds from (payments on) line of credit......... (600) (100) 253
Proceeds from (payments to) current and former
stockholders, net.................................... 784 (17) 5
Proceeds from (payments on) other notes payable........ 4 (37) 6
----- ----- -----
Net cash provided by (used in) financing
activities.................................... 188 (154) 264
----- ----- -----
Net increase in cash and cash equivalents....... 208 27 19
Cash and Cash Equivalents, at beginning of year.......... 50 23 4
----- ----- -----
Cash and Cash Equivalents, at end of year................ $ 258 $ 50 $ 23
===== ===== =====
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest................................. $ 41 $ 78 $ 99
Cash paid for income taxes............................. 92 21 16
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998, 1997, and 1996
1. Business and Organization
East Bay Restaurant Supply, Inc. (the "Company") was founded and
incorporated in the state of California in 1954. The Company is primarily
engaged in the sale and distribution of equipment and supplies to food service
providers, such as restaurants and hotels in the United States. The Company
also performs design services for food service providers. The Company's
headquarters and retail store are located in Oakland, California.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue Recognition
The Company's revenue is derived from the distribution and sale of
equipment and supplies to food service providers and from customers who request
design of their facilities. Sales revenue is recognized upon shipment. Design
revenue is recognized on a percentage-of-completion basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories include new and used saleable equipment and supplies, stated at
the lower of cost on a first-in, first-out basis or market. Cost includes
amounts paid for freight in, when applicable. A valuation allowance is recorded
for items that have a cost in excess of market value or when items are excess
or obsolete. The allowance was $210,000 and $137,000 in 1998 and 1997,
respectively.
Property and Equipment, at Cost
Property and equipment are stated at cost and are primarily depreciated or
amortized using accelerated methods. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Leasehold improvements............. Lesser of lease term or useful life
Fixtures and equipment............. 5-7 years
Vehicles........................... 5-10 years
</TABLE>
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any resulting
gain or loss is included in the income statement.
F-32
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
Using the asset and liability method of the Financial Accounting Standards
Board (FASB) Statement No. 109, "Accounting for Income Taxes," deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Valuation reserves are recorded if it is
uncertain as to the realizability of deferred tax assets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company
sells primarily on 30-day terms, performs credit evaluation procedures on its
customers, and generally does not require collateral on its accounts
receivable. Most of the Company's sales are in California and Nevada. The
Company maintains an allowance for potential credit losses. No single customer
represented more than 10 percent of sales or accounts receivable in any period.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company will adopt SFAS No.
131 in 1999 and does not expect its adoption to have a significant impact on
the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company will adopt SFAS No. 132 in 1999 and does not expect its adoption to
have a significant impact on the financial statements or related footnote
disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in 1999. The Company believes that adoption of SFAS No. 133 will
not significantly affect the Company's financial position and results of
operations.
F-33
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Income Taxes
The provision for income taxes from continuing operations consists of the
following for the years ended September 30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
Federal................................................. $ 321 $ 81 $(29)
State and local......................................... 94 24 (6)
----- ---- ----
415 105 (35)
Deferred liability (asset):
Federal................................................. (143) 3 54
State and local......................................... (47) 8 16
----- ---- ----
$ 225 $116 $ 35
===== ==== ====
</TABLE>
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective income tax rate is
as follows for the years ended September 30, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate........................ 34.0% 34.0% 34.0%
State income tax rate, net of federal benefit............ 5.8 6.1 6.1
Permanent items: items not deductible for tax return
purposes, net.......................................... 2.2 4.8 12.3
Other, net............................................... 2.2 1.1 (9.2)
---- ---- ----
Total provision..................................... 44.2% 46.0% 43.2%
==== ==== ====
</TABLE>
At September 30, 1998, the Company had approximately $192,000 in net
deferred tax assets. These net assets primarily result from reserves deductible
in the future and differences between book and tax depreciation.
At September 30, 1997 and 1996, the Company had approximately $2,000 and
$14,000 respectively, in net deferred tax assets resulting principally from
reserves deductible in the future and differences between book and tax
depreciation.
F-34
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. DEBT
Debt at September 30, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
------- -----
(IN
THOUSANDS)
<S> <C> <C>
Revolving line of credit in the amount of $2 million at
September 30, 1998, and $1.5 million at September 30,
1997; advances under the line accrue interest at the
prime rate plus 1.0 percent (9.5 percent at September 30,
1998 and 1997), and are secured by the Company's accounts
receivable and inventory; the line is guaranteed by
certain stockholders and expires on October 1, 1999...... $ -- $ 600
======= =====
Subordinated notes payable to former stockholders, due on
demand, with interest payable monthly at prime rate plus
1.0 percent (9.5 percent at September 30, 1998 and
1997).................................................... $ 660 $ 214
Subordinated notes payable to stockholders, due on demand,
with interest payable monthly at prime rate plus 1.0
percent (9.5 percent at September 30, 1998 and 1997)..... 390 52
Installment notes payable, with monthly payments, including
interest, through November 2002; interest rates vary from
2.9 percent to 9.3 percent; the notes are secured by the
Company's vehicles....................................... 56 37
Miscellaneous notes payable with monthly payments through
February 1999............................................ 4 19
------- -----
Total debt............................................... 1,110 322
Less: Current maturities................................... (1,068) (294)
------- -----
Long-term portion........................................ $ 42 $ 28
======= =====
</TABLE>
The following is a schedule of annual maturities of long-term debt at
September 30, 1998 (in thousands):
<TABLE>
<S> <C>
Year Ending September 30
1999.............................................................. $1,068
2000.............................................................. 20
2001.............................................................. 11
2002.............................................................. 11
------
$1,110
======
</TABLE>
Interest paid to former stockholders who are considered to be related
parties was $31,000, $18,000, and $64,000 in 1998, 1997, and 1996,
respectively.
5. EMPLOYEE BENEFITS
The Company maintains a qualified 401 (k) profit-sharing plan. Eligible
employees may defer a portion of their salary, and the Company may make a
discretionary matching contribution equal to a percentage of each participating
employee's contribution. The matching contribution, if made, is based on each
employee's contribution up to 2.5 percent of his or her compensation but is
limited to $5,000 per year. The Company's matching contributions for the years
ended September 30, 1998, 1997, and 1996, were $15,000, $13,000, and $12,000,
respectively.
F-35
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company may also contribute additional amounts on a discretionary
basis. The Board of Directors elected to make discretionary contributions of
$100,000, $50,000, and $25,000 for the years ended September 30, 1998, 1997,
and 1996, respectively.
The Company's 401(k) profit-sharing plan trust (the "Trust") has made loans
to customers to refinance certain customer sales and installation contracts.
These transactions are reviewed for fiduciary responsibility by the plan
administrator in accordance with their requirements and provisions of the
Employee Retirement Income and Security Act (ERISA). At September 30, 1998, the
Company was contingently liable under security agreements for the unpaid
balances of those contracts in the amount of $171,000.
6. Operating Leases
The Company's facility is leased on a month-to-month basis from a former
shareholder.
The Company's computer and telephone systems are leased on a month-to-month
basis from a partnership composed of current stockholders.
Rental expense paid to related parties was $224,000, $193,000, and $193,000
for the years ended September 30, 1998, 1997, and 1996, respectively.
7. Related-party Transactions
As discussed in Notes 4 and 6, the Company has subordinated notes
outstanding to former stockholders and leases its building from a former
stockholder who is related to the current owners. Additionally, the Company
leases certain equipment from current stockholders. Several of the current
owners work at the Company and receive wages and other benefits. The amount of
wages and lease payments paid to the stockholders was approximately $616,000,
$607,000, and $527,000 in 1998, 1997, and 1996, respectively.
8. Commitments and Contingencies
Various legal claims arise against the Company during the normal course of
business. In the opinion of management, based on the nature of the claims,
underlying insurance coverage, and other defenses, liabilities, if any, arising
from the claims would not have a material effect on the financial statements.
9. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's stockholders entered into a
definitive agreement to sell the Company to Hospitality Design & Supply, Inc.
The sale transaction, effected through a combination of cash and common stock
of Hospital Design & Supply, Inc., is contingent and effective upon the initial
public offering of the common stock of Hospitality Design & Supply, Inc. The
anticipated selling price of the Company exceeds its net assets as of September
30, 1998.
F-36
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
BALANCE SHEETS--DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
(In thousands,
except share amounts)
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................... $ 17 $ 258
Accounts receivable, less allowance for
doubtful accounts of $272 and $225 on
December 31, 1998 and September 30, 1998
respectively................................. 4,834 4,044
Inventories, net............................... 2,714 2,569
Prepaid expenses and other..................... 90 59
Current deferred tax asset, net................ 195 195
------ ------
Total current assets....................... 7,850 7,125
------ ------
Property and Equipment:
Leasehold improvements......................... 295 271
Fixtures and equipment......................... 191 267
Vehicles....................................... 269 269
------ ------
755 807
Less: Accumulated depreciation................ (470) (539)
------ ------
Net property and equipment................. 285 268
------ ------
Other Assets:
Cash surrender value of life insurance, net of
loans of $66 in 1998 and 1997................ 202 202
Other.......................................... 45 45
------ ------
247 247
------ ------
Total assets............................... $8,382 $7,640
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................... $2,283 $2,917
Customer deposits.............................. 468 392
Accrued liabilities............................ 1,989 1,405
Borrowings under revolving line of credit...... 1,253 --
Current portion of stockholder's notes
payable...................................... 376 1,050
Current portion of other notes payable......... 18 18
------ ------
Total current liabilities.................. 6,387 5,782
------ ------
Deferred Tax Liability, net..................... 3 3
------ ------
Notes Payable, net of current portion........... 33 42
------ ------
Commitments and Contingencies (Notes 5 And 8)
Stockholders' Equity:
Common stock, $20 par value:
Class A--10,000 shares authorized; 4,500
shares issued and outstanding at December
31, 1998 and 1997........................... 90 90
Class B--2,500 shares authorized; 0 shares
issued and outstanding at December 31, 1998
and 1997.................................... -- --
Retained earnings.............................. 1,869 1,723
------ ------
Total stockholders' equity................. 1,959 1,813
------ ------
Total liabilities and stockholders'
equity................................... $8,382 $7,640
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C>
Equipment, installation, design, and service sales..... $8,084 $6,346
Cost of sales.......................................... 6,388 5,172
------ ------
Gross margin...................................... 1,696 1,174
Selling, general, and administrative expenses.......... 1,435 1,212
------ ------
Income from operations............................ 261 (38)
------ ------
Other income (expense):
Interest income...................................... 10 10
Interest expense..................................... (18) (15)
Other................................................ -- (24)
------ ------
Other expense..................................... (8) (29)
------ ------
Income before provision for income taxes.......... 253 (67)
Provision for income taxes............................. 107 (30)
------ ------
Net income............................................. $ 146 $ (37)
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Stock Total
------------ Retained Stockholders'
Share Amount Earnings Equity
----- ------ -------- -------------
(In thousands, except share
amounts)
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1998................. 4,500 $ 90 $1,723 $1,813
Net income................................ -- -- 146 146
----- ------ ------ ------
BALANCE, DECEMBER 31, 1998.................. 4,500 $ 90 $1,869 $1,959
===== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------ -----
(In
thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................................. $ 146 $ (37)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation.............................................. 18 17
Loss on disposition of assets............................. -- 24
Changes in assets and liabilities:
Accounts receivable...................................... (790) (499)
Inventories.............................................. (145) 537
Prepaid expenses and other............................... (31) (14)
Deferred tax assets...................................... -- (29)
Accounts payable......................................... (634) (737)
Accrued liabilities...................................... 584 436
Customer deposits........................................ 76 283
------ -----
Net cash used in operating activities................. (776) (19)
------ -----
Cash Flows from Investing Activities:
Expenditures for property and equipment.................... (34) (36)
------ -----
Cash Flows from Financing Activities:
Net proceeds from borrowings............................... 1,253 --
Repayment of stockholder loans............................. (675) (9)
Repayment of notes payable................................. (9) 16
------ -----
Net cash provided by financing activities............. 569 7
------ -----
Net decrease in cash and cash equivalents............. (241) (48)
Cash and Cash Equivalents, at September 30, 1998............ 258 50
------ -----
Cash and Cash Equivalents, at December 31, 1998............. $ 17 $ 2
====== =====
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest..................................... $ 23 $ 6
Cash paid for income taxes................................. $ 107 $ 69
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
EAST BAY RESTAURANT SUPPLY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
East Bay Restaurant Supply, Inc. (the "Company"), reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of
the results of the interim periods presented. All such adjustments are of a
normal recurring nature. The condensed consolidated financial statements
should be read in conjunction with the to consolidated financial statements
contained in the Company's Financial Statements for the year ended
September 30, 1998 and 1997.
2.Inventories
Inventories include new and used saleable equipment and supplies, stated at
the lower of cost on a first-in, first-out basis or market. Cost includes
amounts paid for freight in, when applicable. A valuation allowance is
recorded for items that have a cost in excess of market value or when items
are excess or obsolete. The allowance was $290 and $210 at December 31,
1998 and September 30, 1998, respectively.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Economy Restaurant Fixtures, Inc.:
We have audited the accompanying balance sheets of Economy Restaurant
Fixtures, Inc., a California corporation as of December 31, 1998 and 1997, and
the related statements of income, stockholders' 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 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Economy Restaurant
Fixtures, Inc. at December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California,
February 12, 1999
F-42
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
BALANCE SHEETS--DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(In thousands,
except share amounts)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents.............................. $ 419 $ 355
Accounts receivable, less allowance for doubtful
accounts of $40 in 1998 and 1997..................... 2,380 1,948
Inventories, net....................................... 2,738 2,621
Prepaid expenses and other............................. 84 4
---------- ----------
Total current assets................................ 5,621 4,928
Property and Equipment, net.............................. 204 248
Other Assets:
Notes receivable from stockholders..................... -- 119
Other.................................................. 44 45
---------- ----------
Total assets........................................ $ 5,869 $ 5,340
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft......................................... $ -- $ 345
Accounts payable....................................... 2,455 1,762
Accrued liabilities.................................... 360 282
Current portion of long-term debt...................... 111 111
Customer deposits...................................... 374 316
---------- ----------
Total current liabilities........................... 3,300 2,816
---------- ----------
Long-Term Debt, net of current portion................... 24 34
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $10 par value:
Authorized and outstanding--450 shares at December
31, 1998 and 1997................................... 5 5
Retained earnings...................................... 2,540 2,485
---------- ----------
Total stockholders' equity.......................... 2,545 2,490
---------- ----------
Total liabilities and stockholders' equity.......... $ 5,869 $ 5,340
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-43
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
STATEMENTS OF INCOME
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Net revenue.................................................... $22,703 $19,884
Cost of revenue................................................ 15,976 14,082
------- -------
Gross profit.............................................. 6,727 5,802
Selling, general, and administrative expenses.................. 5,811 5,114
------- -------
Income from operations.................................... 916 688
Other income (expense):
Interest, net................................................ 29 19
Other........................................................ 46 5
------- -------
Income before income taxes................................ 991 712
Income taxes................................................... 17 10
------- -------
Net income..................................................... $ 974 $ 702
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-44
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In
thousands,
except
share
amounts)
<S> <C> <C> <C> <C>
Balance, December 31, 1996................ 450 $5 $2,252 $2,257
Net income.............................. -- -- 702 702
Distributions........................... -- -- (469) (469)
--- --- ------ ------
Balance, December 31, 1997................ 450 5 2,485 2,490
Net income.............................. -- -- 974 974
Distributions........................... -- -- (919) (919)
--- --- ------ ------
Balance, December 31, 1998................ 450 $5 $2,540 $2,545
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-45
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------- -----
(In
thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................... $ 974 $ 702
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 60 59
Changes in assets and liabilities:
Accounts receivable....................................... (432) (791)
Inventories............................................... (117) (169)
Prepaid expenses and other................................ (80) 29
Accounts payable.......................................... 693 375
Accrued liabilities....................................... 78 19
Other..................................................... 185 (47)
------- -----
Net cash provided by operating activities............... 1,361 177
------- -----
Cash Flows from Investing Activities:
Expenditures for property and equipment...................... (22) (134)
------- -----
Cash Flows from Financing Activities:
Bank overdraft............................................... (345) 345
Proceeds from debt........................................... -- 145
Repayment of debt............................................ (11) --
Distributions to stockholders................................ (919) (469)
------- -----
Net cash provided by (used in) financing activities..... (1,275) 21
------- -----
Net Increase in Cash and Cash Equivalents...................... 64 64
Cash and Cash Equivalents, beginning of year................... 355 291
------- -----
Cash and Cash Equivalents, end of year......................... $ 419 $ 355
======= =====
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest....................................... $ 7 $ 1
Cash paid for income taxes................................... 6 8
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Business and Organization
Economy Restaurant Fixtures, Inc. (the "Company") was founded and
incorporated in the state of California in 1967. The Company's primary business
is the sale and distribution of equipment and supplies to food service
providers, such as restaurants, hotels, cafeterias, and caterers. The Company
also performs design services for food service providers. The Company's
operations are located in California.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue Recognition
The Company's revenue is derived from the distribution and sale of
equipment and supplies to food service providers and from customers who request
design of their facilities. Sales revenue is recognized when the risk of
ownership transfers to the customer, generally upon shipment. Design revenue,
which was not material in 1998 and 1997, is recognized on a percentage-of-
completion basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories include saleable equipment and supplies and are stated at the
lower of cost on a first-in, first-out basis or market.
Property and Equipment, at Cost
Property and equipment are stated at cost and are depreciated or amortized
using the straight-line or accelerated methods. The estimated useful lives are
as follows:
<TABLE>
<S> <C>
Leasehold improvements............... Lesser of lease term or useful life
Fixtures............................. 7 years
Automobiles and equipment............ 5 years
</TABLE>
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, any resulting gain
or loss is included in the income statement.
F-47
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment is measured by
comparing the carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from use of the assets and
their eventual disposition. The Company determined that for the years ended
December 31, 1998 and 1997, there had not been an impairment in the carrying
value of long-lived or intangible assets.
Income Taxes
The Company is an S corporation for income tax purposes. The Company's
income (whether distributed or not) is subject to federal income tax as part of
the individual stockholder's tax returns. Accordingly, no provision for federal
income tax is required in the financial statements. The Company provides for
certain state income taxes.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company
sells primarily on 30-day terms, performs credit evaluation procedures on its
customers, and generally does not require collateral on its accounts
receivable. Most of the Company's sales are in California. The Company
maintains an allowance for potential credit losses. No single customer
represented more than ten percent of sales in any period.
Procurement Rebates
The Company receives quarterly and annual cash rebates on qualifying
purchases from many of its suppliers. The amount of these rebates has been
estimated and accrued in these financial statements. Actual rebates earned
could differ from the estimated amounts.
Financial Instruments
The carrying amounts for cash, receivables, and accounts payable
approximate fair value due to the short-term nature of these instruments. Other
fair value disclosures are in the respective notes.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company adopted SFAS No.
131 in 1998 and its adoption did not have a significant impact on the financial
statements or related footnote disclosures.
F-48
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted SFAS No. 132 in 1998 and its adoption did not have a
significant impact on the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in the year ending December 31, 1999. Since the Company has not
and presently does not own derivative instruments or engage in hedging
activities, it believes that adoption of SFAS No. 133 will not significantly
affect the Company's financial position and results of operations.
3. Property and Equipment
Property and equipment at December 31, 1998 and 1997, consists of the
following:
<TABLE>
<CAPTION>
1998 1997
----- -----
(In
thousands)
<S> <C> <C>
Leasehold improvements...................................... $ 188 $ 204
Fixtures and equipment...................................... 226 299
Automobiles................................................. 168 168
----- -----
Total property and equipment, at cost..................... 582 671
Less: Accumulated depreciation.............................. (378) (423)
----- -----
Net property and equipment................................ $ 204 $ 248
===== =====
</TABLE>
Depreciation of property and equipment in 1998 and 1997, was $60,000 and
$59,000, respectively.
4. Company Stock
The Company has authorized and issued 450 shares of $10 par value common
stock.
5. Debt
Debt at December 31, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
----- -----
(In
thousands)
<S> <C> <C>
Revolving line of credit with a maximum availability in
the amount of $750 at December 31, 1998 and 1997,
expiring in June 1999; advances under the line accrue
interest at the prime rate plus 0.5 percent (8.25
percent at December 31, 1998, and 9.0 percent at
December 31, 1997) and are secured by substantially all
of the Company's assets................................. $ 100 $ 100
Note payable to a bank due in monthly installments of $1,
including interest through November 2001 at 9.75
percent................................................. 35 45
----- -----
Total debt.............................................. 135 145
Less: Current maturities.................................. (111) (111)
----- -----
Long-term portion.................................... $ 24 $ 34
===== =====
</TABLE>
F-49
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company also has a standby letter of credit arrangement with a bank
with a maximum availability of $1 million as of December 31, 1998, and $800 as
of December 31, 1997. No amounts were drawn against this facility at December
31, 1998 or 1997.
Both the line of credit and the standby letter of credit are personally
guaranteed by the Company's stockholders.
The following is a schedule of annual maturities of long-term debt at
December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Years Ending December 31
1999............................................................... $111
2000............................................................... 12
2001............................................................... 12
</TABLE>
6. Employee Benefits
The Company has a retirement savings plan pursuant to section 401(k) of
the Internal Revenue Code that is available to all employees who have
completed 1,000 hours of employment and are at least 21 years of age. Eligible
participants may contribute up to 15 percent or $10,000 of their compensation.
The Company provides discretionary contributions to the Plan that amounted to
$130,000 and $117,000 in 1998 and 1997, respectively.
7. Operating Leases
The Company leases certain facilities consisting of land and improvements
under noncancelable operating leases expiring at various dates through 2005.
Total rent expense for the years ended December 31, 1998 and 1997, was
approximately $403,000 and $395,000, respectively.
At December 31, 1998, future minimum rental payments on noncancelable
operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 454
2000............................................................... 288
2001............................................................... 269
2002............................................................... 258
2003............................................................... 258
Thereafter......................................................... 308
------
Total minimum lease payments..................................... $1,835
======
</TABLE>
8. Related-Party Transactions
During 1998, the Company distributed notes receivable of $115,000 relating
to funds the Company had loaned to its shareholders. The distributions
eliminated all amounts owed to its shareholders to the Company. The balance in
notes receivable of $119,000 for 1997 was included in other assets in the
combined balance sheets.
F-50
<PAGE>
ECONOMY RESTAURANT FIXTURES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Commitments and Contingencies
Various legal claims arise against the Company during the normal course of
business. In the opinion of management, based on the nature of the claims,
underlying insurance coverage, and other defenses, liabilities, if any, arising
from the claims would not have a material effect on the financial statements.
10. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's shareholders entered into a
definitive agreement to sell the Company to Hospitality Design & Supply, Inc.
The sale transaction, effected through a combination of cash and common stock
of Hospitality Design & Supply, Inc., is contingent and effective upon the
initial public offering of the common stock of Hospitality Design & Supply,
Inc. The anticipated selling price of the Company exceeds its net assets as of
December 31, 1998.
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Curtis Restaurant Equipment, Inc.:
We have audited the accompanying balance sheets of Curtis Restaurant
Equipment, Inc. (an Oregon corporation) as of December 31, 1998 and 1997 and
the related statements of income, stockholders' 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 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Curtis Restaurant
Equipment, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Portland, Oregon,
February 17, 1999
F-52
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
BALANCE SHEETS
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------ ------
(In
thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................................... $ 28 $ 95
Trade accounts receivable, less allowance for doubtful
accounts of $164 in 1998 and $268 in 1997.................... 3,943 2,330
Rebates receivable............................................. 811 576
Inventories.................................................... 1,060 949
Prepaid expenses............................................... 44 23
Income tax receivable.......................................... -- 176
------ ------
Total current assets........................................ 5,886 4,149
Property and Equipment, net...................................... 241 235
Other Long-term Assets:
Note receivable................................................ -- 202
Other.......................................................... 159 90
------ ------
Total assets................................................ $6,286 $4,676
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit................................................. $1,900 $1,100
Accounts payable............................................... 1,083 954
Accrued liabilities............................................ 313 376
Deferred revenue............................................... 375 125
Current portion of long-term debt and capital leases........... 68 64
Income taxes payable........................................... 73 --
Deferred income taxes.......................................... 233 145
------ ------
Total current liabilities................................... 4,045 2,764
Long-term Liabilities:
Notes payable, net of current portion.......................... 28 65
Obligations under capital leases............................... 40 12
------ ------
Total liabilities........................................... 4,113 2,841
Stockholders' Equity:
Common stock, no par value..................................... 58 58
Retained earnings.............................................. 2,115 1,777
------ ------
Total stockholders' equity.................................. 2,173 1,835
------ ------
Total liabilities and stockholders' equity.................. $6,286 $4,676
====== ======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-53
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
STATEMENTS OF INCOME
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Net revenue................................................... $20,279 $19,933
Cost of revenue............................................... 16,526 16,434
------- -------
Gross profit............................................. 3,753 3,499
Selling, general and administrative expenses.................. 3,103 3,335
------- -------
Income from operations................................... 650 164
Other income (expense):
Interest expense............................................ (109) (151)
Other....................................................... 15 18
------- -------
Income before income taxes.................................... 556 31
Income taxes.................................................. 218 12
------- -------
Net income.................................................... $ 338 $ 19
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-54
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except shares)
<S> <C> <C> <C> <C>
Balance, December 31, 1996................ 93 $ 58 $1,777 $1,835
Net income.............................. -- -- 19 19
Owner distributions..................... -- -- (19) (19)
--- ---- ------ ------
Balance, December 31, 1997................ 93 58 1,777 1,835
Net income.............................. -- -- 338 338
--- ---- ------ ------
Balance, December 31, 1998................ 93 $ 58 $2,115 $2,173
=== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------- -----
(In
thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................... $ 338 $ 19
Adjustments to reconcile net income to net cash provided by
(used in) operating activities--
Depreciation.............................................. 60 49
Loss on sale of assets.................................... 3 --
Deferred taxes............................................ 88 (106)
Changes in assets and liabilities--
Accounts receivable....................................... (1,613) 822
Rebates receivable........................................ (235) 165
Inventories............................................... (111) 185
Prepaid expenses.......................................... (21) (3)
Income taxes receivable................................... 176 (22)
Other assets.............................................. (47) --
Income tax payable........................................ 73 --
Accounts payable.......................................... 129 (462)
Accrued liabilities....................................... (63) (48)
Deferred revenues......................................... 250 (115)
------- -----
Net cash (used in) provided by operating activities..... (973) 484
Cash Flows from Investing Activities:
Expenditures for property and equipment...................... (23) (8)
Proceeds from the sale of assets............................. 6 --
Key Man Insurance............................................ (22) (16)
------- -----
Net cash used in investing activities................... (39) (24)
------- -----
Cash Flows from Financing Activities:
Line of credit, net.......................................... 800 (300)
Payments received on long-term note receivable............... 202 16
Payments on debt, net........................................ (57) (64)
Dividends to stockholders.................................... -- (19)
------- -----
Net cash provided by (used in) financing activities..... 945 (367)
Net Increase (Decrease) in Cash and Cash Equivalents........... (67) 93
Cash and Cash Equivalents, beginning of year................... 95 2
------- -----
Cash and Cash Equivalents, end of year......................... $ 28 $ 95
======= =====
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest....................................... $ 107 $ 168
Cash paid for income taxes................................... 32 139
Noncash transactions--
Capital leases............................................ 52 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Nature of Operations
Curtis Restaurant Equipment, Inc. (the "Company") was incorporated in the
State of Oregon on July 1, 1975. The Company is headquartered in Springfield,
Oregon, with a branch office in Medford, Oregon. The Company, a dealer for all
major foodservice equipment and supplies manufacturers, sells durable goods to
a wide range of commercial foodservice providers. Sales are made of replacement
items as well as entire new facilities and remodels. Design, layout and
installation services are offered to customers. The Company does not perform
any manufacturing process and only very limited repair functions.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies used in the
preparation of these financial statements.
Revenue and Cost Recognition
Revenues represent sales to individual consumers or business owners
(Individual Sales), and sales to large projects (Job Sales). Individual Sales
and Job Sales represent approximately 33% and 67%, respectively, of total sales
for the year ended December 31, 1998 and 1997. Revenues and the related costs
of revenues are recognized when the goods are sold off the showroom floor,
delivered to the customer or installed at the customer's location, depending on
whether the sale relates to an Individual Sale or Job Sale. Deferred revenue
represents customer deposits on Job Sales.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Instruments
Cash and cash equivalents, receivables, accounts receivables and accounts
payable are settled within a year and are not subject to market rate
fluctuations. Debt instruments are generally at market rates. The carrying
value of these financial instruments approximates fair market value at December
31, 1998 and 1997.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Rebates Receivable
The Company is a member of two buying groups. As a member of these groups
the Company receives rebates for reaching certain purchasing thresholds. The
Company also receives rebates from several individual suppliers for achieving
certain purchasing thresholds. Rebates are included as a reduction of cost of
revenues.
Inventories
Inventories are stated at the lower of cost or market. Costs are determined
on the last-in, first-out (LIFO) method.
F-57
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment,
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the following lives:
<TABLE>
<S> <C>
Fixtures and
equipment........... 2-7 years
Vehicles.............. 5 years
Leasehold
improvements........ Shorter of lease term or useful life of the asset
</TABLE>
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the income statement.
Concentration of Credit Risk
Customers are located across the United States with a heavier concentration
in Oregon and the Pacific Northwest. Trade receivables consist primarily of
balances due for sales made in the normal course of business. While most sales
on open account are made on an unsecured basis, certain balances are subject to
purchase money security agreements. As of December 31, 1998, three customers
accounted for 23%, 14% and 10% of trade accounts receivable. As of December 31,
1997, one customer accounted for 16% of trade accounts receivable.
Sales to two customers combined accounted for 47% and 36% of total sales
for the years ended December 31, 1998 and 1997, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). This pronouncement requires deferred tax assets and liabilities to be
valued using the enacted tax rates expected to be in effect when the temporary
differences are recovered or settled.
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amount
and the tax bases of assets and liabilities.
Other Assets
Other assets consist primarily of the cash surrender value of insurance
policies on the lives of the Company's primary officers/shareholders for which
the Company is the beneficiary.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
F-58
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which requires companies to report financial and descriptive information about
its reportable operating segments in the interim and annual financial
statements. The Company will adopt SFAS No. 131 in 1999 and does not expect its
adoption to have a significant impact on the financial statements or related
footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company will adopt SFAS No. 132 in 1999 and does not expect its adoption to
have a significant impact on the financial statements or related footnote
disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in 1999. The Company believes that adoption of SFAS No. 133 will
not significantly affect the Company's financial position and results of
operations.
3. Inventories
Inventories at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
(In
thousands)
<S> <C> <C> <C> <C>
Smallwares and equipment........................... $ 777 $ 797
Job inventory...................................... 551 399
------ ------
FIFO inventory..................................... 1,328 1,196
LIFO reserve....................................... (268) (247)
------ ------
Net inventories.................................. $1,060 $ 949
====== ======
</TABLE>
4. Property and Equipment
Property and equipment at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
----- -----
(In
thousands)
<S> <C> <C> <C> <C>
Leasehold improvements................................ $ 236 $ 236
Fixtures and equipment................................ 235 179
Vehicles.............................................. 159 174
----- -----
Total property and equipment........................ 630 589
Accumulated depreciation.............................. (389) (354)
----- -----
Net property and equipment............................ $ 241 $ 235
===== =====
</TABLE>
5. Line of Credit
The Company has a revolving line of credit with a bank, secured by accounts
receivable for the amount of $2,000,000. As of December 31, 1998 and 1997,
borrowings outstanding under the Company's line of credit
F-59
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
were $1,900,000 and $1,100,000, respectively. The line of credit bears
interest at prime rate plus 0.50%, which was 8.25% and 9.00% at December 31,
1998 and 1997, respectively. The line expires in April 1999.
Under the terms of the line of credit the Company has agreed to maintain
certain financial covenants. The Company was in compliance with these
covenants as of December 31, 1998.
6. Long Term Notes Payable
The Company's long-term obligations consisted of the following at December
31:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C> <C> <C>
Note payable to the bank, secured by tenant
improvements. Payable in monthly installments of
$2,232. Interest is at 9.75% per annum, maturing
in July 2000..................................... $ 36 $ 57
Note payable to the bank, secured by vehicle.
Payable in monthly installments of $468. Interest
is at 9.25% per annum, maturing in January 2002.. 15 --
Note payable to the bank, secured by vehicle.
Payable in monthly installments of $616. Interest
is at 9.25% per annum, maturing in November
2000............................................. 13 19
Note payable to a former stockholder. Payable in
monthly installments of $2,366. Interest is at
9.00% per annum, maturing in July 1999........... 16 42
Note payable to a credit corporation, secured by
vehicle. Payable in monthly installments of $324.
Interest is at 2.9% per annum, and matured in
December 1998.................................... -- 4
Note payable to the bank, secured by vehicle.
Payable in monthly installments of $324. Interest
is at 9.25% per annum and matured in June 1998... -- 2
------- ------
80 124
Less--Current portion.............................. (52) (59)
------- ------
Total............................................ $ 28 $ 65
======= ======
</TABLE>
Future minimum payments of long-term debt as of December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999................................................................. $52
2000................................................................. 22
2001................................................................. 5
2002................................................................. 1
Thereafter........................................................... --
---
$80
===
</TABLE>
In 1998, the Company's bank issued an irrevocable standby letter of credit
in favor of each of the Company's two buying groups, effectively guaranteeing
payment to the buying group if the Company should fail to do so. The limit on
the letter of credit was $500,000 at December 31, 1998.
F-60
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Capital Leases
The Company has five year capital leases for equipment. The Company's
obligations under capital leases for the years ended December 31, 1998 and
1997 were $57,000 and $17,000, respectively.
Future minimum lease payments under capital leases as of December 31 are
as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................ $ 22
2000................................................................ 22
2001................................................................ 16
2002................................................................ 6
Thereafter.......................................................... --
----
Total minimum lease payments...................................... 66
Less--Amount representing interest (at rates ranging from 6.25% to
11.10%)......................................................... (10)
----
Present value of minimum lease payments............................. 56
Less--Current portion............................................... (16)
----
$ 40
====
</TABLE>
8. Income Taxes
The provision for income taxes consists of the following for the year
ended December 31:
<TABLE>
<CAPTION>
1998 1997
---- -----
(In
thousands)
<S> <C> <C>
Current tax provision--
Federal........................................................ $108 $ 106
State.......................................................... 22 12
---- -----
130 118
Deferred tax provision (benefit)................................. 88 (106)
---- -----
Total provision............................................. $218 $ 12
==== =====
</TABLE>
A reconciliation of the provision for income taxes at the federal
statutory income tax rate to the provision for income taxes as reported is as
follows for December 31:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Federal rate................................................... 34.00% 34.00%
State rate, net................................................ 4.36% 2.53%
Non-deductible dues and other.................................. 0.85% 2.18%
----- -----
Effective tax.................................................. 39.21% 38.71%
===== =====
</TABLE>
The State of Oregon had a one-time reduction in its state income tax rate
in 1997.
F-61
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities are comprised of the following
components at December 31:
<TABLE>
<CAPTION>
1998 1997
----- -----
(In
thousands)
<S> <C> <C>
Current deferred tax (liability) asset--
Rebates receivable.......................................... $(311) $(221)
Allowance for doubtful accounts............................. 42 42
Other....................................................... 36 34
----- -----
Total current deferred tax liability..................... $(233) $(145)
===== =====
</TABLE>
9. Related Party Transactions
The Company has guaranteed to the bank a note payable by the majority
stockholders. The guarantee is collateralized by the Springfield facility.
The majority stockholders also own 51% of one of the Company's suppliers,
Pacific Stainless Products, Inc. (Pacific). Purchases from Pacific for the
years ended December 31, 1998 and 1997 were approximately $1,600,000 and
$1,592,000, respectively. At December 31, 1998 and 1997 the Company owed
Pacific $150,000 and $109,000, respectively, which is included in the
Company's accounts payable in the balance sheets.
The majority stockholders are also shareholders in Vangard Technology, Inc
(Vangard), one of the Company's suppliers. At December 31, 1997, the Company
had a note receivable from Vangard of $195,000. This amount was paid off in
1998.
The Company leases its Springfield facility from the majority
stockholders. The current lease expires December 1, 2002. Lease payments were
$6,000 per month for 1997 and six months of 1998. In June 1998, lease payments
were increased to $10,000 per month.
The Company's majority stockholders also own minority interests in JB
Roadhouse/Colts (JB) and US Basketball Academy (US). Sales to JB for the years
ended December 31, 1998 and 1997 were $1,000 and $78,000, respectively. At
December 31, 1998 and 1997, JB owed the Company $43,000 and $52,000,
respectively. Sales to US for the years ended December 31, 1998 and 1997 were
$0 and $212,000, respectively. At December 31, 1998 and 1997, US owed the
Company $76,000 and $67,000, respectively.
10. Commitments and Contingencies
Operating Leases
The Company leases certain equipment and its operating facility under
operating lease agreements. Future minimum lease payments are as follows (in
thousands):
<TABLE>
<S> <C>
1999.................................................................... $138
2000.................................................................... 133
2001.................................................................... 121
2002.................................................................... 120
2003.................................................................... 100
Thereafter.............................................................. --
----
$612
====
</TABLE>
Rent expense for the year ended December 31, 1998 and 1997 was $100,000
and $82,000, respectively.
F-62
<PAGE>
CURTIS RESTAURANT EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Supplemental Retirement Plan
The Company has a security interest in a life insurance policy for cash
advances made to implement an equity split dollar life insurance fringe benefit
plan for certain key employees of the Company. An assignment of the Company's
security interest has been made for the purpose of providing security for the
indebtedness incurred by the Company to facilitate the implementation of this
benefit plan without disruption of working capital needed for other business
purposes.
12. Profit Sharing Plan
The Company has a discretionary profit sharing plan for all of its
employees. No fixed contribution plan percentage exists. The Company
contributed $120,000 and $140,000 relating to the years ended December 31, 1998
and 1997, respectively.
13. Capital Stock
As of December 31, 1998 and 1997, the Company had the following amounts of
authorized (500 no par value, fully paid, nonassessable) and issued shares
outstanding:
<TABLE>
<CAPTION>
Issued and
Authorized Outstanding
---------- -----------
<S> <C> <C>
1998.................................................. 500 93
1997.................................................. 500 93
</TABLE>
14. Subsequent Event (Unaudited)
Subsequent to December 31, 1998, the Company's stockholders entered into a
definitive agreement to sell the Company to Hospitality Design & Supply, Inc.
The sale transaction, effected through a combination of cash and common stock
of Hospital Design & Supply, Inc., is contingent and effective upon the initial
public offering of the common stock of Hospitality Design & Supply, Inc. The
anticipated selling price of the Company exceeds its net assets as of December
31, 1998.
F-63
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bintz Distributing Co.:
We have audited the accompanying balance sheets of Bintz Distributing Co.
(a Utah corporation) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' 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 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bintz Distributing Co. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Salt Lake City, Utah
February 15, 1999
F-64
<PAGE>
BINTZ DISTRIBUTING CO.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands, except
shares)
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................ $ -- $ --
Trade accounts receivable, less allowance for
doubtful accounts of $47 and
$33 in 1998 and 1997, respectively................ 2,390 1,934
Rebates receivable.................................. 502 348
Inventories......................................... 1,095 1,289
Prepaid expenses and other.......................... 15 107
------ ------
Total current assets............................. 4,002 3,678
------ ------
Property and Equipment:
Leasehold improvements.............................. 290 284
Fixtures and equipment.............................. 180 154
Vehicles............................................ 116 110
Warehouse equipment................................. 33 31
Equipment held under capital lease.................. 24 24
------ ------
643 603
Less accumulated depreciation and amortization... (305) (214)
------ ------
Net property and equipment....................... 338 389
------ ------
Total Assets.......................................... $4,340 $4,067
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit...................................... $1,375 $1,434
Accounts payable.................................... 903 678
Accrued liabilities................................. 195 187
Customer deposits................................... 125 492
Current portion of notes payable.................... 14 13
Current portion of obligations under capital
leases............................................ 7 8
------ ------
Total current liabilities........................ 2,619 2,812
------ ------
Long-term Liabilities:
Related party notes payable......................... 163 164
Notes payable, net of current portion............... 7 21
Obligations under capital leases, net of current
portion........................................... 3 8
------ ------
173 193
------ ------
Commitments and Contingencies (Notes 8 and 10)
Stockholders' Equity:
<CAPTION>
Common stock, no par value
<S> <C> <C>
Authorized--50,000 shares
Issued--17,500 shares.............................. 350 350
Retained earnings................................... 1,198 712
------ ------
Total Stockholders' Equity............................ 1,548 1,062
------ ------
Total Liabilities and Stockholders' Equity............ $4,340 $4,067
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-65
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Net revenue.................................................. $17,835 $13,097
Cost of revenue.............................................. 14,647 10,719
------- -------
Gross profit................................................. 3,188 2,378
Selling, general and administrative expenses................. 2,448 2,071
------- -------
Income from operations....................................... 740 307
Other income (expense):
Interest................................................... (125) (144)
Other...................................................... 1 6
------- -------
Net income................................................... $ 616 $ 169
======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-66
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except shares)
<S> <C> <C> <C> <C>
Balance, December 31, 1996................ 17,500 $350 $ 702 $1,052
Net income.............................. -- -- 169 169
Distributions to stockholders........... -- -- (159) (159)
------ ---- ------ ------
Balance, December 31, 1997................ 17,500 350 712 1,062
Net income.............................. -- -- 616 616
Distributions to stockholders........... -- -- (130) (130)
------ ---- ------ ------
Balance, December 31, 1998................ 17,500 $350 $1,198 $1,548
====== ==== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-67
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December
31,
------------
1998 1997
----- -----
(In
thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income..................................................... $ 616 $ 169
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 92 80
Gain on sale of assets...................................... -- (6)
Changes in assets and liabilities:
Decrease (increase) in:
Trade accounts receivable................................... (456) (97)
Rebates receivable.......................................... (154) (10)
Inventories................................................. 194 (149)
Prepaid expenses and other.................................. 92 (102)
Increase (decrease) in:
Accounts payable............................................ 225 153
Accrued liabilities......................................... 8 (10)
Customer deposits........................................... (367) 439
----- -----
Net cash provided by operating activities................. 250 467
----- -----
Cash Flows from Investing Activities:
Expenditures for property and equipment........................ (41) (159)
Proceeds from disposal of property and equipment............... -- 13
----- -----
Net cash used in investing activities..................... (41) (146)
----- -----
Cash Flows from Financing Activities:
Net change in line of credit................................... (59) (133)
Payments on capital lease obligations.......................... (6) (5)
Payments on notes payable...................................... (14) (24)
Distributions to stockholders.................................. (130) (159)
----- -----
Net cash used in financing activities..................... (209) (321)
----- -----
Net Increase (Decrease) in Cash.................................. -- --
Cash, at Beginning of Period..................................... -- --
----- -----
Cash, at End of Period........................................... $ -- $ --
===== =====
</TABLE>
The accompanying notes to financial statements are an integtal part of these
statements.
F-68
<PAGE>
BINTZ DISTRIBUTING CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years
Ended
December
31,
-------------
1998 1997
------ ------
(In
thousands)
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest.................................... $125 $144
Non-cash transactions related to capital lease
obligations............................................. -- 9
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-69
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization
Bintz Distributing Co. (the "Company"), a Utah corporation, is engaged in
the sale of restaurant equipment and supplies, principally to restaurants,
schools, service stations and other companies with headquarters or operations
in the state of Utah.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue Recognition
Revenues are generally recognized when equipment and supplies are shipped.
For certain orders primarily from the Company's significant customers (see Note
9), at the customer's request, the order is prepared for shipment and the
customer takes title and accepts billing but the equipment and supplies are
held at the Company's warehouse until the customer is ready for installation of
the equipment and supplies at its facility. Bill and hold arrangements are
covered by written contracts and the customer generally retains ten percent of
the invoice price until installation of the shipment at its facility. Revenues
for bill and hold arrangements are recognized when equipment and supplies are
ready for shipment.
Additionally, the Company requires a pre-payment from certain customers
placing large equipment orders. These pre-payments are recorded as customer
deposits and recognized as revenue when the equipment and supplies are shipped.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of all financial instruments approximate fair value.
The estimated fair values have been determined using appropriate market
information and valuation methodologies. The Company's financial instruments
consist primarily of cash, trade accounts receivable, accounts payable and debt
instruments.
Inventories
Inventories are stated at the lower of cost, as determined by the LIFO
method, or market. If inventories had been valued by the first-in, first-out
("FIFO") method, such inventory costs would exceed LIFO costs by approximately
$325,000 and $301,000 at December 31, 1998 and 1997, respectively. Gross profit
and net income during the years ended December 31, 1998 and 1997 would have
been higher by approximately $24,000 and $33,000, respectively, had the Company
valued its inventories using the FIFO method.
F-70
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized
using the straight-line method. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Leasehold improvements.................... Lesser of lease term or 2-10 years
Fixtures and equipment.................... 3-5 years
Vehicles.................................. 3-5 years
Warehouse equipment....................... 3-5 years
Equipment held under capital lease........ 3-5 years
</TABLE>
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is included in the determination of income.
Long-lived assets to be held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Impairment is measured by comparing the
carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from use of the assets and their eventual
disposition. The Company determined that as of December 31, 1998, there had not
been an impairment in the carrying value of long-lived assets.
Income Taxes
The Company has elected S corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under the Internal Revenue Code provisions applicable to S
corporations and similar provisions of the state tax code for the states in
which the Company operates, the stockholders report the Company's taxable
earnings or losses in their personal federal and state income tax returns.
Accordingly, no provision for federal and state income taxes has been reflected
in the accompanying financial statements.
Volume Rebates
The Company records purchase volume rebates at the time of purchase based
upon estimates of purchases during the period. Volume rebates are reflected as
a reduction of the cost of inventory purchases.
Concentration of Credit Risk
In the normal course of business, the Company extends credit to its
customers. The receivables due from the two significant customers identified in
Note 9 amounted to approximately 45 percent and 3 percent of the Company's
trade accounts receivable as of December 31, 1998. If any of these customers'
receivable balances should be deemed uncollectable, it would have a material
effect on the Company's results of operations and financial condition. The
Company regularly reviews accounts receivable and makes provision for
potentially uncollectable balances. At December 31, 1998, management believes
the Company had incurred no material impairments in the carrying values of its
accounts receivable other than those for which provision has been made.
F-71
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company adopted SFAS No.
131 in 1998 and its adoption did not have a significant impact on the financial
statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted SFAS No. 132 in 1998 and its adoption did not have a
significant impact on the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in the year ending December 31, 1999. The Company believes that
adoption of SFAS No. 133 will not significantly affect the Company's financial
position and results of operations.
3. Employee Benefit Plans
The Company has an employees' savings plan under section 401(k) of the
Internal Revenue Code. This plan covers all employees, except union employees
and nonresident aliens, who are at least 21 years of age, have at least one
year of service, and work at least 1,000 hours per year. The Company matches 50
percent of the employee contributions up to a maximum of 6 percent of the
employee's salary. The Company's matching contributions vest at a rate of 20
percent per year beginning after the first year and are fully vested after six
years. The Company contributed approximately $24,000 and $25,000 during the
years ended December 31, 1998 and 1997, respectively.
4. Line of Credit
The Company has a line of credit arrangement ("Line") with a bank for the
lesser of $2,000,000 or the borrowing base, as defined in the Line agreement.
The Line bears an interest rate of prime rate plus 0.25 percent (8 percent at
December 31, 1998) and matures in June 1999. The Company is required to make
monthly interest payments. Accounts receivable and inventories collateralize
the Line. Additionally, the Line is guaranteed by a stockholder of the Company.
At December 31, 1998, the Company had $625,000 available under the Line. The
weighted average interest rate on the Line was 8.31 percent during the year
ended December 31, 1998. The Line contains certain financial and non-financial
covenants with respect to the operations of the Company, including tangible net
worth, net worth ratio, current ratio and a cash flow requirements ratio. Under
the terms of the Line, upon the successful completion of the potential merger
described in Note 10, the outstanding balance will be immediately due and
payable.
F-72
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As the Company receives cash and deposits the cash into its bank account,
the bank account is then swept to the line of credit to reduce the outstanding
balance.
5. Notes Payable
Notes payable at December 31, 1998 and 1997 consist of the following
items:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Various notes payable to banks, at interest rates ranging
from 8 to 8.9%, due in monthly installments, with
maturities from November 1999 through May 2001, secured
by vehicles............................................. $ 21 $ 34
Less current maturities................................... (14) (13)
------- -------
$ 7 $ 21
======= =======
</TABLE>
The following is a schedule of future maturities of notes payable at
December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Year Ending December 31,
1999.................................................................. $14
2000.................................................................. 4
2001.................................................................. 3
---
$21
===
</TABLE>
Related Party Notes Payable
Related party notes payable at December 31, 1998 and 1997 consists of the
following items:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
9% uncollateralized note payable to an officer, principal
due in July 2000, interest payable quarterly.............. $100 $100
9% uncollateralized note payable to an affiliate company,
controlled by a stockholder, principal due in July 2000,
interest payable quarterly................................ 63 64
------- -------
$163 $164
======= =======
</TABLE>
The related party notes payable were paid in full during January 1999.
6. Capital Lease Obligations
The Company leases certain equipment used in its operations. Future
minimum capital lease obligations at December 31, 1998 consist of the
following items (in thousands):
<TABLE>
<S> <C>
Year ending December 31,
1999................................................................. $ 8
2000................................................................. 3
---
Total minimum lease payments........................................... 11
Less amount representing interest...................................... (1)
---
Present value of net minimum lease payments............................ 10
Less current maturities................................................ (7)
---
$ 3
===
</TABLE>
F-73
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Related-Party Transactions
As discussed in Note 5, the Company has notes payable to an officer and an
affiliate company. Additionally, as discussed in Note 8, the Company leases a
building from an affiliate company.
8. Commitments and Contingencies
Operating Lease Commitments
The Company leases a building from an affiliate company controlled by a
stockholder of the Company. Effective June 1, 1996, the Company entered into a
lease agreement with the affiliate company for a five-year period, currently
requiring a payment of $9,000 per month. The lease agreement may be renewed at
the Company's option for up to three consecutive five-year periods subject to a
cost-of-living adjustment.
In connection with the purchase of the building, the affiliate company
incurred debt, on which the Company signed as a co-borrower on the promissory
note. At December 31, 1998, the affiliate company was current on the promissory
note which had an outstanding balance of $844,641.
Additionally, the Company leases certain equipment used in its operations.
The future minimum lease payments for operating leases are due as follows:
<TABLE>
<CAPTION>
Affiliate Other Total
--------- ----- -----
(In thousands)
<S> <C> <C> <C>
Year ending December 31,
1999................................................ $108 $ 4 $112
2000................................................ 108 4 112
2001................................................ 45 4 49
2002................................................ -- 2 2
---- --- ----
$261 $14 $275
==== === ====
</TABLE>
During the years ended December 31, 1998 and 1997, the Company received
approximately $19,000 and $4,000 in sublease income related to the building
leased from an affiliate company. The terms of the sublease are on a month to
month basis. The net amount paid for operating lease expenses totaled
approximately $111,000 and $109,000 during the years ended December 31, 1998
and 1997, respectively.
Litigation
The Company is a party to certain legal proceedings arising in the ordinary
course of business. Management believes the outcome of such legal proceedings
will be covered by the Company's insurance policy and will not have a material
adverse effect on the Company's financial position or results of operations.
9. Significant Customers
During the year ended December 31, 1998, sales to two major customers
represented approximately 32 percent and 14 percent, respectively, of the
Company's total revenue. During the year ended December 31, 1997, sales to two
major customers represented approximately 40 percent and 16 percent,
respectively, of the Company's total revenue.
F-74
<PAGE>
BINTZ DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's stockholders entered into a
definitive agreement to sell the Company to Hospitality Design & Supply, Inc.
The sale transaction, effected through a combination of cash and common stock
of Hospital Design & Supply, Inc., is contingent and effective upon the initial
public offering of the common stock of Hospitality Design & Supply, Inc. The
anticipated selling price of the Company exceeds its net assets as of December
31, 1998.
F-75
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Castino Restaurant Equipment and Supply, Inc.:
We have audited the accompanying balance sheets of Castino Restaurant
Equipment and Supply, Inc. , a California corporation, as of December 31, 1998,
and March 31, 1998, and the related statements of income, stockholder's equity,
and cash flows for the nine months ended December 31, 1998, and for the year
ended March 31, 1998. 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 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Castino Restaurant
Equipment and Supply, Inc. at December 31, 1998, and March 31, 1998, and the
results of its operations and its cash flows for the nine months ended December
31, 1998, and for the year ended March 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California
February 5, 1999
F-76
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
BALANCE SHEETS
As of December 31, 1998 and March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands, except
share amounts)
ASSETS
<S> <C> <C>
Current Assets:
Cash.................................................. $ 5 $ 4
Accounts receivable, less allowance for doubtful
accounts of $30 and $20 at December 31, 1998 and
March 31, 1998...................................... 510 470
Other receivables..................................... 46 81
Inventories, net...................................... 723 878
Deferred income taxes................................. 14 --
Prepaid expenses and other............................ 42 35
------ ------
Total current assets............................... 1,340 1,468
Property and Equipment, net............................. 156 119
Related Party Receivables............................... 94 123
Deferred Income Taxes................................... 37 37
Other Assets............................................ 12 11
------ ------
$1,639 $1,758
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Bank overdraft........................................ $ 55 $ 44
Accounts payable...................................... 277 386
Income tax payable.................................... 26 --
Accrued liabilities................................... 226 176
Customer advances..................................... 227 284
Deferred income taxes................................. -- 9
Borrowings under lines of credit...................... 252 297
Current portion of long-term debt..................... 50 45
------ ------
Total current liabilities.......................... 1,113 1,241
Long-term Debt.......................................... 102 104
Commitments and Contingencies
Stockholder's Equity:
Common stock, no par value; 2,500 shares authorized,
400 shares issued and outstanding at December 31,
1998 and March 31, 1998............................. 4 4
Retained earnings..................................... 420 409
------ ------
Total stockholder's equity......................... 424 413
------ ------
Total liabilities and stockholder's equity......... $1,639 $1,758
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
STATEMENTS OF INCOME
For the Nine Months Ended December 31, 1998 and
For the Year Ended March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C> <C>
Net revenue.......................................... $4,619 $5,921
Cost of revenue...................................... 3,395 4,342
------ ------
Gross profit.................................... 1,224 1,579
Selling, general and administrative expenses......... 1,215 1,470
------ ------
Income from operations.......................... 9 109
Other income (expense):
Interest income and finance charges, net........... 6 22
Interest expense................................... (29) (36)
Gain on sale of assets............................. 16 9
Other.............................................. 13 6
------ ------
6 1
------ ------
Income before income taxes...................... 15 110
Income taxes......................................... (4) (40)
------ ------
Net income...................................... $ 11 $ 70
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
For the Nine Months Ended December 31, 1998 and
For the Year Ended March 31, 1998
<TABLE>
<CAPTION>
Common Stock Total
------------- Retained Stockholders'
Shares Amount Earnings Equity
------ ------ -------- -------------
(In thousands, except share amounts)
<S> <C> <C> <C> <C>
Balance, April 1, 1997.................... 400 $ 4 $339 $343
Net income.............................. -- -- 70 70
--- --- ---- ----
Balance, March 31, 1998................... 400 4 409 413
Net income.............................. -- -- 11 11
--- --- ---- ----
Balance, December 31, 1998................ 400 $ 4 $420 $424
=== === ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31, 1998 and
For the Year Ended March 31, 1998
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income........................................... $ 11 $ 70
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 70 60
Gain on sale of assets............................ (16) (7)
Deferred income taxes............................. (23) 21
Change in assets and liabilities:
Accounts receivables.............................. (40) 377
Other receivables................................. 35 (82)
Inventories....................................... 155 (240)
Prepaid expenses and other........................ (7) (21)
Related party receivables......................... 29 (49)
Other assets...................................... (1) (3)
Accounts payable.................................. (110) (296)
Income tax payable................................ 26 0
Accrued liabilities............................... 50 (14)
Customer advances................................. (57) 216
----- -----
Net cash provided by operating activities....... 122 32
----- -----
Cash Flows from Investing Activities:
Purchase of property and equipment................... (115) (103)
Sale of property and equipment....................... 25 12
----- -----
Net cash used in investing activities........... (90) (91)
----- -----
Cash Flows from Financing Activities:
Change in bank overdraft, net........................ 11 (14)
Decrease in lines of credit, net..................... (45) (34)
Payments on long-term debt........................... (50) (39)
Proceeds from issuance of long-term debt............. 53 139
----- -----
Net cash provided by (used in) financing
activities.................................... (31) 52
----- -----
Increase (Decrease) in Cash............................ 1 (7)
Cash at Beginning of Period............................ 4 11
----- -----
Cash at End of Period.................................. $ 5 $ 4
===== =====
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest.......................................... $ 29 $ 36
Income taxes...................................... 4 88
Supplemental Schedule of Noncash Investing and
Financing Activities: During the year ended March 31,
1998, the Company entered into an equipment finance
lease for the purchase of office equipment totaling
$9
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Business and Organization
Castino Restaurant Equipment and Supply, Inc. (the "Company") was founded
and incorporated in the state of California in 1974. The Company is principally
engaged in the sale and installation of restaurant equipment and in the
wholesale distribution of restaurant supplies. The Company's operations are
located in California.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Revenue Recognition
Revenue is derived from the distribution and sale of equipment and supplies
to restaurants. Sales revenue is recognized when the risk of ownership
transfers to the customer, generally upon shipment. Monies received on
equipment and installation sales contracts for which delivery and installation
has yet to be performed is recorded as a customer advance and the related
revenue is recognized upon delivery and installation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories include saleable equipment and supplies and are stated at the
lower of cost or market using an average cost method.
Property and Equipment, net
Property and Equipment are stated at cost. Depreciation is computed
principally by an accelerated method over the estimated useful lives of the
assets, which range from 5 to 7 years. Leasehold improvements are amortized
over the lesser of the lease term or their estimated useful life.
Costs of normal maintenance and repairs and minor replacements are charged
to expense as incurred. Major replacements or betterments are capitalized. When
assets are sold or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any resulting
gain or loss is included in the statements of income.
Income Taxes
Using the asset and liability method of the Financial Accounting Standards
Board (FASB) Statement No. 109, "Accounting for Income Taxes," deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Valuation reserves are recorded if it is
uncertain as to the realizability of deferred tax assets.
F-81
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade accounts receivable. The Company
sells primarily on 30-day terms, performs credit evaluation procedures on its
customers, and generally does not require collateral on its accounts
receivable. Most of the Company's sales are in California. The Company
maintains an allowance for potential credit losses. No single customer
represented more than 10 percent of sales in any period.
Procurement Rebates
The Company receives quarterly and annual cash rebates on qualifying
purchases from many of their suppliers. The amount of these rebates has been
estimated and accrued in these financial statements. Actual rebates earned
could differ from the estimated amounts.
Financial Instruments
The carrying amounts for cash, receivables, and accounts payable
approximate fair value due to the short-term nature of these instruments. Other
fair value disclosures are in the respective notes.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. Other than net income, the Company has no
comprehensive income.
New Accounting Pronouncements
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about its reportable operating segments
in the interim and annual financial statements. The Company will adopt SFAS No.
131 in 1999 and does not expect its adoption to have a significant impact on
the financial statements or related footnote disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company will adopt SFAS No. 132 in 1999 and does not expect its adoption to
have a significant impact on the financial statements or related footnote
disclosures.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new accounting
model for derivative instruments and hedging activities. The Company will adopt
SFAS No. 133 in 1999. The Company believes that adoption of SFAS No. 133 will
not significantly affect the Company's financial position and results of
operations.
F-82
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment at December 31, 1998 and March 31, 1998, consists of
the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Furniture and fixtures................................ $ 54 $ 44
Office equipment...................................... 106 102
Automotive equipment.................................. 222 217
Computer equipment.................................... 148 146
Leasehold improvements................................ 110 72
----- -----
640 581
Accumulated depreciation and amortization............. (484) (462)
----- -----
$ 156 $ 119
===== =====
</TABLE>
Depreciation and amortization expense for the nine months ended December
31, 1998, and for the year ended March 31, 1998, was $70,000 and $60,000,
respectively.
4. Related Party Receivables
At December 31, 1998, and March 31, 1998 the Company had two notes
receivable with balances totaling $113,000, and $136,000, respectively from the
stockholder and an employee of the Company. The receivable from the stockholder
is unsecured with interest at 6.52 percent per annum. Principal and interest
are being paid currently, amount is to be paid in full by January, 2002. The
receivable from the employee is unsecured with interest at 10.25 percent at
December 31, 1998. Principal and interest are being paid currently, amount is
to be paid in full by July, 2002. The current portion of the related party
receivables is shown on the balance sheets in other receivables.
5. Borrowings Under Lines of Credit
The Company has two revolving line of credit agreements with a bank
expiring on September 1, 1999, which provide for maximum borrowings of $650,000
and are collateralized by the assets of the Company not otherwise encumbered.
The principal balances at December 31, 1998, and March 31, 1998, were $252,000
and $282,000, respectively. Interest is payable monthly at the bank's reference
rate plus 1.75 percent, which was 10 percent at December 31, 1998.
In addition, the Company has a revolving line of credit with a bank,
expiring on February 10, 2001, which provides for maximum borrowings of
$300,000 and is collateralized by inventory, accounts receivable, and equipment
of the Company. The principal balances at December 31, 1998, and March 31,
1998, were $0 and $15,000, respectively.
The Company believes the terms of the debt are representative of current
market and therefore, face value equals carrying value.
All borrowings are personally guaranteed by the stockholder.
F-83
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Lease Commitments
The Company leases its business premises from a related partnership with
total monthly rental payments of approximately $13,000. The leases expire on
August 31, 2000 and March 31, 2001. There is an option to renew the primary
business lease for an additional three years with terms and conditions to be
agreed by both parties upon six months prior to expiration.
At December 31, 1998, Future minimum annual rental payments required under
these leases are as follows (in thousands):
<TABLE>
<S> <C>
Year Ending December 31
1999................................................................ $155
2000................................................................ 144
2001................................................................ 30
2002................................................................ --
2003................................................................ --
Thereafter.......................................................... --
----
$329
====
</TABLE>
Total rent expense was $112,000 and $133,000 for the nine months ended
December 31, 1998, and for the year ended March 31, 1998, respectively.
7. Long-term Debt
Long-term debt at December 31, 1998 and March 31, 1998, consists of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Note payable, financial institution, personally
guaranteed by stockholder, interest at 10.25
percent at December 31, 1998; due July 2002....... $ 57 $ 68
Note payable, finance company, secured by automotive
equipment, interest at 9.75 percent per annum; due
July 2000......................................... 13 18
Note payable, finance company, secured by automotive
equipment, interest at 7.91 percent per annum; due
May 2002.......................................... 20 --
Note payable, finance company, secured by automotive
equipment, interest at 9.0 percent per annum; due
May 2001.......................................... 25 --
Note payable, finance company, secured by automotive
equipment, interest at 5.91 percent per annum; due
October 2002...................................... 19 23
Note payable, finance company, secured by automotive
equipment, interest at 8.25 percent per annum; due
April 2001........................................ 18 23
Note payable, finance company, secured by automotive
equipment, interest at 8.0 percent per annum; paid
August 1998....................................... -- 2
Note payable, financial institution, secured by
automotive equipment, interest at 10.25 percent
per annum; paid April 1998........................ -- 8
Lease payable, financial institution, secured by
copier equipment, interest at 11 percent per
annum; paid October 1998.......................... -- 7
---- ----
Total............................................... 152 149
Less: Current maturities............................ (50) (45)
---- ----
Long-term portion................................... $102 $104
==== ====
</TABLE>
F-84
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Principal payments required on long-term debt for each of the next five
years ending December 31, are as follows (in thousands):
<TABLE>
<S> <C>
1999.................................................................. $ 50
2000.................................................................. 49
2001.................................................................. 36
2002.................................................................. 17
2003.................................................................. --
----
$152
====
</TABLE>
8. Income Taxes
The provision for income taxes consists of the following for the nine
months ended December 31, 1998 and the year ended March 31, 1998:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Current:
Federal.......................................... $ 22 $11
State and local.................................. 8 6
---- ---
30 17
Deferred:
Federal.......................................... (20) 18
State and local.................................. (6) 5
---- ---
$ 4 $40
==== ===
</TABLE>
The reconciliation of income tax from continuing operations computed at the
U.S. federal statutory tax rate to the Company's effective income tax rate is
as follows for the nine months ended December 31, 1998, and for the year ended
March 31, 1998:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Federal statutory income tax rate.................. 34.0% 34.0%
State income tax rate, net of federal benefit...... 6.1 6.1
Permanent items: items not deductible for
tax return purposes, net......................... 29.4 2.2
Benefit resulting from graduated federal tax rates
and other........................................ (42.5) (5.9)
------ -----
Total provision.................................. 27.0% 36.4%
====== =====
</TABLE>
At December 31, 1998, the Company had approximately $51,000 in net deferred
tax assets. These net assets consisted of approximately $5,000 in liabilities
and $56,000 in assets resulting principally from reserves deductible in the
future and differences between book and tax depreciation.
At March 31, 1998, the Company had approximately $28,000 in net deferred
tax assets resulting principally from reserves deductible in the future and
differences between book and tax depreciation.
F-85
<PAGE>
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Retirements Plans
The Company has a defined contribution plan covering substantially all of
its employees. Pension expense for the nine months ended December 31, 1998, and
for the year ended March 31, 1998, was $32,000 and $40,000, respectively. The
Company makes an annual contribution to the plan equal to approximately
6 percent of eligible compensation.
The Company also has a profit-sharing plan covering substantially all of
its employees. Contributions are made at the discretion of the Board of
Directors and are allocated proportionately based on eligible compensation. At
December 31, 1998, and March 31, 1998, the contribution accrued was $14,000 and
$20,000, respectively.
10. Commitments and Contingencies
Various legal claims arise against the Company during the normal course of
business. In the opinion of management, based on the nature of the claims,
underlying insurance coverage, and other defenses, liabilities, if any, arising
from the claims would not have a material effect on the financial statements.
11. Subsequent Events (Unaudited)
Subsequent to December 31, 1998, the Company's stockholder entered into a
definitive agreement to sell the Company to Hospitality Design & Supply, Inc.
The sale transaction, effected through a combination of cash and common stock
of Hospitality Design & Supply, Inc., is contingent and effective upon the
initial public offering of the common stock of Hospitality Design & Supply,
Inc. The anticipated selling price of the Company exceeds its net assets as of
December 31, 1998.
F-86
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by HDSI in
connection with the sale of the common stock it is offering, other than
underwriting commissions and discounts.
<TABLE>
<CAPTION>
Item Amount
---- ----------
<S> <C>
SEC registration fee............................................ $ 25,976
NASD filing fee................................................. 9,844
Nasdaq National Market Listing Fee.............................. 69,375
Blue Sky fees and expenses...................................... 5,000*
Printing and engraving expenses................................. 200,000*
Legal fees and expenses......................................... 250,000*
Accounting fees and expenses.................................... 1,250,000*
Transfer Agent and Registrar fees............................... 6,500*
Miscellaneous expenses.......................................... 8,305*
----------
Total......................................................... $1,825,000
==========
</TABLE>
- --------
*Estimated
Item 14. Indemnification of Directors and Officers.
HDSI has included in its Amended and Restated Certificate of Incorporation
and Restated Bylaws provisions to eliminate the personal liability of its
directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by the General Corporation Law of the State of Delaware
and to indemnify its directors and officers to the fullest extent permitted by
Delaware law, including circumstances in which indemnification is otherwise
discretionary.
Section 145 of the Delaware General Corporation Law permits a corporation,
under specified circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by each in
connection with any action, suit or proceeding brought by third parties by
reason of the fact that they were or are directors, officers, employees or
agents of the corporation, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses (including
attorneys' fees) actually and reasonably incurred by directors, officers,
employees or agents in connection with the defense or settlement of an action
or suit, and only with respect to a matter as to which they shall have acted in
good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, except that no indemnification shall
be made if such person shall have been adjudged liable to the corporation,
unless and only to the extent that the court in which the action or suit was
brought shall determine upon application that the defendant director, officer,
employee or agent is fairly and reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
HDSI has entered into indemnification agreements with its directors and
certain key officers pursuant to which HDSI is generally obligated to indemnify
its directors and such officers to the full extent permitted by Section 145 as
described above.
HDSI intends to purchase insurance for its directors and officers
indemnifying them against certain civil liabilities, including liabilities
under the federal securities laws, which might be incurred by them in such
capacity.
II-1
<PAGE>
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the underwriters of HDSI, its directors and officers, and by HDSI of the
underwriters, for certain liabilities, including liabilities arising under the
Securities Act, and affords certain rights of contribution with respect
thereto.
Item 15. Recent Sales of Unregistered Securities.
Since its incorporation in June 1998, HDSI has issued and sold the
following unregistered securities:
(1) In July 1998, in connection with its formation, HDSI issued an
aggregate of 1,639,375 shares of common stock to private investors for
aggregate cash consideration of $7,625. See "Certain Transactions."
(2) In September 1998, HDSI issued an aggregate of 182,354 shares of its
Series A preferred stock to private investors for cash consideration of
$775,004.50. These shares were issued pursuant to Subscription Agreements
between HDSI and each of the investors.
(3) In January 1999, HDSI issued an aggregate of 134,120 shares of its
Series A preferred stock to private investors for cash consideration of
$570,010. These shares were issued pursuant to Subscription Agreements
between HDSI and each of the investors. See "Certain Transactions."
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were attached to the share
certificates issued in such transactions.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, Raygal Design Associates, Inc. and the
stockholders named therein.
2.2 Agreement and Plan of Reorganization, dated as of February 27, 1999,
by and among HDSI, East Bay Restaurant Supply, Inc. and the
stockholders named therein.
2.3 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, ERF California, Inc., Economy Restaurant
Fixtures, Inc. and the stockholders named therein.
2.4 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, Curtis Restaurant Equipment and the stockholders
named therein.
2.5 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, HDS Utah, Inc., Bintz Distributing Co. and the
stockholders named therein.
2.6 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, Castino Restaurant Equipment and Supply, Inc.
and the stockholders named therein.
3.1* Amended and Restated Certificate of Incorporation of HDSI, as
amended.
3.2 Bylaws of HDSI.
4.1* Specimen Common Stock Certificate.
4.2 Registration Rights Agreement, dated February 26, 1999, between HDSI
and stockholders named on signature page.
5.1* Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation, as to the validity of the issuance of the
securities HDSI is offering.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
10.1 Hospitality Design & Supply, Inc. Stock Option Plan.
10.2 Form of Indemnification Agreement.
10.3 Executive Employment Agreement, dated as of July 20, 1998, between
HDSI and Roger M. Laverty.
10.4 Executive Employment Agreement, dated as of November 16, 1998,
between HDSI and James Castleberry.
10.5 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and Ygal Sonenshine.
10.6 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and John Breznikar.
10.7 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and Michael Weinstock.
10.8 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and Michael Curtis.
10.9 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and Daniel Curtis.
10.10 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and William A. Williams.
10.11 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and David Castino.
10.12 Form of Consulting Agreement, to be dated as of consummation of this
offering, between HDSI and Ross Berner.
10.13 Form of Consulting Agreement, to be dated as of consummation of this
offering, between HDSI and Charles Rothkopf.
23.1* Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
99.1 Form of Consent of director nominee to being named as director.
</TABLE>
- --------
*To be filed by amendment.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the financial statements of the registrant or related
notes thereto.
II-3
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (a) to include
any prospectus required by Section 10(a)(3) of the Securities Act; (b) to
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; (c) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.
(4) That for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(5) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therewith, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on the 4th day of March, 1999.
HOSPITALITY DESIGN & SUPPLY, INC.
By: /s/ Roger M. Laverty
----------------------------------
Roger M. Laverty
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Roger M. Laverty and James Castleberry,
and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution for him in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Roger M. Laverty President, Chief March 4, 1999
____________________________________ Executive Officer and
Roger M. Laverty Director (Principal
Executive Officer)
/s/ James Castleberry Executive Vice President March 4, 1999
____________________________________ and Chief Financial
James Castleberry Officer (Principal
Financial and
Accounting Officer)
/s/ Ross Berner Director March 4, 1999
____________________________________
Ross Berner
/s/ Mark McKinney Director March 4, 1999
____________________________________
Mark McKinney
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, Raygal Design Associates, Inc. and the
stockholders named therein.
2.2 Agreement and Plan of Reorganization, dated as of February 27, 1999,
by and among HDSI, East Bay Restaurant Supply, Inc. and the
stockholders named therein.
2.3 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, ERF California, Inc., Economy Restaurant
Fixtures, Inc. and the stockholders named therein.
2.4 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, Curtis Restaurant Equipment and the stockholders
named therein.
2.5 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, HDS Utah, Inc., Bintz Distributing Co. and the
stockholders named therein.
2.6 Agreement and Plan of Reorganization, dated as of February 26, 1999,
by and among HDSI, Castino Restaurant Equipment and Supply, Inc. and
the stockholders named therein.
3.1* Amended and Restated Certificate of Incorporation of HDSI, as
amended.
3.2 Bylaws of HDSI.
4.1* Specimen Common Stock Certificate.
4.2 Registration Rights Agreement, dated February 26, 1999, between HDSI
and stockholders named on signature page.
5.1* Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation, as to the validity of the issuance of the
securities HDSI is offering.
10.1 Hospitality Design & Supply, Inc. Stock Option Plan.
10.2 Form of Indemnification Agreement.
10.3 Executive Employment Agreement, dated as of July 20, 1998, between
HDSI and Roger M. Laverty.
10.4 Executive Employment Agreement, dated as of November 16, 1998,
between HDSI and James Castleberry.
10.5 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and Ygal Sonenshine.
10.6 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and John Breznikar.
10.7 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and Michael Weinstock.
10.8 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and Michael Curtis.
10.9 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and Daniel Curtis.
10.10 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and William A. Williams.
10.11 Form of Employment Agreement, to be dated as of consummation of this
offering, between HDSI and David Castino.
10.12 Form of Consulting Agreement, to be dated as of consummation of this
offering, between HDSI and Ross Berner.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description of Document
------ -----------------------
<C> <S>
10.13 Form of Consulting Agreement, to be dated as of consummation of this
offering, between HDSI and Charles Rothkopf.
23.1* Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A
Professional Corporation (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
99.1 Form of Consent of director nominee to being named as director.
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
dated as of February 26, 1999
by and among
HOSPITALITY DESIGN & SUPPLY, INC.,
RAYGAL DESIGN ASSOCIATES, INC.
and
the STOCKHOLDERS named herein
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. THE MERGER.................................................................................... 1
1.1 Delivery and Filing of Articles of Merger............................................... 1
1.2 Effective Time of the Merger............................................................ 1
1.3 Certificate of Incorporation, Bylaws and Board of Directors of Surviving Corporation.... 2
1.4 Effect of Merger........................................................................ 2
2. CONVERSION OF STOCK........................................................................... 3
2.1 Manner of Conversion.................................................................... 3
2.2 Other Companies......................................................................... 3
3. DELIVERY OF STOCK............................................................................. 4
3.1 Delivery of HDS Stock................................................................... 4
3.2 Delivery of COMPANY Stock............................................................... 4
4. PRE-CLOSING AND CLOSING....................................................................... 4
4.1 Pre-Closing............................................................................. 4
4.2 Closing................................................................................. 4
4.3 No Assurances........................................................................... 5
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS................................... 5
(A) Representations and Warranties of COMPANY and STOCKHOLDERS.................................... 5
5.1 Due Organization........................................................................ 6
5.2 Authority and Validity.................................................................. 6
5.3 Capital Stock of the COMPANY............................................................ 7
5.4 Transactions in Capital Stock........................................................... 7
5.5 No Bonus Shares......................................................................... 7
5.6 Subsidiaries............................................................................ 8
5.7 Predecessor Status; etc................................................................. 8
5.8 Spin-off by the COMPANY................................................................. 8
5.9 Financial Statements.................................................................... 8
5.10 Liabilities and Obligations............................................................. 9
5.11 Accounts and Notes Receivable........................................................... 9
5.12 Permits and Intangibles................................................................. 10
5.13 Environmental Matters................................................................... 10
5.14 Real and Personal Property.............................................................. 11
5.15 Significant Customers; Material Contracts and Commitments............................... 12
5.16 Title to Real Property.................................................................. 12
5.17 Insurance............................................................................... 13
5.18 Compensation; Employment Agreements..................................................... 13
5.19 Employee Plans.......................................................................... 13
5.20 Compliance with ERISA................................................................... 14
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5.21 Conformity with Law.................................................................... 17
5.22 Taxes.................................................................................. 17
5.23 No Violations.......................................................................... 20
5.24 Government Contracts................................................................... 20
5.25 Absence of Changes..................................................................... 20
5.26 Deposit Accounts; Powers of Attorney................................................... 21
5.27 Relations with Governments............................................................. 22
(B) Representations and Warranties of STOCKHOLDERS............................................... 22
5.28 Authority; Validity; Ownership......................................................... 22
5.29 Preemptive Rights...................................................................... 22
6. REPRESENTATIONS OF HDS....................................................................... 22
6.1 Due Organization....................................................................... 23
6.2 HDS Stock.............................................................................. 23
6.3 Authority and Validity................................................................. 23
6.4 Capital Stock of HDS................................................................... 24
6.5 No Side Agreements..................................................................... 24
6.6 Subsidiaries........................................................................... 24
6.7 Business; Financial Information........................................................ 24
6.8 Conformity with Law.................................................................... 25
6.9 No Violations.......................................................................... 25
6.10 [Intentionally Omitted]................................................................ 25
6.11 Disclosure............................................................................. 26
6.12 Compensation; Employment Agreements.................................................... 26
7. COVENANTS PRIOR TO CLOSING................................................................... 26
7.1 Access and Cooperation; Due Diligence.................................................. 26
7.2 Conduct of Business Pending Closing.................................................... 27
7.3 Prohibited Activities.................................................................. 28
7.4 No Shop................................................................................ 29
7.5 Notice to Bargaining Agents............................................................ 29
7.6 Termination of Plans................................................................... 29
7.7 HDS Prohibited Activities.............................................................. 29
7.8 Notification of Certain Matters........................................................ 30
7.9 Amendment of Schedules................................................................. 30
7.10 Cooperation in Preparation of Registration Statement................................... 31
7.11 Examination of Final Financial Statements.............................................. 32
7.12 Maintenance of Liquidity and Limitation of Debt........................................ 32
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.............................. 32
8.1 Representations and Warranties; Performance of Obligations............................. 33
8.2 Satisfaction........................................................................... 33
8.3 No Litigation.......................................................................... 33
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8.4 Stockholders' Release................................................................. 33
8.5 Opinion of Counsel.................................................................... 34
8.6 Director Indemnification.............................................................. 34
8.7 Registration Statement................................................................ 34
8.8 Consents and Approvals................................................................ 34
8.9 Good Standing Certificates............................................................ 34
8.10 No Waivers............................................................................ 34
8.11 No Material Adverse Change............................................................ 34
8.12 Employment Agreements................................................................. 35
8.13 Consulting Agreements................................................................. 35
8.14 Leases................................................................................ 35
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.................................................. 35
9.1 Representations and Warranties; Performance of Obligations............................ 35
9.2 No Litigation......................................................................... 35
9.3 Financial Statements.................................................................. 35
9.4 No Material Adverse Effect............................................................ 36
9.5 STOCKHOLDERS' Release................................................................. 36
9.6 Satisfaction.......................................................................... 36
9.7 Termination of Related Party Agreements............................................... 36
9.8 Opinion of COMPANY Counsel............................................................ 36
9.9 Consents and Approvals................................................................ 36
9.10 Good Standing Certificates............................................................ 37
9.11 Registration Statement................................................................ 37
9.12 Employment Agreements................................................................. 37
9.13 Consulting Agreements................................................................. 37
9.14 Leases................................................................................ 37
9.15 Repayment of Indebtedness............................................................. 37
9.16 FIRPTA Certificate.................................................................... 37
9.17 Insurance............................................................................. 38
9.18 Nondisturbance Agreements............................................................. 38
10. POST-CLOSING COVENANTS AND SPECIAL TAX MATTERS.............................................. 38
10.1 Intentionally Omitted................................................................. 38
10.2 Disclosure............................................................................ 38
10.3 Cooperation in Tax Return Preparation................................................. 38
10.4 Tax Return Preparation and Filing..................................................... 38
10.5 Tax Treatment of Transaction.......................................................... 39
10.6 Special Definitions Related to Tax Matters............................................ 39
10.7 Directors............................................................................. 40
10.8 Release from Guarantees............................................................... 40
10.9 HDS Stock Options..................................................................... 41
10.10 Determination and Allocation of Consideration......................................... 41
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11. INDEMNIFICATION............................................................................. 42
11.1 General Indemnification by the STOCKHOLDERS........................................... 42
11.2 Indemnification by HDS................................................................ 42
11.3 Third Person Claims................................................................... 43
11.4 Exclusive Remedy...................................................................... 45
11.5 Limitations on Indemnification........................................................ 45
11.6 Special Tax Indemnity Provisions...................................................... 46
11.7 Special Contest Rights Related to Tax Matters......................................... 48
11.8 Special Notification Requirements Regarding Tax Disputes.............................. 48
11.9 Refunds............................................................................... 48
11.10 Optional Payment With Shares.......................................................... 48
12. TERMINATION OF AGREEMENT.................................................................... 49
12.1 Termination........................................................................... 49
12.2 Liabilities in Event of Termination................................................... 49
13. NONCOMPETITION.............................................................................. 50
13.1 Prohibited Activities................................................................. 50
13.2 Damages............................................................................... 51
13.3 Reasonable Restraint.................................................................. 51
13.4 Severability; Reformation............................................................. 51
13.5 Independent Covenant.................................................................. 51
13.6 Materiality........................................................................... 51
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION................................................... 52
14.1 STOCKHOLDERS.......................................................................... 52
14.2 HDS................................................................................... 52
14.3 Damages............................................................................... 52
14.4 Survival.............................................................................. 52
15. TRANSFER RESTRICTIONS....................................................................... 53
15.1 Transfer Restrictions................................................................. 53
15.2 Permitted Transferees................................................................. 53
16. FEDERAL SECURITIES ACT REPRESENTATIONS...................................................... 54
16.1 Compliance with Law................................................................... 54
16.2 Accredited Investors; Economic Risk; Sophistication................................... 54
17. REGISTRATION RIGHTS......................................................................... 54
17.1 Piggyback Registration Rights......................................................... 54
17.2 Demand Registration Rights............................................................ 55
17.3 Registration Procedures............................................................... 56
17.4 Underwriting Agreement................................................................ 56
17.5 HDS Stock............................................................................. 56
17.6 Availability of Rule 144.............................................................. 57
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17.7 Survival.............................................................................. 57
18. GENERAL..................................................................................... 57
18.1 Cooperation........................................................................... 57
18.2 Successors and Assigns................................................................ 57
18.3 Entire Agreement...................................................................... 57
18.4 Counterparts.......................................................................... 58
18.5 Brokers and Agents.................................................................... 58
18.6 Expenses.............................................................................. 58
18.7 Notices............................................................................... 58
18.8 Governing Law; Forum.................................................................. 59
18.9 Survival of Representations and Warranties............................................ 59
18.10 Exercise of Rights and Remedies....................................................... 59
18.11 Time.................................................................................. 60
18.12 Reformation and Severability.......................................................... 60
18.13 Remedies Cumulative................................................................... 60
18.14 Construction.......................................................................... 60
18.15 Captions.............................................................................. 60
18.16 No Obligation......................................................................... 61
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SCHEDULES and ANNEXES
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Annex I - Consideration to Founding Company Stockholders
Annex II - Stockholders and Stock Ownership of the COMPANY
Annex III - Stockholders and Stock Ownership of HDS
Annex IV - Certificate of Incorporation and Bylaws of HDS
Annex V - Form of Opinion of Howard, Rice, Nemerovski, Canady, Falk
& Rabkin, A Professional Corporation
Annex VI - Form of Opinion of COMPANY Counsel
Annex VII - Form of Director Indemnification Agreement
Annex VIII - Form of Employment Agreement
Annex IX - Form of Consulting Agreement
Annex X - Leases
Annex XI - Stockholder Release
Annex XII - Form of Nondisturbance Agreement
Schedule 5.1 - Qualifications to Do Business
Schedule 5.3 - Capital Stock of the COMPANY
Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to
Acquire Capital Stock
Schedule 5.5 - Stock Issued Pursuant For Awards, Grants and Bonuses
Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries
Schedule 5.7 - Names of Predecessor Companies
Schedule 5.8 - Sales or Spin-offs of Significant Assets
Schedule 5.9 - Financial Statements
Schedule 5.10 - Significant Liabilities and Obligations
Schedule 5.11 - Accounts and Notes Receivable
Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental
Authorizations
Schedule 5.13 - Environmental Matters
Schedule 5.14 - Real Property, Leases and Significant Personal Property
Schedule 5.15 - Significant Customers and Material Contracts
Schedule 5.17 - Insurance Policies and Claims
Schedule 5.18 - Officers, Directors and Key Employees, Employment
Agreements; Compensation
Schedule 5.19 - Employee Benefit Plans
Schedule 5.20 - Compliance with ERISA
Schedule 5.21 - Violations of Law, Regulations or Orders
Schedule 5.22 - Taxes
Schedule 5.23 - Violations of Charter Documents and Material Defaults
Schedule 5.24 - Governmental Contracts Subject to Price Redetermination
or Renegotiation
Schedule 5.25 - Changes Since Balance Sheet Date
Schedule 5.26 - Bank Accounts; Powers of Attorney
Schedule 5.28 - Encumbrances on the COMPANY Stock
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Schedule 6.5 - HDS Side Agreements
Schedule 6.6 - HDS Subsidiaries
Schedule 6.7 - HDS Financial Statements
Schedule 6.9 - No Violations
Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course
Between Balance Sheet Date and Closing Date
Schedule 7.3 - Prohibited Activities
Schedule 7.6 - Plans to be Terminated by the Pricing Date
Schedule 7.7 - Exceptions to Restrictions on HDS
Schedule 8.12 - Employment Agreements
Schedule 8.13 - Consulting Agreements
Schedule 8.14 - Leases
Schedule 9.7 - Termination of Related Party Agreements
Schedule 9.18 - Lienholders and Ground Lessors
Schedule 10.9 - HDS Stock Options
Schedule 13.1 - Prohibited Activities
Schedule 16.2 - Non-Accredited Investors
Schedule 18.5 - Brokers and Agents
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TABLE OF DEFINITIONS
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Defined Term Section
- ------------ -------
<S> <C>
Accredited investor 16.2
Acquired Parties 5.22(i)
Adjusted working capital 7.12
Affiliate 10.6(a)
Agreement Preamble
Articles of Merger 1.1
Balance Sheet Date 5.9
Cash Consideration Annex I
Charter Documents 5.1
Closing 4.2
Closing Date 4.2
COBRA 5.20(v)
Code Whereas
COMPANY Preamble
COMPANY Affiliates 5.8
COMPANY Financial Statements 5.9
COMPANY Stock 2.1
COMPANY's Subsidiaries 5.1
Constituent Corporations Whereas
Consulting Agreement 8.13
Controlled group 5.20
December 31, 1998 COMPANY Balance Sheet 5.9
Demand Registration 17.2
Defined Benefit Plan 5.19(iv)
Delaware GCL 1.4
Effective IPO Price Annex I
Effective Time of the Merger 1.2
Election Period 11.3(i)
Employment Agreement 8.12
Environmental Laws 5.13
ERISA 5.19
Expiration Date 5(A)
Founding Companies Whereas
Founding Stockholders 17.1
Group health plans 5.20 (v)
HDS Preamble
HDS Charter Documents 6.1
HDS Material Adverse Effect 6.1
HDS Material Documents 6.9
HDS Stock 2.1
HDS Subsidiaries 6.1
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Defined Term Section
- ------------ -------
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Howard Rice 4.1
Indemnification Threshold 11.5(i)
Indemnified Party 11.3
Indemnifying Party 11.3
Interim Period 10.6(b)
IPO 4.1
Leases 8.14
Material Adverse Effect 5.1
Material Contracts 5.15
Material Leases 5.14
Merger Whereas
Minimum IPO Price Annex I
Multi-employer pension plan 5.20
1933 Act 5(A)
1934 Act 5(A)
Nondisturbance Agreements 14.2
Nondisclosure Agreement 9.18
Other Agreements Whereas
Other Companies Whereas
PBGC 5.19(x)
Plans 5.19
Post-Closing Period 10.6(d)
Pre-Closing 4.1
Pre-Closing Period 10.6(c)
Pricing Date 4.1
Purchase Price Annex I
Qualified Plans 5.19(iii)
Registration Statement 4.3
Relevant Group 5.22(i)
Reportable events 5.20(iii)
SEC 8.2
Significant customers 5.15
Stockholder Release 9.5
STOCKHOLDERS Preamble
Surviving Corporation 1.2
Tax 10.6(e)
Tax Data 10.3
Tax Documentation 10.3
Tax Returns 10.6(f)
Taxing Authority 10.6(g)
Territory 13.1(i)
Third Party Claim 11.3(i)
Third Person 11.3
To the knowledge of COMPANY 5(A)
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Defined Term Section
- ------------ -------
<S> <C>
To the knowledge of HDS 6
Transfer Taxes 17.6
Underwriters 4.3
Underwriting Agreement 8.7
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of the 26th day of February, 1999, by and among HOSPITALITY DESIGN & SUPPLY,
INC., a Delaware Corporation ("HDS"), RAYGAL DESIGN ASSOCIATES, INC., a
California Corporation (the "Company"), and the stockholders of the COMPANY
listed on annex ii (the "STOCKHOLDERS"). the STOCKHOLDERS include all the
stockholders of the COMPANY.
WHEREAS, the respective boards of directors of HDS and the COMPANY
(which together are herein collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the constituent
Corporations and their respective stockholders that the COMPANY merge with and
into HDS under this agreement and the applicable provisions of the laws of the
State of Delaware (such transaction is sometimes herein called the "Merger");
WHEREAS, HDS is entering into other separate agreements (the "Other
Agreements") substantially similar to this Agreement each of which is entitled
"Agreement and Plan of Reorganization," with each of the entities other than the
Company listed in Part II of Annex I (collectively, the "Other Companies") in
order to acquire additional companies in the commercial kitchen design or supply
industry (the Other Companies, together with the Company, are collectively
referred to herein as the "FOUNDING COMPANIES");
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties herto hereby agree as follows:
1. THE MERGER.
1.1 Delivery and Filing of Articles of Merger. The Constituent
-----------------------------------------
Corporations will cause a Certificate of Merger or Articles of Merger with
respect to the Merger (the "Articles of Merger") to be signed, verified,
delivered to and filed with the Secretary of State of the State of Delaware and,
if required, a similar filing to be made with the relevant authorities in the
jurisdiction in which the COMPANY is organized, on or before the Closing Date
(as defined in Section 4.2). The parties contemplate that a Certificate of
Merger or Articles of Merger also will be filed on or before the Closing Date
with respect to each of the Other Agreements.
1.2 Effective Time of the Merger. The "Effective Time of the Merger"
----------------------------
shall be on the Closing Date, as defined in Section 4.2, and simultaneous with
the closing of the IPO, as defined in Section 4.2. At the Effective Time of the
Merger, the COMPANY shall be merged with and into HDS in accordance with the
Articles of Merger, and the separate existence of the COMPANY shall cease. HDS
shall be the surviving party in the Merger and is herein sometimes referred to
as the "Surviving Corporation." The Merger will be effected in a single
transaction.
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1.3 Certificate of Incorporation, Bylaws and Board of Directors of
--------------------------------------------------------------
Surviving Corporation. At the Effective Time of the Merger:
- ---------------------
(i) the Certificate of Incorporation of HDS then in effect shall
become the Certificate of Incorporation of the Surviving Corporation; and
subsequent to the Effective Time of the Merger, such Certificate of
Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation until changed as provided by law;
(ii) the Bylaws of HDS then in effect shall become the Bylaws of
the Surviving Corporation; and subsequent to the Effective Time of the Merger,
such Bylaws shall be the Bylaws of the Surviving Corporation until they shall
thereafter be duly amended;
(iii) the Board of Directors of the Surviving Corporation shall
consist of those persons who constituted the Board of Directors of HDS
immediately before the Merger, who shall hold office subject to the provisions
of the laws of the State of Delaware and of the Certificate of Incorporation and
Bylaws of the Surviving Corporation until such persons' successors and assigns
are duly elected and qualified; and
(iv) the officers of the Surviving Corporation shall be the
persons who were officers of HDS immediately before the Merger, who shall hold
office, subject to the provisions of the Certificate of Incorporation and Bylaws
of the Surviving Corporation and the Employment Agreements (as defined in
Section 8.12), until such officers' successors are duly elected and qualified.
1.4 Effect of Merger. At the Effective Time of the Merger, the effect
----------------
of the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL"). Except as herein
specifically set forth, the identity, existence, purposes, powers, objects,
franchises, privileges, rights and immunities of the COMPANY shall continue
unaffected and unimpaired by the Merger and the corporate franchises, existence
and rights of the COMPANY shall be merged with and into HDS, and HDS, as the
Surviving Corporation, shall be fully vested therewith. At the Effective Time
of the Merger, the separate existence of the COMPANY shall cease and, in
accordance with the terms of this Agreement, the Surviving Corporation shall
possess all the rights, privileges, immunities and franchises of a public, as
well as of a private, nature, and all property, real, personal and mixed, and
all debts due on whatever account, including subscriptions to shares, all taxes,
including those due and owing and those accrued, and all other choses in action,
and all and every other interest of or belonging to or due to the COMPANY and
HDS shall be taken and deemed to be transferred to, and vested in, the Surviving
Corporation without further act or deed. Except as otherwise provided herein,
the Surviving Corporation shall thenceforth be responsible and liable for all
the liabilities and obligations of the COMPANY and HDS and the Surviving
Corporation shall be substituted for the COMPANY or HDS with respect to any
claim existing, or action or proceeding pending, by or against the COMPANY or
HDS. Neither the rights of creditors nor any liens upon the property of the
COMPANY or HDS shall be impaired by the Merger, and all debts,
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liabilities and duties of the COMPANY and HDS shall attach to the Surviving
Corporation, and may be enforced against such Surviving Corporation to the same
extent as if said debts, liabilities and duties had been incurred or contracted
by such Surviving Corporation.
2. CONVERSION OF STOCK.
2.1 Manner of Conversion. At the Effective Time of the Merger, HDS shall
--------------------
have no class of capital stock issued and outstanding which, as a class, shall
have any rights or preferences senior to the shares of HDS Stock received by the
STOCKHOLDERS, including any rights or preferences as to dividends or as to the
assets of HDS upon liquidation or dissolution or as to voting rights, except for
any series of preferred stock that will be converted into HDS Stock on the
Closing Date. The manner of converting the outstanding shares of capital stock
of the COMPANY ("COMPANY Stock") into outstanding shares of common stock of HDS
("HDS Stock") and cash shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of COMPANY Stock issued and outstanding
immediately before the Effective Time of the Merger, by virtue of the Merger and
without any action on the part of the holder thereof, automatically shall be
deemed to represent (1) that number of shares of HDS Stock determined as set
forth in Part I of Annex I hereto and (2) the right to receive the amount of
cash determined as set forth in Part I of Annex I hereto, such shares and cash
to be subject to offsets and distributed to STOCKHOLDERS as provided in Part I
of Annex I hereto; and
(ii) all shares of COMPANY Stock that are held by COMPANY as
treasury stock or owned by any COMPANY Subsidiary shall be cancelled and retired
and no shares of HDS Stock or other consideration shall be delivered or paid in
exchange therefor.
In addition, on the 90th day after the Closing Date, as defined in Section
4.2 (on the first business day after such 90th day if such 90th day is not a
business day), HDS shall pay to The Sonenshine Family Trust dated July 9, 1982
an amount equal to the amount by which adjusted working capital (as defined in
Section 7.12) as of the Closing Date exceeds $100,000. If HDS and The
Sonenshine Family Trust do not agree on the amount to be so paid, such amount
shall be conclusively determined by Arthur Andersen, LLP, and The Sonenshine
Family Trust and HDS each will bear one-half of the fees of Arthur Andersen,
LLP, for making such determination.
2.2 Other Companies. Part II to Annex I sets forth the aggregate
---------------
consideration into which shares of outstanding stock of each Founding Company
will be converted on the Closing Date, or, if applicable, payable with respect
to such shares of outstanding stock on the Closing Date, before offsets.
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3. DELIVERY OF STOCK.
3.1 Delivery of HDS Stock. At the Effective Time of the Merger:
---------------------
(i) the STOCKHOLDERS, as the holders of all outstanding
certificates representing shares of COMPANY Stock, shall, upon surrender of such
certificates, be entitled to receive the number of shares of HDS Stock and the
amount of cash calculated under Section 2.1 above; and
(ii) until the certificates representing COMPANY Stock have been
surrendered by the STOCKHOLDERS and replaced by the HDS Stock, the certificates
for COMPANY Stock shall, for all corporate purposes, be deemed to evidence the
ownership of the number of shares of HDS Stock and cash which such STOCKHOLDER
is entitled to receive as a result of the Merger, as set forth in Section 2.1,
notwithstanding the number of shares of COMPANY Stock such certificates
represent.
3.2 Delivery of COMPANY Stock. The STOCKHOLDERS shall deliver to HDS
-------------------------
at Pre-Closing (as defined below in Section 4.1) the certificates representing
COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by
blank stock powers, and with all necessary transfer tax and other revenue
stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The
STOCKHOLDERS agree promptly to cure any deficiencies with respect to the
endorsement of the certificates or other documents of conveyance with respect to
such COMPANY Stock or with respect to the stock powers accompanying any COMPANY
Stock.
4. PRE-CLOSING AND CLOSING.
4.1 Pre-Closing. The Pre-Closing (defined below) shall take place at the
-----------
offices of Howard, Rice (defined below) at Three Embarcadero Center, 7th Floor,
San Francisco, California 94111. On the date (the "Pricing Date") on which the
public offering price of the shares of HDS Stock in the initial public offering
of HDS Stock (the "IPO") is determined, the parties shall deliver to Howard,
Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation ("Howard
Rice") all documents (except that the actual Merger, the conversion of shares of
COMPANY Stock into shares of HDS Stock and the delivery of shares of HDS Stock
shall not take place until the Closing Date as herein provided) necessary to
effect (i) the Merger (including, at HDS' election, the filing with the
appropriate state authorities of the Articles of Merger and any similar document
to become effective on the Closing Date (as defined below)), (ii) the conversion
of shares of COMPANY Stock into shares of HDS Stock and (iii) the delivery of
shares of HDS Stock to STOCKHOLDERS (such delivery to Howard, Rice is herein
referred to as the "Pre-Closing").
4.2 Closing. On the date when the closing with respect to the IPO occurs
-------
(the "Closing Date"), the Articles of Merger shall be filed with the appropriate
state authorities, or if already filed shall become effective, and the
conversion of shares of COMPANY Stock into shares of HDS Stock, the delivery of
shares of HDS Stock, and
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the transfer of funds, by wire transfer, in an amount equal to the cash portion
of the consideration which the STOCKHOLDERS shall be entitled to receive as a
result of the Merger, shall occur and be deemed to be completed (such
consummation and delivery is herein referred to as the "Closing"). After the
Pre-Closing and until the Closing Date, no party may withdraw, terminate or
rescind any delivery made at the Pre-Closing unless this Agreement is terminated
as provided in Section 12. All documents delivered at the Pre-Closing shall be
held by Howard Rice for final delivery on the Closing Date as directed by the
parties and their counsel at the Pre-Closing, provided only that the Articles of
Merger and any similar document may be filed to become effective on the Closing
Date. Should the Agreement be terminated as provided in Section 12 before the
Closing Date, the parties shall take all steps necessary to rescind any such
filings, Howard Rice shall return all documents delivered at the Pre-Closing to
the parties who delivered the same, all such deliveries at the Pre-Closing will
be rescinded and a nullity, the Merger shall not become effective, the shares of
COMPANY Stock will not be converted into HDS Stock, and shares of HDS Stock will
not be delivered to STOCKHOLDERS. If HDS proposes to file any Articles of Merger
or any similar document before the Closing, the documents delivered at Pre-
Closing shall include documents required to rescind, before the Closing, any
filing of the Articles of Merger and any similar document.
4.3 No Assurances. The COMPANY and the STOCKHOLDERS acknowledge and agree
-------------
that (i) there exists no firm commitment, binding agreement, or promise or other
assurance of any kind, whether express or implied, oral or written, that any
Registration Statement filed in connection with the IPO (the "Registration
Statement") will become effective or that the IPO pursuant thereto will occur at
a particular price or within a particular range of prices or will occur at all;
(ii) neither HDS nor any of its officers, directors, agents or representatives
nor any prospective underwriters in the IPO (the "Underwriters") shall have any
liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or
associated with the COMPANY for any failure of the Registration Statement to
become effective, or of the IPO to occur at a particular price or within a
particular range of prices or to occur at all; and (iii) the decision of the
STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to
the proposed Merger, has been made independent of, and without reliance upon,
any statements, opinions or other communications of, or due diligence
investigations which have been or will be made or performed by, any prospective
Underwriter, relative to HDS or the prospective IPO. The Underwriters shall
have no obligation to the STOCKHOLDERS with respect to any disclosure contained
in the Registration Statement.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS.
(A) Representations and Warranties of COMPANY and STOCKHOLDERS. The
----------------------------------------------------------
COMPANY and each of the STOCKHOLDERS jointly and severally represent and warrant
that all of the following representations and warranties in this Section 5(A)
(which includes 5.1 through 5.27) are true at the date of this Agreement
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<PAGE>
and, subject to Section 7.9 hereof, shall be true at the time of Pre-Closing and
the Closing Date, and that such representations and warranties shall survive the
Closing Date for a period of two (2) years (the last day of such period is
herein called the "Expiration Date"), except that (i) the warranties and
representations set forth in Sections 5.13, 5.19 and 5.20 hereof shall survive
until such date as the limitations period has run for each act, inaction, fact,
event or circumstance which constitutes a breach thereof, which date shall be
deemed to be the Expiration Date for Sections 5.13, 5.19 and 5.20, (ii) the
warranties and representations set forth in Section 5.22 hereof shall survive
until such date as the limitations period has run for all tax periods ended on
or before the Closing Date, which date shall be deemed to be the Expiration Date
for Section 5.22, and (iii) solely for purposes of Section 11.1(iv) hereof, all
warranties and representations shall survive until such date as the limitations
period has run under the Securities Act of 1933, as amended (the "1933 Act"),
the Securities Exchange Act of 1934, as amended (the "1934 Act"), and all other
applicable Federal or state securities laws, which date shall be deemed to be
the Expiration Date for purposes of Section 11.1(iv) hereof. Disclosures or
information in any Schedules attached hereto shall be deemed to be disclosures
or information for all other Schedules attached hereto. For purposes of this
Agreement, "to the knowledge of COMPANY" and similar phrases will mean to the
actual knowledge of an officer or director of COMPANY, without investigation.
5.1 Due Organization. The COMPANY and each of the subsidiaries of the
----------------
COMPANY set forth on Schedule 5.6 (the "COMPANY's Subsidiaries") is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation, and is duly authorized and qualified to do
business under all applicable laws, regulations, ordinances and orders of public
authorities to carry on its business in the places and in the manner as now
conducted except either (i) as disclosed on Schedule 5.1 or (ii) where the
cumulative effect of all failures to be so authorized or qualified would not
have a material adverse effect on the business, operations, properties, assets
or condition (financial or otherwise), of the COMPANY and the COMPANY's
Subsidiaries, taken as a whole (a "Material Adverse Effect"). Schedule 5.1
contains a list of all jurisdictions in which the COMPANY is authorized or
qualified to do business. True, complete and correct copies of the Certificate
(or Articles) of Incorporation and Bylaws, each as amended, of the COMPANY and
each of the COMPANY's Subsidiaries (collectively, the "Charter Documents"),
certified by the Secretary or Assistant Secretary of the COMPANY, are all
attached hereto as part of Schedule 5.1. A true, complete and correct copy of
each Certificate (or Articles) of Incorporation, each as amended, included in
the Charter Documents, certified by the Secretary of State or other appropriate
authority of the state of incorporation of the COMPANY or the applicable
Subsidiary of the COMPANY, as applicable, shall be delivered to HDS at the Pre-
Closing. Except as set forth on Schedule 5.1, the minute books of the COMPANY
and each of the COMPANY's Subsidiaries, as heretofore made available to HDS, are
correct and complete in all material respects.
5.2 Authority and Validity. The representatives of the COMPANY executing
----------------------
this Agreement have the authority to enter into and bind the COMPANY to
the terms of this
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<PAGE>
Agreement and any other agreements contemplated by this Agreement to which
the COMPANY is or is contemplated to be a party. The COMPANY has the full legal
right, power and authority to enter into this Agreement, any other agreements
contemplated by this Agreement, to which the COMPANY is or is contemplated to be
a party, and the Merger. All corporate action necessary for the authorization,
execution, delivery and performance by the COMPANY of the Agreement, and also
any other agreements contemplated by this Agreement to which the COMPANY is or
is contemplated to be a party, has been taken. Assuming due authorization,
execution and delivery by HDS, this Agreement and any other agreements
contemplated by this Agreement to which the COMPANY is or is contemplated to be
a party are or will be legal, valid and binding obligations of the COMPANY,
enforceable in accordance with their respective terms, except as may be limited
by applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally.
5.3 Capital Stock of the COMPANY. The authorized capital stock of the
----------------------------
COMPANY is as set forth in Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS
and in the amounts set forth in Annex II and further, except as set forth
on Schedule 5.3, are owned free and clear of all liens, security interests,
pledges, charges, voting trusts, restrictions, encumbrances and claims of
every kind. All of the issued and outstanding shares of the capital stock
of the COMPANY have been duly authorized and validly issued, are fully paid
and nonassessable, are owned of record and beneficially by the STOCKHOLDERS
and further, such shares were offered, issued, sold and delivered by the
COMPANY in compliance with all applicable state and federal laws concerning
the issuance of securities. Further, none of such shares were issued in
violation of the preemptive rights of any past or present stockholder.
5.4 Transactions in Capital Stock. Except as set forth on Schedule 5.4,
-----------------------------
neither the COMPANY nor any of the COMPANY's Subsidiaries has acquired any
COMPANY Stock since January 1, 1993. Except as set forth on Schedule 5.4, no
option, warrant, call, conversion right or commitment of any kind exists which
obligates the COMPANY or any of the COMPANY's Subsidiaries to issue any of their
respective authorized but unissued capital stock. Except as set forth on
Schedule 5.4, the COMPANY has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interests therein or to pay any dividend or make any distribution in respect
thereof. Except as set forth on Schedule 5.4, there has been no transaction or
action taken with respect to the equity ownership of the COMPANY, or any of the
COMPANY's Subsidiaries, in contemplation of the transactions described in this
Agreement.
5.5 No Bonus Shares. Except as set forth in Schedule 5.5, since January 1,
---------------
1995 none of the shares of COMPANY Stock was issued for less than the fair
market value thereof at the time of issuance or was issued in exchange for
consideration other than cash.
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<PAGE>
5.6 Subsidiaries. Schedule 5.6 attached hereto lists the name of each of
------------
the COMPANY's Subsidiaries and sets forth the number of shares and class of the
authorized capital stock of each of the COMPANY's Subsidiaries and the number of
shares of each of the COMPANY's Subsidiaries which are issued and outstanding,
all of which shares (except as set forth in Schedule 5.6) are owned by the
COMPANY, free and clear of all liens, security interests, pledges, voting
trusts, equities, restrictions, encumbrances and claims of every kind. Except as
set forth in Schedule 5.6, the COMPANY does not presently own, of record or
beneficially, or control, directly or indirectly, any capital stock, securities
convertible into capital stock or any other equity interest in any corporation,
association or business entity nor is the COMPANY, directly or indirectly, a
participant in any joint venture, partnership or other non-corporate entity.
5.7 Predecessor Status; etc. Set forth in Schedule 5.7 is a listing of all
------------------------
names under which the COMPANY or any of the COMPANY's Subsidiaries has done
business during the last five years and all names of all predecessor companies
for the past five years of the COMPANY, including the names of any entities from
whom the COMPANY previously acquired material assets. Except as disclosed in
Schedule 5.7, the COMPANY has not been a subsidiary or division of another
corporation or a part of an acquisition which was later rescinded.
5.8 Spin-off by the COMPANY. Except as set forth on Schedule 5.8, there has
-----------------------
not been any sale, spin-off or split-up of any material assets of the COMPANY or
any of the COMPANY's Subsidiaries or any other person or entity that directly,
or indirectly through one or more intermediaries, controls, is controlled by, or
is under common control with, the COMPANY ("COMPANY Affiliates") other than in
the ordinary course of business, within the preceding two years.
5.9 Financial Statements. Attached hereto as Schedule 5.9 to this Agreement
--------------------
are copies of the following financial statements (the "COMPANY Financial
Statements") of the COMPANY: (i) the COMPANY's balance sheet as of December 31,
1998 and statements of income, cash flows and retained earnings for the twelve
month period ended December 31, 1998 (such Balance Sheet as of December 31, 1998
is herein sometimes referred to as the "December 31, 1998 COMPANY Balance
Sheet," and December 31, 1998 is herein sometimes referred to as the "Balance
Sheet Date") and (ii) the COMPANY's balance sheets as of December 31, 1997 and
1996 and statements of income, cash flows and retained earnings for each of the
years in the two-year period ended December 31, 1997. To the knowledge of the
Company, such Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted). Except as otherwise
disclosed in schedules hereto, such balance sheets as of December 31, 1998, 1997
and 1996 present fairly the financial position of the COMPANY (and each of the
COMPANY's Subsidiaries on a consolidated basis) as of the dates indicated
thereon, and such Statements of Income, Cash Flows and Retained Earnings present
fairly the results of their respective operations for the periods indicated
thereon.
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<PAGE>
5.10 Liabilities and Obligations. For purposes of this Section, any
---------------------------
reference to "all liabilities" shall mean, in each such instance, all
liabilities of the COMPANY (or the COMPANY's Subsidiaries) of any kind,
character or description, whether accrued, absolute, secured or unsecured,
contingent or otherwise. Schedule 5.10 is an accurate list with respect to the
COMPANY and its Subsidiaries of all liabilities as of a date specified therein,
which date shall not be earlier than December 31, 1998. Schedule 5.10 shall be
amended and supplemented pursuant to Section 7.9 to list (i) all liabilities
which were incurred after such date and were incurred other than in the ordinary
course of business or which exceed $20,000 individually or $100,000 in the
aggregate if (and only if) such liabilities would either be accrued on the
balance sheet of the COMPANY in accordance with generally accepted accounting
principles consistently applied if such balance sheet were being prepared
immediately before Closing or if such liabilities represent liabilities of the
nature described in Section 5.13, Section 5.19, Section 5.20 and/or Section 5.22
(excluding items that are both not known to the COMPANY and not covered by any
of such sections because of knowledge qualifications contained in one or more of
such sections); and (ii) each liability which is incurred after such date and
which exceeds $100,000 and is not otherwise described in the immediately
preceding subclause (i).
For each contingent liability, Schedule 5.10 includes, and each
amendment or supplement pursuant to Section 7.9 will include, a reasonable
estimate of the maximum amount which may be payable, and the COMPANY has
provided (or, in the case of contingent liabilities listed in an amendment or
supplement pursuant to Section 7.9, will provide) to HDS the following
information:
(a) a summary description of the liability together with the
following:
(1) copies of all relevant documentation relating thereto;
(2) amounts claimed and any other action or relief sought;
and name of claimant and all other parties to the claim, suit or proceeding;
(b) the name of each court or agency before which any such claim,
suit or proceeding is pending; and
(c) the date that any such claim, suit or proceeding was
instituted.
5.11 Accounts and Notes Receivable. Attached as Schedule 5.11 to
-----------------------------
this Agreement is an accurate list of the accounts and notes receivable of the
COMPANY (including the COMPANY's Subsidiaries), as of the Balance Sheet Date,
including any such amounts which are not reflected in the December 31, 1998
COMPANY Balance Sheet, and including receivables from and advances to employees
and the STOCKHOLDERS. Except to the extent to be reflected on Schedule 5.11,
such accounts and notes are collectible in the amount to be shown in the
December 31, 1998 COMPANY Balance Sheet, net of reserves reflected therein.
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<PAGE>
5.12 Permits and Intangibles. The COMPANY and each of the COMPANY's
-----------------------
Subsidiaries holds all licenses, franchises, permits and other governmental
authorizations including permits, titles (including motor vehicle titles and
current registrations), licenses, franchises, certificates, trademarks, trade
names, patents, patent applications and copyrights, the absence of which, either
singly or in the aggregate, would have a Material Adverse Effect. Schedule 5.12
is an accurate list and summary description of all such licenses, franchises,
permits and other governmental authorizations held by COMPANY, provided that,
with respect to copyrights, Schedule 5.12 may include only those copyrights
which are registered. To the knowledge of the COMPANY, the licenses,
franchises, permits and other governmental authorizations listed on Schedule
5.12 are valid, and neither the COMPANY nor any of the COMPANY's Subsidiaries
has received any notice that any governmental authority intends to cancel,
terminate or not renew any such license, franchise, permit or other governmental
authorization. The COMPANY (including the COMPANY's Subsidiaries) has conducted
and is conducting its business in compliance with the requirements, standards,
criteria and conditions set forth in applicable permits, licenses, orders,
approvals, variances, rules and regulations and is not in violation of any of
the foregoing except where all such non-compliances and violations in the
aggregate would not have a Material Adverse Effect. Except as specifically
provided in Schedule 5.12, the transactions contemplated by this Agreement will
not result in a default under or a breach or violation of, or have a Material
Adverse Effect upon the rights and benefits afforded to the COMPANY (including
the COMPANY's Subsidiaries) by, such licenses, franchises, permits or government
authorizations, either singly or in the aggregate.
5.13 Environmental Matters. Except as set forth on Schedule 5.13, and
---------------------
except to the extent that noncompliance with any Environmental Law (as defined
below), either singly or in the aggregate, does not have a Material Adverse
Effect: (i) the COMPANY and the COMPANY's Subsidiaries have complied with and
are in compliance with all federal, state, local and foreign statutes (civil and
criminal), laws, ordinances, regulations, rules, notices, permits, judgments,
orders and decrees applicable to any of them or any of their respective
properties, assets, operations and businesses relating to environmental
protection (collectively "Environmental Laws") including Environmental Laws
relating to protection of the air, water or land or to the generation, storage,
use, handling, transportation, treatment or disposal of Solid Wastes, Hazardous
Wastes or Hazardous Substances (as such terms are defined in any applicable
Environmental Law); (ii) the COMPANY and the COMPANY's Subsidiaries have
obtained and complied with all necessary permits and other approvals necessary
to treat, transport, store, dispose of or otherwise handle Solid Wastes,
Hazardous Wastes or Hazardous Substances and have reported, to the extent
required by all Environmental Laws, all past and present sites owned and
operated by the COMPANY or any of the COMPANY's Subsidiaries where Solid Wastes,
Hazardous Wastes or Hazardous Substances have been treated, stored, used,
disposed of or otherwise handled; (iii) there have been no releases (as defined
in Environmental Laws) at, from, under, in or on any property owned or operated
by the COMPANY or any of the COMPANY's Subsidiaries except as permitted by
Environmental Laws; (iv) to the knowledge of the COMPANY there is no on-site or
off-
-10-
<PAGE>
site location to which the COMPANY or any of the COMPANY's Subsidiaries has
transported or disposed of Solid Wastes, Hazardous Wastes or Hazardous
Substances or arranged for the transportation of Solid Wastes, Hazardous Wastes
or Hazardous Substances, which site is the subject of any federal, state, local
or foreign enforcement action or any other investigation which could lead to any
claim against the COMPANY, any of the COMPANY's Subsidiaries or HDS for any
clean-up cost, remedial work, damage to natural resources or personal injury,
including any claim under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended; and (v) the COMPANY has no contingent
liability in connection with any release of any Solid Waste, Hazardous Waste or
Hazardous Substance into the environment. Schedule 5.13 lists all releases of
Hazardous Wastes or Hazardous Substances by the COMPANY.
5.14 Real and Personal Property. Schedule 5.14 hereto contains an accurate
--------------------------
list of (x) all real and personal property included (or that will be included)
on the December 31, 1998 COMPANY Balance Sheet, (y) all other real and personal
property of the COMPANY (including the COMPANY's Subsidiaries) with a book value
in excess of $2,500 either (i) as of the Balance Sheet Date or (ii) acquired
since the Balance Sheet Date, and (z) all leases for real and personal property
to which the COMPANY or any of its subsidiaries is a party involving real or
personal property having a value in excess of $20,000 ("Material Leases"),
including true, complete and correct copies of all Material Leases, and
including an indication as to which real and personal property is currently
owned, or was formerly owned, by the STOCKHOLDERS or business or personal
affiliates of the COMPANY or the STOCKHOLDERS. All machinery and equipment of
the COMPANY and the COMPANY's Subsidiaries listed on Schedule 5.14 is in working
order and condition, ordinary wear and tear excepted, except (i) as disclosed in
Schedule 5.14 or (ii) where the cumulative effect of all failures to be in
working order and condition would not have a Material Adverse Effect. All
Material Leases are in full force and effect and constitute valid and binding
agreements of the COMPANY (or a COMPANY Subsidiary, as applicable), and to the
knowledge of the COMPANY, constitute valid and binding agreements on the other
parties thereto (and their successors) in accordance with their respective
terms. All fixed assets used by the COMPANY and the COMPANY's Subsidiaries that
are material to the operation of their respective businesses are either owned by
the COMPANY or the COMPANY's Subsidiaries or leased under an agreement set forth
on Schedule 5.14. Schedule 5.14 contains true, complete and correct copies of
all title reports and title insurance policies received by the COMPANY or the
COMPANY's Subsidiaries with respect to the real property listed on Schedule
5.14. The COMPANY has also provided in Schedule 5.14 a summary description of
all plans or projects that involve the opening of new operations, expansion of
any existing operations or the acquisition of any real property or existing
businesses, with respect to which the COMPANY (or any of the COMPANY's
Subsidiaries) has made any expenditure in the two-year period prior to the date
of the Agreement in excess of $10,000, or which if pursued by the COMPANY (or
such Subsidiary) would require additional expenditures of capital in excess of
$10,000.
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<PAGE>
Except as set forth on Schedule 5.14 and except for liens excepted in
Section 7.3(vi)(1) and (3), there are no liens against the COMPANY's real and
personal properties.
5.15 Significant Customers; Material Contracts and Commitments. Schedule
---------------------------------------------------------
5.15 contains an accurate list of (i) all customers representing five percent
(5%) or more of the COMPANY's revenues for the twelve months ended on the
Balance Sheet Date (collectively, "significant customers") and (ii) except for
Material Leases, all contracts, indentures and other instruments requiring
payment or performance by the COMPANY or any COMPANY Subsidiary in an amount or
with a value in excess of $25,000 ("Material Contracts") to which the COMPANY or
any of its Subsidiaries is a party or by which any of them or any of their
respective properties are bound (including contracts with significant customers,
joint venture or partnership agreements, contracts with any labor organizations,
loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to
purchase land, leases, liens, pledges or other security agreements) either (a)
as of the Balance Sheet Date or (b) entered into since the Balance Sheet Date,
and in each case has delivered true, complete and correct copies of such
agreements to HDS, except that leases set forth on Schedule 5.14 need not be set
forth on Schedule 5.15. Except to the extent set forth on Schedule 5.15, (i)
none of the COMPANY's (including the COMPANY's Subsidiaries) significant
customers has cancelled or substantially reduced or, to the knowledge of the
COMPANY, is currently attempting or threatening to cancel any Material Contract
or substantially reduce utilization of the services provided by the COMPANY
(including the COMPANY's Subsidiaries), and (ii) no Stockholder or any affiliate
of any Stockholder is a party to any such Material Contract. Except as set forth
in Schedule 5.15, the COMPANY and the COMPANY's Subsidiaries have not been the
subject of any election in respect of union representation of employees and are
not bound by or subject to (and none of its respective assets or properties is
bound by or subject to) any arrangement with any labor union. Except as set
forth on Schedule 5.15, no employees of the COMPANY or its Subsidiaries are
represented by any labor union or covered by any collective bargaining agreement
and no campaign to establish such representation has ever occurred or, to the
knowledge of the COMPANY, is in progress. Except as set forth in Schedule 5.15,
there is no pending or, to the COMPANY's knowledge, threatened labor dispute
involving the COMPANY (including the COMPANY's Subsidiaries) and any group of
its employees, nor has the COMPANY (including the COMPANY's Subsidiaries)
experienced any labor interruptions over the past three years, and the COMPANY
considers its and each of the COMPANY's Subsidiaries' relationship with its
respective employees to be good.
5.16 Title to Real Property. The COMPANY (including the COMPANY's
----------------------
Subsidiaries) has good and insurable title to the real property owned and used
in their respective businesses, including those reflected on Schedule 5.14,
subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance
or charge, except for:
(i) liens set forth on Schedules 5.10 and 5.15 securing specified
liabilities (with respect to which no material default exists);
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<PAGE>
(ii) liens for current taxes not yet payable and assessments not
in default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title shown of record in the office of the County Clerk in which the properties,
assets and leasehold estates are located which do not adversely affect the
current use of the property in a material way.
5.17 Insurance. Schedule 5.17 sets forth an accurate list of all
---------
insurance policies carried by the COMPANY (including the COMPANY's
Subsidiaries). Except as set forth on Schedule 5.17, the Company has delivered
to HDS an accurate list (attached to Schedule 5.17) of all insurance loss runs
or worker's compensation claims received for the past three policy years. The
Company has provided HDS with true, complete and correct copies of all policies
currently in effect. Such insurance policies are currently in full force and
effect and shall remain in full force and effect through the Closing Date. No
insurance carried by the COMPANY (including any of the COMPANY's Subsidiaries)
has ever been cancelled by the insurance company and the COMPANY (including such
COMPANY's Subsidiaries) has never been denied coverage.
5.18 Compensation; Employment Agreements. Schedule 5.18 sets forth an
-----------------------------------
accurate schedule showing all officers, directors and key employees of the
COMPANY (including the COMPANY's Subsidiaries), listing all employment
agreements with such officers, directors and key employees and the rate of
compensation (and the portions thereof attributable to salary, bonus and other
compensation, respectively) of each of such persons both (i) for the Balance
Sheet Date and (ii) for the date hereof. The COMPANY has provided to HDS true,
complete and correct copies of any employment agreements for persons listed on
Schedule 5.18. Since the Balance Sheet Date there have been no increases in the
compensation, bonus, sales commissions or fee arrangements payable or to become
payable by the COMPANY to any officer, director, stockholder, employee,
consultant or sales representative or broker, except as listed on Schedule 5.18.
5.19 Employee Plans. Schedule 5.19 sets forth complete and accurate lists
--------------
of all employee benefit plans, all employee welfare benefit plans, all employee
pension benefit plans, all multi-employer plans and all multi-employer welfare
arrangements (as defined in Sections 3(3), (1), (2), (37) and (40),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), which are currently maintained or sponsored by the COMPANY (or any
of the COMPANY's Subsidiaries), or to which the COMPANY (or any of the COMPANY's
Subsidiaries) currently contributes, or has an obligation to contribute in the
future (including benefit plans or arrangements that are not subject to ERISA,
such as employment agreements and any other agreements containing "golden
parachute" provisions and deferred compensation agreements) (collectively, the
"Plans"). Schedule 5.19 also sets forth all of the Plans that have been
terminated within the past six years. The COMPANY has heretofore delivered to
HDS correct and complete copies of each of the following:
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<PAGE>
(i) each Plan and all amendments thereto; the trust agreement or
insurance contracts, if any, forming a part of such Plan and all amendments
thereto; and the resolutions and agreements, if any by which the COMPANY (or any
of the COMPANY's Subsidiaries) adopted such Plan;
(ii) all written, and descriptions of all oral, employment,
termination, and severance agreements, contracts, arrangements and
understandings listed in Schedule 5.19;
(iii) sample benefit distribution forms that pertain to all Plans
that are intended to qualify (the "Qualified Plans") under Section 401(a) of the
Code;
(iv) the most recent actuarial report and the most recent
executed Form PBGC-1 with respect to each Plan that is a defined benefit pension
plan as defined in Section 414(j) of the Code (a "Defined Benefit Plan");
(v) Forms 5500 or, as applicable Forms 5500-C/R, filed with
respect to the three most recent plan years of each Plan, and all schedules
thereto;
(vi) the most recent determination letter issued by the Internal
Revenue Service regarding the qualified status of each Qualified Plan;
(vii) the most recent accountant's report, if any, with respect to
each Plan;
(viii) the most recent summary plan description, and any subsequent
summaries of material modifications, with respect to each Plan;
(ix) the bond required by Section 412 of ERISA, if any; and
(x) all documents required to be filed with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation (the "PBGC"), or distributed
to participants and beneficiaries in connection with the termination of any
Qualified Plan listed on Schedule 5.19 as terminated.
5.20 Compliance with ERISA. Except for the Plans, neither the COMPANY
---------------------
nor any of the COMPANY's Subsidiaries maintains or sponsors, or is a
contributing employer to, a pension, profit-sharing, deferred compensation,
stock option, employee stock purchase or other employee benefit plan, employee
welfare benefit plan, or any other arrangement with their respective employees,
whether or not subject to ERISA. All Plans are in compliance in all material
respects with all applicable provisions of ERISA and the regulations issued
thereunder, the Code and the regulations issued thereunder, as well as with all
other applicable laws, and have been administered, operated and managed in all
material respects in accordance with their governing documents, if any. All
Qualified Plans are qualified under Section 401(a) of the Code and have been
determined by the Internal Revenue Service to be so qualified or application for
determination letters
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<PAGE>
have been timely submitted to the Internal Revenue Service and nothing has
occurred since the date of each Qualified Plan's most recent determination
letter that would adversely affect such Qualified Plan's tax-qualified status.
To the extent that any Qualified Plans have not been amended to comply with
applicable law, the remedial amendment period permitting retroactive amendment
of such Qualified Plans has not expired and will not expire within one hundred
twenty (120) days after the Closing Date. All reports and other documents
required to be filed with any governmental agency or distributed to plan
participants or beneficiaries (including annual reports, summary annual reports,
actuarial reports, PBGC-1 Forms, audits or tax returns) have been timely filed
or distributed. None of: (i) the STOCKHOLDERS; (ii) any Plan; or (iii) the
COMPANY (including any of the COMPANY's Subsidiaries) has engaged in any
transaction prohibited under the provisions of Section 4975 of the Code or
Section 406 of ERISA. No Plan has incurred an accumulated funding deficiency, as
defined in Section 412(a) of the Code and Section 302(1) of ERISA; and no
circumstances exist from which the COMPANY (including any of the COMPANY's
Subsidiaries) could have any direct or indirect liability whatsoever (including
being subject to any statutory lien to secure payment of any such liability), to
the PBGC under Title IV of ERISA or to the Internal Revenue Service for any
excise tax or penalty with respect to any plan now or hereafter maintained or
contributed to by the COMPANY or any member of a "controlled group" (as defined
in Section 4001(a)(14) of ERISA) that includes the COMPANY; and neither the
COMPANY (including any of the COMPANY's Subsidiaries) nor any member of a
"controlled group" (as defined above) that includes the COMPANY currently has
(or at the Closing Date will have) any obligation whatsoever to contribute to
any "multi-employer pension plan" (as defined in ERISA Section 4001(a)(14)), nor
has any withdrawal liability whatsoever (whether or not yet assessed) arising
under or capable of assertion under Title IV of ERISA (including Sections 4201,
4202, 4203, 4204, or 4205 thereof) been incurred by any Plan. Further, except as
set forth in Schedule 5.20:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without a determination by
the Internal Revenue Service that such action does not adversely affect the tax-
qualified status of such Qualified Plan;
(ii) no Plan which is subject to the provisions of Title IV of
ERISA has been terminated;
(iii) there have been no "reportable events" (as defined in Section
4043 of ERISA) with respect to any Plan which were not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of the
Closing Date, shall equal or exceed the actuarial present value of all accrued
pension benefits under any such Qualified Plan in accordance with the
assumptions contained in the Regulations of the PBGC governing the funding of
terminated Defined Benefit Plans;
(v) with respect to Plans which qualify as "group health plans"
under Section 4980B of the Internal Revenue Code and Section 607(l) of ERISA and
related
-15-
<PAGE>
regulations (relating to the benefit continuation rights imposed by
"COBRA"), the COMPANY (including any of the COMPANY's Subsidiaries) has
complied (and on the Closing Date will have complied) in all respects with
all reporting, disclosure, notice, election and other benefit continuation
requirements imposed thereunder as and when applicable to such plans, and
the COMPANY (including the COMPANY's Subsidiaries) has not incurred (and
will not incur) any direct or indirect liability and is not (and will not
be) subject to any loss, assessment, excise tax penalty, loss of federal
income tax deduction or other sanction, arising on account of or in respect
of any direct or indirect failure by the COMPANY (including any of the
COMPANY's Subsidiaries), at any time before the Closing Date, to comply
with any such federal or state benefit continuation requirement, which is
capable of being assessed or asserted before or after the Closing Date
directly or indirectly against the COMPANY (including any of the COMPANY's
Subsidiaries) or the STOCKHOLDERS with respect to such group health plans;
(vi) the COMPANY (including any of the COMPANY's Subsidiaries) is
not now nor has it been within the past six years a member of a "controlled
group" as defined in ERISA Section 4001(a)(14);
(vii) there is no pending litigation, arbitration, or disputed
claim, settlement or adjudication proceeding, and to the knowledge of the
COMPANY, there is no threatened litigation, arbitration or disputed claim,
settlement or adjudication proceeding, audit or any governmental or other
proceeding, audit or investigation with respect to any Plan, or with respect to
any fiduciary, administrator, or sponsor thereof (in their capacities as such),
or any party in interest thereof;
(viii) the Financial Statements as of the Balance Sheet Date
reflect the approximate total pension, medical and other benefit expense for all
Plans, and no material funding changes or irregularities are reflected thereon
which would cause such Financial Statements to be not representative of prior
periods;
(ix) the COMPANY (including any of the COMPANY's Subsidiaries)
has not incurred liability under Section 4062 of ERISA;
(x) each Qualified Plan that is listed as terminated on Schedule
5.19 was terminated in compliance with all applicable requirements of ERISA and
the Code;
(xi) except for any Qualified Plan that is categorized on
Schedule 5.19 as having been merged with another Qualified Plan, no Qualified
Plan of the COMPANY (including any of the COMPANY's Subsidiaries) has been
merged during the six years immediately before the Closing Date;
(xii) each Qualified Plan that is categorized on Schedule 5.19 as
having been merged was merged in compliance with all applicable requirements of
ERISA and the Code;
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<PAGE>
(xiii) apart from health benefits provided to former employees
under Section 4980B of the Code and Part 6 of Title I(B) of ERISA, the COMPANY
(including any of the COMPANY's Subsidiaries) has no obligation to provide
health or medical benefits to anyone other than its active employees;
(xiv) the COMPANY (including any of the COMPANY's Subsidiaries)
does not sponsor, contribute to, or have any obligation to contribute to any
voluntary employees beneficiary association, as described in Section 501(c)(9)
of the Code; and
(xv) except as set forth in Schedule 5.19, the consummation of
the transactions contemplated hereby will not result in any obligation to pay
any employee of the COMPANY (including any of the COMPANY's Subsidiaries)
severance or termination benefits so long as such employee remains employed by
the COMPANY (including any of the COMPANY's Subsidiaries) after the Closing.
5.21 Conformity with Law. Except to the extent set forth on Schedule
-------------------
5.21, the COMPANY (including the COMPANY's Subsidiaries) is not in violation of
any law or regulation or any order of any court or federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over any of them which (either singly or in
the aggregate) would have a Material Adverse Effect; and except to the extent
set forth in Schedule 5.10, there are no claims, actions, suits or proceedings
pending or, to the knowledge of the COMPANY, threatened, against or affecting
the COMPANY (including the COMPANY's Subsidiaries), at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
any of them which (either singly or in the aggregate) would have a Material
Adverse Effect, and no notice of any such claim, action, suit or proceeding that
could have a Material Adverse Effect, whether pending or threatened, has been
received by the COMPANY or any of the COMPANY's Subsidiaries. Except to the
extent set forth on Schedule 5.21, the COMPANY (including all of the COMPANY's
Subsidiaries) has conducted and is conducting its business in compliance with
the requirements, standards, criteria and conditions set forth in applicable
federal, state and local statutes, ordinances, orders, approvals, variances,
rules and regulations and is not in violation of any of the foregoing which
(either singly or in the aggregate) would have a Material Adverse Effect.
5.22 Taxes. Certain of the defined terms used in this Section 5.22 have
-----
the meaning ascribed to them in Section 10. Except as set forth in Schedule
5.22,
(i) All Tax Returns (as defined in Section 10.6(f)) required to
have been filed by or with respect to the COMPANY and any affiliated, combined,
consolidated, unitary or similar group of which the COMPANY is or was a member
(a "Relevant Group") with any Taxing Authority (as defined in Section 10.6(g))
have been duly filed, and each such Tax Return accurately, correctly and
completely reflects the income, franchise or other Tax liability and all other
information, including the tax basis and recovery periods for assets, required
to be reported thereon. The COMPANY has furnished or made available to HDS
complete and accurate copies of all income and
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<PAGE>
franchise tax returns, and any amendments thereto, filed by the COMPANY and any
Acquired Party for all taxable years ending on or after December 31, 1995. All
Taxes (whether or not shown on any Tax Return and whether or not assessed) owed
by the COMPANY, its Subsidiaries and any member of a Relevant Group
(collectively, the "Acquired Parties") have been paid. No Tax payment has been
made by the COMPANY to any Taxing Authority which is inconsistent with the prior
practice of the COMPANY, and no Tax payment has been made by the COMPANY which
is in excess of that which is in good faith determined to be due and owing at
the time of such payment.
(ii) Except for Taxes which may be due because HDS does not
comply with Section 10.4(iv) of this Agreement, the provisions for Taxes due by
the COMPANY and its Subsidiaries (as opposed to any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) in the
COMPANY Financial Statements are sufficient for, and adequate to cover, all
unpaid Taxes of such Acquired Party.
(iii) No Acquired Party is a party to any current agreement
extending the time within which to file any Tax Return. No claim has ever been
made by any Taxing Authority in a jurisdiction in which an Acquired Party does
not file Tax Returns that it is or may be subject to taxation by that
jurisdiction.
(iv) Each Acquired Party has withheld and paid all Taxes required
to have been withheld and paid in connection with amounts paid or owing to any
employee, creditor, independent contractor or other third party.
(v) No Acquired Party expects any Taxing Authority to assess any
additional Taxes against or in respect of it for any past period. There is no
dispute or claim concerning any Tax liability of any Acquired Party either (i)
claimed or raised by any Taxing Authority or (ii) otherwise known to any
Acquired Party. No issues have been raised in any examination by any Taxing
Authority with respect to any Acquired Party that, by application of similar
principles, reasonably could be expected to result in a proposed deficiency for
any other period not so examined. Schedule 5.22 attached hereto lists all
federal, state, local and foreign income Tax Returns filed by or with respect to
any Acquired Party for all taxable periods ended on or after January 1, 1993,
indicates those Tax Returns, if any, that have been audited, and indicates those
Tax Returns that currently are the subject of audit. Each Acquired Party has
delivered to HDS complete and correct copies of all federal, state, local and
foreign income Tax Returns filed by, and all Tax examination reports and
statements of deficiencies assessed against or agreed to by, such Acquired Party
since January 1, 1995.
(vi) No Acquired Party has waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to any Tax
assessment or deficiency.
(vii) No Acquired Party has made any payments, is obligated to
make any payments, or is a party to any agreement that under certain
circumstances could
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<PAGE>
require it to make any payments, that would not be deductible by reason of the
application of Section 280G of the Code.
(viii) No Acquired Party is a party to or has any ongoing liability
under any Tax allocation or sharing agreement.
(ix) None of the assets of any Acquired Party constitutes tax-
exempt bond financed property or tax-exempt use property, within the
meaning of Section 168 of the Code. No Acquired Party is a party to any
"safe harbor lease" that is subject to the provisions of Section 168(f)(8)
of the Internal Revenue Code as in effect before the Tax Reform Act of
1986, or to any "long-term contract" within the meaning of Section 460 of
the Code.
(x) No Acquired Party is a party to any joint venture,
partnership or other arrangement that is treated as a partnership for federal
income Tax purposes.
(xi) There are no accounting method changes of any Acquired Party
that could give rise to an adjustment under Section 481 of the Code for periods
after the Closing Date.
(xii) No Acquired Party has received any written ruling of a
Taxing Authority related to Taxes or entered into any written and legally
binding agreement with a Taxing Authority relating to Taxes.
(xiii) Each Acquired Party has substantial authority for the
treatment of, or has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of
the Code) on its federal income Tax Returns, all positions taken on its relevant
federal income Tax Returns that could give rise to a substantial understatement
of federal income Tax within the meaning of Section 6662(d) of the Code.
(xiv) No Acquired Party has any liability for Taxes of any Person
other than such Acquired Party (i) under Section 1.1502-6 of the Treasury
regulations (or any similar provision of state, local or foreign law), (ii) as a
transferee or successor, (iii) by contract or (iv) otherwise.
(xv) No consent has been filed relating to the COMPANY or any
Acquired Party under Section 341(f) of the Code, nor has the COMPANY or any
Acquired Party made any tax election that would materially increase the amount
of Taxes payable by the COMPANY or any Acquired Party in any Post-Closing Period
(as defined in Section 10.6(d)).
(xvi) The COMPANY made an election to be classified as an S
Corporation for its partial taxable year beginning on March 1, 1983 under
Section 1362(a) of the Code and corresponding provisions of the laws of the
state in which it is subject to tax, and has qualified as an S Corporation at
all times since such date. The
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<PAGE>
COMPANY does not own any subsidiary which is a qualified Subchapter S subsidiary
within the meaning of Section 1361(b)(3) of the Code.
5.23 No Violations. Except as set forth in Schedule 5.23, neither the
-------------
COMPANY (including the COMPANY's Subsidiaries) nor, to the knowledge of the
COMPANY, any other party thereto is (i) in violation of any Charter Document or
(ii) in default under any Material Lease or Material Contract; and, except as
set forth in the schedules and documents attached to this Agreement, (a) the
transactions contemplated hereby will not have a Material Adverse Effect on the
rights and benefits of the COMPANY (including the COMPANY's Subsidiaries) under
the Material Leases and Material Contracts, either singly or in the aggregate,
and (b) except as set forth on Schedule 5.23, the execution of this Agreement
and the performance of the obligations hereunder and the consummation of the
transactions contemplated hereby will not result in any violation or breach or
constitute a default under any of the terms or provisions of the Charter
Documents, Material Leases, Material Contracts, any judgment, decree, order or
award of any court, governmental body or arbitrator, or any law, rule or
regulation applicable to COMPANY or any of COMPANY's Subsidiaries. Except as
set forth in Schedule 5.23, none of the Material Leases or Material Contracts
requires notice to, or the consent or approval of, any third party with respect
to any of the transactions contemplated hereby in order to remain in full force
and effect, nor does this Agreement or any of the transactions contemplated
hereby give rise to any right to termination, cancellation or acceleration or
loss of any right or benefit under any Material Lease or Material Contract.
5.24 Government Contracts. Except as set forth on Schedule 5.24, the
--------------------
COMPANY (including the COMPANY's Subsidiaries) is not now a party to any
governmental contracts subject to price redetermination or renegotiation.
5.25 Absence of Changes. Since the Balance Sheet Date, except as set forth
------------------
on Schedule 5.25, there has not been with respect to the COMPANY and the
COMPANY's Subsidiaries:
(i) any event or circumstance (either singly or in the
aggregate) which would constitute a Material Adverse Effect;
(ii) any change in its authorized capital, or securities
outstanding, or ownership interests or any grant of any options, warrants,
calls, conversion rights or commitments;
(iii) any declaration or payment of any dividend or distribution
in respect of its capital stock or any direct or indirect redemption, purchase
or other acquisition of any of its capital stock, except any declaration of
dividends payable by any COMPANY Subsidiary to the COMPANY;
(iv) any increase of more than five percent (5%) in the
compensation, bonus, sales commissions or fee arrangement payable or to become
payable by it to any
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<PAGE>
of its respective officers, directors, stockholders, employees, consultants or
agents, except for ordinary and customary bonuses and salary for employees
(other than the STOCKHOLDERS) in accordance with past practice;
(v) any work interruptions, labor grievances or claims filed, or
any similar event or condition of any character that would have a Material
Adverse Effect;
(vi) any distribution, sale or transfer, or any agreement to sell
or transfer any material assets, property or rights of any of its respective
business to any person, including the STOCKHOLDERS and their affiliates, other
than distributions, sales or transfers in the ordinary course of business to
persons other than the STOCKHOLDERS and their affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness
or other obligation owing to it, including any indebtedness or obligation of any
STOCKHOLDERS or any affiliate thereof, provided that it may negotiate and adjust
--------
bills in the course of good faith disputes with customers in a manner consistent
with past practice, provided, further, that such adjustments shall not be deemed
-------- -------
to be included in Schedule 5.11 unless specifically listed thereon;
(viii) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property or
rights or requiring consent of any party to the transfer and assignment of any
such assets, property or rights;
(ix) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire any property, rights or assets outside
of the ordinary course of business;
(x) any waiver of any of its material rights or claims;
(xi) any transaction by it outside the ordinary course of their
respective businesses; or
(xii) any cancellation or termination of a Material Contract.
5.26 Deposit Accounts; Powers of Attorney. The COMPANY has delivered
------------------------------------
to HDS an accurate schedule (Schedule 5.26) as of the date of the Agreement, of:
(i) the name of each financial institution in which the COMPANY
has accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
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<PAGE>
Schedule 5.26 also sets forth the name of each person, corporation, firm or
other entity holding a general or special power of attorney from the COMPANY or
any of the COMPANY's Subsidiaries and a description of the terms of such power.
5.27 Relations with Governments. The COMPANY has not made, offered or
--------------------------
agreed to offer anything of value to any governmental official, political party
or candidate for government office which would cause the COMPANY to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended or any law of
similar effect.
(B) Representations and Warranties of STOCKHOLDERS. Each STOCKHOLDER
----------------------------------------------
severally represents and warrants that the representations and warranties set
forth in this Section 5(B) (which includes Sections 5.28-5.29) are true as of
the date of this Agreement and, subject to Section 7.9 hereof, shall be true at
the time of Pre-Closing and on the Closing Date, and that such representations
and warranties survive the Closing Date until the Expiration Date.
5.28 Authority; Validity; Ownership. Such STOCKHOLDER has the full legal
------------------------------
right, power and authority to enter into this Agreement and any other agreements
contemplated by this Agreement to which such STOCKHOLDER is or is contemplated
to be a party. Assuming due authorization, execution and delivery by HDS, this
Agreement and any other agreements contemplated by this Agreement to which such
STOCKHOLDER is or is contemplated to be a party are or will be legal, valid and
binding obligations of each STOCKHOLDER, enforceable in accordance with their
respective terms, except as may be limited by applicable bankruptcy, insolvency,
or similar laws affecting creditors' rights generally. Such STOCKHOLDER owns
beneficially and of record all of the shares of the COMPANY Stock identified on
Annex II as being owned by such STOCKHOLDER, and, except as set forth on
Schedule 5.28 hereto, such COMPANY Stock is owned free and clear of all liens,
encumbrances and claims of every kind.
5.29 Preemptive Rights. Such STOCKHOLDER does not have, or hereby waives,
-----------------
any preemptive or other right to acquire shares of COMPANY Stock or HDS Stock
that such STOCKHOLDER has or may have had other than rights of any STOCKHOLDER
to acquire HDS Stock under (i) this Agreement, (ii) any option granted by HDS or
(iii) any Employment Agreement (as defined in Section 8.12) between STOCKHOLDER
and HDS. Nothing in this Section 5.29 shall restrict any STOCKHOLDER from buying
and selling shares of HDS Stock in the public market or authorize any such
buying or selling by any STOCKHOLDER.
6. REPRESENTATIONS OF HDS.
HDS represents and warrants that all of the following representations and
warranties are true at the date of this Agreement and shall be true at the time
of Pre-Closing and the Closing Date and that such representations and warranties
shall survive the Closing Date until the Expiration Date. Solely for purposes
of Section 11.2(iv) hereof, and solely to the extent that in connection with the
IPO the STOCKHOLDERS
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<PAGE>
actually incur liability under the 1933 Act, the 1934 Act, or any other federal
or state securities laws, the representations and warranties set forth herein
shall survive until the expiration of any applicable limitations period. For
purposes of this Agreement, "to the knowledge of HDS" and similar phrases will
mean to the actual knowledge of an officer or director of HDS, without
investigation.
6.1 Due Organization. HDS and each of the subsidiaries of HDS ("HDS
----------------
Subsidiaries") set forth in Schedule 6.7 is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and is duly authorized and qualified under all applicable laws, regulations,
ordinances and orders of public authorities to carry on its business in the
places and in the manner as now conducted except for where the cumulative effect
of all failures to be so authorized or qualified would not have a material
adverse effect on the business, operations, affairs, properties, assets or
condition (financial or otherwise), of HDS and HDS Subsidiaries, taken as a
whole (an "HDS Material Adverse Effect"). True, complete and correct copies of
the Certificate of Incorporation and the Bylaws each as amended, of HDS and HDS
Subsidiaries (collectively, the "HDS Charter Documents"), certified by the
Secretary or an Assistant Secretary of HDS, are attached hereto as Annex IV. A
true, complete and correct copy of the Certificate of Incorporation each as
amended, of HDS and each of HDS Subsidiaries, certified by the Secretary of
State of the State of Delaware, shall be delivered at the Pre-Closing.
6.2 HDS Stock. The HDS Stock to be delivered to the STOCKHOLDERS on the
---------
Closing Date shall constitute valid and legally issued shares of HDS, fully paid
and nonassessable, and except as set forth in this Agreement, will be owned free
and clear of all liens, security interests, pledges, charges, voting trusts,
restrictions, encumbrances and claims of every kind created by HDS, and will be
legally equivalent in all respects to the HDS Stock issued and outstanding as of
the date hereof. The shares of HDS Stock to be issued to the STOCKHOLDERS under
this Agreement will not be registered under the 1933 Act.
6.3 Authority and Validity. The representatives of HDS executing this
----------------------
Agreement and any other agreements contemplated by this Agreement have the
corporate authority to enter into and bind HDS to the terms of this Agreement
and any other agreements contemplated by this Agreement to which HDS is or is
contemplated to be a party. HDS has the full legal right, power and authority
to enter into this Agreement, any other agreements contemplated by this
Agreement to which HDS is or is contemplated to be a party, and the Merger. All
corporate action necessary for the authorization, execution, delivery and
performance by HDS of this Agreement, and also any other agreements contemplated
by this Agreement to which HDS is contemplated to be a party, has been taken.
Assuming due authorization, execution and delivery by the COMPANY and the
STOCKHOLDERS, as applicable, this Agreement and any other agreements
contemplated by this Agreement to which HDS is or is contemplated to be a party
are or will be legal, valid and binding obligations of HDS, enforceable against
HDS in accordance with their respective terms, except as may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally.
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<PAGE>
6.4 Capital Stock of HDS. Immediately before the Closing, the authorized
--------------------
capital stock of HDS will be as set forth in Schedule 6.4. All of the issued
and outstanding shares of HDS are owned beneficially and of record by the
persons set forth on Annex III. All issued and outstanding shares of HDS stock
are duly authorized, validly issued, fully paid and nonassessable. Except as
may be otherwise provided in this Agreement, there are no obligations of HDS to
repurchase, redeem or otherwise acquire any shares of HDS stock. Except as
described in the Registration Statement and except as may be otherwise provided
in this Agreement, there are no options, warrants, equity securities, calls,
rights, commitments or agreements of any character to which HDS or any of its
subsidiaries are a party or by which they are bound obligating HDS or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of HDS or any of its subsidiaries or
obligating HDS or any of its subsidiaries to grant, extend, enter into any such
option, warrant, equity security, call, right, commitment or agreement or
accelerate its vesting. To the knowledge of HDS, as of the Closing Date, none
of the STOCKHOLDERS set forth on Annex III will be a party to or subject to any
voting trust, proxy or other agreement or understanding with respect to the
shares of capital stock of HDS owned by such STOCKHOLDER. All of the shares of
HDS Stock to be issued to the STOCKHOLDERS in accordance herewith will be duly
authorized, validly issued, fully paid and nonassessable. All of the shares of
HDS Stock issued to persons set forth on Annex III and, based on the
representations of STOCKHOLDERS contained in this Agreement and in the documents
delivered to HDS pursuant hereto, to STOCKHOLDERS under this Agreement, were or
will be offered, issued, sold and delivered by HDS in compliance with all
applicable state and federal laws concerning the issuance of securities and none
of such shares were or will be issued in violation of the preemptive rights of
any past or present stockholder. On the Closing Date the capitalization of HDS
will be as set forth in the Registration Statement.
6.5 No Side Agreements. Except as set forth in Schedule 6.5, HDS has not
------------------
entered into any material agreement with any of the Founding Companies or any of
the stockholders of the Founding Companies other than the Other Agreements and
the agreements contemplated by each of the Other Agreements, including the
employment agreements referred to therein. HDS has made available to the
COMPANY copies of all material agreements entered into between (i) HDS and its
affiliates and (ii) HDS and the Founding Companies or any stockholders of the
Founding Companies. Further, HDS will make available to the COMPANY copies of
all of the foregoing agreements entered into between the date hereof and the
Closing Date promptly after such agreements are entered into.
6.6 Subsidiaries. Except for those companies set forth on Schedule 6.6, HDS
------------
does not presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity. HDS is
not, directly or indirectly, a participant in any joint venture, partnership or
other non-corporate entity.
6.7 Business; Financial Information. HDS has not conducted any business
-------------------------------
since the date of its inception, except in connection with this Agreement, the
Other Agreements
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<PAGE>
and the contemplated IPO of HDS Stock. HDS was formed in 1998, and has
historical financial statements only for the partial years ended December 31,
1998. Attached hereto as Schedule 6.7 are HDS' financial statements for such
partial year. Such HDS financial statements have been prepared in accordance
with generally accepted accounting principles and present fairly the financial
position of HDS as of the dates indicated thereon, and such financial statements
present fairly the results of HDS' operations for the periods indicated thereon.
HDS has no material liabilities, accrued, contingent or threatened, other than
those incurred in connection with this Agreement, the Other Agreements and the
agreements contemplated thereby, the agreements to be filed as exhibits to the
Registration Statement, and the contemplated IPO of HDS Stock.
6.8 Conformity with Law. HDS (including HDS Subsidiaries) is not in
-------------------
violation of any law or regulation or any order of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them which (either singly or
in the aggregate) would have an HDS Material Adverse Effect. There are no
claims, actions, suits or proceedings, pending or, to the knowledge of HDS
(including HDS Subsidiaries), threatened, against or affecting HDS (including
HDS Subsidiaries), at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over any of them and no notice of any claim,
action, suit or proceeding, whether pending or threatened, has been received by
HDS or any of HDS Subsidiaries. HDS (including HDS Subsidiaries) has conducted
and is conducting its business in compliance with the requirements, standards,
criteria and conditions set forth in applicable Federal, state and local
statutes, ordinances, orders, approvals, variances, rules and regulations and is
not in violation of any of the foregoing which would have an HDS Material
Adverse Effect.
6.9 No Violations. HDS (including HDS Subsidiaries) is not (i) in violation
-------------
of any HDS Charter Document or (ii) in default under any material lease,
instrument, agreement, license, or permit to which it is a party or by which its
properties are bound (the "HDS Material Documents"); and, except as set forth in
the Registration Statement, (a) the rights and benefits of HDS (including HDS
Subsidiaries) under the HDS Material Documents will not be materially and
adversely affected by the transactions contemplated hereby and (b) the execution
of this Agreement and the performance of the obligations hereunder and the
consummation of the transactions contemplated hereby will not result in any
violation or breach or constitute a default under any of the terms or provisions
of the HDS Material Documents, the HDS Charter Documents, any judgment, decree,
order or award of any court, governmental body or arbitrator, or any law, rule
or regulation applicable to HDS or any HDS Subsidiary. Except as set forth in
Schedule 6.9, none of the HDS Material Documents requires notice to, or the
consent or approval of, any third party with respect to any of the transactions
contemplated hereby in order to remain in full force and effect, nor does this
Agreement or any of the transactions contemplated hereby give rise to any right
to termination, cancellation or acceleration or loss of any right or benefit.
The minute books of HDS and each HDS Subsidiary as heretofore made available to
the COMPANY are true and correct.
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<PAGE>
6.10 [Intentionally omitted].
---------------------
6.11 Disclosure. To the knowledge of HDS, none of the information in the
----------
Registration Statement or any schedule or exhibit thereto (other than
information concerning the Company or any STOCKHOLDER furnished thereby), taken
as a whole, contains or will contain any untrue statement or omit to state a
material fact necessary in order to make the statements made not misleading.
6.12 Compensation; Employment Agreements. Schedule 6.12 sets forth an
-----------------------------------
accurate schedule showing all officers, directors and key employees of HDS
listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of the date hereof. HDS has provided to the COMPANY true, complete and correct
copies of any employment agreements for persons listed on Schedule 6.12,
excluding John Brezniker.
7. COVENANTS PRIOR TO CLOSING.
7.1 Access and Cooperation; Due Diligence.
-------------------------------------
(i) Between the date of this Agreement and the Closing Date, the
COMPANY shall afford to the officers and authorized representatives of HDS
access to all of the COMPANY's (including the COMPANY's Subsidiaries') key
employees (which, for purposes of this Section 7.1(i), means the STOCKHOLDERS
and Dirk Hallett), sites, properties, books and records and will furnish HDS
with such additional financial and operating data and other information as to
the business and properties of the COMPANY (including the COMPANY's
Subsidiaries) as HDS may from time to time reasonably request. The COMPANY will
cooperate with HDS, its representatives, auditors and counsel in the preparation
of any documents or other material which may be required by this Agreement. The
COMPANY shall not unreasonably refuse to provide reasonable access to the
COMPANY's (including the COMPANY's Subsidiaries) key employees books, records
and other financial data to all Other Companies and their representatives,
auditors and counsel, provided that the COMPANY will not be required to disclose
competitively-sensitive information to such Other Companies. HDS, the
STOCKHOLDERS and the COMPANY will treat all information obtained in connection
with the negotiation and performance of this Agreement or the due diligence
investigations conducted with respect to the Other Companies as confidential in
accordance with the provisions of Section 14 hereof and will not use such
information for any purpose other than for the evaluation of the transactions
contemplated by this Agreement. In addition, HDS will cause each of the Other
Companies to enter into a provision similar to this Section 7.1 requiring each
such Other Company to keep confidential any information obtained by such Other
Company and to not use such information for any purpose other than for the
evaluation of the transactions contemplated by the applicable Other Agreement.
All Other Companies shall be third-party beneficiaries with respect to the
covenant of the COMPANY and the STOCKHOLDERS restricting the use of information
received by the COMPANY and
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such STOCKHOLDERS, and the COMPANY shall be a third-party beneficiary with
respect to the covenant of the Other Companies restricting the use of COMPANY
information received by such Other Companies.
(ii) Between the date of this Agreement and the Closing Date, HDS
shall afford to the officers and authorized representatives of the COMPANY
access to all of HDS' (including HDS Subsidiaries') key employees, sites,
properties, books and records and will furnish the COMPANY with such additional
financial and operating data and other information as to the business and
properties of HDS (including HDS Subsidiaries) as the COMPANY may from time to
time reasonably request. HDS will cooperate with the COMPANY, its
representatives, engineers, auditors and counsel in the preparation of any
documents or other material which may be required by this Agreement. The COMPANY
will cause all information obtained in connection with the negotiation and
performance of this Agreement to be treated as confidential in accordance with
the provisions of Section 14 hereof.
7.2 Conduct of Business Pending Closing. Between the date of this
-----------------------------------
Agreement and the Closing Date, the COMPANY will, and will cause the COMPANY's
subsidiaries to, except as set forth in Schedule 7.2:
(i) carry on its respective businesses in substantially the same
manner as it has heretofore, and not introduce any material new method of
management, operation or accounting;
(ii) maintain its respective properties, facilities, equipment and
other assets, including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(iii) perform all of its respective material obligations under
agreements to which it is a party relating to or affecting its respective
assets, properties or rights;
(iv) subject to Section 7.6, keep in full force and effect present
insurance policies or other comparable insurance coverage;
(v) use reasonable efforts to maintain and preserve its business
organization intact, retain its respective present employees and maintain
its respective relationships with suppliers, customers and others having
business relations with it;
(vi) maintain compliance with all permits, laws, rules and
regulations, consent orders, and all other orders of applicable courts,
regulatory agencies and similar governmental authorities applicable to the
COMPANY; and
(vii) maintain compliance with all present debt and lease
instruments and not enter into new or amended debt or lease instruments
involving payments by the COMPANY or the COMPANY's Subsidiaries over $100,000
(individually or in the
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aggregate), without the knowledge and consent of HDS (which consent shall not be
unreasonably withheld or delayed).
7.3 Prohibited Activities. Except as disclosed in Schedule 7.3,
---------------------
between the date of this Agreement and the Closing Date, the COMPANY has not
and, without the prior written consent of HDS (which consent shall not be
unreasonably withheld or delayed), will not:
(i) make any change in its Articles of Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed on Schedule 5.4 or as
otherwise provided in this Agreement or any schedule;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase, redeem
or otherwise acquire or retire for value any shares of its stock or as otherwise
provided in this Agreement or any schedule;
(iv) enter into any contract (including any contract to provide
services to customers) or commitment or incur or agree to incur any liability or
make any capital expenditures, unless (x) it is in the ordinary course of
business (consistent with past practice) or (y) when aggregated with all other
such contracts, commitments, liabilities and capital expenditures not in the
normal course of business consistent with past practice, it involves an amount
not in excess of $50,000;
(v) increase the compensation payable or to become payable to any
officer, director, STOCKHOLDER, employee or agent, or make any bonus or
management fee payment to any such person, except (x) bonuses to employees
(other than the STOCKHOLDERS or their affiliates) consistent with past practice
and (y) increases in salaries and commission rates payable to employees (other
than to STOCKHOLDERS and their affiliates), provided that neither the salary nor
such commission rate payable to any employee may increase to more than one
hundred five percent (105%) of such employee's current salary or commission
rate, whichever is applicable;
(vi) create, assume or permit to exist any mortgage, pledge or
other lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired, except (1) with respect to purchase money liens incurred in
connection with the acquisition of equipment with an aggregate cost not in
excess of $50,000 necessary or desirable for the conduct of the businesses of
the COMPANY (including the COMPANY's Subsidiaries), or (2) liens set forth on
Schedule 5.14 hereto or (3) liens for taxes either not yet due or materialmen's,
mechanics', workers', repairmen's, employees' or other like liens arising in the
ordinary course of business;
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<PAGE>
(vii) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the ordinary course of business;
(viii) negotiate for the acquisition of any business or the start-up
of any new business;
(ix) merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(x) waive any material rights or claims of the COMPANY, except
for COMPANY's negotiation and adjustment of bills in the course of good faith
disputes with customers in a manner consistent with past practice;
(xi) commit a material breach or amend or terminate any Material
Contract, or material permit, license or other right of the COMPANY, or make or
terminate any election involving Taxes that would in any way adversely affect
the Tax liability of the COMPANY or any Acquired Party (or HDS following the
Merger) in any taxable period; or
(xii) enter into any other transaction outside the ordinary course
of its business or prohibited hereunder.
7.4 No Shop. None of the STOCKHOLDERS, the COMPANY, any of the
-------
COMPANY's Subsidiaries or any agent, officer, director or any representative of
any of the foregoing will, during the period commencing on the date of this
Agreement and ending with the earlier to occur of the Closing Date or the
termination of this Agreement in accordance with its terms, directly or
indirectly: (i) solicit or initiate, either directly or indirectly, the
submission of proposals or offers from any person for, (ii) participate in any
discussions pertaining to or (iii) furnish any information to any person other
than HDS or the Founding Companies relating to, any acquisition or purchase of
all or a material amount of the assets of, or any equity interest in, the
COMPANY or a merger, consolidation or business combination of the COMPANY.
7.5 Notice to Bargaining Agents. Prior to the Closing Date, the COMPANY
---------------------------
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements, and shall
provide HDS with proof that any required notice has been sent.
7.6 Termination of Plans. Before the Pricing Date, the COMPANY shall
--------------------
terminate all Plans listed on Schedule 7.6, conditioned upon the Closing
occurring.
7.7 HDS Prohibited Activities. Between the date of this Agreement and the
-------------------------
Closing Date, except as set forth on Schedule 7.7, HDS will not:
(i) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind;
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<PAGE>
(ii) make any changes in its Certificate of Incorporation or
Bylaws other than one or more amendments to the Certificate of Incorporation to
accomplish a split or reverse split of the HDS Stock (provided that in the event
of any such split or reverse split, the number of shares of HDS Stock to be
delivered to the STOCKHOLDERS, and to the stockholders of the Other Companies,
and also the Minimum IPO Price, all as set forth on Annex I, will be adjusted
accordingly) or to increase the authorized capital stock of HDS to an amount not
to exceed 40 million shares of common stock and 5 million shares of preferred
stock;
(iii) hire or appoint any officer or director or increase the
compensation payable or to become payable to any officer or director;
(iv) acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to HDS and the HDS Subsidiaries; or
(v) engage in any business except good faith efforts to comply
with and exercise rights under this Agreement and the Other Agreements, prepare
for the IPO, and prepare to carry on the business heretofore operated by the
Founding Companies and the business contemplated for HDS after the Closing.
7.8 Notification of Certain Matters. The STOCKHOLDERS and the COMPANY
-------------------------------
shall give prompt notice to HDS of (i) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would be likely to cause any
representation or warranty of the COMPANY or the STOCKHOLDERS contained herein
to be untrue or inaccurate in any material respect at or before the Closing and
(ii) any material failure of any STOCKHOLDER or the COMPANY to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
such person hereunder. HDS shall give prompt notice to the COMPANY of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty of HDS contained
herein to be untrue or inaccurate in any material respect at or before the
Closing and (ii) any material failure of HDS to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. The delivery of any notice under this Section 7.8 shall not be
deemed to (i) modify the representations or warranties hereunder of the party
delivering such notice, which modification may only be made under Section 7.9,
(ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
7.9 Amendment of Schedules. Each party shall have the continuing obligation
----------------------
until the Pre-Closing to supplement or amend promptly the Schedules hereto with
respect to any matter hereafter arising or discovered which, if existing or
known at the date of this Agreement, would have been required to be set forth or
described in the Schedules; provided however, that supplements and
-------- -------
amendments to Schedules 5.10, 5.11 and 5.14
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<PAGE>
shall have to be delivered only at the Pre-Closing Date, unless such Schedule is
to be amended to reflect an event occurring other than in the ordinary course of
business. In the event that the COMPANY amends or supplements a Schedule under
this Section 7.9 in any material respect, and HDS does not consent (which
consent shall not be unreasonably withheld) to the effectiveness of such
amendment or supplement at or before the Pre-Closing, this Agreement shall be
deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. If a
schedule is amended or supplemented in a non-material respect, the consent of
HDS shall be deemed granted. In the event that HDS amends or supplements a
Schedule under this Section 7.9 in any material respect and the Company and a
majority of the Other Companies do not consent (which consent shall not be
unreasonably withheld) to the effectiveness of such amendment or supplement at
or before the Pre-Closing, this Agreement shall be deemed terminated by mutual
consent as set forth in Section 12.1(i) hereof. For all purposes of this
Agreement, including for purposes of determining whether the conditions set
forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be
deemed to be the Schedules as amended or supplemented under this Section 7.9. In
the event that one of the Other Companies amends or supplements a Schedule under
Section 7.9 of one of the Other Agreements in any material respect, HDS shall
give the COMPANY notice promptly after it has knowledge thereof. If HDS and a
majority of the Founding Companies, excluding such Other Company, do not consent
(which consent shall not be unreasonably withheld) to the effectiveness of such
amendment or supplement, at or before the Pre-Closing, this Agreement shall be
deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. For
purposes of this Section 7.9, HDS shall be deemed to have given its consent to
the effectiveness of any amendment or supplement to a Schedule if HDS does not
notify the COMPANY of its disapproval within 48 hours after HDS is notified of
such amendment or supplement, and the COMPANY and each Other Company shall be
deemed to have given its consent to the effectiveness of any amendment or
supplement to a Schedule if the COMPANY or such Other Company, as applicable,
does not notify HDS of its disapproval within 48 hours after the COMPANY or such
Other Company, as applicable, is notified of such amendment or supplement.
Except as otherwise provided herein, no amendment of or supplement to a Schedule
shall be made after the Pre-Closing.
7.10 Cooperation in Preparation of Registration Statement. The COMPANY and
----------------------------------------------------
STOCKHOLDERS shall furnish or cause to be furnished to HDS and the Underwriters
all of the information concerning the COMPANY or the STOCKHOLDERS reasonably
requested by HDS and the Underwriters, subject to the confidentiality provisions
of this Agreement, and will cooperate with HDS and the Underwriters in the
preparation of the Registration Statement and the prospectus included therein
(including audited financial statements prepared in accordance with generally
accepted accounting principles). The COMPANY and the STOCKHOLDERS agree promptly
to advise HDS if at any time during the period in which a prospectus relating to
the offering is required to be delivered under the 1933 Act, any information
contained in the prospectus concerning the COMPANY or the STOCKHOLDERS becomes
incorrect or incomplete in any material respect, and to provide the information
needed to correct such inaccuracy.
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<PAGE>
7.11 Examination of Final Financial Statements. To the extent that
-----------------------------------------
financial statements of the COMPANY for any quarter subsequent to the Balance
Sheet Date are required to be included in the Registration Statement, the
COMPANY shall provide, and HDS shall have had sufficient time to review, the
unaudited balance sheet and statements of income, cash flows and retained
earnings of the COMPANY as of the end of such quarter, disclosing no material
adverse change in the financial condition or results of operations of the
COMPANY, provided, however, that for purposes of this Section 7.11 neither a
decline in nor a distribution disclosed in Schedule 7.3 shall be a material
adverse change. Such financial statements, which shall be deemed to be Financial
Statements (as described in Section 5.9), shall have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted therein). To the extent such
Financial Statements shall be included or reflected in the Registration
Statement, any events or circumstances reflected therein which might constitute
a Material Adverse Effect with respect to the COMPANY shall be deemed to have
been waived by HDS and HDS shall have no rights in respect of such Material
Adverse Effect.
7.12 Maintenance of Liquidity and Limitation of Debt. The COMPANY agrees
-----------------------------------------------
that, as of the Closing Date, the COMPANY will have (i) adjusted working capital
(defined for purposes of this Agreement as cash plus receivables net of
receivables reserves less short-term liabilities, excluding the short-term
portion of long-term debt) of at least $100,000 and (ii) no adjusted long-term
liabilities (defined for this purpose as long-term liabilities plus the short-
term portion of long-term debt). As used in the preceding sentence, the terms
"cash," "receivables," "receivables reserves," "short-term liabilities," "short-
term portion of long-term debt," "long-term liabilities" and "short-term portion
of long-term debt" all will have the same meaning as in generally accepted
accounting principles, as applied in the preparation of the COMPANY Financial
Statements, provided that (i) "short-term liabilities" shall not include any
income or franchise taxes owing by, claimed to be owing by or imposed on the
COMPANY by any Taxing Authority, which are not yet paid as of the Closing Date,
for any taxable periods ending on or before the Closing Date, (ii) "short-term
liabilities" shall include taxes and other amounts required to be withheld
and/or paid with respect to compensation paid to employees owing by the Company
to any Taxing Authority for any taxable period, (iii) "receivables" will include
any note from an employee STOCKHOLDER payable upon the Closing from
consideration otherwise payable to such employee STOCKHOLDER, and (iv) long-term
liabilities will not include rent payable in the future pursuant to the Leases,
as defined in Section 8.14.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.
The obligations of STOCKHOLDERS and the COMPANY with respect to actions to
be taken on the Pricing Date are subject to the satisfaction or waiver on or
before the Pricing Date of all of the following conditions. The obligations of
the STOCKHOLDERS and the COMPANY with respect to actions to be taken on the
Closing Date and their obligations to consummate the Merger are subject to the
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<PAGE>
satisfaction or waiver on or before the Closing Date of the conditions set forth
in Sections 8.1, 8.7 and 8.11.
8.1 Representations and Warranties; Performance of Obligations. All
----------------------------------------------------------
representations and warranties of HDS contained in this Agreement shall be true
and correct in all material respects as of the Pricing Date and the Closing Date
with the same effect as though such representations and warranties had been made
as of that date; each and all of the terms, covenants and conditions of this
Agreement to be complied with and performed by HDS on or before the Pricing Date
and the Closing Date shall have been duly complied with and performed in all
material respects; and a certificate to the foregoing effect dated the Pricing
Date and the Closing Date signed by the President or any Vice President of HDS
and certified by the Secretary or Assistant Secretary of HDS shall have been
delivered to the STOCKHOLDERS.
8.2 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be satisfactory to the COMPANY and its counsel. The
STOCKHOLDERS and the COMPANY shall be satisfied that the Registration Statement
and the prospectus forming a part thereof, including any amendments thereof or
supplement thereto, shall not contain any untrue statement of a material fact,
or omit to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that the
--------
condition contained in this sentence shall be deemed satisfied if (i) HDS shall
have made available to the COMPANY copies of the draft (or changed pages of such
draft) of the Registration Statement prior to the initial filing with the
Securities and Exchange Commission (the "SEC"), each amendment thereto before
the effectiveness thereof with the SEC and of any amendment or supplement
thereto after the effectiveness thereof (including any prospectus filed pursuant
to Rule 424 under the 1933 Act) and (ii) the COMPANY or STOCKHOLDERS shall have
failed to inform HDS in writing before the filing or the effectiveness thereof,
as the case may be, of the existence of an untrue statement of a material fact
or the omission of such a statement of a material fact or other matter with
which they are not satisfied, provided however, that for the period commencing
--------
72 hours prior to any such filing or effectiveness, HDS can make such draft or
changed pages available by facsimile.
8.3 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock under the
Registration Statement and no governmental agency or body shall have taken any
other action or made any request of the COMPANY as a result of which the
management of the COMPANY deems it inadvisable to proceed with the transactions
hereunder.
8.4 Stockholders' Release. Each stockholder of HDS immediately before the
---------------------
Closing Date who is an officer or director of HDS shall have delivered to the
COMPANY an instrument dated the Closing Date releasing HDS from any and all
claims of such stockholder against HDS and obligations of HDS to such
stockholder other than obligations arising in connection with this Agreement,
the Other Agreements, any
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<PAGE>
employment agreements between such stockholder and HDS, any options to purchase
HDS Stock granted by HDS to such stockholder and any right to the issuance of
the shares of HDS Stock set forth in Annex III hereto.
8.5 Opinion of Counsel. The COMPANY shall have received an opinion from
------------------
counsel for HDS, dated the Closing Date, in the form annexed hereto as Annex V.
8.6 Director Indemnification. HDS shall have obtained directors and
------------------------
officers liability insurance from a reputable insurance company in type and
amount as is customary for companies similarly situated, and HDS shall have
entered into an indemnification agreement with each STOCKHOLDER, if any, who
will become a director of HDS, such indemnification agreement to be
substantially in the form attached as Annex VII.
8.7 Registration Statement. The underwriters named in the Registration
----------------------
Statement shall have agreed to acquire on a firm commitment basis such shares of
HDS Stock, subject to the conditions set forth in an underwriting agreement (the
"Underwriting Agreement"), on terms such that the Effective IPO Price (as
defined in Annex I) is equal to or greater than the Minimum IPO Price (as
defined in Annex I).
8.8 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made, no action or
proceeding shall have been instituted or threatened to restrain or prohibit the
Merger, and no governmental agency or body shall have taken any other action or
made any request of the COMPANY as a result of which the COMPANY deems it
inadvisable to proceed with the transactions hereunder.
8.9 Good Standing Certificates. HDS shall have delivered to the COMPANY a
--------------------------
certificate, dated as of a date no later than ten days before the Pricing Date,
duly issued by the Delaware Secretary of State and the Secretary of State of
each state in which HDS is authorized to do business, showing that HDS is in
good standing and authorized to do business and that all state franchise or
income tax returns and taxes for HDS, for all periods before the Closing, have
been filed and paid.
8.10 No Waivers. HDS shall not have waived any closing condition under
----------
any Other Agreement, unless such condition does not constitute a Material
Adverse Effect (as defined in such Other Agreement) on the Other Company party
to such Other Agreement.
8.11 No Material Adverse Change. No event or circumstance shall have
--------------------------
occurred which would constitute an HDS Material Adverse Effect; and the
COMPANY shall have received a certificate signed by HDS dated the Pricing
Date and the Closing Date to such effect.
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<PAGE>
8.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an employment agreement with HDS substantially in the
form of Annex VIII (each an "Employment Agreement").
8.13 Consulting Agreements. Each of the persons listed on Schedule 8.13
---------------------
shall have entered into a consulting agreement with HDS substantially in the
form of Annex IX (each a "Consulting Agreement").
8.14 Leases. Each lease listed on Schedule 8.14 and attached as Annex X,
------
as amended by all amendments included in Annex X, (collectively, the "Leases")
shall have been assumed by HDS, and HDS shall have entered into any amendments
included in Annex X which have not been entered into by the COMPANY.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.
The obligations of HDS with respect to actions to be taken on the Pricing
Date are subject to the satisfaction or waiver on or before the Pricing Date of
all of the following conditions. The obligations of HDS with respect to actions
to be taken on the Closing Date are subject to the satisfaction or waiver on or
before the Closing Date of the conditions set forth in Sections 9.1, 9.3, 9.4
and 9.11.
9.1 Representations and Warranties; Performance of Obligations. All the
----------------------------------------------------------
representations and warranties of the STOCKHOLDERS and the COMPANY contained in
this Agreement shall be true and correct in all material respects as of the
Pricing Date and the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date; each and
all of the terms, covenants and conditions of this Agreement to be complied with
or performed by the STOCKHOLDERS and the COMPANY on or before the Pricing Date
or the Closing Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the STOCKHOLDERS shall have
delivered to HDS a certificate dated the Pricing Date and the Closing Date
signed by them and certified by the Secretary or Assistant Secretary of the
COMPANY to such effect.
9.2 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock under the
Registration Statement, and no governmental agency or body shall have taken any
other action or made any request of HDS as a result of which the management of
HDS deems it inadvisable to proceed with the transactions hereunder.
9.3 Financial Statements. Before the Closing Date, HDS shall have had
--------------------
sufficient time to review consolidated balance sheets of the COMPANY for the
fiscal quarters beginning after the Balance Sheet Date, and consolidated
statements of income, cash flows and retained earnings of the COMPANY for the
fiscal quarters beginning after the Balance Sheet Date, and the same shall not
disclose any material adverse change in the financial condition of the COMPANY
or the results of its operations from the
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<PAGE>
COMPANY Financial Statements as of the Balance Sheet Date, provided, however,
that for purposes of this Section 9.3 neither a decline in revenues nor a
distribution disclosed in Schedule 7.3 shall be a material adverse change.
9.4 No Material Adverse Effect. Except as provided in Schedules 7.2, 7.3
--------------------------
and 7.9, no event or circumstance shall have occurred between the date of this
Agreement and the Pricing Date which would constitute a Material Adverse Effect;
and HDS shall have received a certificate signed by the STOCKHOLDERS dated the
Pricing Date to such effect.
9.5 STOCKHOLDERS' Release. The STOCKHOLDERS, Ygal Sonenshine and Sheila
---------------------
Prell Sonenshine shall have delivered to HDS immediately before the Pricing Date
an instrument substantially in the form of Annex XI (each a "Stockholder
Release") dated the Pricing Date releasing the COMPANY from any and all claims
of the STOCKHOLDERS, Ygal Sonenshine and Sheila Prell Sonenshine against the
COMPANY and obligations of the COMPANY to the STOCKHOLDERS, Ygal Sonenshine and
Sheila Prell Sonenshine, except for (i) items specifically identified in the
Stockholder Release, (ii) continuing obligations to the STOCKHOLDERS, Ygal
Sonenshine and Sheila Prell Sonenshine under this Agreement or relating to their
employment by the Surviving Corporation and (iii) indemnity and contribution
obligations of the COMPANY or its successors to an officer or director of the
COMPANY or the COMPANY's Subsidiaries before the Merger.
9.6 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to HDS.
9.7 Termination of Related Party Agreements. All existing agreements
---------------------------------------
between the COMPANY and the STOCKHOLDERS, any Affiliate of the COMPANY or
the STOCKHOLDERS, any relative or spouse of any STOCKHOLDER, any relative of
the spouse of any STOCKHOLDER, any trust or estate of which any of the
foregoing is a settlor or beneficiary, or any corporation or other
organization in which the foregoing collectively own 10% or more of any
class of equity securities or 10% or more of the equity interest, other than
those agreements set forth on Schedule 9.7, or the Leases attached as Annex
X, shall have been cancelled.
9.8 Opinion of COMPANY Counsel. HDS shall have received an opinion from
--------------------------
counsel to the COMPANY and the STOCKHOLDERS, dated the Pricing Date,
substantially in the form annexed hereto as Annex VI, and the Underwriters shall
have received a copy of the same opinion addressed to them. If such counsel is
not Silver & Freedman, such counsel shall have been approved by HDS, such
approval not to be unreasonably withheld.
9.9 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; the COMPANY
shall have
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<PAGE>
obtained and delivered to HDS such additional consents to the Merger as HDS may
reasonably request, including HDS' receipt on or before the Pricing Date of (a)
consents of third parties to those Material Contracts and Material Leases listed
on Schedule 5.23 under the last sentence of Section 5.23 and (b) those licenses,
franchises, permits or governmental authorizations set forth on Schedule 5.12
under the last sentence of Section 5.12, or assurances reasonably acceptable to
it that such consents, licenses, franchises, permits or governmental
authorizations will be received on the Closing Date or that the failure to
receive such consents, licenses, franchises, permits or governmental
authorizations on the Closing Date will not materially adversely affect its
ability to conduct the business of the COMPANY as conducted before the Closing
Date; no action or proceeding shall have been instituted or threatened to
restrain or prohibit the Merger; and no governmental agency or body shall have
taken any other action or made any request of HDS as a result of which HDS deems
it inadvisable to proceed with the transactions hereunder.
9.10 Good Standing Certificates. The COMPANY shall have delivered to HDS a
--------------------------
certificate, dated as of a date no later than ten days before the Pricing Date,
duly issued by the appropriate governmental authority in the COMPANY's state of
incorporation and in each state in which the COMPANY is authorized to do
business, showing the COMPANY is validly existing, in good standing and
authorized to do business and that all state franchise or income tax returns and
taxes due by the COMPANY for all periods before the Pre-Closing have been filed
and paid.
9.11 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC.
9.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an Employment Agreement with HDS.
9.13 Consulting Agreements. Each of the STOCKHOLDERS listed on Schedule
---------------------
8.13 shall have entered into a Consulting Agreement with HDS.
9.14 Leases. Each of the persons listed in Schedule 8.14 shall have
------
consented to the assumptions contemplated by Section 8.14 and entered into any
amendments included in Annex X.
9.15 Repayment of Indebtedness. Before the Closing Date, the STOCKHOLDERS
-------------------------
shall have fully repaid the COMPANY (including the COMPANY's Subsidiaries) all
amounts owing by the STOCKHOLDERS to the COMPANY (including the COMPANY's
Subsidiaries).
9.16 FIRPTA Certificate. The COMPANY and each STOCKHOLDER shall have
------------------
delivered to HDS a certificate to the effect that the COMPANY or such
STOCKHOLDER, as applicable, is not a "foreign person" under Section 1.1445-2(b)
of the Treasury regulations.
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9.17 Insurance. HDS shall be designated as an additional named insured on
---------
all of the COMPANY's insurance policies.
9.18 Nondisturbance Agreements. Each of the lienholders and ground lessors
-------------------------
listed in Schedule 9.18 shall have entered into nondisturbance agreements with
HDS substantially in the form of Annex XII (collectively the "Nondisturbance
Agreements").
10. POST-CLOSING COVENANTS AND SPECIAL TAX MATTERS.
10.1 Intentionally omitted.
10.2 Disclosure. If, subsequent to the Pricing Date and before the 25th day
----------
after the date of the final prospectus of HDS utilized in connection with
the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or
circumstance which would change (or, if after the Closing Date, would have
changed) a representation or warranty of COMPANY or STOCKHOLDERS in this
Agreement or would affect any document delivered pursuant hereto in any
material respect, the COMPANY and the STOCKHOLDERS shall promptly give
notice of such fact or circumstance to HDS.
10.3 Cooperation in Tax Return Preparation. Each party hereto shall at its
-------------------------------------
own expense cooperate with each other and make available to each other such Tax
data and other information as may be reasonably required in connection with (i)
the preparation or filing of any Tax Return, election, consent or certification,
or any claim for refund, (ii) any determinations of liability for Taxes, or
(iii) an audit, examination or other proceeding with respect to Taxes ("Tax
Data"). Such cooperation shall include making their respective employees and
independent auditors reasonably available on a mutually convenient basis for all
reasonable purposes, including to provide explanations and background
information and to permit the copying of books, records, schedules, workpapers,
notices, revenue agent reports, settlement or closing agreements and other
documents containing the Tax Data ("Tax Documentation"). The Tax Data and the
Tax Documentation shall be retained until one year after the expiration of all
applicable statutes of limitations (including extensions thereof); provided that
--------
in the event an audit, examination, investigation or other proceeding has been
instituted before the expiration of an applicable statute of limitations, the
Tax Data and Tax Documentation relating thereto shall be retained until there is
a final determination thereof (and the time for any appeal has expired).
10.4 Tax Return Preparation and Filing.
---------------------------------
(i) HDS will be responsible for preparing and filing (or causing
the preparation and filing of) all Tax Returns with respect to HDS. The parties
hereto acknowledge that the Closing Date shall be the last day of a taxable
period of the COMPANY.
(ii) STOCKHOLDERS will be responsible for preparing and filing (or
causing the preparation and filing of) all Tax Returns with respect to the
COMPANY and
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any Acquired Party for any taxable period ending on or before the Closing
Date. HDS and the STOCKHOLDERS shall (a) with respect to such Tax Returns,
determine the income, gain, expenses, losses, deductions, and credits of
the COMPANY and any Acquired Party in a manner consistent with prior
practice and in a manner that apportions such income, gain, expenses, loss,
deductions and credits equitably from period to period and (b) prepare such
Tax Returns in a manner consistent with prior years, in each case as
determined in the good faith judgment of the preparer of such returns;
provided, however, that in all events such Tax Returns shall be prepared in
a manner consistent with applicable laws. HDS shall provide the cash
necessary to pay any Taxes shown to be due on such Tax Returns, but without
prejudice to the right of HDS to seek indemnification for such Taxes from
the STOCKHOLDERS under Section 11.6, if applicable.
(iii) In order to appropriately apportion any Taxes relating to a
taxable period that includes (but that would not, but for this section, close
on) the Closing Date, the parties hereto will, to the extent permitted by
applicable law, elect with the relevant taxing authority to treat for all
purposes the Closing Date as the last day of a taxable period of the COMPANY and
any Acquired Party, and such taxable period shall be treated as a Pre-Closing
Period (as defined in Section 10.6(c)) for purposes of this Agreement. In any
case where applicable law does not permit the COMPANY or an Acquired Party to
treat the Closing Date as the last day of a taxable period, then for purposes of
this Agreement, the portion of each such Tax that is attributable to the
operations of the COMPANY or an Acquired Party for such Interim Period shall be
(x) in the case of a Tax that is not based on income or gross receipts, the
total amount of such Tax for the period in question multiplied by a fraction,
the numerator of which is the number of days in the Pre-Closing Period portion
of such Interim Period, and the denominator of which is the total number of days
in such Interim Period, and (y) in the case of a Tax that is based on income or
gross receipts, the Tax that would be due with respect to the Interim Period, if
such Interim Period constituted an entire taxable period.
(iv) Except as required by Section 10.5 and except for any
reasonable Purchase Price allocation by HDS in respect of the assets of the
COMPANY acquired pursuant to this Agreement, HDS shall not make any change in
accounting method or any election after the Closing Date which would result in
the imposition of any additional Tax on the STOCKHOLDERS for any Pre-Closing
Period; provided, however, that HDS may take any action or make any change or
election which is required by any rule, law or regulation.
10.5 Tax Treatment of Transaction. Each of the parties will treat the
----------------------------
merger of HDS and the COMPANY under this Agreement as a taxable sale of the
COMPANY's assets followed by a liquidation of COMPANY in accordance with Revenue
Ruling 69-6, 1969-1 C.B.104, and will, accordingly, comply with all applicable
state and federal tax reporting requirements.
10.6 Special Definitions Related to Tax Matters. For all purposes of this
------------------------------------------
Agreement related to any Tax matters (including Section 5.22):
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<PAGE>
(a) "Affiliate" of a person or entity shall mean a person or entity
that directly or indirectly controls, is controlled by or is under common
control with that person or entity.
(b) "Interim Period" shall mean any taxable period commencing
before the Closing Date and ending after the Closing Date.
(c) "Pre-Closing Period" shall mean (i) any taxable period that
begins before the Closing Date and ends on or before the Closing Date and (ii)
the portion of any Interim Period through and including the Closing Date.
(d) "Post-Closing Period" means any taxable period that begins
after the Closing Date, and, with respect to any Interim Period, the
portion of such Interim Period commencing immediately after the Closing
Date.
(e) "Tax" means any federal, state, local, or foreign income, gross
receipts, ad valorem, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Section 59A), customs duties, capital stock, net worth, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
workers compensation, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever imposed by any federal, state, local or foreign government
or any agency or political subdivision of any such government, including any
interest, penalty, or addition thereto, without regard to whether such tax is
disputed or not or arose before, on or after the Closing Date.
(f) "Tax Returns" means all reports, elections, declarations, claims
for refund, estimates, information statements and returns (including any
schedules and attachments thereto) relating to, or required to be filed in
connection with, any Taxes under the statutes, rules and regulations of any
federal, state, local or foreign government taxing authority.
(g) "Taxing Authority" means any governmental agency, board,
bureau, body, department or authority of any United States federal, state or
local jurisdiction, having or purporting to have jurisdiction with respect to
any Tax.
10.7 Directors. The persons named in the Registration Statement shall be
---------
appointed as directors of HDS on or before the Closing Date.
10.8 Release from Guarantees. HDS shall use its best efforts to have the
-----------------------
STOCKHOLDERS released from any and all guarantees of any obligations of the
COMPANY that they personally guaranteed for the benefit of the COMPANY
(including the COMPANY's Subsidiaries), with all such guarantees of indebtedness
being assumed by HDS. HDS shall indemnify the STOCKHOLDERS against any and all
claims made by lenders under any such guarantees which arise as a result of HDS'
failure to cause such guarantee to be released on or before the Closing.
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10.9 HDS Stock Options. HDS shall prior to the Closing Date adopt an
-----------------
employee stock option plan providing for the grant of options to employees of
HDS as described in the Registration Statement. HDS shall grant stock options to
former employees of the COMPANY under such plan (i) having an exercise price
equal to or less than the Effective IPO Price and (ii) having an aggregate
exercise price equal to $700,000. In granting options under such plan to former
employees of the COMPANY, the Board of Directors of HDS or the committee
administering such plan, as the case may be, shall follow the recommendations
from Ygal Sonenshine set forth in Schedule 10.9 as to the employees to receive
such options and the relative size of the awards to the respective employees. As
long as such employees remain employed by HDS, such employees shall be eligible
for all stock plans, stock option plans, bonuses and benefits, if any, for which
similarly situated employees of HDS are eligible. HDS will have complete
discretion in determining whether or not to grant or award stock, stock options,
bonuses and benefits to such employees, provided only that in determining (i)
whether or not such employees are similarly situated to those employees of HDS
who are eligible for such stock plans, stock option plans, bonuses and benefits,
if any, and (ii) whether or not to make such grants or awards, HDS shall not
take into account or take as a credit options granted pursuant to this Section
10.9. Nothing in this Section 10.9 creates any right of any such employee to
continue being employed by HDS.
10.10 Determination and Allocation of Consideration. The STOCKHOLDERS, the
---------------------------------------------
COMPANY and HDS agree to determine the consideration amount and value of the
total consideration transferred to the STOCKHOLDERS pursuant to this Agreement
plus any liabilities of the COMPANY (plus other relevant items as provided under
the Code) (in the aggregate referred to hereafter as the "Section 1060
Consideration") and to allocate such Section 1060 Consideration among the assets
and liabilities transferred in accordance with the regulations promulgated under
Section 1060 of the Code. Within 90 days after the Closing Date, HDS shall
provide STOCKHOLDERS with one or more schedules allocating the Section 1060
Consideration. If the STOCKHOLDERS disagree with any item reflected on the
schedules so provided, STOCKHOLDERS shall have the right within 30 days of the
date of such notice to notify HDS of any disagreement and the reason for so
disagreeing, in which case STOCKHOLDERS and HDS shall attempt in good faith to
resolve the disagreement without undue delay, provided, however, that if they do
-------- -------
not do so, STOCKHOLDERS and HDS each agree to accept and be bound by the
determination of Deloitte & Touche. HDS and the STOCKHOLDERS each will bear
one-half the fees of Deloitte & Touch in making such determination. The failure
of STOCKHOLDERS to provide notice of disagreement to HDS within such 30 day
period shall constitute a waiver of such right. HDS and the STOCKHOLDERS agree
to prepare and file all forms required to be filed jointly or independently in a
timely fashion in accordance with the rules and regulations under Section 1060
of the Code. Such forms shall be prepared in a manner consistent with the
allocation made under this Section 10.10 (to the extent applicable). To the
extent that the Section 1060 Consideration is adjusted after the Closing Date,
the parties agree to revise and amend any relevant schedule and IRS form in the
same manner and according to the same procedure described hereunder. The
determination and allocation of the Section 1060 Consideration
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derived pursuant to this subsection shall be binding on STOCKHOLDERS and HDS for
all Tax reporting purposes.
11. INDEMNIFICATION.
The STOCKHOLDERS and HDS each make the following covenants that are
applicable to them, respectively:
11.1 General Indemnification by the STOCKHOLDERS. The STOCKHOLDERS jointly
-------------------------------------------
and severally (except with respect to Sections 5.28 through 5.30, which shall be
several) shall indemnify, defend, protect and hold harmless HDS and the COMPANY,
at all times from and after the date of this Agreement until the Expiration Date
as defined in Section 5 above, from and against all claims, damages, actions,
suits, proceedings, demands, assessments, adjustments, costs and expenses
(including reasonable attorneys' fees and expenses of investigation) incurred by
HDS or the COMPANY as a result of or arising from (i) any breach of the
representations and warranties of the STOCKHOLDERS or the COMPANY set forth
herein or on the schedules or certificates delivered in connection herewith
(other than the representations and warranties provided in Section 5.22, for
which Section 11.6 provides special indemnity provisions); (ii) any
nonfulfillment of any covenant on the part of the STOCKHOLDERS or the COMPANY
under this Agreement (other than the covenant in Section 10.4(iv), for which
Section 11.6 provides special indemnity provisions); (iii) (intentionally
omitted); and (iv) except to the extent that such untrue statement of a material
fact (or alleged untrue statement of a material fact) appeared, or omission (or
alleged omission) occurred, in any preliminary prospectus and the STOCKHOLDERS
provided, in writing, corrected information to HDS' counsel and to HDS for
inclusion in the final prospectus, and such information was not so included, any
liability under the 1933 Act, the 1934 Act or other Federal or state law or
regulation, at common law or otherwise, (x) arising out of or based upon any
untrue statement of a material fact relating to the COMPANY (including the
COMPANY's Subsidiaries) or the STOCKHOLDERS that is provided to HDS or its
counsel by the COMPANY or the STOCKHOLDERS and contained in any preliminary
prospectus relating to the IPO, the Registration Statement or any prospectus
forming a part thereof, or any amendment thereof or supplement thereto, or (y)
arising out of or based upon any omission to state therein a material fact
relating to the COMPANY (including the COMPANY's Subsidiaries) or the
STOCKHOLDERS that is required to be stated therein or necessary to make the
statements therein not misleading, and not provided to HDS or its counsel by the
COMPANY or the STOCKHOLDERS.
11.2 Indemnification by HDS. HDS shall indemnify, defend, protect and hold
----------------------
harmless the COMPANY and the STOCKHOLDERS, at all times from and after the date
of this Agreement until the Expiration Date, from and against all claims,
damages, actions, suits, proceedings, demands, assessments, adjustments, costs
and expenses (including reasonable attorneys' fees and expenses of
investigation) incurred by the COMPANY and the STOCKHOLDERS as a result of or
arising from (i) any breach by HDS of its representations and warranties set
forth herein or on the schedules or
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<PAGE>
certificates attached hereto; (ii) any nonfulfillment of any covenant on the
part of HDS under this Agreement; (iii) any liabilities which the COMPANY or the
STOCKHOLDERS may incur due to HDS' failure to be responsible for the liabilities
and obligations of the COMPANY as provided in Section 1.4 hereof (except to the
extent that HDS has claims against the STOCKHOLDERS by reason of such
liabilities); or (iv) any liability under the 1933 Act, the 1934 Act or other
Federal or state law or regulation, at common law or otherwise, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact relating to HDS or any of the Founding Companies other than the COMPANY
(with respect to information furnished to HDS by the COMPANY) contained in any
preliminary prospectus, the Registration Statement or any prospectus forming a
part thereof, or any amendment thereof or supplement thereto, or arising out of
or based upon any omission or alleged omission to state therein a material fact
relating to HDS or any of the Founding Companies other than the COMPANY that is
required to be stated therein or necessary to make the statements therein not
misleading.
11.3 Third Person Claims. (i) Promptly after any party hereto (herein the
-------------------
"Indemnified Party") has received notice of or has knowledge of any claim by a
person not a party to this Agreement ("Third Person"), or the commencement of
any action or proceeding by a Third Person (such claim or commencement of such
action or proceeding being a "Third Party Claim") that could give rise to a
right of indemnification under this Agreement, as a condition precedent to
indemnity by any party obligated to provide indemnification under Section 11.1
or 11.2 hereof (herein the "Indemnifying Party"), the Indemnified Party shall
give the Indemnifying Party: written notice that describes the nature of such
Third Party Claim in reasonable detail; a copy of any and all papers served with
respect to that Third Party Claim; if possible, an estimate (which shall not be
binding or conclusive) of the amount of damages attributable to the Third Party
Claim in reasonable detail if such detail is reasonably available without
investigation; and the basis for the Indemnified Party's request for
indemnification under this Agreement; provided, however, that the failure of the
-------- -------
Indemnified Party to give timely notice hereunder shall relieve the Indemnifying
Party of its indemnification obligations under this Agreement to the extent, but
only to the extent that, such failure materially prejudices the Indemnifying
Party's ability to defend such claim. Within fifteen (15) days after receipt of
such notice (the "Election Period"), the Indemnifying Party shall notify the
Indemnified Party (a) whether the Indemnifying Party disputes its potential
liability to the Indemnified Party under this Section 11 with respect to that
Third Party Claim and (b) if the Indemnifying Party does not dispute its
potential liability to the Indemnified Party with respect to that Third Party
Claim, whether the Indemnifying Party desires, at the sole cost and expense of
the Indemnifying Party, to defend the Indemnified Party against that Third Party
Claim.
(ii) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim through counsel of its own choosing which is acceptable to the
Indemnified Party, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, that Third
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Party Claim by all appropriate proceedings, which proceedings shall be
prosecuted diligently by the Indemnifying Party to a final conclusion or settled
at the discretion of the Indemnifying Party in accordance with this Section
11.3(ii) and the Indemnified Party shall furnish the Indemnifying Party with all
information in its possession regarding that Third Party Claim and otherwise
cooperate with the Indemnifying Party in the defense of that Third Party Claim;
provided, however, that the Indemnifying Party shall not
- -------- -------
enter into any settlement with respect to any Third Party Claim that purports to
limit the activities of, or otherwise restrict in any way, any Indemnified Party
or any affiliate of any Indemnified Party without the prior consent of that
Indemnified Party (which consent may be withheld in the sole discretion of that
Indemnified Party). The Indemnified Party is hereby authorized to file during
the Election Period, at the sole cost and expense of the Indemnifying Party, any
motion, answer or other pleadings that the Indemnified Party shall deem
necessary or appropriate to protect its interests or those of the Indemnifying
Party. The Indemnified Party may participate in, but not control, any defense or
settlement of any Third Party Claim controlled by the Indemnifying Party under
this Section 11.3(ii) and will bear its own costs and expenses with respect to
that participation; provided, however, that if the named parties to any such
-------- -------
action (including any impleaded parties) include both the Indemnifying Party and
the Indemnified Party, and the Indemnified Party has been advised by counsel
that it might have one or more legal defenses that are different from the
Indemnifying Party's defenses or additional to them, then the Indemnified Party
may employ separate counsel at the expense of the Indemnifying Party, and, on
its receipt of written notification of that employment, the Indemnifying Party
shall not have the right to assume or continue the defense of such action on
behalf of the Indemnified Party.
(iii) If the Indemnifying Party (a) within the Election Period (1)
disputes its potential liability to the Indemnified Party under this Section 11,
(2) elects not to defend the Indemnified Party under Section 11.3(ii) or (3)
fails to notify the Indemnified Party of its election to defend the Indemnified
Party under Section 11.3(ii) or (b) fails to prosecute or settle the Third Party
Claim diligently and promptly after such election, then the Indemnified Party
shall have the right to defend the Third Party Claim by all appropriate
proceedings, at the sole cost and expense of the Indemnifying Party (if the
Indemnified Party is entitled to indemnification hereunder). The Indemnified
Party shall have full control of such defense and proceedings which it shall
promptly and vigorously prosecute to a final conclusion or settlement.
Notwithstanding the foregoing, if the Indemnifying Party notifies the
Indemnified Party in writing that it disputes its potential liability to the
Indemnified Party under this Section 11, and if that dispute is resolved in
favor of the Indemnifying Party, then the Indemnifying Party shall not be
required to bear the costs and expenses of the Indemnified Party's defense under
this Section 11.3 or of the Indemnifying Party's participation therein at the
Indemnified Party's request. The Indemnifying Party may participate in, but not
control, any defense or settlement controlled by the Indemnified Party under
this Section 11.3(iii), and the Indemnifying Party shall bear its own costs and
expenses with respect to such participation.
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(iv) If for any reason, indemnification against a Third Party Claim
required by this Agreement is unenforceable in whole or in part then the
Indemnifying Party shall contribute to the amount paid or payable by the
Indemnified Party as a result of such Third Party Claim in a proportion that
reflects the relative benefits received by the Indemnified Party and the
Indemnifying Party, the relative fault of the Indemnified Party and the
Indemnifying Party, and any other relevant equitable considerations.
Notwithstanding the foregoing, the aggregate contribution and indemnity of each
STOCKHOLDER under this Section 11 shall not exceed the limit on indemnity
described in Section 11.5(iii).
(v) The parties hereto will make appropriate adjustments for any Tax
benefits, Tax detriments or insurance proceeds in determining the amount of any
indemnification or contribution obligation under this Section 11, provided
--------
that no Indemnifying Party shall be obligated to seek any payment under the
terms of any insurance policy. All indemnification and contribution
payments under this Section 11 shall be deemed adjustments to the Merger
consideration provided for herein.
11.4 Exclusive Remedy. The indemnification and contribution provided
----------------
for in this Section 11 shall be the exclusive remedies in any action seeking
damages or any other form of monetary relief brought by any party to this
Agreement against another party, provided that nothing herein shall be construed
--------
to limit the right of a party, in a proper case, to seek injunctive relief for a
breach of this Agreement.
11.5 Limitations on Indemnification.
------------------------------
(i) The first amounts otherwise payable by one or more
STOCKHOLDERS (whether jointly and severally or severally ) pursuant to Sections
11.1 and 11.3 to HDS and the COMPANY will be offset and reduced (but not below
zero) by the Indemnification Threshold. The "Indemnification Threshold" is an
amount equal to one and one-half percent (1 1/2%) of the sum of (a) the
aggregate amount of Cash Consideration (as defined in Annex I) for all
STOCKHOLDERS and (b) the aggregate value of all HDS Stock received by all
STOCKHOLDERS on the Closing Date under Section 2.1 of this Agreement. All such
amounts otherwise payable by one or more STOCKHOLDERS in excess of the amount so
offset and reduced shall be paid without offset or reduction pursuant to this
Section 11.5(i). Notwithstanding the foregoing, this Section 11.5(i) shall not
apply to claims for indemnification for breach of Section 7.12 or under Section
11.6. For purposes of determining the Indemnification Threshold under this
Section 11.5(i), the HDS Stock shall be valued at the Effective IPO Price, as
defined in Annex I. Claims paid directly by the STOCKHOLDERS (or third parties
on behalf of the STOCKHOLDERS) shall be excluded for purposes of calculating the
Indemnification Threshold.
(ii) The first amounts otherwise payable by HDS pursuant to
Sections 11.2 and 11.3 to STOCKHOLDERS and the COMPANY will be offset and
reduced (but not below zero) by an amount equal to the Indemnification
Threshold. All
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such amounts otherwise payable by HDS in excess of the amount
so offset and reduced shall be paid without offset or reduction pursuant to
this Section 11.5(ii).
(iii) Notwithstanding any other term of this Agreement, in no event
shall any STOCKHOLDER be liable under this Agreement, including this Section 11,
for more than the sum of (a) the amount of Cash Consideration for such
STOCKHOLDER, (b) the net proceeds to such STOCKHOLDER from the sale of such
STOCKHOLDER's HDS Stock received under Section 2.1 hereof before the indemnity
obligation of such STOCKHOLDER is paid and (c) the value of the shares of HDS
Stock received by such STOCKHOLDER on the Closing Date under Section 2.1 that
have not been sold by such STOCKHOLDER before the indemnity or contribution
obligation of such STOCKHOLDER is paid, valued at the closing price per share on
the trading day before the indemnification or contribution obligation is paid.
11.6 Special Tax Indemnity Provisions.
--------------------------------
(i) From and after the Closing Date, the STOCKHOLDERS, jointly and
severally, shall indemnify and save HDS, the COMPANY and any Acquired Party
harmless from any and all Taxes (including any obligation to contribute to
the payment of a Tax determined on a consolidated, combined or unitary
basis for a group of corporations that includes or included the COMPANY or
any Acquired Party) that are (a) imposed on any member (other than the
COMPANY or any Acquired Party) of the consolidated, unitary or combined
group that includes or included the COMPANY or any Acquired Party or (b)
imposed on the COMPANY or any Acquired Party in respect of its income,
business, property or operations or for which the COMPANY or any Acquired
Party may otherwise be liable (1) for any Pre-Closing Period, (2) resulting
by reason of the several liability of the COMPANY or any Acquired Party
under Treasury Regulations section 1.1502-6 or any analogous state, local
or foreign law or regulation or by reason of the COMPANY or any Acquired
Party having been a member of any consolidated, combined or unitary group
on or before the Closing Date, (3) resulting from the COMPANY or any
Acquired Party ceasing to be a member of any affiliated group (within the
meaning of Section 1504(a) of the Code), (4) in respect of any Post-Closing
Period, attributable to events, transactions, sales, deposits, services or
rentals occurring, received or performed in a Pre-Closing Period, (5) in
respect of any Post-Closing Period, attributable to any change in
accounting method employed by the COMPANY or any Acquired Party during any
of the four previous taxable years, (6) in respect of any Post-Closing
Period, attributable to any items of income or gain of an entity treated as
a partnership reported by the COMPANY or any Acquired Party as a partner,
to the extent such items are properly attributable to periods of the
"partnership" ending on or before the Closing Date, or (7) attributable to
any discharge of indebtedness that may result from any capital
contributions by STOCKHOLDERS (or an affiliate of STOCKHOLDERS) to the
COMPANY or any Acquired Party of any intercompany indebtedness owed by the
COMPANY to any STOCKHOLDER (or an affiliate of any STOCKHOLDER).
Notwithstanding the foregoing, the STOCKHOLDERS shall not be obligated
to make indemnity payments pursuant to this Section 11.6(i) to the extent that
Taxes
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imposed on the STOCKHOLDERS for any Pre-Closing Period are increased as a
direct result of a breach of Section 10.4(iv) of this Agreement by HDS or the
COMPANY after the Closing Date.
(ii) From and after the Closing Date, STOCKHOLDERS shall, jointly
and severally, indemnify and save HDS, the COMPANY and any Acquired Party
harmless from any liability imposed on HDS, the COMPANY and any Acquired Party
(or any affiliate of such companies) attributable to any breach of a warranty or
representation made by STOCKHOLDERS in Section 5.22.
(iii) From and after the Closing Date, and except as expressly provided
otherwise in this Section 11.6, HDS and the COMPANY shall indemnify and hold
harmless STOCKHOLDERS with respect to (i) any Taxes imposed on HDS, the COMPANY
or any Acquired Party with respect to any Post-Closing Period, and (ii) any
increase in Taxes imposed on the STOCKHOLDERS for any Pre-Closing Period which
directly results from a breach of Section 10.4(iv) of this Agreement by HDS or
the COMPANY after the Closing Date.
(iv) To the extent any party to this Agreement is entitled to
indemnification from another party under this Section 11.6, such claim for
indemnification shall include the right to recover any losses, damages,
liabilities, expenses and costs related thereto, including reasonable attorney's
and expert witness fees and other costs of investigating or attempting to avoid
the same or oppose the imposition thereof, together with interest thereon at the
reference rate in effect from time to time at Bank of America, NT&SA, or its
successor, compounded quarterly from the date incurred.
(v) Except to the extent expressly provided to the contrary in this
Section 11.6, the general procedures regarding notice and pursuit of
indemnification claims set forth in Sections 11.1 through 11.5 shall apply
to all claims for indemnification made under this Section 11.6.
Notwithstanding the immediately preceding sentence and any provision of
Section 11 to the contrary, if a claim for indemnification involves any
matter covered in this Section 11.6, then the contest provisions of Section
11.7, as applicable, shall control regarding the defense and handling of
any such third-party claim that could give rise to an indemnification
obligation on the part of one party to another. In addition, and
notwithstanding anything else in Section 11 to the contrary, the party with
the right to control a contest has the right to choose counsel of its
choice regarding such contest. Furthermore, there shall be no limit on (a)
the time period during which a claim for indemnification may be made under
this Section 11.6(i) or (b) the minimum or maximum amount of indemnity
payments that may be recovered under this Section 11.6 (other than (1) each
party's obligation to make claims for indemnification promptly and without
undue delay and (2) the aggregate limit for all indemnity payments imposed
on a STOCKHOLDER provided in Section 11.5(iii)).
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(vi) All amounts paid under this Section 11.6 by one party to
another party (other than interest payments) shall be treated by such parties
as an adjustment to the value of the merger consideration provided under this
Agreement.
11.7 Special Contest Rights Related to Tax Matters.
---------------------------------------------
(i) The STOCKHOLDERS shall have the sole right (but not the
obligation) to control, defend, settle, compromise or prosecute in any manner
any audit, examination, investigation, hearing or other proceeding with respect
to any Tax Return of the COMPANY or any Acquired Party involving only Pre-
Closing Periods.
(ii) Except as expressly provided to the contrary in this Section
11.7, HDS shall have the sole right (but not the obligation) to control,
defend, settle, compromise, or prosecute in any manner an audit, examination,
investigation, hearing or other proceeding with respect to any Tax Return of the
COMPANY or any Acquired Party; provided, however, that any liability for Taxes
-------- -------
or Tax issues related to an Interim Period may not be settled or compromised
without the consent of the STOCKHOLDERS, which consent shall not be unreasonably
withheld or delayed. In addition, (i) HDS shall keep the STOCKHOLDERS duly
informed of any proceedings in connection with an Interim Period and (ii) the
STOCKHOLDERS shall be entitled to receive copies of all correspondence and
documents relating to such proceedings and may, at their option, observe such
proceedings (including any associated meetings or conferences).
11.8 Special Notification Requirements Regarding Tax Disputes. HDS and
--------------------------------------------------------
the COMPANY (including any Acquired Party) shall promptly forward to the
STOCKHOLDERS all written notifications and other written communications from any
Tax Authority received by HDS or the COMPANY (including any Acquired Party)
relating to any Pre-Closing Period of the COMPANY (including any Acquired
Party), and HDS and the COMPANY (including any Acquired Party) shall execute or
cause to be executed any power of attorney or other document or take such
actions as requested by the STOCKHOLDERS to enable the STOCKHOLDERS to take any
action STOCKHOLDERS deem appropriate with respect to any proceedings relating
thereto.
11.9 Refunds. A party receiving a refund, credit or similar offset (or the
-------
benefit thereof) with respect to a Tax effectively paid by another party shall
immediately pay an amount equal to such refund, credit, offset or benefit
(including any interest thereon) to the party that effectively paid the Tax with
respect to which the refund, credit, offset or benefit relates. A party
entitled to a deduction on account of a Tax effectively paid by another party
shall pay an amount equal to any Taxes saved by reason of such deduction to the
party that effectively bore the economic cost of the Tax with respect to which
such deduction relates, such amount to be paid immediately after such saving is
realized.
11.10 Optional Payment With Shares. Subject to Section 10.1, any
----------------------------
STOCKHOLDER may make any payment to HDS required by this Section 11 by tendering
shares of HDS Stock obtained by such STOCKHOLDER under Sections 2 and 3 of this
Agreement, with shares so tendered being valued at the closing price per share
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on the trading day before the indemnification obligation is paid. No STOCKHOLDER
will be entitled to make payment with any other shares of HDS Stock.
12. TERMINATION OF AGREEMENT.
12.1 Termination. This Agreement may be terminated at any time before the
-----------
Closing Date solely:
(i) by mutual consent of the boards of directors of HDS and the
COMPANY;
(ii) at or before the Pre-Closing, by STOCKHOLDERS holding a
majority of each class of COMPANY Stock, by the COMPANY, or by HDS, if the Pre-
Closing has not been completed by June 30, 1999, time being of the essence,
unless the failure to complete the Pre-Closing is due to the willful failure of
the party seeking to terminate this Agreement to perform any of its obligations
under this Agreement to the extent required to be performed by it before or on
the Pricing Date;
(iii) at or before the Pre-Closing, by STOCKHOLDERS holding a
majority of each class of COMPANY Stock or by the COMPANY if a material breach
or default shall be made by HDS, or by HDS if a material breach or default shall
be made by one or more STOCKHOLDERS or the COMPANY, in the observance or in the
due and timely performance of any of the covenants, agreements or conditions
contained herein, and such default shall not have been cured and shall not
reasonably be expected to be cured on or before the Pricing Date;
(iv) at or before the Pre-Closing under Section 7.9 hereof;
(v) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Underwriting Agreement is terminated (HDS promptly shall
notify STOCKHOLDERS and COMPANY of any such termination of the Underwriting
Agreement);
(vi) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock if the Minimum
IPO Price (as defined in Annex I) is not attained at the time of the IPO; or
(vii) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Closing Date does not occur within ten (10) days after the
Pricing Date, time being of the essence.
12.2 Liabilities in Event of Termination. In the event of termination
-----------------------------------
of this Agreement as provided in this Section there shall be no liability or
obligation on the part of any party hereto except to the extent that such
liability is based on the breach by a
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party of any of its representations, warranties or covenants set forth in this
Agreement and the termination was not effected under 12.1(i), provided that
there shall be no liability for a breach of representation or warranty if such
representation or warranty was made in good faith and with no reason to know
that it was not true.
13. NONCOMPETITION.
13.1 Prohibited Activities. Nothing in this Section may be deemed to
---------------------
prohibit any STOCKHOLDER from acquiring, as an investment, up to three percent
(3%) of the capital stock of any business whose stock is traded on a national
securities exchange or over the counter. Except as set forth on Schedule 13.1,
the STOCKHOLDERS will not, for a period of four (4) years following the Closing
Date (except that (v) below shall apply to the period ending at the Closing if
this Agreement is not terminated prior to the Closing, and June 30, 1999 if this
Agreement is terminated prior to the Closing), for any reason whatsoever,
directly or indirectly, for themselves or on behalf of or in conjunction with
any other person, persons, company, partnership, corporation or business of
whatever nature :
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales
representative, in any business which designs, constructs or supplies
commercial kitchens or commercial kitchen fixtures or equipment within one
hundred (100) miles of where the COMPANY conducted business before the
effectiveness of the Merger (the "Territory");
(ii) contact or solicit any person who is, at that time, an employee
of HDS (including the subsidiaries thereof) in a managerial capacity for
the purpose or with the intent of enticing such employee away from or out
of the employ of HDS (including the subsidiaries thereof), provided that
--------
any STOCKHOLDER shall be permitted to solicit and hire any member of his or
her immediate family;
(iii) contact any person or entity which is, at that time, or which
has been, within one (1) year before that time, a customer of HDS
(including the subsidiaries thereof), or any affiliate of such a person or
entity, for the purpose of designing, constructing or supplying commercial
kitchens or commercial kitchen fixtures or equipment;
(iv) contact any prospective acquisition candidate, on any
STOCKHOLDER's own behalf or on behalf of any person who, or entity which,
designs, constructs or supplies commercial kitchens or commercial kitchen
fixtures or equipment, for which HDS (or any subsidiary thereof) made an
acquisition analysis, for the purpose of acquiring such entity, provided
--------
that no STOCKHOLDER shall be charged with a violation of this Section
unless and until such STOCKHOLDER shall have knowledge or notice that such
acquisition analysis was made for the purpose of acquiring such entity; or
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(v) engage, directly or indirectly, through any intermediary or
otherwise, in any conversations or negotiations with any Other Company
regarding a possible business combination between or among them; provided
--------
that such prohibition shall not preclude the COMPANY from conducting
business in the ordinary course with any Other Company or from having
business combination discussions with any other party subject to the
provisions in this Agreement.
13.2 Damages. Because of the difficulty of measuring economic losses
-------
to HDS as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to HDS for which it would
have no other adequate remedy, each STOCKHOLDER agrees that the foregoing
covenant may be enforced by HDS, in the event of breach by such STOCKHOLDER, by
injunctions and restraining orders.
13.3 Reasonable Restraint. It is agreed by the parties hereto that the
--------------------
foregoing covenants in this Section 13 impose a reasonable restraint on the
STOCKHOLDERS in light of the activities and business of HDS (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of HDS.
13.4 Severability; Reformation. The covenants in this Section 13 are
-------------------------
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
13.5 Independent Covenant. All of the covenants in this Section 13 shall be
--------------------
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim or cause of action of any STOCKHOLDER against HDS
(including the subsidiaries thereof), whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by HDS of such
covenants. It is specifically agreed that the period of four (4) years stated
at the beginning of this Section 13, during which the agreements and covenants
of each STOCKHOLDER made in this Section 13 shall be effective, shall be
computed by excluding from such computation any time during which such
STOCKHOLDER is in violation of any provision of this Section 13. The covenants
contained in this Section 13 shall not be affected by any breach of any other
provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 Materiality. The COMPANY and the STOCKHOLDERS hereby agree that the
-----------
covenants in this Section 13 are a material and substantial part of this
transaction.
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<PAGE>
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they had
------------
in the past, currently have, and in the future may possibly have, access to
certain confidential information of the COMPANY, the Other Companies and/or HDS,
such as lists of customers, operational policies, and pricing and cost policies,
which is a valuable, special and unique asset of the COMPANY's, the Other
Companies' and/or HDS' respective businesses, and which the COMPANY, the Other
Companies and/or HDS has reasonably endeavored to protect. The STOCKHOLDERS
shall not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except (a) to authorized representatives of HDS, (b) following the Closing, as
required in the course of performing their duties for HDS, and (c) to counsel
and other advisers; provided that such advisers agree to the confidentiality
-------------
provisions of this Section 14.1 or are subject to substantially similar (or more
restrictive) confidentiality rules in their profession; provided, further, that
-----------------
confidential information shall not include (i) such information which becomes
known to the public generally through no fault of the STOCKHOLDERS, (ii)
information required to be disclosed by law or the order of any governmental
authority under color of law; provided that before disclosing any information
-------------
under this clause (ii), the STOCKHOLDERS, if possible, have given prior written
notice thereof to HDS and have given HDS a reasonable opportunity to contest
such disclosure, or (iii) the disclosing party reasonably believes that such
disclosure is required in connection with the defense of a lawsuit against the
COMPANY, the Other Companies and/or HDS. In the event of a breach or threatened
breach by any of the STOCKHOLDERS of the provisions of this section, HDS shall
be entitled to an injunction restraining such STOCKHOLDERS from disclosing, in
whole or in part, such confidential information. Nothing herein shall be
construed as prohibiting HDS from pursuing any other available remedy for such
breach or threatened breach, including the recovery of damages.
14.2 HDS. That certain Nondisclosure and Confidentiality Agreement between
---
Company and HDS dated as of May __, 1998 (the "Nondisclosure Agreement") remains
in full force and effect but will terminate if and when the Closing occurs.
14.3 Damages. Because of the difficulty of measuring economic losses as a
-------
result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may be
enforced against the other parties by injunctions and restraining orders.
14.4 Survival. The obligations of the parties under this Article 14 shall
--------
survive the termination of this Agreement.
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<PAGE>
15. TRANSFER RESTRICTIONS.
15.1 Transfer Restrictions. Except for transfers as set forth in Section
---------------------
15.2 below to persons or entities who agree to be bound by the restrictions set
forth in this Section 15.1, for a period of one year from the Closing Date, none
of the STOCKHOLDERS shall (i) sell, assign, exchange, transfer, encumber,
pledge, distribute, appoint, or otherwise dispose of (a) any shares of HDS Stock
received by the STOCKHOLDERS in the Merger, or (b) any interest (including an
option to buy or sell) in any such shares of HDS Stock, in whole or in part, and
no such attempted transfer shall be treated as effective for any purpose; or
(ii) engage in any transaction, whether or not with respect to any shares of HDS
Stock or any interest therein, the intent or effect of which is to reduce the
risk of owning the shares of HDS Stock acquired under Section 2 hereof
(including engaging in put, call, short-sale, straddle or similar market
transactions). The certificates evidencing the HDS Stock delivered to the
STOCKHOLDERS under Section 3 of this Agreement will bear a legend substantially
in the form set forth below and contain such other information as HDS may deem
necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION
BEFORE THE FIRST ANNIVERSARY OF THE CLOSING DATE. UPON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER
AGENT) AFTER THE DATE SPECIFIED ABOVE.
15.2 Permitted Transferees. Notwithstanding the provisions of Section 15.1,
---------------------
a STOCKHOLDER shall have the right to transfer some or all of the shares of HDS
stock to any one or more of the following, provided that the transferee agrees
to be bound (in a form reasonably satisfactory to HDS and its counsel) by this
Section 15 in any subsequent transfer of such shares: (a) any family member of
a STOCKHOLDER (including any transfer to a custodian under any gift to minors
statute), with family members being defined as any spouse, lineal descendant or
ancestor of a STOCKHOLDER, (b) any trust which is for the benefit of one or more
family members of a STOCKHOLDER and (c) any corporation, partnership, limited
liability company or other entity (x) of which a majority of the interests
therein by value is owned by the STOCKHOLDER and members of the STOCKHOLDER's
family, and (y) which is and continues to be controlled by the STOCKHOLDER and
members of the STOCKHOLDER'S family for the period set forth in Section 15.1.
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<PAGE>
16. FEDERAL SECURITIES ACT REPRESENTATIONS.
The STOCKHOLDERS acknowledge that the shares of HDS Stock to be delivered to
the STOCKHOLDERS under this Agreement have not been registered and will not be
registered under the 1933 Act and therefore may not be resold without compliance
with the 1933 Act. The HDS Stock to be acquired by such STOCKHOLDERS under this
Agreement is being acquired solely for their own respective accounts, for
investment purposes only, and with no present intention of distributing it,
selling it or otherwise disposing of it in connection with a distribution.
16.1 Compliance with Law. The STOCKHOLDERS covenant, warrant and represent
-------------------
that none of the shares of HDS Stock issued to such STOCKHOLDERS will be
offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the rules and regulations of the SEC. All the HDS Stock
shall bear the following legend in addition to the legend required under Section
15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "1933 ACT") AND MAY ONLY BE SOLD OR
OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE 1933 ACT
AND APPLICABLE SECURITIES LAWS.
16.2 Accredited Investors; Economic Risk; Sophistication. Except as
---------------------------------------------------
disclosed in Schedule 16.2, each STOCKHOLDER represents and warrants that such
STOCKHOLDER is an "accredited investor," as that term is defined in Regulation D
promulgated by the SEC under the 1933 Act. Each STOCKHOLDER is able to bear the
economic risk of an investment in the HDS Stock acquired under this Agreement,
can afford to sustain a total loss of such investment, and has such knowledge
and experience in financial and business matters that he or she is capable of
evaluating the merits and risks of the proposed investment in the HDS Stock.
Each STOCKHOLDER, or his or her respective purchaser representative, has
received all information they deemed material and had an adequate opportunity to
ask questions and receive answers from the officers of HDS concerning any and
all matters relating to the transactions described herein including the
background and experience of the current and proposed officers and directors of
HDS, the plans for the operations of the business of HDS, the business,
operations and financial condition of the Founding Companies other than the
COMPANY, and any plans for additional acquisitions.
17. REGISTRATION RIGHTS.
17.1 Piggyback Registration Rights. At any time following one year after
-----------------------------
the Closing Date, whenever HDS proposes to register any HDS Stock for its own or
others' account under the 1933 Act for a public offering, other than (i)
registrations of shares to be used as consideration for acquisitions of
additional businesses by HDS and
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(ii) registrations relating to employee benefit plans, HDS shall give each of
the STOCKHOLDERS prompt written notice of its intent to do so. Upon the written
request of any of the STOCKHOLDERS given within thirty (30) days after receipt
of such notice, HDS shall cause to be included in such registration all of the
HDS Stock issued pursuant to this Agreement which any such STOCKHOLDER requests.
In addition, if HDS is advised in writing in good faith by any managing
underwriter of an underwritten offering of the securities being offered pursuant
to any registration statement under this Section 17.1 that the number of shares
to be sold by persons other than HDS is greater than the number of such shares
which can be offered without adversely affecting the offering, HDS may reduce
the number of shares offered for the accounts of such persons to a number deemed
satisfactory by such managing underwriter; provided that such reduction shall be
-------------
made first by reducing the number of shares to be sold by persons other than
HDS, the stockholders named on Annex III hereto, the stockholders of the
Founding Companies (the "Founding Stockholders"), and any person or persons who
have required such registration pursuant to "demand" registration rights granted
by HDS; thereafter, if a further reduction is required, it shall be made first
by reducing the number of shares to be sold by the stockholders named on Annex
III hereto and the Founding Stockholders, with such further reduction being made
so that to the extent any shares can be sold by stockholders named in Annex III
hereto and the Founding Stockholders, each such stockholder will be permitted to
sell a number of shares proportionate to the number of shares of HDS Stock owned
by such stockholder immediately after the Closing, provided that if any
stockholder does not wish to sell all shares such stockholder is permitted to
sell, the opportunity to sell additional shares shall be reallocated in the same
manner to those stockholders named in Annex III hereto and the Founding
Stockholders who wish to sell more shares until no more shares can be sold by
such stockholders.
17.2 Demand Registration Rights. At any time after the date one year after
--------------------------
the Closing Date, Founding Stockholders holding shares of HDS Stock issued
pursuant to this Agreement and the Other Agreements which shares have (i) not
been previously registered or sold, (ii) which are not entitled to be sold under
Rule 144(k) (or any similar or successor provision) and (iii) which have an
aggregate market value in excess of $5 million (based on the average closing
price on the five days prior to the date of such request) may request in writing
that HDS file a registration statement under the 1933 Act covering such shares
of HDS Stock then held by such Founding Stockholders (a "Demand Registration");
provided that the aggregate value of HDS Stock proposed to be sold under such
registration statement is not less than $5 million (based on the closing market
price of the HDS Stock within five (5) business days of the date of such
request). Within ten (10) days of the receipt of such request, HDS shall give
written notice of such request to all other Founding Stockholders and shall, as
soon as practicable, file and use its best efforts to cause to become effective
a registration statement covering all such shares. HDS will use its best efforts
to keep such Demand Registration current and effective for one hundred twenty
(120) days (or such shorter period during which holders shall have sold all HDS
Stock which they requested to be registered). HDS shall be obligated to effect
only two (2) Demand Registrations for all Founding Stockholders, and
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the second request may not be made until at least one (1) year after the
effective date of the registration statement for the first Demand Registration.
Notwithstanding the foregoing paragraph, following such a demand a
majority of the COMPANY's disinterested directors (i.e., directors who have not
----
demanded or elected to sell shares in any such public offering) may postpone the
filing of the registration statement for a thirty (30) day period beyond the
period provided above.
If at the time of any request by the Founding Stockholders for a Demand
Registration HDS has fixed plans to file within sixty (60) days after such
request a registration statement covering the sale of any of its securities, no
registration of the Founding Stockholders' HDS Stock shall be initiated under
this Section 17.2 until ninety (90) days after the effective date of such
registration unless HDS is no longer proceeding diligently to effect such
registration; provided that HDS shall provide the Founding Stockholders the
--------
right to participate in such public offering pursuant to, and subject to,
Section 17.1 hereof.
17.3 Registration Procedures. All expenses incurred in connection with the
-----------------------
registrations under this Article 17 (including all registration, filing,
qualification, legal, printer and accounting fees, but excluding underwriting
commissions and discounts) shall be borne by HDS. In connection with
registrations under Sections 17.1 and 17.2, HDS shall (i) prepare and file with
the SEC as soon as reasonably practicable, a registration statement with respect
to the HDS Stock and use its best efforts to cause such registration to promptly
become and remain effective for a period of at least one hundred twenty (120)
days (or such shorter period during which holders shall have sold all HDS Stock
which they requested to be registered); (ii) use its best efforts to register
and qualify the HDS Stock covered by such registration statement under
applicable state securities laws as the holders shall reasonably request for the
distribution for the HDS Stock; and (iii) take such other actions as are
reasonable and necessary to comply with the requirements of the 1933 Act and the
regulations thereunder.
17.4 Underwriting Agreement. In connection with each registration pursuant
----------------------
to Sections 17.1 and 17.2 covering an underwritten registered public offering,
HDS and each participating holder agree to enter into a written agreement with
the managing underwriters in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
managing underwriters and companies of HDS's size and investment stature,
including indemnification. In a registration under Section 17.1, the managing
underwriters shall be selected by HDS (or, if required by a "demand"
registration right of a stockholder requiring such registration, by such
requiring stockholder), and in a registration under Section 17.2, may be
selected by the holders of a majority of the shares that have demanded to be
included in such registration pursuant to Section 17.2, provided the managing
underwriters so selected by such majority are reasonably acceptable to HDS.
17.5 HDS Stock. For the purposes of this Section 17, HDS Stock issued
---------
pursuant to this Agreement shall include shares issued as a stock dividend or
stock split,
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or otherwise distributed by HDS to its stockholders without consideration, in
respect of shares of HDS Stock previously issued pursuant to this Agreement.
17.6 Availability of Rule 144. HDS shall not be obligated to register
------------------------
shares of HDS Stock held by any STOCKHOLDER at any time when the resale
provisions of Rule 144(k) (or any similar or successor provision) promulgated
under the 1933 Act are available to such STOCKHOLDER.
17.7 Survival. The provisions of this Section 17 shall survive the Pre-
--------
Closing and Closing Date until December 31, 2002.
18. GENERAL.
18.1 Cooperation. Except as otherwise provided in Section 12, the COMPANY,
-----------
STOCKHOLDERS and HDS shall each (i) attempt in good faith (without being
required to incur unreasonable expense) to cause all conditions to actions to be
taken on the Pricing Date and the Closing Date to be satisfied, and (ii) deliver
or cause to be delivered to the other on the Pricing Date and Closing Date, and
at such other times and places as shall be reasonably agreed to, such additional
instruments, and take such additional actions as can be taken without
unreasonable expense, as any other may reasonably request for the purpose of
carrying out this Agreement. The COMPANY will cooperate and use its reasonable
efforts to have the present officers, directors and employees of the COMPANY
cooperate with HDS on and after the Closing Date in furnishing information,
evidence, testimony and other assistance in connection with any Tax Return
filing obligations, actions, proceedings, arrangements or disputes of any nature
with respect to matters pertaining to all periods before the Closing Date.
18.2 Successors and Assigns. This Agreement and the rights of the parties
----------------------
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
HDS, and the heirs and legal representatives of the STOCKHOLDERS.
18.3 Entire Agreement. This Agreement (including the schedules, exhibits
----------------
and annexes attached hereto), the Nondisclosure Agreement and the documents
delivered pursuant hereto constitute the entire agreement and understanding
among the STOCKHOLDERS, the COMPANY and HDS and supersede any prior agreement
and understanding relating to the subject matter of this Agreement. This
Agreement, upon execution, constitutes a valid and binding agreement of the
parties hereto enforceable in accordance with its terms. Except as otherwise
stated herein, this Agreement and the Annexes hereto may be modified or amended
only by a written instrument executed by the STOCKHOLDERS, the COMPANY and HDS,
acting through their respective officers, duly authorized by their respective
Boards of Directors. Any disclosure made on any Schedule delivered pursuant
hereto shall be deemed to have been disclosed for purposes of any other Schedule
required hereby.
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18.4 Counterparts. This Agreement may be executed simultaneously in two (2)
------------
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
18.5 Brokers and Agents. Except as disclosed on Schedule 18.5, each party
------------------
represents and warrants that it employed no broker or agent in connection with
this transaction, and each party shall indemnify the other against all loss,
cost, damages or expense arising out of claims for fees or commission of brokers
employed or alleged to have been employed by such indemnifying party.
18.6 Expenses. Whether or not the transactions herein contemplated are
--------
consummated, (i) HDS shall pay the fees, expenses and disbursements of HDS and
its agents, representatives, accountants and counsel incurred in connection with
the subject matter of this Agreement and any amendments thereto, including all
costs and expenses incurred in the performance and compliance with all
conditions to be performed by HDS under this Agreement, including the fees and
expenses of Arthur Andersen, LLP, and Howard, Rice, and the costs of preparing
the Registration Statement, and (ii) prior to the Closing, the COMPANY will pay
the fees, expenses and disbursements of counsel and accountants for the
STOCKHOLDERS and the COMPANY incurred in connection with the subject matter of
this Agreement or the Registration Statement. The STOCKHOLDERS shall pay all
sales, use, transfer, real property transfer, recording, gains, stock transfer
and other similar taxes and fees ("Transfer Taxes") incurred in connection with
the transactions contemplated by this Agreement. The STOCKHOLDERS shall file
all necessary documentation and Tax Returns with respect to such Transfer Taxes.
In addition, each STOCKHOLDER acknowledges that he, and not the COMPANY or HDS,
will pay all taxes due upon receipt of the consideration payable to such
STOCKHOLDER under Section 2 hereof.
18.7 Notices. All notices and other communications required or permitted
-------
hereunder shall be effective upon receipt (or refusal of receipt) and shall be
in writing and delivered by depositing the same in United States mail, addressed
to the party to be notified, postage prepaid and registered or certified with
return receipt requested, by delivering the same in person to such party or to
an officer or agent of such party or by facsimile transmission (followed by
delivery by United States mail).
(a) If mailed to HDS addressed to it at:
Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, Chief Executive Officer
Fax: (310) 253-9734
-58-
<PAGE>
with copies to:
Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111-4065
Attn: Raymond P. Haas
Fax: (415) 217-5910
(b) If mailed to the STOCKHOLDERS, addressed to them at their addresses set
forth on Annex II, with copies to such counsel, if any, as is set forth with
respect to each STOCKHOLDER on such Annex II; if mailed to the COMPANY,
addressed to it at its address set forth on Annex II marked "Personal and
Confidential" with copies to the COMPANY's counsel as set forth on Annex II,
provided that notice to the COMPANY shall only be for notices or communications
- --------
required or permitted hereunder before the Effective Time of the Merger; or to
such other address or counsel as any party hereto shall specify under this
Section 18.7 from time to time.
18.8 Governing Law; Forum. This Agreement shall be governed by and
--------------------
construed in accordance with the laws of the State of California, without giving
effect to laws concerning choice of law or conflicts of law. All disputes
arising out of this Agreement or the obligations of the parties hereunder,
including disputes that may arise following termination of this Agreement, shall
be subject to the exclusive jurisdiction and venue of the California State
courts of Orange County, California (or, if there is federal jurisdiction, then
the exclusive jurisdiction and venue of the United States District Court having
jurisdiction over Orange County). Each party hereby irrevocably and
unconditionally consents to the personal and exclusive jurisdiction and venue of
said courts and any objection that it may now or hereafter have to the venue of
any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same. THE PARTIES HERETO EACH HEREBY KNOWINGLY AND VOLUNTARILY WAIVE TRIAL
BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTER-CLAIM, WHETHER IN CONTRACT
OR TORT OR OTHERWISE, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR
ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH.
18.9 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties, covenants and agreements of the parties made herein, or in writing
delivered under the provisions of this Agreement shall survive the consummation
of the transactions contemplated hereby and any examination on behalf of the
parties until the applicable Expiration Date.
18.10 Exercise of Rights and Remedies. Except as otherwise provided herein,
-------------------------------
no delay of or omission in the exercise of any right, power or remedy accruing
to any party as a result of any breach or default by any other party under this
Agreement shall impair any such right, power, or remedy, nor shall it be
construed as a waiver of or acquiescence
-59-
<PAGE>
in any such breach or default, or of any similar breach or default occurring
later; nor shall any waiver of any single breach or default be deemed a waiver
of any other breach or default occurring before or after that waiver.
18.11 Time. Time is of the essence with respect to this Agreement.
----
18.12 Reformation and Severability. In case any provision of this Agreement
----------------------------
shall be invalid, illegal or unenforceable, it shall, to the extent possible, be
modified in such manner as to be valid, legal and enforceable but so as to most
nearly retain the intent of the parties, and if such modification is not
possible, such provision shall be severed from this Agreement, and in either
case the validity, legality and enforceability of the remaining provisions of
this Agreement shall not in any way be affected or impaired thereby.
18.13 Remedies Cumulative. Except as otherwise provided in Section 11, no
-------------------
right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
18.14 Construction. Generally, this Agreement shall be interpreted
according to its plain meaning, consistent with the following principles:
(i) This Agreement has been negotiated among HDS, the COMPANY, the
STOCKHOLDERS and their respective legal counsel, and legal or equitable
principles that might require the construction of this Agreement or any
provision of this Agreement against the party drafting this Agreement shall not
apply in any construction or interpretation of this Agreement.
(ii) Whenever required by the context hereof, the singular shall be deemed
to include the plural, the plural shall be deemed to include the singular, and
the masculine, the feminine and neuter gender shall be deemed to include the
others.
(iii) Whenever applicable, the term "or" shall be interpreted inclusively
(the same meaning as "and/or" in many legal documents) so that, for example, "A,
B or C" shall be interpreted as A or B or C, or any combination of A, B and C.
(iv) Unless a descriptive list of examples is expressly described as
exclusive, the inclusion of any item in such a list shall not be interpreted to
exclude any item not listed, but merely to insure that the listed items are
clearly understood to be included in the category illustrated (so that
"including" shall generally have the same meaning as "including but not limited
to" in many legal documents).
18.15 Captions. The headings of this Agreement are inserted for
--------
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
-60-
<PAGE>
18.16 No Obligation. Nothing in this Agreement shall obligate the COMPANY
-------------
or any STOCKHOLDER to sell or otherwise transfer COMPANY Stock to any
STOCKHOLDER.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
HOSPITALITY DESIGN & SUPPLY, INC.
By /s/ Roger Laverty
---------------------------------
Name: Roger Laverty
Title: Chief Executive Officer
STOCKHOLDERS:
/s/ Ygal Sonenshine
------------------------------------
/s/ Sheila Prell Sonenshine
-------------------------------------
Trustees of the Sonenshine Family Trust
Dated July 9, 1982
/s/ Eric Smith
-------------------------------------
ERIC SMITH
/s/ Steven W. Parker
-------------------------------------
STEVEN W. PARKER
RAYGAL DESIGN ASSOCIATES, INC.
By /s/ Ygal Sonenshine
----------------------------------
Name: Ygal Sonenshine
Title: President
The undersigned acknowledges that he is a beneficial owner of COMPANY stock,
acknowledges that HDS is relying on the following covenant in entering into the
-61-
<PAGE>
Agreement, and agrees to comply with Section 13 of the Agreement as if he were a
STOCKHOLDER.
/s/ Ygal Sonenshine
------------------------------------
YGAL SONENSHINE
-62-
<PAGE>
ANNEX I
CONSIDERATION TO FOUNDING COMPANY STOCKHOLDERS
Part I
A. Aggregate consideration to be paid to STOCKHOLDERS at the Effective Time
of the Merger:
1. COMPANY Stock will be converted into 116,667 shares of common stock
of HDS and $12,600,000 in cash.
2. The STOCKHOLDERS and the COMPANY will not be obligated to
consummate the Merger if the initial public offering price per
share when the Registration Statement goes effective (the
"Effective IPO Price") is less than $10 per share (the "Minimum IPO
Price").
3. The amount of cash paid to STOCKHOLDERS will be offset and reduced
by the amount of any receivables from STOCKHOLDERS as of the
Effective Time.
-63-
<PAGE>
B. Consideration to be paid to each STOCKHOLDER at the Effective Time of the
Merger:
<TABLE>
<CAPTION>
STOCKHOLDER Shares of Common Cash Before Percentage Allocation
Stock of HDS Offsets & of Any Offsets and
Reductions/1/ Reductions/2/
<S> <C> <C> <C>
The Sonenshine Family 93,683 $10,117,800 80.3%
Trust dated July 9, 1982
Eric Smith 9,217 995,400 7.9%
Steven W. Parker 13,767 1,486,800 11.8%
------- ----------- ------
TOTALS: 116,667 $12,600,000 100%
</TABLE>
- ------------------------------
/1/ For purposes of Section 11.5(i) and 11.5(iii) of the Agreement, the term
"Cash Consideration" means, as to each STOCKHOLDER, the Cash Before Offsets and
Reductions shown for such STOCKHOLDER in this column.
/2/ Excluding offsets and reductions pursuant to Part I, paragraph A.3. of
this Annex I .
-64-
<PAGE>
EXHIBIT 2.2
AGREEMENT AND PLAN OF REORGANIZATION
Dated as of February 27, 1999
by and among
HOSPITALITY DESIGN & SUPPLY, INC.
EAST BAY RESTAURANT SUPPLY, INC.
and
The STOCKHOLDERS named herein
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. STOCK PURCHASE AND SALE............................................ 1
1.1 Sale of COMPANY Stock........................................ 1
1.2 Purchase Price............................................... 1
1.3 Other Companies.............................................. 2
2. DELIVERY OF STOCK.................................................. 2
2.1 Delivery of HDS Stock........................................ 2
3. BOARD OF DIRECTORS AND OFFICERS.................................... 2
3.1 Resignations................................................. 2
3.2 Officers..................................................... 2
4. PRE-CLOSING AND CLOSING............................................ 3
4.1 Pre-Closing.................................................. 3
4.2 Closing...................................................... 3
4.3 No Assurances................................................ 3
5. RREPRESENTATIONS AND WARRANTIES OF COMPANY AND
STOCKHOLDERS....................................................... 4
(A) Representations and Warranties of COMPANY and
STOCKHOLDERS....................................................... 4
5.1 Due Organization............................................. 4
5.2 Authority and Validity....................................... 4
5.3 Capital Stock of the COMPANY................................. 5
5.4 Transactions in Capital Stock................................ 5
5.5 No Bonus Shares.............................................. 5
5.6 Subsidiaries................................................. 5
5.7 Predecessor Status; etc...................................... 6
5.8 Spin-off by the COMPANY...................................... 6
5.9 Financial Statements......................................... 6
5.10 Liabilities and Obligations.................................. 6
5.11 Accounts and Notes Receivable................................ 7
5.12 Permits and Intangibles...................................... 7
5.13 Environmental Matters........................................ 8
5.14 Real and Personal Property................................... 9
5.15 Significant Customers; Material Contracts and Commitments.... 9
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
5.16 Title to Real Property....................................... 10
5.17 Insurance.................................................... 10
5.18 Compensation; Employment Agreements.......................... 11
5.19 Employee Plans............................................... 11
5.20 Compliance with ERISA........................................ 12
5.21 Conformity with Law.......................................... 14
5.22 Taxes........................................................ 15
5.23 No Violations................................................ 17
5.24 Government Contracts......................................... 17
5.25 Absence of Changes........................................... 17
5.26 Deposit Accounts; Powers of Attorney......................... 19
5.27 Relations with Governments................................... 19
(B) Representations and Warranties of STOCKHOLDERS...................... 19
5.28 Authority; Validity; Ownership............................... 19
5.29 Preemptive Rights............................................ 20
5.30 Intentionally omitted........................................ 20
6. REPRESENTATIONS OF HDS.............................................. 20
6.1 Due Organization............................................. 20
6.2 HDS Stock.................................................... 20
6.3 Authority and Validity....................................... 21
6.4 Capital Stock of HDS......................................... 21
6.5 No Side Agreements........................................... 22
6.6 Subsidiaries................................................. 22
6.7 Business; Financial Information............................... 22
6.8 Conformity with Law.......................................... 22
6.9 No Violations................................................ 23
6.10 Intentionally omitted........................................ 23
6.11 Disclosure................................................... 23
6.12 Compensation; Employment Agreements.......................... 23
6.13 Employee Plans............................................... 23
6.14 Absence of Changes........................................... 24
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
7. COVENANTS PRIOR TO CLOSING ......................................... 25
7.1 Access and Cooperation; Due Diligence........................ 25
7.2 Conduct of Business Pending Closing.......................... 26
7.3 Prohibited Activities........................................ 27
7.4 No Shop...................................................... 28
7.5 Notice to Bargaining Agents.................................. 28
7.6 Termination of Plans......................................... 28
7.7 HDS Prohibited Activities.................................... 28
7.8 Notification of Certain Matters.............................. 29
7.9 Amendment of Schedules....................................... 30
7.10 Cooperation in Preparation of Registration Statement......... 31
7.11 Examination of Final Financial Statements.................... 31
7.12 Maintenance of Liquidity and Limitation of Debt.............. 31
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF
STOCKHOLDERS AND COMPANY............................................ 32
8.1 Representations and Warranties; Performance of Obligations... 32
8.2 Satisfaction................................................. 32
8.3 No Litigation................................................ 33
8.4 Stockholders' Release........................................ 33
8.5 Opinion of Counsel........................................... 33
8.6 Director Indemnification..................................... 33
8.7 Registration Statement....................................... 33
8.8 Consents and Approvals....................................... 33
8.9 Good Standing Certificates................................... 33
8.10 No Waivers................................................... 34
8.11 No Material Adverse Change................................... 34
8.12 Employment Agreements........................................ 34
8.13 Consulting Agreements........................................ 34
8.14 Leases....................................................... 34
8.15 IPO Closing.................................................. 34
</TABLE>
-iii-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.......................... 34
9.1 Representations and Warranties; Performance of Obligations.... 34
9.2 No Litigation................................................. 35
9.3 Financial Statements.......................................... 35
9.4 No Material Adverse Effect.................................... 35
9.5 STOCKHOLDERS' Release......................................... 35
9.6 Satisfaction.................................................. 35
9.7 Termination of Related Party Agreements....................... 35
9.8 Opinion of COMPANY Counsel.................................... 35
9.9 Consents and Approvals........................................ 36
9.10 Good Standing Certificates................................... 36
9.11 Registration Statement....................................... 36
9.12 Employment Agreements........................................ 36
9.13 Consulting Agreements........................................ 36
9.14 Leases....................................................... 36
9.15 Repayment of Indebtedness.................................... 36
9.16 FIRPTA Certificate........................................... 36
9.17 Insurance.................................................... 37
9.18 Nondisturbance Agreements.................................... 37
9.19 IPO Closing.................................................. 37
10. CLOSING COVENANTS AND SPECIAL TAX MATTERS........................... 37
10.1 Intentionally omitted........................................ 37
10.2 Disclosure................................................... 37
10.3 Cooperation in Tax Return Preparation........................ 37
10.4 Tax Return Preparation and Filing............................ 38
10.5 Tax Treatment of Transaction................................. 39
10.6 Special Definitions Related to Tax Matters................... 39
10.7 Directors.................................................... 39
10.8 Release from Guarantees...................................... 40
10.9 HDS Stock Options............................................ 40
</TABLE>
-iv-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
11. INDEMNIFICATION..................................................... 40
11.1 General Indemnification by the STOCKHOLDERS.................. 40
11.2 Indemnification by HDS....................................... 41
11.3 Third Person Claims.......................................... 41
11.4 Exclusive Remedy............................................. 43
11.5 Limitations on Indemnification............................... 43
11.6 Special Tax Indemnity Provisions............................. 44
11.7 Special Contest Rights Related to Tax Matters................ 46
11.8 Special Notification Requirements Regarding Tax Disputes..... 47
11.9 Refunds...................................................... 47
11.10 Optional Payment With Shares................................. 47
12. TERMINATION OF AGREEMENT............................................ 47
12.1 Termination.................................................. 47
12.2 Liabilities in Event of Termination.......................... 48
13. NONCOMPETITION...................................................... 48
13.1 Prohibited Activities........................................ 48
13.2 Damages...................................................... 49
13.3 Reasonable Restraint......................................... 50
13.4 Severability; Reformation.................................... 50
13.5 Independent Covenant......................................... 50
13.6 Materiality.................................................. 50
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION........................... 51
14.1 STOCKHOLDERS................................................. 51
14.2 HDS.......................................................... 51
14.3 Damages...................................................... 52
14.4 Survival..................................................... 52
15. TRANSFER RESTRICTIONS............................................... 52
15.1 Transfer Restrictions........................................ 52
15.2 Permitted Transferees........................................ 53
16. FEDERAL SECURITIES ACT REPRESENTATIONS.............................. 53
16.1 Compliance with Law.......................................... 53
</TABLE>
-v-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
16.2 Accredited Investors; Economic Risk; Sophistication.......... 53
17. REGISTRATION RIGHTS................................................. 54
17.1 Piggyback Registration Rights................................ 54
17.2 Demand Registration Rights................................... 55
17.3 Registration Procedures...................................... 56
17.4 Underwriting Agreement....................................... 56
17.5 HDS Stock.................................................... 56
17.6 Availability of Rule 144..................................... 56
17.7 Survival..................................................... 56
18. GENERAL............................................................. 56
18.1 Cooperation.................................................. 56
18.2 Successors and Assigns....................................... 57
18.3 Entire Agreement............................................. 57
18.4 Counterparts................................................. 57
18.5 Brokers and Agents........................................... 57
18.6 Expenses..................................................... 57
18.7 Notices...................................................... 58
18.8 Governing Law; Forum......................................... 59
18.9 Survival of Representations and Warranties................... 59
18.10 Exercise of Rights and Remedies.............................. 59
18.11 Time......................................................... 59
18.12 Reformation and Severability................................. 59
18.13 Construction................................................. 59
18.14 Captions..................................................... 60
18.15 Third-Party Beneficiaries.................................... 60
</TABLE>
-vi-
<PAGE>
SCHEDULES and ANNEXES
<TABLE>
<S> <C>
Annex I - Consideration to Founding Company Stockholders
Annex II - Stockholders and Stock Ownership of the COMPANY
Annex III - Stockholders and Stock Ownership of HDS
Annex IV - Certificate of Incorporation and Bylaws of HDS
Annex V - Form of Opinion of Howard, Rice, Nemerovski, Canady, Falk
& Rabkin, A Professional Corporation
Annex VI - Form of Opinion of COMPANY Counsel
Annex VII - Form of Director Indemnification Agreement
Annex VIII - Form of Employment Agreement
Annex IX - Form of Consulting Agreement
Annex X - Leases
Annex XI - Stockholder Release
Annex XII - Form of Nondisturbance Agreement
Schedule 5.1 - Qualifications to Do Business
Schedule 5.3 - Capital Stock of the COMPANY
Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to Acquire
Capital Stock
Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses
Schedule 5.6 - Subsidiaries
Schedule 5.7 - Names of Predecessor Companies
Schedule 5.8 - Sales or Spin-offs of Significant Assets
Schedule 5.9 - Financial Statements
Schedule 5.10 - Significant Liabilities and Obligations
Schedule 5.11 - Accounts and Notes Receivable
Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental
Authorizations
Schedule 5.13 - Environmental Matters
Schedule 5.14 - Real Property, Leases and Significant Personal Property
Schedule 5.14A - Personal Items
Schedule 5.15 - Significant Customers and Material Contracts
Schedule 5.17 - Insurance Policies and Claims
Schedule 5.18 - Officers, Directors and Key Employees, Employment
Agreements; Compensation
Schedule 5.19 - Employee Benefit Plans
Schedule 5.20 - Compliance with ERISA
Schedule 5.21 - Violations of Law, Regulations or Orders
Schedule 5.22 - Taxes
Schedule 5.23 - Violations of Charter Documents and Material Defaults
Schedule 5.24 - Governmental Contracts Subject to Price Redetermination or Renegotiation
Schedule 5.25 - Changes Since Balance Sheet Date
Schedule 5.26 - Bank Accounts; Powers of Attorney
Schedule 5.28 - Encumbrances on the COMPANY Stock
</TABLE>
-vii-
<PAGE>
<TABLE>
<S> <C>
Schedule 6.5 - HDS Side Agreements
Schedule 6.6 - HDS's Subsidiaries
Schedule 6.7 - HDS's Financial Statements
Schedule 6.9 - No Violations
Schedule 6.12 - Officers, Directors and Key Employees; Compensation
Schedule 6.13 - Employee Plans
Schedule 6.14 - Changes
Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course
between Balance Sheet Date and Closing Date
Schedule 7.3 - Prohibited Activities
Schedule 7.6 - Plans to be Terminated by the Pricing Date
Schedule 7.7 - Exceptions to Restrictions on HDS
Schedule 8.12 - Employment Agreements
Schedule 8.13 - Consulting Agreements
Schedule 8.14 - Leases
Schedule 9.7 - Termination of Related Party Agreements
Schedule 9.18 - Lienholders and Ground Lessors
Schedule 10.9 - HDS Stock Options
Schedule 13.1 - Prohibited Activities
Schedule 16.2 - Non-Accredited Investors
Schedule 18.5 - Brokers and Agents
Schedule 18.6 - Estimated Fees
</TABLE>
-viii-
<PAGE>
TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
Defined Term Section
- ------------ -------
<S> <C>
accredited investor 16.2
adjusted working capital 7.12
Affiliate 10.6(a)
Agreement Preamble
Balance Sheet Date 5.9
Cash Consideration Annex I
Charter Documents 5.1
Closing 4.2
Closing Date 4.2
COBRA 5.20(v)
Code Whereas
COMPANY Preamble
COMPANY Affiliates 5.8
COMPANY Financial Statements 5.9
COMPANY Stock Whereas
Consulting Agreement 8.13
controlled group 5.20
Defined Benefit Plan 5.19(iv)
Demand Registration 17.2
Effective IPO Price Annex I
Election Period 11.3(i)
Employment Agreement 8.12
Environmental Laws 5.13
ERISA 5.19
Expiration Date 5(A)
Founding Companies Whereas
Founding Stockholders 17.1
group health plans 5.20(v)
HDS Preamble
HDS Charter Documents 6.1
HDS Material Adverse Effect 6.1
HDS Material Documents 6.9
HDS Stock 1.2
HDS's Subsidiaries 6.1
Howard Rice 4.1
Indemnification Threshold 11.5(i)
Indemnified Party 11.3
Indemnifying Party 11.3
Interim Period 10.6(b)
IPO 4.1
Leases 8.14
</TABLE>
-ix-
<PAGE>
<TABLE>
DEFINED TERM SECTION
- ------------ -------
<S> <C>
Material Adverse Effect 5.1
Material Contracts 5.15
Material Leases 5.14
Minimum IPO Price Annex I
Net Tax Benefit 11.6 (iii)
multi-employer pension plan 5.20
1933 Act 5(A)
1934 Act 5(A)
Nondisturbance Agreements 9.18
Other Agreements Whereas
Other Companies Whereas
PBGC 5.19(x)
Plans 5.19
Post-Closing Period 10.6(d)
Pre-Closing 4.1
Pre-Closing Period 10.6(c)
Pricing Date 4.1
Purchase Price Annex I
Recharacterization 11.6(iii)
Qualified Plans 5.19(iii)
Registration Statement 4.3
reportable events 5.20(iii)
SEC 8.2
September 30, 1998 COMPANY Balance Sheet 5.9
significant customers 5.15
Stockholder Release 9.5
STOCKHOLDER Guarantee 10.8
STOCKHOLDERS Preamble
Tax 10.6(e)
Tax Data 10.3
Tax Documentation 10.3
Tax Returns 10.6(f)
Taxing Authority 10.6(g)
Territory 13.1(i)
Third Party Claim 11.3(i)
Third Person 11.3
to the knowledge of the COMPANY 5.9
to the knowledge of HDS 6.4
Transfer Taxes 17.6
Underwriters 4.3
Underwriting Agreement 8.7
</TABLE>
-x-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of February 27, 1999, by and among HOSPITALITY DESIGN & SUPPLY, INC., a Delaware
corporation ("HDS"), EAST BAY RESTAURANT SUPPLY, INC., a California corporation
(the "COMPANY"), and the stockholders of the COMPANY listed on Annex II (the
"STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the COMPANY.
WHEREAS, the STOCKHOLDERS own 4,500 shares of Class A Common Stock of
the COMPANY ("COMPANY Stock") representing all of the outstanding stock of the
COMPANY, and the STOCKHOLDERS wish to sell to HDS, and HDS wishes to purchase
from the STOCKHOLDERS, such shares;
WHEREAS, HDS is entering into other separate agreements (the "Other
Agreements") substantially similar to this Agreement, each of which is entitled
"Agreement and Plan of Reorganization," with each of the entities other than the
Company listed in Part II of Annex I (collectively, the "Other Companies") in
order to acquire additional companies in the commercial kitchen design and/or
supply industry (the Other Companies, together with the COMPANY, are
collectively referred to herein as the "Founding Companies"); and
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. STOCK PURCHASE AND SALE.
1.1 Sale of COMPANY Stock. On and subject to the terms and conditions of
---------------------
this Agreement, STOCKHOLDERS will sell, assign and transfer to HDS on the
Closing Date the COMPANY Stock, free and clear of any liens or encumbrances or
of any rights or claims of others, and HDS will purchase the COMPANY Stock and
will pay as consideration therefore the purchase price in accordance with the
terms of this Agreement and on the dates as provided in this Section 1.
1.2 Purchase Price. The purchase price payable to each respective
--------------
STOCKHOLDER for the COMPANY Stock being sold by him or her shall be (1) that
number of shares of common stock of HDS ("HDS Stock"), and (2) the amount of
cash, as set forth opposite each STOCKHOLDERS' name in Part I of Annex I hereto,
such shares and cash to be subject to offsets and distributed to STOCKHOLDERS as
provided in Part I of Annex I hereto.
In addition, on the 90th day after the Closing Date, as defined in
Section 4.2 (on the first business day after such 90th day if such 90th day is
not a business day), HDS shall pay to certain of the STOCKHOLDERS as additional
consideration for their stock
1
<PAGE>
an amount equal to the excess of (x) net income from operations after income and
franchise taxes of the COMPANY for the period beginning October 1, 1998 and
ending on the day before the Closing Date with respect to such net income, over
(y) any distributions in respect of COMPANY Stock during such period other than
those set forth on Schedule 5.14A, all determined in accordance with generally
accepted accounting principles in a manner consistent with the COMPANY Financial
Statements. One-third of such amount shall be paid to John Breznikar, one-third
to Rodney and Mary Rossi and one-third to Louis Breznikar. If HDS and such
STOCKHOLDERS do not agree on the amount to be so paid, such amount shall be
conclusively determined by Arthur Andersen, LLP, and the STOCKHOLDERS and HDS
each will bear one-half of the fees of Arthur Andersen, LLP, for making such
determination.
As of the Closing Date, HDS shall have no class of capital stock issued
and outstanding which, as a class, shall have any rights or preferences senior
to the shares of HDS Stock received by the STOCKHOLDERS, including, without
limitation, any rights or preferences as to dividends or as to the assets of HDS
upon liquidation or dissolution or as to voting rights, except for any series of
Preferred Stock that will be converted into HDS Stock on the Closing Date.
1.3 Other Companies. Part II to Annex I sets forth the aggregate
---------------
consideration into which shares of outstanding stock of each Founding Company
will be converted on the Closing Date, or, if applicable, payable with respect
to such shares of outstanding stock on the Closing Date, before offsets.
2. DELIVERY OF STOCK.
2.1 Delivery of HDS Stock. The STOCKHOLDERS shall deliver to HDS at Pre-
---------------------
Closing (as defined below in Section 4.1) the certificates representing COMPANY
Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by blank stock
powers, and with all necessary transfer tax and other revenue stamps, acquired
at the STOCKHOLDERS' expense, affixed and cancelled. The STOCKHOLDERS agree
promptly to cure any deficiencies with respect to the endorsement of the
certificates or other documents of conveyance with respect to such COMPANY Stock
or with respect to the stock powers accompanying any COMPANY Stock.
3. BOARD OF DIRECTORS AND OFFICERS.
3.1 Resignations. At Pre-Closing, the COMPANY shall deliver to HDS
------------
resignations effective upon the Closing Date from the Board of Directors of the
COMPANY of all directors, except that John Breznikar shall not so resign.
3.2 Officers. At the Pre-Closing, the COMPANY shall deliver to HDS
--------
resignations effective upon the Closing Date from all officers of the COMPANY,
except that John Breznikar shall not so resign from his office as President of
the COMPANY.
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4. PRE-CLOSING AND CLOSING.
4.1 Pre-Closing. On the date (the "Pricing Date") on which the public
-----------
offering price of the shares of HDS Stock in the initial public offering of HDS
Stock (the "IPO") is determined, the parties shall deliver to Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, A Professional Corporation ("Howard Rice")
all documents necessary to effect (i) the delivery of the COMPANY Stock to HDS,
(ii) the delivery of shares of HDS Stock to STOCKHOLDERS (such delivery to
Howard, Rice is herein referred to as the "Pre-Closing"); provided, that the
actual purchase and sale of shares of COMPANY Stock and delivery of shares of
HDS Stock shall not take place until the Closing Date as herein provided. The
Pre-Closing shall take place at the offices of Howard, Rice at 3 Embarcadero
Center, 7th Floor, San Francisco, California 94111.
4.2 Closing. On the date when the closing with respect to the IPO occurs
-------
(the "Closing Date"), the purchase and sale of the COMPANY Stock as provided
herein shall be completed, and the delivery of shares of HDS Stock, and the
transfer of funds by wire transfer in an amount equal to the cash portion of the
consideration which the STOCKHOLDERS shall be entitled to receive, shall occur
and be deemed to be completed (such consummation and delivery is herein referred
to as the "Closing"). After the Pre-Closing and until the Closing Date, no party
may withdraw, terminate or rescind any delivery made at the Pre-Closing unless
this Agreement is terminated as provided in Section 12. All documents delivered
at the Pre-Closing shall be held by Howard Rice for final delivery on the
Closing Date as directed by the parties and their counsel at the Pre-Closing.
Should the Agreement be terminated as provided in Section 12 prior to the
Closing Date, Howard Rice shall return all documents delivered at the Pre-
Closing to the parties who delivered the same and all such deliveries at the
Pre-Closing will be rescinded and a nullity.
4.3 No Assurances. The COMPANY and the STOCKHOLDERS acknowledge and
-------------
agree that (i) there exists no firm commitment, binding agreement, or promise or
other assurance of any kind, whether express or implied, oral or written, that
any Registration Statement filed in connection with the IPO (the "Registration
Statement") will become effective or that the IPO pursuant thereto will occur at
a particular price or within a particular range of prices or will occur at all;
(ii) none of HDS its respective officers, directors, agents or representatives
nor any prospective underwriters in the IPO (the "Underwriters") shall have any
liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or
associated with the COMPANY for any failure of the Registration Statement to
become effective, or of the IPO to occur at a particular price or within a
particular range of prices or to occur at all; and (iii) the decision of the
STOCKHOLDERS to enter into this Agreement, has been made independent of, and
without reliance upon, any statements, opinions or other communications of, or
due diligence investigations which have been or will be made or performed by any
prospective Underwriter, relative to HDS or the prospective IPO. The
Underwriters shall have no obligation to the STOCKHOLDERS with respect to any
disclosure contained in the Registration Statement, except as may be otherwise
provided in the Underwriting Agreement, a copy of which will be provided to the
COMPANY.
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5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND
STOCKHOLDERS.
(A) Representations and Warranties of COMPANY and STOCKHOLDERS. The
----------------------------------------------------------
COMPANY and each of the STOCKHOLDERS jointly and severally represent and warrant
that all of the following representations and warranties in this Section 5(A)
are true at the date of this Agreement and, subject to Section 7.9 hereof, shall
be true at the time of Pre-Closing and the Closing Date, and that such
representations and warranties shall survive the Closing Date for a period of
two (2) years (the last day of such period is herein called the "Expiration
Date"), except that (i) the warranties and representations set forth in Sections
5.13, 5.19 and 5.20 hereof shall survive until such date as the limitations
period has run for each act, inaction, fact, event or circumstance which
constitutes a breach thereof, which date shall be deemed to be the Expiration
Date for Sections 5.13, 5.19 and 5.20, (ii) the warranties and representations
set forth in Section 5.22 hereof shall survive until such date as the
limitations period has run for all tax periods ended on or prior to the Closing
Date, which date shall be deemed to be the Expiration Date for Section 5.22, and
(iii) solely for purposes of Section 11.1(iv) hereof, all warranties and
representations shall survive until such date as the limitations period has run
under the Securities Act of 1933, as amended (the "1933 Act"), the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and all other applicable
Federal or state securities laws, which date shall be deemed to be the
Expiration Date for purposes of Section 11.1(iv) hereof.
5.1 Due Organization. The COMPANY is a corporation duly organized,
----------------
validly existing and in good standing under the laws of the state of its
incorporation, and is duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on its business in the places and in the manner as now conducted except
(i) as disclosed on Schedule 5.1 or (ii) where the cumulative effect of all
failures to be so authorized or qualified would not have a material adverse
effect on the business, operations, properties, assets or condition (financial
or otherwise), of the COMPANY (a "Material Adverse Effect"). Schedule 5.1
contains a list of all jurisdictions in which the COMPANY is authorized or
qualified to do business. True, complete and correct copies of the Certificate
(or Articles) of Incorporation and Bylaws, as amended, of the COMPANY
(collectively, the "Charter Documents"), certified by the Secretary or Assistant
Secretary of the COMPANY, are all attached hereto as part of Schedule 5.1. A
true, complete and correct copy of the Certificate (or Articles) of
Incorporation, as amended, included in the Charter Documents, certified by the
Secretary of State or other appropriate authority of the state of incorporation
of the COMPANY, as applicable, shall be delivered to HDS at the Pre-Closing.
Except as set forth on Schedule 5.1, the minute books of the COMPANY, as
heretofore made available to HDS, are correct and complete in all material
respects.
5.2 Authority and Validity. The representatives of the COMPANY
----------------------
executing this Agreement have the authority to enter into and bind the COMPANY
to the terms of this Agreement and any other agreements contemplated by this
Agreement to which the COMPANY is or is contemplated to be a party. The COMPANY
has the full legal right,
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power and authority to enter into this Agreement, any other agreements
contemplated by this Agreement, to which the COMPANY is or is contemplated to be
a party. All corporate action necessary for the authorization, execution,
delivery and performance by the COMPANY of the Agreement, and also any other
agreements contemplated by this Agreement to which the COMPANY is or is
contemplated to be a party, has been taken. Assuming due authorization,
execution and delivery by HDS, this Agreement and any other agreements
contemplated by this Agreement to which the COMPANY is or is contemplated to be
a party are or will be legal, valid and binding obligations of the COMPANY,
enforceable in accordance with their respective terms, except as may be limited
by applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally.
5.3 Capital Stock of the COMPANY. The authorized capital stock of the
----------------------------
COMPANY is as set forth in Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS and in
the amounts set forth in Annex II and further, except as set forth on Schedule
5.3, are owned free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of the COMPANY have
been duly authorized and validly issued, are fully paid and nonassessable, are
owned of record and beneficially by the STOCKHOLDERS and further, such shares
were offered, issued, sold and delivered by the COMPANY in compliance with all
applicable state and federal laws concerning the issuance of securities.
Further, none of such shares were issued in violation of the preemptive rights
of any past or present stockholder.
5.4 Transactions in Capital Stock. Except as set forth on Schedule 5.4,
-----------------------------
the COMPANY has not acquired any COMPANY Stock since January 1, 1993. Except as
set forth on Schedule 5.4, no option, warrant, call, conversion right or
commitment of any kind exists which obligates the COMPANY to issue any
authorized but unissued capital stock. Except as set forth on Schedule 5.4, the
COMPANY has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof. Except as set
forth on Schedule 5.4, there has been no transaction or action taken with
respect to the equity ownership of the COMPANY, in contemplation of the
transactions described in this Agreement.
5.5 No Bonus Shares. Except as set forth in Schedule 5.5, since January 1
---------------
1995 none of the shares of COMPANY Stock was issued for less than the fair
market value thereof at the time of issuance or was issued in exchange for
consideration other than cash.
5.6 Subsidiaries. Except as set forth in Schedule 5.6, the COMPANY does
------------
not presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity nor is
the COMPANY, directly or indirectly, a participant in any joint venture,
partnership or other non-corporate entity.
5
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5.7 Predecessor Status; etc. Set forth in Schedule 5.7 is a listing
-----------------------
of all names under which the COMPANY has done business during the last five
years and all names under which all predecessor companies of the COMPANY,
including any entities from whom the COMPANY previously acquired material
assets, have done business during the last three years. Except as disclosed in
Schedule 5.7, the COMPANY has not been a subsidiary or division of another
corporation or a part of an acquisition which was later rescinded.
5.8 Spin-off by the COMPANY. Except as set forth on Schedule 5.8,
-----------------------
there has not been any sale, spin-off or split-up of any material assets of the
COMPANY or any other person or entity that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the COMPANY ("COMPANY Affiliates") other than in the ordinary
course of business, within the preceding two years.
5.9 Financial Statements. Attached hereto as Schedule 5.9 to this
--------------------
Agreement are copies of the following financial statements (the "COMPANY
Financial Statements") of the COMPANY: (i) the COMPANY's balance sheet as of
September 30, 1998 and statements of income, cash flows and retained earnings
for the twelve month period ended September 30, 1998 (such Balance Sheet as of
September 30, 1998 is herein sometimes referred to as the "September 30, 1998
COMPANY Balance Sheet," and September 30, 1998 is herein sometimes referred to
as the "Balance Sheet Date") and (ii) the COMPANY's balance sheets as of
September 30, 1997 and 1996 and statements of income, cash flows and retained
earnings for each of the years in the two-year period ended September 30, 1997.
To the knowledge of the COMPANY, such Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated (except as noted). Such balance sheets as
of September 30, 1998, 1997, and 1996 present fairly the financial position of
the COMPANY as of the dates indicated thereon, and such Statements of Income,
Cash Flows and Retained Earnings present fairly the results of their respective
operations for the periods indicated thereon. (For purposes of this Agreement,
"to the knowledge of the COMPANY" and similar phrases mean to the actual present
knowledge of one or more of John Breznikar, Rodney Rossi and Louis Breznikar.)
5.10 Liabilities and Obligations. Schedule 5.10 is an accurate list with
---------------------------
respect to the COMPANY of all liabilities as of a date specified therein, which
date shall not be more than thirty (30) days prior to the date of this
Agreement. Schedule 5.10 shall be amended or supplemented pursuant to Section
7.9 to list (i) all liabilities which were incurred after such date and were
incurred other than in the ordinary course of business or which exceed $10,000
if (and only if) such liabilities in each such case would either be accrued on
the balance sheet of the COMPANY in accordance with generally accepted
6
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accounting principles consistently applied if such balance sheet were being
prepared immediately prior to Closing or represent liabilities of the nature
described in Section 5.13, Section 5.19, Section 5.20 and/or Section 5.22
(excluding items that would otherwise not need to be disclosed in Schedule 5.13,
Schedule 5.19, Schedule 5.20 and/or Schedule 5.22 because of qualifiers in
Sections 5.13, 5.19, 5.20 and/or 5.22, respectively, related to knowledge,
materiality, Material Adverse Effect or dollar amounts); and (ii) all
liabilities which were incurred after such date and were incurred other than in
the ordinary course of business or which exceed $100,000 (in the aggregate) and
are not otherwise described in the immediately preceding subclause (i).
Any reference to "all liabilities" in this Section 5.10 shall mean, in
each such instance, all liabilities of the COMPANY of any kind, character or
description, whether accrued, absolute, secured or unsecured, contingent or
otherwise. In the case of those liabilities which are contingent, Schedule 5.10
includes, and each amendment or supplement pursuant to Section 7.9 will include,
a reasonable estimate of the maximum amount which may be payable. For each such
contingent liability, the COMPANY has provided (or in the case of contingent
liabilities listed in an amendment or supplement pursuant to Section 7.9, will
provide) to HDS the following information:
(a) a summary description of the liability together with the following:
(1) copies of all relevant documentation relating thereto;
(2) amounts claimed and any other action or relief sought; and
(3) name of claimant and all other parties to the claim, suit or
proceeding;
(b) the name of each court or agency before which such claim, suit or
proceeding is pending; and
(c) the date such claim, suit or proceeding was instituted.
5.11 Accounts and Notes Receivable. Attached as Schedule 5.11 to this
-----------------------------
Agreement is an accurate list of the accounts and notes receivable of the
COMPANY as of the Balance Sheet Date, including any such amounts which are not
reflected in the September 30, 1998 COMPANY Balance Sheet, and including
receivables from and advances to employees and the STOCKHOLDERS. Except to the
extent reflected on Schedule 5.11, such accounts and notes are collectible in
the amount to be shown in the September 30, 1998 COMPANY Balance Sheet, net of
reserves reflected therein.
5.12 Permits and Intangibles. The COMPANY holds all licenses, franchises,
-----------------------
permits and other governmental authorizations including permits, titles
(including motor vehicle titles and current registrations), licenses,
franchises, certificates, trademarks, trade names, patents, patent applications
and copyrights, the absence of which, either singly or in the aggregate, would
have a Material Adverse Effect. Schedule 5.12 is an accurate list
7
<PAGE>
and summary description of all such licenses, franchises, permits and other
governmental authorizations, provided that, with respect to copyrights, Schedule
5.12 may include only those copyrights which are registered. To the knowledge of
the COMPANY, the licenses, franchises, permits and other governmental
authorizations listed on Schedule 5.12 are valid, and the COMPANY has not
received any notice that any governmental authority intends to cancel, terminate
or not renew any such license, franchise, permit or other governmental
authorization. The COMPANY has conducted and is conducting its business in
compliance with the requirements, standards, criteria and conditions set forth
in applicable permits, licenses, orders, approvals, variances, rules and
regulations and is not in violation of any such permits, licenses, orders,
approvals, variances, rules and regulations except where all such non-
compliances and violations in the aggregate would not have a Material Adverse
Effect. Except as specifically provided in Schedule 5.12, the transactions
contemplated by this Agreement will not result in a default under or a breach or
violation of (except to the extent such would not have a Material Adverse
Effect, either individually or in the aggregate), or have a Material Adverse
Effect upon the rights and benefits afforded to the COMPANY by, such licenses,
franchises, permits or government authorizations, either singly or in the
aggregate.
5.13 Environmental Matters. Except as set forth on Schedule 5.13, and
---------------------
except to the extent that noncompliance with any Environmental Law (as defined
below), either singly or in the aggregate, does not have a Material Adverse
Effect, (i) the COMPANY has complied with and is in compliance with all federal,
state, local and foreign statutes (civil and criminal), laws, ordinances,
regulations, rules, notices, permits, judgments, orders and decrees applicable
to it or any of its properties, assets, operations and businesses relating to
environmental protection (collectively "Environmental Laws") including, without
limitation, Environmental Laws relating to protection of the air, water or land
or to the generation, storage, use, handling, transportation, treatment or
disposal of Solid Wastes, Hazardous Wastes or Hazardous Substances (as such
terms are defined in any applicable Environmental Law); (ii) the COMPANY has
obtained and complied with all necessary permits and other approvals necessary
to treat, transport, store, dispose of or otherwise handle Solid Wastes,
Hazardous Wastes or Hazardous Substances and has reported, to the extent
required by all Environmental Laws, all past and present sites owned and
operated by the COMPANY where Solid Wastes, Hazardous Wastes or Hazardous
Substances have been treated, stored, used, disposed of or otherwise handled;
(iii) there have been no releases (as defined in Environmental Laws) at, from,
under, in or on any property owned or operated by the COMPANY except as
permitted by Environmental Laws; (iv) to the knowledge of the COMPANY there is
no on-site or off-site location to which the COMPANY has transported or disposed
of Solid Wastes, Hazardous Wastes or Hazardous Substances or arranged for the
transportation of Solid Wastes, Hazardous Wastes or Hazardous Substances, which
site is the subject of any federal, state, local or foreign enforcement action
or any other investigation which could lead to any claim against the COMPANY or
HDS for any clean-up cost, remedial work, damage to natural resources or
personal injury, including, but not limited to, any claim under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended; and (v) the COMPANY has no contingent liability in connection with
8
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any release of any Solid Waste, Hazardous Waste or Hazardous Substance into the
environment. Schedule 5.13 lists all releases of Hazardous Wastes or Hazardous
Substances by the COMPANY which were not in compliance with Environmental Laws.
5.14 Real and Personal Property. Schedule 5.14 hereto contains an accurate
--------------------------
list of (x) all real and personal property included on the September 30, 1998
COMPANY Balance Sheet, (y) all other real and personal property of the COMPANY
with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii)
acquired since the Balance Sheet, and (z) all leases for real and personal
property to which the COMPANY is a party involving real or personal property
having an individual value in excess of $2,500 ("Material Leases"), including
true, complete and correct copies of all Material Leases, and including an
indication as to which real and personal property is currently owned, or was
formerly owned, by the STOCKHOLDERS or business or personal affiliates of the
COMPANY or the STOCKHOLDERS. All machinery and equipment of the COMPANY listed
on Schedule 5.14 is in good working order and condition, ordinary wear and tear
excepted, except (i) as disclosed in Schedule 5.14 or (ii) where the cumulative
effect of all failures to be in good working order and condition would not have
a Material Adverse Effect. All Material Leases are in full force and effect and
constitute valid and binding agreements of the COMPANY and to the knowledge of
the COMPANY, constitute valid and binding agreements on the other parties
thereto (and their successors) in accordance with their respective terms. All
fixed assets used by the COMPANY that are material to the operation of their
respective businesses are either owned by the COMPANY or leased under an
agreement set forth on Schedule 5.14. Schedule 5.14 contains true, complete and
correct copies of all title reports received or owned by the COMPANY and title
insurance policies received or owned by the COMPANY with respect to the real
property listed on Schedule 5.14. The COMPANY has also provided in Schedule 5.14
a summary description of all plans or projects that involve the opening of new
operations, expansion of any existing operations or the acquisition of any real
property or existing businesses, with respect to which the COMPANY has made any
expenditure in the two-year period prior to the date of the Agreement in excess
of $25,000, or which if pursued by the COMPANY would require additional
expenditures of capital in excess of $25,000. Except as set forth on Schedule
5.14 and except for liens excepted in Section 7.3(vi)(1) and (3), there are no
liens against the COMPANY's real and personal properties. Schedule 5.14A
contains a list of items which may have been acquired by the COMPANY but shall
be transferred to the STOCKHOLDERS prior to the Closing.
5.15 Significant Customers; Material Contracts and Commitments. Schedule
---------------------------------------------------------
5.15 contains an accurate list of (i) all customers representing five percent
(5%) or more of the COMPANY's revenues for the twelve months ended on the
Balance Sheet Date or who have paid to the COMPANY $50,000 or more over any four
consecutive fiscal quarters in the year ended on the Balance Sheet Date
(collectively, "significant customers") and (ii) all contracts, indentures and
other instruments requiring payment or performance by the COMPANY in an amount
or with a value in excess of $10,000 ("Material Contracts") to which the COMPANY
is a party or by which the COMPANY
9
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or any of its properties are bound (including, but not limited to, contracts
with significant customers, joint venture or partnership agreements, contracts
with any labor organizations, loan agreements, indemnity or guaranty agreements,
bonds, mortgages, options to purchase land, leases, liens, pledges or other
security agreements) (a) as of the Balance Sheet Date and (b) entered into since
the Balance Sheet Date and in each case has delivered true, complete and correct
copies of such agreements to HDS, except that leases set forth on Schedule 5.14
need not be set forth on Schedule 5.15. Except to the extent set forth on
Schedule 5.15, (i) none of the COMPANY's significant customers has cancelled or
substantially reduced or, to the knowledge of the COMPANY, is currently
attempting or threatening to cancel any Material Contract or substantially
reduce utilization of the services provided by the COMPANY, and (ii) no
Stockholder or any affiliate of any Stockholder is a party to any such Material
Contract. Except as set forth in Schedule 5.15, the COMPANY has not been the
subject of any election in respect of union representation of employees and are
not bound by or subject to (and none of its respective assets or properties is
bound by or subject to) any arrangement with any labor union. Except as set
forth on Schedule 5.15, no employees of the COMPANY are represented by any labor
union or covered by any collective bargaining agreement and no campaign to
establish such representation has ever occurred or, to the knowledge of the
COMPANY, is in progress. There is no pending or, to the COMPANY's knowledge,
threatened labor dispute involving the COMPANY and any group of its employees,
nor has the COMPANY experienced any labor interruptions over the past three
years, and the COMPANY considers its relationship with its respective employees
to be good.
5.16 Title to Real Property. The COMPANY has good and insurable title to
----------------------
the real property owned and used in its business, including those reflected on
Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales
agreement, encumbrance or charge, except for:
(i) liens set forth on Schedules 5.10 and 5.15 securing specified
liabilities (with respect to which no material default exists);
(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title shown of record in the office of the County Clerk in which the properties,
assets and leasehold estates are located which do not adversely affect the
current use of the property.
5.17 Insurance. Schedule 5.17 sets forth an accurate list of all insurance
---------
policies carried by the COMPANY. Except as set forth on Schedule 5.17, the
Company has delivered to HDS an accurate list (attached to Schedule 5.17) of all
insurance loss runs or worker's compensation claims received for the past three
policy years. The Company has provided HDS with true, complete and correct
copies of all policies currently in effect. Such insurance policies are
currently in full force and effect and shall remain in full force
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and effect through the Closing Date. No insurance carried by the COMPANY has
ever been cancelled by the insurance company, and the COMPANY has never
submitted a written application for insurance and been denied coverage.
5.18 Compensation; Employment Agreements. Schedule 5.18 sets forth an
-----------------------------------
accurate schedule showing all officers, directors and key employees of the
COMPANY listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided
to HDS true, complete and correct copies of any employment agreements for
persons listed on Schedule 5.18. Since the Balance Sheet Date there have been,
other than in the ordinary course of business, no increases in the compensation,
bonus, sales commissions or fee arrangements payable or to become payable by the
COMPANY to any officer, director, stockholder, employee, consultant or agent,
except as listed on Schedule 5.18.
5.19 Employee Plans. Schedule 5.19 sets forth complete and accurate lists
--------------
of all employee benefit plans, all employee welfare benefit plans, all employee
pension benefit plans, all multi-employer plans and all multi-employer welfare
arrangements (as defined in Sections 3(3), (1), (2), (37) and (40),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or
to which the COMPANY currently contributes, or has an obligation to contribute
in the future (including, without limitation, benefit plans or arrangements that
are not subject to ERISA, such as employment agreements and any other agreements
containing "golden parachute" provisions and deferred compensation agreements),
together with a classification of employees covered thereby (collectively, the
"Plans"). Schedule 5.19 also sets forth all of the employee pension plans,
within the meaning of Section 3(2) of ERISA, and nonqualified deferred
compensation arrangements that have been terminated within the past six years.
The COMPANY has heretofore delivered to HDS correct and complete copies of each
of the following:
(i) each Plan and all amendments thereto; the trust agreement
and/or insurance contracts, if any, forming a part of such Plan and all
amendments thereto; and the resolutions and agreements, if any by which the
COMPANY adopted such Plan;
(ii) all written, and descriptions of all oral, employment,
termination, and severance agreements, contracts, arrangements and
understandings listed in Schedule 5.19;
(iii) sample benefit distribution forms that pertain to all Plans
that are intended to qualify (the "Qualified Plans") under Section 401(a) of the
Code;
(iv) the most recent actuarial report and the most recent executed
Form PBGC-1 with respect to each Plan that is a defined benefit pension plan as
defined in Section 414(j) of the Code (a "Defined Benefit Plan");
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(v) Forms 5500 or, as applicable Forms 5500-C/R, filed with
respect to the three most recent plan years of each Plan, and all schedules
thereto;
(vi) the most recent determination letter issued by the Internal
Revenue Service regarding the qualified status of each Qualified Plan;
(vii) the most recent accountant's report, if any, with respect to
each Plan;
(viii) the most recent summary plan description, and any subsequent
summaries of material modifications, with respect to each Plan;
(ix) the bond required by Section 412 of ERISA, if any; and
(x) all documents required to be filed with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation (the "PBGC"), or distributed
to participants and beneficiaries in connection with the termination of any
Qualified Plan listed on Schedule 5.19 as terminated.
5.20 Compliance with ERISA. Except for the Plans, the COMPANY does not
---------------------
maintain or sponsor, and is not a contributing employer to, a pension, profit-
sharing, deferred compensation, stock option, employee stock purchase or other
employee benefit plan, employee welfare benefit plan, or any other arrangement
with their respective employees, whether or not subject to ERISA. All Plans are
in compliance in all material respects with all applicable provisions of ERISA
and the regulations issued thereunder, the Code and the regulations issued
thereunder, as well as with all other applicable laws, and have been
administered, operated and managed in all material respects in accordance with
their governing documents, if any. All Qualified Plans are qualified under
Section 401(a) of the Code and have been determined by the Internal Revenue
Service to be so qualified or application for determination letters have been
timely submitted to the Internal Revenue Service and nothing has occurred since
the date of each Qualified Plan's most recent determination letter that would
adversely affect such Qualified Plan's tax-qualified status. To the extent that
any Qualified Plans have not been amended to comply with applicable law, the
remedial amendment period permitting retroactive amendment of such Qualified
Plans has not expired and will not expire within one hundred twenty (120) days
after the Closing Date. All reports and other documents required to be filed
with any governmental agency or distributed to plan participants or
beneficiaries (including, but not limited to, annual reports, summary annual
reports, actuarial reports, PBGC-1 Forms, audits or tax returns) have been
timely filed or distributed. None of: (i) the STOCKHOLDERS; (ii) any Plan; or
(iii) the COMPANY has engaged in any transaction prohibited under the provisions
of Section 4975 of the Code or Section 406 of ERISA. No Plan has incurred an
accumulated funding deficiency, as defined in Section 412(a) of the Code and
Section 302(1) of ERISA; and no circumstances exist pursuant to which the
COMPANY could have any direct or indirect liability whatsoever (including being
subject to any statutory lien to secure payment of any such liability), to the
PBGC under Title IV of ERISA or to the Internal
12
<PAGE>
Revenue Service for any excise tax or penalty with respect to any plan now or
hereafter maintained or contributed to by the COMPANY or any member of a
"controlled group" (as defined in Section 4001(a)(14) of ERISA) that includes
the COMPANY; and neither the COMPANY nor any member of a "controlled group" (as
defined above) that includes the COMPANY currently has (or at the Closing Date
will have) any withdrawal liability whatsoever (whether or not yet assessed)
arising under or capable of assertion under Title IV of ERISA (including, but
not limited to, Sections 4201, 4202, 4203, 4204, or 4205 thereof) been incurred
by any Plan. Further, except as set forth in Schedule 5.20:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without a determination by
the Internal Revenue Service that such action does not adversely affect the tax-
qualified status of such Qualified Plan;
(ii) no Plan which is subject to the provisions of Title IV of
ERISA has been terminated;
(iii) there have been no "reportable events" (as defined in Section
4043 of ERISA) with respect to any Plan which were not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of the
Closing Date, shall equal or exceed the actuarial present value of all accrued
pension benefits under any such Qualified Plan in accordance with the
assumptions contained in the Regulations of the PBGC governing the funding of
terminated Defined Benefit Plans;
(v) with respect to Plans which qualify as "group health plans"
under Section 4980B of the Internal Revenue Code and Section 607(l) of ERISA and
related regulations (relating to the benefit continuation rights imposed by
"COBRA"), the COMPANY has complied (and on the Closing Date will have complied)
in all respects with all reporting, disclosure, notice, election and other
benefit continuation requirements imposed thereunder as and when applicable to
such plans, and the COMPANY has not incurred (and will not incur) any direct or
indirect liability and is not (and will not be) subject to any loss, assessment,
excise tax penalty, loss of federal income tax deduction or other sanction,
arising on account of or in respect of any direct or indirect failure by the
COMPANY, at any time prior to the Closing Date, to comply with any such federal
or state benefit continuation requirement, which is capable of being assessed or
asserted before or after the Closing Date directly or indirectly against the
COMPANY or the STOCKHOLDERS with respect to such group health plans;
(vi) the COMPANY is not now nor has it been within the past six
years a member of a "controlled group" as defined in ERISA Section 4001(a)(14);
(vii) there is no pending litigation, arbitration, or disputed
claim, settlement or adjudication proceeding, and to the knowledge of the
COMPANY, there is no threatened litigation, arbitration or disputed claim,
settlement or adjudication proceeding, audit or any governmental or other
proceeding, audit or investigation with
13
<PAGE>
respect to any Plan, or with respect to any fiduciary, administrator, or sponsor
thereof (in their capacities as such), or any party in interest thereof;
(viii) the Financial Statements as of the Balance Sheet Date
reflect the approximate total pension, medical and other benefit expense for all
Plans, and no material funding changes or irregularities are reflected thereon
which would cause such Financial Statements to be not representative of prior
periods;
(ix) the COMPANY has not incurred liability under Section 4062 of
ERISA;
(x) each Qualified Plan that is listed as terminated on Schedule
5.19 was terminated in compliance with all applicable requirements of ERISA and
the Code;
(xi) except for any Qualified Plan that is categorized on
Schedule 5.19 as having been merged with another Qualified Plan, no Qualified
Plan of the COMPANY has been merged during the six years immediately before
the Closing Date;
(xii) each Qualified Plan that is categorized on Schedule 5.19 as
having been merged was merged in compliance with all applicable requirements of
ERISA and the Code;
(xiii) apart from health benefits provided to former employees
under Section 4980B of the Code and Part 6 of Title I(B) of ERISA, the COMPANY
has no obligation to provide health or medical benefits to anyone other than its
active employees;
(xiv) the COMPANY does not sponsor, contribute to, or have any
obligation to contribute to any voluntary employees beneficiary association, as
described in Section 501(c)(9) of the Code; and
(xv) except as set forth in Schedule 5.19, the consummation of
the transactions contemplated hereby will not result in any obligation to pay
any employee of the COMPANY severance or termination benefits so long as such
employee remains employed by the COMPANY after the Closing.
5.21 Conformity with Law. Except to the extent set forth on Schedule
-------------------
5.21, the COMPANY is not in violation of any law or regulation or any order of
any court or federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
any of them which (either singly or in the aggregate) would have a Material
Adverse Effect; and except to the extent set forth in Schedule 5.10, there are
no claims, actions, suits or proceedings pending or, to the knowledge of the
COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
any of them which (either singly or in the aggregate) would have a Material
Adverse Effect, and
14
<PAGE>
no notice of any such claim, action, suit or proceeding, whether pending or
threatened, has been received by the COMPANY. The COMPANY has conducted and is
conducting its business in compliance with the requirements, standards, criteria
and conditions set forth in applicable federal, state and local statutes,
ordinances, orders, approvals, variances, rules and regulations and is not in
violation of any of the foregoing which (either singly or in the aggregate)
would have a Material Adverse Effect.
5.22 Taxes. Except as set forth in Schedule 5.22,
-----
(i) All Tax Returns (as defined in Section 10.6(f)) required to
have been filed by or with respect to the COMPANY with any Taxing Authority (as
defined in Section 10.6(g)) have been duly filed, and each such Tax Return
accurately, correctly and completely reflects the income, franchise or other Tax
liability and all other information, including the tax basis and recovery
periods for assets, required to be reported thereon. The COMPANY has furnished
or made available to HDS complete and accurate copies of all income and
franchise tax returns, and any amendments thereto, filed by the COMPANY for all
taxable years ending on or after December 31, 1995. All Taxes (whether or not
shown on any Tax Return and whether or not assessed) required to have been paid
by the COMPANY have been paid. No Tax payment has been made by the COMPANY to
any Taxing Authority which is inconsistent with the prior practice of the
COMPANY, and no Tax payment has been made by the COMPANY which is in excess of
that which is in good faith determined to be due and owing at the time of such
payment.
(ii) The COMPANY is not and has not since January 1, 1995 been a
member of any affiliated, combined, consolidated, unitary or similar group.
(iii) The provisions for Taxes due by the COMPANY (as opposed to
any reserve for deferred Taxes established to reflect timing differences between
book and Tax income) in the COMPANY Financial Statements are sufficient for, and
adequate to cover, all unpaid Taxes accrued as of the respective dates of the
COMPANY Financial Statements.
(iv) The COMPANY is not a party to any current agreement
extending the time within which to file any Tax Return. No claim has ever been
made by any Taxing Authority in a jurisdiction in which the COMPANY does not
file Tax Returns that it is or may be subject to taxation by that jurisdiction.
(v) The COMPANY has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
(vi) To the best of its knowledge, the COMPANY does not expect any
Taxing Authority to assess any additional Taxes against or in respect of it for
any past period. There is no dispute or claim concerning any Tax liability
either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to
the COMPANY. No issues
15
<PAGE>
have been raised in any examination by any Taxing Authority with respect to the
COMPANY which, by application of similar principles, reasonably could be
expected to result in a proposed deficiency for any other period not so
examined. Schedule 5.22 attached hereto lists all federal, state, local and
foreign income Tax Returns filed by or with respect to the COMPANY for all
taxable periods ended on or after December 31, 1995, indicates those Tax
Returns, if any, that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The COMPANY has delivered to HDS complete
and correct copies of all federal, state, local and foreign income Tax Returns
filed by, and all Tax examination reports and statements of deficiencies
assessed against or agreed to by, the COMPANY since December 31, 1995.
(vii) The COMPANY has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to any Tax
assessment or deficiency.
(viii) The COMPANY has not made any payments, is not obligated to
make any payments, and is not a party to any agreement that under certain
circumstances could require it to make any payments, that would not be
deductible by reason of the application of Section 280G of the Code.
(ix) The COMPANY is not a party to and has no ongoing liability
under any Tax allocation or sharing agreement.
(x) None of the assets of the COMPANY constitutes tax-exempt bond
financed property or tax-exempt use property, within the meaning of Section 168
of the Code. The COMPANY is not a party to any "safe harbor lease" that is
subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as
in effect prior to the Tax Reform Act of 1986, or to any "long-term contract"
within the meaning of Section 460 of the Code.
(xi) The COMPANY is not a party to any joint venture,
partnership or other arrangement that is treated as a partnership for federal
income Tax purposes.
(xii) There are no accounting method changes of the COMPANY that
could give rise to an adjustment under Section 481 of the Code for periods after
the Closing Date.
(xiii) The COMPANY has not received any written ruling of a Taxing
Authority related to Taxes or entered into any written and legally binding
agreement with a Taxing Authority relating to Taxes.
(xiv) The COMPANY has substantial authority for the treatment of,
or has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on
its federal income Tax Returns, all positions taken on its relevant federal
income Tax Returns that could give rise to a substantial understatement of
federal income Tax within the meaning of Section 6662(d) of the Code.
16
<PAGE>
(xv) The COMPANY does not have any liability for Taxes of any
Person other than the COMPANY (i) under Section 1.1502-6 of the Treasury
regulations (or any similar provision of state, local or foreign law), (ii) as a
transferee or successor, (iii) by contract or (iv) otherwise.
(xvi) No consent has been filed relating to the COMPANY pursuant
to Section 341(f) of the Code, nor has the COMPANY made any tax election that
would materially increase the amount of Taxes payable by the COMPANY, as
compared to the amount of Taxes that would be payable in the absence of such tax
election, in any Post-Closing Period (as defined in Section 10.6(d)).
(xvii) Intentionally omitted.
(xviii) The fair market value of the sum of (i) all dividends paid
and distributions made on or after January 1, 1998 and through the Closing Date
in respect of COMPANY Stock and (ii) all consideration paid by the COMPANY on or
after January 1, 1998 and through the Closing Date in connection with all direct
and indirect redemptions, purchases and other acquisitions of COMPANY Stock is
no greater than zero.
Certain of the defined terms used in this Section 5.22 have the
meaning ascribed to them in Section 10.
5.23 No Violations. Except as set forth in Schedule 5.23, neither the
-------------
COMPANY nor, to the knowledge of the COMPANY, any other party thereto is (i) in
violation of any Charter Document or (ii) in default under any Material Lease or
Material Contract; and, except as set forth in the schedules and documents
attached to this Agreement, (a) the transactions contemplated hereby will not
have a Material Adverse Effect on the rights and benefits of the COMPANY under
the Material Leases and Material Contracts, either singly or in the aggregate,
and (b) except as set forth on Schedule 5.23, the execution of this Agreement
and the performance of the obligations hereunder and the consummation of the
transactions contemplated hereby will not result in any violation or breach or
constitute a default under any of the terms or provisions of the Charter
Documents, Material Leases, Material Contracts, any judgment, decree, order or
award of any court, governmental body or arbitrator, or any law, rule or
regulation applicable to COMPANY. Except as set forth in Schedule 5.23, none of
the Material Leases or Material Contracts requires notice to, or the consent or
approval of, any third party with respect to any of the transactions
contemplated hereby in order to remain in full force and effect, nor does this
Agreement or any of the transactions contemplated hereby give rise to any right
to termination, cancellation or acceleration or loss of any right or benefit
under any Material Lease or Material Contract.
5.24 Government Contracts. Except as set forth on Schedule 5.24, the
--------------------
COMPANY is not now a party to any governmental contracts subject to price
redetermination or renegotiation.
17
<PAGE>
5.25 Absence of Changes. Since September 30, 1998, except as set forth on
------------------
Schedule 5.25, there has not been with respect to the COMPANY:
(i) any event or circumstance (either singly or in the aggregate)
which would constitute a Material Adverse Effect;
(ii) any change in its authorized capital, or securities
outstanding, or ownership interests or any grant of any options, warrants,
calls, conversion rights or commitments;
(iii) any declaration or payment of any dividend or distribution
in respect of its capital stock or any direct or indirect redemption, purchase
or other acquisition of any of its capital stock;
(iv) any increase of more than five percent (5%) in the
compensation, bonus, sales commissions or fee arrangement payable or to become
payable by it to any of its respective officers, directors, stockholders,
employees, consultants or agents, except for ordinary and customary bonuses and
salary increases for employees (other than the STOCKHOLDERS) in accordance with
past practice;
(v) any work interruptions, labor grievances or claims filed,
or any similar event or condition of any character that would have a Material
Adverse Effect;
(vi) any distribution, sale or transfer, or any agreement to sell
or transfer any material assets, property or rights of its business to any
person, including, without limitation, the STOCKHOLDERS and their affiliates,
other than distributions, sales or transfers in the ordinary course of business
to persons other than the STOCKHOLDERS and their affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to it, including without limitation any indebtedness or
obligation of any STOCKHOLDERS or any affiliate thereof, provided that it may
--------
negotiate and adjust bills in the course of good faith disputes with customers
in a manner consistent with past practice, provided, further, that such
-------- -------
adjustments shall not be deemed to be included in Schedule 5.11 unless
specifically listed thereon;
(viii) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property or
rights or requiring consent of any party to the transfer and assignment of any
such assets, property or rights;
(ix) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire any property, rights or assets outside of the
ordinary course of business;
(x) any waiver of any of its rights or claims which would have
a Material Adverse Effect;
18
<PAGE>
(xi) any transaction by it outside the ordinary course of its
business; or
(xii) any cancellation or termination of a Material Contract.
5.26 Deposit Accounts; Powers of Attorney. The COMPANY has delivered to
------------------------------------
HDS an accurate schedule (Schedule 5.26) as of the date of the Agreement, of:
(i) the name of each financial institution in which the COMPANY
has accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation, firm
or other entity holding a general or special power of attorney from the COMPANY
and a description of the terms of such power.
5.27 Relations with Governments. The COMPANY has not made, offered or
--------------------------
agreed to offer anything of value to any governmental official, political party
or candidate for government office which would cause the COMPANY to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended, or any law
of similar effect.
(B) Representations and Warranties of STOCKHOLDERS. Each STOCKHOLDER
----------------------------------------------
severally represents and warrants that the representations and warranties set
forth in this Section 5(B) are true as of the date of this Agreement and,
subject to Section 7.9 hereof, shall be true at the time of Pre-Closing and on
the Closing Date, and that such representations and warranties survive the
Closing Date until the Expiration Date.
5.28 Authority; Validity; Ownership. Such STOCKHOLDER has the full legal
------------------------------
right, power and authority to enter into this Agreement and any other agreements
contemplated by this Agreement to which such STOCKHOLDER is or is contemplated
to be a party. Assuming due authorization, execution and delivery by HDS, this
Agreement and any other agreements contemplated by this Agreement to which such
STOCKHOLDER is or is contemplated to be a party are or will be legal, valid and
binding obligations of each STOCKHOLDER, enforceable in accordance with their
respective terms, except as may be limited by applicable bankruptcy, insolvency,
or similar laws affecting creditors' rights generally. Such STOCKHOLDER owns
beneficially and of record all of the shares of the COMPANY Stock identified on
Annex II as being owned by such STOCKHOLDER, and, except as set forth on
Schedule 5.28 hereto, such COMPANY Stock is owned free and clear of all liens,
encumbrances and claims of every kind. Upon the consummation of the purchase
contemplated hereby,
19
<PAGE>
HDS shall acquire from the STOCKHOLDERS record and beneficial ownership of the
COMPANY Stock, free and clear of any and all covenants, conditions,
restrictions, voting trust arrangements, liens, charges, encumbrances, options
and adverse claims or rights whatsoever, except such as have been created by HDS
to take effect upon its acquisition of the COMPANY Stock.
5.29 Preemptive Rights. Such STOCKHOLDER does not have, or hereby
-----------------
waives, any preemptive or other right to acquire shares of COMPANY Stock or HDS
Stock that such STOCKHOLDER has or may have had, other than rights of any
STOCKHOLDER to acquire HDS Stock pursuant to (i) this Agreement or (ii) any
option granted by HDS.
5.30 Intentionally omitted.
---------------------
6. REPRESENTATIONS OF HDS.
HDS represents and warrants that (i) all of the following
representations and warranties are true at the date of this Agreement and shall
be true at the time of Pre-Closing and the Closing Date and that such
representations and warranties shall survive the Closing Date until the
Expiration Date and (ii) solely for purposes of Section 11.2(iv) hereof, and
solely to the extent that in connection with the IPO the STOCKHOLDERS actually
incur liability under the 1933 Act, the 1934 Act, or any other federal or state
securities laws, the representations and warranties set forth herein shall
survive until the expiration of any applicable limitations period.
6.1 Due Organization. HDS and each of the subsidiaries of HDS ("HDS's
----------------
Subsidiaries") set forth in Schedule 6.7 is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and is duly authorized and qualified under all applicable laws, regulations,
ordinances and orders of public authorities to carry on its business in the
places and in the manner as now conducted except for where the cumulative effect
of all failures to be so authorized or qualified would not have a material
adverse effect on the business, operations, affairs, properties, assets or
condition (financial or otherwise), of HDS and HDS's Subsidiaries, taken as a
whole (an "HDS Material Adverse Effect"). True, complete and correct copies of
the Certificate of Incorporation and the Bylaws, each as amended, of HDS and
HDS's Subsidiaries (collectively, the "HDS Charter Documents"), certified by the
Secretary or an Assistant Secretary of HDS, are attached hereto as Annex IV. A
true, complete and correct copy of the Certificate of Incorporation, each as
amended, of HDS and each of HDS's Subsidiaries, certified by the Secretary of
State of the State of Delaware, shall be delivered at the Pre-Closing.
6.2 HDS Stock. The HDS Stock to be delivered to the STOCKHOLDERS on the
---------
Closing Date shall constitute valid and legally issued shares of HDS, fully paid
and nonassessable, and except as set forth in this Agreement, will be owned free
and clear of all liens, security interests, pledges, charges, voting trusts,
restrictions, encumbrances and claims of every kind created by, through or under
HDS, and will be legally equivalent in
20
<PAGE>
all respects to the HDS Stock issued and outstanding as of the date hereof. The
shares of HDS Stock to be issued to the STOCKHOLDERS pursuant to this Agreement
will not be registered under the 1933 Act.
6.3 Authority and Validity. The representatives of HDS executing this
----------------------
Agreement and any other agreements contemplated by this Agreement have the
corporate authority to enter into and bind HDS to the terms of this Agreement
and any other agreements contemplated by this Agreement to which HDS is or is
contemplated to be a party. HDS has the full legal right, power and authority
to enter into this Agreement, any other agreements contemplated by this
Agreement to which HDS is or is contemplated to be a party. All corporate
action necessary for the authorization, execution, delivery and performance by
HDS of this Agreement, and also any other agreements contemplated by this
Agreement to which HDS is contemplated to be a party, has been taken. Assuming
due authorization, execution and delivery by the COMPANY and the STOCKHOLDERS,
as applicable, this Agreement and any other agreements contemplated by this
Agreement to which HDS is or is contemplated to be a party are or will be legal,
valid and binding obligations of HDS, enforceable against HDS, in accordance
with their respective terms, except as may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights generally.
6.4 Capital Stock of HDS. Immediately prior to the Closing, the
--------------------
authorized capital stock of HDS will be as set forth in Schedule 6.4. All of the
issued and outstanding shares of HDS are owned beneficially and of record by the
persons set forth on Annex III. All issued and outstanding shares of HDS stock
are duly authorized, validly issued, fully paid and nonassessable. There are no
obligations of HDS to repurchase, redeem or otherwise acquire any shares of HDS
stock. Except as described in the Registration Statement, there are no options,
warrants, equity securities, calls, rights, commitments or agreements of any
character to which HDS or any of its subsidiaries are a party or by which they
are bound obligating HDS or any of its subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
HDS or any of its subsidiaries or obligating HDS or any of its subsidiaries to
grant, extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement. To the knowledge of HDS,
as of the Closing Date, none of the STOCKHOLDERS set forth on Annex III will be
a party to or subject to any voting trust, proxy or other agreement or
understanding with respect to the shares of capital stock of HDS owned by such
STOCKHOLDER. (For purposes of this Agreement, "to the knowledge of HDS" and
similar phrases mean to the actual present knowledge of a person listed on
Schedule 6.12.) All of the shares of HDS Stock to be issued to the STOCKHOLDERS
in accordance herewith will be duly authorized, validly issued, fully paid and
nonassessable. All of the shares of HDS Stock issued to persons set forth on
Annex III and, based on the representations of STOCKHOLDERS contained in this
Agreement, to STOCKHOLDERS pursuant to this Agreement, were or will be offered,
issued, sold and delivered by HDS in compliance with all applicable state and
federal laws concerning the issuance of securities and none of such shares were
or will be issued in violation of the preemptive rights of any past or
21
<PAGE>
present stockholder. On the Closing Date the capitalization of HDS will be as
set forth in the Registration Statement.
6.5 No Side Agreements. Except as set forth in Schedule 6.5, HDS has not
------------------
entered into any material agreement with any of the Founding Companies or any of
the stockholders of the Founding Companies or any affiliates of such Founding
Companies or stockholders other than the Other Agreements and the agreements
contemplated by each of the Other Agreements, including the employment
agreements referred to therein. HDS has made available to the COMPANY copies of
all material agreements entered into between (i) HDS and its affiliates and (ii)
HDS and the Founding Companies or any stockholders of the Founding Companies.
Further, HDS will make available to the COMPANY copies of any of the foregoing
agreements entered into between the date hereof and the Closing Date promptly
after such agreements are entered into.
6.6 Subsidiaries. Except for those companies set forth on Schedule 6.6,
------------
HDS does not presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity. HDS is
not, directly or indirectly, a participant in any joint venture, partnership or
other non-corporate entity.
6.7 Business; Financial Information. HDS has not conducted any
-------------------------------
business since the date of its inception, except in connection with this
Agreement, the Other Agreements and the contemplated IPO of HDS Stock. HDS was
formed in 1998, and has historical financial statements only for the partial
years ended December 31, 1998. Attached hereto as Schedule 6.7 are HDS's
financial statements for such partial year. Such HDS financial statements have
been prepared in accordance with generally accepted accounting principles and
present fairly the financial position of HDS as of the dates indicated thereon,
and such financial statements present fairly the results of HDS's operations for
the periods indicated thereon. HDS has no material liabilities, accrued or
contingent, other than those incurred in connection with this Agreement, the
Other Agreements and the agreements contemplated thereby, the agreements to be
filed as exhibits to the Registration Statement, and the contemplated IPO of HDS
Stock.
6.8 Conformity with Law. HDS (including HDS's Subsidiaries) is not in
-------------------
violation of any law or regulation or any order of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them which (either singly or
in the aggregate) would have an HDS Material Adverse Effect. There are no
claims, actions, suits or proceedings, pending or, to the knowledge of HDS
(including HDS's Subsidiaries), threatened, against or affecting HDS (including
HDS's Subsidiaries), at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over any of them and no notice of any claim,
action, suit or proceeding, whether pending or threatened, has been received by
HDS or any of HDS's Subsidiaries. HDS (including HDS's Subsidiaries) has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in applicable Federal, state and
local statutes, ordinances, orders,
22
<PAGE>
approvals, variances, rules and regulations and is not in violation of any of
the foregoing which would have an HDS Material Adverse Effect.
6.9 No Violations. HDS (including HDS's Subsidiaries) is not (i) in
-------------
violation of any HDS Charter Document or (ii) in default under any material
lease, instrument, agreement, license, or permit to which it is a party or by
which its properties are bound (the "HDS Material Documents"); and, except as
set forth in the Registration Statement, (a) the rights and benefits of HDS
(including HDS's Subsidiaries) under the HDS Material Documents will not be
materially and adversely affected by the transactions contemplated hereby and
(b) the execution of this Agreement and the performance of the obligations
hereunder and the consummation of the transactions contemplated hereby will not
result in any violation or breach or constitute a default under any of the terms
or provisions of the HDS Material Documents, the HDS Charter Documents, any
judgment, decree, order or award of any court, governmental body or arbitrator,
or any law, rule or regulation applicable to HDS or any of HDS's Subsidiaries.
Except as set forth in Schedule 6.9, none of the HDS Material Documents requires
notice to, or the consent or approval of, any third party with respect to any of
the transactions contemplated hereby in order to remain in full force and
effect, nor does this Agreement or any of the transactions contemplated hereby
give rise to any right to termination, cancellation or acceleration or loss of
any right or benefit. The minute books of HDS and each of HDS's subsidiaries as
heretofore made available to the COMPANY are true and correct.
6.10 Intentionally omitted.
---------------------
6.11 Disclosure. To the best of HDS's knowledge, none of the
----------
information in the Registration Statement or any schedule or exhibit thereto
(other than information concerning the Company or any Stockholder furnished
thereby), taken as a whole, contains or will contain any untrue statement or
omit to state a material fact necessary in order to make the statements made not
misleading.
6.12 Compensation; Employment Agreements. Schedule 6.12 sets forth an
-----------------------------------
accurate schedule showing all officers, directors and key employees of HDS
listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of the date hereof. HDS has provided to the COMPANY true, complete and correct
copies of any employment agreements for persons listed on Schedule 6.12.
6.13 Employee Plans. Schedule 6.13 sets forth complete and accurate
--------------
lists of all employee benefit plans, all employee welfare benefit plans, all
employee pension benefit plans, all multi-employer plans and all multi-employer
welfare arrangements (as defined in Sections 3(2), (1), (2), (37) and (40),
respectively, of the Employment Retirement Income Security Act of 1974, as
amended ("ERISA")), which are currently maintained and/or sponsored by HDS, or
to which HDS currently contributes, or has an obligation to contribute in the
future (including, without limitation, benefit plans or arrangements that are
not subject to ERISA, such as employment agreements and any other agreements
23
<PAGE>
containing "golden parachute" provisions and deferred compensation agreements),
together with a classification of employees covered thereby (collectively, the
"Plans"). Schedule 6.13 also sets forth all of the employee pension plans,
within the meaning of Section 3(2) of ERISA, and nonqualified deferred
compensation arrangements that have been terminated within the past six years.
HDS has heretofore delivered to the COMPANY correct and complete copies of each
of the following:
(i) each Plan and all amendments thereto; the trust agreement
and/or insurance contracts, if any, forming a part of such Plan and all
amendments thereto; and the resolutions and agreements, if any by which HDS
adopted such Plan;
(ii) all written, and descriptions of all oral, employment,
termination, and severance agreements, contracts, arrangements and
understandings listed in Schedule 5.19;
(iii) sample benefit distribution forms that pertain to all Plans
that are intended to qualify (the "Qualified Plans") under Section 401(a) of the
Code;
(iv) the most recent actuarial report and the most recent executed
Form PBGC-1 with respect to each Plan that is a defined benefit pension plan as
defined in Section 414(j) of the Code (a "Defined Benefit Plan");
(v) Forms 5500 or, as applicable Forms 5500-C/R, filed with
respect to the three most recent plan years of each Plan, and all schedules
thereto;
(vi) the most recent determination letter issued by the Internal
Revenue Service regarding the qualified status of each Qualified Plan;
(vii) the most recent accountant's report, if any, with respect to
each Plan;
(viii) the most recent summary plan description, and any subsequent
summaries of material modifications, with respect to each Plan;
(ix) the bond required by Section 412 of ERISA, if any; and
(x) all documents required to be filed with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation (the "PBGC"), or distributed
to participants and beneficiaries in connection with the termination of any
Qualified Plan listed on Schedule 6.13 as terminated.
24
<PAGE>
6.14 Absence of Changes. Since December 31, 1998, except as set forth
------------------
in the Registration Statement or Schedule 6.14, and except for the execution and
implementation of this Agreement and the Other Agreements, there has not been
with respect to HDS:
(i) any event or circumstance (either singly or in the aggregate)
which would constitute any HDS Material Adverse Effect;
(ii) any change in its authorized capital, or securities
outstanding, or ownership interests or any grant of any options, warrants,
calls, conversion rights or commitments, excluding any grant of options covering
not more than five percent (5%) of the fully-diluted shares of HDS Stock
outstanding on December 31, 1998, including shares issuable upon exercise of
options granted and conversion of preferred stock outstanding on December 31,
1998;
(iii) any declaration or payment of any dividend or distribution in
respect of its capital stock or any direct or indirect redemption, purchase or
other acquisition of any of its capital stock;
(iv) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property or
rights or requiring consent of any party to the transfer and assignment of any
such assets, property or rights; or
(v) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire any property, rights or assets outside of the
ordinary course of business.
7. COVENANTS PRIOR TO CLOSING.
7.1 Access and Cooperation; Due Diligence.
-------------------------------------
(i) Provided that each of the Other Agreements has a provision
which is substantively substantially the same as this Section 7.1(i), between
the date of this Agreement and the Closing Date: (i) the COMPANY will afford to
the officers and authorized representatives of HDS access to all of the
COMPANY's key employees, sites, properties, books and records and will furnish
HDS with such additional financial and operating data and other information as
to the business and properties of the COMPANY as HDS may from time to time
reasonably request; (ii) the COMPANY will cooperate with HDS, its
representatives, auditors and counsel in the preparation of any documents or
other material which may be required by this Agreement; and (iii) the COMPANY
shall provide reasonable access to the COMPANY's key employees, books, records
and other financial data to all Other Companies and their representatives,
auditors and counsel; provided that, the COMPANY will not be required to
-------- ----
disclose competitively-sensitive information to such Other Companies. HDS, the
STOCKHOLDERS and the COMPANY will treat all information obtained in connection
25
<PAGE>
with the negotiation and performance of this Agreement or the due diligence
investigations conducted with respect to the Other Companies as confidential in
accordance with the provisions of Section 14 hereof and will not use such
information for any purpose other than for the evaluation of the transactions
contemplated by this Agreement. In addition, HDS will cause each of the Other
Companies to enter into a provision similar to this Section 7.1 requiring each
such Other Company to keep confidential any information obtained by such Other
Company and to not use such information for any purpose other than for the
evaluation of the transactions contemplated by the applicable Other Agreement.
All Other Companies shall be third-party beneficiaries with respect to the
covenant of the COMPANY and the STOCKHOLDERS restricting the use of information
received by the COMPANY and such STOCKHOLDERS, and the COMPANY shall be a third-
party beneficiary with respect to the covenant of the Other Companies
restricting the use of COMPANY information received by such Other Companies.
(ii) Between the date of this Agreement and the Closing Date, HDS
will afford to the officers and authorized representatives of the COMPANY access
to all of HDS's (including HDS's Subsidiaries') sites, properties, books and
records and will furnish the COMPANY with such additional financial and
operating data and other information as to the business and properties of HDS
(including HDS's Subsidiaries) as the COMPANY may from time to time reasonably
request. HDS will cooperate with the COMPANY, its representatives, engineers,
auditors and counsel in the preparation of any documents or other material which
may be required by this Agreement. The COMPANY will cause all information
obtained in connection with the negotiation and performance of this Agreement to
be treated as confidential in accordance with the provisions of Section 14
hereof.
7.2 Conduct of Business Pending Closing. Between the date of this
-----------------------------------
Agreement and the Closing Date, the COMPANY will, except as set forth in
Schedule 7.2:
(i) carry on its business in substantially the same manner as it
has heretofore, maintain inventory at levels substantially equivalent to those
maintained during the 12 months ended December 31, 1998, and not introduce any
material new method of management, operation or accounting;
(ii) maintain its properties, facilities, equipment and other
assets, including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(iii) perform all of its material obligations under agreements to
which it is a party relating to or affecting its assets, properties or rights;
(iv) subject to Section 7.6, keep in full force and effect present
insurance policies or other comparable insurance coverage;
26
<PAGE>
(v) use best efforts to maintain and preserve its business
organization intact, retain its present employees and maintain its relationships
with suppliers, customers and others having business relations with it;
(vi) maintain compliance with all permits, laws, rules and
regulations, consent orders, and all other orders of applicable courts,
regulatory agencies and similar governmental authorities applicable to the
COMPANY; and
(vii) maintain compliance with all present debt and lease instruments
and not enter into new or amended debt or lease instruments involving payments
by the COMPANY over $50,000 (individually or in the aggregate), without the
knowledge and consent of HDS (which consent shall not be unreasonably delayed or
withheld).
7.3 Prohibited Activities. Except as disclosed in Schedule 7.3, between
---------------------
the date of this Agreement and the Closing Date, the COMPANY will not without
the prior written consent of HDS:
(i) make any change in its Articles of Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed on Schedule 5.4;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase, redeem
or otherwise acquire or retire for value any shares of its stock;
(iv) enter into any contract (including any contract to provide
services to customers) or commitment or incur or agree to incur any liability or
make any capital expenditures, except if (x) it is in the ordinary course of
business (consistent with past practice) or (y) when aggregated with all other
such contracts, commitments, liabilities and capital expenditures not in the
normal course of business consistent with past practice, it involves an amount
not in excess of $35,000;
(v) increase the compensation payable or to become payable to any
officer, director, STOCKHOLDER, employee or agent, or make any bonus or
management fee payment to any such person, except (x) bonuses to employees
(other than the STOCKHOLDERS or their affiliates) consistent with past practice
and (y) increases in salaries and commission rates payable to employees (other
than to STOCKHOLDERS and their affiliates), provided that neither the salary nor
any commission rate payable to any employee may increase to more than one
hundred five percent (105%) of such employee's current salary or such commission
rate, whichever is applicable;
(vi) create, assume or permit to exist any mortgage, pledge or other
lien or encumbrance upon any assets or properties whether now owned or hereafter
acquired,
27
<PAGE>
except (1) with respect to purchase money liens incurred in connection
with the acquisition of equipment with an aggregate cost not in excess of
$10,000 necessary or desirable for the conduct of the business of the COMPANY,
(2) liens set forth on Schedule 5.14 hereto, (3) liens for taxes either not yet
due or materialmen's, mechanics', workers', repairmen's, employees' or other
like liens arising in the ordinary course of business or (4) liens in connection
with contracts or expenditures described in (x) or (y) of Section 7.3(iv) above;
(vii) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the ordinary course of business;
(viii) negotiate for the acquisition of any business or the start-up
of any new business;
(ix) merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(x) waive any material rights or claims of the COMPANY, provided
--------
that the COMPANY may negotiate and adjust bills in the course of good faith
disputes with customers in a manner consistent with past practice, provided,
--------
further, that such adjustments shall not be deemed to be included in Schedule
- -------
5.11 unless specifically listed thereon;
(xi) commit a material breach or, other than in the ordinary course
of business, amend or terminate any Material Contract, or material permit,
license or other right of the COMPANY, or make or terminate any election
involving Taxes which would in any way adversely affect the Tax liability of the
COMPANY (or HDS following the Closing) in any taxable period; or
(xii) enter into any other transaction outside the ordinary course
of its business or prohibited hereunder.
7.4 No Shop. None of the STOCKHOLDERS, the COMPANY or any agent, officer,
-------
director or any representative of any of the foregoing will, during the period
commencing on the date of this Agreement and ending with the earlier to occur of
the Closing Date or the termination of this Agreement in accordance with its
terms, directly or indirectly: (i) solicit or initiate, either directly or
indirectly, the submission of proposals or offers from any person for, (ii)
participate in any discussions pertaining to or (iii) furnish any information to
any person other than HDS or the Founding Companies relating to, any acquisition
or purchase of all or a material amount of the assets of, or any equity interest
in, the COMPANY or a merger, consolidation or business combination of the
COMPANY.
7.5 Notice to Bargaining Agents. Prior to the Closing Date, the COMPANY
---------------------------
shall satisfy any requirement for notice of the transactions contemplated by
this
28
<PAGE>
Agreement under applicable collective bargaining agreements, and shall provide
HDS with proof that any required notice has been sent.
7.6 Termination of Plans. Prior to the Pricing Date, the COMPANY shall
--------------------
terminate all Plans listed on Schedule 7.6.
7.7 HDS Prohibited Activities. Between the date of this Agreement and the
-------------------------
Closing Date, except as set forth on Schedule 7.7, HDS will not:
(i) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind;
(ii) make any changes in its Certificate of Incorporation or Bylaws
other than one or more amendments to the Certificate of Incorporation to
accomplish a split or reverse split of the HDS Stock (provided that in the event
of any such split or reverse split, the number of shares of HDS Stock to be
delivered to the STOCKHOLDERS, and to the stockholders of the Other Companies,
and also the Minimum IPO Price, all as set forth on Annex I, will be adjusted
accordingly) or to increase the authorized Capital Stock of HDS to an amount not
to exceed 40 million shares of common stock and 5 million shares of preferred
stock;
(iii) hire or appoint any officer or director or increase the
compensation payable or to become payable to any officer or director;
(iv) acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to HDS and the HDS Subsidiaries; or
(v) create, assume or permit to exist any mortgage, pledge or other
lien or encumbrance upon any assets or properties whether now owned or hereafter
acquired, except (1) with respect to purchase money liens incurred in connection
with the acquisition of equipment with an aggregate cost not in excess of
$10,000 necessary or desirable for the conduct of the business of HDS or (2)
liens for taxes either not yet due or materialmen's, mechanics', workers',
repairmen's, employees' or other like liens arising in the ordinary course of
business.
7.8 Notification of Certain Matters. The STOCKHOLDERS and the COMPANY,
-------------------------------
to the extent it comes to their attention, shall give prompt notice to HDS (and
deliver to HDS copies of relevant communications from third parties) of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty of the COMPANY or
the STOCKHOLDERS contained herein to be untrue or inaccurate in any material
respect at or prior to the Closing and (ii) any material failure of any
STOCKHOLDER or the COMPANY to comply with or satisfy any covenant, condition or
agreement to be
29
<PAGE>
complied with or satisfied by such person hereunder. HDS, to the extent it comes
to its attention, shall give prompt notice to the COMPANY (and deliver to the
COMPANY copies of relevant communications from third parties) of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty of HDS contained
herein to be untrue or inaccurate in any material respect at or prior to the
Closing and (ii) any material failure of HDS to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. The delivery of any notice pursuant to this Section 7.8 shall not be
deemed to (i) modify the representations or warranties hereunder of the party
delivering such notice, which modification may only be made pursuant to Section
7.9, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
7.9 Amendment of Schedules. Each party hereto agrees that, with
----------------------
respect to the representations and warranties of such party contained in this
Agreement, such party shall have the continuing obligation until the Pre-Closing
to supplement or amend promptly the Schedules hereto with respect to any matter
hereafter arising or discovered which, if existing or known at the date of this
Agreement, would have been required to be set forth or described in the
Schedules, provided however, that supplements and amendments to Schedules
-------- -------
5.10, 5.11 and 5.14 shall only have to be delivered at the Pre-Closing
Date, unless such Schedule is to be amended to reflect an event occurring other
than in the ordinary course of business, and further provided that Schedule 5.10
need not be updated with respect to items described in the parenthetical phrase
in the second sentence of Section 5.10. In the event that the COMPANY amends or
supplements a Schedule pursuant to this Section 7.9 in any material respect, and
HDS does not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement at or before the Pre-Closing, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof. In the event that HDS amends or supplements a Schedule pursuant
to this Section 7.9 in any material respect and a majority of the Founding
Companies do not consent (which consent shall not be unreasonably withheld) to
the effectiveness of such amendment or supplement at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For all purposes of this Agreement, including without
limitation for purposes of determining whether the conditions set forth in
Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed
to be the Schedules as amended or supplemented pursuant to this Section 7.9. In
the event that one of the Other Companies amends or supplements a Schedule
pursuant to Section 7.9 of one of the Other Agreements in any material respect,
HDS shall give the COMPANY notice promptly after it has knowledge thereof. If
HDS and a majority of the Founding Companies, excluding such Other Company, do
not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement, at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For purposes of this Section 7.9, HDS shall be deemed to
have given its consent to the effectiveness of any amendment or supplement to a
Schedule if HDS does not notify the COMPANY of its disapproval within 48 hours
after
30
<PAGE>
HDS is notified of such amendment or supplement, and the COMPANY and each Other
Company shall be deemed to have given its consent to the effectiveness of any
amendment or supplement to a Schedule if the COMPANY or such Other Company, as
applicable, does not notify HDS of its disapproval within 48 hours after the
COMPANY or such Other Company, as applicable, is notified of such amendment or
supplement. Except as otherwise provided herein, no amendment of or supplement
to a Schedule shall be made after the Pre-Closing.
7.10 Cooperation in Preparation of Registration Statement. The COMPANY
----------------------------------------------------
and STOCKHOLDERS shall furnish or cause to be furnished to HDS and the
Underwriters all of the information concerning the COMPANY or the STOCKHOLDERS
reasonably requested by HDS and the Underwriters, and will cooperate with HDS
and the Underwriters in the preparation of the Registration Statement and the
prospectus included therein (including audited financial statements prepared in
accordance with generally accepted accounting principles). The COMPANY and the
STOCKHOLDERS agree promptly to advise HDS if at any time during the period in
which a prospectus relating to the offering is required to be delivered under
the 1933 Act, any information contained in the prospectus concerning the COMPANY
or the STOCKHOLDERS becomes incorrect or incomplete in any material respect, and
to provide the information needed to correct such inaccuracy. Any such
information provided to HDS in writing before the Pre-Closing shall be deemed to
constitute an amendment to the Schedules pursuant to Section 7.9.
7.11 Examination of Final Financial Statements. To the extent that
-----------------------------------------
financial statements of the COMPANY for any quarter subsequent to the Balance
Sheet Date are required to be included in the Registration Statement, the
COMPANY shall provide, and HDS shall have had sufficient time to review, the
unaudited balance sheet and statements of income, cash flows and retained
earnings of the COMPANY as of the end of such quarter, disclosing no material
adverse change in the financial condition or results of operations of the
COMPANY, except as otherwise disclosed pursuant to Section 7.9. Such financial
statements, which shall be deemed to be Financial Statements (as described in
Section 5.9), shall have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated (except as noted therein). To the extent such Financial Statements
shall be included or reflected in the Registration Statement, any events or
circumstances reflected therein which might constitute a Material Adverse Effect
with respect to the COMPANY shall be deemed to have been waived by HDS and HDS
shall have no rights in respect of such Material Adverse Effect.
7.12 Maintenance of Liquidity and Limitation of Debt. The COMPANY
-----------------------------------------------
agrees that, as of the Closing Date, the COMPANY will have (i) adjusted working
capital (defined for purposes of this Agreement as cash plus receivables net of
receivables reserves less short-term liabilities, excluding the short-term
portion of long-term debt) which is no more negative than a negative $315,000
and (ii) adjusted long-term liabilities (defined for this purpose as long-term
liabilities plus the short-term portion of long-term debt) not exceeding
$1,110,000, provided that adjusted working capital shall not be
31
<PAGE>
positively increased by any Net Tax Benefit or increased or decreased by any
receivable or short term liability used in the computation of Net Tax Benefit.
As used in the preceding sentence, the terms "cash," "receivables," "receivables
reserves," "short-term liabilities," "short-term portion of long-term debt,"
"long-term liabilities" and "short-term portion of long-term debt" all will have
the same meaning as in generally accepted accounting principles, as applied in
the preparation of the COMPANY Financial Statements, provided that "short-term
liabilities" shall include, but are not limited to, any Taxes imposed on the
COMPANY by any Taxing Authority which are not yet paid as of the Closing Date in
respect of (x) the taxable period commencing October 1, 1997 and ending
September 30, 1998, and (y) the short taxable period commencing October 1, 1998
and ending on the Closing Date. Notwithstanding the foregoing, as used in the
first sentence of this Section 7.12, "short term liabilities" shall not include
Taxes attributable to any restatement of inventory after the Closing Date.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.
The obligations of STOCKHOLDERS and the COMPANY with respect to
actions to be taken on the Pricing Date are subject to the satisfaction or
waiver on or prior to the Pricing Date of all of the following conditions except
Section 8.15. The obligations of the STOCKHOLDERS and the COMPANY with respect
to actions to be taken on the Closing Date are subject to the satisfaction or
waiver on or prior to the Closing Date of the conditions set forth in Sections
8.1, 8.3, 8.7, 8.11 and Section 8.15.
8.1 Representations and Warranties; Performance of Obligations. All
----------------------------------------------------------
representations and warranties of HDS contained in Section 6 shall be true and
correct in all material respects as of the Pricing Date and the Closing Date
with the same effect as though such representations and warranties had been made
as of that date; each and all of the terms, covenants and conditions of this
Agreement to be complied with and performed by HDS on or before the Pricing Date
and the Closing Date shall have been duly complied with and performed in all
material respects; and a certificate to the foregoing effect dated the Pricing
Date and the Closing Date signed by the President or any Vice President of HDS
and certified, to his or her knowledge, by the Secretary or Assistant Secretary
of HDS shall have been delivered to the STOCKHOLDERS.
8.2 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be satisfactory to the STOCKHOLDERS, the COMPANY and their
respective counsel. The STOCKHOLDERS and the COMPANY shall be satisfied that
the Registration Statement and the prospectus forming a part thereof, including
any amendments thereof or supplement thereto, shall not contain any untrue
statement of a material fact, or omit to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
provided that the condition contained in this sentence shall be deemed satisfied
- --------
if (i) HDS shall have made available to the COMPANY copies of the draft (or
changed pages of such draft) of the Registration Statement prior to the initial
filing with the Securities and Exchange Commission (the "SEC"), each amendment
32
<PAGE>
thereto prior to the effectiveness thereof with the SEC and of any amendment or
supplement thereto after the effectiveness thereof (including any prospectus
filed pursuant to Rule 424 under the 1933 Act) and (ii) the COMPANY or
STOCKHOLDERS shall have failed to inform HDS in writing prior to the filing or
the effectiveness thereof, as the case may be, of the existence of an untrue
statement of a material fact or the omission of such a statement of a material
fact or other matter with which they are not satisfied; provided however, that
-------- -------
for the period commencing 72 hours prior to any such filing or effectiveness,
HDS can make such draft or changed pages available by facsimile.
8.3 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the transactions contemplated hereby or the offering and sale by HDS
of HDS Stock pursuant to the Registration Statement and no governmental agency
or body shall have taken any other action or made any request of the COMPANY as
a result of which the management of the COMPANY deems it inadvisable to proceed
with the transactions hereunder.
8.4 Stockholders' Release. Each stockholder of HDS immediately prior to
---------------------
the Closing Date who is an officer or director of HDS shall have delivered to
the COMPANY an instrument dated the Closing Date releasing HDS from any and all
claims of such stockholder against HDS and obligations of HDS to such
stockholder other than obligations arising in connection with this Agreement,
the Other Agreements, any employment agreements between such stockholder and
HDS, any options to purchase HDS Stock granted by HDS to such stockholder and
any right to the issuance of the shares of HDS Stock set forth in Annex III
hereto.
8.5 Opinion of Counsel. The COMPANY shall have received an opinion from
------------------
counsel for HDS, dated the Closing Date, in the form annexed hereto as Annex V.
8.6 Director Indemnification. HDS shall have obtained directors and
------------------------
officers liability insurance from a reputable insurance company in type and
amount as is customary for companies similarly situated, and HDS shall have
entered into an indemnification agreement with each STOCKHOLDER, if any, who
will become a director of HDS, such indemnification agreement to be
substantially in the form attached as Annex VII.
8.7 Registration Statement. The underwriters named in the Registration
----------------------
Statement shall have agreed to acquire on a firm commitment basis such shares of
HDS Stock, subject to the conditions set forth in an underwriting agreement (the
"Underwriting Agreement"), on terms such that the Effective IPO Price (as
defined in Annex I) is equal to or greater than the Minimum IPO Price (as
defined in Annex I).
8.8 Consents and Approvals. All necessary consents of and filings with
----------------------
any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made, no action or
proceeding shall have been instituted or threatened to restrain or prohibit the
transactions contemplated
33
<PAGE>
hereby, and no governmental agency or body shall have taken any other action or
made any request of the COMPANY as a result of which the COMPANY deems it
inadvisable to proceed with the transactions hereunder.
8.9 Good Standing Certificates. HDS shall have delivered to the COMPANY a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
Date, duly issued by the Delaware Secretary of State and the Secretary of State
of each state in which HDS is authorized to do business, showing that HDS is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for HDS, for all periods prior to the Closing, have
been filed and paid.
8.10 No Waivers. HDS shall not have waived any closing condition under
----------
any Other Agreement, unless such condition does not constitute a Material
Adverse Effect (as defined in such Other Agreement) on the Other Company party
to such Other Agreement.
8.11 No Material Adverse Change. No event or circumstance shall have
--------------------------
occurred which would constitute an HDS Material Adverse Effect; and the COMPANY
shall have received a certificate signed by HDS dated the Pricing Date to such
effect.
8.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an employment agreement with HDS substantially in the
form of Annex VIII (each an "Employment Agreement").
8.13 Consulting Agreements. Each of the persons listed on Schedule 8.13
---------------------
shall have entered into a consulting agreement with HDS substantially in the
form of Annex IX (each a "Consulting Agreement").
8.14 Leases. Each of the persons and entities listed on Schedule 8.14
------
shall have entered into leases with HDS substantially in the forms attached as
Annex X (collectively the "Leases").
8.15 IPO Closing. The closing with respect to the IPO shall have
-----------
occurred.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.
The obligations of HDS with respect to actions to be taken on the
Pricing Date are subject to the satisfaction or waiver on or prior to the
Pricing Date of all of the following conditions except Section 9.19. The
obligations of HDS with respect to actions to be taken on the Closing Date are
subject to the satisfaction or waiver on or prior to the Closing Date of the
conditions set forth in Sections 9.1, 9.2, 9.3, 9.4, 9.11 and 9.19.
9.1 Representations and Warranties; Performance of Obligations. All the
----------------------------------------------------------
representations and warranties of the STOCKHOLDERS and the COMPANY contained in
this Agreement shall be true and correct in all material respects as of the
Pricing Date and the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date; each and
all of the terms, covenants and
34
<PAGE>
conditions of this Agreement to be complied with or performed by the
STOCKHOLDERS and the COMPANY on or before the Pricing Date or the Closing Date,
as the case may be, shall have been duly performed or complied with in all
material respects; and the STOCKHOLDERS shall have delivered to HDS a
certificate dated the Pricing Date and the Closing Date signed by them and
certified, to his or her knowledge, by the Secretary or Assistant Secretary of
the COMPANY to such effect.
9.2 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the transactions contemplated hereby or the offering and sale by HDS
of HDS Stock pursuant to the Registration Statement, and no governmental agency
or body shall have taken any other action or made any request of HDS as a result
of which the management of HDS deems it inadvisable to proceed with the
transactions hereunder.
9.3 Financial Statements. Prior to the Closing Date, HDS shall have had
--------------------
sufficient time to review consolidated balance sheets of the COMPANY for the
fiscal quarters beginning after December 31, 1998, and the unaudited
consolidated statement of income, cash flows and retained earnings of the
COMPANY for the fiscal quarters beginning after December 31, 1998, and the same
shall not disclose any change in the financial condition of the COMPANY or the
results of its operations from the COMPANY financial statements as of the
Balance Sheet Date which constitutes a Material Adverse Effect.
9.4 No Material Adverse Effect. No event or circumstance shall have
--------------------------
occurred which would constitute a Material Adverse Effect; and HDS shall have
received a certificate signed by and to the knowledge of the STOCKHOLDERS dated
the Pricing Date to such effect.
9.5 STOCKHOLDERS' Release. The STOCKHOLDERS shall have delivered to HDS
---------------------
immediately prior to the Pricing Date an instrument substantially in the form of
Annex XI (each a "Stockholder Release") dated the Pricing Date releasing the
COMPANY from any and all claims of the STOCKHOLDERS against the COMPANY and
obligations of the COMPANY to the STOCKHOLDERS, except for (i) items
specifically identified in the Stockholder Release, (ii) continuing obligations
to the STOCKHOLDERS relating to their employment by the COMPANY and (iii)
indemnity and contribution obligations of the COMPANY or its successors to an
officer or director of the COMPANY prior to the Closing.
9.6 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to HDS.
9.7 Termination of Related Party Agreements. All existing agreements
---------------------------------------
between the COMPANY and the STOCKHOLDERS or business or personal affiliates of
the COMPANY or the STOCKHOLDERS, other than those set forth on Schedule 9.7,
shall have been cancelled.
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9.8 Opinion of COMPANY Counsel. HDS shall have received an opinion from
--------------------------
counsel to the COMPANY and the STOCKHOLDERS, dated the Pricing Date,
substantially in the form annexed hereto as Annex VI, and the Underwriters shall
have received a copy of the same opinion addressed to them. Such counsel shall
be Greene, Radovsky, Maloney & Share LLP or such other counsel as shall have
been approved by HDS, such approval not to be unreasonably delayed or withheld.
9.9 Consents and Approvals. All necessary consents of and filings with
----------------------
any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; the COMPANY
shall have obtained and delivered to HDS such additional consents to the
transactions contemplated hereby as HDS may reasonably request, including,
without limitation, HDS's receipt on or prior to the Pricing Date of (a)
consents of third parties to those Material Contracts and Material Leases listed
on Schedule 5.23 pursuant to the last sentence of Section 5.23 and (b) those
licenses, franchises, permits or governmental authorizations set forth on
Schedule 5.12 pursuant to the last sentence of Section 5.12, or assurances
reasonably acceptable to it that such consents, licenses, franchises, permits or
governmental authorizations will be received on the Closing Date or that the
failure to receive such consents, licenses, franchises, permits or governmental
authorizations on the Closing Date will not adversely affect its ability to
conduct the business of the COMPANY as conducted prior to the Closing Date; no
action or proceeding shall have been instituted or threatened to restrain or
prohibit the transactions contemplated hereby; and no governmental agency or
body shall have taken any other action or made any request of HDS as a result of
which HDS deems it inadvisable to proceed with the transactions hereunder.
9.10 Good Standing Certificates. The COMPANY shall have delivered to
--------------------------
HDS a certificate, dated as of a date no later than ten days prior to the
Pricing Date, duly issued by the appropriate governmental authority in the
COMPANY's state of incorporation and in each state in which the COMPANY is
authorized to do business, showing the COMPANY is validly existing, and where
applicable, in good standing and authorized to do business and that all state
franchise and/or income tax returns and taxes due by the COMPANY for all periods
prior to the Pre-Closing have been filed and paid.
9.11 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC.
9.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an Employment Agreement with HDS.
9.13 Consulting Agreements. Each of the STOCKHOLDERS listed on Schedule
---------------------
8.13 shall have entered into a Consulting Agreement with HDS.
9.14 Leases. Each of the persons and entities listed in Schedule 8.14
------
shall have entered into all applicable Leases.
36
<PAGE>
9.15 Repayment of Indebtedness. Prior to the Closing Date, the
-------------------------
STOCKHOLDERS shall have repaid the COMPANY in full all amounts owing by the
STOCKHOLDERS to the COMPANY.
9.16 FIRPTA Certificate. The COMPANY and each STOCKHOLDER shall have
------------------
delivered to HDS a certificate to the effect that the COMPANY or such
STOCKHOLDER, as applicable, is not a "foreign person" pursuant to Section 1.144
5-2(b) of the Treasury regulations.
9.17 Insurance. HDS shall be designated as an additional named insured
---------
on all of the COMPANY's insurance policies.
9.18 Nondisturbance Agreements. Each of the lienholders and/or ground
-------------------------
lessors listed in Schedule 9.18 shall have entered into nondisturbance
agreements with HDS substantially in the form of Annex XII (collectively the
"Nondisturbance Agreements").
9.19 IPO Closing. The closing with respect to the IPO shall have
-----------
occurred.
10. CLOSING COVENANTS AND SPECIAL TAX MATTERS.
10.1 Intentionally omitted.
---------------------
10.2 Disclosure. If, subsequent to the Pricing Date and prior to the
----------
25th day after the date of the final prospectus of HDS utilized in connection
with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or
circumstance which would change (or, if after the Closing Date, would have
changed) a representation or warranty of COMPANY or STOCKHOLDERS in this
Agreement or would affect any document delivered pursuant hereto in any material
respect, the COMPANY and the STOCKHOLDERS shall promptly give notice of such
fact or circumstance to HDS. Until the Closing, HDS will keep copies of the
schedules to the Other Agreements, including but not limited to financial
statements included as schedules, available for inspection by COMPANY and its
counsel at the San Francisco office of Howard Rice.
10.3 Cooperation in Tax Return Preparation. Each party hereto shall at
-------------------------------------
its own expense cooperate with each other and make available to each other such
Tax data and other information as may be reasonably required in connection with
(i) the preparation or filing of any Tax Return, election, consent or
certification, or any claim for refund, (ii) any determinations of liability for
Taxes, or (iii) an audit, examination or other proceeding with respect to Taxes
("Tax Data"). Such cooperation shall include, without limitation, making their
respective employees and independent auditors reasonably available on a mutually
convenient basis for all reasonable purposes, including, without limitation, to
provide explanations and background information and to permit the copying of
books, records, schedules, workpapers, notices, revenue agent reports,
settlement or closing agreements and other documents containing the Tax Data
("Tax Documentation"). The Tax Data and the Tax Documentation shall be retained
until one year after the expiration of all applicable statutes of limitations
(including extensions
37
<PAGE>
thereof); provided, however, that in the event an audit, examination,
-------- ------
investigation or other proceeding has been instituted prior to the expiration of
an applicable statute of limitations, the Tax Data and Tax Documentation
relating thereto shall be retained until there is a final determination thereof
(and the time for any appeal has expired).
10.4 Tax Return Preparation and Filing.
---------------------------------
(i) HDS will be responsible for preparing and filing (or causing
the preparation and filing of) all income Tax Returns with respect to HDS or the
COMPANY for any taxable period beginning after the Closing Date. The parties
hereto acknowledge that the Closing Date shall be the last day of a taxable
period of the COMPANY pursuant to Code Section 381 and the regulations
promulgated thereunder.
(ii) STOCKHOLDERS will be responsible for preparing and filing
(or causing the preparation and filing of) all income Tax Returns with respect
to the COMPANY for any taxable period ending on or before the Closing Date, but
shall be reimbursed by HDS for reasonable legal and accounting fees incurred
thereby. HDS and the STOCKHOLDERS shall (a) with respect to such income Tax
Returns, determine the income, gain, expenses, losses, deductions, and credits
of the COMPANY in a manner consistent with prior practice and in a manner that
apportions such income, gain, expenses, loss, deductions and credits equitably
from period to period and (b) prepare such Tax Returns in a manner consistent
with prior years, in each case as determined in the good faith judgment of the
preparer of such returns; provided, however, that in all events such Tax Returns
-------- -------
shall be prepared in a manner consistent with applicable laws. Notwithstanding
the foregoing, STOCKHOLDERS shall not prepare or file any Tax Return or amended
Tax Return without the reasonable involvement, consent or instructions of HDS
regarding (i) Tax Returns for any period beginning on or after October 1, 1998
and (ii) any restatement of inventory for any taxable period. HDS shall provide
the cash necessary to pay any Taxes shown to be due on such Tax Returns filed
after the Closing Date and imposed on the COMPANY by any Taxing Authority in
respect of any taxable period commencing on or after October 1, 1997, but
without prejudice to the right of HDS to seek indemnification for such Taxes
from the STOCKHOLDERS under Section 11.6, if applicable.
(iii) In order to appropriately apportion any Taxes relating to a
taxable period that includes (but that would not, but for this section, close
on) the Closing Date, the parties hereto will, to the extent permitted by
applicable law, elect with the relevant taxing authority to treat for all
purposes the Closing Date as the last day of a taxable period of the COMPANY,
and such taxable period shall be treated as a Pre-Closing Period (as defined in
Section 10.6(c)) for purposes of this Agreement. In any case where applicable
law does not permit the COMPANY to treat the Closing Date as the last day of a
taxable period, then for purposes of this Agreement, the portion of each such
Tax that is attributable to the operations of the COMPANY for such Interim
Period shall be (i) in the case of a Tax that is not based on income or gross
receipts, the total amount of such Tax for the period in question multiplied by
a fraction, the numerator of which is the number of days in the Pre-Closing
Period portion of such Interim Period, and the denominator of
38
<PAGE>
which is the total number of days in such Interim Period, and (ii) in the case
of a Tax that is based on income or gross receipts, the Tax that would be due
with respect to the Interim Period, if such Interim Period constituted an entire
taxable period.
10.5 Tax Treatment of Transaction. Each of the parties agrees for tax
----------------------------
purposes to treat the purchase by HDS of the stock of the COMPANY pursuant to
this Agreement as an acquisition of stock of the COMPANY by HDS in a taxable
transaction.
10.6 Special Definitions Related to Tax Matters. For all purposes of this
------------------------------------------
Agreement related to any Tax matters (including Section 5.22):
(a) "Affiliate" of a person or entity shall mean a person or entity
that that directly or indirectly controls, is controlled by or is under
common control with that person or entity.
(b) "Interim Period" shall mean any taxable period commencing
prior to the Closing Date and ending after the Closing Date.
(c) "Pre-Closing Period" shall mean (i) any taxable period that
begins before the Closing Date and ends on or before the Closing Date and
(ii) the portion of any Interim Period through and including the Closing
Date.
(d) "Post-Closing Period" means any taxable period that begins after
the Closing Date, and, with respect to any Interim Period, the portion of
such Interim Period commencing immediately after the Closing Date.
(e) "Tax" means any federal, state, local, or foreign income, gross
receipts, ad valorem, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including
taxes under Section 59A), customs duties, capital stock, net worth,
franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, workers compensation, alternative or
add-on minimum, estimated, or other tax of any kind whatsoever imposed by
any federal, state, local or foreign government or any agency or political
subdivision of any such government, including any interest, penalty, or
addition thereto, without regard to whether such tax is disputed or not or
arose before, on or after the Closing Date.
(f) "Tax Returns" means all reports, elections, declarations, claims
for refund, estimates, information statements and returns (including any
schedules and attachments thereto) relating to, or required to be filed in
connection with, any Taxes pursuant to the statutes, rules and regulations
of any federal, state, local or foreign government taxing authority.
39
<PAGE>
(g) "Taxing Authority" means any governmental agency, board, bureau,
body, department or authority of any United States federal, state or local
jurisdiction, having or purporting to have jurisdiction with respect to any
Tax.
10.7 Directors. The persons named in the Registration Statement shall be
---------
appointed as directors of HDS on or before the Closing Date.
10.8 Release from Guarantees. HDS shall use its best efforts to have the
-----------------------
STOCKHOLDERS released from any and all guarantees of any obligations of the
COMPANY that they personally guaranteed for the benefit of the COMPANY
("STOCKHOLDER Guarantees") with all such guarantees of indebtedness being
assumed by HDS.
10.9 HDS Stock Options. HDS shall prior to the Closing Date adopt an
-----------------
employee stock option plan providing for the grant of options to employees of
HDS as described in the Registration Statement. HDS shall grant stock options to
former employees of the COMPANY under such plan (i) having an exercise price
equal to or less than the Effective IPO Price and (ii) having an aggregate
exercise price equal to $1,125,000. In granting options under such plan to
former employees of the COMPANY, the Board of Directors of HDS or the committee
administering such plan, as the case may be, shall follow the recommendations
from John Breznikar set forth in Schedule 10.9 as to the employees to receive
such options and the relative size of the awards to the respective employees.
11. INDEMNIFICATION.
The STOCKHOLDERS and HDS each make the following covenants that are
applicable to them, respectively:
11.1 General Indemnification by the STOCKHOLDERS. The STOCKHOLDERS
-------------------------------------------
covenant and agree that they, jointly and severally (except with respect to
Sections 5.28-5.29, which shall be several), will indemnify, defend, protect and
hold harmless HDS and the COMPANY, at all times from and after the date of this
Agreement until the Expiration Date as defined in Section 5 above, from and
against all claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without limitation,
reasonable attorneys' fees and expenses of investigation) incurred by HDS and
the COMPANY as a result of or arising from (i) any breach of the representations
and warranties of the STOCKHOLDERS or the COMPANY set forth herein or on the
schedules or certificates delivered in connection herewith (other than the
representations and warranties provided in Section 5.22, for which Section 11.6
provides special indemnity provisions); (ii) any nonfulfillment of any agreement
on the part of the STOCKHOLDERS or the COMPANY under this Agreement; (iii)
(intentionally omitted); and (iv) any liability under the 1933 Act, the 1934 Act
or other Federal or state law or regulation, at common law or otherwise, (x)
arising out of or based upon any untrue statement of a material fact relating to
the COMPANY or the STOCKHOLDERS that is provided to HDS or its counsel by
40
<PAGE>
the COMPANY or the STOCKHOLDERS specifically for inclusion and contained in any
preliminary prospectus relating to the IPO, the Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or (y) arising out of or based upon any omission to state therein a
material fact relating to the COMPANY or the STOCKHOLDERS that is required to be
stated therein or necessary to make the statements therein not misleading, and
not provided to HDS or its counsel by the COMPANY or the STOCKHOLDERS; provided,
--------
however, that such indemnity shall not inure to the benefit of HDS or the
- -------
COMPANY to the extent that such untrue statement (or alleged untrue statement)
was made in, or omission (or alleged omission) occurred in, any preliminary
prospectus and the STOCKHOLDERS provided, in writing, corrected information to
HDS counsel and to HDS for inclusion in the final prospectus, and such
information was not so included.
11.2 Indemnification by HDS. HDS covenants and agrees that it will
----------------------
indemnify, defend, protect and hold harmless the COMPANY and the STOCKHOLDERS,
at all times from and after the date of this Agreement until the Expiration
Date, from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) incurred by the COMPANY and the STOCKHOLDERS as a result of or
arising from (i) any breach by HDS of its representations and warranties set
forth herein or on the schedules or certificates attached hereto; (ii) any
nonfulfillment of any agreement on the part of HDS under this Agreement; (iii)
any liabilities which the COMPANY or the STOCKHOLDERS may incur due to HDS's
failure to be responsible for the liabilities and obligations of the COMPANY as
provided in Section 1 hereof (except to the extent that HDS has claims against
the STOCKHOLDERS by reason of such liabilities); (iv) any liability under the
1933 Act, the 1934 Act or other Federal or state law or regulation, at common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact relating to HDS or any of the Founding
Companies other than the COMPANY (with respect to information furnished to HDS
by the COMPANY) contained in any preliminary prospectus, the Registration
Statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact relating to HDS or any of the Founding
Companies other than the COMPANY that is required to be stated therein or
necessary to make the statements therein not misleading; or (v) HDS's failure to
obtain the release of any STOCKHOLDER Guarantee.
11.3 Third Person Claims. (i) Promptly after any party hereto (herein the
-------------------
"Indemnified Party") has received notice of or has knowledge of any claim by a
person not a party to this Agreement ("Third Person"), or the commencement of
any action or proceeding by a Third Person (such claim or commencement of such
action or proceeding being a "Third Party Claim") that could give rise to a
right of indemnification under this Agreement, the Indemnified Party shall, as a
condition precedent to a claim with respect thereto being made against any party
obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof
(herein the "Indemnifying Party"), give the
41
<PAGE>
Indemnifying Party written notice of such Third Party Claim describing in
reasonable detail the nature of such Third Party Claim, a copy of all papers
served with respect to that Third Party Claim (if any), an estimate of the
amount of damages attributable to the Third Party Claim to the extent feasible
(which estimate shall not be conclusive of the final amount of such claim) and
the basis for the Indemnified Party's request for indemnification under this
Agreement; provided, however, that the failure of the Indemnified Party to give
-------- -------
timely notice hereunder shall relieve the Indemnifying Party of its
indemnification obligations under this Agreement to the extent, but only to the
extent that, such failure materially prejudices the Indemnifying Party's ability
to defend such claim. Within fifteen (15) days after receipt of such notice (the
"Election Period"), the Indemnifying Party shall notify the Indemnified Party
(a) whether the Indemnifying Party disputes its potential liability to the
Indemnified Party under this Section 11 with respect to that Third Party Claim
and (b) if the Indemnifying Party does not dispute its potential liability to
the Indemnified Party with respect to that Third Party Claim, whether the
Indemnifying Party desires, at the sole cost and expense of the Indemnifying
Party, to defend the Indemnified Party against that Third Party Claim.
(ii) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim through counsel of its own choosing which is consented to by
the Indemnified Party (which consent shall not be unreasonably delayed or
withheld), then the Indemnifying Party shall have the right to defend, at its
sole cost and expense, that Third Party Claim by all appropriate proceedings,
which proceedings shall be prosecuted diligently by the Indemnifying Party to a
final conclusion or settled at the discretion of the Indemnifying Party in
accordance with this Section 11.3(ii) and the Indemnified Party will furnish the
Indemnifying Party with all information in its possession with respect to that
Third Party Claim and otherwise cooperate with the Indemnifying Party in the
defense of that Third Party Claim; provided, however, that the Indemnifying
-------- -------
Party shall not enter into any settlement with respect to any Third Party Claim
that purports to limit the activities of, or otherwise restrict in any way, any
Indemnified Party or any affiliate of any Indemnified Party without the prior
consent of that Indemnified Party (which consent may be withheld in the sole
discretion of that Indemnified Party). The Indemnified Party is hereby
authorized, at the sole cost and expense of the Indemnifying Party, to file,
during the Election Period, any motion, answer or other pleadings that the
Indemnified Party shall deem necessary or appropriate to protect its interests
or those of the Indemnifying Party. The Indemnified Party may participate in,
but not control, any defense or settlement of any Third Party Claim controlled
by the Indemnifying Party pursuant to this Section 11.3(ii) and will bear its
own costs and expenses with respect to that participation; provided, however,
-------- -------
that if the named parties to any such action (including any impleaded parties)
include both the Indemnifying Party and the Indemnified Party, and the
Indemnified Party has been advised by counsel that there may be one or more
legal defenses available to it which are different from or additional to those
available to the Indemnifying Party (the "Separate Defenses"), then the
Indemnified Party may employ separate counsel at the expense of the Indemnifying
Party, and, on its written notification
42
<PAGE>
of that employment, the Indemnifying Party shall not have the right to assume or
continue the defense of such action on behalf of the Indemnified Party with
respect to the Separate Defenses.
(iii) If the Indemnifying Party (a) within the Election Period (1)
disputes its potential liability to the Indemnified Party under this Section 11,
(2) elects not to defend the Indemnified Party pursuant to Section 11.3(ii) or
(3) fails to notify the Indemnified Party that the Indemnifying Party elects to
defend the Indemnified Party pursuant to Section 11.3(ii) or (b) elects to
defend the Indemnified Party pursuant to Section 11.3(ii) but fails diligently
and promptly to prosecute or settle the Third Party Claim, then the Indemnified
Party shall have the right to defend, at the sole cost and expense of the
Indemnifying Party (if the Indemnified Party is entitled to indemnification
hereunder), the Third Party Claim by all appropriate proceedings, which
proceedings shall be promptly and vigorously prosecuted by the Indemnified Party
to a final conclusion or settled, but any settlement shall require the consent
of the Indemnifying Party, which consent shall not be unreasonably delayed or
withheld. The Indemnified Party shall have full control of such defense and
proceedings. Notwithstanding the foregoing, if the Indemnifying Party has
delivered a written notice to the Indemnified Party to the effect that the
Indemnifying Party disputes its potential liability to the Indemnified Party
under this Section 11 and if such dispute is resolved in favor of the
Indemnifying Party, the Indemnifying Party shall not be required to bear the
costs and expenses of the Indemnified Party's defense pursuant to this Section
11.3 or of the Indemnifying Party's participation therein at the Indemnified
Party's request. The Indemnifying Party may participate in, but not control, any
defense or settlement controlled by the Indemnified Party pursuant to this
Section 11.3(iii), and the Indemnifying Party shall bear its own costs and
expenses with respect to such participation.
(iv) The parties hereto will make appropriate adjustments for any
Tax benefits, Tax detriments or insurance proceeds in determining the amount of
any indemnification obligation under this Section 11, provided that an
--------
Indemnifying Party shall be obligated to seek any payment pursuant to the terms
of any insurance policy. All indemnification payments under this Section 11
shall be deemed adjustments to the consideration provided for herein.
11.4 Exclusive Remedy. The indemnification provided for in this
----------------
Section 11 shall be the exclusive remedy in any action seeking damages or any
other form of monetary relief brought by any party to this Agreement against
another party, provided that nothing herein shall be construed to limit the
--------
in a proper case, to seek injunctive or any other non-monetary relief for a
breach of this Agreement.
11.5 Limitations on Indemnification.
------------------------------
(i) The first amounts otherwise payable by one or more STOCKHOLDERS
(whether jointly and severally or severally ) pursuant to Sections 11.1 and 11.3
to HDS and the COMPANY will be offset and reduced (but not below zero) by
43
<PAGE>
the Indemnification Threshold. The "Indemnification Threshold" is an amount
equal to one and one-half percent (1 1/2%) of the sum of (a) the aggregate
amount of Cash Consideration (as defined in Annex I) for all STOCKHOLDERS and
(b) the aggregate value of all HDS Stock received by all STOCKHOLDERS on the
Closing Date under Section 1.2 of this Agreement. All such amounts otherwise
payable by one or more STOCKHOLDERS in excess of the amount so offset and
reduced shall be paid without offset or reduction pursuant to this Section
11.5(i). Notwithstanding the foregoing, this Section 11.5(i) shall not apply to
claims for indemnification for breach of Section 7.12 or under Section 11.6. For
purposes of determining the Indemnification Threshold under this Section
11.5(i), the HDS Stock shall be valued at the Effective IPO Price, as defined in
Annex I. Claims paid directly by the STOCKHOLDERS (or third parties on behalf of
the STOCKHOLDERS) shall be excluded for purposes of calculating the
Indemnification Threshold.
(ii) The first amounts otherwise payable by HDS pursuant to
Sections 11.2 and 11.3 to STOCKHOLDERS and the COMPANY will be offset and
reduced (but not below zero) by an amount equal to the Indemnification
Threshold. All such amounts otherwise payable by HDS in excess of the amount so
offset and reduced shall be paid without offset or reduction pursuant to this
Section 11.5(ii).
(iii) Notwithstanding any other term of this Agreement, in no event
shall any STOCKHOLDER be liable under this Agreement, including this Section 11,
for an amount which exceeds the sum of (a) the amount of Cash Consideration for
such STOCKHOLDER, (b) the net proceeds to such STOCKHOLDER from the sale of such
STOCKHOLDER's HDS Stock received pursuant to Section 1.2 hereof prior to the
date that the indemnity obligation of such STOCKHOLDER is paid and (c) the value
of the shares of HDS Stock received by such STOCKHOLDER on the Closing Date
pursuant to Section 1.2 that have not been sold by such STOCKHOLDER prior to the
date that the indemnity obligation of such STOCKHOLDER is paid, valued at the
closing price per share on the trading day prior to the date the indemnification
obligation is paid.
11.6 Special Tax Indemnity Provisions.
--------------------------------
(i) From and after the Closing Date, the STOCKHOLDERS, jointly and
severally, shall indemnify and save HDS and the COMPANY harmless from any and
all Taxes (including without limitation any obligation to contribute to the
payment of a Tax determined on a consolidated, combined or unitary basis with
respect to a group of corporations that includes or included the COMPANY) which
are (a) imposed on any member (other than the COMPANY) of the consolidated,
unitary or combined group which includes or included the COMPANY or (b) imposed
on the COMPANY in respect of its income, business, property or operations or for
which the COMPANY may otherwise be liable (1) for any Pre-Closing Period, (2)
resulting by reason of the several liability of the COMPANY pursuant to Treasury
Regulations section 1.1502-6 or any analogous state, local or foreign law or
regulation or by reason of the COMPANY having been a member of any consolidated,
combined or unitary group on or prior to the Closing Date, (3) resulting from
the COMPANY ceasing to be a member of any affiliated group
44
<PAGE>
(within the meaning of Section 1504(a) of the Code), (4) in respect of any Post-
Closing Period, attributable to events, transactions, sales, deposits, services
or rentals occurring, received or performed in a Pre-Closing Period, (5) in
respect of any Post-Closing Period, attributable to any change in accounting
method employed by the COMPANY during any of the four previous taxable years,
(6) in respect of any Post-Closing Period, attributable to any items of income
or gain of an entity treated as a partnership reported by the COMPANY as a
partner, to the extent such items are properly attributable to periods of the
"partnership" ending on or before the Closing Date, or (7) attributable to any
discharge of indebtedness that may result from any capital contributions by
STOCKHOLDERS (or an affiliate of STOCKHOLDERS) to the COMPANY of any
intercompany indebtedness owed by the COMPANY to any STOCKHOLDER (or an
affiliate of any STOCKHOLDER). Notwithstanding the foregoing: (a) the
STOCKHOLDERS shall not be obligated to make indemnity payments pursuant to this
Section 11.6(i) for any Taxes imposed on HDS or the COMPANY for any taxable
period commencing on or after October 1, 1997 and ending as of the Closing Date
except to the extent that adjusted working capital of the COMPANY as of the
Closing Date, calculated as provided in Section 7.12, and in particular (but
without limitation) including such Taxes in short term liability as part of such
calculation of such adjusted working capital, is more negative than a negative
$315,000; (b) the STOCKHOLDERS' aggregate indemnity obligation as to any Taxes
imposed for any taxable period commencing on or after October 1, 1997 and ending
as of the Closing Date shall not exceed an amount equal to the lesser of (1) the
amount by which such adjusted working capital as of the Closing Date is more
negative than a negative $315,000 or (2) the aggregate amount of such Taxes; and
(c) the STOCKHOLDERS shall not be obligated to make indemnity payments pursuant
to this Section 11.6(i) for any federal or state corporate income or franchise
taxes imposed on the COMPANY for any taxable period ending on or before
September 30, 1998 in excess of that shown to be owing on any Tax Return for
such period, to the extent such additional federal or state corporate income or
franchise taxes are attributable to any restatement of inventory for such period
by HDS or the COMPANY after the Closing Date. To the extent any Taxes are
imposed on HDS or the COMPANY after the Closing Date at any time with respect to
a Pre-Closing Period, adjusted working capital will be recalculated at such time
so as to determine the STOCKHOLDERS' indemnity obligations hereunder.
(ii) From and after the Closing Date, STOCKHOLDERS shall, jointly
and severally, indemnify and save HDS and the COMPANY harmless from any
liability imposed on HDS or the COMPANY attributable to any breach of a warranty
or representation made by STOCKHOLDERS in Section 5.22.
(iii) From and after the Closing Date, and except as expressly
provided otherwise in this Section 11.6, HDS and the COMPANY shall indemnify and
hold harmless STOCKHOLDERS with respect to any Taxes imposed on HDS or the
COMPANY with respect to any Post-Closing Period. Additionally, if (a) income
attributable to the value of any HDS stock or the amount of any cash received by
John Brenzikar from HDS pursuant to Section 1.2 hereof is determined by the
Internal
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Revenue Service or California Franchise Tax Board ("FTB") to be derived
other than from the sale of a capital asset (but not a dividend) by John
Brenzikar (a "Recharacterization"), (b) in his relevant tax returns for the tax
year which includes the Closing, John Brenzikar has reported such value or cash
or both, whichever is applicable, as consideration in exchange for his shares of
COMPANY Stock held for over a year, and (c) the Recharacterization and any
payments pursuant to the provisions of this sentence result in the realization
of a net tax benefit (taking into account any deductions to which HDS, the
COMPANY or an affiliate thereof becomes entitled by reason of the
Recharacterization and such payment and considering, without limitation, any
Additional Taxes and Related Expenses) ("Net Tax Benefit") by HDS, the COMPANY
or an affiliate thereof, then (x) HDS shall indemnify and pay John Brenzikar an
amount which, after the application of federal and California income taxes, is
equal to the additional taxes, interest and penalties he is obligated to pay to
the Internal Revenue Service or the FTB by reason of the Recharacterization and
such payment, and the STOCKHOLDERS shall not be obligated to indemnify HDS, the
COMPANY or any affiliate for any Additional Taxes or Related Expenses, but the
amount required to be so paid or relieved from indemnification shall not exceed
the Net Tax Benefit, provided, however, that any liability for any such Taxes or
-------- -------
any Tax issue related to the Recharacterization may not be settled or
compromised without the consent of HDS or the COMPANY, which consent shall not
be unreasonably withheld or delayed. For purposes of this Section 11.6(iii),
"Additional Taxes" means Taxes, including but not limited to interest and
penalties, which may become due and owing by HDS, the COMPANY or an affiliate
thereof as a consequence of the Reacharacterization, and "Related Expenses"
means expenses and costs (including but not limited to reasonable attorneys' and
accountants' fees and expert witnesses' fees) of (I) investigating or attempting
to avoid or oppose the imposition of Additional Taxes, and (II) determining
amounts payable to John Breznikar pursuant to the preceding sentence.
(iv) To the extent any party to this Agreement is entitled to
indemnification from another party under this Section 11.6, such claim for
indemnification shall include the right to recover any losses, damages,
liabilities, expenses and costs related thereto, including, without limitation,
reasonable attorney's and expert witness fees and other costs of investigating
or attempting to avoid the same or oppose the imposition thereof, together with
interest thereon at the reference rate in effect from time to time at Bank of
America, NT&SA, or its successor, compounded quarterly from the date incurred.
(v) Except to the extent expressly provided to the contrary in
this Section 11.6, the general procedures regarding notice and pursuit of
indemnification claims set forth in Sections 11.1 through 11.5 shall apply to
all claims for indemnification made under this Section 11.6. Notwithstanding the
immediately preceding sentence and any provision of Section 11 to the contrary,
if a claim for indemnification involves any matter covered in this Section 11.6,
then the contest provisions of Section 11.7, as applicable, shall control
regarding the defense and handling of any such third-party claim that could give
rise to an indemnification obligation on the part of one party to another.
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<PAGE>
In addition, and notwithstanding anything else in Section 11 to the contrary,
the party with the right to control a contest has the right to choose counsel of
its choice regarding such contest. Furthermore, there shall be no limit on (a)
the time period during which a claim for indemnification may be made under this
Section 11.6 or (b) the minimum or maximum amount of indemnity payments that may
be recovered pursuant to this Section 11.6 (other than (1) each party's
obligation to make claims for indemnification promptly and without undue delay
and (2) the aggregate limit for all indemnity payments imposed on a STOCKHOLDER
provided in Section 11.5(iii)).
(vi) All amounts paid pursuant to this Section 11.6 by one party to
another party (other than interest payments) shall be treated by such parties as
an adjustment to the value of the consideration provided pursuant to this
Agreement.
11.7 Special Contest Rights Related to Tax Matters.
---------------------------------------------
(i) The STOCKHOLDERS shall have the sole right (but not the
obligation) to control, defend, settle, compromise or prosecute in any manner
any audit, examination, investigation, hearing or other proceeding with respect
to any Tax Return of the COMPANY involving only Pre-Closing Periods.
Notwithstanding the foregoing, any liability for Taxes or Tax issues, related to
inventory of the Company in respect of any taxable period ending on or before
the Closing Date, may not be settled or compromised without the consent of HDS,
which consent shall not be unreasonably withheld or delayed. In addition, (i)
the STOCKHOLDERS shall keep HDS duly informed of any proceedings in connection
with any matter related to any inventory of the COMPANY in respect of any
taxable period ending on or before the Closing Date, and (ii) HDS shall be
entitled to receive copies of all correspondence and documents relating to such
proceeding and may, at its option, observe such proceedings (including any
associated meetings or conferences).
(ii) Except as expressly provided to the contrary in this Section
11.7, HDS shall have the sole right (but not the obligation) to control, defend,
settle, compromise, or prosecute in any manner an audit, examination,
investigation, hearing or other proceeding with respect to any Tax Return of the
COMPANY; provided, however, that any liability for Taxes or Tax
-------- -------
issues related to an Interim Period may not be settled or compromised without
the consent of the STOCKHOLDERS, which consent shall not be unreasonably
withheld or delayed. In addition, (i) HDS shall keep the STOCKHOLDERS duly
informed of any proceedings in connection with an Interim Period and (ii) the
STOCKHOLDERS shall be entitled to receive copies of all correspondence and
documents relating to such proceedings and may, at their option, observe such
proceedings (including any associated meetings or conferences).
11.8 Special Notification Requirements Regarding Tax Disputes. HDS and
--------------------------------------------------------
the COMPANY shall promptly forward to the STOCKHOLDERS all written notifications
and other written communications from any Tax Authority received by HDS or the
COMPANY relating to any Pre-Closing Period of the COMPANY, and, subject to
Section 10.4(ii), HDS and the COMPANY shall execute or cause to be executed any
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<PAGE>
power of attorney or other document or take such actions as requested by the
STOCKHOLDERS to enable the STOCKHOLDERS to take any action STOCKHOLDERS deem
appropriate with respect to any proceedings relating thereto.
11.9 Refunds. A party receiving a refund, credit or similar offset (or
-------
the benefit thereof) with respect to a Tax effectively paid by another party
shall immediately pay an amount equal to such refund, credit, offset or benefit
(including any interest thereon) to the party that effectively paid the Tax with
respect to which the refund, credit, offset or benefit relates. A party entitled
to a deduction on account of a Tax effectively paid by another party shall pay
an amount equal to any Taxes saved by reason of such deduction to the party that
effectively bore the economic cost of the Tax with respect to which such
deduction relates, such amount to be paid immediately after such saving is
realized, provided, however, that no STOCKHOLDER shall be entitled to be paid
-------- -------
any amount under this Section 11.9 with respect to any Taxes saved by reason of
any deduction to which HDS, the COMPANY or any affiliate becomes entitled by
reason of any Recharacterization.
11.10 Optional Payment With Shares. Subject to Section 10.1, any
----------------------------
STOCKHOLDER may make any payment to HDS required by this Section 11 by tendering
shares of HDS Stock obtained by such STOCKHOLDER pursuant to this Agreement,
with shares so tendered being valued at the closing price per share on the
trading day prior to the date the indemnification obligation is paid. No
STOCKHOLDER will be entitled to make payment with any other shares of HDS Stock.
12. TERMINATION OF AGREEMENT.
12.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Closing Date solely:
(i) by mutual consent of the boards of directors of HDS and the
COMPANY;
(ii) at or before the Pre-Closing, by STOCKHOLDERS holding a
majority of each class of COMPANY Stock, or by HDS, if the Pre-Closing has not
been completed by June 30, 1999, time being of the essence, unless the failure
to complete the Pre-Closing is due to the willful failure of the party seeking
to terminate this Agreement to perform any of its obligations under this
Agreement to the extent required to be performed by it prior to or on the
Pricing Date;
(iii) at or before the Pre-Closing, by STOCKHOLDERS holding a
majority of each class of COMPANY Stock if a material breach or default shall be
made by HDS, or by HDS if a material breach or default shall be made by one or
more STOCKHOLDERS or the COMPANY, in the observance or in the due and timely
performance of any of the covenants, agreements or conditions contained herein,
and such default shall not have been cured and shall not reasonably be expected
to be cured on or before the Pricing Date;
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(iv) at or before the Pre-Closing pursuant to Section 7.9 hereof;
(v) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Underwriting Agreement is terminated;
(vi) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock if the Minimum
IPO Price (as defined in Annex I) is not attained at the time of the IPO; or
(vii) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Closing Date does not occur within ten (10) days after the
Pricing Date, time being of the essence.
12.2 Liabilities in Event of Termination. In the event of termination
-----------------------------------
of this Agreement as provided in this Section there shall be no liability or
obligation on the part of any party hereto except to the extent that such
liability is based on the breach by a party of any of its representations,
warranties or covenants set forth in this Agreement, provided however, that
there shall be no liability for a breach of representation or warranty if such
representation or warranty was made in good faith and with no reason to know
such representation or warranty was not true at the time made or for a breach of
a covenant if such breach was beyond such party's reasonable control.
13. NONCOMPETITION.
13.1 Prohibited Activities. Except as set forth on Schedule 13.1, the
---------------------
STOCKHOLDERS will not, for a period of four (4) years following the Closing Date
(except that (v) below shall apply to the period ending at the Closing if this
Agreement is not terminated prior to the Closing and June 30, 1999 if this
Agreement is terminated prior to the Closing), for any reason whatsoever,
directly or indirectly, for themselves or on behalf of or in conjunction with
any other person, persons, company, partnership, corporation or business of
whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales representative, in any business
which designs, constructs or supplies commercial kitchens or commercial kitchen
fixtures or equipment, within one hundred (100) miles of where the COMPANY
conducted business prior to the effectiveness of the Closing (the "Territory");
(ii) contact or solicit any person who is, at that time, an employee
of HDS (including the subsidiaries thereof) in a managerial capacity for the
purpose or with the intent of enticing such employee away from or out of the
employ of HDS (including the subsidiaries thereof), provided that any
--------
STOCKHOLDER shall be permitted to solicit and hire any member of his or her
immediate family;
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<PAGE>
(iii) contact any person or entity which is, at that time, or which
has been, within one (1) year prior to that time, a customer of HDS (including
the subsidiaries thereof), or any affiliate of such a person or entity, for the
purpose of designing, constructing or supplying commercial kitchens or
commercial kitchen fixtures or equipment;
(iv) contact any prospective acquisition candidate, on any
STOCKHOLDER's own behalf or on behalf of any person who or entity which designs,
constructs or supplies commercial kitchens or commercial kitchen fixtures or
equipment, which candidate was either called upon by HDS (including the
subsidiaries thereof) or for which HDS (or any subsidiary thereof) made an
acquisition analysis, for the purpose of acquiring such entity, provided
--------
that no STOCKHOLDER shall be charged with a violation of this Section unless and
until such STOCKHOLDER shall have knowledge or notice that such prospective
acquisition candidate was called upon, or that an acquisition analysis was made,
for the purpose of acquiring such entity;
(v) engage, directly or indirectly, through any intermediary or
otherwise, in any conversations or negotiations with any Other Company regarding
a possible business combination between or among them; provided that such
-------------
prohibition shall not preclude the COMPANY from conducting business in the
ordinary course with any Other Company or from having business combination
discussions with any other party subject to the provisions in this Agreement; or
(vi) except in furtherance of HDS's business, disclose
customers,whether in existence or proposed, of the COMPANY to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever
excluding disclosure to HDS or any of HDS's Subsidiaries.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit any STOCKHOLDER from acquiring as an investment not more than one
percent (1%) of the capital stock of any business whose stock is traded on a
national securities exchange or over-the-counter.
13.2 Damages. Because of the difficulty of measuring economic losses to
-------
HDS as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to HDS for which it would
have no other adequate remedy, each STOCKHOLDER agrees that the foregoing
covenant may be enforced by HDS, in the event of breach by such STOCKHOLDER, by
injunctions and restraining orders.
13.3 Reasonable Restraint. It is agreed by the parties hereto that the
--------------------
foregoing covenants in this Section 13 impose a reasonable restraint on the
STOCKHOLDERS in light of the activities and business of HDS (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of HDS.
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<PAGE>
It is further agreed by the parties hereto that, in the event that any
STOCKHOLDER who has entered into an Employment Agreement shall thereafter cease
to be employed thereunder, and such STOCKHOLDER shall enter into a business or
pursue other activities not in competition with HDS and/or any subsidiary
thereof, or similar activities or business in locations the operation of which,
under such circumstances, does not violate clause (i) of Section 13.1, and in
any event such new business, activities or location are not in violation of this
Section 13 or of such STOCKHOLDER's obligations under this Section 13, if any,
such STOCKHOLDER shall not be chargeable with a violation of this Section 13 if
HDS and/or any subsidiary thereof shall thereafter enter the same, similar or a
competitive (i) business, (ii) course of activities or (iii) location, as
applicable.
13.4 Severability; Reformation. The covenants in this Section 13 are
-------------------------
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
13.5 Independent Covenant. All of the covenants in this Section 13 shall
--------------------
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any STOCKHOLDER
against HDS (including the subsidiaries thereof), whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by HDS
of such covenants except for a breach of the Employment Agreement by the COMPANY
involving a material failure to pay compensation, which breach is not cured
within ten (10) days after notice of breach to HDS by STOCKHOLDER. It is
specifically agreed that the period of four (4) years stated at the beginning of
this Section 13, during which the agreements and covenants of each STOCKHOLDER
made in this Section 13 shall be effective, shall be computed by excluding from
such computation any time during which such STOCKHOLDER is in violation of any
provision of this Section 13. The covenants contained in this Section 13 shall
not be affected by any breach of any other provision hereof by any party hereto
except for a breach of the Employment Agreement by the COMPANY involving a
material failure to pay compensation, which breach is not cured within ten (10)
days after notice of breach to HDS by STOCKHOLDER and shall have no effect if
the transactions contemplated by this Agreement are not consummated.
13.6 Materiality. The COMPANY and the STOCKHOLDERS hereby agree that the
-----------
covenants in this Section 13 are a material and substantial part of this
transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they
------------
had in the past, currently have, and in the future may possibly have, access to
certain confidential information of the COMPANY, the Other Companies and/or HDS,
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such as lists of customers, operational policies, and pricing and cost policies
that are valuable, special and unique assets of the COMPANY's, the Other
Companies' and/or HDS's respective businesses. The STOCKHOLDERS agree that they
will not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except (a) to authorized representatives of HDS, (b) prior to the Pre-Closing if
consistent with past practices but only with respect to information concerning
the COMPANY, (c) following the Closing, as required in the course of performing
their duties for HDS, and (d) to counsel and other advisers, provided that such
--------
advisers (other than counsel) agree to the confidentiality provisions of this
Section 14.1; provided, further, that confidential information shall not
-------- -------
include (i) such information which becomes known to the public generally
through no fault of the STOCKHOLDERS, (ii) information required to be disclosed
by law or the order of any governmental authority under color of law, provided
--------
any information pursuant to this clause (ii), the STOCKHOLDERS shall, if
possible, give prior written notice thereof to HDS and provide HDS with the
opportunity to contest such disclosure, or (iii) the disclosing party reasonably
believes that such disclosure is required in connection with the defense of a
lawsuit against the COMPANY, the Other Companies and/or HDS. In the event of a
breach or threatened breach by any of the STOCKHOLDERS of the provisions of this
section, HDS shall be entitled to an injunction restraining such STOCKHOLDERS
from disclosing, in whole or in part, such confidential information. Nothing
herein shall be construed as prohibiting HDS from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
14.2 HDS. HDS recognizes and acknowledges that it had in the past and
---
currently has access to certain confidential information of the COMPANY, such as
lists of customers, operational policies, and pricing and cost policies that are
valuable, special and unique assets of the COMPANY's business. HDS agrees that,
prior to the Closing, it will not disclose such confidential information to any
person, firm, corporation, association or other entity for any purpose or reason
whatsoever, except (a) to authorized representatives of the COMPANY, (b) to
counsel and other advisers, provided that such advisers (other than counsel)
--------
agree to the confidentiality provisions of this Section 14.2 and (c) to the
Other Companies and their representatives pursuant to Section 7.1(i), unless (i)
such information becomes known to the public generally through no fault of HDS
(ii) disclosure is required by law or the order of any governmental authority
under color of law, provided that prior to disclosing any information pursuant
--------
to this clause (ii), HDS shall, if possible, give prior written notice thereof
to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the COMPANY and/or STOCKHOLDERS. In the event of a
breach or threatened breach by HDS of the provisions of this section, the
COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining HDS
from disclosing, in whole or in part, such confidential information. Nothing
herein shall be construed as prohibiting the
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COMPANY and the STOCKHOLDERS from pursuing any other available remedy for such
breach or threatened breach, including the recovery of damages.
14.3 Damages. Because of the difficulty of measuring economic losses as a
-------
result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may be
enforced against the other parties by injunctions and restraining orders.
14.4 Survival. The obligations of the parties under this Section 14 shall
--------
survive the termination of this Agreement.
15. TRANSFER RESTRICTIONS.
15.1 Transfer Restrictions. Except for transfers as set forth in
---------------------
Section 15.2 below to persons or entities who agree to be bound by the
restrictions set forth in this Section 15.1, for a period of one year from the
Closing Date, none of the STOCKHOLDERS shall (i) sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint, or otherwise dispose of (a) any
shares of HDS Stock received by the STOCKHOLDERS pursuant to this Agreement, or
(b) any interest (including, without limitation, an option to buy or sell) in
any such shares of HDS Stock, in whole or in part, and no such attempted
transfer shall be treated as effective for any purpose; or (ii) engage in any
transaction, whether or not with respect to any shares of HDS Stock or any
interest therein, the intent or effect of which is to reduce the risk of owning
the shares of HDS Stock acquired pursuant to Section 2 hereof (including, by way
of example and not limitation, engaging in put, call, short-sale, straddle or
similar market transactions). The certificates evidencing the HDS Stock
delivered to the STOCKHOLDERS pursuant to Section 3 of this Agreement will bear
a legend substantially in the form set forth below and contain such other
information as HDS may deem necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION
PRIOR TO THE FIRST ANNIVERSARY OF THE CLOSING DATE. UPON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER
AGENT) AFTER THE DATE SPECIFIED ABOVE.
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15.2 Permitted Transferees. Notwithstanding the provisions of
---------------------
Section 15.1, a STOCKHOLDER shall have the right to transfer some or all of the
shares of HDS stock to any one or more of the following, provided that the
transferee agrees to be bound (in a form satisfactory to HDS and its counsel) by
the terms and conditions of this Agreement with respect to any further transfer
of such shares: (a) any family member of a STOCKHOLDER (including, without
limitation, any transfer to a custodian under any gift to minors statute), with
family members being defined as any spouse, lineal descendant or ancestor of a
STOCKHOLDER, (b) any trust which is for the benefit of one or more family
members of a STOCKHOLDER and (c) any corporation, partnership, limited liability
company or other entity (x) of which a majority of the interests therein by
value is owned by the STOCKHOLDER and members of the STOCKHOLDER's family, and
(y) which is and continues to be controlled by the STOCKHOLDER and members of
the STOCKHOLDER'S family for the period set forth in Section 15.1.
16. FEDERAL SECURITIES ACT REPRESENTATIONS.
The STOCKHOLDERS acknowledge that the shares of HDS Stock to be
delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will
not be registered under the 1933 Act and therefore may not be resold without
compliance with the 1933 Act. The HDS Stock to be acquired by such STOCKHOLDERS
pursuant to this Agreement is being acquired solely for their own respective
accounts, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution.
16.1 Compliance with Law. The STOCKHOLDERS covenant, warrant and
-------------------
represent that none of the shares of HDS Stock issued to such STOCKHOLDERS will
be offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the rules and regulations of the SEC. All the HDS Stock
shall bear the following legend in addition to the legend required under Section
15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "1933 ACT") AND MAY ONLY BE SOLD OR
OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE 1933 ACT
AND APPLICABLE SECURITIES LAWS.
16.2 Accredited Investors; Economic Risk; Sophistication. Except as
---------------------------------------------------
disclosed in Schedule 16.2, each STOCKHOLDER represents and warrants that such
STOCKHOLDER is an "accredited investor," as that term is defined in Regulation D
promulgated by the SEC under the 1933 Act. The STOCKHOLDERS are able to bear the
economic risk of an investment in the HDS Stock acquired pursuant to this
Agreement and can afford to sustain a total loss of such investment and have
such knowledge and experience in financial and business matters that they are
capable of evaluating the merits and risks of the proposed investment in the HDS
Stock. The
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STOCKHOLDERS or their respective purchaser representatives have received all
information they deemed material and had an adequate opportunity to ask
questions and receive answers from the officers of HDS concerning any and all
matters relating to the transactions described herein including, without
limitation, the background and experience of the current and proposed officers
and directors of HDS, the plans for the operations of the business of HDS, the
business, operations and financial condition of the Founding Companies other
than the COMPANY, and any plans for additional acquisitions and the like. All
STOCKHOLDERS who are not "accredited investors" have been represented by
qualified purchaser representatives.
17. REGISTRATION RIGHTS.
17.1 Piggyback Registration Rights. At any time following one year
-----------------------------
after the Closing Date, whenever HDS proposes to register any HDS Stock for its
own or others' account under the 1933 Act for a public offering, other than (i)
registrations of shares to be used as consideration for acquisitions of
additional businesses by HDS and (ii) registrations relating to employee benefit
plans, HDS shall give each of the STOCKHOLDERS prompt written notice of its
intent to do so. Upon the written request of any of the STOCKHOLDERS given
within thirty (30) days after receipt of such notice, HDS shall cause to be
included in such registration all of the HDS Stock issued pursuant to this
Agreement which any such STOCKHOLDER requests provided that HDS shall have the
right to reduce the number of shares included in such registration to the extent
that inclusion of such shares could, in the opinion of tax counsel to HDS or its
independent auditors, jeopardize the status of the transactions contemplated
hereby and by the Registration Statement as a reorganization described in
Section 368(a)(1)(A) of the Code. In addition, if HDS is advised in writing in
good faith by any managing underwriter of an underwritten offering of the
securities being offered pursuant to any registration statement under this
Section 17.1 that the number of shares to be sold by persons other than HDS is
greater than the number of such shares which can be offered without adversely
affecting the offering, HDS may reduce the number of shares offered for the
accounts of such persons to a number deemed satisfactory by such managing
underwriter; provided that such reduction shall be made first by reducing the
-------- ----
number of shares to be sold by persons other than HDS, the stockholders named on
Annex III hereto, the stockholders of the Founding Companies (the "Founding
Stockholders"), and any person or persons who have required such registration
pursuant to "demand" registration rights granted by HDS; thereafter, if a
further reduction is required, it shall be made first by reducing the number of
shares to be sold by the stockholders named on Annex III hereto and the Founding
Stockholders, with such further reduction being made so that to the extent any
shares can be sold by stockholders named in Annex III hereto and the Founding
Stockholders, each such stockholder will be permitted to sell a number of shares
proportionate to the number of shares of HDS Stock owned by such stockholder
immediately after the Closing, provided that if any stockholder does not wish to
sell all shares such stockholder is permitted to sell, the opportunity to sell
additional shares shall be reallocated in the same manner to those stockholders
named in Annex III hereto and
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the Founding Stockholders who wish to sell more shares until no more shares can
be sold by such stockholders.
17.2 Demand Registration Rights. At any time after the date one year
--------------------------
after the Closing Date, Founding Stockholders holding shares of HDS Stock issued
pursuant to this Agreement and the Other Agreements which shares have (i) not
been previously registered or sold, (ii) which are not entitled to be sold under
Rule 144(k) (or any similar or successor provision) and (iii) which have an
aggregate market value in excess of $5 million (based on the average closing
price on the five days prior to the date of such request) may request in writing
that HDS file a registration statement under the 1933 Act covering such shares
of HDS Stock then held by such Founding Stockholders (a "Demand Registration");
provided that the aggregate value of HDS Stock proposed to be sold under such
registration statement is not less than $5 million (based on the closing market
price of the HDS Stock within five (5) business days of the date of such
request); and provided further that HDS shall have the right to reduce the
number of shares included in such registration to the extent that inclusion of
such shares could, in the opinion of tax counsel to HDS or its independent
auditors, jeopardize the status of the transactions contemplated hereby and by
the Registration Statement as a reorganization described in Section 368(a)(1)(A)
of the Code. Within ten (10) days of the receipt of such request, HDS shall give
written notice of such request to all other Founding Stockholders and shall, as
soon as practicable, file and use its best efforts to cause to become effective
a registration statement covering all such shares. HDS will use its best efforts
to keep such Demand Registration current and effective for one hundred twenty
(120) days (or such shorter period during which holders shall have sold all HDS
Stock which they requested to be registered). HDS shall be obligated to effect
only two (2) Demand Registrations for all Founding Stockholders, and the second
request may not be made until at least one (1) year after the effective date of
the registration statement for the first Demand Registration.
Notwithstanding the foregoing paragraph, following such a demand a
majority of the COMPANY's disinterested directors (i.e., directors who have not
----
demanded or elected to sell shares in any such public offering) may postpone the
filing of the registration statement for a thirty (30) day period beyond the
period provided above.
If at the time of any request by the Founding Stockholders for a Demand
Registration HDS has fixed plans to file within sixty (60) days after such
request a registration statement covering the sale of any of its securities, no
registration of the Founding Stockholders' HDS Stock shall be initiated under
this Section 17.2 until ninety (90) days after the effective date of such
registration unless HDS is no longer proceeding diligently to effect such
registration; provided that HDS shall provide the Founding Stockholders the
--------
right to participate in such public offering pursuant to, and subject to,
Section 17.1 hereof.
17.3 Registration Procedures. All expenses incurred in connection with
-----------------------
the registrations under this Section 17 (including all registration, filing,
qualification, legal, printer and accounting fees, but excluding underwriting
commissions and discounts) shall
56
<PAGE>
be borne by HDS. In connection with registrations under Sections 17.1 and 17.2,
HDS shall (i) prepare and file with the SEC as soon as reasonably practicable, a
registration statement with respect to the HDS Stock and use its best efforts to
cause such registration to promptly become and remain effective for a period of
at least one hundred twenty (120) days (or such shorter period during which
holders shall have sold all HDS Stock which they requested to be registered);
(ii) use its best efforts to register and qualify the HDS Stock covered by such
registration statement under applicable state securities laws as the holders
shall reasonably request for the distribution for the HDS Stock; and (iii) take
such other actions as are reasonable and necessary to comply with the
requirements of the 1933 Act and the regulations thereunder.
17.4 Underwriting Agreement. In connection with each registration
----------------------
pursuant to Sections 17.1 and 17.2 covering an underwritten registered public
offering, HDS and each participating holder agree to enter into a written
agreement with the managing underwriters in such form and containing such
provisions as are customary in the securities business for such an arrangement
between such managing underwriters and companies of HDS's size and investment
stature, including indemnification. In a registration under Section 17.1, the
managing underwriters shall be selected by HDS (or, if required by a "demand"
registration right of a stockholder requiring such registration, by such
requiring stockholder), and in a registration under Section 17.2, may be
selected by the holders of a majority of the shares that have demanded to be
included in such registration pursuant to Section 17.2, provided the managing
underwriters so selected by such majority are reasonably acceptable to HDS.
17.5 HDS Stock. For the purposes of this Section 17, HDS Stock issued
---------
pursuant to this Agreement shall include shares issued as a stock dividend or
stock split, or otherwise distributed by HDS to its stockholders without
consideration, in respect of shares of HDS Stock previously issued pursuant to
this Agreement.
17.6 Availability of Rule 144. HDS shall not be obligated to register
------------------------
shares of HDS Stock held by any STOCKHOLDER at any time when the resale
provisions of Rule 144(k) (or any similar or successor provision) promulgated
under the 1933 Act are available to such STOCKHOLDER.
17.7 Survival. The provisions of this Section 17 shall survive the
--------
Pre-Closing and Closing Date until December 31, 2002.
18. GENERAL.
18.1 Cooperation. The COMPANY, STOCKHOLDERS and HDS shall each
-----------
(i) attempt in good faith (without the COMPANY or HDS being required to incur
unreasonable expense, and without the STOCKHOLDERS being required to incur
expense unless reimbursed by HDS) to cause all conditions to actions to be taken
on the Pricing Date and the Closing Date to be satisfied, and (ii) deliver or
cause to be delivered to the other on the Pricing Date and Closing Date, and at
such other times and places as shall be reasonably agreed to, such additional
instruments, and take such additional
57
<PAGE>
actions as can be taken without unreasonable expense, as any other may
reasonably request for the purpose of carrying out this Agreement. The COMPANY
will cooperate and use its reasonable efforts to have the present officers,
directors and employees of the COMPANY cooperate with HDS on and after the
Closing Date in furnishing information, evidence, testimony and other assistance
in connection with any Tax Return filing obligations, actions, proceedings,
arrangements or disputes of any nature with respect to matters pertaining to all
periods prior to the Closing Date.
18.2 Successors and Assigns. This Agreement and the rights of the parties
----------------------
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
HDS, and the heirs and legal representatives of the STOCKHOLDERS.
18.3 Entire Agreement. This Agreement (including the schedules, exhibits
----------------
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the STOCKHOLDERS, the
COMPANY, and HDS and supersede any prior agreement and understanding relating to
the subject matter of this Agreement. This Agreement, upon execution,
constitutes a valid and binding agreement of the parties hereto enforceable in
accordance with its terms. Except as otherwise stated herein, this Agreement and
the Annexes hereto may be modified or amended only by a written instrument
executed by the STOCKHOLDERS, the COMPANY, and HDS, acting through their
respective officers, duly authorized by their respective Boards of Directors.
Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to
have been disclosed for purposes of any other Schedule required hereby.
18.4 Counterparts. This Agreement may be executed simultaneously in two
------------
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
18.5 Brokers and Agents. Except as disclosed on Schedule 18.5, each party
------------------
represents and warrants that it employed no broker or agent in connection with
this transaction and agrees to indemnify the other against all loss, cost,
damages or expense arising out of claims for fees or commission of brokers
employed or alleged to have been employed by such indemnifying party.
18.6 Expenses. Whether or not the transactions herein contemplated shall
--------
be consummated, (i) HDS will pay the fees, expenses and disbursements of HDS and
its agents, representatives, accountants and counsel incurred in connection with
the subject matter of this Agreement and any amendments thereto, including all
costs and expenses incurred in the performance and compliance with all
conditions to be performed by HDS under this Agreement, including the fees and
expenses of Arthur Andersen, LLP, and Howard, Rice, and the costs of preparing
the Registration Statement, and (ii) prior to the Closing, the COMPANY will pay
the fees, expenses and disbursements of their counsel and accountants for the
STOCKHOLDERS and the COMPANY incurred in connection with the subject matter of
this Agreement or the Registration Statement. Set forth on
58
<PAGE>
Schedule 18.6 hereto is the estimated amount of such fees, expenses and
disbursements to be paid by the COMPANY pursuant to clause (ii) of the preceding
sentence. The STOCKHOLDERS shall pay all sales, use, transfer, real property
transfer, recording, gains, stock transfer and other similar taxes and fees
("Transfer Taxes") incurred in connection with the transactions contemplated by
this Agreement. The STOCKHOLDERS shall file all necessary documentation and Tax
Returns with respect to such Transfer Taxes. In addition, each STOCKHOLDER
acknowledges that he, and not the COMPANY or HDS, will pay all taxes due upon
receipt of the consideration payable to such STOCKHOLDER pursuant to Section 2
hereof.
18.7 Notices. All notices and other communications required or permitted
-------
hereunder shall be effective upon receipt (or refusal of receipt) and shall be
in writing and delivered by depositing the same in United States mail, addressed
to the party to be notified, postage prepaid and registered or certified with
return receipt requested, by delivering the same in person to such party or to
an officer or agent of such party or by facsimile transmission (followed by
delivery by United States mail).
(a) If mailed to HDS, addressed to:
Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, Chief Executive Officer
Fax: (310) 253-9734
with copies to:
Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111-4065
Attn: Raymond P. Haas
Fax: (415) 217-5910
(b) If mailed to the STOCKHOLDERS, addressed to them at their
addresses set forth on Annex II, with copies to such counsel, if any, as is set
forth with respect to each STOCKHOLDER on such Annex II; if mailed to the
COMPANY, addressed to it at its address set forth on Annex II marked "Personal
and Confidential" with copies to the COMPANY's counsel as set forth on Annex II,
provided that notice to the COMPANY shall only be for notices or communications
- --------
required or permitted hereunder prior to the Closing, or to such other address
or counsel as any party hereto shall specify pursuant to this Section 18.7 from
time to time.
18.8 Governing Law; Forum. This Agreement shall be governed by and
--------------------
construed in accordance with the laws of the State of California, without giving
effect to laws concerning choice of law or conflicts of law. All disputes
arising out of this
59
<PAGE>
Agreement or the obligations of the parties hereunder, including disputes that
may arise following termination of this Agreement, shall be subject to the
exclusive jurisdiction and venue of the California State courts of the City and
County of San Francisco, California (or, if there is federal jurisdiction, then
the exclusive jurisdiction and venue of the United States District Court having
jurisdiction over the City and County of San Francisco). Each party hereby
irrevocably and unconditionally consents to the personal and exclusive
jurisdiction and venue of said courts and any objection that it may now or
hereafter have to the venue of any such action or proceeding in any such court
or that such action or proceeding was brought in an inconvenient court and
agrees not to plead or claim the same. THE PARTIES HERETO EACH HEREBY KNOWINGLY
AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTER-
CLAIM, WHETHER IN CONTRACT OR TORT OR OTHERWISE, ARISING OUT OF OR IN ANY WAY
RELATING TO THIS AGREEMENT OR ANY OTHER AGREEMENTS EXECUTED IN CONNECTION
HEREWITH.
18.9 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties, covenants and agreements of the parties made herein, or in writing
delivered pursuant to the provisions of this Agreement shall survive the
consummation of the transactions contemplated hereby and any examination on
behalf of the parties until the applicable Expiration Date.
18.10 Exercise of Rights and Remedies. Except as otherwise provided
-------------------------------
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power, or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.11 Time. Time is of the essence with respect to this Agreement.
----
18.12 Reformation and Severability. In case any provision of this
----------------------------
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
18.13 Construction. This Agreement has been negotiated among HDS, the
------------
COMPANY, the STOCKHOLDERS and their respective legal counsel, and legal or
equitable principles that might require the construction of this Agreement or
any provision of this Agreement against the party drafting this Agreement will
not apply in any construction or interpretation of this Agreement.
60
<PAGE>
18.14 Captions. The headings of this Agreement are inserted for
--------
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
18.15 Third-Party Beneficiaries. This Agreement shall not confer any
-------------------------
rights or remedies upon any person or entity other than the parties hereto, the
parties to the Other Agreements, and their respective successors and permitted
assigns.
[THE REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
61
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
62
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
63
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
HOSPITALITY DESIGN & SUPPLY, INC.
By /s/ Roger Laverty
----------------------------------
Name: Roger Laverty
Title: Chief Executive Officer
STOCKHOLDERS:
/s/ John Breznikar
-------------------------------------
JOHN BREZNIKAR
/s/ Rodney Rossi
-------------------------------------
RODNEY ROSSI
/s/ Mary Rossi
-------------------------------------
MARY ROSSI
/s/ Louis Breznikar
-------------------------------------
LOUIS BREZNIKAR
/s/ Victoria Jeane Neal
-------------------------------------
VICTORIA JEANE NEAL
EAST BAY RESTAURANT SUPPLY, INC.
By /s/ John Breznikar
----------------------------------
Name: John Breznikar
Title: President
64
<PAGE>
ANNEX I
CONSIDERATION TO FOUNDING COMPANY STOCKHOLDERS
Part I
A. Aggregate consideration to be paid to STOCKHOLDERS:
1. COMPANY Stock will be converted into 263,021 shares of common stock
of HDS and $9,468,745 in cash.
2. The STOCKHOLDERS and the COMPANY will not be obligated to consummate
the transaction set forth in the Agreement if the initial public offering price
per share when the Registration Statement goes effective (the "Effective IPO
Price") is less than $10 per share (the "Minimum IPO Price").
3. The amount of cash paid to STOCKHOLDERS will be offset and reduced
by the amount of any receivables from STOCKHOLDERS as of the Effective Time.
65
<PAGE>
B. Consideration to be paid to each STOCKHOLDER:
<TABLE>
<CAPTION>
Percentage
Shares of Cash Before Allocation of Any
STOCKHOLDER Common Offsets & Offsets and
Stock of HDS Reductions/1/ Reductions/2/
<S> <C> <C> <C>
John Breznikar 93,750 $3,374,999 33%
Rodney and Mary Rossi 62,500 2,249,999 33%
Louis Breznikar 62,500 2,249,999 33%
Victoria Jeane Neal 44,271 1,593,748 0%
___________ ___________ ___________
TOTALS: 263,021 $9,468,745 100%
</TABLE>
____________________
/1/ For purposes of Section 11.5(i) and 11.5(iii) of the Agreement, the term
"Cash Consideration" means, as to each STOCKHOLDER, the Cash Before Offsets and
Reductions shown for such STOCKHOLDER in this column.
/2/ Excluding offsets and reductions pursuant to Part I, paragraph 4.3. of
this Annex I.
66
<PAGE>
EXHIBIT 2.3
AGREEMENT AND PLAN OF REORGANIZATION
dated as of February 26, 1999
by and among
HOSPITALITY DESIGN & SUPPLY, INC.,
ERF CALIFORNIA, INC.,
ECONOMY RESTAURANT FIXTURES, INC.
and
the STOCKHOLDERS named herein
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. THE MERGER.................................................................................... 1
1.1 Delivery and Filing of Articles of Merger............................................... 1
1.2 Effective Time of the Merger............................................................ 1
1.3 Certificate of Incorporation, Bylaws and Board of Directors of Surviving Corporation.... 2
1.4 Effect of Merger........................................................................ 2
2. CONVERSION OF STOCK........................................................................... 3
2.1 Manner of Conversion.................................................................... 3
2.2 Other Companies......................................................................... 4
3. DELIVERY OF STOCK............................................................................. 4
3.1 Delivery of HDS Stock................................................................... 4
3.2 Delivery of COMPANY Stock............................................................... 4
4. PRE-CLOSING AND CLOSING....................................................................... 4
4.1 Pre-Closing............................................................................. 4
4.2 Closing................................................................................. 5
4.3 No Assurances........................................................................... 5
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS................................... 6
(A) Representations and Warranties of COMPANY and STOCKHOLDERS................................... 6
5.1 Due Organization....................................................................... 6
5.2 Authority and Validity................................................................. 7
5.3 Capital Stock of the COMPANY........................................................... 7
5.4 Transactions in Capital Stock.......................................................... 7
5.5 No Bonus Shares........................................................................ 7
5.6 Subsidiaries........................................................................... 8
5.7 Predecessor Status; etc................................................................ 8
5.8 Spin-off by the COMPANY................................................................ 8
5.9 Financial Statements................................................................... 8
5.10 Liabilities and Obligations............................................................ 9
5.11 Accounts and Notes Receivable.......................................................... 9
5.12 Permits and Intangibles................................................................ 10
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.13 Environmental Matters.................................................................. 10
5.14 Real and Personal Property............................................................. 11
5.15 Significant Customers; Material Contracts and Commitments.............................. 11
5.16 Title to Real Property................................................................. 12
5.17 Insurance.............................................................................. 12
5.18 Compensation; Employment Agreements.................................................... 13
5.19 Employee Plans......................................................................... 13
5.20 Compliance with ERISA.................................................................. 14
5.21 Conformity with Law.................................................................... 16
5.22 Taxes.................................................................................. 17
5.23 No Violations.......................................................................... 19
5.24 Government Contracts................................................................... 20
5.25 Absence of Changes..................................................................... 20
5.26 Deposit Accounts; Powers of Attorney................................................... 21
5.27 Relations with Governments............................................................. 21
(B) Representations and Warranties of STOCKHOLDERS............................................... 21
5.28 Authority; Validity; Ownership......................................................... 22
5.29 Preemptive Rights...................................................................... 22
6. REPRESENTATIONS OF HDS....................................................................... 22
6.1 Due Organization....................................................................... 22
6.2 HDS Stock.............................................................................. 23
6.3 Authority and Validity................................................................. 23
6.4 Capital Stock of HDS................................................................... 23
6.5 No Side Agreements..................................................................... 24
6.6 Subsidiaries........................................................................... 24
6.7 Business; Financial Information........................................................ 24
6.8 Conformity with Law.................................................................... 25
6.9 No Violations.......................................................................... 25
6.10 Intentionally Omitted.................................................................. 25
7. COVENANTS PRIOR TO CLOSING................................................................... 26
7.1 Access and Cooperation; Due Diligence.................................................. 26
7.2 Conduct of Business Pending Closing.................................................... 27
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.3 Prohibited Activities.................................................................. 27
7.4 No Shop................................................................................ 29
7.5 Notice to Bargaining Agents............................................................ 29
7.6 Termination of Plans................................................................... 29
7.7 HDS Prohibited Activities.............................................................. 29
7.8 Notification of Certain Matters........................................................ 29
7.9 Amendment of Schedules................................................................. 30
7.10 Cooperation in Preparation of Registration Statement................................... 31
7.11 Examination of Final Financial Statements.............................................. 31
7.12 Maximum Working Capital Deficit and Advances to STOCKHOLDERS........................... 31
7.13 Other Agreement Terms.................................................................. 32
7.14 Employment Matters..................................................................... 32
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.............................. 32
8.1 Representations and Warranties; Performance of Obligations............................. 32
8.2 Satisfaction........................................................................... 33
8.3 No Litigation.......................................................................... 33
8.4 Stockholders' Release.................................................................. 33
8.5 Opinion of Counsel..................................................................... 33
8.6 Director Indemnification............................................................... 34
8.7 Registration Statement................................................................. 34
8.8 Consents and Approvals................................................................. 34
8.9 Good Standing Certificates............................................................. 34
8.10 No Waivers............................................................................. 34
8.11 No Material Adverse Change............................................................. 34
8.12 Employment Agreements.................................................................. 34
8.13 Consulting Agreements.................................................................. 34
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.................................................. 35
9.1 Representations and Warranties; Performance of Obligations............................ 35
9.2 No Litigation......................................................................... 35
9.3 Financial Statements.................................................................. 35
</TABLE>
-iii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
9.4 No Material Adverse Effect............................................................ 35
9.5 STOCKHOLDERS' Release................................................................. 35
9.6 Satisfaction.......................................................................... 36
9.7 Termination of Related Party Agreements............................................... 36
9.8 Opinion of COMPANY Counsel............................................................ 36
9.9 Consents and Approvals................................................................ 36
9.10 Good Standing Certificates............................................................ 36
9.11 Registration Statement................................................................ 37
9.12 Employment Agreements................................................................. 37
9.13 Consulting Agreements................................................................. 37
9.14 Intentionally Omitted................................................................. 37
9.15 Repayment of Indebtedness............................................................. 37
9.16 FIRPTA Certificate.................................................................... 37
9.17 Insurance............................................................................. 37
10. POST-CLOSING COVENANTS AND SPECIAL TAX MATTERS.............................................. 37
10.1 Intentionally Omitted................................................................. 37
10.2 Disclosure............................................................................ 37
10.3 Cooperation in Tax Return Preparation................................................. 37
10.4 Tax Return Preparation and Filing..................................................... 38
10.5 Tax Treatment of Transaction.......................................................... 39
10.6 Special Definitions Related to Tax Matters............................................ 39
10.7 Directors............................................................................. 40
10.8 Release from Guarantees............................................................... 40
10.9 Preservation of Plans................................................................. 40
10.10 HDS Stock Options..................................................................... 41
10.11 Section 338(h)(10) Election........................................................... 41
11. INDEMNIFICATION............................................................................. 42
11.1 General Indemnification by the STOCKHOLDERS........................................... 42
11.2 Indemnification by HDS................................................................ 42
11.3 Third Person Claims................................................................... 43
11.4 Exclusive Remedy...................................................................... 45
11.5 Limitations on Indemnification........................................................ 45
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
11.6 Special Tax Indemnity Provisions...................................................... 46
11.7 Special Contest Rights Related to Tax Matters......................................... 47
11.8 Special Notification Requirements Regarding Tax Disputes.............................. 48
11.9 Refunds............................................................................... 48
11.10 Optional Payment With Shares.......................................................... 48
12. TERMINATION OF AGREEMENT.................................................................... 48
12.1 Termination........................................................................... 48
12.2 Liabilities in Event of Termination................................................... 49
13. NONCOMPETITION.............................................................................. 49
13.1 Prohibited Activities................................................................. 49
13.2 Damages............................................................................... 50
13.3 Reasonable Restraint.................................................................. 51
13.4 Severability; Reformation............................................................. 51
13.5 Independent Covenant.................................................................. 51
13.6 Materiality........................................................................... 51
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION................................................... 52
14.1 STOCKHOLDERS.......................................................................... 52
14.2 HDS................................................................................... 52
14.3 Damages............................................................................... 53
14.4 Survival.............................................................................. 53
15. TRANSFER RESTRICTIONS....................................................................... 53
15.1 Transfer Restrictions................................................................. 53
15.2 Permitted Transferees................................................................. 53
16. FEDERAL SECURITIES ACT REPRESENTATIONS...................................................... 54
16.1 No Registration Rights................................................................ 54
16.2 Compliance with Law................................................................... 54
16.3 Accredited Investors; Economic Risk; Sophistication................................... 54
17. REGISTRATION RIGHTS......................................................................... 55
17.1 Piggyback Registration Rights......................................................... 55
17.2 Demand Registration Rights............................................................ 55
17.3 Registration Procedures............................................................... 56
17.4 Underwriting Agreement................................................................ 56
</TABLE>
-v-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
17.5 HDS Stock............................................................................. 57
17.6 Availability of Rule 144.............................................................. 57
17.7 Survival.............................................................................. 57
18. GENERAL..................................................................................... 57
18.1 Cooperation........................................................................... 57
18.2 Successors and Assigns................................................................ 57
18.3 Entire Agreement...................................................................... 58
18.4 Counterparts.......................................................................... 58
18.5 Brokers and Agents.................................................................... 58
18.6 Expenses.............................................................................. 58
18.7 Notices............................................................................... 58
18.8 Governing Law; Forum.................................................................. 59
18.9 Survival of Representations and Warranties............................................ 59
18.10 Exercise of Rights and Remedies....................................................... 60
18.11 Time.................................................................................. 60
18.12 Reformation and Severability.......................................................... 60
18.13 Remedies Cumulative................................................................... 60
18.14 Construction.......................................................................... 60
18.15 Captions.............................................................................. 60
</TABLE>
-vi-
<PAGE>
SCHEDULES and ANNEXES
<TABLE>
<S> <C> <C>
Annex I -- Consideration to Founding Company Stockholders
Annex II -- Stockholders and Stock Ownership of the COMPANY
Annex III -- Stockholders and Stock Ownership of HDS
Annex IV -- Certificate of Incorporation and Bylaws of HDS
Annex V -- Form of Opinion of Howard, Rice, Nemerovski, Canady, Falk &
Rabkin, A Professional Corporation
Annex VI -- Form of Opinion of COMPANY Counsel
Annex VII -- Form of Director Indemnification Agreement
Annex VIII -- Form of Employment Agreement
Annex IX -- Form of Consulting Agreement
Annex X -- Leases
Annex XI -- Stockholder Release
Schedule 5.1 -- Qualifications to Do Business
Schedule 5.3 -- Capital Stock of the COMPANY
Schedule 5.4 -- Transactions in Capital Stock; Options & Warrants to Acquire
Capital Stock
Schedule 5.5 -- Stock Issued Pursuant to Awards, Grants and Bonuses
Schedule 5.6 -- Subsidiaries; Capitalization of Subsidiaries
Schedule 5.7 -- Names of Predecessor Companies
Schedule 5.8 -- Sales or Spin-offs of Significant Assets
Schedule 5.9 -- Financial Statements
Schedule 5.10 -- Significant Liabilities and Obligations
Schedule 5.11 -- Accounts and Notes Receivable
Schedule 5.12 -- Licenses, Franchises, Permits and Other Governmental
Authorizations
Schedule 5.13 -- Environmental Matters
Schedule 5.14 -- Real Property, Leases and Significant Personal Property
Schedule 5.15 -- Significant Customers and Material Contracts
Schedule 5.17 -- Insurance Policies and Claims
Schedule 5.18 -- Officers, Directors and Key Employees, Employment Agreements;
Compensation
Schedule 5.19 -- Employee Benefit Plans
Schedule 5.20 -- Compliance with ERISA
Schedule 5.21 -- Violations of Law, Regulations or Orders
Schedule 5.22 -- Taxes
Schedule 5.23 -- Violations of Charter Documents and Material Defaults
Schedule 5.24 -- Governmental Contracts Subject to Price Redetermination or
Renegotiation
Schedule 5.25 -- Changes Since Balance Sheet Date
Schedule 5.26 -- Bank Accounts; Powers of Attorney
Schedule 5.28 -- Encumbrances on the COMPANY Stock
Schedule 6.4 -- Authorized Capital
</TABLE>
-vii-
<PAGE>
<TABLE>
<S> <C> <C>
Schedule 6.5 -- HDS Side Agreements
Schedule 6.6 -- HDS's Subsidiaries
Schedule 6.7 -- HDS's Financial Statements
Schedule 6.9 -- No Violations
Schedule 7.2 -- Exceptions to Conducting Business in the Ordinary Course
Between Balance Sheet Date and Closing Date
Schedule 7.3 -- Prohibited Activities
Schedule 7.6 -- Plans to be Terminated by the Pricing Date
Schedule 7.7 -- Exceptions to Restrictions on HDS
Schedule 8.12 -- Employment Agreements
Schedule 8.13 -- Consulting Agreements
Schedule 8.14 -- Leases
Schedule 9.7 -- Termination of Related Party Agreements
Schedule 10.9 -- Preserved Plans
Schedule 10.10 -- Stock Options
Schedule 13.1 -- Prohibited Activities
Schedule 16.3 -- Non-Accredited Investors
Schedule 18.5 -- Brokers and Agents
</TABLE>
-viii-
<PAGE>
TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
Defined Term Section
- ------------ -------
<S> <C>
accredited investor 16.2
Affiliate 10.6(a)
Agreement Preamble
Articles of Merger 1.1
Balance Sheet Date 5.9
Cash Consideration Annex I
Charter Documents 5.1
Closing 4.2
Closing Date 4.2
COBRA 5.20(v)
Code Whereas
COMPANY Preamble
COMPANY Affiliates 5.8
COMPANY Financial Statements 5.9
COMPANY Stock 2.1
Constituent Corporations Whereas
Consulting Agreement 8.13
controlled group 5.20
December 31, 1998 COMPANY 5.9
Balance Sheet
December 31, 1998 COMPANY Financial 5.9
Statements
Defined Benefit Plan 5.19(iv)
Delaware GCL 1.4
Effective IPO Price Annex I
Effective Time of the Merger 1.2
Election Period 11.3(i)
Employment Agreement 8.12
Environmental Laws 5.13
ERISA 5.19
Expiration Date 5(A)
Founding Companies Whereas
group health plans 5.20(v)
HDS Preamble
HDS Charter Documents 6.1
HDS Material Adverse Effect 6.1
HDS Material Documents 6.9
HDS Stock 2.1
HDS's Subsidiaries 6.1
Howard Rice 4.1
</TABLE>
-ix-
<PAGE>
<TABLE>
<S> <C>
Indemnification Threshold 11.5(i)
Indemnified Party 11.3
Indemnifying Party 11.3
Interim Period 10.6(b)
IPO 4.1
Material Adverse Effect 5.1
Material Contracts 5.15
Material Leases 5.14
Merger Whereas
Minimum IPO Price Annex I
multi-employer pension plan 5.20
1933 Act 5(A)
1934 Act 5(A)
Nondisturbance Agreements 9.18
Other Agreements Whereas
Other Companies Whereas
PBGC 5.19(x)
Plans 5.19
Post-Closing Period 10.6(d)
Pre-Closing 4.1
Pre-Closing Period 10.6(c)
Pricing Date 4.1
Purchase Price Annex I
Qualified Plans 5.19(iii)
Registration Statement 4.3
reportable events 5.20(iii)
SEC 8.2
significant customers 5.15
Stockholder Release 9.5
STOCKHOLDERS Preamble
Surviving Corporation 1.2
Tax 10.6(e)
Tax Data 10.3
Tax Documentation 10.3
Tax Returns 10.6(f)
Taxing Authority 10.6(g)
Territory 13.1(i)
Third Party Claim 11.3(i)
Third Person 11.3
Transfer Taxes 17.6
Underwriters 4.3
Underwriting Agreement 8.7
</TABLE>
-x-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of February 26, 1999, by and among HOSPITALITY DESIGN & SUPPLY, INC., a
Delaware corporation ("HDS"), ERF CALIFORNIA, INC., a California corporation and
a wholly owned subsidiary of HDS ("ERF"), ECONOMY RESTAURANT FIXTURES, INC., a
California corporation (the "COMPANY"), and the stockholders of the COMPANY
listed on Annex II (the "STOCKHOLDERS"). The STOCKHOLDERS are all the
stockholders of the COMPANY.
WHEREAS, the respective Boards of Directors of HDS, ERF and the COMPANY
(which together are herein collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that ERF merge with and into the
COMPANY pursuant to this Agreement and the applicable provisions of the laws of
the State of California (such transaction is sometimes herein called the
"Merger");
WHEREAS, HDS is entering into other separate agreements (the "Other
Agreements") substantially similar to this Agreement, each of which is entitled
"Agreement and Plan of Reorganization," with each of the entities other than the
Company listed in Part II of Annex I (collectively, the "Other Companies") in
order to acquire additional companies in the commercial kitchen design and/or
supply industry (the Other Companies, together with the COMPANY, are
collectively referred to herein as the "Founding Companies"); and
WHEREAS, HDS desires to engage certain principal shareholders and other
employees of Company as employees of HDS who will continue to work at HDS upon
consummation of the transactions described herein, and each of the principal
shareholders desires to enter into such employment arrangements with HDS upon
terms and conditions more fully described below; and
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. THE MERGER.
1.1 Delivery and Filing of Articles of Merger. The Constituent
-----------------------------------------
Corporations will cause a Certificate of Merger or Articles of Merger in
mutually agreeable form with respect to the Merger (the "Articles of Merger") to
be signed, verified, delivered to and filed with the Secretary of State of the
State of California on or before the Closing Date (as defined in Section 4.2).
1.2 Effective Time of the Merger. The "Effective Time of the Merger"
----------------------------
shall be on the Closing Date, as defined in Section 4.2, and simultaneous with
the closing of the IPO,
-1-
<PAGE>
as defined in Section 4.1. At the Effective Time of the Merger, the ERF shall be
merged with and into the COMPANY in accordance with the Articles of Merger, and
the separate existence of ERF shall cease. The COMPANY shall be the surviving
party in the Merger and is herein sometimes referred to as the "Surviving
Corporation." The Merger will be effected in a single transaction.
1.3 Certificate of Incorporation, Bylaws and Board of Directors of
--------------------------------------------------------------
Surviving Corporation. At the Effective Time of the Merger:
- ---------------------
(i) the Articles of Incorporation of the Surviving Corporation shall be
amended and restated at and as of the Effective Time to read as did the Articles
of Incorporation of ERF immediately prior to the Effective Time, except that the
name of the Surviving Corporation shall remain unchanged;
(ii) the Bylaws of the Surviving Corporation shall be amended and
restated at and as of the Effective Time to read as did the Bylaws of ERF
immediately prior to the Effective Time, except that the name of the Surviving
Corporation shall remain unchanged;
(iii) the Board of Directors of the Surviving Corporation shall consist
of those persons who constituted the Board of Directors of ERF immediately prior
to the Merger, who shall hold office subject to the provisions of the laws of
the State of California and of the Articles of Incorporation and Bylaws of the
Surviving Corporation until such persons' successors and assigns are duly
elected and qualified; and
(iv) the officers of the Surviving Corporation shall be the persons who
were officers of ERF immediately prior to the Merger, who shall hold office,
subject to the provisions of the Articles of Incorporation and Bylaws of the
Surviving Corporation and the Employment Agreements (as defined in Section
8.12), until such officers' successors are duly elected and qualified.
1.4 Effect of Merger. At the Effective Time of the Merger, the effect
----------------
of the Merger shall be as provided in the applicable provisions of the
California Corporations Code. At the Effective Time of the Merger, the separate
existence of ERF shall cease and, in accordance with the terms of this
Agreement, the Surviving Corporation shall possess all the rights, privileges,
immunities and franchises of a public, as well as of a private, nature, and all
property, real, personal and mixed, and all debts due on whatever account,
including subscriptions to shares, all taxes, including those due and owing and
those accrued, and all other choses in action, and all and every other interest
of or belonging to or due to the COMPANY and ERF shall be taken and deemed to be
transferred to, and vested in, the Surviving Corporation without further act or
deed. Except as otherwise provided herein, the Surviving Corporation shall
thenceforth be responsible and liable for all the liabilities and obligations of
the COMPANY and ERF and the Surviving Corporation shall be substituted for the
COMPANY or ERF with respect to any claim existing, or action or proceeding
pending, by or against the COMPANY or ERF. Neither the rights of creditors nor
any liens upon the property of the COMPANY or ERF shall be
-2-
<PAGE>
impaired by the Merger, and all debts, liabilities and duties of the COMPANY and
ERF shall attach to the Surviving Corporation, and may be enforced against such
Surviving Corporation to the same extent as if said debts, liabilities and
duties had been incurred or contracted by such Surviving Corporation.
2. CONVERSION OF STOCK.
2.1 Manner of Conversion. The manner of converting the outstanding
--------------------
shares of capital stock of the COMPANY ("COMPANY Stock") into outstanding shares
of common stock of HDS ("HDS Stock") and cash shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of COMPANY Stock issued and outstanding
immediately prior to the Effective Time of the Merger, shall be converted into
the right to receive (1) that number of shares of HDS Stock determined as set
forth in Part I of Annex I hereto and (2) the amount of cash determined as set
forth in Part I of Annex I hereto, such shares and cash to be subject to offset
as provided in Section 7.12 and distributed to STOCKHOLDERS as provided in Part
I of Annex I hereto;
(ii) all shares of COMPANY Stock that are held by COMPANY as treasury
stock or by any COMPANY Subsidiary shall be cancelled and retired and no
consideration shall be delivered or paid in exchange therefor; and
(iii) each share of common stock of ERF shall be converted into one
share of common stock of the Surviving Corporation.
In addition, (a) on the 90th day after the Closing Date, as defined in
Section 4.2, (or the first business day after such 90th day if the 90th day is
not a business day), HDS shall pay to the Stockholders an amount equal to the
amount of the excess of (i) the net income of the COMPANY for the period from
January 1, 1999 through the Closing Date over (ii) an amount equal to 3% times
the total revenues of the COMPANY for the period from January 1, 1999 through
the Closing Date, and (b) on May 31, 2000, HDS shall pay to the STOCKHOLDERS an
amount equal to 3% times the total revenues of the COMPANY for the period from
January 1, 1999 through the Closing Date. The amounts of net income and
revenues referred to in (a) and (b) above shall be amounts determined in
accordance with generally accepted accounting principles as consistently applied
with the preparation of the December 31, 1998 Company Financial Statements. If
HDS and the STOCKHOLDERS do not agree on the amount to be so paid, such amount
shall be conclusively determined by Arthur Andersen, LLP, and the STOCKHOLDERS
and HDS each will bear one-half of the fees of Arthur Andersen, LLP, for making
such determination. The amounts so due under (a) and (b) above shall be paid in
the form of HDS' check to the STOCKHOLDERS, and one-half of each such amount
shall be paid to each of the STOCKHOLDERS.
-3-
<PAGE>
At the Effective Time of the Merger, HDS shall have no class of
capital stock authorized, issued or outstanding which, as a class, shall have
any rights or preferences senior to the shares of HDS Stock received by the
STOCKHOLDERS, including, without limitation, any rights or preferences as to
dividends or as to the assets of HDS upon liquidation or dissolution or as to
voting rights, except for any series of Preferred Stock that will be converted
into HDS Stock on the Closing Date (as defined below).
2.2 Other Companies. Part II to Annex I sets forth the aggregate
---------------
consideration into which shares of outstanding stock of each Founding Company
will be converted on the Closing Date, or, if applicable, payable with respect
to such shares of outstanding stock on the Closing Date, before offsets.
3. DELIVERY OF STOCK.
3.1 Delivery of HDS Stock. At or immediately after the Effective Time of
_____________________
the Merger:
(i) the STOCKHOLDERS, as the holders of all outstanding certificates
representing shares of COMPANY Stock, shall, upon surrender of such
certificates, be entitled to receive the number of shares of HDS Stock and the
amount of cash calculated pursuant to Section 2.1 above; and
(ii) until the certificates representing COMPANY Stock have been
surrendered by the STOCKHOLDERS and replaced by the HDS Stock, the certificates
for COMPANY Stock shall, for all corporate purposes, be deemed to evidence the
ownership of the number of shares of HDS Stock and cash which such STOCKHOLDER
is entitled to receive as a result of the Merger, as set forth in Section 2.1,
notwithstanding the number of shares of COMPANY Stock such certificates
represent.
3.2 Delivery of COMPANY Stock. The STOCKHOLDERS shall deliver to HDS at
-------------------------
Pre-Closing (as defined below in Section 4.1) the certificates representing
COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by
blank stock powers, and with all necessary transfer tax and other revenue
stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The
STOCKHOLDERS agree promptly to cure any deficiencies with respect to the
endorsement of the certificates or other documents of conveyance with respect to
such COMPANY Stock or with respect to the stock powers accompanying any COMPANY
Stock.
4. PRE-CLOSING AND CLOSING.
4.1 Pre-Closing. On the date (the "Pricing Date") on which the public of
-----------
price of the shares of HDS Stock in the initial public offering of HDS Stock
(the "IPO") is determined, the parties shall deliver to Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, A Professional Corporation ("Howard Rice")
all documents necessary to effect (i) the Merger (including, at HDS's election,
the filing with the appropriate state authorities of the Articles of Merger and
any similar document to become effective on the
-4-
<PAGE>
Closing Date (as defined below)), (ii) the conversion of shares of ERF Stock
into shares of stock of the Surviving Corporation and (iii) the delivery of
shares of HDS Stock to STOCKHOLDERS (such delivery to Howard, Rice is herein
referred to as the "Pre-Closing"); provided, that the actual Merger, the
conversion of shares of ERF Stock into shares of stock of the Surviving
Corporation and the delivery of shares of HDS Stock shall not take place until
the Closing Date as herein provided. The Pre-Closing shall take place at the
offices of Howard, Rice at Three Embarcadero Center, 7th Floor, San Francisco,
California 94111.
4.2 Closing. On the date when the closing with respect to the IPO
-------
occurs (the"Closing Date"), the Articles of Merger shall be filed with the
appropriate state authorities, or if already filed shall become effective, and
the conversion of shares of ERF Stock into shares of stock of the Surviving
Corporation, the delivery of shares of HDS Stock, and the transfer of funds, by
wire transfer, in an amount equal to the cash portion of the consideration which
the STOCKHOLDERS shall be entitled to receive pursuant to the Merger, as set
forth in Section 2.1, shall occur and be deemed to be completed (such
consummation and delivery is herein referred to as the "Closing"). After the
Pre-Closing and until the Closing Date, no party may withdraw, terminate or
rescind any delivery made at the Pre-Closing unless this Agreement is
terminated as provided in Section 12. All documents delivered at the
Pre-Closing shall be held by Howard Rice for final delivery on the Closing Date
as directed by the parties and their counsel at the Pre-Closing, provided only
that the Articles of Merger and any similar document may be filed to become
effective on the Closing Date. Should the Agreement be terminated as provided in
Section 12 prior to the Closing Date, the parties shall take all steps necessary
to rescind any such filings, Howard Rice shall return all documents delivered at
the Pre-Closing to the parties who delivered the same, all such deliveries at
the Pre-Closing will be rescinded and a nullity, the Merger shall not become
effective, the shares of COMPANY Stock will not be converted into cash and HDS
Stock, the shares of ERF Stock will not be converted into shares of stock of the
Surviving Corporation, and shares of HDS Stock will not be delivered to
STOCKHOLDERS. If HDS proposes to file any Articles of Merger or any similar
document prior to the Closing, the documents delivered at Pre-Closing shall
include documents required to rescind, prior to the Closing, any filing of the
Articles of Merger and any similar document.
4.3 No Assurances. The COMPANY and the STOCKHOLDERS acknowledge and
-------------
agree that (i) there exists no firm commitment, binding agreement, or promise or
other assurance of any kind, whether express or implied, oral or written, that
any Registration Statement filed in connection with the IPO (the "Registration
Statement") will become effective or that the IPO pursuant thereto will occur at
a particular price or within a particular range of prices or will occur at all;
(ii) none of HDS, ERF or their respective officers, directors, agents or
representatives nor any prospective underwriters in the IPO (the "Underwriters")
shall have any liability to the COMPANY, the STOCKHOLDERS or any other person
affiliated or associated with the COMPANY for any failure of the Registration
Statement to become effective, or of the IPO to occur at a particular price or
within a particular range of prices or to occur at all;
-5-
<PAGE>
and (iii) the decision of the STOCKHOLDERS to enter into this Agreement, or to
vote in favor of or consent to the proposed Merger, has been made independent
of, and without reliance upon, any statements, opinions or other communications
of, or due diligence investigations which have been or will be made or performed
by any prospective Underwriter, relative to HDS, ERF or the prospective IPO. The
Underwriters shall have no obligation to the STOCKHOLDERS with respect to any
disclosure contained in the Registration Statement, except as may be set forth
in the Underwriting Agreement.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS.
(A) Representations and Warranties of COMPANY and STOCKHOLDERS.
----------------------------------------------------------
The COMPANY and each of the STOCKHOLDERS jointly and severally represent and
warrant that all of the following representations and warranties in this Section
5(A) are true at the date of this Agreement and, subject to Section 7.9 hereof,
shall be true at the time of Pre-Closing and the Closing Date, and that such
representations and warranties shall survive the Closing Date for a period of
two (2) years (the last day of such period is herein called the "Expiration
Date"), except that (i) the warranties and representations set forth in Sections
5.13, 5.19 and 5.20 hereof shall survive until such date as the limitations
period has run for each act, inaction, fact, event or circumstance which
constitutes a breach thereof, which date shall be deemed to be the Expiration
Date for Sections 5.13, 5.19 and 5.20, (ii) the warranties and representations
set forth in Section 5.22 hereof shall survive until such date as the
limitations period has run for all tax periods ended on or prior to the Closing
Date, which date shall be deemed to be the Expiration Date for Section 5.22, and
(iii) solely for purposes of Section 11.1(iv) hereof, all warranties and
representations shall survive until such date as the limitations period has run
under the Securities Act of 1933, as amended (the "1933 Act"), the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and all other applicable
Federal or state securities laws, which date shall be deemed to be the
Expiration Date for purposes of Section 11.1(iv) hereof.
5.1 Due Organization. The COMPANY is a corporation duly organized,
----------------
validly existing and in good standing under the laws of the state of its
incorporation, and is duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on its business in the places and in the manner as now conducted except
(i) as disclosed on Schedule 5.1 or (ii) where the cumulative effect of all
failures to be so authorized or qualified would not have a material adverse
effect on the business, operations, properties, assets or financial condition,
of the COMPANY (a "Material Adverse Effect"). Schedule 5.1 contains a list of
all jurisdictions in which the COMPANY is authorized or qualified to do
business. True, complete and correct copies of the Articles of Incorporation and
Bylaws, each as amended, of the COMPANY (collectively, the "Charter Documents"),
certified by the Secretary or Assistant Secretary of the COMPANY, are all
attached hereto as part of Schedule 5.1. A true, complete and correct copy of
each Articles of Incorporation, as amended, included in the Charter Documents,
certified by the Secretary of State or other appropriate authority of the state
of incorporation of the COMPANY, as applicable, shall be delivered to HDS at the
Pre-
-6-
<PAGE>
Closing. Except as set forth on Schedule 5.1, the minute books of the
COMPANY, as heretofore made available to HDS, are correct and complete in all
material respects.
5.2 Authority and Validity. The representatives of the COMPANY executing
----------------------
this Agreement have the authority to enter into and bind the COMPANY to the
terms of this Agreement and any other agreements contemplated by this Agreement
to which the COMPANY is or is contemplated to be a party. The COMPANY has the
full legal right, power and authority to enter into this Agreement, any other
agreements contemplated by this Agreement, to which the COMPANY is or is
contemplated to be a party, and the Merger. All corporate action necessary for
the authorization, execution, delivery and performance by the COMPANY of the
Agreement, and also any other agreements contemplated by this Agreement to which
the COMPANY is or is contemplated to be a party, has been taken. Assuming due
authorization, execution and delivery by HDS, this Agreement and any other
agreements contemplated by this Agreement to which the COMPANY is or is
contemplated to be a party are or will be legal, valid and binding obligations
of the COMPANY, enforceable in accordance with their respective terms, except as
may be limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and except that the availability of equitable
remedies is subject to the discretion of the court before which any proceeding
therefor may be brought.
5.3 Capital Stock of the COMPANY. The authorized capital stock of
----------------------------
the COMPANY is as set forth in Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS and in
the amounts set forth in Annex II and further, except as set forth on Schedule
5.3, are owned free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of the COMPANY have
been duly authorized and validly issued, are fully paid and nonassessable, are
owned of record and beneficially by the STOCKHOLDERS and further, such shares
were offered, issued, sold and delivered by the COMPANY in compliance with all
applicable state and federal laws concerning the issuance of securities.
Further, none of such shares were issued in violation of the preemptive rights
of any past or present stockholder.
5.4 Transactions in Capital Stock. Except as set forth on Schedule 5.4,
-----------------------------
the COMPANY has not acquired any COMPANY Stock since January 1, 1993. Except as
set forth on Schedule 5.4, no option, warrant, call, conversion right or
commitment of any kind exists which obligates the COMPANY to issue any
authorized but unissued capital stock. Except as set forth on Schedule 5.4, the
COMPANY has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof. Except as set
forth on Schedule 5.4, there has been no transaction or action taken with
respect to the equity ownership of the COMPANY, in contemplation of the
transactions described in this Agreement.
5.5 No Bonus Shares. Except as set forth in Schedule 5.5, since
---------------
January 1, 1995 none of the shares of COMPANY Stock was issued for less than the
fair market value
-7-
<PAGE>
thereof at the time of issuance or was issued in exchange for consideration
other than cash.
5.6 Subsidiaries. The COMPANY has no subsidiaries or affiliated
------------
companies. In this Agreement, a "Subsidiary" means any corporation more than
fifty percent (50%) of whose outstanding voting securities are, or any
partnership, joint venture or other entity more than fifty percent (50%) of
whose total equity interest is directly or indirectly, owned by the COMPANY.
Except as set forth in Schedule 5.6 attached hereto, the COMPANY does not
presently own, of record or beneficially, or control, directly or indirectly,
any capital stock, securities convertible into capital stock or any other equity
interest in any corporation, association or business entity nor is the COMPANY,
directly or indirectly, a participant in any joint venture, partnership or other
non-corporate entity.
5.7 Predecessor Status; etc. Set forth in Schedule 5.7 is a listing of
------------------------
names under which the COMPANY has done business during the last five years and
all names of all predecessor companies for the past five years of the COMPANY,
including the names of any entities from whom the COMPANY previously acquired
material assets. Except as disclosed in Schedule 5.7, the COMPANY has not been
a subsidiary or division of another corporation or a part of an acquisition
which was later rescinded.
5.8 Spin-off by the COMPANY. Except as set forth on Schedule 5.8,
-----------------------
there has not been any sale, spin-off or split-up of any material assets of the
COMPANY or any other person or entity that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the COMPANY ("COMPANY Affiliates") other than in the ordinary
course of business, within the preceding two years.
5.9 Financial Statements. Attached hereto as Schedule 5.9 to this
--------------------
Agreement are copies of the following financial statements (the "COMPANY
Financial Statements") of the COMPANY: (i) the COMPANY's balance sheet as of
December 31, 1998 and statements of income, cash flows and retained earnings for
the twelve month period ended December 31, 1998 (such Balance Sheet as of
December 31, 1998 is herein sometimes referred to as the "December 31, 1998
COMPANY Balance Sheet," the December 31, 1998 COMPANY Balance Sheet and such
statements of income, cash flows and retained earnings for the twelve months
ended December 31, 1998 are herein sometimes referred to as December 31, 1998
COMPANY Financial Statements, and December 31, 1998 is herein sometimes referred
to as the "Balance Sheet Date") and (ii) the COMPANY's balance sheets as of
December 31, 1997 and statements of income, cash flows and retained earnings for
the year ended December 31, 1997. To the knowledge of the Company, such
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated (except as noted). Such balance sheets as of December 31, 1998 and
1997 present fairly the financial position of the COMPANY as of the dates
indicated thereon, and such Statements of Income, Cash Flows and Retained
Earnings present fairly the results of their respective operations for the
periods indicated thereon.
-8-
<PAGE>
5.10 Liabilities and Obligations. Schedule 5.10 is an accurate list with
---------------------------
respect to the COMPANY of:
(i) all liabilities as of December 31, 1998;
(ii) in the case of any supplement or amendment pursuant to Section
7.9, all liabilities which were incurred after the date of this Agreement and
were incurred other than in the ordinary course of business or which exceed
$20,000 (individually or in the aggregate) if (and only if) such liabilities
would either be accrued on the balance sheet of the COMPANY in accordance with
generally accepted accounting principles consistently applied if such balance
sheet were being prepared immediately prior to Closing or if such liabilities
represent liabilities of the nature described in Section 5.13, Section 5.19,
Section 5.20 and/or Section 5.22 (excluding items that are both not known to the
COMPANY and not covered by any of such sections because of knowledge
qualifications contained in one or more of such sections); and
(iii) in the case of any supplement or amendment pursuant to Section
7.9, all liabilities which were incurred after the date of this Agreement and
were incurred other than in the ordinary course of business or which exceed
$100,000 (in the aggregate) and are not otherwise described in the immediately
preceding subclause (ii).
Any reference to "all liabilities" in the preceding subclauses (i) through (iii)
inclusive shall mean, in each such instance, all liabilities of the COMPANY of
any kind, character or description, whether accrued, absolute, secured or
unsecured, contingent or otherwise. In the case of those liabilities which are
contingent, Schedule 5.10 includes a reasonable estimate of the maximum amount
which may be payable. For each such contingent liability, the COMPANY has
provided to HDS the following information:
(a) a summary description of the liability together with the
following:
(1) copies of all relevant documentation relating thereto;
(2) amounts claimed and any other action or relief sought;
and
(3) name of claimant and all other parties to the claim,
suit or proceeding;
(b) the name of each court or agency before which such claim,
suit or proceeding is pending; and
(c) the date such claim, suit or proceeding was instituted.
5.11 Accounts and Notes Receivable. Schedule 5.11 is an accurate list of
-----------------------------
the accounts and notes receivable of the COMPANY as of the Balance Sheet Date,
including any such amounts which are not reflected in the December 31, 1998
COMPANY Balance Sheet, and including receivables from and advances to employees
and the
-9-
<PAGE>
STOCKHOLDERS. Except to the extent to be reflected on Schedule 5.11,
such accounts and notes are collectible in the amount to be shown on Schedule
5.11, net of reserves reflected in the December 31, 1998 COMPANY Balance Sheet.
5.12 Permits and Intangibles. The COMPANY holds all licenses, franchises,
-----------------------
permits and other governmental authorizations including permits, titles
(including motor vehicle titles and current registrations), licenses,
franchises, certificates, trademarks, trade names, patents, patent applications
and copyrights, the absence of which, either singly or in the aggregate, would
have a Material Adverse Effect. Schedule 5.12 is an accurate list and summary
description of all such licenses, franchises, permits and other governmental
authorizations, provided that, with respect to copyrights, Schedule 5.12 may
include only those copyrights which are registered. To the knowledge of the
COMPANY, the licenses, franchises, permits and other governmental authorizations
listed on Schedule 5.12 are valid, and the COMPANY has not received any notice
that any governmental authority intends to cancel, terminate or not renew any
such license, franchise, permit or other governmental authorization. The COMPANY
has conducted and is conducting its business in compliance with the
requirements, standards, criteria and conditions set forth in applicable
permits, licenses, orders, approvals, variances, rules and regulations and is
not in violation of any of the foregoing except where all such non-compliances
and violations in the aggregate would not have a Material Adverse Effect. Except
as specifically provided in Schedule 5.12, the transactions contemplated by this
Agreement will not result in a default under or a breach or violation of, or
have a Material Adverse Effect upon the rights and benefits afforded to the
COMPANY by, such licenses, franchises, permits or government authorizations,
either singly or in the aggregate.
5.13 Environmental Matters. Except as set forth on Schedule 5.13, and
---------------------
except to the extent that noncompliance with any Environmental Law (as defined
below), either singly or in the aggregate, does not have a Material Adverse
Effect, (i) the COMPANY has complied with and is in compliance with all federal,
state, local and foreign statutes (civil and criminal), laws, ordinances,
regulations, rules, notices, permits, judgments, orders and decrees applicable
to it or any of its properties, assets, operations and businesses relating to
environmental protection (collectively "Environmental Laws") including, without
limitation, Environmental Laws relating to protection of the air, water or land
or to the generation, storage, use, handling, transportation, treatment or
disposal of Solid Wastes, Hazardous Wastes or Hazardous Substances (as such
terms are defined in any applicable Environmental Law); (ii) the COMPANY has
obtained and complied with all necessary permits and other approvals necessary
to treat, transport, store, dispose of or otherwise handle Solid Wastes,
Hazardous Wastes or Hazardous Substances and has reported, to the extent
required by all Environmental Laws, all past and present sites owned and
operated by the COMPANY where Solid Wastes, Hazardous Wastes or Hazardous
Substances have been treated, stored, used, disposed of or otherwise handled;
(iii) there have been no releases (as defined in Environmental Laws) at, from,
under, in or on any property owned or operated by the COMPANY except as
permitted by Environmental Laws; (iv) to the knowledge of the COMPANY there is
no on-site or off-site location to which the COMPANY has transported or disposed
of Solid Wastes,
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<PAGE>
Hazardous Wastes or Hazardous Substances or arranged for the transportation of
Solid Wastes, Hazardous Wastes or Hazardous Substances, which site is the
subject of any federal, state, local or foreign enforcement action or any other
investigation which could lead to any claim against the COMPANY or HDS for any
clean-up cost, remedial work, damage to natural resources or personal injury,
including, but not limited to, any claim under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended; and (v) the
COMPANY has no contingent liability in connection with any release of any Solid
Waste, Hazardous Waste or Hazardous Substance into the environment. Schedule
5.13 lists all releases of Hazardous Wastes or Hazardous Substances by the
COMPANY.
5.14 Real and Personal Property. Schedule 5.14 hereto contains an
--------------------------
accurate list of (x) all real and personal property included (or that will be
included) on the December 31, 1998 COMPANY Balance Sheet, (y) all other real and
personal property of the COMPANY with a value in excess of $50,000 (i) as of the
Balance Sheet Date and (ii) acquired since the Balance Sheet Date, and (z) all
leases for real and personal property to which the COMPANY is a party involving
real or personal property having a value in excess of $50,000 ("Material
Leases"), including true, complete and correct copies of all Material Leases,
and including an indication as to which real and personal property is currently
owned, or was formerly owned, by the STOCKHOLDERS or business or personal
affiliates of the COMPANY or the STOCKHOLDERS. All machinery and equipment of
the COMPANY listed on Schedule 5.14 is in good working order and condition,
ordinary wear and tear excepted, except (i) as disclosed in Schedule 5.14 or
(ii) where the cumulative effect of all failures to be in good working order and
condition would not have a Material Adverse Effect. All Material Leases are in
full force and effect and constitute valid and binding agreements of the COMPANY
and to the knowledge of the COMPANY, constitute valid and binding agreements on
the other parties thereto (and their successors) in accordance with their
respective terms. All fixed assets used by the COMPANY that are material to the
operation of their respective businesses are either owned by the COMPANY or
leased under an agreement set forth on Schedule 5.14. The Company has provided
to HDS true, complete and correct copies of all Material Leases and all title
reports and title insurance policies received or owned by the COMPANY with
respect to the real property listed on Schedule 5.14. The COMPANY has also
provided in Schedule 5.14 a summary description of all plans or projects that
involve the opening of new operations, expansion of any existing operations or
the acquisition of any real property or existing businesses, with respect to
which the COMPANY has made any expenditure in the two-year period prior to the
date of the Agreement in excess of $50,000, or which if pursued by the COMPANY
would require additional expenditures of capital in excess of $50,000. Except as
set forth on Schedule 5.14 and except for liens excepted in Section 7.3(vi)(1)
and (3), there are no liens against the COMPANY's real and personal properties.
5.15 Significant Customers; Material Contracts and Commitments. Schedule
---------------------------------------------------------
5.15 contains an accurate list of (i) all customers representing five percent
(5%) or more of the COMPANY's revenues for the twelve months ended on the
Balance Sheet Date, or
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<PAGE>
who have paid to the COMPANY $100,000 or more over any four consecutive
fiscal quarters in the two years ended on the Balance Sheet Date (collectively,
"significant customers") and (ii) all contracts, indentures and other
instruments requiring payment or performance by the COMPANY in an amount or with
a value in excess of $50,000 ("Material Contracts") to which the COMPANY is a
party or by which the COMPANY or any of its properties are bound (including, but
not limited to, contracts with significant customers, joint venture or
partnership agreements, contracts with any labor organizations, loan agreements,
indemnity or guaranty agreements, bonds, mortgages, options to purchase land,
leases, liens, pledges or other security agreements) (a) as of the Balance Sheet
Date and (b) entered into since the Balance Sheet Date, and in each case has
delivered true, complete and correct copies of such agreements to HDS, except
that leases set forth on Schedule 5.14 need not be set forth on Schedule 5.15.
Except to the extent set forth on Schedule 5.15, (i) none of the COMPANY's
significant customers has cancelled or substantially reduced or, to the
knowledge of the COMPANY, is currently attempting or threatening to cancel any
Material Contract or substantially reduce utilization of the services provided
by the COMPANY, and (ii) no Stockholder or any affiliate of any Stockholder is a
party to any such Material Contract. Except as set forth in Schedule 5.15, the
COMPANY has not been the subject of any election in respect of union
representation of employees and is not bound by or subject to (and none of its
respective assets or properties is bound by or subject to) any arrangement with
any labor union. Except as set forth on Schedule 5.15, no employees of the
COMPANY are represented by any labor union or covered by any collective
bargaining agreement and no campaign to establish such representation has ever
occurred or, to the knowledge of the COMPANY, is in progress. There is no
pending or, to the COMPANY's knowledge, threatened labor dispute involving the
COMPANY and any group of its employees, nor has the COMPANY experienced any
labor interruptions over the past three years, and the COMPANY considers its
relationship with its respective employees to be good.
5.16 Title to Real Property. The COMPANY has good and insurable title
----------------------
to the real property owned and used its business, including that reflected on
Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales
agreement, encumbrance or charge, except for:
(i) liens set forth on Schedules 5.10 and 5.15 securing specified
liabilities (with respect to which no material default exists);
(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title shown of record in the office of the County Clerk in which the properties,
assets and leasehold estates are located which do not adversely affect the
current use of the property.
5.17 Insurance. Schedule 5.17 sets forth an accurate list as of the
---------
Balance Sheet Date of all insurance policies carried by the COMPANY. Except as
set forth on Schedule
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<PAGE>
5.17, the Company has delivered to HDS an accurate list (attached to Schedule
5.17) of all insurance loss runs or worker's compensation claims received for
the past three policy years. The Company has provided HDS with true, complete
and correct copies of all policies currently in effect. Such insurance policies
are currently in full force and effect and shall remain in full force and effect
through the Closing Date. No insurance carried by the COMPANY has been cancelled
by the insurance company, and the COMPANY has not been denied coverage, during
the five year period ending on the Balance Sheet Date.
5.18 Compensation; Employment Agreements. Schedule 5.18 sets forth an
-----------------------------------
accurate schedule showing all officers, directors and key employees of the
COMPANY listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided
to HDS true, complete and correct copies of any employment agreements for
persons listed on Schedule 5.18. Since the Balance Sheet Date there have been no
increases in the compensation, bonus, sales commissions or fee arrangements
payable or to become payable by the COMPANY to any officer, director,
stockholder, employee, consultant or agent, except as listed on Schedule 5.18.
5.19 Employee Plans. Schedule 5.19 sets forth complete and accurate
--------------
lists of all employee benefit plans, all employee welfare benefit plans, all
employee pension benefit plans, all multi-employer plans and all multi-employer
welfare arrangements (as defined in Sections 3(3), (1), (2), (37) and (40),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or
to which the COMPANY currently contributes, or has an obligation to contribute
in the future (including, without limitation, benefit plans or arrangements that
are not subject to ERISA, such as employment agreements and any other agreements
containing "golden parachute" provisions and deferred compensation agreements),
together with a classification of employees covered thereby (collectively, the
"Plans"). Schedule 5.19 also sets forth all of the Plans that have been
terminated within the past six years. The COMPANY has heretofore delivered to
HDS correct and complete copies of each of the following:
(i) each Plan and all amendments thereto; the trust agreement and/or
insurance contracts, if any, forming a part of such Plan and all amendments
thereto; and the resolutions and agreements, if any by which the COMPANY adopted
such Plan;
(ii) all written, and descriptions of all oral, employment,
termination, and severance agreements, contracts, arrangements and
understandings listed in Schedule 5.19;
(iii) sample benefit distribution forms that pertain to all Plans that
are intended to qualify (the "Qualified Plans") under Section 401(a) of the
Code;
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<PAGE>
(iv) the most recent actuarial report and the most recent executed
Form PBGC-1 with respect to each Plan that is a defined benefit pension plan as
defined in Section 414(j) of the Code (a "Defined Benefit Plan");
(v) Forms 5500 or, as applicable Forms 5500-C/R, filed with respect
to the three most recent plan years of each Plan, and all schedules thereto;
(vi) the most recent determination letter issued by the Internal
Revenue Service regarding the qualified status of each Qualified Plan;
(vii) the most recent accountant's report, if any, with respect to
each Plan;
(viii) the most recent summary plan description, and any subsequent
summaries of material modifications, with respect to each Plan;
(ix) the bond required by Section 412 of ERISA, if any; and
(x) all documents required to be filed with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation (the "PBGC"), or distributed
to participants and beneficiaries in connection with the termination of any
Qualified Plan listed on Schedule 5.19 as terminated.
5.20 Compliance with ERISA. Except for the Plans, the COMPANY does not
---------------------
maintain or sponsor, or is a contributing employer to, a pension, profit-
sharing, deferred compensation, stock option, employee stock purchase or other
employee benefit plan, employee welfare benefit plan, or any other arrangement
with their respective employees, whether or not subject to ERISA. All Plans are
in compliance in all material respects with all applicable provisions of ERISA
and the regulations issued thereunder, the Code and the regulations issued
thereunder, as well as with all other applicable laws, and have been
administered, operated and managed in all material respects in accordance with
their governing documents, if any. All Qualified Plans are qualified under
Section 401(a) of the Code and have been determined by the Internal Revenue
Service to be so qualified or application for determination letters have been
timely submitted to the Internal Revenue Service and nothing has occurred since
the date of each Qualified Plan's most recent determination letter that would
adversely affect such Qualified Plan's tax-qualified status. To the extent that
any Qualified Plans have not been amended to comply with applicable law, the
remedial amendment period permitting retroactive amendment of such Qualified
Plans has not expired and will not expire within one hundred twenty (120) days
after the Closing Date. All reports and other documents required to be filed
with any governmental agency or distributed to plan participants or
beneficiaries (including, but not limited to, annual reports, summary annual
reports, actuarial reports, PBGC-1 Forms, audits or tax returns) have been
timely filed or distributed. None of: (i) the STOCKHOLDERS; (ii) any Plan; or
(iii) the COMPANY has engaged in any transaction prohibited under the provisions
of Section 4975 of the Code or Section 406 of ERISA. No Plan has incurred an
accumulated funding deficiency, as defined in Section 412(a) of the Code and
Section 302(1) of ERISA; and no circumstances exist pursuant to which the
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<PAGE>
COMPANY could have any direct or indirect liability whatsoever (including being
subject to any statutory lien to secure payment of any such liability), to the
PBGC under Title IV of ERISA or to the Internal Revenue Service for any excise
tax or penalty with respect to any plan now or hereafter maintained or
contributed to by the COMPANY or any member of a "controlled group" (as defined
in Section 4001(a)(14) of ERISA) that includes the COMPANY; and neither the
COMPANY nor any member of a "controlled group" (as defined above) that includes
the COMPANY currently has (or at the Closing Date will have) any obligation
whatsoever to contribute to any "multi-employer pension plan" (as defined in
ERISA Section 4001(a)(14)), nor has any withdrawal liability whatsoever (whether
or not yet assessed) arising under or capable of assertion under Title IV of
ERISA (including, but not limited to, Sections 4201, 4202, 4203, 4204, or 4205
thereof) been incurred by any Plan. Further, except as set forth in Schedule
5.20:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without a determination by
the Internal Revenue Service that such action does not adversely affect the tax-
qualified status of such Qualified Plan;
(ii) no Plan which is subject to the provisions of Title IV of ERISA
has been terminated;
(iii) there have been no "reportable events" (as defined in Section
4043 of ERISA) with respect to any Plan which were not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of the Closing
Date, shall equal or exceed the actuarial present value of all accrued pension
benefits under any such Qualified Plan in accordance with the assumptions
contained in the Regulations of the PBGC governing the funding of terminated
Defined Benefit Plans;
(v) with respect to Plans which qualify as "group health plans"
under Section 4980B of the Internal Revenue Code and Section 607(l) of ERISA and
related regulations (relating to the benefit continuation rights imposed by
"COBRA"), the COMPANY has complied (and on the Closing Date will have complied)
in all material respects with all reporting, disclosure, notice, election and
other benefit continuation requirements imposed thereunder as and when
applicable to such plans, and the COMPANY has not incurred (and will not incur)
any direct or indirect liability and is not (and will not be) subject to any
loss, assessment, excise tax penalty, loss of federal income tax deduction or
other sanction, arising on account of or in respect of any direct or indirect
failure by the COMPANY, at any time prior to the Closing Date, to comply with
any federal or state group health care plan benefit continuation requirement,
which is capable of being assessed or asserted before or after the Closing Date
directly or indirectly against the COMPANY or the STOCKHOLDERS with respect to
such group health plans;
(vi) the COMPANY is not now nor has it been within the past six years
a member of a "controlled group" as defined in ERISA Section 4001(a)(14);
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<PAGE>
(vii) there is no pending litigation, arbitration, or disputed claim,
settlement or adjudication proceeding, and to the knowledge of the COMPANY,
there is no threatened litigation, arbitration or disputed claim, settlement or
adjudication proceeding, audit or any governmental or other proceeding, audit or
investigation with respect to any Plan, or with respect to any fiduciary,
administrator, or sponsor thereof (in their capacities as such), or any party in
interest thereof;
(viii) the Financial Statements as of the Balance Sheet Date reflect
the approximate total pension, medical and other benefit expense for all Plans,
and no material funding changes or irregularities are reflected thereon which
would cause such Financial Statements to be not representative of prior periods;
(ix) the COMPANY has not incurred liability under Section 4062 of
ERISA;
(x) each Qualified Plan that is listed as terminated on Schedule
5.19 was terminated in compliance with all applicable requirements of ERISA and
the Code;
(xi) except for any Qualified Plan that is categorized on Schedule
5.19 as having been merged with another Qualified Plan, no Qualified Plan of the
COMPANY has been merged during the six years immediately before the Closing
Date;
(xii) each Qualified Plan that is categorized on Schedule 5.19 as
having been merged was merged in compliance with all applicable requirements of
ERISA and the Code;
(xiii) apart from health benefits provided to former employees under
Section 4980B of the Code and Part 6 of Title I(B) of ERISA or other comparable
laws, the COMPANY has no obligation to provide health or medical benefits to
anyone other than its active employees;
(xiv) the COMPANY does not sponsor, contribute to, or have any
obligation to contribute to any voluntary employees beneficiary association, as
described in Section 501(c)(9) of the Code; and
(xv) except as set forth in Schedule 5.19, the consummation of the
transactions contemplated hereby will not result in any obligation to pay any
employee of the COMPANY severance or termination benefits so long as such
employee remains employed by the COMPANY after the Closing.
5.21 Conformity with Law. Except to the extent set forth on
-------------------
Schedule 5.21, the COMPANY is not in violation of any law or regulation or any
order of any court or federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality having
jurisdiction over any of them which (either singly or in the aggregate) would
have a Material Adverse Effect; and except to the extent set forth in Schedule
5.10, there are no claims, actions, suits or proceedings pending or, to the
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<PAGE>
knowledge of the COMPANY, threatened, against or affecting the COMPANY, at law
or in equity, or before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality
having jurisdiction over any of them which (either singly or in the aggregate)
would have a Material Adverse Effect, and no notice of any such claim, action,
suit or proceeding, whether pending or threatened, has been received by the
COMPANY. The COMPANY has conducted and is conducting its business in compliance
with the requirements, standards, criteria and conditions set forth in
applicable federal, state and local statutes, ordinances, orders, approvals,
variances, rules and regulations and is not in violation of any of the foregoing
which (either singly or in the aggregate) would have a Material Adverse Effect.
5.22 Taxes. Except as set forth in Schedule 5.22,
-----
(i) All Tax Returns (as defined in Section 10.6(f)) required to have
been filed by or with respect to the COMPANY with any Taxing Authority (as
defined in Section 10.6(g)) have been duly filed, and each such Tax Return
accurately, correctly and completely reflects the income, franchise or other Tax
liability and all other information, including the tax basis and recovery
periods for assets, required to be reported thereon. The COMPANY has furnished
or made available to HDS complete and accurate copies of all income and
franchise tax returns, and any amendments thereto, filed by the COMPANY for all
taxable years ending on or after December 31, 1995. All Taxes (whether or not
shown on any Tax Return and whether or not assessed) owed by the COMPANY have
been paid. No Tax payment has been made by the COMPANY to any Taxing Authority
which is inconsistent with the prior practice of the COMPANY, and no Tax payment
has been made by the COMPANY which is in excess of that which is in good faith
determined to be due and owing at the time of such payment.
(ii) The COMPANY is not and has not since January 1, 1995 been a
member of any affiliated, combined, consolidated, unitary or similar group.
(iii) The provisions for Taxes due by the COMPANY (as opposed to any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) in the COMPANY Financial Statements are sufficient for, and
adequate to cover, all unpaid Taxes.
(iv) The COMPANY is not a party to any current agreement extending
the time within which to file any Tax Return. No claim has ever been made by any
Taxing Authority in a jurisdiction in which the COMPANY does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction.
(v) The COMPANY has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
(vi) To the best of its knowledge, the COMPANY does not expect any
Taxing Authority to assess any additional Taxes against or in respect of it for
any past
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<PAGE>
period. There is no dispute or claim concerning any Tax liability either (i)
claimed or raised by any Taxing Authority or (ii) otherwise known to the
COMPANY. No issues have been raised in any examination by any Taxing Authority
with respect to the COMPANY which, by application of similar principles,
reasonably could be expected to result in a proposed deficiency for any other
period not so examined. Schedule 5.22 attached hereto lists all federal, state,
local and foreign income Tax Returns filed by or with respect to the COMPANY for
all taxable periods ended on or after December 31, 1994, indicates those Tax
Returns, if any, that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The COMPANY has delivered to HDS complete
and correct copies of all federal, state, local and foreign income Tax Returns
filed by, and all Tax examination reports and statements of deficiencies
assessed against or agreed to by, the COMPANY since December 31, 1995.
(vii) The COMPANY has not waived any statute of limitations in respect
of Taxes or agreed to any extension of time with respect to any Tax assessment
or deficiency.
(viii) The COMPANY has not made any payments, is not obligated to make
any payments, and is not a party to any agreement that under certain
circumstances could require it to make any payments, that would not be
deductible by reason of the application of Section 280G of the Code.
(ix) The COMPANY is not a party to and has no ongoing liability under
any Tax allocation or sharing agreement.
(x) None of the assets of the COMPANY constitutes tax-exempt bond
financed property or tax-exempt use property, within the meaning of Section 168
of the Code. The COMPANY is not a party to any "safe harbor lease" that is
subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as
in effect prior to the Tax Reform Act of 1986, or to any "long-term contract"
within the meaning of Section 460 of the Code.
(xi) The COMPANY is not a party to any joint venture, partnership or
other arrangement that is treated as a partnership for federal income Tax
purposes.
(xii) There are no accounting method changes of the COMPANY that could
give rise to an adjustment under Section 481 of the Code for periods after the
Closing Date.
(xiii) The COMPANY has not received any written ruling of a Taxing
Authority related to Taxes or entered into any written and legally binding
agreement with a Taxing Authority relating to Taxes.
(xiv) The COMPANY has substantial authority for the treatment of, or
has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its
federal income Tax Returns, all positions taken on its relevant federal income
Tax Returns that
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<PAGE>
could give rise to a substantial understatement of federal income Tax within the
meaning of Section 6662(d) of the Code.
(xv) The COMPANY does not have any liability for Taxes of any Person
other than the COMPANY (i) under Section 1.1502-6 of the Treasury regulations
(or any similar provision of state, local or foreign law), (ii) as a transferee
or successor, (iii) by contract or (iv) otherwise.
(xvi) No consent has been filed relating to the COMPANY pursuant to
Section 341(f) of the Code, nor has the COMPANY made any tax election that would
materially increase the amount of Taxes payable by the COMPANY, as compared to
the amount of Taxes that would be payable in the absence of such tax election,
in any Post-Closing Period (as defined in Section 10.6(d)).
(xvii) The COMPANY made an election to be classified as an S
Corporation for its partial taxable year beginning on April 1,1990 under Section
1362(a) of the Code and corresponding provisions of the laws of the state in
which it is subject to tax, and has qualified as an S Corporation at all times
since such date. The COMPANY does not own any subsidiary which is a qualified
Subchapter S subsidiary within the meaning of Section 1361(b)(3) of the Code.
(xviii) The fair market value of the sum of (i) all dividends paid and
distributions made on or after January 1, 1998 and through the date of this
Agreement in respect of COMPANY Stock and (ii) all consideration paid by the
COMPANY on or after January 1, 1998 and through the date of this Agreement in
connection with all direct and indirect redemptions, purchases and other
acquisitions of COMPANY Stock is not greater than $997,585.
(xix) The book value of the COMPANY's inventory as of and on the
Closing Date for financial statement and tax purposes will be determined using
the same methodology as was used in determining the book value of the Company's
inventory on the December 31, 1998 COMPANY Balance Sheet.
Certain of the defined terms used in this Section 5.22 have the meaning
ascribed to them in Section 10.
5.23 No Violations. Except as set forth in Schedule 5.23, neither the
-------------
COMPANY nor, to the knowledge of the COMPANY, any other party thereto is (i) in
violation of any Charter Document or (ii) in default under any Material Lease or
Material Contract; and, except as set forth in the schedules and documents
attached to this Agreement, (a) the transactions contemplated hereby will not
have a Material Adverse Effect on the rights and benefits of the COMPANY under
the Material Leases and Material Contracts, either singly or in the aggregate,
and (b) except as set forth on Schedule 5.23, the execution of this Agreement
and the performance of the obligations hereunder and the consummation of the
transactions contemplated hereby will not result in any violation or breach or
constitute a default under any of the terms or provisions of
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<PAGE>
the Charter Documents, Material Leases, Material Contracts, any judgment,
decree, order or award of any court, governmental body or arbitrator, or any
law, rule or regulation applicable to COMPANY. Except as set forth in Schedule
5.23, none of the Material Leases or Material Contracts requires notice to, or
the consent or approval of, any third party with respect to any of the
transactions contemplated hereby in order to remain in full force and effect,
nor does this Agreement or any of the transactions contemplated hereby give rise
to any right to termination, cancellation or acceleration or loss of any right
or benefit under any Material Lease or Material Contract.
5.24 Government Contracts. Except as set forth on Schedule 5.24, the
--------------------
COMPANY is not now a party to any governmental contracts subject to price
redetermination or renegotiation.
5.25 Absence of Changes. Since the Balance Sheet Date, except as set
------------------
forth on Schedule 5.25, there has not been with respect to the COMPANY:
(i) any event or circumstance (either singly or in the aggregate)
which would constitute a Material Adverse Effect;
(ii) any change in its authorized capital, or securities outstanding,
or ownership interests or any grant of any options, warrants, calls, conversion
rights or commitments;
(iii) any declaration or payment of any dividend or distribution in
respect of its capital stock or any direct or indirect redemption, purchase or
other acquisition of any of its capital stock;
(iv) any increase of more than five percent (5%) in the compensation,
bonus, sales commissions or fee arrangement payable or to become payable by it
to any of its respective officers, directors, stockholders, employees,
consultants or agents, except for ordinary and customary bonuses and salary
increases for employees (other than the STOCKHOLDERS) in accordance with past
practice;
(v) any work interruptions, labor grievances or claims filed, or any
similar event or condition of any character that would have a Material Adverse
Effect;
(vi) any distribution, sale or transfer, or any agreement to sell or
transfer any material assets, property or rights of its business to any person,
including, without limitation, the STOCKHOLDERS and their affiliates, other than
distributions, sales or transfers in the ordinary course of business to persons
other than the STOCKHOLDERS and their affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to it, including without limitation any indebtedness or
obligation of any STOCKHOLDERS or any affiliate thereof, provided that it may
--------
negotiate and adjust bills in the course of good faith disputes with customers
in a manner consistent with past
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<PAGE>
practice, provided, further, that such adjustments shall not be deemed
-------- -------
to be included in Schedule 5.11 unless specifically listed thereon;
(viii) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property or
rights or requiring consent of any party to the transfer and assignment of any
such assets, property or rights;
(ix) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire any property, rights or assets outside of the
ordinary course of business;
(x) any waiver of any of its material rights or claims;
(xi) any transaction by it outside the ordinary course of its
business; or
(xii) any cancellation or termination of a Material Contract.
5.26 Deposit Accounts; Powers of Attorney. The COMPANY has delivered
------------------------------------
to HDS anaccurate schedule (Schedule 5.26) as of the date of the Agreement, of:
(i) the name of each financial institution in which the COMPANY has
accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation, firm
or other entity holding a general or special power of attorney from the COMPANY
and a description of the terms of such power.
5.27 Relations with Governments. The COMPANY has not made, offered or
--------------------------
agreed to offer anything of value to any governmental official, political party
or candidate for government office which would cause the COMPANY to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended, or any law
of similar effect.
(B) Representations and Warranties of STOCKHOLDERS. Each STOCKHOLDER
----------------------------------------------
severally (and not jointly) represents and warrants that the representations and
warranties set forth in this Section 5(B) are true as of the date of this
Agreement and, subject to Section 7.9 hereof, shall be true at the time of Pre-
Closing and on the Closing Date, and that such representations and warranties
survive the Closing Date until the Expiration Date.
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5.28 Authority; Validity; Ownership. Such STOCKHOLDER has the full legal
------------------------------
right, power and authority to enter into this Agreement and any other agreements
contemplated by this Agreement to which such STOCKHOLDER is or is contemplated
to be a party. Assuming due authorization, execution and delivery by HDS and
ERF, this Agreement and any other agreements contemplated by this Agreement to
which such STOCKHOLDER is or is contemplated to be a party are or will be legal,
valid and binding obligations of each STOCKHOLDER, enforceable in accordance
with their respective terms, except as may be limited by applicable bankruptcy,
insolvency, or similar laws affecting creditors' rights generally. Such
STOCKHOLDER owns beneficially and of record all of the shares of the COMPANY
Stock identified on Annex II as being owned by such STOCKHOLDER, and, except as
set forth on Schedule 5.28 hereto, such COMPANY Stock is owned free and clear of
all liens, encumbrances and claims of every kind.
5.29 Preemptive Rights. Such STOCKHOLDER does not have, or hereby waives,
-----------------
any preemptive or other right to acquire shares of COMPANY Stock or HDS Stock
that such STOCKHOLDER has or may have had other than rights of any STOCKHOLDER
to acquire HDS Stock pursuant to (i) this Agreement or (ii) any option granted
by HDS.
6. REPRESENTATIONS OF HDS.
HDS represents and warrants that all of the following representations
and warranties are true at the date of this Agreement and shall be true at the
time of Pre-Closing and the Closing Date and that such representations and
warranties shall survive the Closing Date until the Expiration Date, except that
(i) the warranties and representations set forth in Section 6.10 shall survive
until such date as the limitations period has run for all tax periods ended on
or prior to the Closing Date, which date shall be deemed to be the Expiration
Date for Section 6.10; and (ii) solely for purposes of Section 11.2(iv) hereof,
and solely to the extent that in connection with the IPO the STOCKHOLDERS
actually incur liability under the 1933 Act, the 1934 Act, or any other federal
or state securities laws, the representations and warranties set forth herein
shall survive until the expiration of any applicable limitations period.
6.1 Due Organization. HDS and each of the subsidiaries of HDS ("HDS's
----------------
Subsidiaries") set forth in Schedule 6.6 is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation, and is duly authorized and qualified under all applicable laws,
regulations, ordinances and orders of public authorities to carry on its
business in the places and in the manner as now conducted except for where the
cumulative effect of all failures to be so authorized or qualified would not
have a material adverse effect on the business, operations, affairs, properties,
assets or condition (financial or otherwise), of HDS and HDS's Subsidiaries,
taken as a whole (an "HDS Material Adverse Effect"). True, complete and correct
copies of the Certificate of Incorporation and the Bylaws each as amended, of
HDS and HDS's Subsidiaries (collectively, the "HDS Charter Documents"),
certified by the Secretary or an Assistant Secretary of HDS, are attached hereto
as Annex IV. A true, complete and
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correct copy of the Certificate of Incorporation each as amended, of HDS and
each of HDS's Subsidiaries, certified by the Secretary of State of the State of
Delaware, shall be delivered at the Pre-Closing.
6.2 HDS Stock. The HDS Stock to be delivered to the STOCKHOLDERS on the
---------
Closing Date shall constitute valid and legally issued shares of HDS, fully paid
and nonassessable, and except as set forth in this Agreement, will be owned free
and clear of all liens, security interests, pledges, charges, voting trusts,
restrictions, encumbrances and claims of every kind created by HDS, and will be
legally equivalent in all respects to the HDS Stock issued and outstanding as of
the date hereof. Except for any series of Preferred Stock that will be
converted into HDS Stock on the Closing Date, HDS has no series or class of
capital stock authorized, issued or outstanding which, as a series or class, has
any rights or preferences senior to the shares of the HDS stock to be delivered
to the STOCKHOLDERS on the Closing Date, including, without limitation, any
rights or preferences as to dividends or as to the assets of HDS upon
liquidation or dissolution or as to redemption, pre-emptive or voting rights.
The shares of HDS Stock to be issued to the STOCKHOLDERS pursuant to this
Agreement will not be registered under the 1933 Act.
6.3 Authority and Validity. The representatives of HDS and ERF executing
----------------------
this Agreement and any other agreements contemplated by this Agreement have the
corporate authority to enter into and bind HDS and ERF, respectively, to the
terms of this Agreement and any other agreements contemplated by this Agreement
to which HDS or ERF is or is contemplated to be a party. HDS and ERF have the
full legal right, power and authority to enter into this Agreement, any other
agreements contemplated by this Agreement to which HDS or ERF is or is
contemplated to be a party, and the Merger. All corporate action necessary for
the authorization, execution, delivery and performance by HDS and ERF of this
Agreement, and also any other agreements contemplated by this Agreement to which
HDS or ERF is contemplated to be a party, has been taken. Assuming due
authorization, execution and delivery by the COMPANY and the STOCKHOLDERS, as
applicable, this Agreement and any other agreements contemplated by this
Agreement to which HDS or ERF is or is contemplated to be a party are or will be
legal, valid and binding obligations of HDS or ERF, enforceable against HDS and
ERF, respectively, in accordance with their respective terms, except as may be
limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally, and except that the availability of equitable
remedies is subject to the discretion of the court before which any proceeding
therefor may be brought.
6.4 Capital Stock of HDS. Immediately prior to the Closing, the
--------------------
authorized capital stock of HDS will be as set forth in Schedule 6.4. All of the
issued and outstanding shares of HDS are owned beneficially and of record by the
persons set forth on Annex III. All issued and outstanding shares of HDS stock
are duly authorized, validly issued, fully paid and nonassessable. There are no
obligations of HDS to repurchase, redeem or otherwise acquire any shares of HDS
stock. Except as described in the Registration Statement, there are no options,
warrants, equity securities, calls, rights, commitments or agreements of any
character to which HDS or any of its subsidiaries are
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<PAGE>
a party or by which they are bound obligating HDS or any of its subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of HDS or any of its subsidiaries or obligating HDS or
any of its subsidiaries to grant, extend, accelerate the vesting of or enter
into any such option, warrant, equity security, call, right, commitment or
agreement. To the knowledge of HDS, as of the Closing Date, none of the
stockholders set forth on Annex III will be a party to or subject to any voting
trust, proxy or other agreement or understanding with respect to the shares of
capital stock of HDS owned by such stockholder. All of the shares of HDS Stock
to be issued to the STOCKHOLDERS in accordance herewith will be duly authorized,
validly issued, fully paid and nonassessable. All of the shares of HDS Stock
issued to persons set forth on Annex III and, based on the representations of
STOCKHOLDERS contained in this Agreement and in the documents delivered to HDS
pursuant hereto, to STOCKHOLDERS pursuant to this Agreement, were or will be
offered, issued, sold and delivered by HDS in compliance with all applicable
state and federal laws concerning the issuance of securities and none of such
shares were or will be issued in violation of the preemptive rights of any past
or present stockholder. On the Closing Date the capitalization of HDS will be as
set forth in the Registration Statement.
6.5 No Side Agreements. Except as set forth in Schedule 6.5, HDS and
------------------
ERF have not entered into any material agreement with any of the Founding
Companies or any of the stockholders of the Founding Companies other than the
Other Agreements and the agreements contemplated by each of the Other
Agreements, including the employment agreements referred to therein. HDS and ERF
have identified to the COMPANY, and at the request of the COMPANY will provide
it with copies of, all material agreements entered into between (i) HDS, ERF and
their affiliates and (ii) HDS or ERF and the Founding Companies or any
stockholders of the Founding Companies. Further, HDS will make available to the
COMPANY copies of any of the foregoing agreements entered into between the date
hereof and the Closing Date promptly after such agreements are entered into.
Each of the Other Agreements is in a form substantially similar to this
Agreement.
6.6 Subsidiaries. Except for those companies set forth on Schedule 6.6,
------------
HDS does not presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity. HDS is
not, directly or indirectly, a participant in any joint venture, partnership or
other non-corporate entity.
6.7 Business; Financial Information. Neither HDS nor ERF have conducted
-------------------------------
any business since the date of its inception, except in connection with this
Agreement, the Other Agreements and the contemplated IPO of HDS Stock. HDS was
formed in 1998, and has historical financial statements only for the partial
year ended December 31, 1998. Attached hereto as Schedule 6.7 are HDS's
financial statements for such partial year. Such HDS financial statements have
been prepared in accordance with generally accepted accounting principles and
present fairly the financial position of HDS as of the dates indicated thereon,
and such financial statements present fairly the results of HDS's operations for
the periods indicated thereon. HDS and ERF have no material liabilities,
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<PAGE>
accrued or contingent, other than those incurred in connection with this
Agreement, the Other Agreements and the agreements contemplated thereby, the
agreements to be filed as exhibits to the Registration Statement, and the
contemplated IPO of HDS Stock.
6.8 Conformity with Law. HDS (including HDS's Subsidiaries) is not in
-------------------
violation of any law or regulation or any order of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them which (either singly or
in the aggregate) would have an HDS Material Adverse Effect. There are no
claims, actions, suits or proceedings, pending or, to the knowledge of HDS
(including HDS's Subsidiaries), threatened, against or affecting HDS (including
HDS's Subsidiaries), at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over any of them and no notice of any claim,
action, suit or proceeding, whether pending or threatened, has been received by
HDS or any of HDS's Subsidiaries. HDS (including HDS's Subsidiaries) has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in applicable Federal, state and
local statutes, ordinances, orders, approvals, variances, rules and regulations
and is not in violation of any of the foregoing which would have an HDS Material
Adverse Effect.
6.9 No Violations. HDS (including HDS's Subsidiaries) is not (i) in
-------------
violation of any HDS Charter Document or (ii) in default under any material
lease, instrument, agreement, license, or permit to which it is a party or by
which its properties are bound (the "HDS Material Documents"); and, except as
set forth in the Registration Statement, (a) the rights and benefits of HDS
(including HDS's Subsidiaries) under the HDS Material Documents will not be
materially and adversely affected by the transactions contemplated hereby and
(b) the execution of this Agreement and the performance of the obligations
hereunder and the consummation of the transactions contemplated hereby will not
result in any violation or breach or constitute a default under any of the terms
or provisions of the HDS Material Documents, the HDS Charter Documents, any
judgment, decree, order or award of any court, governmental body or arbitrator,
or any law, rule or regulation applicable to HDS or any of HDS's Subsidiaries.
Except as set forth in Schedule 6.9, none of the HDS Material Documents requires
notice to, or the consent or approval of, any third party with respect to any of
the transactions contemplated hereby in order to remain in full force and
effect, nor does this Agreement or any of the transactions contemplated hereby
give rise to any right to termination, cancellation or acceleration or loss of
any right or benefit. The minute books of HDS and each of HDS's subsidiaries as
heretofore made available to the COMPANY are true and correct.
6.10 Intentionally Omitted.
---------------------
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<PAGE>
7. COVENANTS PRIOR TO CLOSING.
7.1 Access and Cooperation; Due Diligence.
-------------------------------------
(i) Between the date of this Agreement and the Closing Date, the
COMPANY will afford to the officers and authorized representatives of HDS
access to all of the COMPANY's key employees, sites, properties, books and
records and will furnish HDS with such additional financial and operating
data and other information as to the business and properties of the COMPANY
as HDS may from time to time reasonably request. The COMPANY will cooperate
with HDS, its representatives, auditors and counsel in the preparation of
any documents or other material which may be required by this Agreement.
The COMPANY shall provide reasonable access to the COMPANY's key employees,
books, records and other financial data to all Other Companies and their
representatives, auditors and counsel; provided that, the COMPANY will not
-------- ----
be required to disclose competitively-sensitive information to such Other
Companies. HDS, the STOCKHOLDERS and the COMPANY will treat all information
obtained in connection with the negotiation and performance of this
Agreement or the due diligence investigations conducted with respect to the
Other Companies as confidential in accordance with the provisions of
Section 14 hereof and will not use such information for any purpose other
than for the evaluation of the transactions contemplated by this Agreement.
In addition, HDS will cause each of the Other Companies to enter into a
provision similar to this Section 7.1 requiring each such Other Company to
keep confidential any information obtained by such Other Company and to not
use such information for any purpose other than for the evaluation of the
transactions contemplated by the applicable Other Agreement. All Other
Companies shall be third-party beneficiaries with respect to the covenant
of the COMPANY and the STOCKHOLDERS restricting the use of information
received by the COMPANY and such STOCKHOLDERS, and the COMPANY shall be a
third-party beneficiary with respect to the covenant of the Other Companies
and their respective shareholders restricting the use of COMPANY
information received by such Other Companies and shareholders.
(ii) Between the date of this Agreement and the Closing Date, HDS
will afford to the officers and authorized representatives of the COMPANY
access to all of HDS's (including HDS's Subsidiaries') sites, properties,
books and records (including without limitation the records, reports and
other communications regarding the COMPANY to HDS by the auditors engaged
by HDS to review and audit the COMPANY) and will furnish the COMPANY with
such additional financial and operating data and other information as to
the business and properties of HDS (including HDS's Subsidiaries) as the
COMPANY may from time to time reasonably request. HDS will cooperate with
the COMPANY, its representatives, engineers, auditors and counsel in the
preparation of any documents or other material which may be required by
this Agreement. The COMPANY will cause all information obtained in
connection with the negotiation and performance of this Agreement to be
treated as confidential in accordance with the provisions of Section 14
hereof.
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<PAGE>
7.2 Conduct of Business Pending Closing. Between the date of this
-----------------------------------
Agreement and the Closing Date, the COMPANY will, except as set forth in
Schedule 7.2:
(i) carry on its business in substantially the same manner as it has
heretofore, maintain inventory at levels substantially equivalent to those
maintained during the 12 months ended December 31, 1998, and not introduce any
material new method of management, operation or accounting;
(ii) maintain its properties, facilities, equipment and other assets,
including those held under leases, in as good working order and condition as at
present, ordinary wear and tear excepted;
(iii) perform all of its material obligations under agreements to
which it is a party relating to or affecting its assets, properties or rights;
(iv) subject to Section 7.6, keep in full force and effect present
insurance policies or other comparable insurance coverage;
(v) use best efforts to maintain and preserve its business
organization intact, retain its present employees and maintain its
relationships with suppliers, customers and others having business
relations with it;
(vi) maintain compliance with all permits, laws, rules and
regulations, consent orders, and all other orders of applicable courts,
regulatory agencies and similar governmental authorities applicable to the
COMPANY; and
(vii) maintain compliance with all present debt and lease instruments
and not enter into new or amended debt or lease instruments involving payments
by the COMPANY over $50,000 (individually or in the aggregate), without the
knowledge and consent of HDS (which consent shall not be unreasonably withheld).
7.3 Prohibited Activities. Except as disclosed in Schedule 7.3, between
---------------------
the date of this Agreement and the Closing Date, the COMPANY has not and,
without the prior written consent of HDS, will not:
(i) make any change in its Articles of Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed on Schedule 5.4;
(iii) declare or pay any dividend, or make any distribution in respect
of its stock whether now or hereafter outstanding, or purchase, redeem or
otherwise acquire or retire for value any shares of its stock;
(iv) enter into any contract (including any contract to provide
services to customers) or commitment or incur or agree to incur any liability or
make any capital
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<PAGE>
expenditures, except if (x) it is in the ordinary course of business (consistent
with past practice) or (y) when aggregated with all other such contracts,
commitments, liabilities and capital expenditures not in the normal course of
business consistent with past practice, it involves an amount not in excess of
$100,000;
(v) increase the compensation payable or to become payable to any
officer, director, STOCKHOLDER, employee or agent, or make any bonus or
management fee payment to any such person, except (x) bonuses to employees
(other than the STOCKHOLDERS or their affiliates) consistent with past practice
and (y) increases in salaries and commission rates payable to employees (other
than to STOCKHOLDERS and their affiliates), provided that neither the salary nor
any commission rate payable to any employee may increase to more than one
hundred five percent (105%) of such employee's current salary or commission
rate, whichever is applicable;
(vi) create, assume or permit to exist any mortgage, pledge or other
lien or encumbrance upon any assets or properties whether now owned or hereafter
acquired, except (1) with respect to purchase money liens incurred in connection
with the acquisition of equipment with an aggregate cost not in excess of
$50,000 necessary or desirable for the conduct of the business of the COMPANY,
or (2) liens set forth on Schedule 5.14 hereto or (3) liens for taxes either not
yet due or materialmen's, mechanics', workers', repairmen's, employees' or other
like liens arising in the ordinary course of business ;
(vii) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the ordinary course of business;
(viii) negotiate for the acquisition of any business or the start-up of
any new business;
(ix) merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(x) waive any material rights or claims of the COMPANY, provided that
--------
the COMPANY may negotiate and adjust bills in the course of good faith disputes
with customers in a manner consistent with past practice, provided, further,
-------- -------
that such adjustments shall not be deemed to be included in Schedule 5.11
unless specifically listed thereon;
(xi) commit a material breach or amend or terminate any Material
Contract, or material permit, license or other right of the COMPANY, or make or
terminate any election involving Taxes which would in any way adversely affect
the Tax liability of the COMPANY (or HDS following the Merger) in any taxable
period; or
(xii) enter into any other transaction outside the ordinary course of
its business or prohibited hereunder.
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<PAGE>
7.4 No Shop. None of the STOCKHOLDERS, the COMPANY or any agent, officer,
-------
director or any representative of any of the foregoing will, during the period
commencing on the date of this Agreement and ending with the earlier to occur of
the Closing Date or the termination of this Agreement in accordance with its
terms, directly or indirectly: (i) solicit or initiate, either directly or
indirectly, the submission of proposals or offers from any person for, (ii)
participate in any discussions pertaining to or (iii) furnish any information to
any person other than HDS or the Founding Companies relating to, any acquisition
or purchase of all or a material amount of the assets of, or any equity interest
in, the COMPANY or a merger, consolidation or business combination of the
COMPANY.
7.5 Notice to Bargaining Agents. Prior to the Closing Date, the COMPANY
---------------------------
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements, and shall
provide HDS with proof that any required notice has been sent.
7.6 Termination of Plans. Prior to the Pricing Date, the COMPANY shall
--------------------
terminate all Plans listed on Schedule 7.6.
7.7 HDS Prohibited Activities. Between the date of this Agreement and the
-------------------------
Closing Date, except as set forth on Schedule 7.7, HDS will not:
(i) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind;
(ii) make any changes in its Certificate of Incorporation or Bylaws
other than one or more amendments to the Certificate of Incorporation to
accomplish a split or reverse split of the HDS Stock (provided that in the event
of any such split or reverse split, the number of shares of HDS Stock to be
delivered to the STOCKHOLDERS, and to the stockholders of the Other Companies,
and the Minimum IPO Price, as set forth on Annex I, will be adjusted
accordingly) or to increase the authorized capital stock of HDS to an amount not
to exceed 40,000,000 shares of common stock and 5,000,000 shares of preferred
stock;
(iii) hire or appoint any officer or director or increase the
compensation payable or to become payable to any officer or director; or
(iv) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to HDS and the HDS Subsidiaries.
7.8 Notification of Certain Matters. The STOCKHOLDERS and the COMPANY
-------------------------------
shall give prompt notice to HDS of (i) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would be likely to cause any
representation or
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warranty of the COMPANY or the STOCKHOLDERS contained herein to be untrue or
inaccurate in any material respect at or prior to the Closing and (ii) any
material failure of any STOCKHOLDER or the COMPANY to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by such person
hereunder. HDS shall give prompt notice to the COMPANY of (i) the occurrence or
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any representation or warranty of HDS contained herein to be
untrue or inaccurate in any material respect at or prior to the Closing and (ii)
any material failure of HDS to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder. The delivery of any
notice pursuant to this Section 7.8 shall not be deemed to (i) modify the
representations or warranties hereunder of the party delivering such notice,
which modification may only be made pursuant to Section 7.9, (ii) modify the
conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
7.9 Amendment of Schedules. Each party hereto agrees that, with respect
----------------------
to the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until the Pre-Closing to
supplement or amend promptly the Schedules hereto with respect to any matter
hereafter arising or discovered which, if existing or known at the date of this
Agreement, would have been required to be set forth or described in the
Schedules; provided, however, that supplements and amendments to Schedules 5.10,
-------- -------
5.11 and 5.14 shall only have to be delivered at the Pre-Closing Date, unless
such Schedule is to be amended to reflect an event occurring other than in the
ordinary course of business. In the event that the COMPANY amends or
supplements a Schedule pursuant to this Section 7.9 in any material respect, and
HDS does not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement at or before the Pre-Closing, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof. In the event that HDS amends or supplements a Schedule pursuant
to this Section 7.9 in any material respect and a majority of the Founding
Companies do not consent (which consent shall not be unreasonably withheld) to
the effectiveness of such amendment or supplement at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For all purposes of this Agreement, including without
limitation for purposes of determining whether the conditions set forth in
Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed
to be the Schedules as amended or supplemented pursuant to this Section 7.9. In
the event that one of the Other Companies amends or supplements a Schedule
pursuant to Section 7.9 of one of the Other Agreements in any material respect,
or any Other Agreement is amended in any material respect with respect to any of
the terms described in Section 7.13 below, HDS shall give the COMPANY notice
promptly after it has knowledge thereof. If HDS and a majority of the Other
Companies, excluding such other Company effecting the amendment or supplement,
do not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement, at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For purposes of this Section 7.9, HDS shall be deemed
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to have given its consent to the effectiveness of any amendment or supplement to
a Schedule if HDS does not notify the COMPANY of its disapproval within 48 hours
after HDS is notified of such amendment or supplement, and the COMPANY and each
Other Company shall be deemed to have given its consent to the effectiveness of
any amendment or supplement to a Schedule if the COMPANY or such Other Company,
as applicable, does not notify HDS of its disapproval within 48 hours after the
COMPANY or such Other Company, as applicable, is notified of such amendment or
supplement. Except as otherwise provided herein, no amendment of or supplement
to a Schedule shall be made after the Pre-Closing.
7.10 Cooperation in Preparation of Registration Statement. The COMPANY and
----------------------------------------------------
STOCKHOLDERS shall furnish or cause to be furnished to HDS and the Underwriters
all of the information concerning the COMPANY or the STOCKHOLDERS reasonably
requested by HDS and the Underwriters, and will cooperate with HDS and the
Underwriters in the preparation of the Registration Statement and the prospectus
included therein (including audited financial statements prepared in accordance
with generally accepted accounting principles). HDS has delivered to the
COMPANY and the STOCKHOLDERS a copy of the current draft of the Registration
Statement as of the date of this Agreement and shall promptly deliver to the
COMPANY and the STOCKHOLDERS prior to filing a copy of the initial filing
thereof and each amendment thereto. The COMPANY and the STOCKHOLDERS agree
promptly to advise HDS if at any time during the period in which a prospectus
relating to the offering is required to be delivered under the 1933 Act, any
information contained in the prospectus concerning the COMPANY or the
STOCKHOLDERS becomes incorrect or incomplete in any material respect, and to
provide the information needed to correct such inaccuracy.
7.11 Examination of Final Financial Statements. To the extent that
-----------------------------------------
financial statements of the COMPANY for any quarter subsequent to the Balance
Sheet Date are required to be included in the Registration Statement, the
COMPANY shall provide, and HDS shall have had sufficient time to review, the
unaudited balance sheet and statements of income, cash flows and retained
earnings of the COMPANY as of the end of such quarter, disclosing no material
adverse change in the financial condition or results of operations of the
COMPANY. Such financial statements, which shall be deemed to be Financial
Statements (as described in Section 5.9), shall have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted therein). To the extent such
Financial Statements shall be included or reflected in the Registration
Statement, any events or circumstances reflected therein which might constitute
a Material Adverse Effect with respect to the COMPANY shall be deemed to have
been waived by HDS and HDS shall have no rights in respect of such Material
Adverse Effect.
7.12 Maximum Working Capital Deficit and Advances to STOCKHOLDERS. As
------------------------------------------------------------
of the Closing Date, the COMPANY will have an adjusted working capital (defined
for this purpose as cash plus receivables net of receivables reserves less short
term liabilities, excluding the short-term portion of long-term debt) deficit
not in excess of $950,000. As used in the preceding sentence, the terms "cash,"
"receivables,"
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"receivables reserves," "short-term liabilities" and "short-term portion of
long-term debt" all will have the same meaning as in generally accepted
accounting principles, as applied in the preparation of the COMPANY Financial
Statements. Notwithstanding the provisions of Sections 7.1 and 7.2 above, the
COMPANY may make demand loans to the STOCKHOLDERS in respect of tax payments
required of them based on the COMPANY'S income for 1998, provided the aggregate
amount of such loans shall not exceed $1,000,000. The amount of such loans shall
be included within the definition of "receivables" for the purpose of this
Section 7.12, and the COMPANY shall give prompt written notice to HDS of the
making of any such loan. The amount of such loans shall be repaid on the Closing
Date and may, at HDS' election, be repaid by HDS' offsetting the amount of such
loans to each of the STOCKHOLDERS against the amount of cash due to such
STOCKHOLDER on the Closing Date pursuant to Section 2.1. The amount of such
loans shall not be reflected in an amendment of Schedule 5.11 and such loans
shall be repaid as provided in this Section 7.12 rather than pursuant to Section
9.15, provided that any such loans as to which HDS has not received written
notice shall be repaid in accordance with Section 9.15.
7.13 Other Agreement Terms. HDS represents and warrants to the
---------------------
STOCKHOLDERS that in none of the Other Agreements (i) is the survival period
provided in Section 5(A) for representations and warranties in Section 5 less
than two (2) years after the Closing Date, (ii) is the period of prohibited
activities provided in the first sentence of Section 13.1 less than four (4)
years from the Closing Date, (iii) is the Indemnification Threshold in Section
11.5(i) higher than 1.5% of the aggregate value of cash and HDS Stock payable at
closing to the stockholders of the respective Other Company.
7.14 Employment Matters. HDS shall offer to enter into three (3) year
------------------
employment agreements in substantially the form of the Employment Agreement (as
defined in Section 8.12) with each of Josh Weinstock, Jeff Weinstock, Jill
Fusari and Richard Michka, at respective annual salaries in amounts previously
agreed between the COMPANY and HDS.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.
The obligations of STOCKHOLDERS and the COMPANY with respect to actions
to be taken on the Pricing Date are subject to the satisfaction or waiver on or
prior to the Pricing Date of all of the following conditions. The obligations
of the STOCKHOLDERS and the COMPANY with respect to actions to be taken on the
Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of the conditions set forth in Sections 8.1, 8.7 and 8.11.
8.1 Representations and Warranties; Performance of Obligations. All
----------------------------------------------------------
representations and warranties of HDS and ERF contained in Section 6 shall be
true and correct in all material respects as of the Pricing Date and the Closing
Date with the same effect as though such representations and warranties had been
made as of that date; each
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and all of the terms, covenants and conditions of this Agreement to be complied
with and performed by HDS and ERF on or before the Pricing Date and the Closing
Date shall have been duly complied with and performed in all material respects;
and a certificate to the foregoing effect dated the Pricing Date and the Closing
Date signed by the President or any Vice President of HDS and certified by the
Secretary or Assistant Secretary of HDS shall have been delivered to the
STOCKHOLDERS.
8.2 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be satisfactory to the COMPANY and its counsel. The
STOCKHOLDERS and the COMPANY shall be satisfied that the Registration Statement
and the prospectus forming a part thereof, including any amendments thereof or
supplement thereto, shall not contain any untrue statement of a material fact,
or omit to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that the
--------
condition contained in this sentence shall be deemed satisfied if (i) HDS shall
have made available to the COMPANY copies of the draft (or changed pages of such
draft) of the Registration Statement prior to the initial filing with the
Securities and Exchange Commission (the "SEC"), each amendment thereto prior to
the effectiveness thereof with the SEC and of any amendment or supplement
thereto after the effectiveness thereof (including any prospectus filed pursuant
to Rule 424 under the 1933 Act) and (ii) the COMPANY or STOCKHOLDERS shall have
failed to inform HDS in writing prior to the filing or the effectiveness
thereof, as the case may be, of the existence of an untrue statement of a
material fact or the omission of such a statement of a material fact or other
matter with which they are not satisfied, provided, however, that for the period
-------- -------
commencing 72 hours prior to any such filing or effectiveness, HDS can make such
draft or changed pages available by facsimile.
8.3 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock pursuant to
the Registration Statement and no governmental agency or body shall have taken
any other action or made any request of the COMPANY as a result of which the
management of the COMPANY deems it inadvisable to proceed with the transactions
hereunder.
8.4 Stockholders' Release. Each stockholder of HDS immediately prior to
---------------------
the Closing Date who is an officer or director of HDS shall have delivered to
the COMPANY an instrument dated the Closing Date releasing HDS from any and all
claims of such stockholder against HDS and obligations of HDS to such
stockholder other than obligations arising in connection with this Agreement,
the Other Agreements, any employment agreements between such stockholder and
HDS, any options to purchase HDS Stock granted by HDS to such stockholder and
any right to the issuance of the shares of HDS Stock set forth in Annex III
hereto.
8.5 Opinion of Counsel. The COMPANY shall have received an opinion from
------------------
counsel for HDS, dated the Closing Date, in the form annexed hereto as Annex V.
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8.6 Director Indemnification. HDS shall have obtained directors and
------------------------
officers liability insurance from a reputable insurance company in type and
amount as is customary for companies similarly situated, and HDS shall have
entered into an indemnification agreement with each STOCKHOLDER, if any, who
will become a director of HDS, such indemnification agreement to be
substantially in the form attached as Annex VII.
8.7 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC and the underwriters named therein shall have
agreed to acquire on a firm commitment basis such shares of HDS Stock, subject
to the conditions set forth in an underwriting agreement (the "Underwriting
Agreement"), on terms such that the Effective IPO Price (as defined in Annex I)
is equal to or greater than the Minimum IPO Price (as defined in Annex I).
8.8 Consents and Approvals. All necessary consents of and filings with
----------------------
any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made, no action or
proceeding shall have been instituted or threatened to restrain or prohibit the
Merger, and no governmental agency or body shall have taken any other action or
made any request of the COMPANY as a result of which the COMPANY deems it
inadvisable to proceed with the transactions hereunder.
8.9 Good Standing Certificates. HDS shall have delivered to the COMPANY a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
Date, duly issued by the Delaware Secretary of State and the Secretary of State
of each state in which HDS is authorized to do business, showing that HDS is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for HDS, for all periods prior to the Closing, have
been filed and paid.
8.10 No Waivers. HDS shall not have waived any closing condition under
----------
any Other Agreement, unless such condition does not constitute a Material
Adverse Effect (as defined in such Other Agreement) on the Other Company party
to such Other Agreement.
8.11 No Material Adverse Change. No event or circumstance shall have
--------------------------
occurred which would constitute an HDS Material Adverse Effect; and the COMPANY
shall have received a certificate signed by HDS dated the Pricing Date and the
Closing Date to such effect.
8.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an employment agreement with HDS substantially in the
form of Annex VIII (each an "Employment Agreement").
8.13 Consulting Agreements. Each of the persons listed on Schedule 8.13
---------------------
shall have entered into a consulting agreement with HDS substantially in the
form of Annex IX (each a "consulting Agreement").
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9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.
The obligations of HDS with respect to actions to be taken on the
Pricing Date are subject to the satisfaction or waiver on or prior to the
Pricing Date of all of the following conditions. The obligations of HDS with
respect to actions to be taken on the Closing Date are subject to the
satisfaction or waiver on or prior to the Closing Date of the conditions set
forth in Sections 9.1, 9.3, 9.4 and 9.11.
9.1 Representations and Warranties; Performance of Obligations. All the
----------------------------------------------------------
representations and warranties of the STOCKHOLDERS and the COMPANY contained in
this Agreement shall be true and correct in all material respects as of the
Pricing Date and the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date; each and
all of the terms, covenants and conditions of this Agreement to be complied with
or performed by the STOCKHOLDERS and the COMPANY on or before the Pricing Date
or the Closing Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the STOCKHOLDERS shall have
delivered to HDS a certificate dated the Pricing Date and the Closing Date
signed by them and certified by the Secretary or Assistant Secretary of the
COMPANY to such effect.
9.2 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock pursuant to
the Registration Statement, and no governmental agency or body shall have taken
any other action or made any request of HDS as a result of which the management
of HDS deems it inadvisable to proceed with the transactions hereunder.
9.3 Financial Statements. Prior to the Closing Date, HDS shall have had
--------------------
sufficient time to review the unaudited consolidated balance sheets of the
COMPANY for the fiscal quarters beginning after the Balance Sheet Date, and the
unaudited consolidated statement of income, cash flows and retained earnings of
the COMPANY for the fiscal quarters beginning after the Balance Sheet Date, and
the same shall not disclose any material adverse change in the financial
condition of the COMPANY or the results of its operations from the December 31,
1998 COMPANY Financial Statements, provided however that an increase in the
COMPANY's adjusted working capital deficit above the amount of such deficit on
December 31, 1998 will not in and of itself constitute a material adverse change
in the financial condition of the COMPANY if the amount of such deficit does not
exceed the amount provided in Section 7.12.
9.4 No Material Adverse Effect. No event or circumstance shall have
--------------------------
occurred which would constitute a Material Adverse Effect; and HDS shall have
received a certificate signed by the STOCKHOLDERS dated the Pricing Date to such
effect.
9.5 STOCKHOLDERS' Release. The STOCKHOLDERS shall have delivered to HDS
---------------------
immediately prior to the Pricing Date an instrument substantially in the form of
Annex XI (each a "Stockholder Release") dated the Pricing Date releasing the
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COMPANY effective upon the Closing, from any and all claims of the STOCKHOLDERS
against the COMPANY and obligations of the COMPANY to the STOCKHOLDERS, except
for (i) items specifically identified in the Stockholder Release, (ii)
continuing obligations to the STOCKHOLDERS relating to their employment by the
Surviving Corporation and (iii) indemnity and contribution obligations of the
COMPANY or its successors to an officer or director of the COMPANY prior to the
Merger.
9.6 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to HDS.
9.7 Termination of Related Party Agreements. All existing agreements
---------------------------------------
between the COMPANY and the STOCKHOLDERS or business or personal affiliates of
the COMPANY or the STOCKHOLDERS, other than those set forth on Schedule 9.7,
shall have been cancelled.between
9.8 Opinion of COMPANY Counsel. HDS shall have received an opinion dated
--------------------------
the Pricing Date of Pillsbury, Madison & Sutro LLP, counsel to the COMPANY,
substantially in the form annexed hereto as Annex VI, and the Underwriters shall
have received a copy of the same opinion addressed to them.
9.9 Consents and Approvals. All necessary consents of and filings with
----------------------
any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; the COMPANY
shall have obtained and delivered to HDS such additional consents to the Merger
as HDS may reasonably request, including, without limitation, HDS's receipt on
or prior to the Pricing Date of (a) consents of third parties to those Material
Contracts and Material Leases listed on Schedule 5.23 pursuant to the last
sentence of Section 5.23 and (b) those licenses, franchises, permits or
governmental authorizations set forth on Schedule 5.12 pursuant to the last
sentence of Section 5.12, or assurances reasonably acceptable to it that such
consents, licenses, franchises, permits or governmental authorizations will be
received on the Closing Date or that the failure to receive such consents,
licenses, franchises, permits or governmental authorizations on the Closing Date
will not adversely affect its ability to conduct the business of the COMPANY as
conducted prior to the Closing Date; no action or proceeding shall have been
instituted or threatened to restrain or prohibit the Merger; and no governmental
agency or body shall have taken any other action or made any request of HDS as a
result of which HDS deems it inadvisable to proceed with the transactions
hereunder.
9.10 Good Standing Certificates. The COMPANY shall have delivered to HDS a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
Date, duly issued by the appropriate governmental authority in the COMPANY's
state of incorporation and in each state in which the COMPANY is authorized to
do business, showing the COMPANY is validly existing, and where applicable, in
good standing and authorized to
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<PAGE>
do business and that all state franchise and/or income tax returns and taxes due
by the COMPANY for all periods prior to the Pre-Closing have been filed and
paid.
9.11 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC.
9.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an Employment Agreement with HDS.
9.13 Consulting Agreements. Each of the STOCKHOLDERS listed on Schedule
---------------------
8.13 shall have entered into a Consulting Agreement with HDS.
9.14 Intentionally Omitted
9.15 Repayment of Indebtedness. On or before the Closing Date, the
-------------------------
STOCKHOLDERS shall have repaid the COMPANY in full all amounts owing by the
STOCKHOLDERS to the COMPANY.
9.16 FIRPTA Certificate. The COMPANY and each STOCKHOLDER shall have
------------------
delivered to HDS a certificate to the effect that the COMPANY or such
STOCKHOLDER, as applicable, is not a "foreign person" pursuant to Section
1.1445-2(b) of the Treasury regulations.
9.17 Insurance. HDS shall be designated as an additional named insured
---------
on all of the COMPANY's insurance policies.
10. POST-CLOSING COVENANTS AND SPECIAL TAX MATTERS.
10.1 Intentionally Omitted.
---------------------
10.2 Disclosure. If, subsequent to the Pricing Date and prior to the
----------
25th day after the date of the final prospectus of HDS utilized in connection
with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or
circumstance which would change (or, if after the Closing Date, would have
changed) a representation or warranty of COMPANY or STOCKHOLDERS in this
Agreement or would affect any document delivered pursuant hereto in any material
respect, the COMPANY and the STOCKHOLDERS shall promptly give notice of such
fact or circumstance to HDS.
10.3 Cooperation in Tax Return Preparation. Each party hereto shall at
-------------------------------------
its own expense cooperate with each other and make available to each other such
Tax data and other information as may be reasonably required in connection with
(i) the preparation or filing of any Tax Return, election, consent or
certification, or any claim for refund, (ii) any determinations of liability for
Taxes, or (iii) an audit, examination or other proceeding with respect to Taxes
("Tax Data"). Such cooperation shall include, without limitation, making their
respective employees and independent auditors reasonably available on a mutually
convenient basis for all reasonable purposes, including, without limitation, to
provide explanations and background information and to permit the copying
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<PAGE>
of books, records, schedules, workpapers, notices, revenue agent reports,
settlement or closing agreements and other documents containing the Tax Data
("Tax Documentation"). The Tax Data and the Tax Documentation shall be retained
until one year after the expiration of all applicable statutes of limitations
(including extensions thereof); provided, however, that in the event an audit,
-------- -------
examination, investigation or other proceeding has been instituted prior to the
expiration of an applicable statute of limitations, the Tax Data and Tax
Documentation relating thereto shall be retained until there is a final
determination thereof (and the time for any appeal has expired).
10.4 Tax Return Preparation and Filing.
---------------------------------
(i) HDS will be responsible for preparing and filing (or causing the
preparation and filing of) all income Tax Returns with respect to HDS. The
parties hereto acknowledge that the Closing Date shall be the last day of a
taxable period of the COMPANY pursuant to Code Section 381 and the regulations
promulgated thereunder.
(ii) STOCKHOLDERS will be responsible for preparing and filing (or
causing the preparation and filing of) all income Tax Returns with respect to
the COMPANY for any taxable period ending on or before the Closing Date. HDS and
the STOCKHOLDERS shall (a) with respect to such income Tax Returns, determine
the income, gain, expenses, losses, deductions, and credits of the COMPANY in a
manner consistent with prior practice and in a manner that apportions such
income, gain, expenses, loss, deductions and credits equitably from period to
period and (b) prepare such Tax Returns in a manner consistent with prior years,
in each case as determined in the good faith judgment of the preparer of such
returns; provided, however, that in all events such Tax Returns shall be
prepared in a manner consistent with applicable laws. The COMPANY shall provide
the cash necessary to pay such Taxes, if any, shown to be due from the Company
on any such Tax Returns filed after the Closing Date, but without prejudice to
the right of HDS or the COMPANY to seek indemnification for such Taxes from the
STOCKHOLDERS pursuant to Section 11.6, if applicable.
(iii) In order to appropriately apportion any Taxes relating to a
taxable period that includes (but that would not, but for this section, close
on) the Closing Date, the parties hereto will, to the extent permitted by
applicable law, elect with the relevant taxing authority to treat for all
purposes the Closing Date as the last day of a taxable period of the COMPANY,
and such taxable period shall be treated as a Pre-Closing Period (as defined in
Section 10.6(c)) for purposes of this Agreement. In any case where applicable
law does not permit the COMPANY to treat the Closing Date as the last day of a
taxable period, then for purposes of this Agreement, the portion of each such
Tax that is attributable to the operations of the COMPANY for such Interim
Period shall be (i) in the case of a Tax that is not based on income or gross
receipts, the total amount of such Tax for the period in question multiplied by
a fraction, the numerator of which is the number of days in the Pre-Closing
Period portion of such Interim Period, and the denominator of which is the total
number of days in such Interim Period, and (ii) in the case of a Tax that is
based on income or gross receipts, the Tax that would be due with respect to the
Interim Period, if such Interim Period constituted an entire taxable period.
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<PAGE>
(iv) The STOCKHOLDERS represent and warrant to HDS that the COMPANY
is entitled to receive rebates in respect of sales made during the period from
January 1, 1999 through the Closing Date of approximately 3% of its revenues
during such period, which rebate amounts are currently expected to be paid to
HDS as the COMPANY's successor on or before May 31, 2000. The STOCKHOLDERS will
cause, in accordance with Section 10.4(ii) of this Agreement, (x) the COMPANY to
include an amount in respect of such anticipated rebates that is not less than
3% of the COMPANY'S revenues during the period from January 1, 1999 through the
Closing Date as income in the Company's Tax Returns for the short taxable period
commencing January 1, 1999 and ending as of, or on, the Closing Date, and (y)
the COMPANY to include an amount as income on the COMPANY's Tax Returns for the
short taxable period commencing January 1, 1999 and ending as of, or on, the
Closing Date that is not less than the aggregate amount of distributions made to
the STOCKHOLDERS as set forth on Schedule 7.3.
10.5 Tax Treatment of Transaction. Each of the parties agrees for tax
----------------------------
purposes to treat the merger of ERF with and into the COMPANY pursuant to this
Agreement as an acquisition of stock of the COMPANY by HDS in a taxable
transaction, subject to Section 10.11 of this Agreement.
10.6 Special Definitions Related to Tax Matters. For all purposes of this
------------------------------------------
Agreement related to any Tax matters (including Section 5.22):
(a) "Affiliate" of a person or entity shall mean a person or
entity that directly or indirectly controls, is controlled by or is under common
control with that person or entity .
(b) "Interim Period" shall mean any taxable period commencing
prior to the Closing Date and ending after the Closing Date.
(c) "Pre-Closing Period" shall mean (i) any taxable period that
begins before the Closing Date and ends on or before the Closing Date and (ii)
the portion of any Interim Period through and including the Closing Date.
(d) "Post-Closing Period" means any taxable period that begins
after the Closing Date, and, with respect to any Interim Period, the portion of
such Interim Period commencing immediately after the Closing Date.
(e) "Tax" means any federal, state, local, or foreign income,
gross receipts, ad valorem, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including taxes
under Section 59A), customs duties, capital stock, net worth, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration, value
added, workers compensation, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever imposed by any federal, state, local or foreign
government or any agency or political subdivision of any such government,
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<PAGE>
including any interest, penalty, or addition thereto, without regard to whether
such tax is disputed or not or arose before, on or after the Closing Date.
(f) "Tax Returns" means all reports, elections, declarations,
claims for refund, estimates, information statements and returns (including
any schedules and attachments thereto) relating to, or required to be filed
in connection with, any Taxes pursuant to the statutes, rules and
regulations of any federal, state, local or foreign government taxing
authority.
(g) "Taxing Authority" means any governmental agency, board,
bureau, body, department or authority of any United States federal, state
or local jurisdiction, having or purporting to have jurisdiction with
respect to any Tax.
10.7 Directors. The persons named in the Registration Statement shall be
---------
appointed as directors of HDS on or before the Closing Date. After giving
effect to the election of the directors named in the Registration Statement, the
number of directors of HDS shall not be more than 13, and Charles Rothkopf shall
be one of the directors so elected.
10.8 Release from Guarantees. HDS shall use its best efforts to have the
-----------------------
STOCKHOLDERS released from any and all guarantees of any obligations of the
COMPANY that they personally guaranteed for the benefit of the COMPANY. HDS
hereby agrees, effective as of the Closing, to assume the STOCKHOLDERS'
obligations under all such guarantees and to indemnify the STOCKHOLDERS against
any and all claims made by lenders, lessors or other obligees of the Company
under any such guarantee which arise as a result of HDS' failure to cause such
guarantee to be released on or prior to the Closing. Without limiting the
foregoing, within 90 days after the Closing Date HDS (a) shall (i) terminate the
Company's existing credit facility with Union Bank of California and repay the
outstanding balance due thereunder and replace the existing standby letters of
credit in favor of Allied Buying Group and International Foodservice Equipment
Distributors, Inc. or (ii) secure the release of the Stockholders from their
guarantees of the outstanding balance due under such credit facility and under
such letters of credit.
10.9 Preservation of Plans. Until the end of the first full calendar year
---------------------
following the Closing Date, HDS will maintain in full force and effect each Plan
listed in Schedule 10.9, and with respect to any such Plan that is a Qualified
Plan, will continue to make contributions to such Plan at or above the level
currently provided thereunder; provided, however, that in lieu of maintaining a
Plan listed on Schedule 10.9 HDS may establish a replacement Plan providing
equivalent or better benefits, provided that if the cost of providing equivalent
benefits should, in the good faith judgment of HDS, become commercially
unreasonable, the replacement plan established by HDS may have benefits that
are, in the good faith judgment of HDS, as close to the equivalent as can be
obtained at commercially reasonable cost. There are no intended third party
beneficiaries of this Section 10.9, and after the Closing Date it can be waived
or modified by HDS and
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<PAGE>
STOCKHOLDERS (or their successors) shown as owning two-thirds of Company
Stock on Annex II.
10.10 HDS Stock Options. HDS shall prior to the Closing Date adopt an
-----------------
employee stock option plan providing for the grant of options to employees of
HDS as described in the Registration Statement. Effective as of the Closing
Date, HDS shall grant stock options under such plan to employees of the COMPANY
(i) having an exercise price equal to 90% of the Effective IPO Price and (ii)
having an aggregate exercise price equal to $652,500, in the amounts and to the
employees specified on Schedule 10.10. In granting additional options under such
plan for a period of three years after the Closing Date to former employees of
the Company, the Board of Directors of HDS or the committee administering such
plan, as the case may be, shall receive recommendations from Charles Rothkopf
and Michael Weinstock as to the employees to receive such options and the
relative size of the awards to the respective employees, and to the extent
deemed reasonable by the Board of Directors or committee such recommendations
shall be accepted.
10.11 Section 338(h)(10) Election
---------------------------
(a) Election. The COMPANY and the STOCKHOLDERS will join
--------
with HDS in making a timely and effective election under Section 338(h)(10) of
the Code (and any corresponding election under state, local and foreign law)
with respect to the acquisition of stock pursuant to this Agreement (the
"Section 338 Election"). At the Closing, the STOCKHOLDERS (and where
appropriate, the STOCKHOLDERS' spouses) and HDS shall execute IRS Form 8023,
which will be completed to the extent reasonably practicable. Within 90 days
after the Closing Date, HDS shall deliver to STOCKHOLDERS a completed IRS Form
8023 (along with any required schedules and/or attachments) with respect to the
acquisition of stock pursuant to this Agreement. Each of the STOCKHOLDERS
consents to the filing of such Form 8023 by HDS.
(b) Cooperation. STOCKHOLDERS shall cooperate fully with HDS
-----------
and make available to HDS such data and other information as may be reasonably
required by HDS in order to prepare and timely file the forms and other required
statements or schedules in connection with the Section 338 Election. In the
event any dispute involving the Section 338 Election arises and is not resolved
prior to the due date of the Form 8023, HDS shall be entitled to file the Form
8023, subject to Section 10.11(c), in a manner which HDS determines to be
reasonable under the circumstances.
(c) Allocation Rules. For purposes of the Section 338 Election
----------------
and otherwise allocating the Section 338 Consideration, the parties hereto agree
that (i) the fair market value of the COMPANY's inventory on the Closing Date
shall be equal to the COMPANY's book value in such inventory on such date, and
(ii) the aggregate fair market value of the remaining assets of the COMPANY
other than intangibles (including goodwill), on such date shall not exceed the
book value of such assets on such date by more than $50,000, and (iii) no Form
8023 shall be filed by HDS pursuant to this Section 10.11 that does not reflect
the foregoing.
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<PAGE>
11. INDEMNIFICATION.
The STOCKHOLDERS and HDS each make the following covenants that are
applicable to them, respectively:
11.1 General Indemnification by the STOCKHOLDERS. The STOCKHOLDERS
-------------------------------------------
covenant and agree that they, jointly and severally (except with respect to
Sections 5.28 through 5.29, which shall be several), will indemnify, defend,
protect and hold harmless HDS and the COMPANY, at all times from and after the
date of this Agreement until the Expiration Date as defined in Section 5 above,
from and against all claims, damages, actions, suits, proceedings, demands,
assessments, adjustments, costs and expenses (including specifically, but
without limitation, reasonable attorneys' fees and expenses of investigation)
incurred by HDS and the COMPANY as a result of or arising from (i) any breach of
the representations and warranties of the STOCKHOLDERS or the COMPANY set forth
herein or on the schedules or certificates delivered in connection herewith
(other than the representations and warranties provided in Section 5.22, for
which Section 11.6 provides special indemnity provisions); (ii) any
nonfulfillment of any agreement on the part of the STOCKHOLDERS or the COMPANY
under this Agreement; (iii) any liability not disclosed to HDS whether known,
unknown, contingent or otherwise at the time of Closing, arising out of any
acts, events, omissions or transactions occurring prior to the date of Closing;
and (iv) any liability under the 1933 Act, the 1934 Act or other Federal or
state law or regulation, at common law or otherwise, (x) arising out of or based
upon any untrue statement of a material fact relating to the COMPANY or the
STOCKHOLDERS that is provided to HDS or its counsel by the COMPANY or the
STOCKHOLDERS and contained in any preliminary prospectus relating to the IPO,
the Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or (y) arising out of or based upon any
omission to state therein a material fact relating to the COMPANY or the
STOCKHOLDERS that is required to be stated therein or necessary to make the
statements therein not misleading, and not provided to HDS or its counsel by the
COMPANY or the STOCKHOLDERS; provided, however, that such indemnity shall
-------- -------
not inure to the benefit of HDS, the COMPANY or the Surviving Corporation
to the extent that such untrue statement (or alleged untrue statement) was made
in, or omission (or alleged omission) occurred in, any preliminary prospectus
and the STOCKHOLDERS provided, in writing, corrected information to HDS counsel
and to HDS for inclusion in the final prospectus, and such information was not
so included.
11.2 Indemnification by HDS. HDS covenants and agrees that it will
----------------------
indemnify,defend, protect and hold harmless the COMPANY and the STOCKHOLDERS, at
all times from and after the date of this Agreement until the Expiration Date,
from and against all claims, damages, actions, suits, proceedings, demands,
assessments, adjustments, costs and expenses (including specifically, but
without limitation, reasonable attorneys' fees and expenses of investigation)
incurred by the COMPANY and the STOCKHOLDERS as a result of or arising from (i)
any breach by HDS of its representations and warranties set forth herein or on
the schedules or certificates attached
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hereto; (ii) any nonfulfillment of any agreement on the part of HDS under this
Agreement; (iii) any liabilities which the COMPANY or the STOCKHOLDERS may incur
due to HDS's failure to be responsible for the liabilities and obligations of
the COMPANY as provided in Section 1 hereof (except to the extent that HDS has
claims against the STOCKHOLDERS by reason of such liabilities); or (iv) any
liability under the 1933 Act, the 1934 Act or other Federal or state law or
regulation, at common law or otherwise, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact relating to HDS or any
of the Founding Companies other than the COMPANY (with respect to information
furnished to HDS by the COMPANY) contained in any preliminary prospectus, the
Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact relating to HDS or
any of the Founding Companies other than the COMPANY that is required to be
stated therein or necessary to make the statements therein not misleading.
11.3 Third Person Claims.
-------------------
(i) Promptly after any party hereto (herein the "Indemnified Party")
has received notice of or has knowledge of any claim by a person not a party to
this Agreement ("Third Person"), or the commencement of any action or proceeding
by a Third Person (such claim or commencement of such action or proceeding being
a "Third Party Claim") that could give rise to a right of indemnification under
this Agreement, the Indemnified Party shall, as a condition precedent to a claim
with respect thereto being made against any party obligated to provide
indemnification pursuant to Section 11.1 or 11.2 hereof (herein the
"Indemnifying Party"), give the Indemnifying Party written notice of such Third
Party Claim describing in reasonable detail the nature of such Third Party
Claim, a copy of all papers served with respect to that Third Party Claim (if
any), an estimate of the amount of damages attributable to the Third Party Claim
to the extent feasible (which estimate shall not be conclusive of the final
amount of such claim) and the basis for the Indemnified Party's request for
indemnification under this Agreement; provided, however, that the failure of the
-------- -------
Indemnified Party to give timely notice hereunder shall relieve the Indemnifying
Party of its indemnification obligations under this Agreement to the extent, but
only to the extent that, such failure materially prejudices the Indemnifying
Party's ability to defend such claim. Within fifteen (15) days after receipt of
such notice (the "Election Period"), the Indemnifying Party shall notify the
Indemnified Party (a) whether the Indemnifying Party disputes its potential
liability to the Indemnified Party under this Section 11 with respect to that
Third Party Claim and (b) if the Indemnifying Party does not dispute its
potential liability to the Indemnified Party with respect to that Third Party
Claim, whether the Indemnifying Party desires, at the sole cost and expense of
the Indemnifying Party, to defend the Indemnified Party against that Third Party
Claim.
(ii) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim through counsel of its own choosing which is acceptable to the
Indemnified Party, then the
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Indemnifying Party shall have the right to defend, at its sole cost and expense,
that Third Party Claim by all appropriate proceedings, which proceedings shall
be prosecuted diligently by the Indemnifying Party to a final conclusion or
settled at the discretion of the Indemnifying Party in accordance with this
Section 11.3(ii) and the Indemnified Party will furnish the Indemnifying Party
with all information in its possession with respect to that Third Party Claim
and otherwise cooperate with the Indemnifying Party in the defense of that Third
Party Claim; provided, however, that the Indemnifying Party shall not enter
-------- -------
into any settlement with respect to any Third Party Claim that purports to limit
the activities of, or otherwise restrict in any way, any Indemnified Party or
any affiliate of any Indemnified Party without the prior consent of that
Indemnified Party (which consent may be withheld in the sole discretion of that
Indemnified Party). The Indemnified Party is hereby authorized, at the sole cost
and expense of the Indemnifying Party, to file, during the Election Period, any
motion, answer or other pleadings that the Indemnified Party shall deem
necessary or appropriate to protect its interests or those of the Indemnifying
Party. The Indemnified Party may participate in, but not control, any defense or
settlement of any Third Party Claim controlled by the Indemnifying Party
pursuant to this Section 11.3(ii) and will bear its own costs and expenses with
respect to that participation; provided, however, that if the named parties to
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any such action (including any impleaded parties) include both the Indemnifying
Party and the Indemnified Party, and the Indemnified Party has been advised by
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the Indemnifying Party, then
the Indemnified Party may employ separate counsel at the expense of the
Indemnifying Party, and, on its written notification of that employment, the
Indemnifying Party shall not have the right to assume or continue the defense of
such action on behalf of the Indemnified Party.
(iii) If the Indemnifying Party (a) within the Election Period (1)
disputes its potential liability to the Indemnified Party under this Section 11,
(2) elects not to defend the Indemnified Party pursuant to Section 11.3(ii) or
(3) fails to notify the Indemnified Party that the Indemnifying Party elects to
defend the Indemnified Party pursuant to Section 11.3(ii) or (b) elects to
defend the Indemnified Party pursuant to Section 11.3(ii) but fails diligently
and promptly to prosecute or settle the Third Party Claim, then the Indemnified
Party shall have the right to defend, at the sole cost and expense of the
Indemnifying Party (if the Indemnified Party is entitled to indemnification
hereunder), the Third Party Claim by all appropriate proceedings, which
proceedings shall be promptly and vigorously prosecuted by the Indemnified Party
to a final conclusion or settled. The Indemnified Party shall have full control
of such defense and proceedings. Notwithstanding the foregoing, if the
Indemnifying Party has delivered a written notice to the Indemnified Party to
the effect that the Indemnifying Party disputes its potential liability to the
Indemnified Party under this Section 11 and if such dispute is resolved in favor
of the Indemnifying Party, the Indemnifying Party shall not be required to bear
the costs and expenses of the Indemnified Party's defense pursuant to this
Section 11.3 or of the Indemnifying Party's participation therein at the
Indemnified Party's request. The Indemnifying Party may participate in, but not
control, any defense or settlement controlled by the Indemnified Party pursuant
to this Section 11.3(iii), and the
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Indemnifying Party shall bear its own costs and expenses with respect to
such participation.
(iv) The parties hereto will make appropriate adjustments for any Tax
benefits, Tax detriments or insurance proceeds in determining the amount of any
indemnification obligation under this Section 11, provided that no Indemnifying
Party shall be obligated to seek any payment pursuant to the terms of any
insurance policy. All indemnification payments under this Section 11 shall be
deemed adjustments to the Merger consideration provided for herein.
11.4 Exclusive Remedy. The indemnification provided for in this Section 11
----------------
shall be the exclusive remedy in any action seeking damages or any other form of
monetary relief brought by any party to this Agreement against another party,
provided that nothing herein shall be construed to limit the right of a party,
in a proper case, to seek injunctive relief for a breach of this Agreement.
11.5 Limitations on Indemnification.
------------------------------
(i) The first amounts otherwise payable by one or more STOCKHOLDERS
(whether jointly and severally or severally) pursuant to Sections 11.1 and 11.3
to HDS and the COMPANY will be offset and reduced (but not below zero) by the
Indemnification Threshold. The "Indemnification Threshold" is an amount equal to
one and one-half percent (1.5%) of the sum of (a) the aggregate amount of Cash
Consideration (as defined in Annex I) for all STOCKHOLDERS and (b) the aggregate
value of all HDS Stock received by all STOCKHOLDERS on the Closing Date pursuant
to Section 2.1 of this Agreement. All such amounts otherwise payable by one or
more STOCKHOLDERS in excess of the Indemnification Threshold shall be paid
without offset or reduction pursuant to this Section 11.5(i). Notwithstanding
the foregoing, this Section 11.5(i) shall not apply to claims for
indemnification pursuant to Section 11.6. For purposes of determining the
Indemnification Threshold pursuant to this Section 11.5(i), the HDS Stock shall
be valued at the Effective IPO Price, as defined in Annex I. Claims paid
directly by the STOCKHOLDERS (or third parties on behalf of the STOCKHOLDERS)
shall be excluded for purposes of calculating the Indemnification Threshold.
(ii) The first amounts otherwise payable by HDS pursuant to Sections
11.2 and 11.3 to STOCKHOLDERS and the COMPANY will be offset and reduced (but
not below zero) by an amount equal to the Indemnification Threshold. All such
amounts otherwise payable by HDS in excess of the Indemnification Threshold
shall be paid without offset or reduction pursuant to this Section 11.5(ii).
This Section 11.5(ii) shall not apply to claims for indemnification for breach
of Section 2.1 or Section 10.8.
(iii) Notwithstanding any other term of this Agreement, in no event
shall any STOCKHOLDER be liable under this Agreement, including this Section 11,
for an amount which exceeds the sum of (a) the amount of Cash Consideration
received by such STOCKHOLDER on the Closing Date pursuant to Section 2.1, (b)
the net proceeds to
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such STOCKHOLDER from the sale of such STOCKHOLDER's HDS Stock received
pursuant to Section 2.1 hereof prior to the date that the indemnity obligation
of such STOCKHOLDER is paid and (c) the value of the shares of HDS Stock
received by such STOCKHOLDER on the Closing Date pursuant to Section 2.1 that
have not been sold by such STOCKHOLDER prior to the date that the indemnity
obligation of such STOCKHOLDER is paid, valued at the closing price per share on
the trading day prior to the date the indemnification obligation is paid.
11.6 Special Tax Indemnity Provisions.
--------------------------------
(i) From and after the Closing Date, the STOCKHOLDERS, jointly and
severally, shall indemnify and save HDS and the COMPANY harmless from any and
all Taxes (including without limitation any obligation to contribute to the
payment of a Tax determined on a consolidated, combined or unitary basis with
respect to a group of corporations that includes or included the COMPANY) which
are (a) imposed on any member (other than the COMPANY) of the consolidated,
unitary or combined group which includes or included the COMPANY or (b) imposed
on the COMPANY in respect of its income, business, property or operations or for
which the COMPANY may otherwise be liable (1) for any Pre-Closing Period, (2)
resulting by reason of the several liability of the COMPANY pursuant to Treasury
Regulations section 1.1502-6 or any analogous state, local or foreign law or
regulation or by reason of the COMPANY having been a member of any consolidated,
combined or unitary group on or prior to the Closing Date, (3) resulting from
the COMPANY ceasing to be a member of any affiliated group (within the meaning
of Section 1504(a) of the Code), (4) in respect of any Post-Closing Period,
attributable to events, transactions, sales, deposits, services or rentals
occurring, received or performed in a Pre-Closing Period, (5) in respect of any
Post-Closing Period, attributable to any change in accounting method employed by
the COMPANY during any of the four previous taxable years, (6) in respect of any
Post-Closing Period, attributable to any items of income or gain of an entity
treated as a partnership reported by the COMPANY as a partner, to the extent
such items are properly attributable to periods of the "partnership" ending on
or before the Closing Date, (7) attributable to any discharge of indebtedness
that may result from any capital contributions by STOCKHOLDERS (or an affiliate
of STOCKHOLDERS) to the COMPANY of any intercompany indebtedness owed by the
COMPANY to any STOCKHOLDER (or an affiliate of any STOCKHOLDER), or (8) by
reason of any Section 338(h)(10) Election.
(ii) From and after the Closing Date, STOCKHOLDERS shall, jointly and
severally, indemnify and save HDS and the COMPANY harmless from any liability
imposed on HDS or the COMPANY (or any affiliate of such companies) attributable
to any breach of a warranty or representation made by STOCKHOLDERS in Section
5.22.
(iii) From and after the Closing Date, and except as expressly
provided otherwise in this Section 11.6, HDS and the COMPANY shall indemnify and
hold harmless STOCKHOLDERS with respect to any Taxes imposed on HDS or the
COMPANY with respect to any Post-Closing Period.
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(iv) To the extent any party to this Agreement is entitled to
indemnification from another party under this Section 11.6, such claim for
indemnification shall include the right to recover any losses, damages,
liabilities, expenses and costs related thereto, including, without limitation,
reasonable attorney's and expert witness fees and other costs of investigating
or attempting to avoid the same or oppose the imposition thereof, together with
interest thereon at the reference rate in effect from time to time at Bank of
America, NT&SA, or its successor, compounded quarterly from the date incurred.
(v) Except to the extent expressly provided to the contrary in this
Section 11.6, the general procedures regarding notice and pursuit of
indemnification claims set forth in Sections 11.1 through 11.5 shall apply to
all claims for indemnification made under this Section 11.6. Notwithstanding the
immediately preceding sentence and any provision of Section 11 to the contrary,
if a claim for indemnification involves any matter covered in this Section 11.6,
then the contest provisions of Section 11.7, as applicable, shall control
regarding the defense and handling of any such third-party claim that could give
rise to an indemnification obligation on the part of one party to another. In
addition, and notwithstanding anything else in Section 11 to the contrary, the
party with the right to control a contest has the right to choose counsel of its
choice regarding such contest. Furthermore, there shall be no limit on (a) the
time period during which a claim for indemnification may be made under this
Section 11.6(i) or (b) the minimum or maximum amount of indemnity payments that
may be recovered pursuant to this Section 11.6 (other than (1) each party's
obligation to make claims for indemnification promptly and without undue delay
and (2) the aggregate limit for all indemnity payments imposed on a STOCKHOLDER
provided in Section 11.5(iii)).
(vi) All amounts paid pursuant to this Section 11.6 by one party to
another party (other than interest payments) shall be treated by such parties
as an adjustment to the value of the merger consideration provided pursuant to
this Agreement.
11.7 Special Contest Rights Related to Tax Matters.
-------------------------------------------------
(i) The STOCKHOLDERS shall have the sole right (but not the
obligation) to control, defend, settle, compromise or prosecute in any manner
any audit, examination, investigation, hearing or other proceeding with respect
to any Tax Return of the COMPANY involving only Pre-Closing Periods.
(ii) Except as expressly provided to the contrary in this Section
11.7, HDS shall have the sole right (but not the obligation) to control, defend,
settle, compromise, or prosecute in any manner an audit, examination,
investigation, hearing or other proceeding with respect to any Tax Return
of the COMPANY; provided, however, that any liability for Taxes or Tax
-------- -------
issues related to an Interim Period may not be settled or compromised without
the consent of the STOCKHOLDERS, which consent shall not be unreasonably
withheld or delayed. In addition, (i) HDS shall keep the STOCKHOLDERS duly
informed of any proceedings in connection with an Interim Period and (ii) the
STOCKHOLDERS shall be entitled to receive copies of all
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correspondence and documents relating to such proceedings and may, at their
option, observe such proceedings (including any associated meetings or
conferences).
11.8 Special Notification Requirements Regarding Tax Disputes. HDS and
--------------------------------------------------------
the COMPANY shall promptly forward to the STOCKHOLDERS all written notifications
and other written communications from any Tax Authority received by HDS or the
COMPANY relating to any Pre-Closing Period of the COMPANY, and HDS and the
COMPANY shall execute or cause to be executed any power of attorney or other
document or take such actions as requested by the STOCKHOLDERS to enable the
STOCKHOLDERS to take any action STOCKHOLDERS deem appropriate with respect to
any proceedings relating thereto.
11.9 Refunds. A party receiving a refund, credit or similar offset (or
-------
the benefit thereof) with respect to a Tax effectively paid by another party
shall immediately pay an amount equal to such refund, credit, offset or benefit
(including any interest thereon) to the party that effectively paid the Tax with
respect to which the refund, credit, offset or benefit relates. A party entitled
to a deduction on account of a Tax effectively paid by another party shall pay
an amount equal to any Taxes saved by reason of such deduction to the party that
effectively bore the economic cost of the Tax with respect to which such
deduction relates, such amount to be paid immediately after such saving is
realized.
11.10 Optional Payment With Shares. Any STOCKHOLDER may make any payment
----------------------------
to HDS required by this Section 11 by tendering shares of HDS Stock obtained by
such STOCKHOLDER pursuant to Sections 2 and 3 of this Agreement, with shares so
tendered being valued at the closing price per share on the trading day prior to
the date the indemnification obligation is paid. No STOCKHOLDER will be entitled
to make payment with any other shares of HDS Stock.
12. TERMINATION OF AGREEMENT.
12.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Closing Date solely:
(i) by mutual consent of the boards of directors of HDS and the
COMPANY;
(ii) at or before the Pre-Closing, by STOCKHOLDERS holding a majority
of each class of COMPANY Stock, by the COMPANY, or by HDS, if the Pre-Closing
has not been completed by June 30, 1999, time being of the essence, unless the
failure to complete the Pre-Closing is due to the willful failure of the party
seeking to terminate this Agreement to perform any of its obligations under this
Agreement to the extent required to be performed by it prior to or on the
Pricing Date;
(iii) at or before the Pre-Closing, by STOCKHOLDERS holding a majority
of each class of COMPANY Stock or by the COMPANY if a material breach or default
shall be made by HDS, or by HDS if a material breach or default shall be made by
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one or more STOCKHOLDERS or the COMPANY, in the observance or in the due and
timely performance of any of the covenants, agreements or conditions contained
herein, and such default shall not have been cured and shall not reasonably be
expected to be cured on or before the Pricing Date;
(iv) at or before the Pre-Closing pursuant to Section 7.9 hereof;
(v) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Underwriting Agreement is terminated;
(vi) after the Pre-Closing and before the Closing Date, by STOCKHOLDERS
holding a majority of each class of COMPANY Stock if the Minimum IPO Price (as
defined in Annex I) is not attained at the time of the IPO; or
(vii) after the Pre-Closing and before the Closing Date, by STOCKHOLDERS
holding a majority of each class of COMPANY Stock, by the COMPANY, or by HDS, if
the Closing Date does not occur within ten (10) days after the Pricing Date,
time being of the essence.
12.2 Liabilities in Event of Termination. In the event of termination of
-----------------------------------
this Agreement as provided in this Section there shall be no liability or
obligation on the part of any party hereto except to the extent that such
liability is based on the breach by a party of any of its representations,
warranties or covenants set forth in this Agreement, provided however, that
there shall be no liability for a breach of representation or warranty if such
representation or warranty was made in good faith and with no reason to know
such representation or warranty was not true at the time made.
13. NONCOMPETITION.
13.1 Prohibited Activities. Except as set forth on Schedule 13.1, the
---------------------
STOCKHOLDERS will not, for a period of four (4) years following the Closing Date
(except that (v) below shall apply to the period ending at the Closing if this
Agreement is not terminated prior to the Closing and June 30, 1999 if this
Agreement is terminated prior to the Closing), for any reason whatsoever,
directly or indirectly, for themselves or on behalf of or in conjunction with
any other person, persons, company, partnership, corporation or business of
whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner, joint
venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales representative, in any business
selling any products or services in direct competition with HDS or any of the
subsidiaries thereof, within one hundred (100) miles of where the COMPANY
conducted business prior to the effectiveness of the Merger (the "Territory");
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(ii) contact or solicit any person who is, at that time, an employee of
HDS (including the subsidiaries thereof) in a managerial capacity for the
purpose or with the intent of enticing such employee away from or out of the
employ of HDS (including the subsidiaries thereof), provided that any
--------
STOCKHOLDER shall be permitted to solicit and hire any member of his or her
immediate family;
(iii) contact any person or entity which is, at that time, or which
has been, within one (1) year prior to that time, a customer of HDS (including
the subsidiaries thereof), or any affiliate of such a person or entity, for the
purpose of soliciting or selling products or services in direct competition with
HDS;
(iv) contact any prospective acquisition candidate, on any STOCKHOLDER's
own behalf or on behalf of any competitor within the Territory in the commercial
kitchen design and/or supply business, which candidate was either called upon by
HDS (including the subsidiaries thereof) or for which HDS (or any subsidiary
thereof) made an acquisition analysis, for the purpose of acquiring such entity,
provided that no STOCKHOLDER shall be charged with a violation of this Section
- --------
unless and until such STOCKHOLDER shall have knowledge or notice that such
prospective acquisition candidate was called upon, or that an acquisition
analysis was made, for the purpose of acquiring such entity;
(v) engage, directly or indirectly, through any intermediary or
otherwise, in any conversations or negotiations with any Other Company regarding
a possible business combination between or among them; provided that such
-------- ----
prohibition shall not preclude the COMPANY from conducting business in the
ordinary course with any other company or from having business combination
discussions with any other party subject to the provisions in this Agreement; or
(vi) except in furtherance of HDS's business, disclose customers,
whether in existence or proposed, of the COMPANY to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever
excluding disclosure to HDS or any of HDS's Subsidiaries.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit any STOCKHOLDER from acquiring as an investment not more than three
percent (3%) of the capital stock of any business whose stock is traded on a
national securities exchange or over-the-counter, or having an ownership
interest in a mutual fund or being a passive member or limited partner of a
venture fund that has as a portfolio investment an equity interest in a
competing business.
13.2 Damages. Because of the difficulty of measuring economic losses to
-------
HDS as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to HDS for which it would
have no other adequate remedy, each STOCKHOLDER agrees that the foregoing
covenant may be enforced by HDS, in the event of breach by such STOCKHOLDER, by
injunctions and restraining orders.
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13.3 Reasonable Restraint. It is agreed by the parties hereto that the
--------------------
foregoing covenants in this Section 13 impose a reasonable restraint on the
STOCKHOLDERS in light of the activities and business of HDS (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of HDS; but it is also the intent of HDS and the STOCKHOLDERS that
such covenants be construed and enforced in accordance with the changing
activities and business of HDS (including the subsidiaries thereof) throughout
the term of this covenant.
It is further agreed by the parties hereto that, in the event that any
STOCKHOLDER who has entered into an Employment Agreement shall thereafter cease
to be employed thereunder, and such STOCKHOLDER shall enter into a business or
pursue other activities not in competition with HDS and/or any subsidiary
thereof, or similar activities or business in locations the operation of which,
under such circumstances, does not violate clause (i) of Section 13.1, and in
any event such new business, activities or location are not in violation of this
Section 13 or of such STOCKHOLDER's obligations under this Section 13, if any,
such STOCKHOLDER shall not be chargeable with a violation of this Section 13 if
HDS and/or any subsidiary thereof shall thereafter enter the same, similar or a
competitive (i) business, (ii) course of activities or (iii) location, as
applicable.
13.4 Severability; Reformation. The covenants in this Section 13 are
-------------------------
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
13.5 Independent Covenant. All of the covenants in this Section 13 shall
--------------------
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any STOCKHOLDER
against HDS (including the subsidiaries thereof), whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by HDS
of such covenants. It is specifically agreed that the period of four (4) years
stated at the beginning of this Section 13, during which the agreements and
covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall
be computed by excluding from such computation any time during which such
STOCKHOLDER is in violation of any provision of this Section 13. The covenants
contained in this Section 13 shall not be affected by any breach of any other
provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 Materiality. The COMPANY and the STOCKHOLDERS hereby agree that the
-----------
covenants in this Section 13 are a material and substantial part of this
transaction.
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14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they
------------
had in the past, currently have, and in the future may possibly have, access to
certain confidential information of the COMPANY, the Other Companies and/or HDS,
such as lists of customers, operational policies, and pricing and cost policies
that are valuable, special and unique assets of the COMPANY's, the Other
Companies' and/or HDS's respective businesses. The STOCKHOLDERS agree that they
will not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except (a) to authorized representatives of HDS, (b) following the Closing, as
required in the course of performing their duties for HDS, and (c) to counsel
and other advisers; provided that such advisers (other than counsel) agree to
-------- ----
the confidentiality provisions of this Section 14.1; provided, further, that
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confidential information shall not include (i) such information which becomes
known to the public generally through no fault of the STOCKHOLDERS, (ii)
information required to be disclosed by law or the order of any governmental
authority under color of law; provided that prior to disclosing any information
-------- ----
pursuant to this clause (ii), the STOCKHOLDERS shall, if possible, give prior
written notice thereof to HDS and provide HDS with the opportunity to contest
such disclosure, or (iii) information as to which the disclosing party
reasonably believes that disclosure is required in connection with the defense
of a lawsuit against the COMPANY, the Other Companies and/or HDS. In the event
of a breach or threatened breach by any of the STOCKHOLDERS of the provisions of
this section, HDS shall be entitled to an injunction restraining such
STOCKHOLDERS from disclosing, in whole or in part, such confidential
information. Nothing herein shall be construed as prohibiting HDS from pursuing
any other available remedy for such breach or threatened breach, including the
recovery of damages.
14.2 HDS. HDS recognizes and acknowledges that it had in the past and
---
currently has access to certain confidential information of the COMPANY, such as
lists of customers, operational policies, and pricing and cost policies that are
valuable, special and unique assets of the COMPANY's business. HDS agrees that,
prior to the Closing, it will not disclose such confidential information to any
person, firm, corporation, association or other entity for any purpose or reason
whatsoever, except (a) to authorized representatives of the COMPANY, (b) to
counsel and other advisers, provided that such advisers (other than counsel)
--------
agree to the confidentiality provisions of this Section 14.2 and (c) to the
Other Companies and their representatives pursuant to Section 7.1(i), unless (i)
such information becomes known to the public generally through no fault of HDS
(ii) disclosure is required by law or the order of any governmental authority
under color of law, provided that prior to disclosing any information pursuant
--------
to this clause (ii), HDS shall, if possible, give prior written notice thereof
to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that disclosure is required in connection with the defense
of a lawsuit against the COMPANY and/or STOCKHOLDERS. In the event of a breach
or threatened breach by HDS of the provisions of this section, the COMPANY and
the STOCKHOLDERS shall
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<PAGE>
be entitled to an injunction restraining HDS from disclosing, in whole or in
part, such confidential information. Nothing herein shall be construed as
prohibiting the COMPANY and the STOCKHOLDERS from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
14.3 Damages. Because of the difficulty of measuring economic losses as a
-------
result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may be
enforced against the other parties by injunctions and restraining orders.
14.4 Survival. The obligations of the parties under this Article 14 shall
--------
survive the termination of this Agreement.
15. TRANSFER RESTRICTIONS.
15.1 Transfer Restrictions. Except for transfers as set forth in Section
---------------------
15.2 below to persons or entities who agree to be bound by the restrictions set
forth in this Section 15.1, for a period of one year from the Closing Date, none
of the STOCKHOLDERS shall (i) sell, assign, exchange, transfer, encumber,
pledge, distribute, appoint, or otherwise dispose of (a) any shares of HDS Stock
received by the STOCKHOLDERS in the Merger, or (b) any interest (including,
without limitation, an option to buy or sell) in any such shares of HDS Stock,
in whole or in part, and no such attempted transfer shall be treated as
effective for any purpose; or (ii) engage in any transaction, whether or not
with respect to any shares of HDS Stock or any interest therein, the intent or
effect of which is to reduce the risk of owning the shares of HDS Stock acquired
pursuant to Section 2 hereof (including, by way of example and not limitation,
engaging in put, call, short-sale, straddle or similar market transactions). The
certificates evidencing the HDS Stock delivered to the STOCKHOLDERS pursuant to
Section 3 of this Agreement will bear a legend substantially in the form set
forth below and contain such other information as HDS may deem necessary or
appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE
DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY
ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE,
DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO THE FIRST ANNIVERSARY OF
THE CLOSING DATE. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE,
THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED
WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE.
15.2 Permitted Transferees. Notwithstanding the provisions of Section 15.1
---------------------
a STOCKHOLDER shall have the right to transfer some or all of the shares of
HDS stock
-53-
<PAGE>
to any one or more of the following, provided that the transferee agrees to be
bound (in a form satisfactory to HDS and its counsel) by the terms and
conditions of this Agreement with respect to any further transfer of such
shares: (a) any family member of a STOCKHOLDER (including, without limitation,
any transfer to a custodian under any gift to minors statute), with family
members being defined as any spouse, sibling, lineal descendant or ancestor of a
STOCKHOLDER, (b) any trust which is for the benefit of one or more family
members of a STOCKHOLDER and (c) any corporation, partnership, limited liability
company or other entity (x) of which a majority of the interests therein by
value is owned by the STOCKHOLDER and members of the STOCKHOLDER's family, and
(y) which is and continues to be controlled by the STOCKHOLDER and members of
the STOCKHOLDER'S family for the period set forth in Section 15.1.
16. FEDERAL SECURITIES ACT REPRESENTATIONS.
16.1 No Registration Rights. The STOCKHOLDERS acknowledge that the shares
----------------------
of HDS Stock to be delivered to the STOCKHOLDERS pursuant tothis Agreement have
not been and will not be registered under the 1933 Act and therefore may not be
resold without compliance with the 1933 Act. The HDS Stock to be acquired by
such STOCKHOLDERS pursuant to this Agreement is being acquired solely for their
own respective accounts, for investment purposes only, and with no present
intention of distributing, selling or otherwise disposing of it in connection
with a distribution.
16.2 Compliance with Law. The STOCKHOLDERS covenant, warrant and represent
-------------------
that none of the shares of HDS Stock issued to such STOCKHOLDERS will be
offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the rules and regulations of the SEC. All the HDS Stock
shall bear the following legend in addition to the legend required under Section
15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AS AMENDED (THE "1933 ACT") AND MAY ONLY BE SOLD OR
OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE 1933 ACT AND
APPLICABLE SECURITIES LAWS.
16.3 Accredited Investors; Economic Risk; Sophistication. Except as
---------------------------------------------------
disclosed in Schedule 16.3, each STOCKHOLDER represents and warrants that such
STOCKHOLDER is an "accredited investor," as that term is defined in Regulation D
promulgated by the SEC under the 1933 Act. The STOCKHOLDERS are able to bear the
economic risk of an investment in the HDS Stock acquired pursuant to this
Agreement and can afford to sustain a total loss of such investment and have
such knowledge and experience in financial and business matters that they are
capable of evaluating the merits and risks of the proposed investment in the HDS
Stock. The STOCKHOLDERS or their respective purchaser representatives have
received all information they deemed material and had an adequate opportunity to
ask questions and receive answers from the officers of HDS concerning any and
all matters relating to the
-54-
<PAGE>
transactions described herein including, without limitation, the background and
experience of the current and proposed officers and directors of HDS, the plans
for the operations of the business of HDS, the business, operations and
financial condition of the Founding Companies other than the COMPANY, and any
plans for additional acquisitions and the like. All STOCKHOLDERS who are not
"accredited investors" have been represented by qualified purchaser
representatives.
17. REGISTRATION RIGHTS.
17.1 Piggyback Registration Rights. At any time following one year after
-----------------------------
the Closing Date, whenever HDS proposes to register any HDS Stock for its own or
others' account under the 1933 Act for a public offering, other than (i)
registrations of shares to be used as consideration for acquisitions of
additional businesses by HDS and (ii) registrations relating to employee benefit
plans, HDS shall give each of the STOCKHOLDERS prompt written notice of its
intent to do so. Upon the written request of any of the STOCKHOLDERS given
within thirty (30) days after receipt of such notice, HDS shall cause to be
included in such registration all of the HDS Stock issued pursuant to this
Agreement which any such STOCKHOLDER requests. In addition, if HDS is advised in
writing in good faith by any managing underwriter of an underwritten offering
of the securities being offered pursuant to any registration statement under
this Section 17.1 that the number of shares to be sold by persons other than HDS
is greater than the number of such shares which can be offered without adversely
affecting the offering, HDS may reduce the number of shares offered for the
accounts of such persons to a number deemed satisfactory by such managing
underwriter; provided that such reduction shall be made first by reducing the
-------- ----
number of shares to be sold by persons other than HDS, the stockholders named on
Annex III hereto, the stockholders of the Founding Companies (the "Founding
Stockholders"), and any person or persons who have required such registration
pursuant to "demand" registration rights granted by HDS; thereafter, if a
further reduction is required, it shall be made first by reducing the number of
shares to be sold by the stockholders named on Annex III hereto and the Founding
Stockholders, with such further reduction being made so that to the extent any
shares can be sold by stockholders named in Annex III hereto and the Founding
Stockholders, each such stockholder will be permitted to sell a number of shares
proportionate to the number of shares of HDS Stock owned by such stockholder
immediately after the Closing, provided that if any stockholder does not wish to
sell all shares such stockholder is permitted to sell, the opportunity to sell
additional shares shall be reallocated in the same manner to those stockholders
named in Annex III hereto and the Founding Stockholders who wish to sell more
shares until no more shares can be sold by such stockholders.
17.2 Demand Registration Rights. At any time after the date one year after
--------------------------
the Closing Date, Founding Stockholders holding shares of HDS Stock issued
pursuant to this Agreement and the Other Agreements which shares have (i) not
been previously registered or sold, (ii) which are not entitled to be sold under
Rule 144(k) (or any similar or successor provision) and (iii) which have an
aggregate market value in excess of $5 million (based on the average closing
price on the five days prior to the date of such request) may request in writing
that HDS file a registration statement under the 1933 Act
-55-
<PAGE>
covering such shares of HDS Stock then held by such Founding Stockholders (a
"Demand Registration"); provided that the aggregate value of HDS Stock proposed
to be sold under such registration statement is not less than $5 million (based
on the average closing price on the five days prior to the date of such
request). Within ten (10) days of the receipt of such request, HDS shall give
written notice of such request to all other Founding Stockholders and shall, as
soon as practicable, file and use its best efforts to cause to become effective
a registration statement covering all such shares. HDS will use its best efforts
to keep such Demand Registration current and effective for one hundred twenty
(120) days (or such shorter period during which holders shall have sold all HDS
Stock which they requested to be registered). HDS shall be obligated to effect
only two (2) Demand Registrations for all Founding Stockholders, and the second
request may not be made until at least one (1) year after the effective date of
the registration statement for the first Demand Registration, provided that the
first Demand Registration remained effective for the full time provided by the
preceding sentence.
Notwithstanding the foregoing paragraph, following such a demand a
majority of the COMPANY's disinterested directors (i.e, directors who have not
---
demanded or elected to sell shares in any such public offering) may postpone the
filing of the registration statement for a period of up to thirty (30) days.
If at the time of any request by the Founding Stockholders for a
Demand Registration HDS has fixed plans to file within sixty (60) days after
such request a registration statement covering the sale of any of its
securities, no registration of the Founding Stockholders' HDS Stock shall be
filed under this Section 17.2 until ninety (90) days after the effective date of
such registration unless HDS is no longer proceeding diligently to effect such
registration; provided that HDS shall provide the Founding Stockholders the
--------
right to participate in such public offering pursuant to, and subject to,
Section 17.1 hereof.
17.3 Registration Procedures. All expenses incurred in connection with
-----------------------
the registrations under this Article 17 (including all registration, filing,
qualification, legal, printer and accounting fees, but excluding underwriting
commissions and discounts) shall be borne by HDS. In connection with
registrations under Sections 17.1 and 17.2, HDS shall (i) prepare and file with
the SEC as soon as reasonably practicable, a registration statement with respect
to the HDS Stock and use its best efforts to cause such registration to promptly
become and remain effective for a period of at least one hundred twenty (120)
days (or such shorter period during which holders shall have sold all HDS Stock
which they requested to be registered); (ii) use its best efforts to register
and qualify the HDS Stock covered by such registration statement under
applicable state securities laws as the holders shall reasonably request for the
distribution for the HDS Stock; and (iii) take such other actions as are
reasonable and necessary to comply with the requirements of the 1933 Act and the
regulations thereunder.
17.4 Underwriting Agreement. In connection with each registration pursuant
----------------------
to Sections 17.1 and 17.2 covering an underwritten registered public offering,
HDS and each participating holder agree to enter into a written agreement with
the managing
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<PAGE>
underwriters in such form and containing such provisions as are customary in the
securities business for such an arrangement between such managing underwriters
and companies of HDS's size and investment stature, including indemnification.
In a registration under Section 17.1, the managing underwriters shall be
selected by HDS (or, if required by a "demand" registration right of a
stockholder requiring such registration, by such requiring stockholder), and in
a registration under Section 17.2, may be selected by the holders of a majority
of the shares that have demanded to be included in such registration pursuant to
Section 17.2, provided the managing underwriters so selected by such majority
are reasonably acceptable to HDS.
17.5 HDS Stock. For the purposes of this Section 17, HDS Stock issued
---------
pursuant to this Agreement shall include shares issued as a stock dividend or
stock split, or otherwise distributed by HDS to its stockholders without
consideration, in respect of shares of HDS Stock previously issued pursuant to
this Agreement.
17.6 Availability of Rule 144. HDS shall not be obligated to register
------------------------
shares of HDS Stock held by any STOCKHOLDER at any time when the resale
provisions of Rule 144 (or any similar or successor provision) promulgated under
the 1933 Act are available to enable such STOCKHOLDER to sell all shares of HDS
Stock issued pursuant to this Agreement and then held by such STOCKHOLDER within
a consecutive 90 day period.
17.7 Survival. The provisions of this Section 17 shall survive the Pre-
Closing and closing Date until December 31, 2002.
18. GENERAL.
18.1 Cooperation. The COMPANY, STOCKHOLDERS and HDS shall each (i) attempt
in good faith (without being required to incur unreasonable expense) to cause
all conditions to actions to be taken on the Pricing Date and the Closing Date
to be satisfied, and (ii) deliver or cause to be delivered to the other on the
Pricing Date and Closing Date, and at such other times and places as shall be
reasonably agreed to, such additional instruments, and take such additional
actions as can be taken without unreasonable expense, as any other may
reasonably request for the purpose of carrying out this Agreement. The COMPANY
will cooperate and use its reasonable efforts to have the present officers,
directors and employees of the COMPANY cooperate with HDS on and after the
Closing Date in furnishing information, evidence, testimony and other assistance
in connection with any Tax Return filing obligations, actions, proceedings,
arrangements or disputes of any nature with respect to matters pertaining to all
periods prior to the Closing Date .
18.2 Successors and Assigns. This Agreement and the rights of the parties
----------------------
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
HDS, and the heirs and legal representatives of the STOCKHOLDERS.
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<PAGE>
18.3 Entire Agreement. This Agreement (including the schedules, exhibits
----------------
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the STOCKHOLDERS, the
COMPANY, HDS and ERF and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement, upon
execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms. Except as otherwise stated herein,
this Agreement and the Annexes hereto may be modified or amended only by a
written instrument executed by the STOCKHOLDERS, the COMPANY, HDS and ERF,
acting through their respective officers, duly authorized by their respective
Boards of Directors. Any disclosure made on any Schedule delivered pursuant
hereto shall be deemed to have been disclosed for purposes of any other Schedule
required hereby.
18.4 Counterparts. This Agreement may be executed simultaneously in two (2)
------------
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
18.5 Brokers and Agents. Except as disclosed on Schedule 17.5, each party
------------------
represents and warrants that it employed no broker or agent in connection with
this transaction and agrees to indemnify the other against all loss, cost,
damages or expense arising out of claims for fees or commission of brokers
employed or alleged to have been employed by such indemnifying party.
18.6 Expenses. Whether or not the transactions herein contemplated shall be
--------
consummated, (i) HDS will pay the fees, expenses and disbursements of HDS, ERF
and their agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement and any amendments thereto,
including all costs and expenses incurred in the performance and compliance with
all conditions to be performed by HDS and ERF under this Agreement, including
the fees and expenses of Arthur Andersen, LLP, and Howard, Rice, and the costs
of preparing the Registration Statement, and (ii) prior to the Closing, the
COMPANY will pay the fees, expenses and disbursements of their counsel and
accountants for the STOCKHOLDERS and the COMPANY incurred in connection with the
subject matter of this Agreement or the Registration Statement. The STOCKHOLDERS
shall pay all sales, use, transfer, real property transfer, recording, gains,
stock transfer and other similar taxes and fees ("Transfer Taxes") incurred in
connection with the transactions contemplated by this Agreement. The
STOCKHOLDERS shall file all necessary documentation and Tax Returns with respect
to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and
not the COMPANY, HDS or ERF, will pay all taxes due upon receipt of the
consideration payable to such STOCKHOLDER pursuant to Section 2 hereof.
18.7 Notices. All notices and other communications required or permitted
-------
hereunder shall be effective upon receipt (or refusal of receipt) and shall be
in writing and delivered by depositing the same in United States mail, addressed
to the party to be notified, postage prepaid and registered or certified with
return receipt requested, by
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<PAGE>
delivering the same in person to such party or to an officer or agent of such
party or by facsimile transmission (followed by delivery by United States mail).
(a) If mailed to HDS or ERF addressed to such entity at:
Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, Chief Executive Officer
Fax: (310) 253-9734
with copies to:
Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111-4065
Attn: Raymond P. Haas
Fax: (415) 217-5910
(b) If mailed to the STOCKHOLDERS, addressed to them at their
addresses set forth on Annex II, with copies to such counsel, if any, as is
set forth with respect to each STOCKHOLDER on such Annex II; if mailed to
the COMPANY, addressed to it at its address set forth on Annex II marked
"Personal and Confidential" with copies to the COMPANY's counsel as set
forth on Annex II, provided that notice to the COMPANY shall only be for
--------
notices or communications required or permitted hereunder prior to the
Effective Time of the Merger; or to such other address or counsel as any
party hereto shall specify pursuant to this Section 18.7 from time to time.
18.8 Governing Law; Forum. This Agreement shall be governed by and
--------------------
construed in accordance with the laws of the State of California, without giving
effect to laws concerning choice of law or conflicts of law. All disputes
arising out of this Agreement or the obligations of the parties hereunder,
including disputes that may arise following termination of this Agreement, shall
be subject to the exclusive jurisdiction and venue of the California State
courts of the City and County of San Francisco, California (or, if there is
federal jurisdiction, then the exclusive jurisdiction and venue of the United
States District Court having jurisdiction over the City and County of San
Francisco). Each party hereby irrevocably and unconditionally consents to the
personal and exclusive jurisdiction and venue of said courts and any objection
that it may now or hereafter have to the venue of any such action or proceeding
in any such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same.
18.9 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties, covenants and agreements of the parties made herein, or in writing
delivered pursuant to the provisions of this Agreement shall survive the
consummation of the
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<PAGE>
transactions contemplated hereby and any examination on behalf of the parties
until the applicable Expiration Date.
18.10 Exercise of Rights and Remedies. Except as otherwise provided herein,
-------------------------------
no delay of or omission in the exercise of any right, power or remedy accruing
to any party as a result of any breach or default by any other party under this
Agreement shall impair any such right, power, or remedy, nor shall it be
construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.11 Time. Time is of the essence with respect to this Agreement.
----
18.12 Reformation and Severability. In case any provision of this Agreement
----------------------------
shall be invalid, illegal or unenforceable, it shall, to the extent possible, be
modified in such manner as to be valid, legal and enforceable but so as to most
nearly retain the intent of the parties, and if such modification is not
possible, such provision shall be severed from this Agreement, and in either
case the validity, legality and enforceability of the remaining provisions of
this Agreement shall not in any way be affected or impaired thereby.
18.13 Remedies Cumulative. Except as otherwise provided in Section 11, no
-------------------
right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
18.14 Construction. This Agreement has been negotiated among HDS, the
------------
COMPANY, the STOCKHOLDERS and their respective legal counsel, and legal or
equitable principles that might require the construction of this Agreement or
any provision of this Agreement against the party drafting this Agreement will
not apply in any construction or interpretation of this Agreement.
18.15 Captions. The headings of this Agreement are inserted for convenience
--------
only, shall not constitute a part of this Agreement or be used to construe or
interpret any provision hereof.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
HOSPITALITY DESIGN & SUPPLY, INC.
By /s/ Roger Laverty
-----------------------------------------
Name: Roger Laverty
Title: Chief Executive Officer
ERF CALIFORNIA, INC.
By /s/ Roger Laverty
-----------------------------------------
Name: Roger Laverty
Title: Chief Executive Officer
STOCKHOLDERS:
/s/ Charles Rothkopf
--------------------------------------------
Charles Rothkopf, Trustee of the Rothkopf
Revocable Trust
/s/ Diane Rothkopf
--------------------------------------------
Diane Rothkopf, Trustee of the Rothkopf
Revocable Trust
/s/ Michael Weinstock
--------------------------------------------
Michael A. Weinstock
/s/ BettySue Weinstock
--------------------------------------------
Betty Sue Weinstock
ECONOMY RESTAURANT FIXTURES, INC.
By /s/ Charles Rothkopf
-----------------------------------------
Name: Charles Rothkopf
Title: President
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<PAGE>
ANNEX I
CONSIDERATION TO FOUNDING COMPANY STOCKHOLDERS
Part I
A. Aggregate consideration to be paid to STOCKHOLDERS:
1. COMPANY Stock will be converted into 343,678 shares of common stock of
HDS and $10,825,862 in cash.
2. The STOCKHOLDERS and the COMPANY will not be obligated to consummate the
Merger if the initial public offering price per share when the
Registration Statement goes effective (the "Effective IPO Price") is
less than $10.00 per share (the "Minimum IPO Price").
3. The amount of cash paid to STOCKHOLDERS will be offset and reduced by
the amount of any receivables from STOCKHOLDERS.
<PAGE>
B. Consideration to be paid to each STOCKHOLDER:
<TABLE>
<CAPTION> Percentage
STOCKHOLDER Shares of Common Stock Cash Before Allocation of Any
of HDS Offsets & Offsets and
Reductions/1/ Reductions/2/
<S> <C> <C> <C>
Michael Weinstock and Betty 171,839 $ 5,412,931 50%
Sue Weinstock
Charles Rothkopf, Trustee and 171,839 $ 5,412,931 50%
Diane Rothkopf, Trustee of
the Rothkopf Revocable Trust
------------------ ------------------ ---------------------
TOTALS: 343,678 $ 10,825,862 100%
</TABLE>
- ---------------------------
/1/ For purposes of Section 11.5(i) and 11.5(iii) of the Agreement, the
term "Cash Consideration" means, as to each STOCKHOLDER, the Cash Before Offsets
and Reductions shown for such STOCKHOLDER in this column.
/2/Excluding offsets and reductions pursuant to Part I, paragraph A.3. of
this Annex I.
<PAGE>
EXHIBIT 2.4
AGREEMENT AND PLAN OF REORGANIZATION
Dated as of February 26, 1999
by and among
HOSPITALITY DESIGN & SUPPLY, INC.
CURTIS RESTAURANT EQUIPMENT
and
The STOCKHOLDERS named herein
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. THE MERGER.................................................................................... 1
1.1 Delivery and Filing of Articles of Merger............................................... 1
1.2 Effective Time of the Merger............................................................ 1
1.3 Certificate of Incorporation, Bylaws and Board of Directors of Surviving Corporation.... 2
1.4 Effect of Merger........................................................................ 2
2. CONVERSION OF STOCK........................................................................... 3
2.1 Manner of Conversion.................................................................... 3
2.2 Other Companies......................................................................... 3
3. DELIVERY OF STOCK............................................................................. 3
3.1 Delivery of HDS Stock................................................................... 3
3.2 Delivery of COMPANY Stock............................................................... 4
4. PRE-CLOSING AND CLOSING....................................................................... 4
4.1 Pre-Closing............................................................................. 4
4.2 Closing................................................................................. 4
4.3 No Assurances........................................................................... 5
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS................................... 5
5.1 Due Organization....................................................................... 6
5.2 Authority and Validity................................................................. 6
5.3 Capital Stock of the COMPANY........................................................... 7
5.4 Transactions in Capital Stock.......................................................... 7
5.5 No Bonus Shares........................................................................ 7
5.6 Subsidiaries........................................................................... 7
5.7 Predecessor Status; etc................................................................ 7
5.8 Spin-off by the COMPANY................................................................ 8
5.9 Financial Statements................................................................... 8
5.10 Liabilities and Obligations............................................................ 8
5.11 Accounts and Notes Receivable.......................................................... 9
5.12 Permits and Intangibles................................................................ 9
5.13 Environmental Matters.................................................................. 10
5.14 Real and Personal Property............................................................. 10
5.15 Significant Customers; Material Contracts and Commitments.............................. 11
5.16 Title to Real Property................................................................. 12
5.17 Insurance.............................................................................. 12
5.18 Compensation; Employment Agreements.................................................... 12
5.19 Employee Plans......................................................................... 12
5.20 Compliance with ERISA.................................................................. 13
5.21 Conformity with Law.................................................................... 16
5.22 Taxes.................................................................................. 16
5.23 No Violations.......................................................................... 19
5.24 Government Contracts................................................................... 20
5.25 Absence of Changes..................................................................... 20
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.26 Deposit Accounts; Powers of Attorney................................................... 21
5.27 Relations with Governments............................................................. 21
5.28 Authority; Validity; Ownership......................................................... 21
5.29 Preemptive Rights...................................................................... 22
5.30 No HDS Intention to Reacquire Stock.................................................... 22
6. REPRESENTATIONS OF HDS....................................................................... 22
6.1 Due Organization....................................................................... 22
6.2 HDS Stock.............................................................................. 23
6.3 Authority and Validity................................................................. 23
6.4 Capital Stock of HDS................................................................... 23
6.5 No Side Agreements..................................................................... 24
6.6 Subsidiaries........................................................................... 24
6.7 Business; Financial Information........................................................ 24
6.8 Conformity with Law.................................................................... 24
6.9 No Violations.......................................................................... 25
6.10 Taxes.................................................................................. 25
7. COVENANTS PRIOR TO CLOSING................................................................... 26
7.1 Access and Cooperation; Due Diligence.................................................. 26
7.2 Conduct of Business Pending Closing.................................................... 27
7.3 Prohibited Activities.................................................................. 28
7.4 No Shop................................................................................ 29
7.5 Notice to Bargaining Agents............................................................ 29
7.6 Termination of Plans................................................................... 29
7.7 HDS Prohibited Activities.............................................................. 29
7.8 Notification of Certain Matters........................................................ 30
7.9 Amendment of Schedules................................................................. 30
7.10 Cooperation in Preparation of Registration Statement................................... 31
7.11 Examination of Final Financial Statements.............................................. 32
7.12 Maintenance of Liquidity and Limitation of Debt........................................ 32
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.............................. 32
8.1 Representations and Warranties; Performance of Obligations............................. 32
8.2 Satisfaction........................................................................... 33
8.3 No Litigation.......................................................................... 33
8.4 Stockholders' Release.................................................................. 33
8.5 Opinion of Counsel..................................................................... 33
8.6 Director Indemnification............................................................... 34
8.7 Registration Statement................................................................. 34
8.8 Consents and Approvals................................................................. 34
8.9 Good Standing Certificates............................................................. 34
8.10 No Waivers............................................................................. 34
8.11 No Material Adverse Change............................................................. 34
8.12 Employment Agreements.................................................................. 34
8.13 Consulting Agreements.................................................................. 34
</TABLE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
8.14 Leases................................................................................ 35
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.................................................. 35
9.1 Representations and Warranties; Performance of Obligations............................ 35
9.2 No Litigation......................................................................... 35
9.3 Financial Statements.................................................................. 35
9.4 No Material Adverse Effect............................................................ 35
9.5 STOCKHOLDERS' Release................................................................. 35
9.6 Satisfaction.......................................................................... 36
9.7 Termination of Related Party Agreements............................................... 36
9.8 Opinion of COMPANY Counsel............................................................ 36
9.9 Consents and Approvals................................................................ 36
9.10 Good Standing Certificates............................................................ 36
9.11 Registration Statement................................................................ 37
9.12 Employment Agreements................................................................. 37
9.13 Consulting Agreements................................................................. 37
9.14 Leases................................................................................ 37
9.15 Repayment of Indebtedness............................................................. 37
9.16 FIRPTA Certificate.................................................................... 37
9.17 Insurance............................................................................. 37
9.18 Nondisturbance Agreements............................................................. 37
10. POST-CLOSING COVENANTS AND SPECIAL TAX MATTERS.............................................. 37
10.1 Preservation of Tax and Accounting Treatment.......................................... 37
10.2 Disclosure............................................................................ 38
10.3 Cooperation in Tax Return Preparation................................................. 38
10.4 Tax Return Preparation and Filing..................................................... 38
10.5 Reorganization Status Information Reporting........................................... 39
10.6 Special Definitions Related to Tax Matters............................................ 39
10.7 Directors............................................................................. 40
10.8 Release from Guarantees............................................................... 40
10.9 HDS Stock Options..................................................................... 40
11. INDEMNIFICATION............................................................................. 41
11.1 General Indemnification by the STOCKHOLDERS........................................... 41
11.2 Indemnification by HDS................................................................ 41
11.3 Third Person Claims................................................................... 42
11.4 Exclusive Remedy...................................................................... 44
11.5 Limitations on Indemnification........................................................ 44
11.6 Special Tax Indemnity Provisions...................................................... 45
11.7 Special Contest Rights Related to Tax Matters......................................... 46
11.8 Special Notification Requirements Regarding Tax Disputes.............................. 47
11.9 Refunds............................................................................... 47
11.10 Optional Payment With Shares.......................................................... 47
12. TERMINATION OF AGREEMENT.................................................................... 48
12.1 Termination........................................................................... 48
</TABLE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
12.2 Liabilities in Event of Termination................................................... 48
13. NONCOMPETITION.............................................................................. 49
13.1 Prohibited Activities................................................................. 49
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION................................................... 51
14.1 STOCKHOLDERS.......................................................................... 51
14.2 HDS................................................................................... 51
14.3 Damages............................................................................... 52
14.4 Survival.............................................................................. 52
15. TRANSFER RESTRICTIONS....................................................................... 52
15.1 Transfer Restrictions................................................................. 52
15.2 Permitted Transferees................................................................. 53
16. FEDERAL SECURITIES ACT REPRESENTATIONS...................................................... 53
16.1 Compliance with Law................................................................... 53
16.2 Accredited Investors; Economic Risk; Sophistication................................... 54
17. REGISTRATION RIGHTS......................................................................... 54
17.1 Piggyback Registration Rights......................................................... 54
17.2 Demand Registration Rights............................................................ 55
17.3 Registration Procedures............................................................... 56
17.4 Underwriting Agreement................................................................ 56
17.5 HDS Stock............................................................................. 56
17.6 Availability of Rule 144.............................................................. 57
17.7 Survival.............................................................................. 57
18. GENERAL..................................................................................... 57
18.1 Cooperation........................................................................... 57
18.2 Successors and Assigns................................................................ 57
18.3 Entire Agreement...................................................................... 57
18.4 Counterparts.......................................................................... 58
18.5 Brokers and Agents.................................................................... 58
18.6 Expenses.............................................................................. 58
18.7 Notices............................................................................... 58
18.8 Governing Law; Forum.................................................................. 59
18.9 Survival of Representations and Warranties............................................ 59
18.10 Exercise of Rights and Remedies....................................................... 59
18.11 Time.................................................................................. 59
18.12 Reformation and Severability.......................................................... 59
18.13 Remedies Cumulative................................................................... 60
18.14 Construction.......................................................................... 60
18.15 Captions.............................................................................. 60
</TABLE>
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SCHEDULES and ANNEXES
<TABLE>
<S> <C>
Annex I - Consideration to Founding Company Stockholders
Annex II - Stockholders and Stock Ownership of the COMPANY
Annex III - Stockholders and Stock Ownership of HDS
Annex IV - Certificate of Incorporation and Bylaws of HDS
Annex V - Form of Opinion of Howard, Rice, Nemerovski, Canady, Falk
& Rabkin, A Professional Corporation
Annex VI - Form of Opinion of COMPANY Counsel
Annex VII - Form of Director Indemnification Agreement
Annex VIII - Form of Employment Agreement
Annex IX - Form of Consulting Agreement
Annex X - Leases
Annex XI - Stockholder Release
Annex XII - Form of Nondisturbance Agreement
Schedule 5.1 - Qualifications to Do Business
Schedule 5.3 - Capital Stock of the COMPANY
Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to
Acquire Capital Stock
Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses
Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries
Schedule 5.7 - Names of Predecessor Companies
Schedule 5.8 - Sales or Spin-offs of Significant Assets
Schedule 5.9 - Financial Statements
Schedule 5.10 - Significant Liabilities and Obligations
Schedule 5.11 - Accounts and Notes Receivable
Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental
Authorizations
Schedule 5.13 - Environmental Matters
Schedule 5.14 - Real Property, Leases and Significant Personal Property
Schedule 5.15 - Significant Customers and Material Contracts
Schedule 5.17 - Insurance Policies and Claims
Schedule 5.18 - Officers, Directors and Key Employees, Employment
Agreements; Compensation
Schedule 5.19 - Employee Benefit Plans
Schedule 5.20 - Compliance with ERISA
Schedule 5.21 - Violations of Law, Regulations or Orders
Schedule 5.22 - Taxes
Schedule 5.23 - Violations of Charter Documents and Material Defaults
Schedule 5.24 - Governmental Contracts Subject to Price Redetermination
or Renegotiation
Schedule 5.25 - Changes Since Balance Sheet Date
Schedule 5.26 - Bank Accounts; Powers of Attorney
Schedule 5.28 - Encumbrances on the COMPANY Stock
</TABLE>
v
<PAGE>
SCHEDULES and ANNEXES
<TABLE>
<S> <C>
Schedule 6.5 - HDS Side Agreements
Schedule 6.6 - HDS's Subsidiaries
Schedule 6.7 - HDS's Financial Statements
Schedule 6.9 - No Violations
Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course
Between Balance Sheet Date and Closing Date
Schedule 7.3 - Prohibited Activities
Schedule 7.6 - Plans to be Terminated by the Pricing Date
Schedule 7.7 - Exceptions to Restrictions on HDS
Schedule 8.12 - Employment Agreements
Schedule 8.13 - Consulting Agreements
Schedule 8.14 - Leases
Schedule 9.7 - Termination of Related Party Agreements
Schedule 9.18 - Lienholders and Ground Lessors
Schedule 13.1 - Prohibited Activities
Schedule 16.2 - Non-Accredited Investors
Schedule 18.5 - Brokers and Agents
</TABLE>
vi
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TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
Defined Term Section
- ------------ -------
<S> <C>
accredited investor 16.2
adjusted working capital 7.12
Adjustment Amount Annex I
Affiliate 10.6(a)
Agreement Preamble
Articles of Merger 1.1
Attributed Pre-Tax Earnings Annex I
Balance Sheet Date 5.9
Cash Consideration Annex I
Charter Documents 5.1
Closing 4.2
Closing Date 4.2
COBRA 5.20(v)
Code Whereas
COMPANY Preamble
COMPANY Affiliates 5.8
COMPANY Financial Statements 5.9
COMPANY Stock 2.1
Constituent Corporations Whereas
Consulting Agreement 8.13
controlled group 5.20
December 31, 1998 COMPANY Balance Sheet 5.9
Defined Benefit Plan 5.19(iv)
Delaware GCL 1.4
Demand Registration 17.2
Effective IPO Price Annex I
Effective Time of the Merger 1.2
Election Period 11.3(i)
Employment Agreement 8.12
Environmental Laws 5.13
ERISA 5.19
Expiration Date 5(A)
Founding Companies Whereas
Founding Stockholders 17.1
group health plans 5.20(v)
HDS Preamble
HDS Charter Documents 6.1
HDS Material Adverse Effect 6.1
HDS Material Documents 6.9
HDS Stock 2.1
HDS's Subsidiaries 6.1
</TABLE>
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TABLE OF DEFINITIONS
<TABLE>
<S> <C>
Howard Rice 4.1
Indemnification Threshold 11.5(i)
Indemnified Party 11.3
Indemnifying Party 11.3
Interim Period 10.6(b)
IPO 4.1
Leases 8.14
Material Adverse Effect 5.1
Material Contracts 5.15
Material Leases 5.14
Merger Whereas
Minimum IPO Price Annex I
multi-employer pension plan 5.20
1933 Act 5(A)
1934 Act 5(A)
Nondisturbance Agreements 9.18
Other Agreements Whereas
Other Companies Whereas
PBGC 5.19(x)
Plans 5.19
Post-Closing Period 10.6(d)
Pre-Closing 4.1
Pre-Closing Period 10.6(c)
Pricing Date 4.1
Purchase Price Annex I
Qualified Plans 5.19(iii)
Registration Statement 4.3
reportable events 5.20(iii)
SEC 8.2
significant customers 5.15
Stockholder Release 9.5
STOCKHOLDERS Preamble
Surviving Corporation 1.2
Tax 10.6(e)
Tax Data 10.3
Tax Documentation 10.3
Tax Returns 10.6(f)
Taxing Authority 10.6(g)
Territory 13.1(i)
Third Party Claim 11.3(i)
Third Person 11.3
Transfer Taxes 17.6
Underwriters 4.3
Underwriting Agreement 8.7
</TABLE>
viii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of February 26, 1999 by and among HOSPITALITY DESIGN & SUPPLY, INC., a Delaware
corporation ("HDS"), CURTIS RESTAURANT EQUIPMENT, an Oregon corporation (the
"COMPANY"), and the stockholders of the COMPANY listed on Annex II (the
"STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the COMPANY.
WHEREAS, the respective Boards of Directors of HDS and the COMPANY
(which together are herein collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that the COMPANY merge with and
into HDS pursuant to this Agreement and the applicable provisions of the laws of
the State of Delaware (such transaction is sometimes herein called the
"Merger");
WHEREAS, HDS is entering into other separate agreements (the "Other
Agreements") substantially similar to this Agreement, each of which is entitled
"Agreement and Plan of Reorganization," with each of the entities other than the
Company listed in Part II of Annex I (collectively, the "Other Companies") in
order to acquire additional companies in the commercial kitchen design and/or
supply industry (the Other Companies, together with the COMPANY, are
collectively referred to herein as the "Founding Companies");
WHEREAS, the Boards of Directors of HDS and the COMPANY have approved
and adopted this Agreement as a reorganization described in Section 368(a)(1)(A)
of the Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. THE MERGER.
1.1 Delivery and Filing of Articles of Merger. The Constituent Corporations
-----------------------------------------
will cause a Certificate of Merger or Articles of Merger with respect to the
Merger (the "Articles of Merger") to be signed, verified, delivered to and filed
with the Secretary of State of the State of Delaware and, if required, a similar
filing to be made with the relevant authorities in the jurisdiction in which the
COMPANY is organized, on or before the Closing Date (as defined in Section 4.2).
1.2 Effective Time of the Merger. The "Effective Time of the Merger" shall
----------------------------
be on the Closing Date, as defined in Section 4.2, and simultaneous with the
closing of the IPO, as defined in Section 4.1. At the Effective Time of the
Merger, the COMPANY shall be merged with and into HDS in accordance with the
Articles of Merger, and the
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separate existence of the COMPANY shall cease. HDS shall be the surviving party
in the Merger and is herein sometimes referred to as the "Surviving
Corporation." The Merger will be effected in a single transaction.
1.3 Certificate of Incorporation, Bylaws and Board of Directors of Surviving
------------------------------------------------------------------------
Corporation. At the Effective Time of the Merger:
- -----------
(i) the Certificate of Incorporation of HDS then in effect shall
become the Certificate of Incorporation of the Surviving Corporation; and
subsequent to the Effective Time of the Merger, such Certificate of
Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation until changed as provided by law;
(ii) the Bylaws of HDS then in effect shall become the Bylaws of the
Surviving Corporation; and subsequent to the Effective Time of the Merger, such
Bylaws shall be the Bylaws of the Surviving Corporation until they shall
thereafter be duly amended;
(iii) the Board of Directors of the Surviving Corporation shall consist
of those persons who constituted the Board of Directors of HDS immediately prior
to the Merger, who shall hold office subject to the provisions of the laws of
the State of Delaware and of the Certificate of Incorporation and Bylaws of the
Surviving Corporation until such persons' successors and assigns are duly
elected and qualified; and
(iv) the officers of the Surviving Corporation shall be the persons who
were officers of HDS immediately prior to the Merger, who shall hold office,
subject to the provisions of the Certificate of Incorporation and Bylaws of the
Surviving Corporation and the Employment Agreements (as defined in Section
8.12), until such officers' successors are duly elected and qualified.
1.4 Effect of Merger. At the Effective Time of the Merger, the effect of
----------------
the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL"). Except as herein
specifically set forth, the identity, existence, purposes, powers, objects,
franchises, privileges, rights and immunities of the COMPANY shall continue
unaffected and unimpaired by the Merger and the corporate franchises, existence
and rights of the COMPANY shall be merged with and into HDS, and HDS, as the
Surviving Corporation, shall be fully vested therewith. At the Effective Time
of the Merger, the separate existence of the COMPANY shall cease and, in
accordance with the terms of this Agreement, the Surviving Corporation shall
possess all the rights, privileges, immunities and franchises of a public, as
well as of a private, nature, and all property, real, personal and mixed, and
all debts due on whatever account, including subscriptions to shares, all taxes,
including those due and owing and those accrued, and all other choses in action,
and all and every other interest of or belonging to or due to the COMPANY and
HDS shall be taken and deemed to be transferred to, and vested in, the Surviving
Corporation without further act or deed. Except as otherwise provided herein,
the Surviving Corporation shall thenceforth be responsible and liable for all
the liabilities and obligations of the
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COMPANY and HDS and the Surviving Corporation shall be substituted for the
COMPANY or HDS with respect to any claim existing, or action or proceeding
pending, by or against the COMPANY or HDS. Neither the rights of creditors nor
any liens upon the property of the COMPANY or HDS shall be impaired by the
Merger, and all debts, liabilities and duties of the COMPANY and HDS shall
attach to the Surviving Corporation, and may be enforced against such Surviving
Corporation to the same extent as if said debts, liabilities and duties had been
incurred or contracted by such Surviving Corporation.
2. CONVERSION OF STOCK.
2.1 Manner of Conversion. The manner of converting the outstanding shares
--------------------
of capital stock of the COMPANY ("COMPANY Stock") into outstanding shares of
common stock of HDS ("HDS Stock") and cash shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of COMPANY Stock issued and outstanding
immediately prior to the Effective Time of the Merger, by virtue of the Merger
and without any action on the part of the holder thereof, automatically shall be
deemed to represent (1) that number of shares of HDS Stock determined as set
forth in Part I of Annex I hereto and (2) the right to receive the amount of
cash determined as set forth in Part I of Annex I hereto, such shares and cash
to be subject to offsets and distributed to STOCKHOLDERS as provided in Part I
of Annex I hereto; and
(ii) all shares of COMPANY Stock that are held by COMPANY as treasury
stock or owned by any COMPANY Subsidiary shall be cancelled and retired and no
shares of HDS Stock or other consideration shall be delivered or paid in
exchange therefor.
At the Effective Time of the Merger, HDS shall have no class of capital
stock issued and outstanding which, as a class, shall have any rights or
preferences senior to the shares of HDS Stock received by the STOCKHOLDERS,
including, without limitation, any rights or preferences as to dividends or as
to the assets of HDS upon liquidation or dissolution or as to voting rights,
except for any series of Preferred Stock that will be converted into HDS Stock
on the Closing Date (as defined below).
2.2 Other Companies. Part II to Annex I sets forth the aggregate
---------------
consideration into which shares of outstanding stock of each Founding Company
will be converted on the Closing Date or, if applicable, payable with respect to
such shares of outstanding stock on the Closing Date, before offsets.
3. DELIVERY OF STOCK.
3.1 Delivery of HDS Stock. At or immediately after the Effective Time of
---------------------
the Merger:
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<PAGE>
(i) the STOCKHOLDERS, as the holders of all outstanding certificates
representing shares of COMPANY Stock, shall, upon surrender of such
certificates, be entitled to receive the number of shares of HDS Stock and the
amount of cash calculated pursuant to Section 2.1 above; and
(ii) until the certificates representing COMPANY Stock have been
surrendered by the STOCKHOLDERS and replaced by the HDS Stock, the certificates
for COMPANY Stock shall, for all corporate purposes, be deemed to evidence the
ownership of the number of shares of HDS Stock and cash which such STOCKHOLDER
is entitled to receive as a result of the Merger, as set forth in Section 2.1,
notwithstanding the number of shares of COMPANY Stock such certificates
represent.
3.2 Delivery of COMPANY Stock. The STOCKHOLDERS shall deliver to HDS at
-------------------------
Pre-Closing (as defined below in Section 4.1) the certificates representing
COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by
blank stock powers, and with all necessary transfer tax and other revenue
stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The
STOCKHOLDERS agree promptly to cure any deficiencies with respect to the
endorsement of the certificates or other documents of conveyance with respect to
such COMPANY Stock or with respect to the stock powers accompanying any COMPANY
Stock.
4. PRE-CLOSING AND CLOSING.
4.1 Pre-Closing. On the date (the "Pricing Date") on which the public
-----------
offering price of the shares of HDS Stock in the initial public offering of HDS
Stock (the "IPO") is determined, the parties shall deliver to Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, A Professional Corporation ("Howard Rice")
all documents necessary to effect (i) the Merger (including, at HDS's election,
the filing with the appropriate state authorities of the Articles of Merger and
any similar document to become effective on the Closing Date (as defined
below)), (ii) the conversion of shares of COMPANY Stock into shares of HDS Stock
and (iii) the delivery of shares of HDS Stock to STOCKHOLDERS (such delivery to
Howard, Rice is herein referred to as the "Pre-Closing"); provided, that the
actual Merger, the conversion of shares of COMPANY Stock into shares of HDS
Stock and the delivery of shares of HDS Stock shall not take place until the
Closing Date as herein provided. The Pre-Closing shall take place at the offices
of Howard, Rice at 3 Embarcadero Center, 7th Floor, San Francisco, California
94111.
4.2 Closing. On the date when the closing with respect to the IPO occurs
-------
(the "Closing Date"), the Articles of Merger shall be filed with the appropriate
state authorities, or if already filed shall become effective, and the
conversion of shares of COMPANY Stock into shares of HDS Stock, the delivery of
shares of HDS Stock, and the transfer of funds by wire transfer in an amount
equal to the cash portion of the consideration which the STOCKHOLDERS shall be
entitled to receive pursuant to the Merger, shall occur and be deemed to be
completed (such consummation and delivery is herein referred to as the
"Closing"). After the Pre-Closing and until the Closing Date, no
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<PAGE>
party may withdraw, terminate or rescind any delivery made at the Pre-Closing
unless this Agreement is terminated as provided in Section 12. All documents
delivered at the Pre-Closing shall be held by Howard Rice for final delivery on
the Closing Date as directed by the parties and their counsel at the Pre-
Closing, provided only that the Articles of Merger and any similar document may
be filed to become effective on the Closing Date. Should the Agreement be
terminated as provided in Section 12 prior to the Closing Date, the parties
shall take all steps necessary to rescind any such filings, Howard Rice shall
return all documents delivered at the Pre-Closing to the parties who delivered
the same, all such deliveries at the Pre-Closing will be rescinded and a
nullity, the Merger shall not become effective, the shares of COMPANY Stock will
not be converted into HDS Stock, and shares of HDS Stock will not be delivered
to STOCKHOLDERS. If HDS proposes to file any Articles of Merger or any similar
document prior to the Closing, the documents delivered at Pre-Closing shall
include documents required to rescind, prior to the Closing, any filing of the
Articles of Merger and any similar document.
4.3 No Assurances. The COMPANY and the STOCKHOLDERS acknowledge and agree
-------------
that (i) there exists no firm commitment, binding agreement, or promise or other
assurance of any kind, whether express or implied, oral or written, that any
Registration Statement filed in connection with the IPO (the "Registration
Statement") will become effective or that the IPO pursuant thereto will occur at
a particular price or within a particular range of prices or will occur at all;
(ii) neither HDS nor any of its officers, directors, agents or representatives
nor any prospective underwriters in the IPO (the "Underwriters") shall have any
liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or
associated with the COMPANY for any failure of the Registration Statement to
become effective, or of the IPO to occur at a particular price or within a
particular range of prices or to occur at all; and (iii) the decision of the
STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to
the proposed Merger, has been made independent of, and without reliance upon,
any statements, opinions or other communications of, or due diligence
investigations which have been or will be made or performed by any prospective
Underwriter, relative to HDS or the prospective IPO. The Underwriters shall
have no obligation to the STOCKHOLDERS with respect to any disclosure contained
in the Registration Statement.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS.
(A) Representations and Warranties of COMPANY and STOCKHOLDERS. The
----------------------------------------------------------
COMPANY and each of the STOCKHOLDERS jointly and severally represent and warrant
that all of the following representations and warranties in this Section 5(A)
are true at the date of this Agreement and, subject to Section 7.9 hereof, shall
be true at the time of Pre-Closing and the Closing Date, and that such
representations and warranties shall survive the Closing Date for a period of
two (2) years (the last day of such period is herein called the "Expiration
Date"), except that (i) the warranties and representations set forth in Sections
5.13, 5.19 and 5.20 hereof shall
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<PAGE>
survive until such date as the limitations period has run for each act,
inaction, fact, event or circumstance which constitutes a breach thereof, which
date shall be deemed to be the Expiration Date for Sections 5.13, 5.19 and 5.20,
(ii) the warranties and representations set forth in Section 5.22 hereof shall
survive until such date as the limitations period has run for all tax periods
ended on or prior to the Closing Date, which date shall be deemed to be the
Expiration Date for Section 5.22, and (iii) solely for purposes of Section
11.1(iv) hereof, all warranties and representations shall survive until such
date as the limitations period has run under the Securities Act of 1933, as
amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the
"1934 Act"), and all other applicable Federal or state securities laws, which
date shall be deemed to be the Expiration Date for purposes of Section 11.1(iv)
hereof.
5.1 Due Organization. The COMPANY is a corporation duly organized, validly
----------------
existing and in good standing under the laws of the state of its incorporation,
and is duly authorized and qualified to do business under all applicable laws,
regulations, ordinances and orders of public authorities to carry on its
business in the places and in the manner as now conducted except (i) as
disclosed on Schedule 5.1 or (ii) where the cumulative effect of all failures to
be so authorized or qualified would not have a material adverse effect on the
business, operations, properties, assets or condition (financial or otherwise),
of the COMPANY (a "Material Adverse Effect"). Schedule 5.1 contains a list of
all jurisdictions in which the COMPANY is authorized or qualified to do
business. True, complete and correct copies of the Certificate (or Articles) of
Incorporation and Bylaws, as amended, of the COMPANY (collectively, the "Charter
Documents"), certified by the Secretary or Assistant Secretary of the COMPANY,
are all attached hereto as part of Schedule 5.1. A true, complete and correct
copy of the Certificate (or Articles) of Incorporation, as amended, included in
the Charter Documents, certified by the Secretary of State or other appropriate
authority of the state of incorporation of the COMPANY, as applicable, shall be
delivered to HDS at the Pre-Closing. Except as set forth on Schedule 5.1, the
minute books of the COMPANY, as heretofore made available to HDS, are correct
and complete in all material respects.
5.2 Authority and Validity. The representatives of the COMPANY executing
----------------------
this Agreement have the authority to enter into and bind the COMPANY to the
terms of this Agreement and any other agreements contemplated by this Agreement
to which the COMPANY is or is contemplated to be a party. The COMPANY has the
full legal right, power and authority to enter into this Agreement, any other
agreements contemplated by this Agreement, to which the COMPANY is or is
contemplated to be a party, and the Merger. All corporate action necessary for
the authorization, execution, delivery and performance by the COMPANY of the
Agreement, and also any other agreements contemplated by this Agreement to which
the COMPANY is or is contemplated to be a party, has been taken. Assuming due
authorization, execution and delivery by HDS, this Agreement and any other
agreements contemplated by this Agreement to which the COMPANY is or is
contemplated to be a party are or will be legal, valid and binding obligations
of the COMPANY, enforceable in accordance with their respective terms,
-6-
<PAGE>
except as may be limited by applicable bankruptcy, insolvency or similar laws
affecting creditors' rights generally.
5.3 Capital Stock of the COMPANY. The authorized capital stock of the
----------------------------
COMPANY is as set forth in Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS and in
the amounts set forth in Annex II and further, except as set forth on Schedule
5.3, are owned free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of the COMPANY have
been duly authorized and validly issued, are fully paid and nonassessable, are
owned of record and beneficially by the STOCKHOLDERS and further, such shares
were offered, issued, sold and delivered by the COMPANY in compliance with all
applicable state and federal laws concerning the issuance of securities.
Further, none of such shares were issued in violation of the preemptive rights
of any past or present stockholder.
5.4 Transactions in Capital Stock. Except as set forth on Schedule 5.4, the
-----------------------------
COMPANY has not acquired any COMPANY Stock since January 1, 1993. Except as set
forth on Schedule 5.4, no option, warrant, call, conversion right or commitment
of any kind exists which obligates the COMPANY to issue any authorized but
unissued capital stock. Except as set forth on Schedule 5.4, the COMPANY has no
obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any of its equity securities or any interests therein or to pay any dividend or
make any distribution in respect thereof. Except as set forth on Schedule 5.4,
there has been no transaction or action taken with respect to the equity
ownership of the COMPANY, in contemplation of the transactions described in this
Agreement.
5.5 No Bonus Shares. Except as set forth in Schedule 5.5, since January 1,
---------------
1995 none of the shares of COMPANY Stock was issued for less than the fair
market value thereof at the time of issuance or was issued in exchange for
consideration other than cash.
5.6 Subsidiaries. The COMPANY does not presently own, of record or
------------
beneficially, or control, directly or indirectly, any capital stock, securities
convertible into capital stock or any other equity interest in any corporation,
association or business entity nor is the COMPANY, directly or indirectly, a
participant in any joint venture, partnership or other non-corporate entity.
5.7 Predecessor Status; etc. Set forth in Schedule 5.7 is a listing of all
------------------------
names under which the COMPANY has done business during the last five years and
all names of all predecessor companies for the past five years of the COMPANY,
including the names of any entities from whom the COMPANY previously acquired
material assets. Except as disclosed in Schedule 5.7, the COMPANY has not been
a subsidiary or division of another corporation or a part of an acquisition
which was later rescinded.
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5.8 Spin-off by the COMPANY. Except as set forth on Schedule 5.8, there has
-----------------------
not been any sale, spin-off or split-up of any material assets of the COMPANY or
any other person or entity that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the COMPANY ("COMPANY Affiliates") other than in the ordinary course of
business, within the preceding two years.
5.9 Financial Statements. Attached hereto as Schedule 5.9 to this Agreement
--------------------
are copies of the following financial statements (the "COMPANY Financial
Statements") of the COMPANY: (i) the COMPANY's balance sheet as of December 31,
1998 and statements of income, cash flows and retained earnings for the twelve
month period ended December 31, 1998 (such Balance Sheet as of December 31, 1998
is herein sometimes referred to as the "December 31, 1998 COMPANY Balance
Sheet," and December 31, 1998 is herein sometimes referred to as the "Balance
Sheet Date") and (ii) the COMPANY's balance sheets as of December 31, 1998 and
1997 and statements of income, cash flows and retained earnings for each of the
years in the two-year period ended December 31, 1998. To the knowledge of the
COMPANY, such Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted). Such balance sheets as of
December 31, 1998, and 1997 present fairly the financial position of the
COMPANY as of the dates indicated thereon, and such Statements of Income, Cash
Flows and Retained Earnings present fairly the results of their respective
operations for the periods indicated thereon.
5.10 Liabilities and Obligations. Schedule 5.10 is an accurate list with
---------------------------
respect to the COMPANY of all liabilities as of a date specified therein, which
date shall not be more than thirty (30) days prior to the date of this
Agreement. Schedule 5.10 shall be amended or supplemented pursuant to Section
7.9 to list (i) all liabilities which were incurred after such date and were
incurred other than in the ordinary course of business or which exceed $10,000
(individually or in the aggregate) if (and only if) such liabilities would
either be accrued on the balance sheet of the COMPANY in accordance with
generally accepted accounting principles consistently applied if such balance
sheet were being prepared immediately prior to Closing or if such liabilities
represent liabilities of the nature described in Section 5.13, Section 5.19,
Section 5.20 and/or Section 5.22 (excluding items that are both not known to the
COMPANY and not covered by any of such sections because of knowledge
qualifications contained in one or more of such sections); and (ii) all
liabilities which were incurred after such date and were incurred other than in
the ordinary course of business or which exceed $100,000 (in the aggregate) and
are not otherwise described in the immediately preceding subclause (i).
Any reference to "all liabilities" in this Section 5.10 shall mean, in
each such instance, all liabilities of the COMPANY of any kind, character or
description, whether accrued, absolute, secured or unsecured, contingent or
otherwise. In the case of those liabilities which are contingent, Schedule 5.10
includes, and each amendment or supplement pursuant to Section 7.9 will include,
a reasonable estimate of the maximum amount which may be payable. For each such
contingent liability, the COMPANY has
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provided (or in the case of contingent liabilities listed in an amendment or
supplement pursuant to Section 7.9, will provide) to HDS the following
information:
(a) a summary description of the liability together with the following:
(1) copies of all relevant documentation relating thereto;
(2) amounts claimed and any other action or relief sought; and
(3) name of claimant and all other parties to the claim, suit or
proceeding;
(b) the name of each court or agency before which such claim, suit or
proceeding is pending; and
(c) the date such claim, suit or proceeding was instituted.
5.11 Accounts and Notes Receivable. Schedule 5.11 is an accurate list of the
-----------------------------
accounts and notes receivable of the COMPANY as of the Balance Sheet Date,
including any such amounts which are not reflected in the December 31, 1998
COMPANY Balance Sheet, and including receivables from and advances to employees
and the STOCKHOLDERS. Except to the extent to be reflected on Schedule 5.11,
such accounts and notes are collectible in the amount to be shown in the
December 31, 1998 COMPANY Balance Sheet, net of reserves reflected therein.
5.12 Permits and Intangibles. The COMPANY holds all licenses, franchises,
-----------------------
permits and other governmental authorizations including permits, titles
(including motor vehicle titles and current registrations), licenses,
franchises, certificates, trademarks, trade names, patents, patent applications
and copyrights, the absence of which, either singly or in the aggregate, would
have a Material Adverse Effect. Schedule 5.12 is an accurate list and summary
description of all such licenses, franchises, permits and other governmental
authorizations, provided that, with respect to copyrights, Schedule 5.12 may
include only those copyrights which are registered. To the knowledge of the
COMPANY, the licenses, franchises, permits and other governmental authorizations
listed on Schedule 5.12 are valid, and the COMPANY has not received any notice
that any governmental authority intends to cancel, terminate or not renew any
such license, franchise, permit or other governmental authorization. The
COMPANY has conducted and is conducting its business in compliance with the
requirements, standards, criteria and conditions set forth in applicable
permits, licenses, orders, approvals, variances, rules and regulations and is
not in violation of any of the foregoing except where all such non-compliances
and violations in the aggregate would not have a Material Adverse Effect.
Except as specifically provided in Schedule 5.12, the transactions contemplated
by this Agreement will not result in a default under or a breach or violation
of, or have a Material Adverse Effect upon the rights and benefits afforded to
the COMPANY by, such licenses, franchises, permits or government authorizations,
either singly or in the aggregate.
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<PAGE>
5.13 Environmental Matters. Except as set forth on Schedule 5.13, and
---------------------
except to the extent that noncompliance with any Environmental Law (as defined
below), either singly or in the aggregate, does not have a Material Adverse
Effect, (i) the COMPANY has complied with and is in compliance with all federal,
state, local and foreign statutes (civil and criminal), laws, ordinances,
regulations, rules, notices, permits, judgments, orders and decrees applicable
to it or its properties, assets, operations and businesses relating to
environmental protection (collectively "Environmental Laws") including, without
limitation, Environmental Laws relating to protection of the air, water or land
or to the generation, storage, use, handling, transportation, treatment or
disposal of Solid Wastes, Hazardous Wastes or Hazardous Substances (as such
terms are defined in any applicable Environmental Law); (ii) the COMPANY has
obtained and complied with all necessary permits and other approvals necessary
to treat, transport, store, dispose of or otherwise handle Solid Wastes,
Hazardous Wastes or Hazardous Substances and has reported, to the extent
required by all Environmental Laws, all past and present sites owned and
operated by the COMPANY where Solid Wastes, Hazardous Wastes or Hazardous
Substances have been treated, stored, used, disposed of or otherwise handled;
(iii) there have been no releases (as defined in Environmental Laws) at, from,
under, in or on any property owned or operated by the COMPANY except as
permitted by Environmental Laws; (iv) to the knowledge of the COMPANY there is
no on-site or off-site location to which the COMPANY has transported or disposed
of Solid Wastes, Hazardous Wastes or Hazardous Substances or arranged for the
transportation of Solid Wastes, Hazardous Wastes or Hazardous Substances, which
site is the subject of any federal, state, local or foreign enforcement action
or any other investigation which could lead to any claim against the COMPANY or
HDS for any clean-up cost, remedial work, damage to natural resources or
personal injury, including, but not limited to, any claim under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended; and (v) the COMPANY has no contingent liability in connection with any
release of any Solid Waste, Hazardous Waste or Hazardous Substance into the
environment. Schedule 5.13 lists all releases of Hazardous Wastes or Hazardous
Substances by the COMPANY.
5.14 Real and Personal Property. Schedule 5.14 hereto contains an accurate
--------------------------
list of (x) all real and personal property included on the December 31, 1998
COMPANY Balance Sheet, (y) all other real and personal property of the COMPANY
with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii)
acquired since the Balance Sheet Date, and (z) all leases for real and personal
property to which the COMPANY is a party involving real or personal property
having a value in excess of $2,500 ("Material Leases"), including true, complete
and correct copies of all Material Leases, and including an indication as to
which real and personal property is currently owned, or was formerly owned, by
the STOCKHOLDERS or business or personal affiliates of the COMPANY or the
STOCKHOLDERS. All machinery and equipment of the COMPANY listed on Schedule
5.14 is in good working order and condition, ordinary wear and tear excepted,
except (i) as disclosed in Schedule 5.14 or (ii) where the cumulative effect of
all failures to be in good working order and condition would not have a Material
Adverse Effect. All Material Leases are in full force and effect and
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<PAGE>
constitute valid and binding agreements of the COMPANY and to the knowledge of
the COMPANY, constitute valid and binding agreements on the other parties
thereto (and their successors) in accordance with their respective terms. All
fixed assets used by the COMPANY that are material to the operation of their
respective businesses are either owned by the COMPANY or leased under an
agreement set forth on Schedule 5.14. Schedule 5.14 contains true, complete and
correct copies of all title reports received or owned by the COMPANY and title
insurance policies received or owned by the COMPANY with respect to the real
property listed on Schedule 5.14. The COMPANY has also provided in Schedule 5.14
a summary description of all plans or projects that involve the opening of new
operations, expansion of any existing operations or the acquisition of any real
property or existing businesses, with respect to which the COMPANY has made any
expenditure in the two-year period prior to the date of the Agreement in excess
of $10,000, or which if pursued by the COMPANY would require additional
expenditures of capital in excess of $10,000. Except as set forth on Schedule
5.14 and except for liens excepted in Section 7.3(vi)(1) and (3), there are no
liens against the COMPANY's real and personal properties.
5.15 Significant Customers; Material Contracts and Commitments. Schedule
---------------------------------------------------------
5.15 contains an accurate list of (i) all customers representing five percent
(5%) or more of the COMPANY's revenues for the twelve months ended on the
Balance Sheet Date, or who have paid to the COMPANY $50,000 or more over any
four consecutive fiscal quarters in the three years ended on the Balance Sheet
Date (collectively, "significant customers") and (ii) all contracts, indentures
and other instruments requiring payment or performance by the COMPANY in an
amount or with a value in excess of $10,000 ("Material Contracts") to which the
COMPANY is a party or by which the COMPANY or any of its respective properties
are bound (including, but not limited to, contracts with significant customers,
joint venture or partnership agreements, contracts with any labor organizations,
loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to
purchase land, leases, liens, pledges or other security agreements) (a) as of
the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in
each case has delivered true, complete and correct copies of such agreements to
HDS, except that leases set forth on Schedule 5.14 need not be set forth on
Schedule 5.15. Except to the extent set forth on Schedule 5.15, (i) none of the
COMPANY's significant customers has cancelled or substantially reduced or, to
the knowledge of the COMPANY, is currently attempting or threatening to cancel
any Material Contract or substantially reduce utilization of the services
provided by the COMPANY, and (ii) no Stockholder or any affiliate of any
Stockholder is a party to any such Material Contract. Except as set forth in
Schedule 5.15, the COMPANY has not been the subject of any election in respect
of union representation of employees and are not bound by or subject to (and
none of its respective assets or properties is bound by or subject to) any
arrangement with any labor union. Except as set forth on Schedule 5.15, no
employees of the COMPANY are represented by any labor union or covered by any
collective bargaining agreement and no campaign to establish such representation
has ever occurred or, to the knowledge of the COMPANY, is in progress. There is
no pending or, to the COMPANY's knowledge, threatened labor dispute involving
the COMPANY and any group of its employees, nor
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<PAGE>
has the COMPANY experienced any labor interruptions over the past three years,
and the COMPANY considers its relationship with its respective employees to be
good.
5.16 Title to Real Property. The COMPANY has good and insurable title to
----------------------
the real property owned and used in its business, including those reflected on
Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales
agreement, encumbrance or charge, except for:
(i) liens set forth on Schedules 5.10 and 5.15 securing specified
liabilities (with respect to which no material default exists);
(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title shown of record in the office of the County Clerk in which the properties,
assets and leasehold estates are located which do not adversely affect the
current use of the property.
5.17 Insurance. Schedule 5.17 sets forth an accurate list of all insurance
---------
policies carried by the COMPANY. Except as set forth on Schedule 5.17, the
Company has delivered to HDS an accurate list (attached to Schedule 5.17) of all
insurance loss runs or worker's compensation claims received for the past three
policy years. The Company has provided HDS with true, complete and correct
copies of all policies currently in effect. Such insurance policies are
currently in full force and effect and shall remain in full force and effect
through the Closing Date. No insurance carried by the COMPANY has ever been
cancelled by the insurance company and the COMPANY has never been denied
coverage.
5.18 Compensation; Employment Agreements. Schedule 5.18 sets forth an
-----------------------------------
accurate schedule showing all officers, directors and key employees of the
COMPANY listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided
to HDS true, complete and correct copies of any employment agreements for
persons listed on Schedule 5.18. Since the Balance Sheet Date there have been no
increases in the compensation, bonus, sales commissions or fee arrangements
payable or to become payable by the COMPANY to any officer, director,
stockholder, employee, consultant or agent, except as listed on Schedule 5.18.
5.19 Employee Plans. Schedule 5.19 sets forth complete and accurate lists
--------------
of all employee benefit plans, all employee welfare benefit plans, all employee
pension benefit plans, all multi-employer plans and all multi-employer welfare
arrangements (as defined in Sections 3(3), (1), (2), (37) and (40),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), which are currently maintained and/or
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<PAGE>
sponsored by the COMPANY, or to which the COMPANY currently contributes, or has
an obligation to contribute in the future (including, without limitation,
benefit plans or arrangements that are not subject to ERISA, such as employment
agreements and any other agreements containing "golden parachute" provisions and
deferred compensation agreements), together with a classification of employees
covered thereby (collectively, the "Plans"). Schedule 5.19 also sets forth all
of the Plans that have been terminated within the past six years. The COMPANY
has heretofore delivered to HDS correct and complete copies of each of the
following:
(i) each Plan and all amendments thereto; the trust agreement
and/or insurance contracts, if any, forming a part of such Plan and all
amendments thereto; and the resolutions and agreements, if any by which the
COMPANY adopted such Plan;
(ii) all written, and descriptions of all oral, employment,
termination, and severance agreements, contracts, arrangements and
understandings listed in Schedule 5.19;
(iii) sample benefit distribution forms that pertain to all Plans
that are intended to qualify (the "Qualified Plans") under Section 401(a) of the
Code; (iv) the most recent actuarial report and the most recent executed Form
PBGC-1 with respect to each Plan that is a defined benefit pension plan as
defined in Section 414(j) of the Code (a "Defined Benefit Plan");
(v) Forms 5500 or, as applicable Forms 5500-C/R, filed with respect
to the three most recent plan years of each Plan, and all schedules thereto;
(vi) the most recent determination letter issued by the Internal
Revenue Service regarding the qualified status of each Qualified Plan;
(vii) the most recent accountant's report, if any, with respect to
each Plan;
(viii) the most recent summary plan description, and any subsequent
summaries of material modifications, with respect to each Plan;
(ix) the bond required by Section 412 of ERISA, if any; and
(x) all documents required to be filed with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation (the "PBGC"), or distributed
to participants and beneficiaries in connection with the termination of any
Qualified Plan listed on Schedule 5.19 as terminated.
5.20 Compliance with ERISA. Except for the Plans, the COMPANY does not
---------------------
maintain or sponsor, and is not a contributing employer to, a pension, profit-
sharing, deferred compensation, stock option, employee stock purchase or other
employee benefit plan, employee welfare benefit plan, or any other arrangement
with their respective employees, whether or not subject to ERISA. All Plans are
in compliance in all material
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respects with all applicable provisions of ERISA and the regulations issued
thereunder, the Code and the regulations issued thereunder, as well as with all
other applicable laws, and have been administered, operated and managed in all
material respects in accordance with their governing documents, if any. All
Qualified Plans are qualified under Section 401(a) of the Code and have been
determined by the Internal Revenue Service to be so qualified or application for
determination letters have been timely submitted to the Internal Revenue Service
and nothing has occurred since the date of each Qualified Plan's most recent
determination letter that would adversely affect such Qualified Plan's tax-
qualified status. To the extent that any Qualified Plans have not been amended
to comply with applicable law, the remedial amendment period permitting
retroactive amendment of such Qualified Plans has not expired and will not
expire within one hundred twenty (120) days after the Closing Date. All reports
and other documents required to be filed with any governmental agency or
distributed to plan participants or beneficiaries (including, but not limited
to, annual reports, summary annual reports, actuarial reports, PBGC-1 Forms,
audits or tax returns) have been timely filed or distributed. None of: (i) the
STOCKHOLDERS; (ii) any Plan; or (iii) the COMPANY has engaged in any transaction
prohibited under the provisions of Section 4975 of the Code or Section 406 of
ERISA. No Plan has incurred an accumulated funding deficiency, as defined in
Section 412(a) of the Code and Section 302(1) of ERISA; and no circumstances
exist pursuant to which the COMPANY could have any direct or indirect liability
whatsoever (including being subject to any statutory lien to secure payment of
any such liability), to the PBGC under Title IV of ERISA or to the Internal
Revenue Service for any excise tax or penalty with respect to any plan now or
hereafter maintained or contributed to by the COMPANY or any member of a
"controlled group" (as defined in Section 4001(a)(14) of ERISA) that includes
the COMPANY; and neither the COMPANY nor any member of a "controlled group" (as
defined above) that includes the COMPANY currently has (or at the Closing Date
will have) any obligation whatsoever to contribute to any "multi-employer
pension plan" (as defined in ERISA Section 4001(a)(14)), nor has any withdrawal
liability whatsoever (whether or not yet assessed) arising under or capable of
assertion under Title IV of ERISA (including, but not limited to, Sections 4201,
4202, 4203, 4204, or 4205 thereof) been incurred by any Plan. Further, except as
set forth in Schedule 5.20:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without a determination by
the Internal Revenue Service that such action does not adversely affect the tax-
qualified status of such Qualified Plan;
(ii) no Plan which is subject to the provisions of Title IV of ERISA
has been terminated;
(iii) there have been no "reportable events" (as defined in Section
4043 of ERISA) with respect to any Plan which were not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of the Closing
Date, shall equal or exceed the actuarial present value of all accrued pension
benefits under any
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<PAGE>
such Qualified Plan in accordance with the assumptions contained in the
Regulations of the PBGC governing the funding of terminated Defined Benefit
Plans;
(v) with respect to Plans which qualify as "group health plans"
under Section 4980B of the Internal Revenue Code and Section 607(l) of ERISA and
related regulations (relating to the benefit continuation rights imposed by
"COBRA"), the COMPANY has complied (and on the Closing Date will have complied)
in all respects with all reporting, disclosure, notice, election and other
benefit continuation requirements imposed thereunder as and when applicable to
such plans, and the COMPANY has not incurred (and will not incur) any direct or
indirect liability and is not (and will not be) subject to any loss, assessment,
excise tax penalty, loss of federal income tax deduction or other sanction,
arising on account of or in respect of any direct or indirect failure by the
COMPANY, at any time prior to the Closing Date, to comply with any such federal
or state benefit continuation requirement, which is capable of being assessed or
asserted before or after the Closing Date directly or indirectly against the
COMPANY or the STOCKHOLDERS with respect to such group health plans;
(vi) the COMPANY is not now nor has it been within the past six
years a member of a "controlled group" as defined in ERISA Section 4001(a)(14);
(vii) there is no pending litigation, arbitration, or disputed claim,
settlement or adjudication proceeding, and to the knowledge of the COMPANY,
there is no threatened litigation, arbitration or disputed claim, settlement or
adjudication proceeding, audit or any governmental or other proceeding, audit or
investigation with respect to any Plan, or with respect to any fiduciary,
administrator, or sponsor thereof (in their capacities as such), or any party in
interest thereof;
(viii) the Financial Statements as of the Balance Sheet Date reflect
the approximate total pension, medical and other benefit expense for all Plans,
and no material funding changes or irregularities are reflected thereon which
would cause such Financial Statements to be not representative of prior periods;
(ix) the COMPANY has not incurred liability under Section 4062 of
ERISA;
(x) each Qualified Plan that is listed as terminated on Schedule
5.19 was terminated in compliance with all applicable requirements of ERISA and
the Code;
(xi) except for any Qualified Plan that is categorized on Schedule
5.19 as having been merged with another Qualified Plan, no Qualified Plan of the
COMPANY has been merged during the six years immediately before the Closing
Date;
(xii) each Qualified Plan that is categorized on Schedule 5.19 as
having been merged was merged in compliance with all applicable requirements of
ERISA and the Code;
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<PAGE>
(xiii) apart from health benefits provided to former employees under
Section 4980B of the Code and Part 6 of Title I(B) of ERISA, the COMPANY has no
obligation to provide health or medical benefits to anyone other than its active
employees;
(xiv) the COMPANY does not sponsor, contribute to, or have any
obligation to contribute to any voluntary employees beneficiary association, as
described in Section 501(c)(9) of the Code; and
(xv) except as set forth in Schedule 5.19, the consummation of the
transactions contemplated hereby will not result in any obligation to pay any
employee of the COMPANY severance or termination benefits so long as such
employee remains employed by the COMPANY after the Closing.
5.21 Conformity with Law. Except to the extent set forth on Schedule
-------------------
5.21, the COMPANY is not in violation of any law or regulation or any order of
any court or federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
any of them which (either singly or in the aggregate) would have a Material
Adverse Effect; and except to the extent set forth in Schedule 5.10, there are
no claims, actions, suits or proceedings pending or, to the knowledge of the
COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
any of them which (either singly or in the aggregate) would have a Material
Adverse Effect, and no notice of any such claim, action, suit or proceeding,
whether pending or threatened, has been received by the COMPANY. The COMPANY has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in applicable federal, state and
local statutes, ordinances, orders, approvals, variances, rules and regulations
and is not in violation of any of the foregoing which (either singly or in the
aggregate) would have a Material Adverse Effect.
5.22 Taxes. Except as set forth in Schedule 5.22,
-----
(i) All Tax Returns (as defined in Section 10.6(f)) required to have
been filed by or with respect to the COMPANY with any Taxing Authority (as
defined in Section 10.6(g)) have been duly filed, and each such Tax Return
accurately, correctly and completely reflects the income, franchise or other Tax
liability and all other information, including the tax basis and recovery
periods for assets, required to be reported thereon. The COMPANY has furnished
or made available to HDS complete and accurate copies of all income and
franchise tax returns, and any amendments thereto, filed by the COMPANY for all
taxable years ending on or after December 31, 1995. All Taxes (whether or not
shown on any Tax Return and whether or not assessed) owed by the COMPANY have
been paid. No Tax payment has been made by the COMPANY to any Taxing Authority
which is inconsistent with the prior practice of the COMPANY, and no Tax payment
has been made by the COMPANY which is in excess of that which is in good faith
determined to be due and owing at the time of such payment.
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(ii) The COMPANY is not and has not since January 1, 1995 been a
member of any affiliated, combined, consolidated, unitary or similar group.
(iii) The provisions for Taxes due by the COMPANY (as opposed to any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) in the COMPANY Financial Statements are sufficient for, and
adequate to cover, all unpaid Taxes.
(iv) The COMPANY is not a party to any current agreement extending
the time within which to file any Tax Return. No claim has ever been made by any
Taxing Authority in a jurisdiction in which the COMPANY does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction.
(v) The COMPANY has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
(vi) To the best of its knowledge, the COMPANY does not expect any
Taxing Authority to assess any additional Taxes against or in respect of it for
any past period. There is no dispute or claim concerning any Tax liability
either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to
the COMPANY. No issues have been raised in any examination by any Taxing
Authority with respect to the COMPANY which, by application of similar
principles, reasonably could be expected to result in a proposed deficiency for
any other period not so examined. Schedule 5.22 attached hereto lists all
federal, state, local and foreign income Tax Returns filed by or with respect to
the COMPANY for all taxable periods ended on or after December 31, 1994,
indicates those Tax Returns, if any, that have been audited, and indicates those
Tax Returns that currently are the subject of audit. The COMPANY has delivered
to HDS complete and correct copies of all federal, state, local and foreign
income Tax Returns filed by, and all Tax examination reports and statements of
deficiencies assessed against or agreed to by, the COMPANY since December 31,
1995.
(vii) The COMPANY has not waived any statute of limitations in respect
of Taxes or agreed to any extension of time with respect to any Tax assessment
or deficiency.
(viii) The COMPANY has not made any payments, is not obligated to make
any payments, and is not a party to any agreement that under certain
circumstances could require it to make any payments, that would not be
deductible by reason of the application of Section 280G of the Code.
(ix) The COMPANY is not a party to and has no ongoing liability under
any Tax allocation or sharing agreement.
(x) None of the assets of the COMPANY constitutes tax-exempt bond
financed property or tax-exempt use property, within the meaning of Section 168
of the
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Code. The COMPANY is not a party to any "safe harbor lease" that is subject to
the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect
prior to the Tax Reform Act of 1986, or to any "long-term contract" within the
meaning of Section 460 of the Code.
(xi) The COMPANY is not a party to any joint venture, partnership or
other arrangement that is treated as a partnership for federal income Tax
purposes.
(xii) There are no accounting method changes of the COMPANY that
could give rise to an adjustment under Section 481 of the Code for periods after
the Closing Date.
(xiii) The COMPANY has not received any written ruling of a Taxing
Authority related to Taxes or entered into any written and legally binding
agreement with a Taxing Authority relating to Taxes.
(xiv) The COMPANY has substantial authority for the treatment of, or
has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its
federal income Tax Returns, all positions taken on its relevant federal income
Tax Returns that could give rise to a substantial understatement of federal
income Tax within the meaning of Section 6662(d) of the Code.
(xv) The COMPANY does not have any liability for Taxes of any Person
other than the COMPANY (i) under Section 1.1502-6 of the Treasury regulations
(or any similar provision of state, local or foreign law), (ii) as a transferee
or successor, (iii) by contract or (iv) otherwise.
(xvi) No consent has been filed relating to the COMPANY pursuant to
Section 341(f) of the Code, nor has the COMPANY made any tax election that would
materially increase the amount of Taxes payable by the COMPANY, as compared to
the amount of Taxes that would be payable in the absence of such tax election,
in any Post-Closing Period (as defined in Section 10.6(d)).
(xvii) Intentionally omitted.
(xviii) There is no intercorporate indebtedness existing between HDS
and the COMPANY that was issued, acquired, or will be settled at a discount.
(xix) The COMPANY is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(xx) The fair market value of the assets of the COMPANY acquired by
HDS as a result of the Merger will equal or exceed the sum of the COMPANY's
liabilities assumed by HDS in the Merger, plus the amount of liabilities, if
any, to which the transferred assets of the COMPANY are subject (but, in the
case of liabilities to
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which such assets are subject, only to the extent such liabilities are not
included in the COMPANY's liabilities).
(xxi) The liabilities of the COMPANY assumed by HDS and the
liabilities to which the transferred assets of the COMPANY are subject were
incurred by the COMPANY in the ordinary course of its business.
(xxii) The COMPANY is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
(xxiii) To the knowledge of the COMPANY, none of the compensation
received by any STOCKHOLDER-employees of the COMPANY will be separate
consideration for, or allocable to, any of their shares of the COMPANY; none of
the shares of HDS Stock received by any STOCKHOLDER-employees in the Merger will
be separate consideration for, or allocable to, any employment agreement; and
the compensation paid to any STOCKHOLDER-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
(xxiv) To the knowledge of the COMPANY, the fair market value of the
HDS Stock and other consideration to be received by each STOCKHOLDER pursuant to
the Merger, will be approximately equal to the fair market value of the COMPANY
Stock surrendered in the Merger.
(xxv) The fair market value of the sum of (i) all dividends paid and
distributions made on or after January 1, 1998 and through the Closing Date in
respect of COMPANY Stock and (ii) all consideration paid by the COMPANY on or
after January 1, 1998 and through the Closing Date in connection with all direct
and indirect redemptions, purchases and other acquisitions of COMPANY Stock is
no greater than $45,000.
Certain of the defined terms used in this Section 5.22 have the meaning
ascribed to them in Section 10.
5.23 No Violations. Except as set forth in Schedule 5.23, neither the
-------------
COMPANY nor, to the knowledge of the COMPANY, any other party thereto is (i) in
violation of any Charter Document or (ii) in default under any Material Lease or
Material Contract; and, except as set forth in the schedules and documents
attached to this Agreement, (a) the transactions contemplated hereby will not
have a Material Adverse Effect on the rights and benefits of the COMPANY under
the Material Leases and Material Contracts, either singly or in the aggregate,
and (b) except as set forth on Schedule 5.23, the execution of this Agreement
and the performance of the obligations hereunder and the consummation of the
transactions contemplated hereby will not result in any violation or breach or
constitute a default under any of the terms or provisions of the Charter
Documents, Material Leases, Material Contracts, any judgment, decree, order or
award of any court, governmental body or arbitrator, or any law, rule or
regulation applicable to COMPANY.
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<PAGE>
Except as set forth in Schedule 5.23, none of the Material Leases or Material
Contracts requires notice to, or the consent or approval of, any third party
with respect to any of the transactions contemplated hereby in order to remain
in full force and effect, nor does this Agreement or any of the transactions
contemplated hereby give rise to any right to termination, cancellation or
acceleration or loss of any right or benefit under any Material Lease or
Material Contract.
5.24 Government Contracts. Except as set forth on Schedule 5.24, the
--------------------
COMPANY is not now a party to any governmental contracts subject to price
redetermination or renegotiation.
5.25 Absence of Changes. Since December 31, 1998, except as set forth on
------------------
Schedule 5.25, there has not been with respect to the COMPANY:
(i) any event or circumstance (either singly or in the aggregate)which
would constitute a Material Adverse Effect;
(ii) any change in its authorized capital, or securities outstanding, or
ownership interests or any grant of any options, warrants, calls, conversion
rights or commitments;
(iii) any declaration or payment of any dividend or distribution in
respect of its capital stock or any direct or indirect redemption, purchase or
other acquisition of any of its capital stock;
(iv) any increase of more than five percent (5%) in the compensation,
bonus, sales commissions or fee arrangement payable or to become payable by it
to any of its respective officers, directors, stockholders, employees,
consultants or agents, except for ordinary and customary bonuses and salary
increases for employees (other than the STOCKHOLDERS) in accordance with past
practice;
(v) any work interruptions, labor grievances or claims filed, or any
similar event or condition of any character that would have a Material Adverse
Effect;
(vi) any distribution, sale or transfer, or any agreement to sell or
transfer any material assets, property or rights of its business to any person,
including, without limitation, the STOCKHOLDERS and their affiliates, other than
distributions, sales or transfers in the ordinary course of business to persons
other than the STOCKHOLDERS and their affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness or other
obligation owing to it, including without limitation any indebtedness or
obligation of any STOCKHOLDERS or any affiliate thereof, provided that it may
--------
negotiate and adjust bills in the course of good faith disputes with customers
in a manner consistent with past practice, provided, further, that such
-------- -------
adjustments shall not be deemed to be included in Schedule 5.11 unless
specifically listed thereon;
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<PAGE>
(viii) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property or
rights or requiring consent of any party to the transfer and assignment of any
such assets, property or rights;
(ix) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire any property, rights or assets outside of the
ordinary course of business;
(x) any waiver of any of its material rights or claims;
(xi) any transaction by it outside the ordinary course of its
business; or
(xii) any cancellation or termination of a Material Contract.
5.26 Deposit Accounts; Powers of Attorney. The COMPANY has delivered to HDS
------------------------------------
an accurate schedule (Schedule 5.26) as of the date of the Agreement, of:
(i) the name of each financial institution in which the COMPANY has
accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have access
thereto.
Schedule 5.26 also sets forth the name of each person, corporation,
firm or other entity holding a general or special power of attorney from the
COMPANY and a description of the terms of such power.
5.27 Relations with Governments. The COMPANY has not made, offered or
--------------------------
agreed to offer anything of value to any governmental official, political party
or candidate for government office which would cause the COMPANY to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended, or any law
of similar effect.
(B) Representations and Warranties of STOCKHOLDERS. Each STOCKHOLDER
----------------------------------------------
severally represents and warrants that the representations and warranties set
forth in this Section 5(B) are true as of the date of this Agreement and,
subject to Section 7.9 hereof, shall be true at the time of Pre-Closing and on
the Closing Date, and that such representations and warranties survive the
Closing Date until the Expiration Date.
5.28 Authority; Validity; Ownership. Such STOCKHOLDER has the full legal
------------------------------
right, power and authority to enter into this Agreement and any other agreements
contemplated by this Agreement to which such STOCKHOLDER is or is contemplated
to be a party. Assuming due authorization, execution and delivery by HDS, this
Agreement
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<PAGE>
and any other agreements contemplated by this Agreement to which such
STOCKHOLDER is or is contemplated to be a party are or will be legal, valid and
binding obligations of each STOCKHOLDER, enforceable in accordance with their
respective terms, except as may be limited by applicable bankruptcy, insolvency,
or similar laws affecting creditors' rights generally. Such STOCKHOLDER owns
beneficially and of record all of the shares of the COMPANY Stock identified on
Annex II as being owned by such STOCKHOLDER, and, except as set forth on
Schedule 5.28 hereto, such COMPANY Stock is owned free and clear of all liens,
encumbrances and claims of every kind.
5.29 Preemptive Rights. Such STOCKHOLDER does not have, or hereby waives,
-----------------
any preemptive or other right to acquire shares of COMPANY Stock or HDS Stock
that such STOCKHOLDER has or may have had, other than rights of any STOCKHOLDER
to acquire HDS Stock pursuant to (i) the transactions contemplated by this
Agreement or (ii) any option granted by HDS.
5.30 No HDS Intention to Reacquire Stock. To the best of such STOCKHOLDER's
-----------------------------------
knowledge, there is no plan or intention by HDS or any HDS affiliate to purchase
or reacquire any of the HDS Stock issued in connection with the Merger.
6. REPRESENTATIONS OF HDS.
HDS represents and warrants that (i) all of the following
representations and warranties are true at the date of this Agreement and shall
be true at the time of Pre-Closing and the Closing Date and that such
representations and warranties shall survive the Closing Date until the
Expiration Date and (ii) solely for purposes of Section 11.2(iv) hereof, and
solely to the extent that in connection with the IPO the STOCKHOLDERS actually
incur liability under the 1933 Act, the 1934 Act, or any other federal or state
securities laws, the representations and warranties set forth herein shall
survive until the expiration of any applicable limitations period.
6.1 Due Organization. HDS and each of the subsidiaries of HDS ("HDS's
----------------
Subsidiaries") set forth in Schedule 6.7 is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and is duly authorized and qualified under all applicable laws, regulations,
ordinances and orders of public authorities to carry on its business in the
places and in the manner as now conducted except for where the cumulative effect
of all failures to be so authorized or qualified would not have a material
adverse effect on the business, operations, affairs, properties, assets or
condition (financial or otherwise), of HDS and HDS's Subsidiaries, taken as a
whole (an "HDS Material Adverse Effect"). True, complete and correct copies of
the Certificate of Incorporation and the Bylaws, each as amended, of HDS and
HDS's Subsidiaries (collectively, the "HDS Charter Documents"), certified by the
Secretary or an Assistant Secretary of HDS, are attached hereto as Annex IV. A
true, complete and correct copy of the Certificate of Incorporation, each as
amended, of HDS and each of
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<PAGE>
HDS's Subsidiaries, certified by the Secretary of State of the State of
Delaware, shall be delivered at the Pre-Closing.
6.2 HDS Stock. The HDS Stock to be delivered to the STOCKHOLDERS on the
---------
Closing Date shall constitute valid and legally issued shares of HDS, fully paid
and nonassessable, and except as set forth in this Agreement, will be owned free
and clear of all liens, security interests, pledges, charges, voting trusts,
restrictions, encumbrances and claims of every kind created or incurred by HDS,
and will be legally equivalent in all respects to the HDS Stock issued and
outstanding as of the date hereof. The shares of HDS Stock to be issued to the
STOCKHOLDERS pursuant to this Agreement will not be registered under the 1933
Act.
6.3 Authority and Validity. The representatives of HDS executing this
----------------------
Agreement and any other agreements contemplated by this Agreement have the
corporate authority to enter into and bind HDS to the terms of this Agreement
and any other agreements contemplated by this Agreement to which HDS is or is
contemplated to be a party. HDS has the full legal right, power and authority
to enter into this Agreement, any other agreements contemplated by this
Agreement to which HDS is or is contemplated to be a party, and the Merger. All
corporate action necessary for the authorization, execution, delivery and
performance by HDS of this Agreement, and also any other agreements contemplated
by this Agreement to which HDS is contemplated to be a party, has been taken.
Assuming due authorization, execution and delivery by the COMPANY and the
STOCKHOLDERS, as applicable, this Agreement and any other agreements
contemplated by this Agreement to which HDS is or is contemplated to be a party
are or will be legal, valid and binding obligations of HDS, enforceable against
HDS in accordance with their respective terms, except as may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally.
6.4 Capital Stock of HDS. Immediately prior to the Closing, the authorized
--------------------
capital stock of HDS will be as set forth in Schedule 6.4. All of the issued
and outstanding shares of HDS are owned beneficially and of record by the
persons set forth on Annex III. All issued and outstanding shares of HDS stock
are duly authorized, validly issued, fully paid and nonassessable. There are no
obligations of HDS to repurchase, redeem or otherwise acquire any shares of HDS
stock. Except as described in the Registration Statement, there are no options,
warrants, equity securities, calls, rights, commitments or agreements of any
character to which HDS or any of its subsidiaries are a party or by which they
are bound obligating HDS or any of its subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
HDS or any of its subsidiaries or obligating HDS or any of its subsidiaries to
grant, extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement. To the knowledge of HDS,
as of the Closing Date, none of the STOCKHOLDERS set forth on Annex III will be
a party to or subject to any voting trust, proxy or other agreement or
understanding with respect to the shares of capital stock of HDS owned by such
STOCKHOLDER. All of the
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<PAGE>
shares of HDS Stock to be issued to the STOCKHOLDERS in accordance herewith will
be duly authorized, validly issued, fully paid and nonassessable. All of the
shares of HDS Stock issued to persons set forth on Annex III and, based on the
representations of STOCKHOLDERS contained in this Agreement and in the documents
delivered to HDS pursuant hereto, to STOCKHOLDERS pursuant to this Agreement,
were or will be offered, issued, sold and delivered by HDS in compliance with
all applicable state and federal laws concerning the issuance of securities and
none of such shares were or will be issued in violation of the preemptive rights
of any past or present stockholder. On the Closing Date the capitalization of
HDS will be as set forth in the Registration Statement.
6.5 No Side Agreements. Except as set forth in Schedule 6.5, HDS has not
------------------
entered into any material agreement with any of the Founding Companies or any of
the stockholders of the Founding Companies other than the Other Agreements and
the agreements contemplated by each of the Other Agreements, including the
employment agreements referred to therein. HDS has made available to the
COMPANY copies of all material agreements entered into between (i) HDS and its
affiliates and (ii) HDS and the Founding Companies or any stockholders of the
Founding Companies. Further, HDS will make available to the COMPANY copies of
any of the foregoing agreements entered into between the date hereof and the
Closing Date promptly after such agreements are entered into.
6.6 Subsidiaries. Except for those companies set forth on Schedule 6.6, HDS
------------
does not presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity. HDS
is not, directly or indirectly, a participant in any joint venture, partnership
or other non-corporate entity.
6.7 Business; Financial Information. HDS has not conducted any business
-------------------------------
since the date of its inception, except in connection with this Agreement, the
Other Agreements and the contemplated IPO of HDS Stock. HDS was formed in 1998,
and has historical financial statements only for the partial year ended December
31, 1998. Attached hereto as Schedule 6.7 are HDS's financial statements for
such partial year. Such HDS financial statements have been prepared in
accordance with generally accepted accounting principles and present fairly the
financial position of HDS as of the dates indicated thereon, and such financial
statements present fairly the results of HDS's operations for the periods
indicated thereon. HDS has no material liabilities, accrued or contingent, other
than those incurred in connection with this Agreement, the Other Agreements and
the agreements contemplated thereby, the agreements to be filed as exhibits to
the Registration Statement, and the contemplated IPO of HDS Stock.
6.8 Conformity with Law. HDS (including HDS's Subsidiaries) is not in
-------------------
violation of any law or regulation or any order of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them which (either singly or
in the aggregate) would have an HDS Material Adverse Effect. There are no
claims, actions, suits or proceedings, pending or, to the knowledge of HDS
(including HDS's Subsidiaries), threatened, against or affecting HDS (including
HDS's Subsidiaries), at law or in equity, or before or by any
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<PAGE>
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality having jurisdiction over any of them and no
notice of any claim, action, suit or proceeding, whether pending or threatened,
has been received by HDS or any of HDS's Subsidiaries. HDS (including HDS's
Subsidiaries) has conducted and is conducting its business in compliance with
the requirements, standards, criteria and conditions set forth in applicable
Federal, state and local statutes, ordinances, orders, approvals, variances,
rules and regulations and is not in violation of any of the foregoing which
would have an HDS Material Adverse Effect.
6.9 No Violations. HDS (including HDS's Subsidiaries) is not (i) in
-------------
violation of any HDS Charter Document or (ii) in default under any material
lease, instrument, agreement, license, or permit to which it is a party or by
which its properties are bound (the "HDS Material Documents"); and, except as
set forth in the Registration Statement, (a) the rights and benefits of HDS
(including HDS's Subsidiaries) under the HDS Material Documents will not be
materially and adversely affected by the transactions contemplated hereby and
(b) the execution of this Agreement and the performance of the obligations
hereunder and the consummation of the transactions contemplated hereby will not
result in any violation or breach or constitute a default under any of the terms
or provisions of the HDS Material Documents, the HDS Charter Documents, any
judgment, decree, order or award of any court, governmental body or arbitrator,
or any law, rule or regulation applicable to HDS or any of HDS's Subsidiaries.
Except as set forth in Schedule 6.9, none of the HDS Material Documents requires
notice to, or the consent or approval of, any third party with respect to any of
the transactions contemplated hereby in order to remain in full force and
effect, nor does this Agreement or any of the transactions contemplated hereby
give rise to any right to termination, cancellation or acceleration or loss of
any right or benefit. The minute books of HDS and each of HDS's subsidiaries as
heretofore made available to the COMPANY are true and correct.
6.10 Taxes.
-----
(i) HDS has no plan or intention for either it or any affiliated
party to purchase or reacquire any of the HDS stock issued in connection with
the Merger.
(ii) HDS and, to the knowledge of HDS, the STOCKHOLDERS and the
COMPANY will each pay their respective expenses, if any, incurred in connection
with the Merger.
(iii) There is no intercorporate indebtedness existing between HDS and
the COMPANY that was issued, acquired, or will be settled at a discount.
(iv) HDS is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(v) HDS presently intends after the Closing Date to continue the
historic business of the COMPANY or to use a significant portion of the
COMPANY's historic business assets in operations.
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<PAGE>
(vi) HDS has no plan or intention to sell or otherwise dispose of any
of the assets of the COMPANY acquired in the transaction, except for
dispositions made in the ordinary course of business or transfers described in
Section 368(a)(2)(C) of the Internal Revenue Code.
(vii) To the knowledge of HDS, none of the compensation received by
any STOCKHOLDER-employees of the COMPANY after the Merger will be separate
consideration for, or allocable to, any of their shares of the COMPANY; none of
the shares of HDS Stock received by any STOCKHOLDER-employees in the Merger will
be separate consideration for, or allocable to, any employment agreement; and
the compensation paid to any STOCKHOLDER-employees after the Merger pursuant to
arrangements entered into after the Merger will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
(viii) The proposed Merger is being undertaken for reasons germane to
the business of HDS.
(ix) To the knowledge of HDS, the fair market value of HDS Stock and
other consideration received by each STOCKHOLDER will be approximately equal to
the fair market value of COMPANY Stock surrendered in the exchange.
7. COVENANTS PRIOR TO CLOSING.
7.1 Access and Cooperation; Due Diligence.
-------------------------------------
(i) Between the date of this Agreement and the Closing Date, the
COMPANY will afford to the officers and authorized representatives of HDS access
to all of the COMPANY's key employees, sites, properties, books and records and
will furnish HDS with such additional financial and operating data and other
information as to the business and properties of the COMPANY as HDS may from
time to time reasonably request. The COMPANY will cooperate with HDS, its
representatives, auditors and counsel in the preparation of any documents or
other material which may be required by this Agreement. The COMPANY shall
provide reasonable access to the COMPANY's key employees, books, records and
other financial data to all Other Companies and their representatives, auditors
and counsel; provided that, the COMPANY will not be required to disclose
-------- ----
competitively-sensitive information to such Other Companies. HDS, the
STOCKHOLDERS and the COMPANY will treat all information obtained in connection
with the negotiation and performance of this Agreement or the due diligence
investigations conducted with respect to the Other Companies as confidential in
accordance with the provisions of Section 14 hereof and will not use such
information for any purpose other than for the evaluation of the transactions
contemplated by this Agreement. In addition, HDS will cause each of the Other
Companies to enter into a provision similar to this Section 7.1 requiring each
such Other Company to keep confidential any information obtained by such Other
Company and to not use such information for any purpose other than for the
evaluation of the transactions
-26-
<PAGE>
contemplated by the applicable Other Agreement. All Other Companies shall be
third-party beneficiaries with respect to the covenant of the COMPANY and the
STOCKHOLDERS restricting the use of information received by the COMPANY and such
STOCKHOLDERS, and the COMPANY shall be a third-party beneficiary with respect to
the covenant of the Other Companies restricting the use of COMPANY information
received by such Other Companies.
(ii) Between the date of this Agreement and the Closing Date, HDS
will afford to the officers and authorized representatives of the COMPANY access
to all of HDS's (including HDS's Subsidiaries') sites, properties, books and
records and will furnish the COMPANY with such additional financial and
operating data and other information as to the business and properties of HDS
(including HDS's Subsidiaries) as the COMPANY may from time to time reasonably
request. HDS will cooperate with the COMPANY, its representatives, engineers,
auditors and counsel in the preparation of any documents or other material which
may be required by this Agreement. The COMPANY will cause all information
obtained in connection with the negotiation and performance of this Agreement to
be treated as confidential in accordance with the provisions of Section 14
hereof.
7.2 Conduct of Business Pending Closing. Between the date of this
-----------------------------------
Agreement and the Closing Date, the COMPANY will, except as set forth in
Schedule 7.2:
(i) carry on its business in substantially the same manner as
it has heretofore, maintain inventory at levels substantially equivalent to
those maintained during the 12 months ended December 31, 1998, and not introduce
any material new method of management, operation or accounting;
(ii) maintain its properties, facilities, equipment and other
assets, including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(iii) perform all of its material obligations under agreements to
which it is a party relating to or affecting its assets, properties or rights;
(iv) subject to Section 7.6, keep in full force and effect
present insurance policies or other comparable insurance coverage;
(v) use best efforts to maintain and preserve its business
organization intact, retain its present employees and maintain its relationships
with suppliers, customers and others having business relations with it;
(vi) maintain compliance with all permits, laws, rules and
regulations, consent orders, and all other orders of applicable courts,
regulatory agencies and similar governmental authorities applicable to the
COMPANY; and
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<PAGE>
(vii) maintain compliance with all present debt and lease
instruments and not enter into new or amended debt or lease instruments
involving payments by the COMPANY over $50,000 (individually or in the
aggregate), without the knowledge and consent of HDS (which consent shall not be
unreasonably withheld).
7.3 Prohibited Activities. Except as disclosed in Schedule 7.3,
---------------------
between the date of this Agreement and the Closing Date, the COMPANY has not
and, without the prior written consent of HDS, will not:
(i) make any change in its Articles of Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed on Schedule 5.4;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase, redeem
or otherwise acquire or retire for value any shares of its stock;
(iv) enter into any contract (including any contract to provide
services to customers) or commitment or incur or agree to incur any liability or
make any capital expenditures, except if (x) it is in the ordinary course of
business (consistent with past practice) or (y) when aggregated with all other
such contracts, commitments, liabilities and capital expenditures not in the
normal course of business consistent with past practice, it involves an amount
not in excess of $25,000;
(v) increase the compensation payable or to become payable to
any officer, director, STOCKHOLDER, employee or agent, or make any bonus or
management fee payment to any such person, except (x) bonuses to employees
(other than the STOCKHOLDERS or their affiliates) consistent with past practice
and (y) increases in salaries and commission rates payable to employees (other
than to STOCKHOLDERS and their affiliates), provided that neither the salary nor
any commission rate payable to any employee may increase to more than one
hundred five percent (105%) of such employee's current salary or such commission
rate, whichever is applicable;
(vi) create, assume or permit to exist any mortgage, pledge or
other lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired, except (1) with respect to purchase money liens incurred in
connection with the acquisition of equipment with an aggregate cost not in
excess of $10,000 necessary or desirable for the conduct of the business of the
COMPANY, or (2) liens set forth on Schedule 5.14 hereto or (3) liens for taxes
either not yet due or materialmen's, mechanics', workers', repairmen's,
employees' or other like liens arising in the ordinary course of business;
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<PAGE>
(vii) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the ordinary course of business;
(viii) negotiate for the acquisition of any business or the start-
up of any new business;
(ix) merge or consolidate or agree to merge or consolidate with
or into any other corporation;
(x) waive any material rights or claims of the COMPANY, provided
--------
that the COMPANY may negotiate and adjust bills in the course of good faith
disputes with customers in a manner consistent with past practice, provided,
--------
further, that such adjustments shall not be deemed to be included in Schedule
- -------
5.11 unless specifically listed thereon;
(xi) commit a material breach or amend or terminate any Material
Contract, or material permit, license or other right of the COMPANY, or make or
terminate any election involving Taxes which would in any way adversely affect
the Tax liability of the COMPANY (or HDS following the Merger) in any taxable
period; or
(xii) enter into any other transaction outside the ordinary course
of its business or prohibited hereunder.
7.4 No Shop. None of the STOCKHOLDERS, the COMPANY or any agent,
-------
officer, director or any representative of any of the foregoing will, during the
period commencing on the date of this Agreement and ending with the earlier to
occur of the Closing Date or the termination of this Agreement in accordance
with its terms, directly or indirectly: (i) solicit or initiate, either directly
or indirectly, the submission of proposals or offers from any person for, (ii)
participate in any discussions pertaining to or (iii) furnish any information to
any person other than HDS or the Founding Companies relating to, any acquisition
or purchase of all or a material amount of the assets of, or any equity interest
in, the COMPANY or a merger, consolidation or business combination of the
COMPANY.
7.5 Notice to Bargaining Agents. Prior to the Closing Date, the
---------------------------
COMPANY shall satisfy any requirement for notice of the transactions
contemplated by this Agreement under applicable collective bargaining
agreements, and shall provide HDS with proof that any required notice has been
sent.
7.6 Termination of Plans. Prior to the Pricing Date, the COMPANY
--------------------
shall terminate all Plans listed on Schedule 7.6.
7.7 HDS Prohibited Activities. Between the date of this Agreement and
-------------------------
the Closing Date, except as set forth on Schedule 7.7, HDS will not:
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(i) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind;
(ii) make any changes in its Certificate of Incorporation or
Bylaws other than one or more amendments to the Certificate of Incorporation to
accomplish a split or reverse split of the HDS Stock (provided that in the event
of any such split or reverse split, the number of shares of HDS Stock to be
delivered to the STOCKHOLDERS, and to the stockholders of the Other Companies,
and the Minimum IPO Price, as set forth on Annex I, will be adjusted
accordingly) or to increase the authorized Capital Stock of HDS to an amount not
to exceed 40 million shares of common stock and 5 million shares of preferred
stock;
(iii) hire or appoint any officer or director or increase the
compensation payable or to become payable to any officer or director; or
(iv) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in or substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to HDS and the HDS Subsidiaries.
7.8 Notification of Certain Matters. The STOCKHOLDERS and the COMPANY
-------------------------------
shall give prompt notice to HDS of (i) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would be likely to cause any
representation or warranty of the COMPANY or the STOCKHOLDERS contained herein
to be untrue or inaccurate in any material respect at or prior to the Closing
and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by such person hereunder. HDS shall give prompt notice to the COMPANY of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty of HDS contained
herein to be untrue or inaccurate in any material respect at or prior to the
Closing and (ii) any material failure of HDS to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. The delivery of any notice pursuant to this Section 7.8 shall not be
deemed to (i) modify the representations or warranties hereunder of the party
delivering such notice, which modification may only be made pursuant to Section
7.9, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
7.9 Amendment of Schedules. Each party hereto agrees that, with
----------------------
respect to the representations and warranties of such party contained in this
Agreement, such party shall have the continuing obligation until the Pre-Closing
to supplement or amend promptly the Schedules hereto with respect to any matter
hereafter arising or discovered which, if existing or known at the date of this
Agreement, would have been required to be set forth or described in the
Schedules, provided however, that supplements and amendments to Schedules 5.10,
-------- -------
5.11 and 5.14 shall only have to be delivered at the Pre-Closing Date,
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unless such Schedule is to be amended to reflect an event occurring other than
in the ordinary course of business. In the event that the COMPANY amends or
supplements a Schedule pursuant to this Section 7.9 in any material respect, and
HDS does not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement at or before the Pre-Closing, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof. In the event that HDS amends or supplements a Schedule pursuant
to this Section 7.9 in any material respect and a majority of the Founding
Companies do not consent (which consent shall not be unreasonably withheld) to
the effectiveness of such amendment or supplement at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For all purposes of this Agreement, including without
limitation for purposes of determining whether the conditions set forth in
Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed
to be the Schedules as amended or supplemented pursuant to this Section 7.9. In
the event that one of the Other Companies amends or supplements a Schedule
pursuant to Section 7.9 of one of the Other Agreements in any material respect,
HDS shall give the COMPANY notice promptly after it has knowledge thereof. If
HDS and a majority of the Founding Companies, excluding such Other Company, do
not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement, at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For purposes of this Section 7.9, HDS shall be deemed to
have given its consent to the effectiveness of any amendment or supplement to a
Schedule if HDS does not notify the COMPANY of its disapproval within 48 hours
after HDS is notified of such amendment or supplement, and the COMPANY and each
Other Company shall be deemed to have given its consent to the effectiveness of
any amendment or supplement to a Schedule if the COMPANY or such Other Company,
as applicable, does not notify HDS of its disapproval within 48 hours after the
COMPANY or such Other Company, as applicable, is notified of such amendment or
supplement. Except as otherwise provided herein, no amendment of or supplement
to a Schedule shall be made after the Pre-Closing.
7.10 Cooperation in Preparation of Registration Statement. The COMPANY
----------------------------------------------------
and STOCKHOLDERS shall furnish or cause to be furnished to HDS and the
Underwriters all of the information concerning the COMPANY or the STOCKHOLDERS
reasonably requested by HDS and the Underwriters, and will cooperate with HDS
and the Underwriters in the preparation of the Registration Statement and the
prospectus included therein (including audited financial statements prepared in
accordance with generally accepted accounting principles). The COMPANY and the
STOCKHOLDERS agree promptly to advise HDS if at any time during the period in
which a prospectus relating to the offering is required to be delivered under
the 1933 Act, any information contained in the prospectus concerning the COMPANY
or the STOCKHOLDERS becomes incorrect or incomplete in any material respect, and
to provide the information needed to correct such inaccuracy.
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<PAGE>
7.11 Examination of Final Financial Statements. To the extent that
-----------------------------------------
financial statements of the COMPANY for any quarter subsequent to the Balance
Sheet Date are required to be included in the Registration Statement, the
COMPANY shall provide, and HDS shall have had sufficient time to review, balance
sheets and statements of income, cash flows and retained earnings of the COMPANY
as of the end of such quarter, disclosing no material adverse change in the
financial condition or results of operations of the COMPANY. Such financial
statements, which shall be deemed to be Financial Statements (as described in
Section 5.9), shall have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated (except as noted therein). To the extent such Financial Statements
shall be included or reflected in the Registration Statement, any events or
circumstances reflected therein which might constitute a Material Adverse Effect
with respect to the COMPANY shall be deemed to have been waived by HDS and HDS
shall have no rights in respect of such Material Adverse Effect.
7.12 Maintenance of Liquidity and Limitation of Debt. The COMPANY
-----------------------------------------------
agrees that, as of the Closing Date, the COMPANY will have (i) adjusted working
capital (defined for purposes of this Agreement as cash plus receivables net of
receivables reserves less short-term liabilities, (other than short-term
liabilities consisting of interest-bearing debt) excluding the short-term
portion of long-term debt) of at least $100,000 and (ii) adjusted long-term
liabilities (defined for this purpose as long-term liabilities plus the short-
term portion of long-term debt) not exceeding $136,000. As used in the preceding
sentence, the terms "cash," "receivables," "receivables reserves," "short-term
liabilities," "short-term portion of long-term debt," "long-term liabilities"
and "short-term portion of long-term debt" all will have the same meaning as in
generally accepted accounting principles, as applied in the preparation of the
COMPANY Financial Statements, provided that "short-term liabilities" shall
include, but are not limited to, any outstanding Tax liabilities of the COMPANY
owing to any Taxing Authority listed on Schedule 7.12 which are not yet paid as
of the Closing Date in respect of the short taxable period commencing July 1,
1998 and ending on the Closing Date. Notwithstanding the foregoing, such Taxes
for such period shall not be included in short term liabilities to the extent
that inclusion would cause adjusted working capital to be less than $100,000.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.
The obligations of STOCKHOLDERS and the COMPANY with respect to actions
to be taken on the Pricing Date are subject to the satisfaction or waiver on or
prior to the Pricing Date of all of the following conditions. The obligations
of the STOCKHOLDERS and the COMPANY with respect to actions to be taken on the
Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of the conditions set forth in Sections 8.1, 8.7 and 8.11.
8.1 Representations and Warranties; Performance of Obligations. All
----------------------------------------------------------
representations and warranties of HDS contained in Section 6 shall be true and
correct in all material respects as of the Pricing Date and the Closing Date
with the same effect as
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though such representations and warranties had been made as of that date; each
and all of the terms, covenants and conditions of this Agreement to be complied
with and performed by HDS on or before the Pricing Date and the Closing Date
shall have been duly complied with and performed in all material respects; and a
certificate to the foregoing effect dated the Pricing Date and the Closing Date
signed by the President or any Vice President of HDS and certified by the
Secretary or Assistant Secretary of HDS shall have been delivered to the
STOCKHOLDERS.
8.2 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be satisfactory to the COMPANY and its counsel. The
STOCKHOLDERS and the COMPANY shall be satisfied that the Registration Statement
and the prospectus forming a part thereof, including any amendments thereof or
supplement thereto, shall not contain any untrue statement of a material fact,
or omit to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that the
--------
condition contained in this sentence shall be deemed satisfied if (i) HDS shall
have made available to the COMPANY copies of the draft (or changed pages of such
draft) of the Registration Statement prior to the initial filing with the
Securities and Exchange Commission (the "SEC"), each amendment thereto prior to
the effectiveness thereof with the SEC and of any amendment or supplement
thereto after the effectiveness thereof (including any prospectus filed pursuant
to Rule 424 under the 1933 Act) and (ii) the COMPANY or STOCKHOLDERS shall have
failed to inform HDS in writing prior to the filing or the effectiveness
thereof, as the case may be, of the existence of an untrue statement of a
material fact or the omission of such a statement of a material fact or other
matter with which they are not satisfied; provided however, that for the period
-------- -------
commencing 72 hours prior to any such filing or effectiveness, HDS can make such
draft or changed pages available by facsimile.
8.3 No Litigation. No action or proceeding before a court or any
-------------
other governmental agency or body shall have been instituted or threatened to
restrain or prohibit the Merger or the offering and sale by HDS of HDS Stock
pursuant to the Registration Statement and no governmental agency or body shall
have taken any other action or made any request of the COMPANY as a result of
which the management of the COMPANY deems it inadvisable to proceed with the
transactions hereunder.
8.4 Stockholders' Release. Each stockholder of HDS immediately prior
---------------------
to the Closing Date who is an officer or director of HDS shall have delivered to
the COMPANY an instrument dated the Closing Date releasing HDS from any and all
claims of such stockholder against HDS and obligations of HDS to such
stockholder other than obligations arising in connection with this Agreement,
the Other Agreements, any employment agreements between such stockholder and
HDS, any options to purchase HDS Stock granted by HDS to such stockholder and
any right to the issuance of the shares of HDS Stock set forth in Annex III
hereto.
8.5 Opinion of Counsel. The COMPANY shall have received an opinion
------------------
from counsel for HDS, dated the Closing Date, in the form annexed hereto as
Annex V.
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8.6 Director Indemnification. HDS shall have obtained directors and
------------------------
officers liability insurance from a reputable insurance company in type and
amount as is customary for companies similarly situated, and HDS shall have
entered into an indemnification agreement with each STOCKHOLDER, if any, who
will become a director of HDS, such indemnification agreement to be
substantially in the form attached as Annex VII.
8.7 Registration Statement. The Underwriters named in the
----------------------
Registration Statement shall have agreed to acquire on a firm commitment basis
such shares of HDS Stock, subject to the conditions set forth in an underwriting
agreement (the "Underwriting Agreement"), on terms such that the Effective IPO
Price (as defined in Annex I) is equal to or greater than the Minimum IPO Price
(as defined in Annex I).
8.8 Consents and Approvals. All necessary consents of and filings
----------------------
with any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made, no action or
proceeding shall have been instituted or threatened to restrain or prohibit the
Merger, and no governmental agency or body shall have taken any other action or
made any request of the COMPANY as a result of which the COMPANY deems it
inadvisable to proceed with the transactions hereunder.
8.9 Good Standing Certificates. HDS shall have delivered to the
--------------------------
COMPANY a certificate, dated as of a date no later than ten days prior to the
Pricing Date, duly issued by the Delaware Secretary of State and the Secretary
of State of each state in which HDS is authorized to do business, showing that
HDS is in good standing and authorized to do business and that all state
franchise and/or income tax returns and taxes for HDS, for all periods prior to
the Closing, have been filed and paid.
8.10 No Waivers. HDS shall not have waived any closing condition
----------
under any Other Agreement, unless such condition does not constitute a Material
Adverse Effect (as defined in such Other Agreement) on the Other Company party
to such Other Agreement.
8.11 No Material Adverse Change. No event or circumstance shall have
--------------------------
occurred which would constitute an HDS Material Adverse Effect; and the COMPANY
shall have received a certificate signed by HDS dated the Pricing Date and the
Closing Date to such effect.
8.12 Employment Agreements. Each of the persons listed on Schedule
---------------------
8.12 shall have entered into an employment agreement with HDS substantially in
the form of Annex VIII (each an "Employment Agreement").
8.13 Consulting Agreements. Each of the persons listed on Schedule
---------------------
8.13 shall have entered into a consulting agreement with HDS substantially in
the form of Annex IX (each a "Consulting Agreement").
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<PAGE>
8.14 Leases. Each of the STOCKHOLDERS listed on Schedule 8.14 shall
------
have entered into leases with HDS substantially in the form of Annex X
(collectively the "Leases").
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.
The obligations of HDS with respect to actions to be taken on the
Pricing Date are subject to the satisfaction or waiver on or prior to the
Pricing Date of all of the following conditions. The obligations of HDS with
respect to actions to be taken on the Closing Date are subject to the
satisfaction or waiver on or prior to the Closing Date of the conditions set
forth in Sections 9.1, 9.3, 9.4 and 9.11.
9.1 Representations and Warranties; Performance of Obligations. All the
----------------------------------------------------------
representations and warranties of the STOCKHOLDERS and the COMPANY contained in
this Agreement shall be true and correct in all material respects as of the
Pricing Date and the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date; each and
all of the terms, covenants and conditions of this Agreement to be complied with
or performed by the STOCKHOLDERS and the COMPANY on or before the Pricing Date
or the Closing Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the STOCKHOLDERS shall have
delivered to HDS a certificate dated the Pricing Date and the Closing Date
signed by them and certified by the Secretary or Assistant Secretary of the
COMPANY to such effect.
9.2 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock pursuant to
the Registration Statement, and no governmental agency or body shall have taken
any other action or made any request of HDS as a result of which the management
of HDS deems it inadvisable to proceed with the transactions hereunder.
9.3 Financial Statements. Prior to the Closing Date, HDS shall have had
--------------------
sufficient time to review consolidated balance sheets of the COMPANY for the
fiscal quarters beginning after December 31, 1998, and the unaudited
consolidated statement of income, cash flows and retained earnings of the
COMPANY for the fiscal quarters beginning after December 31, 1998, and the same
shall not disclose any material adverse change in the financial condition of the
COMPANY or the results of its operations from the COMPANY Financial Statements
as of the Balance Sheet Date.
9.4 No Material Adverse Effect. No event or circumstance shall have
--------------------------
occurred which would constitute a Material Adverse Effect; and HDS shall have
received a certificate signed by the STOCKHOLDERS dated the Pricing Date to such
effect.
9.5 STOCKHOLDERS' Release. The STOCKHOLDERS shall have delivered to HDS
---------------------
immediately prior to the Pricing Date an instrument substantially in the form of
Annex XI (each a "Stockholder Release") dated the Pricing Date releasing the
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<PAGE>
COMPANY from any and all claims of the STOCKHOLDERS against the COMPANY and
obligations of the COMPANY to the STOCKHOLDERS, except for (i) items
specifically identified in the Stockholder Release (ii) continuing obligations
to the STOCKHOLDERS relating to their employment by the Surviving Corporation
and (iii) indemnity and contribution obligations of the COMPANY or its
successors to an officer or director of the COMPANY prior to the Merger.
9.6 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to HDS.
9.7 Termination of Related Party Agreements. All existing agreements
---------------------------------------
between the COMPANY and the STOCKHOLDERS or business or personal affiliates of
the COMPANY or the STOCKHOLDERS, other than those set forth on Schedule 9.7,
shall have been cancelled.
9.8 Opinion of COMPANY Counsel. HDS shall have received an opinion from
--------------------------
counsel to the COMPANY and the STOCKHOLDERS, dated the Pricing Date,
substantially in the form annexed hereto as Annex VI, and the Underwriters shall
have received a copy of the same opinion addressed to them. Such counsel shall
have been approved by HDS, such approval not to be unreasonably withheld.
9.9 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; the COMPANY
shall have obtained and delivered to HDS such additional consents to the Merger
as HDS may reasonably request, including, without limitation, HDS's receipt on
or prior to the Pricing Date of (a) consents of third parties to those Material
Contracts and Material Leases listed on Schedule 5.23 pursuant to the last
sentence of Section 5.23 and (b) those licenses, franchises, permits or
governmental authorizations set forth on Schedule 5.12 pursuant to the last
sentence of Section 5.12, or assurances reasonably acceptable to it that such
consents, licenses, franchises, permits or governmental authorizations will be
received on the Closing Date or that the failure to receive such consents,
licenses, franchises, permits or governmental authorizations on the Closing Date
will not adversely affect its ability to conduct the business of the COMPANY as
conducted prior to the Closing Date; no action or proceeding shall have been
instituted or threatened to restrain or prohibit the Merger; and no governmental
agency or body shall have taken any other action or made any request of HDS as a
result of which HDS deems it inadvisable to proceed with the transactions
hereunder.
9.10 Good Standing Certificates. The COMPANY shall have delivered to HDS a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
Date, duly issued by the appropriate governmental authority in the COMPANY's
state of incorporation and in each state in which the COMPANY is authorized to
do business, showing the COMPANY is validly existing, and where applicable, in
good standing and authorized to
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<PAGE>
do business and that all state franchise and/or income tax returns and taxes due
by the COMPANY for all periods prior to the Pre-Closing have been filed and
paid.
9.11 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC.
9.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an Employment Agreement with HDS.
9.13 Consulting Agreements. Each of the STOCKHOLDERS listed on Schedule
---------------------
8.13 shall have entered into a Consulting Agreement with HDS.
9.14 Leases. Each of the persons listed in Schedule 8.14 shall have entered
------
into a Lease with HDS.
9.15 Repayment of Indebtedness. Prior to the Closing Date, the STOCKHOLDERS
-------------------------
shall have repaid the COMPANY in full all amounts owing by the STOCKHOLDERS to
the COMPANY.
9.16 FIRPTA Certificate. The COMPANY and each STOCKHOLDER shall have
------------------
delivered to HDS a certificate to the effect that the COMPANY or such
STOCKHOLDER, as applicable, is not a "foreign person" pursuant to Section
1.1445-2(b) of the Treasury regulations.
9.17 Insurance. HDS shall be designated as an additional named insured on
---------
all of the COMPANY's insurance policies.
9.18 Nondisturbance Agreements. Each of the lienholders and/or ground
-------------------------
lessors listed in Schedule 9.18 shall have entered into nondisturbance
agreements with HDS substantially in the form of Annex XII (collectively the
"Nondisturbance Agreements").
10. POST-CLOSING COVENANTS AND SPECIAL TAX MATTERS.
10.1 Preservation of Tax and Accounting Treatment. After the Closing Date,
--------------------------------------------
none of the parties shall knowingly undertake any act, or knowingly permit any
subsidiary or affiliate to undertake any act, that would jeopardize the status
of the Merger as a reorganization described in Section 368(a)(1)(A) of the Code.
Such prohibited acts shall include, but not be limited to, the following:
(i) the retirement or reacquisition, directly or indirectly, by HDS
of all or part of the HDS Stock issued in connection with the transactions
contemplated hereby;
(ii) the provision of any financial and/or economic benefits by HDS
to the STOCKHOLDERS in their capacity as such, except as expressly provided in
this Agreement;
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<PAGE>
(iii) the disposition of any material part of the assets of the
COMPANY within two years following the Closing Date except (x) in the ordinary
course of business, (y) to eliminate duplicate services or excess capacity or
(z) to address financial matters or performance issues which were not reasonably
expected to occur as of the Closing Date; or
(iv) in the absence of compelling financial concerns not otherwise
present on the Closing Date or other changed circumstances not otherwise
anticipated on the Closing Date, the discontinuance of the historic business of
the COMPANY.
10.2 Disclosure. If, subsequent to the Pricing Date and prior to the 25th
----------
day after the date of the final prospectus of HDS utilized in connection with
the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or
circumstance which would change (or, if after the Closing Date, would have
changed) a representation or warranty of COMPANY or STOCKHOLDERS in this
Agreement or would affect any document delivered pursuant hereto in any material
respect, the COMPANY and the STOCKHOLDERS shall promptly give notice of such
fact or circumstance to HDS.
10.3 Cooperation in Tax Return Preparation. Each party hereto shall at its
-------------------------------------
own expense cooperate with each other and make available to each other such Tax
data and other information as may be reasonably required in connection with (i)
the preparation or filing of any Tax Return, election, consent or certification,
or any claim for refund, (ii) any determinations of liability for Taxes, or
(iii) an audit, examination or other proceeding with respect to Taxes ("Tax
Data"). Such cooperation shall include, without limitation, making their
respective employees and independent auditors reasonably available on a mutually
convenient basis for all reasonable purposes, including, without limitation, to
provide explanations and background information and to permit the copying of
books, records, schedules, workpapers, notices, revenue agent reports,
settlement or closing agreements and other documents containing the Tax Data
("Tax Documentation"). The Tax Data and the Tax Documentation shall be retained
until one year after the expiration of all applicable statutes of limitations
(including extensions thereof); provided, however, that in the event an audit,
-------- -------
examination, investigation or other proceeding has been instituted prior to the
expiration of an applicable statute of limitations, the Tax Data and Tax
Documentation relating thereto shall be retained until there is a final
determination thereof (and the time for any appeal has expired).
10.4 Tax Return Preparation and Filing.
---------------------------------
(i) HDS will be responsible for preparing and filing (or causing the
preparation and filing of) all income Tax Returns with respect to HDS or the
COMPANY for any taxable period beginning after the Closing Date. The parties
hereto acknowledge that the Closing Date shall be the last day of a taxable
period of the COMPANY pursuant to Code Section 381 and the regulations
promulgated thereunder.
(ii) STOCKHOLDERS will be responsible for preparing and filing (or
causing the preparation and filing of) all income Tax Returns with respect to
the
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<PAGE>
COMPANY for any taxable period ending on or before the Closing Date. HDS and the
STOCKHOLDERS shall (a) with respect to such income Tax Returns, determine the
income, gain, expenses, losses, deductions, and credits of the COMPANY in a
manner consistent with prior practice and in a manner that apportions such
income, gain, expenses, loss, deductions and credits equitably from period to
period and (b) prepare such Tax Returns in a manner consistent with prior years,
in each case as determined in the good faith judgment of the preparer of such
returns; provided, however, that in all events such Tax Returns shall be
prepared in a manner consistent with applicable laws. HDS shall provide the cash
necessary to pay any Taxes shown to be due on such Tax Returns filed after the
Closing Date and imposed on the COMPANY by any Taxing Authority listed in
Schedule 7.12 with respect to the taxable period ending on the Closing Date, but
without prejudice to the right of HDS to seek indemnification for such taxes
from the STOCKHOLDERS under Section 11.6, if applicable.
(iii) In order to appropriately apportion any Taxes relating to a
taxable period that includes (but that would not, but for this section, close
on) the Closing Date, the parties hereto will, to the extent permitted by
applicable law, elect with the relevant taxing authority to treat for all
purposes the Closing Date as the last day of a taxable period of the COMPANY,
and such taxable period shall be treated as a Pre-Closing Period (as defined in
Section 10.6(c)) for purposes of this Agreement. In any case where applicable
law does not permit the COMPANY to treat the Closing Date as the last day of a
taxable period, then for purposes of this Agreement, the portion of each such
Tax that is attributable to the operations of the COMPANY for such Interim
Period shall be (i) in the case of a Tax that is not based on income or gross
receipts, the total amount of such Tax for the period in question multiplied by
a fraction, the numerator of which is the number of days in the Pre-Closing
Period portion of such Interim Period, and the denominator of which is the total
number of days in such Interim Period, and (ii) in the case of a Tax that is
based on income or gross receipts, the Tax that would be due with respect to the
Interim Period, if such Interim Period constituted an entire taxable period.
10.5 Reorganization Status Information Reporting. Each of the parties
-------------------------------------------
agrees to file whatever information returns may be required to treat the merger
of HDS and the COMPANY pursuant to this Agreement as a reorganization described
in Section 368(a)(1)(A) of the Code, and, in particular, to comply with the tax
reporting requirements of Section 1.368-3 of the Treasury Regulations.
10.6 Special Definitions Related to Tax Matters. For all purposes of this
------------------------------------------
Agreement related to any Tax matters (including Sections 5.22 and 6.10):
(a) "Affiliate" of a person or entity shall mean a person or entity
that directly or indirectly controls, is controlled by or is under common
control with that person or entity.
(b) "Interim Period" shall mean any taxable period commencing prior to
the Closing Date and ending after the Closing Date.
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<PAGE>
(c) "Pre-Closing Period" shall mean (i) any taxable period that begins
before the Closing Date and ends on or before the Closing Date and (ii) the
portion of any Interim Period through and including the Closing Date.
(d) "Post-Closing Period" means any taxable period that begins after
the Closing Date, and, with respect to any Interim Period, the portion of such
Interim Period commencing immediately after the Closing Date.
(e) "Tax" means any federal, state, local, or foreign income, gross
receipts, ad valorem, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Section 59A), customs duties, capital stock, net worth, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
workers compensation, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever imposed by any federal, state, local or foreign government
or any agency or political subdivision of any such government, including any
interest, penalty, or addition thereto, without regard to whether such tax is
disputed or not or arose before, on or after the Closing Date.
(f) "Tax Returns" means all reports, elections, declarations, claims
for refund, estimates, information statements and returns (including any
schedules and attachments thereto) relating to, or required to be filed in
connection with, any Taxes pursuant to the statutes, rules and regulations of
any federal, state, local or foreign government taxing authority.
(g) "Taxing Authority" means any governmental agency, board, bureau,
body, department or authority of any United States federal, state or local
jurisdiction, having or purporting to have jurisdiction with respect to any Tax.
10.7 Directors. The persons named in the Registration Statement shall be
---------
appointed as directors of HDS on or before the Closing Date.
10.8 Release from Guarantees. HDS shall use its best efforts to have the
-----------------------
STOCKHOLDERS released from any and all guarantees of any obligations of the
COMPANY that they personally guaranteed for the benefit of the COMPANY with all
such guarantees of indebtedness being assumed by HDS. HDS agrees to indemnify
the STOCKHOLDERS against any and all claims made by lenders under any such
guarantee which arise as a result of HDS's failure to cause such guarantee to be
released on or prior to the Closing.
10.9 HDS Stock Options. HDS shall prior to the Closing Date adopt an
-----------------
employee stock option plan providing for the grant of options to employees of
HDS as described in the Registration Statement. HDS shall grant stock options to
former employees of the COMPANY under such plan (i) having an exercise price
equal to the Effective IPO Price and (ii) having an aggregate exercise price
equal to $325,000. In granting options under such plan to former employees of
the COMPANY, the Board of Directors of HDS or the
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committee administering such plan, as the case may be, shall receive
recommendations from Michael Curtis and Daniel Curtis as to the employees to
receive such options and the relative size of the awards to the respective
employees, and to the extent deemed reasonable by the Board of Directors or
committee, such recommendations shall be accepted.
11. INDEMNIFICATION.
The STOCKHOLDERS and HDS each make the following covenants that are
applicable to them, respectively:
11.1 General Indemnification by the STOCKHOLDERS. The STOCKHOLDERS covenant
-------------------------------------------
and agree that they, jointly and severally (except with respect to Sections 5.28
through 5.30, which shall be several), will indemnify, defend, protect and hold
harmless HDS and the COMPANY, at all times from and after the date of this
Agreement until the Expiration Date as defined in Section 5 above, from and
against all claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without limitation,
reasonable attorneys' fees and expenses of investigation) incurred by HDS and
the COMPANY as a result of or arising from (i) any breach of the representations
and warranties of the STOCKHOLDERS or the COMPANY set forth herein or on the
schedules or certificates delivered in connection herewith (other than the
representations and warranties provided in Section 5.22, for which Section 11.6
provides special indemnity provisions); (ii) any nonfulfillment of any agreement
on the part of the STOCKHOLDERS or the COMPANY under this Agreement; (iii) any
liability not disclosed to HDS whether known, unknown, contingent or otherwise
at the time of Closing, arising out of any acts, events, omissions or
transactions occurring prior to the date of Closing; and (iv) any liability
under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at
common law or otherwise, (x) arising out of or based upon any untrue statement
of a material fact relating to the COMPANY or the STOCKHOLDERS that is provided
to HDS or its counsel by the COMPANY or the STOCKHOLDERS and contained in any
preliminary prospectus relating to the IPO, the Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or (y) arising out of or based upon any omission to state therein a
material fact relating to the COMPANY or the STOCKHOLDERS that is required to be
stated therein or necessary to make the statements therein not misleading, and
not provided to HDS or its counsel by the COMPANY or the STOCKHOLDERS; provided,
--------
however, that such indemnity shall not inure to the benefit of HDS, the COMPANY
- -------
or the Surviving Corporation to the extent that such untrue statement (or
alleged untrue statement) was made in, or omission (or alleged omission)
occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in
writing, corrected information to HDS counsel and to HDS for inclusion in the
final prospectus, and such information was not so included.
11.2 Indemnification by HDS. HDS covenants and agrees that it will
----------------------
indemnify, defend, protect and hold harmless the COMPANY and the STOCKHOLDERS,
at all times from and after the date of this Agreement until the Expiration
Date, from and
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against all claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without limitation,
reasonable attorneys' fees and expenses of investigation) incurred by the
COMPANY and the STOCKHOLDERS as a result of or arising from (i) any breach by
HDS of its representations and warranties set forth herein or on the schedules
or certificates attached hereto; (ii) any nonfulfillment of any agreement on the
part of HDS under this Agreement; (iii) any claim by any of the Other Companies
based on any nonfulfillment of any agreement on the part of HDS under any Other
Agreement; (iv) any liabilities which the COMPANY or the STOCKHOLDERS may incur
due to HDS's failure to be responsible for the liabilities and obligations of
the COMPANY as provided in Section 1 hereof (except to the extent that HDS has
claims against the STOCKHOLDERS by reason of such liabilities); or (v) any
liability under the 1933 Act, the 1934 Act or other Federal or state law or
regulation, at common law or otherwise, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact relating to HDS or any
of the Founding Companies other than the COMPANY (with respect to information
furnished to HDS by the COMPANY) contained in any preliminary prospectus, the
Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact relating to HDS or
any of the Founding Companies other than the COMPANY that is required to be
stated therein or necessary to make the statements therein not misleading.
11.3 Third Person Claims. (i) Promptly after any party hereto (herein the
-------------------
"Indemnified Party") has received notice of or has knowledge of any claim by a
person not a party to this Agreement ("Third Person"), or the commencement of
any action or proceeding by a Third Person (such claim or commencement of such
action or proceeding being a "Third Party Claim") that could give rise to a
right of indemnification under this Agreement, the Indemnified Party shall, as a
condition precedent to a claim with respect thereto being made against any party
obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof
(herein the "Indemnifying Party"), give the Indemnifying Party written notice of
such Third Party Claim describing in reasonable detail the nature of such Third
Party Claim, a copy of all papers served with respect to that Third Party Claim
(if any), an estimate of the amount of damages attributable to the Third Party
Claim to the extent feasible (which estimate shall not be conclusive of the
final amount of such claim) and the basis for the Indemnified Party's request
for indemnification under this Agreement; provided, however, that the failure of
-------- -------
the Indemnified Party to give timely notice hereunder shall relieve the
Indemnifying Party of its indemnification obligations under this Agreement to
the extent, but only to the extent that, such failure materially prejudices the
Indemnifying Party's ability to defend such claim. Within fifteen (15) days
after receipt of such notice (the "Election Period"), the Indemnifying Party
shall notify the Indemnified Party (a) whether the Indemnifying Party disputes
its potential liability to the Indemnified Party under this Section 11 with
respect to that Third Party Claim and (b) if the Indemnifying Party does not
dispute its potential liability to the Indemnified Party with respect to that
Third Party Claim, whether the
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Indemnifying Party desires, at the sole cost and expense of the Indemnifying
Party, to defend the Indemnified Party against that Third Party Claim.
(ii) If the Indemnifying Party does not dispute its potential liability
to the Indemnified Party and notifies the Indemnified Party within the Election
Period that the Indemnifying Party elects to assume the defense of the Third
Party Claim through counsel of its own choosing which is acceptable to the
Indemnified Party, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, that Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 11.3(ii) and the Indemnified
Party will furnish the Indemnifying Party with all information in its possession
with respect to that Third Party Claim and otherwise cooperate with the
Indemnifying Party in the defense of that Third Party Claim; provided, however,
-------- -------
that the Indemnifying Party shall not enter into any settlement with respect to
any Third Party Claim that purports to limit the activities of, or otherwise
restrict in any way, any Indemnified Party or any affiliate of any Indemnified
Party without the prior consent of that Indemnified Party (which consent may be
withheld in the sole discretion of that Indemnified Party). The Indemnified
Party is hereby authorized, at the sole cost and expense of the Indemnifying
Party, to file, during the Election Period, any motion, answer or other
pleadings that the Indemnified Party shall deem necessary or appropriate to
protect its interests or those of the Indemnifying Party. The Indemnified Party
may participate in, but not control, any defense or settlement of any Third
Party Claim controlled by the Indemnifying Party pursuant to this Section
11.3(ii) and will bear its own costs and expenses with respect to that
participation; provided, however, that if the named parties to any such
-------- -------
action (including any impleaded parties) include both the Indemnifying Party and
the Indemnified Party, and the Indemnified Party has been advised by counsel
that there may be one or more legal defenses available to it which are different
from or additional to those available to the Indemnifying Party, then the
Indemnified Party may employ separate counsel at the expense of the Indemnifying
Party, and, on its written notification of that employment, the Indemnifying
Party shall not have the right to assume or continue the defense of such action
on behalf of the Indemnified Party.
(iii) If the Indemnifying Party (a) within the Election Period (1)
disputes its potential liability to the Indemnified Party under this Section 11,
(2) elects not to defend the Indemnified Party pursuant to Section 11.3(ii) or
(3) fails to notify the Indemnified Party that the Indemnifying Party elects to
defend the Indemnified Party pursuant to Section 11.3(ii) or (b) elects to
defend the Indemnified Party pursuant to Section 11.3(ii) but fails diligently
and promptly to prosecute or settle the Third Party Claim, then the Indemnified
Party shall have the right to defend, at the sole cost and expense of the
Indemnifying Party (if the Indemnified Party is entitled to indemnification
hereunder), the Third Party Claim by all appropriate proceedings, which
proceedings shall be promptly and vigorously prosecuted by the Indemnified Party
to a final conclusion or settled. The Indemnified Party shall have full control
of such defense and proceedings. Notwithstanding the foregoing, if the
Indemnifying Party has delivered a
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written notice to the Indemnified Party to the effect that the Indemnifying
Party disputes its potential liability to the Indemnified Party under this
Section 11 and if such dispute is resolved in favor of the Indemnifying Party,
the Indemnifying Party shall not be required to bear the costs and expenses of
the Indemnified Party's defense pursuant to this Section 11.3 or of the
Indemnifying Party's participation therein at the Indemnified Party's request.
The Indemnifying Party may participate in, but not control, any defense or
settlement controlled by the Indemnified Party pursuant to this Section
11.3(iii), and the Indemnifying Party shall bear its own costs and expenses with
respect to such participation.
(iv) The parties hereto will make appropriate adjustments for any Tax
benefits, Tax detriments or insurance proceeds in determining the amount of any
indemnification obligation under this Section 11, provided that no Indemnifying
--------
Party shall be obligated to seek any payment pursuant to the terms of any
insurance policy. All indemnification payments under this Section 11 shall be
deemed adjustments to the Merger consideration provided for herein.
11.4 Exclusive Remedy. The indemnification provided for in this
----------------
Section 11 shall be the exclusive remedy in any action seeking damages or any
other form of monetary relief brought by any party to this Agreement against
another party, provided that nothing herein shall be construed to limit the
--------
right of a party, in a proper case, to seek injunctive relief for a breach of
this Agreement.
11.5 Limitations on Indemnification.
------------------------------
(i) The first amounts otherwise payable by one or more STOCKHOLDERS
(whether jointly and severally or severally) pursuant to Section 11.1 and 11.3
to HDS and the COMPANY will be offset and reduced (but not below zero) by the
Indemnification Threshold. The "Indemnification Threshold" is an amount equal to
one and one-half percent (1.5%) of the sum of (a) the aggregate amount of Cash
Consideration (as defined in Annex I) for all STOCKHOLDERS and (b) the aggregate
value of all HDS Stock received by all STOCKHOLDERS on the Closing Date pursuant
to Section 2.1 of this Agreement. All such amounts otherwise payable by one or
more STOCKHOLDERS in excess of the amount so offset and reduced shall be paid
without offset or reduction pursuant to this Section 11.5(i). Notwithstanding
the foregoing, this Section 11.5(i) shall not apply to claims for
indemnification for breach of Section 7.12 or under Section 11.6. For purposes
of determining the Indemnification Threshold pursuant to this Section 11.5(i),
the HDS Stock shall be valued at the Effective IPO Price, as defined in Annex I.
Claims paid directly by the STOCKHOLDERS (or third parties on behalf of the
STOCKHOLDERS) shall be excluded for purposes of calculating the Indemnification
Threshold.
(ii) The first amounts otherwise payable by HDS pursuant to Sections
11.2 and 11.3 to STOCKHOLDERS and the COMPANY will be offset and reduced (but
not below zero) by an amount equal to the Indemnification Threshold. All
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such amounts otherwise payable by HDS in excess of the amount so offset and
reduced shall be paid without offset or reduction pursuant to this Section
11.5(ii).
(iii) Notwithstanding any other term of this Agreement, in no event
shall any STOCKHOLDER be liable under this Agreement, including this Section 11,
for an amount which exceeds the sum of (a) the amount of Cash Consideration for
such STOCKHOLDER, (b) the net proceeds to such STOCKHOLDER from the sale of such
STOCKHOLDER's HDS Stock received pursuant to Section 2.1 hereof prior to the
date that the indemnity obligation of such STOCKHOLDER is paid and (c) the value
of the shares of HDS Stock received by such STOCKHOLDER on the Closing Date
pursuant to Section 2.1 that have not been sold by such STOCKHOLDER prior to the
date that the indemnity obligation of such STOCKHOLDER is paid, valued at the
closing price per share on the trading day prior to the date the indemnification
obligation is paid.
11.6 Special Tax Indemnity Provisions.
--------------------------------
(i) From and after the Closing Date, the STOCKHOLDERS, jointly and
severally, shall indemnify and save HDS and the COMPANY harmless from any and
all Taxes (including without limitation any obligation to contribute to the
payment of a Tax determined on a consolidated, combined or unitary basis with
respect to a group of corporations that includes or included the COMPANY) which
are (a) imposed on any member (other than the COMPANY) of the consolidated,
unitary or combined group which includes or included the COMPANY or (b) imposed
on the COMPANY in respect of its income, business, property or operations or for
which the COMPANY may otherwise be liable (1) for any Pre-Closing Period, (2)
resulting by reason of the several liability of the COMPANY pursuant to Treasury
Regulations section 1.1502-6 or any analogous state, local or foreign law or
regulation or by reason of the COMPANY having been a member of any consolidated,
combined or unitary group on or prior to the Closing Date, (3) resulting from
the COMPANY ceasing to be a member of any affiliated group (within the meaning
of Section 1504(a) of the Code), (4) in respect of any Post-Closing Period,
attributable to events, transactions, sales, deposits, services or rentals
occurring, received or performed in a Pre-Closing Period, (5) in respect of any
Post-Closing Period, attributable to any change in accounting method employed by
the COMPANY during any of the four previous taxable years, (6) in respect of any
Post-Closing Period, attributable to any items of income or gain of an entity
treated as a partnership reported by the COMPANY as a partner, to the extent
such items are properly attributable to periods of the "partnership" ending on
or before the Closing Date, or (7) attributable to any discharge of indebtedness
that may result from any capital contributions by STOCKHOLDERS (or an affiliate
of STOCKHOLDERS) to the COMPANY of any intercompany indebtedness owed by the
COMPANY to any STOCKHOLDER (or an affiliate of any STOCKHOLDER). Notwithstanding
the foregoing, the STOCKHOLDERS shall not be obligated to make indemnity
payments pursuant to this Section 11.6(i) for Taxes imposed on the COMPANY for
the short taxable period commencing July 1, 1998 and ending on the Closing Date,
unless and to the extent such Taxes for such period exceed the amount of Taxes
included in short term liabilities for purposes of calculating adjusted working
capital pursuant to Section 7.12.
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(ii) From and after the Closing Date, STOCKHOLDERS shall, jointly and
severally, indemnify and save HDS and the COMPANY harmless from any liability
imposed on HDS or the COMPANY (or any affiliate of such companies) attributable
to any breach of a warranty or representation made by STOCKHOLDERS in Section
5.22.
(iii) From and after the Closing Date, and except as expressly
provided otherwise in this Section 11.6, HDS and the COMPANY shall indemnify and
hold harmless STOCKHOLDERS (x) with respect to any Taxes imposed on HDS or the
COMPANY with respect to any Post-Closing Period and (y) from any liability
imposed on STOCKHOLDERS attributable to any breach of a warranty or
representation made by HDS in Section 6.10.
(iv) To the extent any party to this Agreement is entitled to
indemnification from another party under this Section 11.6, such claim for
indemnification shall include the right to recover any losses, damages,
liabilities, expenses and costs related thereto, including, without limitation,
reasonable attorney's and expert witness fees and other costs of investigating
or attempting to avoid the same or oppose the imposition thereof, together with
interest thereon at the reference rate in effect from time to time at Bank of
America, NT&SA, or its successor, compounded quarterly from the date incurred.
(v) Except to the extent expressly provided to the contrary in this
Section 11.6, the general procedures regarding notice and pursuit of
indemnification claims set forth in Sections 11.1 through 11.5 shall apply to
all claims for indemnification made under this Section 11.6. Notwithstanding the
immediately preceding sentence and any provision of Section 11 to the contrary,
if a claim for indemnification involves any matter covered in this Section 11.6,
then the contest provisions of Section 11.7, as applicable, shall control
regarding the defense and handling of any such third-party claim that could give
rise to an indemnification obligation on the part of one party to another. In
addition, and notwithstanding anything else in Section 11 to the contrary, the
party with the right to control a contest has the right to choose counsel of its
choice regarding such contest. Furthermore, there shall be no limit on (a) the
time period during which a claim for indemnification may be made under this
Section 11.6 or (b) the minimum or maximum amount of indemnity payments that may
be recovered pursuant to this Section 11.6 (other than (1) each party's
obligation to make claims for indemnification promptly and without undue delay
and (2) the aggregate limit for all indemnity payments imposed on a STOCKHOLDER
provided in Section 11.5(iii)).
(vi) All amounts paid pursuant to this Section 11.6 by one party to
another party (other than interest payments) shall be treated by such parties as
an adjustment to the value of the merger consideration provided pursuant to this
Agreement.
11.7 Special Contest Rights Related to Tax Matters.
---------------------------------------------
(i) The STOCKHOLDERS shall have the sole right (but not the
obligation) to control, defend, settle, compromise or prosecute in any manner
any audit,
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examination, investigation, hearing or other proceeding with respect to any Tax
Return of the COMPANY involving only Pre-Closing Periods.
(ii) Except as expressly provided to the contrary in this Section 11.7,
HDS shall have the sole right (but not the obligation) to control, defend,
settle, compromise, or prosecute in any manner an audit, examination,
investigation, hearing or other proceeding with respect to any Tax Return of the
COMPANY; provided, however, that any liability for Taxes or Tax issues related
-------- -------
to an Interim Period may not be settled or compromised without the consent of
the STOCKHOLDERS, which consent shall not be unreasonably withheld or delayed.
In addition, (i) HDS shall keep the STOCKHOLDERS duly informed of any
proceedings in connection with an Interim Period and (ii) the STOCKHOLDERS shall
be entitled to receive copies of all correspondence and documents relating to
such proceedings and may, at their option, observe such proceedings (including
any associated meetings or conferences).
11.8 Special Notification Requirements Regarding Tax Disputes. HDS and
--------------------------------------------------------
the COMPANY shall promptly forward to the STOCKHOLDERS all written notifications
and other written communications from any Tax Authority received by HDS or the
COMPANY relating to any Pre-Closing Period of the COMPANY, and HDS and the
COMPANY shall execute or cause to be executed any power of attorney or other
document or take such actions as requested by the STOCKHOLDERS to enable the
STOCKHOLDERS to take any action STOCKHOLDERS deem appropriate with respect to
any proceedings relating thereto.
11.9 Refunds. A party receiving a refund, credit or similar offset (or the
-------
benefit thereof) with respect to a Tax effectively paid by another party shall
immediately pay an amount equal to such refund, credit, offset or benefit
(including any interest thereon) to the party that effectively paid the Tax with
respect to which the refund, credit, offset or benefit relates. A party
entitled to a deduction on account of a Tax effectively paid by another party
shall pay an amount equal to any Taxes saved by reason of such deduction to the
party that effectively bore the economic cost of the Tax with respect to which
such deduction relates, such amount to be paid immediately after such saving is
realized. Notwithstanding any other provision in this Section 11.9 to the
contrary, to the extent any amount of Taxes paid by the COMPANY in respect of
the six month period commencing July 1, 1998 and ending December 31, 1998 is
greater than the liability for Taxes allocable to such period, such excess
amounts shall be applied to satisfy any liability for Taxes of the COMPANY that
may be shown to be due on any Tax Returns filed after the Closing Date.
11.10 Optional Payment With Shares. Subject to Section 10.1, any
----------------------------
STOCKHOLDER may make any payment to HDS required by this Section 11 by tendering
shares of HDS Stock obtained by such STOCKHOLDER pursuant to Sections 2 and 3 of
this Agreement, with shares so tendered being valued at the closing price per
share on the trading day prior to the date the indemnification obligation is
paid. No STOCKHOLDER will be entitled to make payment with any other shares of
HDS Stock.
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12. TERMINATION OF AGREEMENT.
12.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing Date solely:
(i) by mutual consent of the boards of directors of HDS and the
COMPANY;
(ii) at or before the Pre-Closing, by STOCKHOLDERS holding a majority
of each class of COMPANY Stock, by the COMPANY, or by HDS, if the Pre-Closing
has not been completed by June 30, 1999, time being of the essence, unless the
failure to complete the Pre-Closing is due to the willful failure of the party
seeking to terminate this Agreement to perform any of its obligations under this
Agreement to the extent required to be performed by it prior to or on the
Pricing Date;
(iii) at or before the Pre-Closing, by STOCKHOLDERS holding a majority
of each class of COMPANY Stock or by the COMPANY if a material breach or default
shall be made by HDS, or by HDS if a material breach or default shall be made by
one or more STOCKHOLDERS or the COMPANY, in the observance or in the due and
timely performance of any of the covenants, agreements or conditions contained
herein, and such default shall not have been cured and shall not reasonably be
expected to be cured on or before the Pricing Date;
(iv) at or before the Pre-Closing pursuant to Section 7.9 hereof;
(v) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Underwriting Agreement is terminated;
(vi) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock if the Minimum
IPO Price (as defined in Annex I) is not attained at the time of the IPO; or
(vii) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Closing Date does not occur within ten (10) days after the
Pricing Date, time being of the essence.
12.2 Liabilities in Event of Termination. In the event of termination of
-----------------------------------
this Agreement as provided in this Section there shall be no liability or
obligation on the part of any party hereto except to the extent that such
liability is based on the breach by a party of any of its representations,
warranties or covenants set forth in this Agreement, provided however, that
there shall be no liability for a breach of representation or warranty if such
representation or warranty was made in good faith and with no reason to know
such representation or warranty was not true at the time made.
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13. NONCOMPETITION.
13.1 Prohibited Activities. Except as set forth on Schedule 13.1, the
---------------------
STOCKHOLDERS will not, for a period of four (4) years following the Closing Date
(except that (v) below shall apply to the period ending at the Closing if this
Agreement is not terminated prior to the Closing and June 30, 1999, if this
Agreement is terminated prior to the Closing), for any reason whatsoever,
directly or indirectly, for themselves or on behalf of or in conjunction with
any other person, persons, company, partnership, corporation or business of
whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales representative, in any business
selling any products or services in direct competition with HDS or any of the
subsidiaries thereof, within one hundred (100) miles of where the COMPANY
conducted business prior to the effectiveness of the Merger (the "Territory");
(ii) contact or solicit any person who is, at that time, an employee of
HDS (including the subsidiaries thereof) in a managerial capacity for the
purpose or with the intent of enticing such employee away from or out of the
employ of HDS (including the subsidiaries thereof), provided that any
--------
STOCKHOLDER shall be permitted to solicit and hire any member of his or her
immediate family;
(iii) contact any person or entity which is, at that time, or which
has been, within one (1) year prior to that time, a customer of HDS (including
the subsidiaries thereof), or any affiliate of such a person or entity, for the
purpose of soliciting or selling products or services in direct competition with
HDS;
(iv) contact any prospective acquisition candidate, on any
STOCKHOLDER's own behalf or on behalf of any competitor within the Territory in
the commercial kitchen design and/or supply business, which candidate was either
called upon by HDS (including the subsidiaries thereof) or for which HDS (or any
subsidiary thereof) made an acquisition analysis, for the purpose of acquiring
such entity, provided that no STOCKHOLDER shall be charged with a violation of
--------
this Section unless and until such STOCKHOLDER shall have knowledge or notice
that such prospective acquisition candidate was called upon, or that an
acquisition analysis was made, for the purpose of acquiring such entity;
(v) engage, directly or indirectly, through any intermediary or
otherwise, in any conversations or negotiations with any Other Company regarding
a possible business combination between or among them; provided that such
-------- ----
prohibition shall not preclude the COMPANY from conducting business in the
ordinary course with any Other Company or from having business combination
discussions with any other party subject to the provisions in this Agreement; or
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(vi) except in furtherance of HDS's business, disclose customers,
whether in existence or proposed, of the COMPANY to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever
excluding disclosure to HDS or any of HDS's Subsidiaries.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit any STOCKHOLDER from acquiring as an investment not more than one
percent (1%) of the capital stock of any business whose stock is traded on a
national securities exchange or over-the-counter.
13.2 Damages. Because of the difficulty of measuring economic losses to HDS
-------
as a result of a breach of the foregoing covenant, and because of the immediate
and irreparable damage that could be caused to HDS for which it would have no
other adequate remedy, each STOCKHOLDER agrees that the foregoing covenant may
be enforced by HDS, in the event of breach by such STOCKHOLDER, by injunctions
and restraining orders.
13.3 Reasonable Restraint. It is agreed by the parties hereto that the
--------------------
foregoing covenants in this Section 13 impose a reasonable restraint on the
STOCKHOLDERS in light of the activities and business of HDS (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of HDS; but it is also the intent of HDS and the STOCKHOLDERS that
such covenants be construed and enforced in accordance with the changing
activities and business of HDS (including the subsidiaries thereof) throughout
the term of this covenant.
It is further agreed by the parties hereto that, in the event that any
STOCKHOLDER who has entered into an Employment Agreement shall thereafter cease
to be employed thereunder, and such STOCKHOLDER shall enter into a business or
pursue other activities not in competition with HDS and/or any subsidiary
thereof, or similar activities or business in locations the operation of which,
under such circumstances, does not violate clause (i) of Section 13.1, and in
any event such new business, activities or location are not in violation of this
Section 13 or of such STOCKHOLDER's obligations under this Section 13, if any,
such STOCKHOLDER shall not be chargeable with a violation of this Section 13 if
HDS and/or any subsidiary thereof shall thereafter enter the same, similar or a
competitive (i) business, (ii) course of activities or (iii) location, as
applicable.
13.4 Severability; Reformation. The covenants in this Section 13 are
-------------------------
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
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13.5 Independent Covenant. All of the covenants in this Section 13 shall be
--------------------
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim or cause of action of any STOCKHOLDER against HDS
(including the subsidiaries thereof), whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by HDS of such
covenants. It is specifically agreed that the period of four (4) years stated
at the beginning of this Section 13, during which the agreements and covenants
of each STOCKHOLDER made in this Section 13 shall be effective, shall be
computed by excluding from such computation any time during which such
STOCKHOLDER is in violation of any provision of this Section 13. The covenants
contained in this Section 13 shall not be affected by any breach of any other
provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 Materiality. The COMPANY and the STOCKHOLDERS hereby agree that the
-----------
covenants in this Section 13 are a material and substantial part of this
transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they
------------
had in the past, currently have, and in the future may possibly have, access to
certain confidential information of the COMPANY, the Other Companies and/or HDS,
such as lists of customers, operational policies, and pricing and cost policies
that are valuable, special and unique assets of the COMPANY's, the Other
Companies' and/or HDS's respective businesses. The STOCKHOLDERS agree that they
will not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except (a) to authorized representatives of HDS, (b) following the Closing, as
required in the course of performing their duties for HDS, and (c) to counsel
and other advisers, provided that such advisers (other than counsel) agree to
--------
the confidentiality provisions of this Section 14.1; provided, further, that
-------- -------
confidential information shall not include (i) such information which becomes
known to the public generally through no fault of the STOCKHOLDERS, (ii)
information required to be disclosed by law or the order of any governmental
authority under color of law, provided that prior to disclosing any information
--------
pursuant to this clause (ii), the STOCKHOLDERS shall, if possible, give prior
written notice thereof to HDS and provide HDS with the opportunity to contest
such disclosure, or (iii) the disclosing party reasonably believes that such
disclosure is required in connection with the defense of a lawsuit against the
COMPANY, the Other Companies and/or HDS. In the event of a breach or threatened
breach by any of the STOCKHOLDERS of the provisions of this section, HDS shall
be entitled to an injunction restraining such STOCKHOLDERS from disclosing, in
whole or in part, such confidential information. Nothing herein shall be
construed as prohibiting HDS from pursuing any other available remedy for such
breach or threatened breach, including the recovery of damages.
14.2 HDS. HDS recognizes and acknowledges that it had in the past and
---
currently has access to certain confidential information of the COMPANY and the
STOCKHOLDERS, such as lists of customers, operational policies, and pricing and
cost
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<PAGE>
policies that are valuable, special and unique assets of the COMPANY's
business. HDS agrees that, prior to the Closing, it will not disclose such
confidential information to any person, firm, corporation, association or other
entity for any purpose or reason whatsoever, except (a) to authorized
representatives of the COMPANY and the STOCKHOLDERS, (b) to counsel and other
advisers, provided that such advisers (other than counsel) agree to the
--------
confidentiality provisions of this Section 14.2 and (c) to the Other Companies
and their representatives pursuant to Section 7.1(i), unless (i) such
information becomes known to the public generally through no fault of HDS (ii)
disclosure is required by law or the order of any governmental authority under
color of law, provided that prior to disclosing any information pursuant to this
--------
clause (ii), HDS shall, if possible, give prior written notice thereof to the
COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS with
the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the COMPANY and/or STOCKHOLDERS. In the event of a
breach or threatened breach by HDS or any of the Other Companies of the
provisions of this section, the COMPANY and the STOCKHOLDERS shall be entitled
to an injunction restraining HDS and/or such Other Company from disclosing, in
whole or in part, such confidential information. Nothing herein shall be
construed as prohibiting the COMPANY and the STOCKHOLDERS from pursuing any
other available remedy for such breach or threatened breach, including the
recovery of damages.
14.3 Damages. Because of the difficulty of measuring economic losses as a
-------
result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may be
enforced against the other parties by injunctions and restraining orders.
14.4 Survival. The obligations of the parties under this Article 14 shall
--------
survive the termination of this Agreement.
15. TRANSFER RESTRICTIONS.
15.1 Transfer Restrictions. Except for transfers as set forth in Section
---------------------
15.2 below to persons or entities who agree to be bound by the restrictions set
forth in this Section 15.1, for a period of one year from the Closing Date, none
of the STOCKHOLDERS shall (i) sell, assign, exchange, transfer, encumber,
pledge, distribute, appoint, or otherwise dispose of (a) any shares of HDS Stock
received by the STOCKHOLDERS in the Merger, or (b) any interest (including,
without limitation, an option to buy or sell) in any such shares of HDS Stock,
in whole or in part, and no such attempted transfer shall be treated as
effective for any purpose; or (ii) engage in any transaction, whether or not
with respect to any shares of HDS Stock or any interest therein, the intent or
effect of which is to reduce the risk of owning the shares of HDS Stock acquired
pursuant to Section 2 hereof (including, by way of example and not limitation,
engaging in put, call, short-sale, straddle or similar market transactions). The
certificates evidencing the HDS
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<PAGE>
Stock delivered to the STOCKHOLDERS pursuant to Section 3 of this Agreement will
bear a legend substantially in the form set forth below and contain such other
information as HDS may deem necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION
PRIOR TO THE FIRST ANNIVERSARY OF THE CLOSING DATE. UPON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER
AGENT) AFTER THE DATE SPECIFIED ABOVE.
15.2 Permitted Transferees. Notwithstanding the provisions of Section 15.1,
---------------------
a STOCKHOLDER shall have the right to transfer some or all of the shares of HDS
stock to any one or more of the following, provided that the transferee agrees
to be bound (in a form satisfactory to HDS and its counsel) by the terms and
conditions of this Agreement with respect to any further transfer of such
shares: (a) any family member of a STOCKHOLDER (including, without limitation,
any transfer to a custodian under any gift to minors statute), with family
members being defined as any spouse, lineal descendant or ancestor of a
STOCKHOLDER, (b) any trust which is for the benefit of one or more family
members of a STOCKHOLDER and (c) any corporation, partnership, limited liability
company or other entity (x) of which a majority of the interests therein by
value is owned by the STOCKHOLDER and members of the STOCKHOLDER's family, and
(y) which is and continues to be controlled by the STOCKHOLDER and members of
the STOCKHOLDER'S family for the period set forth in Section 15.1.
16. FEDERAL SECURITIES ACT REPRESENTATIONS.
The STOCKHOLDERS acknowledge that the shares of HDS Stock to be
delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will
not be registered under the 1933 Act and therefore may not be resold without
compliance with the 1933 Act. The HDS Stock to be acquired by such STOCKHOLDERS
pursuant to this Agreement is being acquired solely for their own respective
accounts, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution.
16.1 Compliance with Law. The STOCKHOLDERS covenant, warrant and represent
-------------------
that none of the shares of HDS Stock issued to such STOCKHOLDERS will be
offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the
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<PAGE>
rules and regulations of the SEC. All the HDS Stock shall bear the following
legend in addition to the legend required under Section 15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "1933 ACT") AND MAY ONLY BE SOLD OR
OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE 1933 ACT
AND APPLICABLE SECURITIES LAWS.
16.2 Accredited Investors; Economic Risk; Sophistication. Except as disclosed
---------------------------------------------------
in Schedule 16.2, each STOCKHOLDER represents and warrants that such STOCKHOLDER
is an "accredited investor," as that term is defined in Regulation D promulgated
by the SEC under the 1933 Act. The STOCKHOLDERS are able to bear the economic
risk of an investment in the HDS Stock acquired pursuant to this Agreement and
can afford to sustain a total loss of such investment and have such knowledge
and experience in financial and business matters that they are capable of
evaluating the merits and risks of the proposed investment in the HDS Stock. The
STOCKHOLDERS or their respective purchaser representatives have received all
information they deemed material and had an adequate opportunity to ask
questions and receive answers from the officers of HDS concerning any and all
matters relating to the transactions described herein including, without
limitation, the background and experience of the current and proposed officers
and directors of HDS, the plans for the operations of the business of HDS, the
business, operations and financial condition of the Founding Companies other
than the COMPANY, and any plans for additional acquisitions and the like. All
STOCKHOLDERS who are not "accredited investors" have such knowledge and
experience in financial and business matters that they are capable of evaluating
the merits and risks of the investment in HDS Stock acquired pursuant to this
Agreement.
17. REGISTRATION RIGHTS.
-------------------
17.1 Piggyback Registration Rights. At any time following one year after
-----------------------------
the Closing Date, whenever HDS proposes to register any HDS Stock for its own or
others' account under the 1933 Act for a public offering, other than (i)
registrations of shares to be used as consideration for acquisitions of
additional businesses by HDS and (ii) registrations relating to employee benefit
plans, HDS shall give each of the STOCKHOLDERS prompt written notice of its
intent to do so. Upon the written request of any of the STOCKHOLDERS given
within thirty (30) days after receipt of such notice, HDS shall cause to be
included in such registration all of the HDS Stock issued pursuant to this
Agreement which any such STOCKHOLDER requests; provided that HDS shall have the
-------- ----
right to reduce the number of shares included in such registration to the extent
that inclusion of such shares could, in the opinion of tax counsel to HDS or its
independent auditors, jeopardize the status of the transactions contemplated
hereby and by the Registration Statement as a reorganization described in
Section 368(a)(1)(A) of the Code. In addition, if HDS is advised in writing in
good faith by any managing
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<PAGE>
underwriter of an underwritten offering of the securities being offered pursuant
to any registration statement under this Section 17.1 that the number of shares
to be sold by persons other than HDS is greater than the number of such shares
which can be offered without adversely affecting the offering, HDS may reduce
the number of shares offered for the accounts of such persons to a number deemed
satisfactory by such managing underwriter; provided that such reduction shall be
-------- ----
made first by reducing the number of shares to be sold by persons other than
HDS, the stockholders named on Annex III hereto, the stockholders of the
Founding Companies (the "Founding Stockholders"), and any person or persons who
have required such registration pursuant to "demand" registration rights granted
by HDS; thereafter, if a further reduction is required, it shall be made first
by reducing the number of shares to be sold by the stockholders named on Annex
III hereto and the Founding Stockholders, with such further reduction being made
so that to the extent any shares can be sold by stockholders named in Annex III
hereto and the Founding Stockholders, each such stockholder will be permitted to
sell a number of shares proportionate to the number of shares of HDS Stock owned
by such stockholder immediately after the Closing, provided that if any
stockholder does not wish to sell all shares such stockholder is permitted to
sell, the opportunity to sell additional shares shall be reallocated in the same
manner to those stockholders named in Annex III hereto and the Founding
Stockholders who wish to sell more shares until no more shares can be sold by
such stockholders.
17.2 Demand Registration Rights. At any time after the date one year after
--------------------------
the Closing Date, Founding Stockholders holding shares of HDS Stock issued
pursuant to this Agreement and the Other Agreements which shares have (i) not
been previously registered or sold, (ii) which are not entitled to be sold under
Rule 144(k) (or any similar or successor provision) and (iii) which have an
aggregate market value in excess of $5 million (based on the average closing
price on the five days prior to the date of such request) may request in writing
that HDS file a registration statement under the 1933 Act covering such shares
of HDS Stock then held by such Founding Stockholders (a "Demand Registration");
provided that the aggregate value of HDS Stock proposed to be sold under such
registration statement is not less than $5 million (based on the closing market
price of the HDS Stock within five (5) business days of the date of such
request); and provided further that HDS shall have the right to reduce the
-------- -------
number of shares included in such registration to the extent that inclusion of
such shares could, in the opinion of tax counsel to HDS or its independent
auditors, jeopardize the status of the transactions contemplated hereby and by
the Registration Statement as a reorganization described in Section 368(a)(1)(A)
of the Code. Within ten (10) days of the receipt of such request, HDS shall give
written notice of such request to all other Founding Stockholders and shall, as
soon as practicable, file and use its best efforts to cause to become effective
a registration statement covering all such shares. HDS will use its best efforts
to keep such Demand Registration current and effective for one hundred twenty
(120) days (or such shorter period during which holders shall have sold all HDS
Stock which they requested to be registered). HDS shall be obligated to effect
only two (2) Demand Registrations for all Founding Stockholders, and the second
request may not be
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<PAGE>
made until at least one (1) year after the effective date of the registration
statement for the first Demand Registration.
Notwithstanding the foregoing paragraph, following such a demand a
majority of the COMPANY's disinterested directors (i.e, directors who have not
---
demanded or elected to sell shares in any such public offering) may postpone the
filing of the registration statement for a thirty (30) day period beyond the
period provided above.
If at the time of any request by the Founding Stockholders for a Demand
Registration HDS has fixed plans to file within sixty (60) days after such
request a registration statement covering the sale of any of its securities, no
registration of the Founding Stockholders' HDS Stock shall be initiated under
this Section 17.2 until ninety (90) days after the effective date of such
registration unless HDS is no longer proceeding diligently to effect such
registration; provided that HDS shall provide the Founding Stockholders the
--------
right to participate in such public offering pursuant to, and subject to,
Section 17.1 hereof.
17.3 Registration Procedures. All expenses incurred in connection with the
-----------------------
registrations under this Article 17 (including all registration, filing,
qualification, legal, printer and accounting fees, but excluding underwriting
commissions and discounts) shall be borne by HDS. In connection with
registrations under Sections 17.1 and 17.2, HDS shall (i) prepare and file with
the SEC as soon as reasonably practicable, a registration statement with respect
to the HDS Stock and use its best efforts to cause such registration to promptly
become and remain effective for a period of at least one hundred twenty (120)
days (or such shorter period during which holders shall have sold all HDS Stock
which they requested to be registered); (ii) use its best efforts to register
and qualify the HDS Stock covered by such registration statement under
applicable state securities laws as the holders shall reasonably request for the
distribution for the HDS Stock; and (iii) take such other actions as are
reasonable and necessary to comply with the requirements of the 1933 Act and the
regulations thereunder.
17.4 Underwriting Agreement. In connection with each registration pursuant
----------------------
to Sections 17.1 and 17.2 covering an underwritten registered public offering,
HDS and each participating holder agree to enter into a written agreement with
the managing underwriters in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
managing underwriters and companies of HDS's size and investment stature,
including indemnification. In a registration under Section 17.1, the managing
underwriters shall be selected by HDS (or, if required by a "demand"
registration right of a stockholder requiring such registration, by such
requiring stockholder), and in a registration under Section 17.2, may be
selected by the holders of a majority of the shares that have demanded to be
included in such registration pursuant to Section 17.2, provided the managing
underwriters so selected by such majority are reasonably acceptable to HDS.
17.5 HDS Stock. For the purposes of this Section 17, HDS Stock issued pursuant
---------
to this Agreement shall include shares issued as a stock dividend or stock
split, or
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<PAGE>
otherwise distributed by HDS to its stockholders without consideration, in
respect of shares of HDS Stock previously issued pursuant to this Agreement.
17.6 Availability of Rule 144. HDS shall not be obligated to register
------------------------
shares of HDS Stock held by any STOCKHOLDER at any time when the resale
provisions of Rule 144(k) (or any similar or successor provision) promulgated
under the 1933 Act are available to such STOCKHOLDER.
17.7 Survival. The provisions of this Section 17 shall survive the Pre-
--------
Closing and Closing Date until December 31, 2002.
18. GENERAL.
18.1 Cooperation. Except as otherwise provided in Section 12, the
-----------
COMPANY, STOCKHOLDERS and HDS shall each (i) attempt in good faith (without
being required to incur unreasonable expense) to cause all conditions to actions
to be taken on the Pricing Date and the Closing Date to be satisfied, and (ii)
deliver or cause to be delivered to the other on the Pricing Date and Closing
Date, and at such other times and places as shall be reasonably agreed to, such
additional instruments, and take such additional actions as can be taken without
unreasonable expense, as any other may reasonably request for the purpose of
carrying out this Agreement. The COMPANY will cooperate and use its reasonable
efforts to have the present officers, directors and employees of the COMPANY
cooperate with HDS on and after the Closing Date in furnishing information,
evidence, testimony and other assistance in connection with any Tax Return
filing obligations, actions, proceedings, arrangements or disputes of any nature
with respect to matters pertaining to all periods prior to the Closing Date.
18.2 Successors and Assigns. This Agreement and the rights of the parties
----------------------
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
HDS, the successors of the COMPANY, and the heirs and legal representatives of
the STOCKHOLDERS.
18.3 Entire Agreement. This Agreement (including the schedules, exhibits
----------------
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the STOCKHOLDERS, the
COMPANY and HDS and supersede any prior agreement and understanding relating to
the subject matter of this Agreement. This Agreement, upon execution,
constitutes a valid and binding agreement of the parties hereto enforceable in
accordance with its terms. Except as otherwise stated herein, this Agreement and
the Annexes hereto may be modified or amended only by a written instrument
executed by the STOCKHOLDERS, the COMPANY and HDS, acting through their
respective officers, duly authorized by their respective Boards of Directors.
Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to
have been disclosed for purposes of any other Schedule required hereby.
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18.4 Counterparts. This Agreement may be executed simultaneously in two
------------
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
18.5 Brokers and Agents. Except as disclosed on Schedule 18.5, each party
------------------
represents and warrants that it employed no broker or agent in connection with
this transaction and agrees to indemnify the other against all loss, cost,
damages or expense arising out of claims for fees or commission of brokers
employed or alleged to have been employed by such indemnifying party.
18.6 Expenses. Whether or not the transactions herein contemplated shall
--------
be consummated, (i) HDS will pay the fees, expenses and disbursements of HDS and
its agents, representatives, accountants and counsel incurred in connection with
the subject matter of this Agreement and any amendments thereto, including all
costs and expenses incurred in the performance and compliance with all
conditions to be performed by HDS under this Agreement, including the fees and
expenses of Arthur Andersen, LLP, and Howard, Rice, and the costs of preparing
the Registration Statement, and (ii) prior to the Closing, the COMPANY will pay
the fees, expenses and disbursements of counsel and accountants for the
STOCKHOLDERS and the COMPANY incurred in connection with the subject matter of
this Agreement or the Registration Statement. Set forth on Schedule 18.6 hereto
is the estimated amount of such fees, expenses, and disbursements to be paid by
the COMPANY pursuant to the foregoing clause (ii). The STOCKHOLDERS shall pay
all sales, use, transfer, real property transfer, recording, gains, stock
transfer and other similar taxes and fees ("Transfer Taxes") incurred in
connection with the transactions contemplated by this Agreement. The
STOCKHOLDERS shall file all necessary documentation and Tax Returns with respect
to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and
not the COMPANY or HDS, will pay all taxes due upon receipt of the consideration
payable to such STOCKHOLDER pursuant to Section 2 hereof.
18.7 Notices. All notices and other communications required or permitted
-------
hereunder shall be effective upon receipt (or refusal of receipt) and shall be
in writing and delivered by depositing the same in United States mail, addressed
to the party to be notified, postage prepaid and registered or certified with
return receipt requested, by delivering the same in person to such party or to
an officer or agent of such party or by facsimile transmission (followed by
delivery by United States mail).
(a) If mailed to HDS addressed to it at:
Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, Chief Executive Officer
Fax: (310) 253-9734
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<PAGE>
with copies to:
Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111-4065
Attn: Raymond P. Haas
Fax: (415) 217-5910
(b) If mailed to the STOCKHOLDERS, addressed to them at their
addresses set forth on Annex II, with copies to such counsel, if any, as is set
forth with respect to each STOCKHOLDER on such Annex II; if mailed to the
COMPANY, addressed to it at its address set forth on Annex II marked "Personal
and Confidential" with copies to the COMPANY's counsel as set forth on Annex II,
provided that notice to the COMPANY shall only be for notices or communications
- --------
required or permitted hereunder prior to the Effective Time of the Merger; or to
such other address or counsel as any party hereto shall specify pursuant to this
Section 18.7 from time to time.
18.8 Governing Law; Forum. This Agreement shall be governed by and
--------------------
construed in accordance with the laws of the State of California, without giving
effect to laws concerning choice of law or conflicts of law. THE PARTIES HERETO
EACH HEREBY KNOWINGLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING, CLAIM OR COUNTER-CLAIM, WHETHER IN CONTRACT OR TORT OR OTHERWISE,
ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR ANY OTHER AGREEMENTS
EXECUTED IN CONNECTION HEREWITH.
18.9 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties, covenants and agreements of the parties made herein, or in writing
delivered pursuant to the provisions of this Agreement shall survive the
consummation of the transactions contemplated hereby and any examination on
behalf of the parties until the applicable Expiration Date.
18.10 Exercise of Rights and Remedies. Except as otherwise provided
-------------------------------
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power, or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.11 Time. Time is of the essence with respect to this Agreement.
----
18.12 Reformation and Severability. In case any provision of this
----------------------------
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent
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<PAGE>
of the parties, and if such modification is not possible, such provision shall
be severed from this Agreement, and in either case the validity, legality and
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
18.13 Remedies Cumulative. Except as otherwise provided in Section 11,
-------------------
no right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
18.14 Construction. This Agreement has been negotiated among HDS, the
------------
COMPANY, the STOCKHOLDERS and their respective legal counsel, and legal or
equitable principles that might require the construction of this Agreement or
any provision of this Agreement against the party drafting this Agreement will
not apply in any construction or interpretation of this Agreement.
18.15 Captions. The headings of this Agreement are inserted for
--------
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
HOSPITALITY DESIGN & SUPPLY, INC.
By: /s/ Roger Laverty
--------------------------------
Name: Roger Laverty
Title: Chief Executive Officer
STOCKHOLDERS:
/s/ Michael Curtis
------------------------------------
/s/ Daniel Curtis
------------------------------------
CURTIS RESTAURANT EQUIPMENT
By: /s/ Michael Curtis
--------------------------------
Name: Michael Curtis
Title: President
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ANNEX I
CONSIDERATION TO FOUNDING COMPANY STOCKHOLDERS
Part I
A. Aggregate consideration to be paid to STOCKHOLDERS:
1. COMPANY Stock will be converted into 270,833 shares of common stock of
HDS and $3,250,000 in cash.
2. The STOCKHOLDERS and the COMPANY will not be obligated to consummate
the Merger if the initial public offering price per share when the
Registration Statement goes effective (the "Effective IPO Price") is
less than $10 per share (the "Minimum IPO Price").
3. The amount of cash paid to STOCKHOLDERS will be offset and reduced by
the amount of any receivables from STOCKHOLDERS as of the Effective
Time.
B. Post-Closing Purchase Price Adjustment.
1. STOCKHOLDERS agree, jointly and severally, to pay to HDS, on or before
March 31, 2000, an amount equal to the Adjustment Amount (as defined herein);
provided that the Adjustment Amount shall be zero if the Attributed Pre-Tax
- -------- ----
Earnings (as defined herein) are at least $850,000 for the fiscal year ended
December 31, 1999; and provided further that in no event shall the Adjustment
-------- -------
Amount exceed $650,000.
2. For purposes of determining the Adjustment Amount:
a. The Adjustment Amount shall be calculated by multiplying 6.5 times
the amount by which $850,000 exceeds the Attributed Pre-Tax
Earnings.
b. Attributed Pre-tax Earnings shall mean that portion of the pre-tax
earnings generated by HDS directly attributable to the operations
of the Curtis Restaurant Equipment division (formerly, the
operations of the COMPANY), as shown on the financial statements of
such division, calculated in accordance with generally accepted
accounting principles, with respect to the period beginning January
1, 1999, and ending on December 31, 1999.
3. HDS shall be entitled to make decisions regarding the allocation of
costs in HDS's reasonable discretion, provided that such decisions are
-------- ----
consistent with generally accepted accounting principles; and provided further
-------- -------
that HDS shall not allocate corporate overhead in such a way as to adversely
affect the Attributed Pre-Tax Earnings. In addition, HDS shall be entitled to
make other decisions that impact earnings, including without limitation
decisions regarding the allocation and non-allocation of capital and
<PAGE>
other resources, decisions regarding business that will be accepted or rejected,
personnel decisions including decisions to hire and lay off employees, and
decisions to enlarge, shut down or downsize operations, all without making any
offsetting adjustments to earnings; provided only that such decisions are made
in a good faith effort to maximize total return to the shareholders of HDS to
the extent that the same can be realized without undue risk and in compliance
with applicable laws.
4. The Adjustment Amount will be paid in cash, without interest (even
though interest may be imputed for purposes such as income taxes).
5. Any disputes concerning the amount of the Adjustment Amount will be
finally determined by the independent certified public accountants engaged by
HDS to audit the financial statements of HDS for its fiscal year ended December
31, 1999.
C. Consideration to be paid to each STOCKHOLDER:
<TABLE>
<CAPTION>
Shares of Common Cash Before Percentage Allocation
STOCKHOLDER Stock of HDS Offsets & of Any Offsets and
Reductions/1/ Reductions/2/
<S> <C> <C> <C>
Daniel E. Curtis 129,592 $1,555,107.50 48%
Michael R. Curtis 129,592 1,555,107.50 48%
William F. Kottas 11,649 139,785.00 4%
TOTALS: 270,833 $3,250,000.00 100%
</TABLE>
- ----------------------
/1/For purposes of Section 11.5(i) and 11.5(iii) of the Agreement, the term
"Cash Consideration" means, as to each STOCKHOLDER, the Cash Before Offsets
and Reductions shown for such STOCKHOLDER in this column.
/2/Excluding offsets and reductions pursuant to Part I, paragraph A.3. of this
Annex I.
<PAGE>
EXHIBIT 2.5
AGREEMENT AND PLAN OF REORGANIZATION
Dated as of February 26, 1999
by and among
HOSPITALITY DESIGN & SUPPLY, INC.
HDS UTAH, INC.
BINTZ DISTRIBUTING CO.
and
The STOCKHOLDERS named herein
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
1. THE MERGER................................................................................... 1
1.1 Delivery and Filing of Articles of Merger.............................................. 1
1.2 Effective Time of the Merger........................................................... 1
1.3 Certificate of Incorporation, Bylaws and Board of Directors of Surviving Corporation... 2
1.4 Effect of Merger....................................................................... 2
2. CONVERSION OF STOCK.......................................................................... 3
2.1 Manner of Conversion................................................................... 3
2.2 Other Companies........................................................................ 3
3. DELIVERY OF STOCK............................................................................ 3
3.1 Delivery of HDS Stock.................................................................. 3
3.2 Delivery of COMPANY Stock.............................................................. 4
4. PRE-CLOSING AND CLOSING...................................................................... 4
4.1 Pre-Closing............................................................................ 4
4.2 Closing................................................................................ 4
4.3 No Assurances.......................................................................... 5
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS................................... 5
5.1 Due Organization...................................................................... 6
5.2 Authority and Validity................................................................ 6
5.3 Capital Stock of the COMPANY.......................................................... 6
5.4 Transactions in Capital Stock......................................................... 7
5.5 No Bonus Shares....................................................................... 7
5.6 Subsidiaries.......................................................................... 7
5.7 Predecessor Status; etc............................................................... 7
5.8 Spin-off by the COMPANY............................................................... 7
5.9 Financial Statements.................................................................. 7
5.10 Liabilities and Obligations........................................................... 8
5.11 Accounts and Notes Receivable......................................................... 9
5.12 Permits and Intangibles............................................................... 9
5.13 Environmental Matters................................................................. 9
5.14 Real and Personal Property............................................................ 10
5.15 Significant Customers; Material Contracts and Commitments............................. 11
5.16 Title to Real Property................................................................ 11
5.17 Insurance............................................................................. 12
5.18 Compensation; Employment Agreements................................................... 12
5.19 Employee Plans........................................................................ 12
5.20 Compliance with ERISA................................................................. 13
5.21 Conformity with Law................................................................... 16
5.22 Taxes................................................................................. 16
5.23 No Violations......................................................................... 18
5.24 Government Contracts.................................................................. 19
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
5.25 Absence of Changes.................................................................... 19
5.26 Deposit Accounts; Powers of Attorney.................................................. 20
5.27 Relations with Governments............................................................ 20
5.28 Authority; Validity; Ownership........................................................ 21
5.29 Preemptive Rights..................................................................... 21
5.30 No HDS Intention to Reacquire Stock................................................... 21
6. REPRESENTATIONS OF HDS....................................................................... 21
6.1 Due Organization...................................................................... 21
6.2 HDS Stock............................................................................. 22
6.3 Authority and Validity................................................................ 22
6.4 Capital Stock of HDS.................................................................. 22
6.5 No Side Agreements.................................................................... 23
6.6 Subsidiaries.......................................................................... 23
6.7 Business; Financial Information....................................................... 23
6.8 Conformity with Law................................................................... 23
6.9 No Violations......................................................................... 24
6.10 Intentionally Omitted................................................................. 24
7. COVENANTS PRIOR TO CLOSING................................................................... 24
7.1 Access and Cooperation; Due Diligence................................................. 24
7.2 Conduct of Business Pending Closing................................................... 25
7.3 Prohibited Activities................................................................. 26
7.4 No Shop............................................................................... 27
7.5 Notice to Bargaining Agents........................................................... 27
7.6 Termination of Plans.................................................................. 28
7.7 HDS Prohibited Activities............................................................. 28
7.8 Notification of Certain Matters....................................................... 28
7.9 Amendment of Schedules................................................................ 29
7.10 Cooperation in Preparation of Registration Statement.................................. 29
7.11 Examination of Final Financial Statements............................................. 30
7.12 Maintenance of Liquidity and Limitation of Debt....................................... 30
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.............................. 30
8.1 Representations and Warranties; Performance of Obligations............................ 30
8.2 Satisfaction.......................................................................... 31
8.3 No Litigation......................................................................... 31
8.4 Stockholders' Release................................................................. 31
8.5 Opinion of Counsel.................................................................... 31
8.6 Director Indemnification.............................................................. 31
8.7 Registration Statement................................................................ 32
8.8 Consents and Approvals................................................................ 32
8.9 Good Standing Certificates............................................................ 32
8.10 No Waivers............................................................................ 32
8.11 No Material Adverse Change............................................................ 32
8.12 Employment Agreements................................................................. 32
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
8.13 Consulting Agreements................................................................. 32
8.14 Leases................................................................................ 33
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.................................................. 33
9.1 Representations and Warranties; Performance of Obligations............................ 33
9.2 No Litigation......................................................................... 33
9.3 Financial Statements.................................................................. 33
9.4 No Material Adverse Effect............................................................ 33
9.5 STOCKHOLDERS' Release................................................................. 34
9.6 Satisfaction.......................................................................... 34
9.7 Termination of Related Party Agreements............................................... 34
9.8 Opinion of COMPANY Counsel............................................................ 34
9.9 Consents and Approvals................................................................ 34
9.10 Good Standing Certificates........................................................... 34
9.11 Registration Statement............................................................... 35
9.12 Employment Agreements................................................................ 35
9.13 Consulting Agreements................................................................ 35
9.14 Leases............................................................................... 35
9.15 Repayment of Indebtedness............................................................ 35
9.16 FIRPTA Certificate................................................................... 35
9.17 Insurance............................................................................ 35
9.18 Nondisturbance Agreements............................................................ 35
10. POST-CLOSING COVENANTS AND SPECIAL TAX MATTERS............................................... 36
10.1 Intentionally Omitted................................................................ 36
10.2 Disclosure........................................................................... 36
10.3 Cooperation in Tax Return Preparation................................................ 36
10.4 Tax Return Preparation and Filing.................................................... 36
10.5 Tax Treatment of Transaction......................................................... 37
10.6 Special Definitions Related to Tax Matters........................................... 37
10.7 Directors............................................................................ 38
10.8 Release from Guarantees.............................................................. 38
10.9 HDS Stock Options.................................................................... 38
10.10 Section 338(h)(10) Election.......................................................... 39
11. INDEMNIFICATION.............................................................................. 39
11.1 General Indemnification by the STOCKHOLDERS.......................................... 39
11.2 Indemnification by HDS............................................................... 40
11.3 Third Person Claims.................................................................. 40
11.4 Exclusive Remedy..................................................................... 42
11.5 Limitations on Indemnification....................................................... 42
11.6 Special Tax Indemnity Provisions..................................................... 43
11.7 Special Contest Rights Related to Tax Matters........................................ 45
11.8 Special Notification Requirements Regarding Tax Disputes............................. 45
11.9 Refunds.............................................................................. 45
11.10 Optional Payment With Shares......................................................... 45
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
12. TERMINATION OF AGREEMENT..................................................................... 46
12.1 Termination.......................................................................... 46
12.2 Liabilities in Event of Termination.................................................. 46
13. NONCOMPETITION............................................................................... 47
13.1 Prohibited Activities................................................................ 47
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.................................................... 49
14.1 STOCKHOLDERS......................................................................... 49
14.2 HDS.................................................................................. 49
14.3 Damages.............................................................................. 50
14.4 Survival............................................................................. 50
15. TRANSFER RESTRICTIONS........................................................................ 50
15.1 Transfer Restrictions................................................................ 50
15.2 Permitted Transferees................................................................ 51
16. FEDERAL SECURITIES ACT REPRESENTATIONS....................................................... 51
16.1 Compliance with Law.................................................................. 51
16.2 Accredited Investors; Economic Risk; Sophistication.................................. 52
17. REGISTRATION RIGHTS.......................................................................... 52
17.1 Piggyback Registration Rights........................................................ 52
17.2 Demand Registration Rights........................................................... 53
17.3 Registration Procedures.............................................................. 54
17.4 Underwriting Agreement............................................................... 54
17.5 HDS Stock............................................................................ 54
17.6 Availability of Rule 144............................................................. 54
17.7 Survival............................................................................. 54
18. GENERAL...................................................................................... 55
18.1 Cooperation.......................................................................... 55
18.2 Successors and Assigns............................................................... 55
18.3 Entire Agreement..................................................................... 55
18.4 Counterparts......................................................................... 55
18.5 Brokers and Agents................................................................... 55
18.6 Expenses............................................................................. 55
18.7 Notices.............................................................................. 56
18.8 Governing Law; Forum................................................................. 57
18.9 Survival of Representations and Warranties........................................... 57
18.10 Exercise of Rights and Remedies...................................................... 57
18.11 Time................................................................................. 57
18.12 Reformation and Severability......................................................... 57
18.13 Remedies Cumulative.................................................................. 58
18.14 Construction......................................................................... 58
18.15 Captions............................................................................. 58
</TABLE>
-iv-
<PAGE>
SCHEDULES and ANNEXES
<TABLE>
<CAPTION>
<S> <C> <C>
Annex I - Consideration to Founding Company Stockholders
Annex II - Stockholders and Stock Ownership of the COMPANY
Annex III - Stockholders and Stock Ownership of HDS
Annex IV - Certificate of Incorporation and Bylaws of HDS
Annex V - Form of Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation
Annex VI - Form of Opinion of COMPANY Counsel
Annex VII - Form of Director Indemnification Agreement
Annex VIII - Form of Employment Agreement
Annex IX - Form of Consulting Agreement
Annex X - Leases
Annex XI - Stockholder Release
Annex XII - Form of Nondisturbance Agreement
Schedule 5.1 - Qualifications to Do Business
Schedule 5.3 - Capital Stock of the COMPANY
Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to Acquire Capital Stock
Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses
Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries
Schedule 5.7 - Names of Predecessor Companies
Schedule 5.8 - Sales or Spin-offs of Significant Assets
Schedule 5.9 - Financial Statements
Schedule 5.10 - Significant Liabilities and Obligations
Schedule 5.11 - Accounts and Notes Receivable
Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental Authorizations
Schedule 5.13 - Environmental Matters
Schedule 5.14 - Real Property, Leases and Significant Personal Property
Schedule 5.15 - Significant Customers and Material Contracts
Schedule 5.17 - Insurance Policies and Claims
Schedule 5.18 - Officers, Directors and Key Employees, Employment Agreements; Compensation
Schedule 5.19 - Employee Benefit Plans
Schedule 5.20 - Compliance with ERISA
Schedule 5.21 - Violations of Law, Regulations or Orders
Schedule 5.22 - Taxes
Schedule 5.23 - Violations of Charter Documents and Material Defaults
Schedule 5.24 - Governmental Contracts Subject to Price Redetermination or Renegotiation
Schedule 5.25 - Changes Since Balance Sheet Date
Schedule 5.26 - Bank Accounts; Powers of Attorney
Schedule 5.28 - Encumbrances on the COMPANY Stock
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Schedule 6.5 - HDS Side Agreements
Schedule 6.6 - HDS's Subsidiaries
Schedule 6.7 - HDS's Financial Statements
Schedule 6.9 - No Violations
Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course Between Balance Sheet Date and Closing Date
Schedule 7.3 - Prohibited Activities
Schedule 7.6 - Plans to be Terminated by the Pricing Date
Schedule 7.7 - Exceptions to Restrictions on HDS
Schedule 8.12 - Employment Agreements
Schedule 8.13 - Consulting Agreements
Schedule 8.14 - Leases
Schedule 9.7 - Termination of Related Party Agreements
Schedule 9.18 - Lienholders and Ground Lessors
Schedule 13.1 - Prohibited Activities
Schedule 16.2 - Non-Accredited Investors
Schedule 18.5 - Brokers and Agents
Schedule 18.6 - Fees, Expenses and Disbursements
</TABLE>
-ii-
<PAGE>
TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
Defined Term Section
- ------------ -------
<S> <C>
accredited investor 16.2
adjusted working capital 7.12
Affiliate 10.6(a)
Agreement Preamble
Articles of Merger 1.1
Balance Sheet Date 5.9
Cash Consideration Annex I
Charter Documents 5.1
Closing 4.2
Closing Date 4.2
COBRA 5.20(v)
Code Whereas
COMPANY Preamble
COMPANY Affiliates 5.8
COMPANY Financial Statements 5.9
COMPANY Stock 2.1
Constituent Corporations Whereas
Consulting Agreement 8.13
controlled group 5.20
December 31, 1998 COMPANY Balance 5.9
Sheet
Defined Benefit Plan 5.19(iv)
Delaware GCL 1.4
Demand Registration 17.2
Effective IPO Price Annex I
Effective Time of the Merger 1.2
Election Period 11.3(i)
Employment Agreement 8.12
Environmental Laws 5.13
ERISA 5.19
Expiration Date 5(A)
Founding Companies Whereas
Founding Stockholders 17.1
group health plans 5.20(v)
HDS Preamble
HDS Charter Documents 6.1
HDS Material Adverse Effect 6.1
HDS Material Documents 6.9
HDS Stock 2.1
HDS's Subsidiaries 6.1
Howard Rice 4.1
</TABLE>
-i-
<PAGE>
TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
Indemnification Threshold 11.5(i)
Indemnified Party 11.3
Indemnifying Party 11.3
Interim Period 10.6(b)
IPO 4.1
Leases 8.14
Material Adverse Effect 5.1
Material Contracts 5.15
Material Leases 5.14
Merger Whereas
Minimum IPO Price Annex I
multi-employer pension plan 5.20
1933 Act 5(A)
1934 Act 5(A)
Nondisturbance Agreements 9.18
Other Agreements Whereas
Other Companies Whereas
PBGC 5.19(x)
Plans 5.19
Post-Closing Period 10.6(d)
Pre-Closing 4.1
Pre-Closing Period 10.6(c)
Pricing Date 4.1
Purchase Price Annex I
Qualified Plans 5.19(iii)
Registration Statement 4.3
reportable events 5.20(iii)
SEC 8.2
significant customers 5.15
Stockholder Release 9.5
STOCKHOLDERS Preamble
Surviving Corporation 1.2
Tax 10.6(e)
Tax Data 10.3
Tax Documentation 10.3
Tax Returns 10.6(f)
Taxing Authority 10.6(g)
Territory 13.1(i)
Third Party Claim 11.3(i)
Third Person 11.3
Transfer Taxes 17.6
Underwriters 4.3
Underwriting Agreement 8.7
</TABLE>
-ii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of February 26, 1999, by and among HOSPITALITY DESIGN & SUPPLY, INC., a Delaware
corporation ("HDS"), HDS UTAH, INC, a Delaware corporation and a wholly owned
subsidiary of HDS ("HDSU"), BINTZ DISTRIBUTING CO., a Utah corporation (the
"COMPANY"), and the stockholders of the COMPANY listed on Annex II (the
"STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the COMPANY.
WHEREAS, the respective Boards of Directors of HDS, HDSU and the
COMPANY (which together are herein collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that HDSU merge with and into the
COMPANY pursuant to this Agreement and the applicable provisions of the laws of
the State of Utah (such transaction is sometimes herein called the "Merger");
WHEREAS, HDS is entering into other separate agreements (the "Other
Agreements") substantially similar to this Agreement, each of which is entitled
"Agreement and Plan of Reorganization," with each of the entities other than the
Company listed in Part II of Annex I (collectively, the "Other Companies") in
order to acquire additional companies in the commercial kitchen design and/or
supply industry (the Other Companies, together with the COMPANY, are
collectively referred to herein as the "Founding Companies");
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. THE MERGER.
1.1 Delivery and Filing of Articles of Merger. The Constituent Corporations
-----------------------------------------
will cause a Certificate of Merger or Articles of Merger with respect to the
Merger (the "Articles of Merger") to be signed, verified, delivered to and filed
with the Secretary of State of the State of Delaware and with the relevant
authorities in the State of Utah, on or before the Closing Date (as defined in
Section 4.2).
1.2 Effective Time of the Merger. The "Effective Time of the Merger" shall
----------------------------
be on the Closing Date, as defined in Section 4.2, and simultaneous with the
closing of the IPO, as defined in Section 4.1. At the Effective Time of the
Merger, HDSU shall be merged with and into the COMPANY in accordance with the
Articles of Merger, and the separate existence of HDSU shall cease. The COMPANY
shall be the surviving party in the Merger and is herein sometimes referred to
as the "Surviving Corporation." The Merger will be effected in a single
transaction.
-1-
<PAGE>
1.3 Certificate of Incorporation, Bylaws and Board of Directors of Surviving
Corporation. At the Effective Time of the Merger:
(i) the Articles of Incorporation of the Surviving Corporation shall
be amended and restated at and as of the Effective Time to read as did the
Certificate of Incorporation of HDSU immediately prior to the Effective
Time, except that the name of the Surviving Corporation will remain
unchanged;
(ii) the Bylaws of the Surviving Corporation shall be amended and
restated at and as of the Effective Time to read as did the Bylaws of HDSU
immediately prior to the Effective Time, except that the name of the
Surviving Corporation will remain unchanged;
(iii) the Board of Directors of the Surviving Corporation shall consist
of those persons who constituted the Board of Directors of HDSU immediately
prior to the Merger, who shall hold office subject to the provisions of the laws
of the State of Utah and of the Articles of Incorporation and Bylaws of the
Surviving Corporation until such persons' successors are duly elected and
qualified; and
(iv) the officers of the Surviving Corporation shall be the persons
who were officers of HDSU immediately prior to the Merger, who shall hold
office, subject to the provisions of the Articles of Incorporation and
Bylaws of the Surviving Corporation and the Employment Agreements (as
defined in Section 8.12), until such officers' successors are duly elected
and qualified.
1.4 Effect of Merger. At the Effective Time of the Merger, the effect of
----------------
the Merger shall be as provided in the applicable provisions of the Utah Revised
Business Corporation Act. At the Effective Time of the Merger, the separate
existence of HDSU shall cease and, in accordance with the terms of this
Agreement, the Surviving Corporation shall possess all the rights, privileges,
immunities and franchises of a public, as well as of a private, nature, and all
property, real, personal and mixed, and all debts due on whatever account,
including subscriptions to shares, all taxes, including those due and owing and
those accrued, and all other choses in action, and all and every other interest
of or belonging to or due to the COMPANY and HDSU shall be taken and deemed to
be transferred to, and vested in, the Surviving Corporation without further act
or deed. Except as otherwise provided herein, the Surviving Corporation shall
thenceforth be responsible and liable for all the liabilities and obligations of
the COMPANY and HDSU and the Surviving Corporation shall be substituted for the
COMPANY or HDSU with respect to any claim existing, or action or proceeding
pending, by or against the COMPANY or HDSU. Neither the rights of creditors nor
any liens upon the property of the COMPANY or HDSU shall be impaired by the
Merger, and all debts, liabilities and duties of the COMPANY and HDSU shall
attach to the Surviving Corporation, and may be enforced against such Surviving
Corporation to the same extent as if said debts, liabilities and duties had been
incurred or contracted by such Surviving Corporation.
-2-
<PAGE>
2. CONVERSION OF STOCK.
2.1 Manner of Conversion. The manner of converting the outstanding shares
--------------------
of capital stock of the COMPANY ("COMPANY Stock") into outstanding shares of
common stock of HDS ("HDS Stock") and cash shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of COMPANY Stock issued and outstanding
immediately prior to the Effective Time of the Merger, shall be converted into
the right to receive (1) that number of shares of HDS Stock determined as set
forth in Part I of Annex I hereto and (2) the amount of cash determined as set
forth in Part I of Annex I hereto, such shares and cash to be subject to offsets
and distributed to STOCKHOLDERS as provided in Part I of Annex I hereto;
(ii) all shares of COMPANY Stock that are held by COMPANY as treasury
stock or owned by any COMPANY Subsidiary shall be cancelled and retired and no
consideration shall be delivered or paid in exchange therefor; and
each share of common stock of HDSU shall be converted into one share of
common stock of the Surviving Corporation.
At the Effective Time of the Merger, HDS shall have no class of
capital stock issued and outstanding which, as a class, shall have any rights or
preferences senior to the shares of HDS Stock received by the STOCKHOLDERS,
including, without limitation, any rights or preferences as to dividends or as
to the assets of HDS upon liquidation or dissolution or as to voting rights,
except for any series of Preferred Stock that will be converted into HDS Stock
concurrently with or immediately after the Merger.
2.2 Other Companies. Part II to Annex I sets forth the aggregate
---------------
consideration into which shares of outstanding stock of each Founding Company
will be converted on the Closing Date, or, if applicable, payable with respect
to such shares of outstanding stock on the Closing Date, before offsets.
3. DELIVERY OF STOCK.
3.1 Delivery of HDS Stock. At or immediately after the Effective Time of
---------------------
the Merger:
(i) the STOCKHOLDERS, as the holders of all outstanding certificates
representing shares of COMPANY Stock, shall, upon surrender of such
certificates, be entitled to receive the number of shares of HDS Stock and the
amount of cash calculated pursuant to Section 2.1 above; and
(ii) until the certificates representing COMPANY Stock have been
surrendered by the STOCKHOLDERS and replaced by the HDS Stock, the certificates
for COMPANY Stock shall, for all corporate purposes, be deemed to evidence the
-3-
<PAGE>
ownership of the number of shares of HDS Stock and cash which such STOCKHOLDER
is entitled to receive as a result of the Merger, as set forth in Section 2.1,
notwithstanding the number of shares of COMPANY Stock such certificates
represent.
3.2 Delivery of COMPANY Stock. The STOCKHOLDERS shall deliver to HDS at
-------------------------
Pre-Closing (as defined below in Section 4.1) the certificates representing
COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by
blank stock powers, and with all necessary transfer tax and other revenue
stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The
STOCKHOLDERS agree promptly to cure any deficiencies with respect to the
endorsement of the certificates or other documents of conveyance with respect to
such COMPANY Stock or with respect to the stock powers accompanying any COMPANY
Stock.
4. PRE-CLOSING AND CLOSING.
4.1 Pre-Closing. On the date (the "Pricing Date") on which the public
-----------
offering price of the shares of HDS Stock in the initial public offering of HDS
Stock (the "IPO") is determined, the parties shall deliver to Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, A Professional Corporation ("Howard Rice")
all documents necessary to effect (i) the Merger (including, at HDS's election,
the filing with the appropriate state authorities of the Articles of Merger and
any similar document to become effective on the Closing Date (as defined
below)), (ii) the conversion of shares of HDSU Stock into shares of stock of the
Surviving Corporation and (iii) the delivery of shares of HDS Stock to
STOCKHOLDERS (such delivery to Howard, Rice is herein referred to as the "Pre-
Closing"); provided, that the actual Merger, the conversion of shares of HDSU
-------- ----
Stock into shares of stock of the Surviving Corporation and the delivery of
shares of HDS Stock shall not take place until the Closing Date as herein
provided. The Pre-Closing shall take place at the offices of Howard, Rice at 3
Embarcadero Center, 7th Floor, San Francisco, California 94111.
4.2 Closing. On the date when the closing with respect to the IPO occurs
-------
(the "Closing Date"), the Articles of Merger shall be filed with the appropriate
state authorities, or if already filed shall become effective, and the
conversion of shares of HDSU Stock into shares of stock of the Surviving
Corporation, the delivery of shares of HDS Stock, and the transfer of funds by
wire transfer in an amount equal to the cash portion of the consideration which
the STOCKHOLDERS shall be entitled to receive pursuant to the Merger, shall
occur and be deemed to be completed (such consummation and delivery is herein
referred to as the "Closing"). After the Pre-Closing and until the Closing
Date, no party may withdraw, terminate or rescind any delivery made at the Pre-
Closing unless this Agreement is terminated as provided in Section 12. All
documents delivered at the Pre-Closing shall be held by Howard Rice for final
delivery on the Closing Date as directed by the parties and their counsel at the
Pre-Closing, provided only that the Articles of Merger and any similar document
may be filed to become effective on the Closing Date. Should the Agreement be
terminated as provided in Section 12 prior to the Closing Date, the parties
shall take all steps necessary to rescind
-4-
<PAGE>
any such filings, Howard Rice shall return all documents delivered at the Pre-
Closing to the parties who delivered the same, all such deliveries at the Pre-
Closing will be rescinded and a nullity, the Merger shall not become effective,
the shares of HDSU Stock will not be converted into stock of the Surviving
Corporation, and shares of HDS Stock will not be delivered to STOCKHOLDERS. If
HDS proposes to file any Articles of Merger or any similar document prior to the
Closing, the documents delivered at Pre-Closing shall include documents required
to rescind, prior to the Closing, any filing of the Articles of Merger and any
similar document.
4.3 No Assurances. The COMPANY and the STOCKHOLDERS acknowledge and
-------------
agree that (i) there exists no firm commitment, binding agreement, or promise or
other assurance of any kind, whether express or implied, oral or written, that
any Registration Statement filed in connection with the IPO (the "Registration
Statement") will become effective or that the IPO pursuant thereto will occur at
a particular price or within a particular range of prices or will occur at all;
(ii) none of HDS, HDSU or their respective officers, directors, agents or
representatives nor any prospective underwriters in the IPO (the "Underwriters")
shall have any liability to the COMPANY, the STOCKHOLDERS or any other person
affiliated or associated with the COMPANY for any failure of the Registration
Statement to become effective, or of the IPO to occur at a particular price or
within a particular range of prices or to occur at all; and (iii) the decision
of the STOCKHOLDERS to enter into this Agreement, or to vote in favor of or
consent to the proposed Merger, has been made independent of, and without
reliance upon, any statements, opinions or other communications of, or due
diligence investigations which have been or will be made or performed by any
prospective Underwriter, relative to HDS, HDSU or the prospective IPO. The
Underwriters shall have no obligation to the STOCKHOLDERS with respect to any
disclosure contained in the Registration Statement.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS.
(A) Representations and Warranties of COMPANY and STOCKHOLDERS. The
--- ----------------------------------------------------------
COMPANY and each of the STOCKHOLDERS jointly and severally represent and warrant
that all of the following representations and warranties in this Section 5(A)
are true at the date of this Agreement and, subject to Section 7.9 hereof, shall
be true at the time of Pre-Closing and the Closing Date, and that such
representations and warranties shall survive the Closing Date for a period of
two (2) years (the last day of such period is herein called the "Expiration
Date"), except that (i) the warranties and representations set forth in Sections
5.13, 5.19 and 5.20 hereof shall survive until such date as the limitations
period has run for each act, inaction, fact, event or circumstance which
constitutes a breach thereof, which date shall be deemed to be the Expiration
Date for Sections 5.13, 5.19 and 5.20, (ii) the warranties and representations
set forth in Section 5.22 hereof shall survive until such date as the
limitations period has run for all tax periods ended on or prior to the Closing
Date, which date shall be deemed to be the Expiration Date for Section 5.22, and
(iii) solely for purposes of Section 11.1(iv) hereof, all warranties and
representations shall survive until such date as the limitations period has run
under the
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Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act
of 1934, as amended (the "1934 Act"), and all other applicable Federal or state
securities laws, which date shall be deemed to be the Expiration Date for
purposes of Section 11.1(iv) hereof.
5.1 Due Organization. The COMPANY is a corporation duly organized,
----------------
validly existing and in good standing under the laws of the state of its
incorporation, and is duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on its business in the places and in the manner as now conducted except
(i) as disclosed on Schedule 5.1 or (ii) where the cumulative effect of all
failures to be so authorized or qualified would not have a material adverse
effect on the business, operations, properties, assets or condition (financial
or otherwise), of the COMPANY (a "Material Adverse Effect"). Schedule 5.1
contains a list of all jurisdictions in which the COMPANY is authorized or
qualified to do business. True, complete and correct copies of the Certificate
(or Articles) of Incorporation and Bylaws, as amended, of the COMPANY
(collectively, the "Charter Documents"), certified by the Secretary or Assistant
Secretary of the COMPANY, are all attached hereto as part of Schedule 5.1. A
true, complete and correct copy of the Certificate (or Articles) of
Incorporation, as amended, included in the Charter Documents, certified by the
Secretary of State or other appropriate authority of the state of incorporation
of the COMPANY, as applicable, shall be delivered to HDS at the Pre-Closing.
Except as set forth on Schedule 5.1, the minute books of the COMPANY, as
heretofore made available to HDS, are correct and complete in all material
respects.
5.2 Authority and Validity. The representatives of the COMPANY executing
----------------------
this Agreement have the authority to enter into and bind the COMPANY to the
terms of this Agreement and any other agreements contemplated by this Agreement
to which the COMPANY is or is contemplated to be a party. The COMPANY has the
full legal right, power and authority to enter into this Agreement, any other
agreements contemplated by this Agreement, to which the COMPANY is or is
contemplated to be a party, and the Merger. All corporate action necessary for
the authorization, execution, delivery and performance by the COMPANY of the
Agreement, and also any other agreements contemplated by this Agreement to which
the COMPANY is or is contemplated to be a party, has been taken. Assuming due
authorization, execution and delivery by HDS, this Agreement and any other
agreements contemplated by this Agreement to which the COMPANY is or is
contemplated to be a party are or will be legal, valid and binding obligations
of the COMPANY, enforceable in accordance with their respective terms, except as
may be limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally.
5.3 Capital Stock of the COMPANY. The authorized capital stock of the
----------------------------
COMPANY is as set forth in Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS and in
the amounts set forth in Annex II and further, except as set forth on Schedule
5.3, are owned free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the
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capital stock of the COMPANY have been duly authorized and validly issued, are
fully paid and nonassessable, are owned of record and beneficially by the
STOCKHOLDERS and further, such shares were offered, issued, sold and delivered
by the COMPANY in compliance with all applicable state and federal laws
concerning the issuance of securities. Further, none of such shares were issued
in violation of the preemptive rights of any past or present stockholder.
5.4 Transactions in Capital Stock. Except as set forth on Schedule 5.4,
-----------------------------
the COMPANY has not acquired any COMPANY Stock since January 1, 1993. Except as
set forth on Schedule 5.4, no option, warrant, call, conversion right or
commitment of any kind exists which obligates the COMPANY to issue any
authorized but unissued capital stock. Except as set forth on Schedule 5.4, the
COMPANY has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof. Except as set
forth on Schedule 5.4, there has been no transaction or action taken with
respect to the equity ownership of the COMPANY, in contemplation of the
transactions described in this Agreement.
5.5 No Bonus Shares. Except as set forth in Schedule 5.5, since January 1,
---------------
1995 none of the shares of COMPANY Stock was issued for less than the fair
market value thereof at the time of issuance or was issued in exchange for
consideration other than cash.
5.6 Subsidiaries. The COMPANY does not presently own, of record or
------------
beneficially, or control, directly or indirectly, any capital stock, securities
convertible into capital stock or any other equity interest in any corporation,
association or business entity nor is the COMPANY, directly or indirectly, a
participant in any joint venture, partnership or other non-corporate entity.
5.7 Predecessor Status; etc. Set forth in Schedule 5.7 is a listing of all
------------------------
names under which the COMPANY has done business during the last five years and
all names of all predecessor companies for the past five years of the COMPANY,
including the names of any entities from whom the COMPANY previously acquired
material assets. Except as disclosed in Schedule 5.7, the COMPANY has not been
a subsidiary or division of another corporation or a part of an acquisition
which was later rescinded.
5.8 Spin-off by the COMPANY. Except as set forth on Schedule 5.8, there
-----------------------
has not been any sale, spin-off or split-up of any material assets of the
COMPANY or any other person or entity that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the COMPANY ("COMPANY Affiliates") other than in the ordinary
course of business, within the preceding two years.
5.9 Financial Statements. Attached hereto as Schedule 5.9 to this
--------------------
Agreement are copies of the following financial statements (the "COMPANY
Financial Statements") of the COMPANY: (i) the COMPANY's balance sheet as of
December 31, 1998 and
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statements of income, cash flows and retained earnings for the twelve month
period ended December 31, 1998 (such Balance Sheet as of December 31, 1998 is
herein sometimes referred to as the "December 31, 1998 COMPANY Balance Sheet,"
and December 31, 1998 is herein sometimes referred to as the "Balance Sheet
Date") and (ii) the COMPANY's balance sheets as of December 31, 1997 and 1996
and statements of income, cash flows and retained earnings for each of the years
in the two-year period ended December 31, 1997. To the knowledge of the COMPANY,
such Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods indicated (except as noted). Such balance sheets as of December 31,
1998, 1997 and 1996 present fairly the financial position of the COMPANY as of
the dates indicated thereon, and such Statements of Income, Cash Flows and
Retained Earnings present fairly the results of their respective operations for
the periods indicated thereon.
5.10 Liabilities and Obligations. Schedule 5.10 is an accurate list with
---------------------------
respect to the COMPANY of all liabilities as of a date specified therein, which
date shall not be more than thirty (30) days prior to the date of this
Agreement. Schedule 5.10 shall be amended or supplemented pursuant to Section
7.9 to list (i) all liabilities which were incurred after such date and were
incurred other than in the ordinary course of business or which exceed $10,000
(individually or in the aggregate) if (and only if) such liabilities would
either be accrued on the balance sheet of the COMPANY in accordance with
generally accepted accounting principles consistently applied if such balance
sheet were being prepared immediately prior to Closing or if such liabilities
represent liabilities of the nature described in Section 5.13, Section 5.19,
Section 5.20 and/or Section 5.22 (excluding items that are both not known to the
COMPANY and not covered by any of such sections because of knowledge
qualifications contained in one or more of such sections); and (ii) all
liabilities which were incurred after such date and were incurred other than in
the ordinary course of business or which exceed $100,000 (in the aggregate) and
are not otherwise described in the immediately preceding subclause (i).
Any reference to "all liabilities" in this Section 5.10 shall mean, in each such
instance, all liabilities of the COMPANY of any kind, character or description,
whether accrued, absolute, secured or unsecured, contingent or otherwise. In
the case of those liabilities which are contingent, Schedule 5.10 includes, and
each amendment or supplement pursuant to Section 7.9 will include, a reasonable
estimate of the maximum amount which may be payable. For each such contingent
liability, the COMPANY has provided (or in the case of contingent liabilities
listed in an amendment or supplement pursuant to Section 7.9, will provide) to
HDS the following information:
(a) a summary description of the liability together with the following:
(1) copies of all relevant documentation relating thereto;
(2) amounts claimed and any other action or relief sought; and
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(3) name of claimant and all other parties to the claim, suit
or proceeding;
(b) the name of each court or agency before which such claim, suit or
proceeding is pending; and
(c) the date such claim, suit or proceeding was instituted.
5.11 Accounts and Notes Receivable. Attached hereto as Schedule 5.11 to
-----------------------------
this Agreement is an accurate list of the accounts and notes receivable of the
COMPANY as of the Balance Sheet Date, including any such amounts which are not
reflected in the December 31, 1998 COMPANY Balance Sheet, and including
receivables from and advances to employees and the STOCKHOLDERS. Except to the
extent to be reflected on Schedule 5.11, such accounts and notes are collectible
in the amount to be shown in the December 31, 1998 COMPANY Balance Sheet, net of
reserves reflected therein.
5.12 Permits and Intangibles. The COMPANY holds all licenses, franchises,
-----------------------
permits and other governmental authorizations including permits, titles
(including motor vehicle titles and current registrations), licenses,
franchises, certificates, trademarks, trade names, patents, patent applications
and copyrights, the absence of which, either singly or in the aggregate, would
have a Material Adverse Effect. Schedule 5.12 is an accurate list and summary
description of all such licenses, franchises, permits and other governmental
authorizations, provided that, with respect to copyrights, Schedule 5.12 may
include only those copyrights which are registered. To the knowledge of the
COMPANY, the licenses, franchises, permits and other governmental authorizations
listed on Schedule 5.12 are valid, and the COMPANY has not received any notice
that any governmental authority intends to cancel, terminate or not renew any
such license, franchise, permit or other governmental authorization. The
COMPANY has conducted and is conducting its business in compliance with the
requirements, standards, criteria and conditions set forth in applicable
permits, licenses, orders, approvals, variances, rules and regulations and is
not in violation of any of the foregoing except where all such non-compliances
and violations in the aggregate would not have a Material Adverse Effect.
Except as specifically provided in Schedule 5.12, the transactions contemplated
by this Agreement will not result in a default under or a breach or violation
of, or have a Material Adverse Effect upon the rights and benefits afforded to
the COMPANY by, such licenses, franchises, permits or government authorizations,
either singly or in the aggregate.
5.13 Environmental Matters. Except as set forth on Schedule 5.13, and
---------------------
except to the extent that noncompliance with any Environmental Law (as defined
below), either singly or in the aggregate, does not have a Material Adverse
Effect, (i) the COMPANY has complied with and is in compliance with all federal,
state, local and foreign statutes (civil and criminal), laws, ordinances,
regulations, rules, notices, permits, judgments, orders and decrees applicable
to it or its properties, assets, operations and businesses relating to
environmental protection (collectively "Environmental Laws") including, without
limitation, Environmental Laws relating to protection of the air, water or land
or to the generation, storage, use, handling, transportation, treatment or
disposal of Solid
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Wastes, Hazardous Wastes or Hazardous Substances (as such terms are defined in
any applicable Environmental Law); (ii) the COMPANY has obtained and complied
with all necessary permits and other approvals necessary to treat, transport,
store, dispose of or otherwise handle Solid Wastes, Hazardous Wastes or
Hazardous Substances and has reported, to the extent required by all
Environmental Laws, all past and present sites owned and operated by the COMPANY
where Solid Wastes, Hazardous Wastes or Hazardous Substances have been treated,
stored, used, disposed of or otherwise handled; (iii) there have been no
releases (as defined in Environmental Laws) at, from, under, in or on any
property owned or operated by the COMPANY except as permitted by Environmental
Laws; (iv) to the knowledge of the COMPANY there is no on-site or off-site
location to which the COMPANY has transported or disposed of Solid Wastes,
Hazardous Wastes or Hazardous Substances or arranged for the transportation of
Solid Wastes, Hazardous Wastes or Hazardous Substances, which site is the
subject of any federal, state, local or foreign enforcement action or any other
investigation which could lead to any claim against the COMPANY or HDS for any
clean-up cost, remedial work, damage to natural resources or personal injury,
including, but not limited to, any claim under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended; and (v) the
COMPANY has no contingent liability in connection with any release of any Solid
Waste, Hazardous Waste or Hazardous Substance into the environment. Schedule
5.13 lists all releases of Hazardous Wastes or Hazardous Substances by the
COMPANY.
5.14 Real and Personal Property. Schedule 5.14 hereto contains an accurate
--------------------------
list of (x) all real and personal property included on the December 31, 1998
COMPANY Balance Sheet, (y) all other real and personal property of the COMPANY
with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii)
acquired since the Balance Sheet Date, and (z) all leases for real and personal
property to which the COMPANY is a party involving real or personal property
having a value in excess of $2,500 ("Material Leases"), including true, complete
and correct copies of all Material Leases, and including an indication as to
which real and personal property is currently owned, or was formerly owned, by
the STOCKHOLDERS or business or personal affiliates of the COMPANY or the
STOCKHOLDERS. All machinery and equipment of the COMPANY listed on Schedule
5.14 is in good working order and condition, ordinary wear and tear excepted,
except (i) as disclosed in Schedule 5.14 or (ii) where the cumulative effect of
all failures to be in good working order and condition would not have a Material
Adverse Effect. All Material Leases are in full force and effect and constitute
valid and binding agreements of the COMPANY and to the knowledge of the COMPANY,
constitute valid and binding agreements on the other parties thereto (and their
successors) in accordance with their respective terms. All fixed assets used by
the COMPANY that are material to the operation of their respective businesses
are either owned by the COMPANY or leased under an agreement set forth on
Schedule 5.14. Schedule 5.14 contains true, complete and correct copies of all
title reports received or owned by the COMPANY and title insurance policies
received or owned by the COMPANY with respect to the real property listed on
Schedule 5.14. The COMPANY has also provided in Schedule 5.14 a summary
description of all plans or projects that
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involve the opening of new operations, expansion of any existing operations or
the acquisition of any real property or existing businesses, with respect to
which the COMPANY has made any expenditure in the two-year period prior to the
date of the Agreement in excess of $10,000, or which if pursued by the COMPANY
would require additional expenditures of capital in excess of $10,000. Except as
set forth on Schedule 5.14 and except for liens excepted in Section 7.3(vi)(1)
and (3), there are no liens against the COMPANY's real and personal properties.
5.15 Significant Customers; Material Contracts and Commitments. Schedule
---------------------------------------------------------
5.15 contains an accurate list of (i) all customers representing five percent
(5%) or more of the COMPANY's revenues for the twelve months ended on the
Balance Sheet Date, or who have paid to the COMPANY $50,000 or more over any
four consecutive fiscal quarters in the three years ended on the Balance Sheet
Date (collectively, "significant customers") and (ii) all contracts, indentures
and other instruments requiring payment or performance by the COMPANY in an
amount or with a value in excess of $10,000 ("Material Contracts") to which the
COMPANY is a party or by which the COMPANY or any of its respective properties
are bound (including, but not limited to, contracts with significant customers,
joint venture or partnership agreements, contracts with any labor organizations,
loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to
purchase land, leases, liens, pledges or other security agreements) (a) as of
the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in
each case has delivered true, complete and correct copies of such agreements to
HDS, except that leases set forth on Schedule 5.14 need not be set forth on
Schedule 5.15. Except to the extent set forth on Schedule 5.15, (i) none of the
COMPANY's significant customers has cancelled or substantially reduced or, to
the knowledge of the COMPANY, is currently attempting or threatening to cancel
any Material Contract or substantially reduce utilization of the services
provided by the COMPANY, and (ii) no Stockholder or any affiliate of any
Stockholder is a party to any such Material Contract. Except as set forth in
Schedule 5.15, the COMPANY has not been the subject of any election in respect
of union representation of employees and are not bound by or subject to (and
none of its respective assets or properties is bound by or subject to) any
arrangement with any labor union. Except as set forth on Schedule 5.15, no
employees of the COMPANY are represented by any labor union or covered by any
collective bargaining agreement and no campaign to establish such representation
has ever occurred or, to the knowledge of the COMPANY, is in progress. There is
no pending or, to the COMPANY's knowledge, threatened labor dispute involving
the COMPANY and any group of its employees, nor has the COMPANY experienced any
labor interruptions over the past three years, and the COMPANY considers its
relationship with its respective employees to be good.
5.16 Title to Real Property. The COMPANY has good and insurable title to
----------------------
the real property owned and used in its business, including those reflected on
Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales
agreement, encumbrance or charge, except for:
(i) liens set forth on Schedules 5.10 and 5.15 securing specified
liabilities (with respect to which no material default exists);
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(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title shown of record in the office of the County Clerk in which the
properties, assets and leasehold estates are located which do not adversely
affect the current use of the property.
5.17 Insurance. Schedule 5.17 sets forth an accurate list of all
---------
insurance policies carried by the COMPANY. Except as set forth on Schedule 5.17,
the Company has delivered to HDS an accurate list (attached to Schedule 5.17) of
all insurance loss runs or worker's compensation claims received for the past
three policy years. The Company has provided HDS with true, complete and correct
copies of all policies currently in effect. Such insurance policies are
currently in full force and effect and shall remain in full force and effect
through the Closing Date. No insurance carried by the COMPANY has ever been
cancelled by the insurance company and the COMPANY has never been denied
coverage.
5.18 Compensation; Employment Agreements. Schedule 5.18 sets forth an
-----------------------------------
accurate schedule showing all officers, directors and key employees of the
COMPANY listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided
to HDS true, complete and correct copies of any employment agreements for
persons listed on Schedule 5.18. Since the Balance Sheet Date there have been no
increases in the compensation, bonus, sales commissions or fee arrangements
payable or to become payable by the COMPANY to any officer, director,
stockholder, employee, consultant or agent, except as listed on Schedule 5.18.
5.19 Employee Plans. Schedule 5.19 sets forth complete and accurate lists
--------------
of all employee benefit plans, all employee welfare benefit plans, all employee
pension benefit plans, all multi-employer plans and all multi-employer welfare
arrangements (as defined in Sections 3(3), (1), (2), (37) and (40),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or
to which the COMPANY currently contributes, or has an obligation to contribute
in the future (including, without limitation, benefit plans or arrangements that
are not subject to ERISA, such as employment agreements and any other agreements
containing "golden parachute" provisions and deferred compensation agreements),
together with a classification of employees covered thereby (collectively, the
"Plans"). Schedule 5.19 also sets forth all of the Plans that have been
terminated within the past six years. The COMPANY has heretofore delivered to
HDS correct and complete copies of each of the following:
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(i) each Plan and all amendments thereto; the trust agreement
and/or insurance contracts, if any, forming a part of such Plan and all
amendments thereto; and the resolutions and agreements, if any by which the
COMPANY adopted such Plan;
(ii) all written, and descriptions of all oral, employment,
termination, and severance agreements, contracts, arrangements and
understandings listed in Schedule 5.19;
(iii) sample benefit distribution forms that pertain to all Plans
that are intended to qualify (the "Qualified Plans") under Section 401(a)
of the Code;
(iv) the most recent actuarial report and the most recent executed
Form PBGC-1 with respect to each Plan that is a defined benefit pension
plan as defined in Section 414(j) of the Code (a "Defined Benefit Plan");
(v) Forms 5500 or, as applicable Forms 5500-C/R, filed with respect
to the three most recent plan years of each Plan, and all schedules
thereto;
(vi) the most recent determination letter issued by the Internal
Revenue Service regarding the qualified status of each Qualified Plan;
(vii) the most recent accountant's report, if any, with respect to
each Plan;
(viii) the most recent summary plan description, and any subsequent
summaries of material modifications, with respect to each Plan;
(ix) the bond required by Section 412 of ERISA, if any; and
(x) all documents required to be filed with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation (the "PBGC"), or distributed
to participants and beneficiaries in connection with the termination of any
Qualified Plan listed on Schedule 5.19 as terminated.
5.20 Compliance with ERISA. Except for the Plans, the COMPANY does not
---------------------
maintain or sponsor, and is not a contributing employer to, a pension, profit-
sharing, deferred compensation, stock option, employee stock purchase or other
employee benefit plan, employee welfare benefit plan, or any other arrangement
with their respective employees, whether or not subject to ERISA. All Plans are
in compliance in all material respects with all applicable provisions of ERISA
and the regulations issued thereunder, the Code and the regulations issued
thereunder, as well as with all other applicable laws, and have been
administered, operated and managed in all material respects in accordance with
their governing documents, if any. All Qualified Plans are qualified under
Section 401(a) of the Code and have been determined by the Internal Revenue
Service to be so qualified or application for determination letters have been
timely submitted to the Internal Revenue Service and nothing has occurred since
the date of each Qualified Plan's most recent determination letter that would
adversely affect such Qualified Plan's
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tax-qualified status. To the extent that any Qualified Plans have not been
amended to comply with applicable law, the remedial amendment period permitting
retroactive amendment of such Qualified Plans has not expired and will not
expire within one hundred twenty (120) days after the Closing Date. All reports
and other documents required to be filed with any governmental agency or
distributed to plan participants or beneficiaries (including, but not limited
to, annual reports, summary annual reports, actuarial reports, PBGC-1 Forms,
audits or tax returns) have been timely filed or distributed. None of: (i) the
STOCKHOLDERS; (ii) any Plan; or (iii) the COMPANY has engaged in any transaction
prohibited under the provisions of Section 4975 of the Code or Section 406 of
ERISA. No Plan has incurred an accumulated funding deficiency, as defined in
Section 412(a) of the Code and Section 302(1) of ERISA; and no circumstances
exist pursuant to which the COMPANY could have any direct or indirect liability
whatsoever (including being subject to any statutory lien to secure payment of
any such liability), to the PBGC under Title IV of ERISA or to the Internal
Revenue Service for any excise tax or penalty with respect to any plan now or
hereafter maintained or contributed to by the COMPANY or any member of a
"controlled group" (as defined in Section 4001(a)(14) of ERISA) that includes
the COMPANY; and neither the COMPANY nor any member of a "controlled group" (as
defined above) that includes the COMPANY currently has (or at the Closing Date
will have) any obligation whatsoever to contribute to any "multi-employer
pension plan" (as defined in ERISA Section 4001(a)(14)), nor has any withdrawal
liability whatsoever (whether or not yet assessed) arising under or capable of
assertion under Title IV of ERISA (including, but not limited to, Sections 4201,
4202, 4203, 4204, or 4205 thereof) been incurred by any Plan. Further, except as
set forth in Schedule 5.20:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without a determination by
the Internal Revenue Service that such action does not adversely affect the tax-
qualified status of such Qualified Plan;
(ii) no Plan which is subject to the provisions of Title IV of ERISA
has been terminated ;
(iii) there have been no "reportable events" (as defined in Section
4043 of ERISA) with respect to any Plan which were not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of the
Closing Date, shall equal or exceed the actuarial present value of all accrued
pension benefits under any such Qualified Plan in accordance with the
assumptions contained in the Regulations of the PBGC governing the funding of
terminated Defined Benefit Plans;
(v) with respect to Plans which qualify as "group health plans" under
Section 4980B of the Internal Revenue Code and Section 607(l) of ERISA and
related regulations (relating to the benefit continuation rights imposed by
"COBRA"), the COMPANY has complied (and on the Closing Date will have complied)
in all respects with all reporting, disclosure, notice, election and other
benefit continuation requirements
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imposed thereunder as and when applicable to such plans, and the COMPANY has not
incurred (and will not incur) any direct or indirect liability and is not (and
will not be) subject to any loss, assessment, excise tax penalty, loss of
federal income tax deduction or other sanction, arising on account of or in
respect of any direct or indirect failure by the COMPANY, at any time prior to
the Closing Date, to comply with any such federal or state benefit continuation
requirement, which is capable of being assessed or asserted before or after the
Closing Date directly or indirectly against the COMPANY or the STOCKHOLDERS with
respect to such group health plans;
(vi) the COMPANY is not now nor has it been within the past six
years a member of a "controlled group" as defined in ERISA Section 4001(a)(14);
(vii) there is no pending litigation, arbitration, or disputed claim,
settlement or adjudication proceeding, and to the knowledge of the COMPANY,
there is no threatened litigation, arbitration or disputed claim, settlement or
adjudication proceeding, audit or any governmental or other proceeding, audit or
investigation with respect to any Plan, or with respect to any fiduciary,
administrator, or sponsor thereof (in their capacities as such), or any party in
interest thereof;
(viii) the Financial Statements as of the Balance Sheet Date reflect
the approximate total pension, medical and other benefit expense for all Plans,
and no material funding changes or irregularities are reflected thereon which
would cause such Financial Statements to be not representative of prior periods;
(ix) the COMPANY has not incurred liability under Section 4062 of
ERISA;
(x) each Qualified Plan that is listed as terminated on Schedule
5.19 was terminated in compliance with all applicable requirements of ERISA and
the Code;
(xi) except for any Qualified Plan that is categorized on Schedule
5.19 as having been merged with another Qualified Plan, no Qualified Plan of the
COMPANY has been merged during the six years immediately before the Closing
Date;
(xii) each Qualified Plan that is categorized on Schedule 5.19 as
having been merged was merged in compliance with all applicable requirements of
ERISA and the Code;
(xiii) apart from health benefits provided to former employees under
Section 4980B of the Code and Part 6 of Title I(B) of ERISA, the COMPANY has no
obligation to provide health or medical benefits to anyone other than its active
employees;
(xiv) the COMPANY does not sponsor, contribute to, or have any
obligation to contribute to any voluntary employees beneficiary association, as
described in Section 501(c)(9) of the Code; and
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(xv) except as set forth in Schedule 5.19, the consummation of the
transactions contemplated hereby will not result in any obligation to pay
any employee of the COMPANY severance or termination benefits so long as
such employee remains employed by the COMPANY after the Closing.
5.21 Conformity with Law. Except to the extent set forth on Schedule
-------------------
5.21, the COMPANY is not in violation of any law or regulation or any order of
any court or federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
any of them which (either singly or in the aggregate) would have a Material
Adverse Effect; and except to the extent set forth in Schedule 5.10, there are
no claims, actions, suits or proceedings pending or, to the knowledge of the
COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality having jurisdiction over
any of them which (either singly or in the aggregate) would have a Material
Adverse Effect, and no notice of any such claim, action, suit or proceeding,
whether pending or threatened, has been received by the COMPANY. The COMPANY has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in applicable federal, state and
local statutes, ordinances, orders, approvals, variances, rules and regulations
and is not in violation of any of the foregoing which (either singly or in the
aggregate) would have a Material Adverse Effect.
5.22 Taxes. Except as set forth in Schedule 5.22,
-----
(i) All Tax Returns (as defined in Section 10.6(f)) required to
have been filed by or with respect to the COMPANY with any Taxing Authority (as
defined in Section 10.6(g)) have been duly filed, and each such Tax Return
accurately, correctly and completely reflects the income, franchise or other Tax
liability and all other information, including the tax basis and recovery
periods for assets, required to be reported thereon. The COMPANY has furnished
or made available to HDS complete and accurate copies of all income and
franchise tax returns, and any amendments thereto, filed by the COMPANY for all
taxable years ending on or after December 31, 1995. All Taxes (whether or not
shown on any Tax Return and whether or not assessed) owed by the COMPANY have
been paid. No Tax payment has been made by the COMPANY to any Taxing Authority
which is inconsistent with the prior practice of the COMPANY, and no Tax payment
has been made by the COMPANY which is in excess of that which is in good faith
determined to be due and owing at the time of such payment.
(ii) The COMPANY is not and has not since January 1, 1995 been a
member of any affiliated, combined, consolidated, unitary or similar group.
(iii) The provisions for Taxes due by the COMPANY (as opposed to any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) in the COMPANY Financial Statements are sufficient for, and
adequate to cover, all unpaid Taxes.
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(iv) The COMPANY is not a party to any current agreement extending
the time within which to file any Tax Return. No claim has ever been made by any
Taxing Authority in a jurisdiction in which the COMPANY does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction.
(v) The COMPANY has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
(vi) To the best of its knowledge, the COMPANY does not expect any
Taxing Authority to assess any additional Taxes against or in respect of it for
any past period. There is no dispute or claim concerning any Tax liability
either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to
the COMPANY. No issues have been raised in any examination by any Taxing
Authority with respect to the COMPANY which, by application of similar
principles, reasonably could be expected to result in a proposed deficiency for
any other period not so examined. Schedule 5.22 attached hereto lists all
federal, state, local and foreign income Tax Returns filed by or with respect to
the COMPANY for all taxable periods ended on or after December 31, 1994,
indicates those Tax Returns, if any, that have been audited, and indicates those
Tax Returns that currently are the subject of audit. The COMPANY has delivered
to HDS complete and correct copies of all federal, state, local and foreign
income Tax Returns filed by, and all Tax examination reports and statements of
deficiencies assessed against or agreed to by, the COMPANY since December 31,
1995.
(vii) The COMPANY has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to any Tax
assessment or deficiency.
(viii) The COMPANY has not made any payments, is not obligated to make
any payments, and is not a party to any agreement that under certain
circumstances could require it to make any payments, that would not be
deductible by reason of the application of Section 280G of the Code.
(ix) The COMPANY is not a party to and has no ongoing liability
under any Tax allocation or sharing agreement.
(x) None of the assets of the COMPANY constitutes tax-exempt bond
financed property or tax-exempt use property, within the meaning of Section 168
of the Code. The COMPANY is not a party to any "safe harbor lease" that is
subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as
in effect prior to the Tax Reform Act of 1986, or to any "long-term contract"
within the meaning of Section 460 of the Code.
(xi) The COMPANY is not a party to any joint venture, partnership or
other arrangement that is treated as a partnership for federal income Tax
purposes.
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(xii) There are no accounting method changes of the COMPANY that
could give rise to an adjustment under Section 481 of the Code for periods after
the Closing Date.
(xiii) The COMPANY has not received any written ruling of a Taxing
Authority related to Taxes or entered into any written and legally binding
agreement with a Taxing Authority relating to Taxes.
(xiv) The COMPANY has substantial authority for the treatment of, or
has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its
federal income Tax Returns, all positions taken on its relevant federal income
Tax Returns that could give rise to a substantial understatement of federal
income Tax within the meaning of Section 6662(d) of the Code.
(xv) The COMPANY does not have any liability for Taxes of any Person
other than the COMPANY (i) under Section 1.1502-6 of the Treasury regulations
(or any similar provision of state, local or foreign law), (ii) as a transferee
or successor, (iii) by contract or (iv) otherwise.
(xvi) No consent has been filed relating to the COMPANY pursuant to
Section 341(f) of the Code, nor has the COMPANY made any tax election that would
materially increase the amount of Taxes payable by the COMPANY, as compared to
the amount of Taxes that would be payable in the absence of such tax election,
in any Post-Closing Period (as defined in Section 10.6(d)).
(xvii) The COMPANY made an election to be classified as an S
Corporation for its first complete taxable year beginning on January 1, 1989
under Section 1362(a) of the Code and corresponding provisions of the laws of
the state in which it is subject to tax, and has qualified as an S Corporation
at all times since such date. The COMPANY does not own any subsidiary which is a
qualified Subchapter S subsidiary within the meaning of Section 1361(b)(3) of
the Code.
Certain of the defined terms used in this Section 5.22 have the
meaning ascribed to them in Section 10.
5.23 No Violations. Except as set forth in Schedule 5.23, neither the
-------------
COMPANY nor, to the knowledge of the COMPANY, any other party thereto is (i) in
violation of any Charter Document or (ii) in default under any Material Lease or
Material Contract; and, except as set forth in the schedules and documents
attached to this Agreement, (a) the transactions contemplated hereby will not
have a Material Adverse Effect on the rights and benefits of the COMPANY under
the Material Leases and Material Contracts, either singly or in the aggregate,
and (b) except as set forth on Schedule 5.23, the execution of this Agreement
and the performance of the obligations hereunder and the consummation of the
transactions contemplated hereby will not result in any violation or breach or
constitute a default under any of the terms or provisions of the Charter
Documents, Material Leases, Material Contracts, any judgment, decree, order or
award of any court,
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governmental body or arbitrator, or any law, rule or regulation applicable to
COMPANY. Except as set forth in Schedule 5.23, none of the Material Leases or
Material Contracts requires notice to, or the consent or approval of, any third
party with respect to any of the transactions contemplated hereby in order to
remain in full force and effect, nor does this Agreement or any of the
transactions contemplated hereby give rise to any right to termination,
cancellation or acceleration or loss of any right or benefit under any Material
Lease or Material Contract.
5.24 Government Contracts. Except as set forth on Schedule 5.24, the
--------------------
COMPANY is not now a party to any governmental contracts subject to price
redetermination or renegotiation.
5.25 Absence of Changes. Since December 31, 1998, except as set forth on
------------------
Schedule 5.25, there has not been with respect to the COMPANY:
(i) any event or circumstance (either singly or in the
aggregate)which would constitute a Material Adverse Effect;
(ii) any change in its authorized capital, or securities
outstanding, or ownership interests or any grant of any options, warrants,
calls, conversion rights or commitments;
(iii) any declaration or payment of any dividend or distribution in
respect of its capital stock or any direct or indirect redemption, purchase or
other acquisition of any of its capital stock;
(iv) any increase of more than five percent (5%) in the
compensation, bonus, sales commissions or fee arrangement payable or to become
payable by it to any of its respective officers, directors, stockholders,
employees, consultants or agents, except for ordinary and customary bonuses and
salary increases for employees (other than the STOCKHOLDERS) in accordance with
past practice;
(v) any work interruptions, labor grievances or claims filed, or
any similar event or condition of any character that would have a Material
Adverse Effect;
(vi) any distribution, sale or transfer, or any agreement to sell or
transfer any material assets, property or rights of its business to any
person, including, without limitation, the STOCKHOLDERS and their
affiliates, other than distributions, sales or transfers in the ordinary
course of business to persons other than the STOCKHOLDERS and their
affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to it, including without limitation any indebtedness or
obligation of any STOCKHOLDERS or any affiliate thereof, provided that it may
--------
negotiate and adjust bills in the course of good faith disputes with customers
in a manner consistent with past
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practice, provided, further, that such adjustments shall not be deemed to be
-------- -------
included in Schedule 5.11 unless specifically listed thereon;
(viii) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property or
rights or requiring consent of any party to the transfer and assignment of any
such assets, property or rights;
(ix) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire any property, rights or assets outside of the
ordinary course of business;
(x) any waiver of any of its material rights or claims;
(xi) any transaction by it outside the ordinary course of its
business; or
(xii) any cancellation or termination of a Material Contract.
5.26 Deposit Accounts; Powers of Attorney. The COMPANY has delivered to
------------------------------------
HDS an accurate schedule (Schedule 5.26) as of the date of the Agreement, of:
(i) the name of each financial institution in which the COMPANY has
accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation,
firm or other entity holding a general or special power of attorney from the
COMPANY and a description of the terms of such power.
5.27 Relations with Governments. The COMPANY has not made, offered or
--------------------------
agreed to offer anything of value to any governmental official, political party
or candidate for government office which would cause the COMPANY to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended, or any law
of similar effect.
(B) Representations and Warranties of STOCKHOLDERS. Each
----------------------------------------------
STOCKHOLDER severally represents and warrants that the representations and
warranties set forth in this Section 5(B) are true as of the date of this
Agreement and, subject to Section 7.9 hereof, shall be true at the time of Pre-
Closing and on the Closing Date, and that such representations and warranties
survive the Closing Date until the Expiration Date.
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<PAGE>
5.28 Authority; Validity; Ownership. Such STOCKHOLDER has the full legal
------------------------------
right, power and authority to enter into this Agreement and any other agreements
contemplated by this Agreement to which such STOCKHOLDER is or is contemplated
to be a party. Assuming due authorization, execution and delivery by HDS and
HDSU, this Agreement and any other agreements contemplated by this Agreement to
which such STOCKHOLDER is or is contemplated to be a party are or will be legal,
valid and binding obligations of each STOCKHOLDER, enforceable in accordance
with their respective terms, except as may be limited by applicable bankruptcy,
insolvency, or similar laws affecting creditors' rights generally. Such
STOCKHOLDER owns beneficially and of record all of the shares of the COMPANY
Stock identified on Annex II as being owned by such STOCKHOLDER, and, except as
set forth on Schedule 5.28 hereto, such COMPANY Stock is owned free and clear of
all liens, encumbrances and claims of every kind.
5.29 Preemptive Rights. Such STOCKHOLDER does not have, or hereby waives,
-----------------
any preemptive or other right to acquire shares of COMPANY Stock or HDS Stock
that such STOCKHOLDER has or may have had, other than rights of any STOCKHOLDER
to acquire HDS Stock pursuant to (i) this Agreement or (ii) any option granted
by HDS.
5.30 No HDS Intention to Reacquire Stock. To the best of such STOCKHOLDER's
-----------------------------------
knowledge, there is no plan or intention by HDS or any HDS affiliate to purchase
or reacquire any of the HDS Stock issued in connection with the Merger.
6. REPRESENTATIONS OF HDS.
HDS represents and warrants that (i) all of the following
representations and warranties are true at the date of this Agreement and shall
be true at the time of Pre-Closing and the Closing Date and that such
representations and warranties shall survive the Closing Date until the
Expiration Date and (ii) solely for purposes of Section 11.2(iv) hereof, and
solely to the extent that in connection with the IPO the STOCKHOLDERS actually
incur liability under the 1933 Act, the 1934 Act, or any other federal or state
securities laws, the representations and warranties set forth herein shall
survive until the expiration of any applicable limitations period.
6.1 Due Organization. HDS and each of the subsidiaries of HDS ("HDS's
----------------
Subsidiaries") set forth in Schedule 6.6 is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and is duly authorized and qualified under all applicable laws, regulations,
ordinances and orders of public authorities to carry on its business in the
places and in the manner as now conducted except for where the cumulative effect
of all failures to be so authorized or qualified would not have a material
adverse effect on the business, operations, affairs, properties, assets or
condition (financial or otherwise), of HDS and HDS's Subsidiaries, taken as a
whole (an "HDS Material Adverse Effect"). True, complete and correct copies of
the Certificate of Incorporation and the Bylaws, each as amended, of HDS and
HDS's Subsidiaries (collectively, the "HDS Charter Documents"), certified by the
Secretary or
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<PAGE>
an Assistant Secretary of HDS, are attached hereto as Annex IV. A true, complete
and correct copy of the Certificate of Incorporation, each as amended, of HDS
and each of HDS's Subsidiaries, certified by the Secretary of State of the State
of Delaware, shall be delivered at the Pre-Closing.
6.2 HDS Stock. The HDS Stock to be delivered to the STOCKHOLDERS on the
---------
Closing Date shall constitute valid and legally issued shares of HDS, fully paid
and nonassessable, and except as set forth in this Agreement, will be owned free
and clear of all liens, security interests, pledges, charges, voting trusts,
restrictions, encumbrances and claims of every kind created by HDS, and will be
legally equivalent in all respects to the HDS Stock issued and outstanding as of
the date hereof. The shares of HDS Stock to be issued to the STOCKHOLDERS
pursuant to this Agreement will not be registered under the 1933 Act.
6.3 Authority and Validity. The representatives of HDS and HDSU executing
----------------------
this Agreement and any other agreements contemplated by this Agreement have the
corporate authority to enter into and bind HDS and HDSU, respectively, to the
terms of this Agreement and any other agreements contemplated by this Agreement
to which HDS or HDSU is or is contemplated to be a party. HDS and HDSU have the
full legal right, power and authority to enter into this Agreement, any other
agreements contemplated by this Agreement to which HDS or HDSU is or is
contemplated to be a party, and the Merger. All corporate action necessary for
the authorization, execution, delivery and performance by HDS and HDSU of this
Agreement, and also any other agreements contemplated by this Agreement to which
HDS or HDSU is contemplated to be a party, has been taken. Assuming due
authorization, execution and delivery by the COMPANY and the STOCKHOLDERS, as
applicable, this Agreement and any other agreements contemplated by this
Agreement to which HDS or HDSU is or is contemplated to be a party are or will
be legal, valid and binding obligations of HDS or HDSU, enforceable against HDS
and HDSU, respectively, in accordance with their respective terms, except as may
be limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally.
6.4 Capital Stock of HDS. Immediately prior to the Closing, the authorized
--------------------
capital stock of HDS will be as set forth in Schedule 6.4. All of the issued
and outstanding shares of HDS are owned beneficially and of record by the
persons set forth on Annex III. All issued and outstanding shares of HDS stock
are duly authorized, validly issued, fully paid and nonassessable. There are no
obligations of HDS to repurchase, redeem or otherwise acquire any shares of HDS
stock. Except as described in the Registration Statement, there are no options,
warrants, equity securities, calls, rights, commitments or agreements of any
character to which HDS or any of its subsidiaries are a party or by which they
are bound obligating HDS or any of its subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
HDS or any of its subsidiaries or obligating HDS or any of its subsidiaries to
grant, extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement. To the knowledge of HDS,
as of the Closing Date, none of the STOCKHOLDERS set forth on Annex III will
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<PAGE>
be a party to or subject to any voting trust, proxy or other agreement or
understanding with respect to the shares of capital stock of HDS owned by such
STOCKHOLDER. All of the shares of HDS Stock to be issued to the STOCKHOLDERS in
accordance herewith will be duly authorized, validly issued, fully paid and
nonassessable. All of the shares of HDS Stock issued to persons set forth on
Annex III and, based on the representations of STOCKHOLDERS contained in this
Agreement and in the documents delivered to HDS pursuant hereto, to STOCKHOLDERS
pursuant to this Agreement, were or will be offered, issued, sold and delivered
by HDS in compliance with all applicable state and federal laws concerning the
issuance of securities and none of such shares were or will be issued in
violation of the preemptive rights of any past or present stockholder. On the
Closing Date the capitalization of HDS will be as set forth in the Registration
Statement.
6.5 No Side Agreements. Except as set forth in Schedule 6.5, HDS and
------------------
HDSU have not entered into any material agreement with any of the Founding
Companies or any of the stockholders of the Founding Companies other than the
Other Agreements and the agreements contemplated by each of the Other
Agreements, including the employment agreements referred to therein. HDS and
HDSU have made available to the COMPANY copies of all material agreements
entered into between (i) HDS, HDSU and their affiliates and (ii) HDS or HDSU and
the Founding Companies or any stockholders of the Founding Companies. Further,
HDS will make available to the COMPANY copies of any of the foregoing agreements
entered into between the date hereof and the Closing Date promptly after such
agreements are entered into.
6.6 Subsidiaries. Except for those companies set forth on Schedule 6.6,
------------
HDS does not presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity. HDS
is not, directly or indirectly, a participant in any joint venture, partnership
or other non-corporate entity.
6.7 Business; Financial Information. Neither HDS nor HDSU has conducted
-------------------------------
any business since the date of its inception, except in connection with this
Agreement, the Other Agreements and the contemplated IPO of HDS Stock. HDS was
formed in 1998, and has historical financial statements only for the partial
year ended December 31, 1998. Attached hereto as Schedule 6.7 are HDS's
financial statements for such partial year. Such HDS financial statements have
been prepared in accordance with generally accepted accounting principles and
present fairly the financial position of HDS as of the dates indicated thereon,
and such financial statements present fairly the results of HDS's operations for
the periods indicated thereon. HDS and HDSU have no material liabilities,
accrued or contingent, other than those incurred in connection with this
Agreement, the Other Agreements and the agreements contemplated thereby, the
agreements to be filed as exhibits to the Registration Statement, and the
contemplated IPO of HDS Stock.
6.8 Conformity with Law. HDS (including HDS's Subsidiaries) is not in
-------------------
violation of any law or regulation or any order of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality
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<PAGE>
having jurisdiction over either of them which (either singly or in the
aggregate) would have an HDS Material Adverse Effect. There are no claims,
actions, suits or proceedings, pending or, to the knowledge of HDS (including
HDS's Subsidiaries), threatened, against or affecting HDS (including HDS's
Subsidiaries), at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over any of them and no notice of any claim,
action, suit or proceeding, whether pending or threatened, has been received by
HDS or any of HDS's Subsidiaries. HDS (including HDS's Subsidiaries) has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in applicable Federal, state and
local statutes, ordinances, orders, approvals, variances, rules and regulations
and is not in violation of any of the foregoing which would have an HDS Material
Adverse Effect.
6.9 No Violations. HDS (including HDS's Subsidiaries) is not (i) in
-------------
violation of any HDS Charter Document or (ii) in default under any material
lease, instrument, agreement, license, or permit to which it is a party or by
which its properties are bound (the "HDS Material Documents"); and, except as
set forth in the Registration Statement, (a) the rights and benefits of HDS
(including HDS's Subsidiaries) under the HDS Material Documents will not be
materially and adversely affected by the transactions contemplated hereby and
(b) the execution of this Agreement and the performance of the obligations
hereunder and the consummation of the transactions contemplated hereby will not
result in any violation or breach or constitute a default under any of the terms
or provisions of the HDS Material Documents, the HDS Charter Documents, any
judgment, decree, order or award of any court, governmental body or arbitrator,
or any law, rule or regulation applicable to HDS or any of HDS's Subsidiaries.
Except as set forth in Schedule 6.9, none of the HDS Material Documents requires
notice to, or the consent or approval of, any third party with respect to any of
the transactions contemplated hereby in order to remain in full force and
effect, nor does this Agreement or any of the transactions contemplated hereby
give rise to any right to termination, cancellation or acceleration or loss of
any right or benefit. The minute books of HDS and each of HDS's subsidiaries as
heretofore made available to the COMPANY are true and correct.
6.10 Intentionally Omitted.
7. COVENANTS PRIOR TO CLOSING.
7.1 Access and Cooperation; Due Diligence.
(i) Between the date of this Agreement and the Closing Date, the
COMPANY will afford to the officers and authorized representatives of HDS access
to all of the COMPANY's key employees, sites, properties, books and records and
will furnish HDS with such additional financial and operating data and other
information as to the business and properties of the COMPANY as HDS may from
time to time reasonably request. The COMPANY will cooperate with HDS, its
representatives, auditors and counsel in the preparation of any documents or
other material which may be required by this Agreement. The COMPANY shall
provide reasonable access to the COMPANY's
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<PAGE>
key employees, books, records and other financial data to all Other Companies
and their representatives, auditors and counsel; provided that, the COMPANY
-------- ----
will not be required to disclose competitively-sensitive information to such
Other Companies. HDS, the STOCKHOLDERS and the COMPANY will treat all
information obtained in connection with the negotiation and performance of this
Agreement or the due diligence investigations conducted with respect to the
Other Companies as confidential in accordance with the provisions of Section 14
hereof and will not use such information for any purpose other than for the
evaluation of the transactions contemplated by this Agreement. In addition, HDS
will cause each of the Other Companies to enter into a provision similar to this
Section 7.1 requiring each such Other Company to keep confidential any
information obtained by such Other Company and to not use such information for
any purpose other than for the evaluation of the transactions contemplated by
the applicable Other Agreement. All Other Companies shall be third-party
beneficiaries with respect to the covenant of the COMPANY and the STOCKHOLDERS
restricting the use of information received by the COMPANY and such
STOCKHOLDERS, and the COMPANY shall be a third-party beneficiary with respect to
the covenant of the Other Companies restricting the use of COMPANY information
received by such Other Companies.
(ii) Between the date of this Agreement and the Closing Date, HDS will
afford to the officers and authorized representatives of the COMPANY access to
all of HDS's (including HDS's Subsidiaries') sites, properties, books and
records and will furnish the COMPANY with such additional financial and
operating data and other information as to the business and properties of HDS
(including HDS's Subsidiaries) as the COMPANY may from time to time reasonably
request. HDS will cooperate with the COMPANY, its representatives, engineers,
auditors and counsel in the preparation of any documents or other material which
may be required by this Agreement. The COMPANY will cause all information
obtained in connection with the negotiation and performance of this Agreement to
be treated as confidential in accordance with the provisions of Section 14
hereof.
7.2 Conduct of Business Pending Closing. Between the date of this Agreement
-----------------------------------
and the Closing Date, the COMPANY will, except as set forth in Schedule 7.2:
(i) carry on its business in substantially the same manner as it has
heretofore, maintain inventory at levels substantially equivalent to those
maintained during the 12 months ended December 31, 1998, and not introduce any
material new method of management, operation or accounting;
(ii) maintain its properties, facilities, equipment and other assets,
including those held under leases, in as good working order and condition as at
present, ordinary wear and tear excepted;
(iii) perform all of its material obligations under agreements to which
it is a party relating to or affecting its assets, properties or rights;
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<PAGE>
(iv) subject to Section 7.6, keep in full force and effect present
insurance policies or other comparable insurance coverage;
(v) use best efforts to maintain and preserve its business organization
intact, retain its present employees and maintain its relationships with
suppliers, customers and others having business relations with it;
(vi) maintain compliance with all permits, laws, rules and regulations,
consent orders, and all other orders of applicable courts, regulatory agencies
and similar governmental authorities applicable to the COMPANY; and
(vii) maintain compliance with all present debt and lease instruments
and not enter into new or amended debt or lease instruments involving payments
by the COMPANY over $50,000 (individually or in the aggregate), without the
knowledge and consent of HDS (which consent shall not be unreasonably withheld).
7.3 Prohibited Activities. Except as disclosed in Schedule 7.3, between the
---------------------
date of this Agreement and the Closing Date, the COMPANY has not and, without
the prior written consent of HDS, will not:
(i) make any change in its Articles of Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls, conversion rights
or commitments relating to its securities of any kind other than in connection
with the exercise of options or warrants listed on Schedule 5.4;
(iii) declare or pay any dividend, or make any distribution in respect
of its stock whether now or hereafter outstanding, or purchase, redeem or
otherwise acquire or retire for value any shares of its stock;
(iv) enter into any contract (including any contract to provide
services to customers) or commitment or incur or agree to incur any liability or
make any capital expenditures, except if (x) it is in the ordinary course of
business (consistent with past practice) or (y) when aggregated with all other
such contracts, commitments, liabilities and capital expenditures not in the
normal course of business consistent with past practice, it involves an amount
not in excess of $25,000;
(v) increase the compensation payable or to become payable to any
officer, director, STOCKHOLDER, employee or agent, or make any bonus or
management fee payment to any such person, except (x) bonuses to employees
(other than the STOCKHOLDERS or their affiliates) consistent with past practice
and (y) increases in salaries and commission rates payable to employees (other
than to STOCKHOLDERS and their affiliates), provided that neither the salary nor
any commission rate payable to any employee may increase to more than one
hundred five percent (105%) of such employee's current salary or such commission
rate, whichever is applicable;
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(vi) create, assume or permit to exist any mortgage, pledge or other
lien or encumbrance upon any assets or properties whether now owned or hereafter
acquired, except (1) with respect to purchase money liens incurred in connection
with the acquisition of equipment with an aggregate cost not in excess of
$10,000 necessary or desirable for the conduct of the business of the COMPANY,
or (2) liens set forth on Schedule 5.14 hereto or (3) liens for taxes either not
yet due or materialmen's, mechanics', workers', repairmen's, employees' or other
like liens arising in the ordinary course of business;
(vii) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the ordinary course of business;
(viii) negotiate for the acquisition of any business or the start-up of
any new business;
(ix) merge or consolidate or agree to merge or consolidate with or into
any other corporation;
(x) waive any material rights or claims of the COMPANY, provided that
--------
the COMPANY may negotiate and adjust bills in the course of good faith disputes
with customers in a manner consistent with past practice, provided, further,
-------- -------
that such adjustments shall not be deemed to be included in Schedule 5.11 unless
specifically listed thereon;
(xi) commit a material breach or amend or terminate any Material
Contract, or material permit, license or other right of the COMPANY, or make or
terminate any election involving Taxes which would in any way adversely affect
the Tax liability of the COMPANY (or HDS following the Merger) in any taxable
period; or
(xii) enter into any other transaction outside the ordinary course of
its business or prohibited hereunder.
7.4 No Shop. None of the STOCKHOLDERS, the COMPANY or any agent, officer,
-------
director or any representative of any of the foregoing will, during the period
commencing on the date of this Agreement and ending with the earlier to occur of
the Closing Date or the termination of this Agreement in accordance with its
terms, directly or indirectly: (i) solicit or initiate, either directly or
indirectly, the submission of proposals or offers from any person for, (ii)
participate in any discussions pertaining to or (iii) furnish any information to
any person other than HDS or the Founding Companies relating to, any acquisition
or purchase of all or a material amount of the assets of, or any equity interest
in, the COMPANY or a merger, consolidation or business combination of the
COMPANY.
7.5 Notice to Bargaining Agents. Prior to the Closing Date, the COMPANY
---------------------------
shall satisfy any requirement for notice of the transactions contemplated by
this
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Agreement under applicable collective bargaining agreements, and shall provide
HDS with proof that any required notice has been sent.
7.6 Termination of Plans. Prior to the Pricing Date, the COMPANY shall
--------------------
terminate all Plans listed on Schedule 7.6.
7.7 HDS Prohibited Activities. Between the date of this Agreement and the
-------------------------
Closing Date, except as set forth on Schedule 7.7, HDS will not:
(i) issue any securities, options, warrants, calls, conversion rights
or commitments relating to its securities of any kind;
(ii) make any changes in its Certificate of Incorporation or Bylaws
other than one or more amendments to the Certificate of Incorporation to
accomplish a split or reverse split of the HDS Stock (provided that in the event
of any such split or reverse split, the number of shares of HDS Stock to be
delivered to the STOCKHOLDERS, and to the stockholders of the Other Companies,
and the Minimum IPO Price, as set forth on Annex I, will be adjusted
accordingly) or to increase the authorized Capital Stock of HDS to an amount not
to exceed 40 million shares of common stock and 5 million shares of preferred
stock;
(iii) hire or appoint any officer or director or increase the
compensation payable or to become payable to any officer or director; or
(iv) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to HDS and the HDS Subsidiaries.
7.8 Notification of Certain Matters. The STOCKHOLDERS and the COMPANY
-------------------------------
shall give prompt notice to HDS of (i) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would be likely to cause any
representation or warranty of the COMPANY or the STOCKHOLDERS contained herein
to be untrue or inaccurate in any material respect at or prior to the Closing
and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by such person hereunder. HDS shall give prompt notice to the COMPANY of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty of HDS contained
herein to be untrue or inaccurate in any material respect at or prior to the
Closing and (ii) any material failure of HDS to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. The delivery of any notice pursuant to this Section 7.8 shall not be
deemed to (i) modify the representations or warranties hereunder of the party
delivering such notice, which modification may only be made pursuant to Section
7.9,
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(ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
7.9 Amendment of Schedules. Each party hereto agrees that, with respect
----------------------
to the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until the Pre-Closing to
supplement or amend promptly the Schedules hereto with respect to any matter
hereafter arising or discovered which, if existing or known at the date of
this Agreement, would have been required to be set forth or described in the
Schedules, provided however, that supplements and amendments to Schedules 5.10,
-------- -------
5.11 and 5.14 shall only have to be delivered at the Pre-Closing Date, unless
such Schedule is to be amended to reflect an event occurring other than in the
ordinary course of business. In the event that the COMPANY amends or supplements
a Schedule pursuant to this Section 7.9 in any material respect, and HDS does
not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement at or before the Pre-Closing, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof. In the event that HDS amends or supplements a Schedule pursuant
to this Section 7.9 in any material respect, and a majority of the Founding
Companies do not consent (which consent shall not be unreasonably withheld) to
the effectiveness of such amendment or supplement at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For all purposes of this Agreement, including without
limitation for purposes of determining whether the conditions set forth in
Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed
to be the Schedules as amended or supplemented pursuant to this Section 7.9. In
the event that one of the Other Companies amends or supplements a Schedule
pursuant to Section 7.9 in any material respect of one of the Other Agreements,
HDS shall give the COMPANY notice promptly after it has knowledge thereof. If
HDS and a majority of the Founding Companies, excluding such Other Company, do
not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement, at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For purposes of this Section 7.9, HDS shall be deemed to
have given its consent to the effectiveness of any amendment or supplement to a
Schedule if HDS does not notify the COMPANY of its disapproval within 48 hours
after HDS is notified of such amendment or supplement, and the COMPANY and each
Other Company shall be deemed to have given its consent to the effectiveness of
any amendment or supplement to a Schedule if the COMPANY or such Other Company,
as applicable, does not notify HDS of its disapproval within 48 hours after the
COMPANY or such Other Company, as applicable, is notified of such amendment or
supplement. Except as otherwise provided herein, no amendment of or supplement
to a Schedule shall be made after the Pre-Closing.
7.10 Cooperation in Preparation of Registration Statement. The COMPANY and
----------------------------------------------------
STOCKHOLDERS shall furnish or cause to be furnished to HDS and the Underwriters
all of the information concerning the COMPANY or the STOCKHOLDERS reasonably
requested by HDS and the Underwriters, and will cooperate with HDS and the
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Underwriters in the preparation of the Registration Statement and the prospectus
included therein (including audited financial statements prepared in accordance
with generally accepted accounting principles). The COMPANY and the
STOCKHOLDERS agree promptly to advise HDS if at any time during the period in
which a prospectus relating to the offering is required to be delivered under
the 1933 Act, any information contained in the prospectus concerning the COMPANY
or the STOCKHOLDERS becomes incorrect or incomplete in any material respect, and
to provide the information needed to correct such inaccuracy.
7.11 Examination of Final Financial Statements. To the extent that
-----------------------------------------
financial statements of the COMPANY for any quarter subsequent to the Balance
Sheet Date are required to be included in the Registration Statement, the
COMPANY shall provide, and HDS shall have had sufficient time to review, balance
sheets and statements of income, cash flows and retained earnings of the COMPANY
as of the end of such quarter, disclosing no material adverse change in the
financial condition or results of operations of the COMPANY. Such financial
statements, which shall be deemed to be Financial Statements (as described in
Section 5.9), shall have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated (except as noted therein). To the extent such Financial Statements
shall be included or reflected in the Registration Statement, any events or
circumstances reflected therein which might constitute a Material Adverse Effect
with respect to the COMPANY shall be deemed to have been waived by HDS and HDS
shall have no rights in respect of such Material Adverse Effect.
7.12 Maintenance of Liquidity and Limitation of Debt. As of the Closing
-----------------------------------------------
date, the COMPANY will have (i) adjusted working capital (defined for this
purpose as cash plus receivables net of receivables reserves less short term
liabilities, excluding the short-term portion of long-term debt) of at least
$100,000 and (ii) adjusted long term liabilities (defined for this purpose as
long-term liabilities plus the short-term portion of long-term debt) not
exceeding $35,000. As used in the preceding sentence, the terms "cash,"
"receivables," "receivables reserves," "short-term liabilities," "short-term
portion of long-term debt," "long-term liabilities" and "short-term portion of
long-term debt" all will have the same meaning as in generally accepted
accounting principles, as applied in the preparation of the COMPANY Financial
Statements.
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8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.
The obligations of STOCKHOLDERS and the COMPANY with respect to
actions to be taken on the Pricing Date are subject to the satisfaction or
waiver on or prior to the Pricing Date of all of the following conditions. The
obligations of the STOCKHOLDERS and the COMPANY with respect to actions to be
taken on the Closing Date are subject to the satisfaction or waiver on or prior
to the Closing Date of the conditions set forth in Sections 8.1, 8.7 and 8.11.
8.1 Representations and Warranties; Performance of Obligations. All
----------------------------------------------------------
representations and warranties of HDS and HDSU contained in Section 6 shall be
true and correct in all material respects as of the Pricing Date and the Closing
Date with the same effect as though such representations and warranties had been
made as of that date; each and all of the terms, covenants and conditions of
this Agreement to be complied with and performed by HDS and HDSU on or before
the Pricing Date and the Closing Date shall have been duly complied with and
performed in all material respects; and a certificate to the foregoing effect
dated the Pricing Date and the Closing Date signed by the President or any Vice
President of HDS and certified by the Secretary or Assistant Secretary of HDS
shall have been delivered to the STOCKHOLDERS.
8.2 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be satisfactory to the COMPANY and its counsel. The
STOCKHOLDERS and the COMPANY shall be satisfied that the Registration Statement
and the prospectus forming a part thereof, including any amendments thereof or
supplement thereto, shall not contain any untrue statement of a material fact,
or omit to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that the
--------
condition contained in this sentence shall be deemed satisfied if (i) HDS shall
have made available to the COMPANY copies of the draft (or changed pages of such
draft) of the Registration Statement prior to the initial filing with the
Securities and Exchange Commission (the "SEC"), each amendment thereto prior to
the effectiveness thereof with the SEC and of any amendment or supplement
thereto after the effectiveness thereof (including any prospectus filed pursuant
to Rule 424 under the 1933 Act) and (ii) the COMPANY or STOCKHOLDERS shall have
failed to inform HDS in writing prior to the filing or the effectiveness
thereof, as the case may be, of the existence of an untrue statement of a
material fact or the omission of such a statement of a material fact or other
matter with which they are not satisfied; provided however, that for the period
-------- -------
commencing 72 hours prior to any such filing or effectiveness, HDS can make such
draft or changed pages available by facsimile.
8.3 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock pursuant to
the Registration Statement and no governmental agency or body shall have taken
any other
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<PAGE>
action or made any request of the COMPANY as a result of which the management of
the COMPANY deems it inadvisable to proceed with the transactions hereunder.
8.4 Stockholders' Release. Each stockholder of HDS immediately prior to
---------------------
the Closing Date who is an officer or director of HDS shall have delivered to
the COMPANY an instrument dated the Closing Date releasing HDS from any and all
claims of such stockholder against HDS and obligations of HDS to such
stockholder other than obligations arising in connection with this Agreement,
the Other Agreements, any employment agreements between such stockholder and
HDS, any options to purchase HDS Stock granted by HDS to such stockholder and
any right to the issuance of the shares of HDS Stock set forth in Annex III
hereto.
8.5 Opinion of Counsel. The COMPANY shall have received an opinion from
------------------
counsel for HDS, dated the Closing Date, in the form annexed hereto as Annex V.
8.6 Director Indemnification. HDS shall have obtained directors and
------------------------
officers liability insurance from a reputable insurance company in type and
amount as is customary for companies similarly situated, and HDS shall have
entered into an indemnification agreement with each STOCKHOLDER, if any, who
will become a director of HDS, such indemnification agreement to be
substantially in the form attached as Annex VII.
8.7 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC and the underwriters named therein shall have
agreed to acquire on a firm commitment basis such shares of HDS Stock, subject
to the conditions set forth in an underwriting agreement (the "Underwriting
Agreement"), on terms such that the Effective IPO Price (as defined in Annex I)
is equal to or greater than the Minimum IPO Price (as defined in Annex I).
8.8 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made, no action or
proceeding shall have been instituted or threatened to restrain or prohibit the
Merger, and no governmental agency or body shall have taken any other action or
made any request of the COMPANY as a result of which the COMPANY deems it
inadvisable to proceed with the transactions hereunder.
8.9 Good Standing Certificates. HDS shall have delivered to the COMPANY a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
Date, duly issued by the Delaware Secretary of State and the Secretary of State
of each state in which HDS is authorized to do business, showing that HDS is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for HDS, for all periods prior to the Closing, have
been filed and paid.
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8.10 No Waivers. HDS shall not have waived any closing condition under any
----------
Other Agreement, unless such condition does not constitute a Material Adverse
Effect (as defined in such Other Agreement) on the Other Company party to such
Other Agreement.
8.11 No Material Adverse Change. No event or circumstance shall have
--------------------------
occurred which would constitute an HDS Material Adverse Effect; and the COMPANY
shall have received a certificate signed by HDS dated the Pricing Date and the
Closing Date to such effect.
8.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an employment agreement with HDS substantially in the
form of Annex VIII (each an "Employment Agreement").
8.13 Consulting Agreements. Each of the persons listed on Schedule 8.13
---------------------
shall have entered into a consulting agreement with HDS substantially in the
form of Annex IX (each a "Consulting Agreement").
8.14 Leases. Each of the STOCKHOLDERS listed on Schedule 8.14 shall have
------
entered into leases with HDS substantially in the form of Annex X (collectively
the "Leases").
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.
The obligations of HDS with respect to actions to be taken on the
Pricing Date are subject to the satisfaction or waiver on or prior to the
Pricing Date of all of the following conditions. The obligations of HDS with
respect to actions to be taken on the Closing Date are subject to the
satisfaction or waiver on or prior to the Closing Date of the conditions set
forth in Sections 9.1, 9.3, 9.4 and 9.11.
9.1 Representations and Warranties; Performance of Obligations. All the
----------------------------------------------------------
representations and warranties of the STOCKHOLDERS and the COMPANY contained in
this Agreement shall be true and correct in all material respects as of the
Pricing Date and the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date; each and
all of the terms, covenants and conditions of this Agreement to be complied with
or performed by the STOCKHOLDERS and the COMPANY on or before the Pricing Date
or the Closing Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the STOCKHOLDERS shall have
delivered to HDS a certificate dated the Pricing Date and the Closing Date
signed by them and certified by the Secretary or Assistant Secretary of the
COMPANY to such effect.
9.2 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock pursuant to
the Registration Statement, and no governmental agency or body shall have taken
any other
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action or made any request of HDS as a result of which the management of HDS
deems it inadvisable to proceed with the transactions hereunder.
9.3 Financial Statements. Prior to the initial filing of the Registration
--------------------
Statement, HDS shall have had sufficient time to review audited financial
statements for the fiscal year ending December 31, 1998, and prior to the
Closing Date, HDS shall have had sufficient time to review the consolidated
balance sheets of the COMPANY for the fiscal quarters beginning after December
31, 1998, and the unaudited consolidated statement of income, cash flows and
retained earnings of the COMPANY for the fiscal quarters beginning after
December 31, 1998, and, in each case, the same shall not disclose any material
adverse change in the financial condition of the COMPANY or the results of its
operations from the COMPANY Financial Statements as of the Balance Sheet Date.
9.4 No Material Adverse Effect. No event or circumstance shall have
--------------------------
occurred which would constitute a Material Adverse Effect; and HDS shall have
received a certificate signed by the STOCKHOLDERS dated the Pricing Date to such
effect.
9.5 STOCKHOLDERS' Release. The STOCKHOLDERS shall have delivered to HDS
---------------------
immediately prior to the Pricing Date an instrument substantially in the form of
Annex XI (each a "Stockholder Release") dated the Pricing Date releasing the
COMPANY from any and all claims of the STOCKHOLDERS against the COMPANY and
obligations of the COMPANY to the STOCKHOLDERS, except for (i) items
specifically identified in the Stockholder Release, (ii) continuing obligations
to the STOCKHOLDERS relating to their employment by the Surviving Corporation
and (iii) indemnity and contribution obligations of the COMPANY or its
successors to an officer or director of the COMPANY prior to the Merger.
9.6 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to HDS.
9.7 Termination of Related Party Agreements. All existing agreements
---------------------------------------
between the COMPANY and the STOCKHOLDERS or business or personal affiliates of
the COMPANY or the STOCKHOLDERS, other than those set forth on Schedule 9.7,
shall have been cancelled.
9.8 Opinion of COMPANY Counsel. HDS shall have received an opinion from
--------------------------
counsel to the COMPANY and the STOCKHOLDERS, dated the Pricing Date,
substantially in the form annexed hereto as Annex VI, and the Underwriters shall
have received a copy of the same opinion addressed to them. Such counsel shall
have been approved by HDS, such approval not to be unreasonably withheld.
9.9 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; the COMPANY
shall have obtained and delivered to HDS such additional consents to the Merger
as HDS may
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<PAGE>
reasonably request, including, without limitation, HDS's receipt on or prior to
the Pricing Date of (a) consents of third parties to those Material Contracts
and Material Leases listed on Schedule 5.23 pursuant to the last sentence of
Section 5.23 and (b) those licenses, franchises, permits or governmental
authorizations set forth on Schedule 5.12 pursuant to the last sentence of
Section 5.12, or assurances reasonably acceptable to it that such consents,
licenses, franchises, permits or governmental authorizations will be received on
the Closing Date or that the failure to receive such consents, licenses,
franchises, permits or governmental authorizations on the Closing Date will not
adversely affect its ability to conduct the business of the COMPANY as conducted
prior to the Closing Date; no action or proceeding shall have been instituted or
threatened to restrain or prohibit the Merger; and no governmental agency or
body shall have taken any other action or made any request of HDS as a result of
which HDS deems it inadvisable to proceed with the transactions hereunder.
9.10 Good Standing Certificates. The COMPANY shall have delivered to HDS a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
Date, duly issued by the appropriate governmental authority in the COMPANY's
state of incorporation and in each state in which the COMPANY is authorized to
do business, showing the COMPANY is validly existing, and where applicable, in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes due by the COMPANY for all periods prior to the
Pre-Closing have been filed and paid.
9.11 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC.
9.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an Employment Agreement with HDS.
9.13 Consulting Agreements. Each of the STOCKHOLDERS listed on Schedule
---------------------
8.13 shall have entered into a Consulting Agreement with HDS.
9.14 Leases. Each of the persons listed in Schedule 8.14 shall have entered
------
into a Lease with HDS.
9.15 Repayment of Indebtedness. Prior to the Closing Date, the STOCKHOLDERS
-------------------------
shall have repaid the COMPANY in full all amounts owing by the STOCKHOLDERS to
the COMPANY.
9.16 FIRPTA Certificate. The COMPANY and each STOCKHOLDER shall have
------------------
delivered to HDS a certificate to the effect that the COMPANY or such
STOCKHOLDER, as applicable, is not a "foreign person" pursuant to Section
1.1445-2(b) of the Treasury regulations.
9.17 Insurance. HDS shall be designated as an additional named insured on
---------
all of the COMPANY's insurance policies.
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<PAGE>
9.18 Nondisturbance Agreements. Each of the lienholders and/or ground
-------------------------
lessors listed in Schedule 9.18 shall have entered into nondisturbance
agreements with HDS substantially in the form of Annex XII (collectively the
"Nondisturbance Agreements").
10. POST-CLOSING COVENANTS AND SPECIAL TAX MATTERS.
10.1 Intentionally Omitted.
10.2 Disclosure. If, subsequent to the Pricing Date and prior to the 25th
----------
day after the date of the final prospectus of HDS utilized in connection with
the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or
circumstance which would change (or, if after the Closing Date, would have
changed) a representation or warranty of COMPANY or STOCKHOLDERS in this
Agreement or would affect any document delivered pursuant hereto in any material
respect, the COMPANY and the STOCKHOLDERS shall promptly give notice of such
fact or circumstance to HDS.
10.3 Cooperation in Tax Return Preparation. Each party hereto shall at its
-------------------------------------
own expense cooperate with each other and make available to each other such Tax
data and other information as may be reasonably required in connection with (i)
the preparation or filing of any Tax Return, election, consent or certification,
or any claim for refund, (ii) any determinations of liability for Taxes, or
(iii) an audit, examination or other proceeding with respect to Taxes ("Tax
Data"). Such cooperation shall include, without limitation, making their
respective employees and independent auditors reasonably available on a mutually
convenient basis for all reasonable purposes, including, without limitation, to
provide explanations and background information and to permit the copying of
books, records, schedules, workpapers, notices, revenue agent reports,
settlement or closing agreements and other documents containing the Tax Data
("Tax Documentation"). The Tax Data and the Tax Documentation shall be retained
until one year after the expiration of all applicable statutes of limitations
(including extensions thereof); provided, however, that in the event an audit,
-------- -------
examination, investigation or other proceeding has been instituted prior to the
expiration of an applicable statute of limitations, the Tax Data and Tax
Documentation relating thereto shall be retained until there is a final
determination thereof (and the time for any appeal has expired).
10.4 Tax Return Preparation and Filing.
(i) HDS will be responsible for preparing and filing (or causing the
preparation and filing of) all income Tax Returns with respect to HDS or the
COMPANY for any taxable period beginning after the Closing Date. The parties
hereto acknowledge that the Closing Date shall be the last day of a taxable
period of the COMPANY pursuant to Code Section 381 and the regulations
promulgated thereunder.
(ii) STOCKHOLDERS will be responsible for preparing and filing (or
causing the preparation and filing of) all income Tax Returns with respect to
the COMPANY for any taxable period ending on or before the Closing Date. HDS and
the STOCKHOLDERS shall (a) with respect to such income Tax Returns, determine
the
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<PAGE>
income, gain, expenses, losses, deductions, and credits of the COMPANY in a
manner consistent with prior practice and in a manner that apportions such
income, gain, expenses, loss, deductions and credits equitably from period to
period and (b) prepare such Tax Returns in a manner consistent with prior years,
in each case as determined in the good faith judgment of the preparer of such
returns; provided, however, that in all events such Tax Returns shall be
prepared in a manner consistent with applicable laws. The COMPANY shall provide
the cash necessary to pay such Taxes, if any, shown to be due from the COMPANY
on any such Tax Returns filed after the Closing Date, but without prejudice to
the right of HDS or the COMPANY to seek indemnification for such Taxes from the
STOCKHOLDERS pursuant to Section 11.6, if applicable.
(iii) In order to appropriately apportion any Taxes relating to a
taxable period that includes (but that would not, but for this section, close
on) the Closing Date, the parties hereto will, to the extent permitted by
applicable law, elect with the relevant taxing authority to treat for all
purposes the Closing Date as the last day of a taxable period of the COMPANY,
and such taxable period shall be treated as a Pre-Closing Period (as defined in
Section 10.6(c)) for purposes of this Agreement. In any case where applicable
law does not permit the COMPANY to treat the Closing Date as the last day of a
taxable period, then for purposes of this Agreement, the portion of each such
Tax that is attributable to the operations of the COMPANY for such Interim
Period shall be (i) in the case of a Tax that is not based on income or gross
receipts, the total amount of such Tax for the period in question multiplied by
a fraction, the numerator of which is the number of days in the Pre-Closing
Period portion of such Interim Period, and the denominator of which is the total
number of days in such Interim Period, and (ii) in the case of a Tax that is
based on income or gross receipts, the Tax that would be due with respect to the
Interim Period, if such Interim Period constituted an entire taxable period.
10.5 Tax Treatment of Transaction. Each of the parties agrees for tax
----------------------------
purposes to treat the merger of HDSU with and into the COMPANY pursuant to this
Agreement as an acquisition of stock of the COMPANY by HDS in a taxable
transaction, subject to Section 10.10 of this Agreement.
10.6 Special Definitions Related to Tax Matters. For all purposes of this
------------------------------------------
Agreement related to any Tax matters (including Sections 5.22 and 6.10):
(a) "Affiliate" of a person or entity shall mean a person or
entity that directly or indirectly controls, is controlled by or is under common
control with that person or entity.
(b) "Interim Period" shall mean any taxable period commencing
prior to the Closing Date and ending after the Closing Date.
(c) "Pre-Closing Period" shall mean (i) any taxable period that
begins before the Closing Date and ends on or before the Closing Date and (ii)
the portion of any Interim Period through and including the Closing Date.
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(d) "Post-Closing Period" means any taxable period that begins
after the Closing Date, and, with respect to any Interim Period, the portion of
such Interim Period commencing immediately after the Closing Date.
(e) "Tax" means any federal, state, local, or foreign income,
gross receipts, ad valorem, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including taxes
under Section 59A), customs duties, capital stock, net worth, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration, value
added, workers compensation, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever imposed by any federal, state, local or foreign
government or any agency or political subdivision of any such government,
including any interest, penalty, or addition thereto, without regard to whether
such tax is disputed or not or arose before, on or after the Closing Date.
(f) "Tax Returns" means all reports, elections, declarations,
claims for refund, estimates, information statements and returns (including any
schedules and attachments thereto) relating to, or required to be filed in
connection with, any Taxes pursuant to the statutes, rules and regulations of
any federal, state, local or foreign government taxing authority.
(g) "Taxing Authority" means any governmental agency, board,
bureau, body, department or authority of any United States federal, state or
local jurisdiction, having or purporting to have jurisdiction with respect to
any Tax.
10.7 Directors. The persons named in the Registration Statement shall be
---------
appointed as directors of HDS on or before the Closing Date.
10.8 Release from Guarantees. HDS shall use its best efforts to have the
-----------------------
STOCKHOLDERS released from any and all guarantees of any obligations of the
COMPANY that they personally guaranteed for the benefit of the COMPANY with all
such guarantees of indebtedness being assumed by HDS. HDS agrees to indemnify
the STOCKHOLDERS against any and all claims made by lenders under any such
guarantee which arise as a result of HDS's failure to cause such guarantee to be
released on or prior to the Closing.
10.9 HDS Stock Options. HDS shall prior to the Closing Date adopt an
-----------------
employee stock option plan providing for the grant of options to employees of
HDS as described in the Registration Statement. HDS shall grant stock options to
former employees of the COMPANY under such plan (i) having an exercise price
equal to the Effective IPO Price and (ii) having an aggregate exercise price
equal to $324,850. In granting options under such plan to former employees of
the COMPANY, the Board of Directors of HDS or the committee administering such
plan, as the case may be, shall receive recommendations from Bill Williams as to
the employees to receive such options and the relative size of the awards to the
respective employees, and to the extent deemed reasonable by the Board of
Directors or committee, such recommendations shall be accepted.
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<PAGE>
10.10 Section 338(h)(10) Election.
(a) Election. The COMPANY and the STOCKHOLDERS will join with
--------
HDS in making a timely and effective election under Section 338(h)(10) of the
Code (and any corresponding election under state, local and foreign tax law)
with respect to the acquisition of stock pursuant to this Agreement (the
"Section 338 Election"). At the Closing, the STOCKHOLDERS (and where
appropriate, the STOCKHOLDERS' spouses) and HDS shall execute IRS Form 8023,
which will be completed to the extent reasonably practicable. Within 90 days
after the Closing Date, HDS shall deliver to STOCKHOLDERS a completed IRS Form
8023 (along with any required schedules and/or attachments) with respect to the
acquisition of stock pursuant to this Agreement. Each of the STOCKHOLDERS
consents to the filing of such Form 8023 by HDS.
(b) Cooperation. STOCKHOLDERS shall cooperate fully with HDS and
-----------
make available to HDS such data and other information as may be reasonably
required by HDS in order to prepare and timely file the forms and other required
statements or schedules in connection with the Section 338 Election. In the
event any dispute involving the Section 338 Election arises and is not resolved
prior to the due date of the Form 8023, HDS shall be entitled to file the Form
8023, in a manner which HDS determines to be reasonable under the circumstances.
10.11 Release of COMPANY From Loans. STOCKHOLDERS shall use their best
-----------------------------
efforts to have the COMPANY released from any and all loans from or guarantees
in favor of U.S. Bank National Association and the Small Business
Administration, and any related loans or guarantees. STOCKHOLDERS agree to
indemnify HDS against any and all claims made by such lenders under any such
loans or guarantees which arise as a result of STOCKHOLDERS' failure to cause
such loans or guarantees to be released on or prior to the Closing.
11. INDEMNIFICATION.
The STOCKHOLDERS and HDS each make the following covenants that are
applicable to them, respectively:
11.1 General Indemnification by the STOCKHOLDERS. The STOCKHOLDERS
-------------------------------------------
covenant and agree that they, jointly and severally (except with respect to
Sections 5.28 through 5.30, which shall be several), will indemnify, defend,
protect and hold harmless HDS and the COMPANY, at all times from and after the
date of this Agreement until the Expiration Date as defined in Section 5 above,
from and against all claims, damages, actions, suits, proceedings, demands,
assessments, adjustments, costs and expenses (including specifically, but
without limitation, reasonable attorneys' fees and expenses of investigation)
incurred by HDS, HDSU and the COMPANY as a result of or arising from (i) any
breach of the representations and warranties of the STOCKHOLDERS or the COMPANY
set forth herein or on the schedules or certificates delivered in connection
herewith (other than the representations and warranties provided in Section
5.22, for which Section 11.6 provides special indemnity provisions); (ii) any
nonfulfillment of any
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<PAGE>
agreement on the part of the STOCKHOLDERS or the COMPANY under this Agreement;
(iii) any liability not disclosed to HDS whether known, unknown, contingent or
otherwise at the time of Closing, arising out of any acts, events, omissions or
transactions occurring prior to the date of Closing; and (iv) any liability
under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at
common law or otherwise, (x) arising out of or based upon any untrue statement
of a material fact relating to the COMPANY or the STOCKHOLDERS that is provided
to HDS or its counsel by the COMPANY or the STOCKHOLDERS and contained in any
preliminary prospectus relating to the IPO, the Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or (y) arising out of or based upon any omission to state therein a
material fact relating to the COMPANY or the STOCKHOLDERS that is required to be
stated therein or necessary to make the statements therein not misleading, and
not provided to HDS or its counsel by the COMPANY or the STOCKHOLDERS; provided,
--------
however, that such indemnity shall not inure to the benefit of HDS, HDSU, the
- -------
COMPANY or the Surviving Corporation to the extent that such untrue statement
(or alleged untrue statement) was made in, or omission (or alleged omission)
occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in
writing, corrected information to HDS counsel and to HDS for inclusion in the
final prospectus, and such information was not so included.
11.2 Indemnification by HDS. HDS covenants and agrees that it will
----------------------
indemnify, defend, protect and hold harmless the COMPANY and the STOCKHOLDERS,
at all times from and after the date of this Agreement until the Expiration
Date, from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) incurred by the COMPANY and the STOCKHOLDERS as a result of or
arising from (i) any breach by HDS of its representations and warranties set
forth herein or on the schedules or certificates attached hereto; (ii) any
nonfulfillment of any agreement on the part of HDS under this Agreement; (iii)
any liabilities which the COMPANY or the STOCKHOLDERS may incur due to HDS's
failure to be responsible for the liabilities and obligations of the COMPANY as
provided in Section 1 hereof (except to the extent that HDS has claims against
the STOCKHOLDERS by reason of such liabilities); or (iv) any liability under the
1933 Act, the 1934 Act or other Federal or state law or regulation, at common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact relating to HDS or any of the Founding
Companies other than the COMPANY (with respect to information furnished to HDS
by the COMPANY) contained in any preliminary prospectus, the Registration
Statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact relating to HDS or any of the Founding
Companies other than the COMPANY that is required to be stated therein or
necessary to make the statements therein not misleading.
11.3 Third Person Claims. (i) Promptly after any party hereto (herein
-------------------
the "Indemnified Party") has received notice of or has knowledge of any claim by
a person
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<PAGE>
not a party to this Agreement ("Third Person"), or the commencement of any
action or proceeding by a Third Person (such claim or commencement of such
action or proceeding being a "Third Party Claim") that could give rise to a
right of indemnification under this Agreement, the Indemnified Party shall, as a
condition precedent to a claim with respect thereto being made against any party
obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof
(herein the "Indemnifying Party"), give the Indemnifying Party written notice of
such Third Party Claim describing in reasonable detail the nature of such Third
Party Claim, a copy of all papers served with respect to that Third Party Claim
(if any), an estimate of the amount of damages attributable to the Third Party
Claim to the extent feasible (which estimate shall not be conclusive of the
final amount of such claim) and the basis for the Indemnified Party's request
for indemnification under this Agreement; provided, however, that the failure
-------- -------
of the Indemnified Party to give timely notice hereunder shall relieve the
Indemnifying Party of its indemnification obligations under this Agreement to
the extent, but only to the extent that, such failure materially prejudices the
Indemnifying Party's ability to defend such claim. Within fifteen (15) days
after receipt of such notice (the "Election Period"), the Indemnifying Party
shall notify the Indemnified Party (a) whether the Indemnifying Party disputes
its potential liability to the Indemnified Party under this Section 11 with
respect to that Third Party Claim and (b) if the Indemnifying Party does not
dispute its potential liability to the Indemnified Party with respect to that
Third Party Claim, whether the Indemnifying Party desires, at the sole cost and
expense of the Indemnifying Party, to defend the Indemnified Party against that
Third Party Claim.
(ii) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim through counsel of its own choosing which is acceptable to the
Indemnified Party, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, that Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 11.3(ii) and the Indemnified
Party will furnish the Indemnifying Party with all information in its possession
with respect to that Third Party Claim and otherwise cooperate with the
Indemnifying Party in the defense of that Third Party Claim; provided, however,
-------- -------
that the Indemnifying Party shall not enter into any settlement with respect to
any Third Party Claim that purports to limit the activities of, or otherwise
restrict in any way, any Indemnified Party or any affiliate of any Indemnified
Party without the prior consent of that Indemnified Party (which consent may be
withheld in the sole discretion of that Indemnified Party). The Indemnified
Party is hereby authorized, at the sole cost and expense of the Indemnifying
Party, to file, during the Election Period, any motion, answer or other
pleadings that the Indemnified Party shall deem necessary or appropriate to
protect its interests or those of the Indemnifying Party. The Indemnified Party
may participate in, but not control, any defense or settlement of any Third
Party Claim controlled by the Indemnifying Party pursuant to this Section
11.3(ii) and will bear its own costs and expenses with respect to that
participation; provided, however, that if the named parties to any such
-------- -------
action
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<PAGE>
(including any impleaded parties) include both the Indemnifying Party and the
Indemnified Party, and the Indemnified Party has been advised by counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the Indemnifying Party, then the Indemnified
Party may employ separate counsel at the expense of the Indemnifying Party, and,
on its written notification of that employment, the Indemnifying Party shall not
have the right to assume or continue the defense of such action on behalf of the
Indemnified Party.
(iii) If the Indemnifying Party (a) within the Election Period (1)
disputes its potential liability to the Indemnified Party under this Section 11,
(2) elects not to defend the Indemnified Party pursuant to Section 11.3(ii) or
(3) fails to notify the Indemnified Party that the Indemnifying Party elects to
defend the Indemnified Party pursuant to Section 11.3(ii) or (b) elects to
defend the Indemnified Party pursuant to Section 11.3(ii) but fails diligently
and promptly to prosecute or settle the Third Party Claim, then the Indemnified
Party shall have the right to defend, at the sole cost and expense of the
Indemnifying Party (if the Indemnified Party is entitled to indemnification
hereunder), the Third Party Claim by all appropriate proceedings, which
proceedings shall be promptly and vigorously prosecuted by the Indemnified Party
to a final conclusion or settled. The Indemnified Party shall have full control
of such defense and proceedings. Notwithstanding the foregoing, if the
Indemnifying Party has delivered a written notice to the Indemnified Party to
the effect that the Indemnifying Party disputes its potential liability to the
Indemnified Party under this Section 11 and if such dispute is resolved in favor
of the Indemnifying Party, the Indemnifying Party shall not be required to bear
the costs and expenses of the Indemnified Party's defense pursuant to this
Section 11.3 or of the Indemnifying Party's participation therein at the
Indemnified Party's request. The Indemnifying Party may participate in, but not
control, any defense or settlement controlled by the Indemnified Party pursuant
to this Section 11.3(iii), and the Indemnifying Party shall bear its own costs
and expenses with respect to such participation.
(iv) The parties hereto will make appropriate adjustments for any
Tax benefits, Tax detriments or insurance proceeds in determining the amount of
any indemnification obligation under this Section 11, provided that no
--------
Indemnifying Party shall be obligated to seek any payment pursuant to the terms
of any insurance policy. All indemnification payments under this Section 11
shall be deemed adjustments to the Merger consideration provided for herein.
11.4 Exclusive Remedy. The indemnification provided for in this Section 11
----------------
shall be the exclusive remedy in any action seeking damages or any other form of
monetary relief brought by any party to this Agreement against another party,
provided that nothing herein shall be construed to limit the right of a party,
- --------
in a proper case, to seek injunctive relief for a breach of this Agreement.
11.5 Limitations on Indemnification.
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<PAGE>
(i) The first amounts otherwise payable by one or more STOCKHOLDERS
(whether jointly and severally or severally) pursuant to Section 11.1 and 11.3
to HDS and the COMPANY will be offset and reduced (but not below zero) by the
Indemnification Threshold. The "Indemnification Threshold" is an amount equal to
one and one-half percent (1.5%) of the sum of (a) the aggregate amount of Cash
Consideration (as defined in Annex I) for all STOCKHOLDERS and (b) the aggregate
value of all HDS Stock received by all STOCKHOLDERS on the Closing Date pursuant
to Section 2.1 of this Agreement. All such amounts otherwise payable by one or
more STOCKHOLDERS in excess of the amount so offset and reduced shall be paid
without offset or reduction pursuant to this Section 11.5(i). Notwithstanding
the foregoing, this Section 11.5 shall not apply to claims for indemnification
for breach of Section 7.12 or under Section 11.6. For purposes of determining
the Indemnification Threshold pursuant to this Section 11.5, the HDS Stock shall
be valued at the Effective IPO Price, as defined in Annex I. Claims paid
directly by the STOCKHOLDERS (or third parties on behalf of the STOCKHOLDERS)
shall be excluded for purposes of calculating the Indemnification Threshold.
(ii) The first amounts otherwise payable by HDS pursuant to Sections 1
1.2 and 11.3 to STOCKHOLDERS and the COMPANY will be offset and reduced (but not
below zero) by an amount equal to the Indemnification Threshold. All such
amounts otherwise payable by HDS in excess of the amount so offset and reduced
shall be paid without offset or reduction pursuant to this Section 11.5(ii).
(iii) Notwithstanding any other term of this Agreement, in no event
shall any STOCKHOLDER be liable under this Agreement, including this Section 11,
for an amount which exceeds the sum of (a) the amount of Cash Consideration for
such STOCKHOLDER, (b) the net proceeds to such STOCKHOLDER from the sale of such
STOCKHOLDER's HDS Stock received pursuant to Section 2.1 hereof prior to the
date that the indemnity obligation of such STOCKHOLDER is paid and (c) the value
of the shares of HDS Stock received by such STOCKHOLDER on the Closing Date
pursuant to Section 2.1 that have not been sold by such STOCKHOLDER prior to the
date that the indemnity obligation of such STOCKHOLDER is paid, valued at the
closing price per share on the trading day prior to the date the indemnification
obligation is paid.
11.6 Special Tax Indemnity Provisions.
(i) From and after the Closing Date, the STOCKHOLDERS, jointly and
severally, shall indemnify and save HDS and the COMPANY harmless from any and
all Taxes (including without limitation any obligation to contribute to the
payment of a Tax determined on a consolidated, combined or unitary basis with
respect to a group of corporations that includes or included the COMPANY) which
are (a) imposed on any member (other than the COMPANY) of the consolidated,
unitary or combined group which includes or included the COMPANY or (b) imposed
on the COMPANY in respect of its income, business, property or operations or for
which the COMPANY may otherwise be liable (1) for any Pre-Closing Period, (2)
resulting by reason of the several liability of the COMPANY pursuant to Treasury
Regulations section 1.1502-6 or any
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<PAGE>
analogous state, local or foreign law or regulation or by reason of the COMPANY
having been a member of any consolidated, combined or unitary group on or prior
to the Closing Date, (3) resulting from the COMPANY ceasing to be a member of
any affiliated group (within the meaning of Section 1504(a) of the Code), (4) in
respect of any Post-Closing Period, attributable to events, transactions, sales,
deposits, services or rentals occurring, received or performed in a Pre-Closing
Period, (5) in respect of any Post-Closing Period, attributable to any change in
accounting method employed by the COMPANY during any of the four previous
taxable years, (6) in respect of any Post-Closing Period, attributable to any
items of income or gain of an entity treated as a partnership reported by the
COMPANY as a partner, to the extent such items are properly attributable to
periods of the "partnership" ending on or before the Closing Date, (7)
attributable to any discharge of indebtedness that may result from any capital
contributions by STOCKHOLDERS (or an affiliate of STOCKHOLDERS) to the COMPANY
of any intercompany indebtedness owed by the COMPANY to any STOCKHOLDER (or an
affiliate of any STOCKHOLDER), or (8) by reason of any Section 338(h)(10)
Election (including, without limitation, Taxes associated with the COMPANY's
"built-in-gains" pursuant to Section 1374 of the Code, or comparable state
statutes) which may occur in accordance with Section 10.10 of this Agreement.
(ii) From and after the Closing Date, STOCKHOLDERS shall, jointly and
severally, indemnify and save HDS and the COMPANY harmless from any liability
imposed on HDS or the COMPANY (or any affiliate of such companies) attributable
to any breach of a warranty or representation made by STOCKHOLDERS in Section
5.22.
(iii) From and after the Closing Date, and except as expressly provided
otherwise in this Section 11.6, HDS and the COMPANY shall indemnify and hold
harmless STOCKHOLDERS with respect to any Taxes imposed on HDS or the COMPANY
with respect to any Post-Closing Period.
(iv) To the extent any party to this Agreement is entitled to
indemnification from another party under this Section 11.6, such claim for
indemnification shall include the right to recover any losses, damages,
liabilities, expenses and costs related thereto, including, without limitation,
reasonable attorney's and expert witness fees and other costs of investigating
or attempting to avoid the same or oppose the imposition thereof, together with
interest thereon at the reference rate in effect from time to time at Bank of
America, NT&SA, or its successor, compounded quarterly from the date incurred.
(v) Except to the extent expressly provided to the contrary in this
Section 11.6, the general procedures regarding notice and pursuit of
indemnification claims set forth in Sections 11.1 through 11.5 shall apply to
all claims for indemnification made under this Section 11.6. Notwithstanding the
immediately preceding sentence and any provision of Section 11 to the contrary,
if a claim for indemnification involves any matter covered in this Section 11.6,
then the contest provisions of Section 11.7, as applicable, shall control
regarding the defense and handling of any such third-party claim that could give
rise to an indemnification obligation on the part of one party to another.
In addition,
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and notwithstanding anything else in Section 11 to the contrary, the party with
the right to control a contest has the right to choose counsel of its choice
regarding such contest. Furthermore, there shall be no limit on (a) the time
period during which a claim for indemnification may be made under this Section
11.6(i) or (b) the minimum or maximum amount of indemnity payments that may be
recovered pursuant to this Section 11.6 (other than (1) each party's obligation
to make claims for indemnification promptly and without undue delay and (2) the
aggregate limit for all indemnity payments imposed on a STOCKHOLDER provided in
Section 11.5(iii)).
(vi) All amounts paid pursuant to this Section 11.6 by one party to
another party (other than interest payments) shall be treated by such parties as
an adjustment to the value of the merger consideration provided pursuant to this
Agreement.
11.7 Special Contest Rights Related to Tax Matters.
(i) The STOCKHOLDERS shall have the sole right (but not the
obligation) to control, defend, settle, compromise or prosecute in any manner
any audit, examination, investigation, hearing or other proceeding with respect
to any Tax Return of the COMPANY involving only Pre-Closing Periods. (ii) Except
as expressly provided to the contrary in this Section 11.7, HDS shall have the
sole right (but not the obligation) to control, defend, settle, compromise, or
prosecute in any manner an audit, examination, investigation, hearing or other
proceeding with respect to any Tax Return of the COMPANY; provided, however,
-------- -------
that any liability for Taxes or Tax issues related to an Interim Period may not
be settled or compromised without the consent of the STOCKHOLDERS, which consent
shall not be unreasonably withheld or delayed. In addition, (i) HDS shall keep
the STOCKHOLDERS duly informed of any proceedings in connection with an Interim
Period and (ii) the STOCKHOLDERS shall be entitled to receive copies of all
correspondence and documents relating to such proceedings and may, at their
option, observe such proceedings (including any associated meetings or
conferences).
11.8 Special Notification Requirements Regarding Tax Disputes. HDS and the
--------------------------------------------------------
COMPANY shall promptly forward to the STOCKHOLDERS all written notifications and
other written communications from any Tax Authority received by HDS or the
COMPANY relating to any Pre-Closing Period of the COMPANY, and HDS and the
COMPANY shall execute or cause to be executed any power of attorney or other
document or take such actions as requested by the STOCKHOLDERS to enable the
STOCKHOLDERS to take any action STOCKHOLDERS deem appropriate with respect to
any proceedings relating thereto.
11.9 Refunds. A party receiving a refund, credit or similar offset (or the
-------
benefit thereof) with respect to a Tax effectively paid by another party shall
immediately pay an amount equal to such refund, credit, offset or benefit
(including any interest thereon) to the party that effectively paid the Tax with
respect to which the refund, credit, offset or benefit relates. A party
entitled to a deduction on account of a Tax effectively paid by
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another party shall pay an amount equal to any Taxes saved by reason of such
deduction to the party that effectively bore the economic cost of the Tax with
respect to which such deduction relates, such amount to be paid immediately
after such saving is realized.
11.10 Optional Payment With Shares. Any STOCKHOLDER may make any payment to
----------------------------
required by this Section 11 by tendering shares of HDS Stock obtained by
such STOCKHOLDER pursuant to Sections 2 and 3 of this Agreement, with shares so
tendered being valued at the closing price per share on the trading day prior to
the date the indemnification obligation is paid. No STOCKHOLDER will be
entitled to make payment with any other shares of HDS Stock.
12. TERMINATION OF AGREEMENT.
12.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Closing Date solely:
(i) by mutual consent of the boards of directors of HDS and the
COMPANY;
(ii) at or before the Pre-Closing, by STOCKHOLDERS holding a majority
of each class of COMPANY Stock, by the COMPANY, or by HDS, if the Pre-Closing
has not been completed by June 30, 1999, time being of the essence, unless the
failure to complete the Pre-Closing is due to the willful failure of the party
seeking to terminate this Agreement to perform any of its obligations under this
Agreement to the extent required to be performed by it prior to or on the
Pricing Date;
(iii) at or before the Pre-Closing, by STOCKHOLDERS holding a majority
of each class of COMPANY Stock or by the COMPANY if a material breach or default
shall be made by HDS, or by HDS if a material breach or default shall be made by
one or more STOCKHOLDERS or the COMPANY, in the observance or in the due and
timely performance of any of the covenants, agreements or conditions contained
herein, and such default shall not have been cured and shall not reasonably be
expected to be cured on or before the Pricing Date;
(iv) at or before the Pre-Closing pursuant to Section 7.9 hereof;
(v) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Underwriting Agreement is terminated;
(vi) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock if the Minimum
IPO Price (as defined in Annex I) is not attained at the time of the IPO; or
(vii) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the
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COMPANY, or by HDS, if the Closing Date does not occur within ten (10) days
after the Pricing Date, time being of the essence.
12.2 Liabilities in Event of Termination. In the event of termination of
-----------------------------------
this Agreement as provided in this Section there shall be no liability or
obligation on the part of any party hereto except to the extent that such
liability is based on the breach by a party of any of its representations,
warranties or covenants set forth in this Agreement, provided however, that
there shall be no liability for a breach of representation or warranty if such
representation or warranty was made in good faith and with no reason to know
such representation or warranty was not true at the time made.
13. NONCOMPETITION.
13.1 Prohibited Activities. Except as set forth on Schedule 13.1, the
---------------------
STOCKHOLDERS will not, for a period of four (4) years following the Closing Date
(except that (v) below shall apply to the period ending at the Closing if this
Agreement is not terminated prior to the Closing and June 30, 1999 if this
Agreement is terminated prior to the Closing), for any reason whatsoever,
directly or indirectly, for themselves or on behalf of or in conjunction with
any other person, persons, company, partnership, corporation or business of
whatever nature:
(i) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial capacity, whether as an employee, independent
contractor, consultant or advisor, or as a sales representative, in any business
selling any products or services in direct competition with HDS or any of the
subsidiaries thereof, within one hundred (100) miles of where the COMPANY
conducted business prior to the effectiveness of the Merger (the "Territory");
(ii) contact or solicit any person who is, at that time, an employee
of HDS (including the subsidiaries thereof) in a managerial capacity for the
purpose or with the intent of enticing such employee away from or out of the
employ of HDS (including the subsidiaries thereof), provided that any
--------
STOCKHOLDER shall be permitted to solicit and hire any member of his or her
immediate family;
(iii) contact any person or entity which is, at that time, or which
has been, within one (1) year prior to that time, a customer of HDS (including
the subsidiaries thereof), or any affiliate of such a person or entity, for the
purpose of soliciting or selling products or services in direct competition with
HDS;
(iv) contact any prospective acquisition candidate, on any
STOCKHOLDER's own behalf or on behalf of any competitor within the Territory
in the commercial kitchen design and/or supply business, which candidate was
either called upon by HDS (including the subsidiaries thereof) or for which
HDS (or any subsidiary thereof) made an acquisition analysis, for the
purpose of acquiring such entity, provided that no STOCKHOLDER shall be
--------
charged with a violation of this Section unless and until such STOCKHOLDER
shall have knowledge or notice that such prospective
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acquisition candidate was called upon, or that an acquisition analysis was made,
for the purpose of acquiring such entity;
(v) engage, directly or indirectly, through any intermediary or
otherwise, in any conversations or negotiations with any Other Company
regarding a possible business combination between or among them; provided that
-------- ----
such prohibition shall not preclude the COMPANY from conducting business in the
ordinary course with any Other Company or from having business combination
discussions with any other party subject to the provisions in this Agreement; or
(vi) except in furtherance of HDS's business, disclose customers,
whether in existence or proposed, of the COMPANY to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever
excluding disclosure to HDS or any of HDS's Subsidiaries.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit any STOCKHOLDER from acquiring as an investment not more than one
percent (1%) of the capital stock of any business whose stock is traded on a
national securities exchange or over-the-counter.
13.2 Damages. Because of the difficulty of measuring economic losses to HDS
-------
as a result of a breach of the foregoing covenant, and because of the immediate
and irreparable damage that could be caused to HDS for which it would have no
other adequate remedy, each STOCKHOLDER agrees that the foregoing covenant may
be enforced by HDS, in the event of breach by such STOCKHOLDER, by injunctions
and restraining orders.
13.3 Reasonable Restraint. It is agreed by the parties hereto that the
--------------------
foregoing covenants in this Section 13 impose a reasonable restraint on the
STOCKHOLDERS in light of the activities and business of HDS (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of HDS; but it is also the intent of HDS and the STOCKHOLDERS that
such covenants be construed and enforced in accordance with the changing
activities and business of HDS (including the subsidiaries thereof) throughout
the term of this covenant.
It is further agreed by the parties hereto that, in the event that any
STOCKHOLDER who has entered into an Employment Agreement shall thereafter cease
to be employed thereunder, and such STOCKHOLDER shall enter into a business or
pursue other activities not in competition with HDS and/or any subsidiary
thereof, or similar activities or business in locations the operation of which,
under such circumstances, does not violate clause (i) of Section 13.1, and in
any event such new business, activities or location are not in violation of this
Section 13 or of such STOCKHOLDER's obligations under this Section 13, if any,
such STOCKHOLDER shall not be chargeable with a violation of this Section 13 if
HDS and/or any subsidiary thereof shall thereafter enter the same, similar or a
competitive (i) business, (ii) course of activities or (iii) location, as
applicable.
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13.4 Severability; Reformation. The covenants in this Section 13 are
-------------------------
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
13.5 Independent Covenant. All of the covenants in this Section 13 shall be
--------------------
construed as an agreement independent of any other provision in this Agreement,
and the existence of any claim or cause of action of any STOCKHOLDER against HDS
(including the subsidiaries thereof), whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by HDS of such
covenants. It is specifically agreed that the period of four (4) years stated
at the beginning of this Section 13, during which the agreements and covenants
of each STOCKHOLDER made in this Section 13 shall be effective, shall be
computed by excluding from such computation any time during which such
STOCKHOLDER is in violation of any provision of this Section 13. The covenants
contained in this Section 13 shall not be affected by any breach of any other
provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 Materiality. The COMPANY and the STOCKHOLDERS hereby agree that the
-----------
covenants in this Section 13 are a material and substantial part of this
transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they
------------
had in the past, currently have, and in the future may possibly have, access to
certain confidential information of the COMPANY, the Other Companies and/or HDS,
such as lists of customers, operational policies, and pricing and cost policies
that are valuable, special and unique assets of the COMPANY's, the Other
Companies' and/or HDS's respective businesses. The STOCKHOLDERS agree that they
will not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except (a) to authorized representatives of HDS, (b) following the Closing, as
required in the course of performing their duties for HDS, and (c) to counsel
and other advisers, provided that such advisers (other than counsel) agree to
--------
the confidentiality provisions of this Section 14.1; provided, further, that
-------- -------
confidential information shall not include (i) such information which becomes
known to the public generally through no fault of the STOCKHOLDERS, (ii)
information required to be disclosed by law or the order of any governmental
authority under color of law, provided that prior to disclosing any information
--------
pursuant to this clause (ii), the STOCKHOLDERS shall, if possible, give prior
written notice thereof to HDS and provide HDS with the opportunity to contest
such disclosure, or (iii) the disclosing party reasonably believes that such
disclosure is required in connection with the defense of a lawsuit against the
COMPANY, the Other Companies and/or HDS. In the event of a breach or threatened
breach by any of the STOCKHOLDERS of the provisions of this
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section, HDS shall be entitled to an injunction restraining such STOCKHOLDERS
from disclosing, in whole or in part, such confidential information. Nothing
herein shall be construed as prohibiting HDS from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
14.2 HDS. HDS recognizes and acknowledges that it had in the past and
---
currently has access to certain confidential information of the COMPANY, such as
lists of customers, operational policies, and pricing and cost policies that are
valuable, special and unique assets of the COMPANY's business. HDS agrees that,
prior to the Closing, it will not disclose such confidential information to any
person, firm, corporation, association or other entity for any purpose or reason
whatsoever, except (a) to authorized representatives of the COMPANY, (b) to
counsel and other advisers, provided that such advisers (other than counsel)
--------
agree to the confidentiality provisions of this Section 14.2 and (c) to the
Other Companies and their representatives pursuant to Section 7.1(i), unless (i)
such information becomes known to the public generally through no fault of HDS
(ii) disclosure is required by law or the order of any governmental authority
under color of law, provided that prior to disclosing any information pursuant
--------
to this clause (ii), HDS shall, if possible, give prior written notice thereof
to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the COMPANY and/or STOCKHOLDERS. In the event of a
breach or threatened breach by HDS of the provisions of this section, the
COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining HDS
from disclosing, in whole or in part, such confidential information. Nothing
herein shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from
pursuing any other available remedy for such breach or threatened breach,
including the recovery of damages.
14.3 Damages. Because of the difficulty of measuring economic losses as a
-------
result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may be
enforced against the other parties by injunctions and restraining orders.
14.4 Survival. The obligations of the parties under this Article 14 shall
--------
survive the termination of this Agreement.
15. TRANSFER RESTRICTIONS.
15.1 Transfer Restrictions. Except for transfers as set forth in Section
---------------------
15.2 below to persons or entities who agree to be bound by the restrictions set
forth in this Section 15.1, for a period of one year from the Closing Date, none
of the STOCKHOLDERS shall (i) sell, assign, exchange, transfer, encumber,
pledge, distribute, appoint, or otherwise dispose of (a) any shares of HDS Stock
received by the STOCKHOLDERS in the Merger, or (b) any interest (including,
without limitation, an option to buy or sell) in
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<PAGE>
any such shares of HDS Stock, in whole or in part, and no such attempted
transfer shall be treated as effective for any purpose; or (ii) engage in any
transaction, whether or not with respect to any shares of HDS Stock or any
interest therein, the intent or effect of which is to reduce the risk of owning
the shares of HDS Stock acquired pursuant to Section 2 hereof (including, by way
of example and not limitation, engaging in put, call, short-sale, straddle or
similar market transactions). The certificates evidencing the HDS Stock
delivered to the STOCKHOLDERS pursuant to Section 3 of this Agreement will bear
a legend substantially in the form set forth below and contain such other
information as HDS may deem necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION
PRIOR TO THE FIRST ANNIVERSARY OF THE CLOSING DATE. UPON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER
AGENT) AFTER THE DATE SPECIFIED ABOVE.
15.2 Permitted Transferees. Notwithstanding the provisions of Section
---------------------
15.1, a STOCKHOLDER shall have the right to transfer some or all of the shares
of HDS stock to any one or more of the following, provided that the transferee
agrees to be bound (in a form satisfactory to HDS and its counsel) by the terms
and conditions of this Agreement with respect to any further transfer of such
shares: (a) any family member of a STOCKHOLDER (including, without limitation,
any transfer to a custodian under any gift to minors statute), with family
members being defined as any spouse, lineal descendant or ancestor of a
STOCKHOLDER, (b) any trust which is for the benefit of one or more family
members of a STOCKHOLDER and (c) any corporation, partnership, limited liability
company or other entity (x) of which a majority of the interests therein by
value is owned by the STOCKHOLDER and members of the STOCKHOLDER's family, and
(y) which is and continues to be controlled by the STOCKHOLDER and members of
the STOCKHOLDER'S family for the period set forth in Section 15.1.
16. FEDERAL SECURITIES ACT REPRESENTATIONS.
The STOCKHOLDERS acknowledge that the shares of HDS Stock to be
delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will
not be registered under the 1933 Act and therefore may not be resold without
compliance with the 1933 Act. The HDS Stock to be acquired by such STOCKHOLDERS
pursuant to this Agreement is being acquired solely for their own respective
accounts, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution.
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<PAGE>
16.1 Compliance with Law. The STOCKHOLDERS covenant, warrant and represent
-------------------
that none of the shares of HDS Stock issued to such STOCKHOLDERS will be
offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the rules and regulations of the SEC. All the HDS Stock
shall bear the following legend in addition to the legend required under Section
15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "1933 ACT") AND MAY ONLY BE SOLD OR
OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE 1933 ACT
AND APPLICABLE SECURITIES LAWS.
16.2 Accredited Investors; Economic Risk; Sophistication. Except as
---------------------------------------------------
disclosed in Schedule 16.2, each STOCKHOLDER represents and warrants that such
STOCKHOLDER is an "accredited investor," as that term is defined in Regulation D
promulgated by the SEC under the 1933 Act. The STOCKHOLDERS are able to bear the
economic risk of an investment in the HDS Stock acquired pursuant to this
Agreement and can afford to sustain a total loss of such investment and have
such knowledge and experience in financial and business matters that they are
capable of evaluating the merits and risks of the proposed investment in the HDS
Stock. The STOCKHOLDERS or their respective purchaser representatives have
received all information they deemed material and had an adequate opportunity to
ask questions and receive answers from the officers of HDS concerning any and
all matters relating to the transactions described herein including, without
limitation, the background and experience of the current and proposed officers
and directors of HDS, the plans for the operations of the business of HDS, the
business, operations and financial condition of the Founding Companies other
than the COMPANY, and any plans for additional acquisitions and the like. All
STOCKHOLDERS who are not "accredited investors" have been represented by
qualified purchaser representatives.
17. REGISTRATION RIGHTS.
-------------------
17.1 Piggyback Registration Rights. At any time following one year after
-----------------------------
the Closing Date, whenever HDS proposes to register any HDS Stock for its own or
others' account under the 1933 Act for a public offering, other than (i)
registrations of shares to be used as consideration for acquisitions of
additional businesses by HDS and (ii) registrations relating to employee benefit
plans, HDS shall give each of the STOCKHOLDERS prompt written notice of its
intent to do so. Upon the written request of any of the STOCKHOLDERS given
within thirty (30) days after receipt of such notice, HDS shall cause to be
included in such registration all of the HDS Stock issued pursuant to this
Agreement which any such STOCKHOLDER requests. In addition, if HDS is advised in
writing in good faith by any managing underwriter of an underwritten offering of
the securities being offered pursuant to any registration statement under this
Section 17.1 that the number of shares to be sold by persons other than HDS is
greater than the number of such shares which can be offered without adversely
affecting the
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<PAGE>
offering, HDS may reduce the number of shares offered for the accounts of such
persons to a number deemed satisfactory by such managing underwriter; provided
--------
that such reduction shall be made first by reducing the number of shares to be
- ----
sold by persons other than HDS, the stockholders named on Annex III hereto, the
stockholders of the Founding Companies (the "Founding Stockholders"), and any
person or persons who have required such registration pursuant to "demand"
registration rights granted by HDS; thereafter, if a further reduction is
required, it shall be made first by reducing the number of shares to be sold by
the stockholders named on Annex III hereto and the Founding Stockholders, with
such further reduction being made so that to the extent any shares can be sold
by stockholders named in Annex III hereto and the Founding Stockholders, each
such stockholder will be permitted to sell a number of shares proportionate to
the number of shares of HDS Stock owned by such stockholder immediately after
the Closing, provided that if any stockholder does not wish to sell all shares
such stockholder is permitted to sell, the opportunity to sell additional shares
shall be reallocated in the same manner to those stockholders named in Annex III
hereto and the Founding Stockholders who wish to sell more shares until no more
shares can be sold by such stockholders.
17.2 Demand Registration Rights. At any time after the date one year
--------------------------
after the Closing Date, Founding Stockholders holding shares of HDS Stock issued
pursuant to this Agreement and the Other Agreements which shares have (i) not
been previously registered or sold, (ii) which are not entitled to be sold under
Rule 144(k) (or any similar or successor provision) and (iii) which have an
aggregate market value in excess of $5 million (based on the average closing
price on the five days prior to the date of such request) may request in writing
that HDS file a registration statement under the 1933 Act covering such shares
of HDS Stock then held by such Founding Stockholders (a "Demand Registration");
provided that the aggregate value of HDS Stock proposed to be sold under such
registration statement is not less than $5 million (based on the closing market
price of the HDS Stock within five (5) business days of the date of such
request). Within ten (10) days of the receipt of such request, HDS shall give
written notice of such request to all other Founding Stockholders and shall, as
soon as practicable, file and use its best efforts to cause to become effective
a registration statement covering all such shares. HDS will use its best efforts
to keep such Demand Registration current and effective for one hundred twenty
(120) days (or such shorter period during which holders shall have sold all HDS
Stock which they requested to be registered). HDS shall be obligated to effect
only two (2) Demand Registrations for all Founding Stockholders, and the second
request may not be made until at least one (1) year after the effective date of
the registration statement for the first Demand Registration.
Notwithstanding the foregoing paragraph, following such a demand a
majority of the COMPANY's disinterested directors (i.e., directors who have not
----
demanded or elected to sell shares in any such public offering) may postpone the
filing of the registration statement for a thirty (30) day period beyond the
period provided above.
If at the time of any request by the Founding Stockholders for a Demand
Registration HDS has fixed plans to file within sixty (60) days after such
request a registration statement covering the sale of any of its securities, no
registration of the
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<PAGE>
Founding Stockholders' HDS Stock shall be initiated under this Section 17.2
until ninety (90) days after the effective date of such registration unless
HDS is no longer proceeding diligently to effect such registration; provided
--------
that HDS shall provide the Founding Stockholders the right to participate in
such public offering pursuant to, and subject to, Section 17.1 hereof.
17.3 Registration Procedures. All expenses incurred in connection with the
-----------------------
registrations under this Article 17 (including all registration, filing,
qualification, legal, printer and accounting fees, but excluding underwriting
commissions and discounts) shall be borne by HDS. In connection with
registrations under Sections 17.1 and 17.2, HDS shall (i) prepare and file with
the SEC as soon as reasonably practicable, a registration statement with respect
to the HDS Stock and use its best efforts to cause such registration to promptly
become and remain effective for a period of at least one hundred twenty (120)
days (or such shorter period during which holders shall have sold all HDS Stock
which they requested to be registered); (ii) use its best efforts to register
and qualify the HDS Stock covered by such registration statement under
applicable state securities laws as the holders shall reasonably request for the
distribution for the HDS Stock; and (iii) take such other actions as are
reasonable and necessary to comply with the requirements of the 1933 Act and the
regulations thereunder.
17.4 Underwriting Agreement. In connection with each registration pursuant
----------------------
to Sections 17.1 and 17.2 covering an underwritten registered public offering,
HDS and each participating holder agree to enter into a written agreement with
the managing underwriters in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
managing underwriters and companies of HDS's size and investment stature,
including indemnification. In a registration under Section 17.1, the managing
underwriters shall be selected by HDS (or, if required by a "demand"
registration right of a stockholder requiring such registration, by such
requiring stockholder), and in a registration under Section 17.2, may be
selected by the holders of a majority of the shares that have demanded to be
included in such registration pursuant to Section 17.2, provided the managing
underwriters so selected by such majority are reasonably acceptable to HDS.
17.5 HDS Stock. For the purposes of this Section 17, HDS Stock issued
---------
pursuant to this Agreement shall include shares issued as a stock dividend or
stock split, or otherwise distributed by HDS to its stockholders without
consideration, in respect of shares of HDS Stock previously issued pursuant to
this Agreement.
17.6 Availability of Rule 144. HDS shall not be obligated to register
------------------------
shares of HDS Stock held by any STOCKHOLDER at any time when the resale
provisions of Rule 144(k) (or any similar or successor provision) promulgated
under the 1933 Act are available to such STOCKHOLDER.
17.7 Survival. The provisions of this Section 17 shall survive the Pre-
--------
Closing and Closing Date until December 31, 2002.
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<PAGE>
18. GENERAL.
18.1 Cooperation. Except as otherwise provided in Section 12, the COMPANY,
-----------
STOCKHOLDERS and HDS shall each (i) attempt in good faith (without being
required to incur unreasonable expense) to cause all conditions to actions to be
taken on the Pricing Date and the Closing Date to be satisfied, and (ii) deliver
or cause to be delivered to the other on the Pricing Date and Closing Date, and
at such other times and places as shall be reasonably agreed to, such additional
instruments, and take such additional actions as can be taken without
unreasonable expense, as any other may reasonably request for the purpose of
carrying out this Agreement. The COMPANY will cooperate and use its reasonable
efforts to have the present officers, directors and employees of the COMPANY
cooperate with HDS on and after the Closing Date in furnishing information,
evidence, testimony and other assistance in connection with any Tax Return
filing obligations, actions, proceedings, arrangements or disputes of any nature
with respect to matters pertaining to all periods prior to the Closing Date.
18.2 Successors and Assigns. This Agreement and the rights of the parties
----------------------
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
HDS, and the heirs and legal representatives of the STOCKHOLDERS.
18.3 Entire Agreement. This Agreement (including the schedules, exhibits
----------------
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the STOCKHOLDERS, the
COMPANY, HDS and HDSU and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement, upon
execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms. Except as otherwise stated herein,
this Agreement and the Annexes hereto may be modified or amended only by a
written instrument executed by the STOCKHOLDERS, the COMPANY, HDS and HDSU,
acting through their respective officers, duly authorized by their respective
Boards of Directors. Any disclosure made on any Schedule delivered pursuant
hereto shall be deemed to have been disclosed for purposes of any other Schedule
required hereby.
18.4 Counterparts. This Agreement may be executed simultaneously in two
------------
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
18.5 Brokers and Agents. Except as disclosed on Schedule 18.5, each party
------------------
represents and warrants that it employed no broker or agent in connection with
this transaction and agrees to indemnify the other against all loss, cost,
damages or expense arising out of claims for fees or commission of brokers
employed or alleged to have been employed by such indemnifying party.
18.6 Expenses. Whether or not the transactions herein contemplated shall be
--------
consummated, (i) HDS will pay the fees, expenses and disbursements of HDS, HDSU
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<PAGE>
and its agents, representatives, accountants and counsel incurred in connection
with the subject matter of this Agreement and any amendments thereto, including
all costs and expenses incurred in the performance and compliance with all
conditions to be performed by HDS and HDSU under this Agreement, including the
fees and expenses of Arthur Andersen, LLP, and Howard, Rice, and the costs of
preparing the Registration Statement, and (ii) prior to the Closing, the COMPANY
will pay the fees, expenses and disbursements of counsel and accountants for the
STOCKHOLDERS and the COMPANY incurred in connection with the subject matter of
this Agreement or the Registration Statement. Set forth on Schedule 18.6 hereto
is the estimated amount of such fees, expenses, and disbursements to be paid by
the COMPANY pursuant to the foregoing clause (ii). The STOCKHOLDERS shall pay
all sales, use, transfer, real property transfer, recording, gains, stock
transfer and other similar taxes and fees ("Transfer Taxes") incurred in
connection with the transactions contemplated by this Agreement. The
STOCKHOLDERS shall file all necessary documentation and Tax Returns with respect
to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and
not the COMPANY, HDS or HDSU, will pay all taxes due upon receipt of the
consideration payable to such STOCKHOLDER pursuant to Section 2 hereof.
18.7 Notices. All notices and other communications required or permitted
-------
hereunder shall be effective upon receipt (or refusal of receipt) and shall be
in writing and delivered by depositing the same in United States mail, addressed
to the party to be notified, postage prepaid and registered or certified with
return receipt requested, by delivering the same in person to such party or to
an officer or agent of such party or by facsimile transmission (followed by
delivery by United States mail).
(a) If mailed to HDS or HDSU addressed to such entity at:
Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, Chief Executive Officer
Fax: (310) 253-9734
with copies to:
Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111-4065
Attn: Raymond P. Haas
Fax: (415) 217-5910
(b) If mailed to the STOCKHOLDERS, addressed to them at their
addresses set forth on Annex II, with copies to such counsel, if any, as is set
forth with respect to each STOCKHOLDER on such Annex II; if mailed to the
COMPANY, addressed to it at its address set forth on Annex II marked "Personal
and Confidential"
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<PAGE>
with copies to the COMPANY's counsel as set forth on Annex II, provided that
--------
notice to the COMPANY shall only be for notices or communications required or
permitted hereunder prior to the Effective Time of the Merger; or to such other
address or counsel as any party hereto shall specify pursuant to this Section
18.7 from time to time.
18.8 Governing Law; Forum. This Agreement shall be governed by and
--------------------
construed in accordance with the laws of the State of California, without giving
effect to laws concerning choice of law or conflicts of law. All disputes
arising out of this Agreement or the obligations of the parties hereunder,
including disputes that may arise following termination of this Agreement, shall
be subject to the exclusive jurisdiction and venue of the California State
courts of Los Angeles County, California (or, if there is federal jurisdiction,
then the exclusive jurisdiction and venue of the United States District Court
having jurisdiction over Los Angeles County). Each party hereby irrevocably and
unconditionally consents to the personal and exclusive jurisdiction and venue of
said courts and any objection that it may now or hereafter have to the venue of
any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same. THE PARTIES HERETO EACH HEREBY KNOWINGLY AND VOLUNTARILY WAIVE TRIAL
BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTER-CLAIM, WHETHER IN CONTRACT
OR TORT OR OTHERWISE, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR
ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH.
18.9 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties, covenants and agreements of the parties made herein, or in writing
delivered pursuant to the provisions of this Agreement shall survive the
consummation of the transactions contemplated hereby and any examination on
behalf of the parties until the applicable Expiration Date.
18.10 Exercise of Rights and Remedies. Except as otherwise provided herein,
-------------------------------
no delay of or omission in the exercise of any right, power or remedy accruing
to any party as a result of any breach or default by any other party under this
Agreement shall impair any such right, power, or remedy, nor shall it be
construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.11 Time. Time is of the essence with respect to this Agreement.
----
18.12 Reformation and Severability. In case any provision of this Agreement
----------------------------
shall be invalid, illegal or unenforceable, it shall, to the extent possible, be
modified in such manner as to be valid, legal and enforceable but so as to most
nearly retain the intent of the parties, and if such modification is not
possible, such provision shall be severed from this Agreement, and in either
case the validity, legality and enforceability of the remaining provisions of
this Agreement shall not in any way be affected or impaired thereby.
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<PAGE>
18.13 Remedies Cumulative. Except as otherwise provided in Section 11, no
-------------------
right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
18.14 Construction. This Agreement has been negotiated among HDS, HDSU, the
------------
COMPANY, the STOCKHOLDERS and their respective legal counsel, and legal or
equitable principles that might require the construction of this Agreement or
any provision of this Agreement against the party drafting this Agreement will
not apply in any construction or interpretation of this Agreement.
18.15 Captions. The headings of this Agreement are inserted for convenience
--------
only, shall not constitute a part of this Agreement or be used to construe or
interpret any provision hereof.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
HOSPITALITY DESIGN & SUPPLY, INC.
By: /s/ Roger Laverty
-----------------------------
Name: Roger Laverty
Title: Chief Executive Officer
HDS UTAH, INC.
By: /s/ Roger Laverty
-----------------------------
Name: Roger Laverty
Title: Chief Executive Officer
STOCKHOLDERS:
/s/ William A. Williams
---------------------------------
WILLIAM A. WILLIAMS
/s/ Clarice Williams
---------------------------------
CLARICE WILLIAMS
BINTZ DISTRIBUTING CO.
By: /s/ William A. Williams
-----------------------------
Name: William A. Williams
Title: President
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<PAGE>
ANNEX I
CONSIDERATION TO FOUNDING COMPANY STOCKHOLDERS
Part I
A. Aggregate consideration to be paid to STOCKHOLDERS:
1. COMPANY Stock will be converted into 191,538 shares of common
stock of HDS and $4,268,550 in cash.
2. The STOCKHOLDERS and the COMPANY will not be obligated to
consummate the Merger if the initial public offering price per
share when the Registration Statement goes effective (the
"Effective IPO Price") is less than $10 per share (the "Minimum
IPO Price").
3. The amount of cash paid to STOCKHOLDERS will be offset and
reduced by the amount of any receivables from STOCKHOLDERS as of
the Effective Time.
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<PAGE>
B. Consideration to be paid to each STOCKHOLDER:
<TABLE>
<CAPTION>
Percentage
Cash Before Allocation of Any
Shares of Common Offsets & Offsets and
STOCKHOLDER Stock of HDS Reductions/1/ Reductions/2/
<S> <C> <C> <C>
William A. Williams 95,769 $2,134,275 50%
Clarice Williams 95,769 $2,134,275 50%
______________ __________ __________
TOTALS: 191,538 $4,268,550 100%
</TABLE>
- -------------------
/1/ For purposes of Section 11.5(i) and 11.5(iii) of the Agreement, the
term "Cash Consideration" means, as to each STOCKHOLDER, the Cash Before Offsets
and Reductions shown for such STOCKHOLDER in this column.
/2/ Excluding offsets and reductions pursuant to Part I, paragraph A.3 of
this Annex I.
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EXHIBIT 2.6
AGREEMENT AND PLAN OF REORGANIZATION
dated as of February 26, 1999
by and among
HOSPITALITY DESIGN & SUPPLY, INC.,
CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC.
and
the STOCKHOLDERS named herein
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
1. THE MERGER.................................................................................... 1
1.1 Delivery and Filing of Articles of Merger............................................... 1
1.2 Effective Time of the Merger............................................................ 1
1.3 Certificate of Incorporation, Bylaws and Board of Directors of Surviving Corporation.... 2
1.4 Effect of Merger........................................................................ 2
2. CONVERSION OF STOCK........................................................................... 3
2.1 Manner of Conversion.................................................................... 3
2.2 Other Companies......................................................................... 3
3. DELIVERY OF STOCK............................................................................. 4
3.1 Delivery of HDS Stock................................................................... 4
3.2 Delivery of COMPANY Stock............................................................... 4
4. PRE-CLOSING AND CLOSING....................................................................... 4
4.1 Pre-Closing............................................................................. 4
4.2 Closing................................................................................. 4
4.3 No Assurances........................................................................... 5
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS................................... 5
5.1 Due Organization....................................................................... 6
5.2 Authority and Validity................................................................. 6
5.3 Capital Stock of the COMPANY........................................................... 7
5.4 Transactions in Capital Stock.......................................................... 7
5.5 No Bonus Shares........................................................................ 7
5.6 Subsidiaries........................................................................... 7
5.7 Predecessor Status; etc................................................................ 7
5.8 Spin-off by the COMPANY................................................................ 8
5.9 Financial Statements................................................................... 8
5.10 Liabilities and Obligations............................................................ 8
5.11 Accounts and Notes Receivable.......................................................... 9
5.12 Permits and Intangibles................................................................ 9
5.13 Environmental Matters.................................................................. 10
5.14 Real and Personal Property............................................................. 10
5.15 Significant Customers; Material Contracts and Commitments.............................. 11
5.16 Title to Real Property................................................................. 12
5.17 Insurance.............................................................................. 12
5.18 Compensation; Employment Agreements.................................................... 12
5.19 Employee Plans......................................................................... 13
5.20 Compliance with ERISA.................................................................. 14
5.21 Conformity with Law.................................................................... 16
5.22 Taxes.................................................................................. 16
5.23 No Violations.......................................................................... 19
5.24 Government Contracts................................................................... 20
</TABLE>
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<S> <C>
5.25 Absence of Changes..................................................................... 20
5.26 Deposit Accounts; Powers of Attorney................................................... 21
5.27 Relations with Governments............................................................. 21
5.28 Authority; Validity; Ownership......................................................... 22
5.29 Preemptive Rights...................................................................... 22
5.30 No HDS Intention to Reacquire Stock.................................................... 22
6. REPRESENTATIONS OF HDS....................................................................... 22
6.1 Due Organization....................................................................... 22
6.2 HDS Stock.............................................................................. 23
6.3 Authority and Validity................................................................. 23
6.4 Capital Stock of HDS................................................................... 23
6.5 No Side Agreements..................................................................... 24
6.6 Subsidiaries........................................................................... 24
6.7 Business; Financial Information........................................................ 24
6.8 Conformity with Law.................................................................... 25
6.9 No Violations.......................................................................... 25
6.10 Taxes.................................................................................. 25
7. COVENANTS PRIOR TO CLOSING................................................................... 26
7.1 Access and Cooperation; Due Diligence.................................................. 26
7.2 Conduct of Business Pending Closing.................................................... 27
7.3 Prohibited Activities.................................................................. 28
7.4 No Shop................................................................................ 29
7.5 Notice to Bargaining Agents............................................................ 29
7.6 Termination of Plans................................................................... 30
7.7 HDS Prohibited Activities.............................................................. 30
7.8 Notification of Certain Matters........................................................ 30
7.9 Amendment of Schedules................................................................. 31
7.10 Cooperation in Preparation of Registration Statement................................... 31
7.11 Examination of Final Financial Statements.............................................. 32
7.12 Maintenance of Liquidity and Limitation of Debt........................................ 32
7.13 Employment Matters..................................................................... 32
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.............................. 32
8.1 Representations and Warranties; Performance of Obligations............................. 33
8.2 Satisfaction........................................................................... 33
8.3 No Litigation.......................................................................... 33
8.4 Stockholders' Release.................................................................. 33
8.5 Opinion of Counsel..................................................................... 34
8.6 Director Indemnification............................................................... 34
8.7 Registration Statement................................................................. 34
8.8 Consents and Approvals................................................................. 34
8.9 Good Standing Certificates............................................................. 34
8.10 No Waivers............................................................................. 34
</TABLE>
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<S> <C>
8.11 No Material Adverse Change............................................................. 34
8.12 Employment Agreements.................................................................. 35
8.13 Consulting Agreements.................................................................. 35
8.14 Leases................................................................................. 35
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.................................................. 35
9.1 Representations and Warranties; Performance of Obligations............................ 35
9.2 No Litigation......................................................................... 35
9.3 Financial Statements.................................................................. 35
9.4 No Material Adverse Effect............................................................ 36
9.5 STOCKHOLDERS' Release................................................................. 36
9.6 Satisfaction.......................................................................... 36
9.7 Termination of Related Party Agreements............................................... 36
9.8 Opinion of COMPANY Counsel............................................................ 36
9.9 Consents and Approvals................................................................ 36
9.10 Good Standing Certificates............................................................ 37
9.11 Registration Statement................................................................ 37
9.12 Employment Agreements................................................................. 37
9.13 Consulting Agreements................................................................. 37
9.14 Leases................................................................................ 37
9.15 Repayment of Indebtedness............................................................. 37
9.16 FIRPTA Certificate.................................................................... 37
9.17 Insurance............................................................................. 37
9.18 Nondisturbance Agreements............................................................. 37
10. CLOSING COVENANTS AND SPECIAL TAX MATTERS................................................... 37
10.1 Preservation of Tax and Accounting Treatment.......................................... 37
10.2 Disclosure............................................................................ 38
10.3 Cooperation in Tax Return Preparation................................................. 38
10.4 Tax Return Preparation and Filing..................................................... 38
10.5 Reorganization Status Information Reporting........................................... 39
10.6 Special Definitions Related to Tax Matters............................................ 39
10.7 Directors............................................................................. 40
10.8 Release from Guarantees............................................................... 40
10.9 HDS Stock Options..................................................................... 40
10.10 Use of Name........................................................................... 41
11. INDEMNIFICATION............................................................................. 41
11.1 General Indemnification by the STOCKHOLDERS........................................... 41
11.2 Indemnification by HDS................................................................ 42
11.3 Third Person Claims................................................................... 42
11.4 Exclusive Remedy...................................................................... 44
11.5 Limitations on Indemnification........................................................ 44
11.6 Special Tax Indemnity Provisions...................................................... 45
11.7 Special Contest Rights Related to Tax Matters......................................... 47
11.8 Special Notification Requirements Regarding Tax Disputes.............................. 47
</TABLE>
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TABLE OF CONTENTS
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<S> <C>
11.9 Refunds............................................................................... 47
11.10 Optional Payment With Shares.......................................................... 47
12. TERMINATION OF AGREEMENT.................................................................... 48
12.1 Termination........................................................................... 48
12.2 Liabilities in Event of Termination................................................... 48
13. NONCOMPETITION.............................................................................. 49
13.1 Prohibited Activities................................................................. 49
13.2 Damages............................................................................... 50
13.3 Reasonable Restraint.................................................................. 50
13.4 Severability; Reformation............................................................. 50
13.5 Independent Covenant.................................................................. 51
13.6 Materiality........................................................................... 51
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION................................................... 51
14.1 STOCKHOLDERS.......................................................................... 51
14.2 HDS................................................................................... 52
14.3 Damages............................................................................... 52
14.4 Survival.............................................................................. 52
15. TRANSFER RESTRICTIONS....................................................................... 52
15.1 Transfer Restrictions................................................................. 52
15.2 Permitted Transferees................................................................. 53
16. FEDERAL SECURITIES ACT REPRESENTATIONS...................................................... 53
16.1 Compliance with Law................................................................... 53
16.2 Accredited Investors; Economic Risk; Sophistication................................... 54
17. REGISTRATION RIGHTS......................................................................... 54
17.1 Piggyback Registration Rights......................................................... 54
17.2 Demand Registration Rights............................................................ 55
17.3 Registration Procedures............................................................... 56
17.4 Underwriting Agreement................................................................ 56
17.5 HDS Stock............................................................................. 56
17.6 Availability of Rule 144.............................................................. 57
17.7 Survival.............................................................................. 57
18. GENERAL..................................................................................... 57
18.1 Cooperation........................................................................... 57
18.2 Successors and Assigns................................................................ 57
18.3 Entire Agreement...................................................................... 57
18.4 Counterparts.......................................................................... 58
18.5 Brokers and Agents.................................................................... 58
18.6 Expenses.............................................................................. 58
18.7 Notices............................................................................... 58
18.8 Governing Law; Forum.................................................................. 59
18.9 Survival of Representations and Warranties............................................ 59
</TABLE>
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TABLE OF CONTENTS
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<S> <C>
18.10 Exercise of Rights and Remedies....................................................... 59
18.11 Time.................................................................................. 60
18.12 Reformation and Severability.......................................................... 60
18.13 Remedies Cumulative................................................................... 60
18.14 Construction.......................................................................... 60
18.15 Captions.............................................................................. 60
</TABLE>
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<PAGE>
SCHEDULES and ANNEXES
<TABLE>
<S> <C>
Annex I - Consideration to Founding Company Stockholders
Annex II - Stockholders and Stock Ownership of the COMPANY
Annex III - Stockholders and Stock Ownership of HDS
Annex IV - Certificate of Incorporation and Bylaws of HDS
Annex V - Form of Opinion of Howard, Rice, Nemerovski, Canady, Falk
& Rabkin, A Professional Corporation
Annex VI - Form of Opinion of COMPANY Counsel
Annex VII - Form of Director Indemnification Agreement
Annex VIII - Form of Employment Agreement
Annex IX - Form of Consulting Agreement
Annex X - Leases
Annex XI - Stockholder Release
Annex XII - Form of Nondisturbance Agreement
Schedule 5.1 - Qualifications to Do Business
Schedule 5.3 - Capital Stock of the COMPANY
Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to
Acquire Capital Stock
Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses
Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries
Schedule 5.7 - Names of Predecessor Companies
Schedule 5.8 - Sales or Spin-offs of Significant Assets
Schedule 5.9 - Financial Statements
Schedule 5.10 - Significant Liabilities and Obligations
Schedule 5.11 - Accounts and Notes Receivable
Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental
Authorizations
Schedule 5.13 - Environmental Matters
Schedule 5.14 - Real Property, Leases and Significant Personal Property
Schedule 5.15 - Significant Customers and Material Contracts
Schedule 5.17 - Insurance Policies and Claims
Schedule 5.18 - Officers, Directors and Key Employees, Employment
Agreements; Compensation
Schedule 5.19 - Employee Benefit Plans
Schedule 5.20 - Compliance with ERISA
Schedule 5.21 - Violations of Law, Regulations or Orders
Schedule 5.22 - Taxes
Schedule 5.23 - Violations of Charter Documents and Material Defaults
Schedule 5.24 - Governmental Contracts Subject to Price Redetermination
or Renegotiation
Schedule 5.25 - Changes Since Balance Sheet Date
Schedule 5.26 - Bank Accounts; Powers of Attorney
Schedule 5.28 - Encumbrances on the COMPANY Stock
Schedule 6.5 - HDS Side Agreements
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Schedule 6.6 - HDS's Subsidiaries
Schedule 6.7 - HDS's Financial Statements
Schedule 6.9 - No Violations
Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course
Between Balance Sheet Date and Closing Date
Schedule 7.3 - Prohibited Activities
Schedule 7.6 - Plans to be Terminated by the Pricing Date
Schedule 7.7 - Exceptions to Restrictions on HDS
Schedule 8.12 - Employment Agreements
Schedule 8.13 - Consulting Agreements
Schedule 8.14 - Leases
Schedule 9.7 - Termination of Related Party Agreements
Schedule 9.18 - Lienholders and Ground Lessors
Schedule 13.1 - Prohibited Activities
Schedule 16.2 - Non-Accredited Investors
Schedule 18.5 - Brokers and Agents
Schedule 18.6 - Fees, Expenses and Disbursements
</TABLE>
<PAGE>
TABLE OF DEFINITIONS
<TABLE>
<CAPTION>
Defined Term Section
- ------------ -------
<S> <C>
Accredited investor 16.2
adjusted working capital 7.12
Affiliate 10.6(a)
Agreement Preamble
Articles of Merger 1.1
Attributed Pre-Tax Earnings Annex I
Balance Sheet Date 5.9
Cash Consideration Annex I
Charter Documents 5.1
Closing 4.2
Closing Date 4.2
COBRA 5.20(v)
Code Whereas
COMPANY Preamble
COMPANY Affiliates 5.8
COMPANY Financial Statements 5.9
COMPANY Stock 2.1
Constituent Corporations Whereas
Consulting Agreement 8.13
Controlled group 5.20
December 31, 1998 COMPANY 5.9
Balance Sheet
Defined Benefit Plan 5.19(iv)
Delaware GCL 1.4
Demand Registration 17.2
Effective IPO Price Annex I
Effective Time of the Merger 1.2
Election Period 11.3(i)
Employment Agreement 8.12
Environmental Laws 5.13
ERISA 5.19
Expiration Date 5(A)
Founding Companies Whereas
Founding Stockholders 17.1
Group health plans 5.20(v)
HDS Preamble
HDS Charter Documents 6.1
HDS Material Adverse Effect 6.1
HDS Material Documents 6.9
HDS Stock 2.1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Defined Term Section
- ------------ -------
<S> <C>
HDS's Subsidiaries 6.1
Howard Rice 4.1
Indemnification Threshold 11.5(i)
Indemnified Party 11.3
Indemnifying Party 11.3
Interim Period 10.6(b)
IPO 4.1
Leases 8.14
Line of Credit 7.12
Material Adverse Effect 5.1
Material Contracts 5.15
Material Leases 5.14
Merger Whereas
Minimum IPO Price Annex I
Multi-employer pension plan 5.20
1933 Act 5(A)
1934 Act 5(A)
Nondisturbance Agreements 9.18
Other Agreements Whereas
Other Companies Whereas
PBGC 5.19(x)
Plans 5.19
Post-Closing Period 10.6(d)
Pre-Closing 4.1
Pre-Closing Period 10.6(c)
Pricing Date 4.1
Purchase Price Annex I
Qualified Plans 5.19(iii)
Registration Statement 4.3
Reportable events 5.20(iii)
Reserved Amount Annex I
SEC 8.2
Significant customers 5.15
Stockholder Release 9.5
STOCKHOLDERS Preamble
Surviving Corporation 1.2
Tax 10.6(e)
Tax Data 10.3
Tax Documentation 10.3
Tax Returns 10.6(f)
Taxing Authority 10.6(g)
Territory 13.1(i)
Third Party Claim 11.3(i)
Third Person 11.3
</TABLE>
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<TABLE>
<CAPTION>
Defined Term Section
- ------------ -------
<S> <C>
Transfer Taxes 17.6
Underwriters 4.3
Underwriting Agreement 8.7
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of February 26, 1999, by and among HOSPITALITY DESIGN & SUPPLY, INC., a Delaware
corporation ("HDS"), CASTINO RESTAURANT EQUIPMENT AND SUPPLY, INC., a California
corporation (the "COMPANY"), and the stockholders of the COMPANY listed on Annex
II (the "STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the
COMPANY.
WHEREAS, the respective Boards of Directors of HDS and the COMPANY
(which together are herein collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that the COMPANY merge with and
into HDS pursuant to this Agreement and the applicable provisions of the laws of
the State of Delaware (such transaction is sometimes herein called the
"Merger");
WHEREAS, HDS is entering into other separate agreements (the "Other
Agreements") substantially similar to this Agreement, each of which is entitled
"Agreement and Plan of Reorganization," with each of the entities other than the
Company listed in Part II of Annex I (collectively, the "Other Companies") in
order to acquire additional companies in the commercial kitchen design and/or
supply industry (the Other Companies, together with the COMPANY, are
collectively referred to herein as the "Founding Companies");
WHEREAS, the Boards of Directors of HDS and the COMPANY have approved
and adopted this Agreement as a reorganization described in Section 368(a)(1)(A)
of the Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto hereby agree as follows:
1. THE MERGER.
1.1 Delivery and Filing of Articles of Merger. The Constituent
-----------------------------------------
Corporations will cause a Certificate of Merger or Articles of Merger with
respect to the Merger (the "Articles of Merger") to be signed, verified,
delivered to and filed with the Secretary of State of the State of Delaware and,
if required, a similar filing to be made with the relevant authorities in the
jurisdiction in which the COMPANY is organized, on or before the Closing Date
(as defined in Section 4.2).
1.2 Effective Time of the Merger. The "Effective Time of the Merger" shall
----------------------------
be on the Closing Date, as defined in Section 4.2, and simultaneous with the
closing of the IPO, as defined in Section 4.1. At the Effective Time of the
Merger, the COMPANY
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shall be merged with and into HDS in accordance with the Articles of Merger, and
the separate existence of the COMPANY shall cease. HDS shall be the surviving
party in the Merger and is herein sometimes referred to as the "Surviving
Corporation." The Merger will be effected in a single transaction.
1.3 Certificate of Incorporation, Bylaws and Board of Directors of
--------------------------------------------------------------
Surviving Corporation. At the Effective Time of the Merger:
- ---------------------
(i) the Certificate of Incorporation of HDS then in effect shall
become the Certificate of Incorporation of the Surviving Corporation; and
subsequent to the Effective Time of the Merger, such Certificate of
Incorporation shall be the Certificate of Incorporation of the Surviving
Corporation until changed as provided by law;
(ii) the Bylaws of HDS then in effect shall become the Bylaws of the
Surviving Corporation; and subsequent to the Effective Time of the Merger, such
Bylaws shall be the Bylaws of the Surviving Corporation until they shall
thereafter be duly amended;
(iii) the Board of Directors of the Surviving Corporation shall
consist of those persons who constituted the Board of Directors of HDS
immediately prior to the Merger, who shall hold office subject to the provisions
of the laws of the State of Delaware and of the Certificate of Incorporation and
Bylaws of the Surviving Corporation until such persons' successors and assigns
are duly elected and qualified; and
(iv) the officers of the Surviving Corporation shall be the persons
who were officers of HDS immediately prior to the Merger, who shall hold office,
subject to the provisions of the Certificate of Incorporation and Bylaws of the
Surviving Corporation and the Employment Agreements (as defined in Section
8.12), until such officers' successors are duly elected and qualified.
1.4 Effect of Merger. At the Effective Time of the Merger, the effect of
----------------
the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL"). Except as herein
specifically set forth, the identity, existence, purposes, powers, objects,
franchises, privileges, rights and immunities of the COMPANY shall continue
unaffected and unimpaired by the Merger and the corporate franchises, existence
and rights of the COMPANY shall be merged with and into HDS, and HDS, as the
Surviving Corporation, shall be fully vested therewith. At the Effective Time
of the Merger, the separate existence of the COMPANY shall cease and, in
accordance with the terms of this Agreement, the Surviving Corporation shall
possess all the rights, privileges, immunities and franchises of a public, as
well as of a private, nature, and all property, real, personal and mixed, and
all debts due on whatever account, including subscriptions to shares, all taxes,
including those due and owing and those accrued, and all other choses in action,
and all and every other interest of or belonging to or due to the COMPANY and
HDS shall be taken and deemed to be transferred to, and vested in, the Surviving
Corporation without further act or deed. Except as otherwise provided herein,
the Surviving Corporation shall
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<PAGE>
thenceforth be responsible and liable for all the liabilities and obligations of
the COMPANY and HDS and the Surviving Corporation shall be substituted for the
COMPANY or HDS with respect to any claim existing, or action or proceeding
pending, by or against the COMPANY or HDS. Neither the rights of creditors nor
any liens upon the property of the COMPANY or HDS shall be impaired by the
Merger, and all debts, liabilities and duties of the COMPANY and HDS shall
attach to the Surviving Corporation, and may be enforced against such Surviving
Corporation to the same extent as if said debts, liabilities and duties had been
incurred or contracted by such Surviving Corporation.
2. CONVERSION OF STOCK.
2.1 Manner of Conversion. The manner of converting the outstanding shares
--------------------
of capital stock of the COMPANY ("COMPANY Stock") into outstanding shares of
common stock of HDS ("HDS Stock") and cash shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of COMPANY Stock issued and outstanding
immediately prior to the Effective Time of the Merger, by virtue of the Merger
and without any action on the part of the holder thereof, automatically shall be
deemed to represent (1) that number of shares of HDS Stock determined as set
forth in Part I of Annex I hereto and (2) the right to receive the amount of
cash determined as set forth in Part I of Annex I hereto, such shares and cash
to be subject to offsets and distributed to STOCKHOLDERS as provided in Part I
of Annex I hereto; and
(ii) all shares of COMPANY Stock that are held by COMPANY as
treasury stock or owned by any COMPANY Subsidiary shall be cancelled and retired
and no shares of HDS Stock or other consideration shall be delivered or paid in
exchange therefor.
At the Effective Time of the Merger, HDS shall have no class of capital
stock issued and outstanding which, as a class, shall have any rights or
preferences senior to the shares of HDS Stock received by the STOCKHOLDERS,
including, without limitation, any rights or preferences as to dividends or as
to the assets of HDS upon liquidation or dissolution or as to voting rights,
except for any series of Preferred Stock that will be converted into HDS Stock
on the Closing Date (as defined below).
2.2 Other Companies. Part II to Annex I sets forth the aggregate
---------------
consideration into which shares of outstanding stock of each Founding Company
will be converted on the Closing Date, or, if applicable, payable with respect
to such shares of outstanding stock on the Closing Date, before offsets.
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3. DELIVERY OF STOCK.
3.1 Delivery of HDS Stock. At or immediately after the Effective Time of
---------------------
the Merger:
(i) the STOCKHOLDERS, as the holders of all outstanding
certificates representing shares of COMPANY Stock, shall, upon surrender of such
certificates, be entitled to receive the number of shares of HDS Stock and the
amount of cash calculated pursuant to Section 2.1 above; and
(ii) until the certificates representing COMPANY Stock have been
surrendered by the STOCKHOLDERS and replaced by the HDS Stock, the certificates
for COMPANY Stock shall, for all corporate purposes, be deemed to evidence the
ownership of the number of shares of HDS Stock and cash which such STOCKHOLDER
is entitled to receive as a result of the Merger, as set forth in Section 2.1,
notwithstanding the number of shares of COMPANY Stock such certificates
represent.
3.2 Delivery of COMPANY Stock. The STOCKHOLDERS shall deliver to HDS at
-------------------------
Pre-Closing (as defined below in Section 4.1) the certificates representing
COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by
blank stock powers, and with all necessary transfer tax and other revenue
stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The
STOCKHOLDERS agree promptly to cure any deficiencies with respect to the
endorsement of the certificates or other documents of conveyance with respect to
such COMPANY Stock or with respect to the stock powers accompanying any COMPANY
Stock.
4. PRE-CLOSING AND CLOSING.
4.1 Pre-Closing. On the date (the "Pricing Date") on which the
-----------
public offering price of the shares of HDS Stock in the initial public offering
of HDS Stock (the "IPO") is determined, the parties shall deliver to Howard,
Rice, Nemerovski, Canady, Falk & Rabkin, A Professional Corporation ("Howard
Rice") all documents necessary to effect (i) the Merger (including, at HDS's
election, the filing with the appropriate state authorities of the Articles of
Merger and any similar document to become effective on the Closing Date (as
defined below)), (ii) the conversion of shares of COMPANY Stock into shares of
HDS Stock and (iii) the delivery of shares of HDS Stock to STOCKHOLDERS (such
delivery to Howard, Rice is herein referred to as the "Pre-Closing"); provided,
that the actual Merger, the conversion of shares of COMPANY Stock into shares of
HDS Stock and the delivery of shares of HDS Stock shall not take place until the
Closing Date as herein provided. The Pre-Closing shall take place at the offices
of Howard, Rice at Three Embarcadero Center, 7th Floor, San Francisco,
California 94111.
4.2 Closing. On the date when the closing with respect to the IPO
-------
occurs (the "Closing Date"), the Articles of Merger shall be filed with the
appropriate state authorities, or if already filed shall become effective, and
the conversion of shares of
-4-
<PAGE>
COMPANY Stock into shares of HDS Stock, the delivery of shares of HDS Stock, and
the transfer of funds by wire transfer in an amount equal to the cash portion of
the consideration which the STOCKHOLDERS shall be entitled to receive pursuant
to the Merger, shall occur and be deemed to be completed (such consummation and
delivery is herein referred to as the "Closing"). After the Pre-Closing and
until the Closing Date, no party may withdraw, terminate or rescind any delivery
made at the Pre-Closing unless this Agreement is terminated as provided in
Section 12. All documents delivered at the Pre-Closing shall be held by Howard
Rice for final delivery on the Closing Date as directed by the parties and their
counsel at the Pre-Closing, provided only that the Articles of Merger and any
similar document may be filed to become effective on the Closing Date. Should
the Agreement be terminated as provided in Section 12 prior to the Closing Date,
the parties shall take all steps necessary to rescind any such filings, Howard
Rice shall return all documents delivered at the Pre-Closing to the parties who
delivered the same, all such deliveries at the Pre-Closing will be rescinded and
a nullity, the Merger shall not become effective, the shares of COMPANY Stock
will not be converted into HDS Stock, and shares of HDS Stock will not be
delivered to STOCKHOLDERS. If HDS proposes to file any Articles of Merger or any
similar document prior to the Closing, the documents delivered at Pre-Closing
shall include documents required to rescind, prior to the Closing, any filing of
the Articles of Merger and any similar document.
4.3 No Assurances. The COMPANY and the STOCKHOLDERS acknowledge and agree
-------------
that (i) there exists no firm commitment, binding agreement, or promise or other
assurance of any kind, whether express or implied, oral or written, that any
Registration Statement filed in connection with the IPO (the "Registration
Statement") will become effective or that the IPO pursuant thereto will occur at
a particular price or within a particular range of prices or will occur at all;
(ii) neither HDS nor any of its officers, directors, agents or representatives
nor any prospective underwriters in the IPO (the "Underwriters") shall have any
liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or
associated with the COMPANY for any failure of the Registration Statement to
become effective, or of the IPO to occur at a particular price or within a
particular range of prices or to occur at all; and (iii) the decision of the
STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to
the proposed Merger, has been made independent of, and without reliance upon,
any statements, opinions or other communications of, or due diligence
investigations which have been or will be made or performed by any prospective
Underwriter, relative to HDS or the prospective IPO. The Underwriters shall have
no obligation to the STOCKHOLDERS with respect to any disclosure contained in
the Registration Statement.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS.
(A) Representations and Warranties of COMPANY and STOCKHOLDERS. The
----------------------------------------------------------
COMPANY and each of the STOCKHOLDERS jointly and severally represent and warrant
that all of the following representations and warranties in
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this Section 5(A) are true at the date of this Agreement and, subject to Section
7.9 hereof, shall be true at the time of Pre-Closing and the Closing Date, and
that such representations and warranties shall survive the Closing Date for a
period of two (2) years (the last day of such period is herein called the
"Expiration Date"), except that (i) the warranties and representations set forth
in Sections 5.13, 5.19 and 5.20 hereof shall survive until such date as the
limitations period has run for each act, inaction, fact, event or circumstance
which constitutes a breach thereof, which date shall be deemed to be the
Expiration Date for Sections 5.13, 5.19 and 5.20, (ii) the warranties and
representations set forth in Section 5.22 hereof shall survive until such date
as the limitations period has run for all tax periods ended on or prior to the
Closing Date, which date shall be deemed to be the Expiration Date for Section
5.22, and (iii) solely for purposes of Section 11.1(iv) hereof, all warranties
and representations shall survive until such date as the limitations period has
run under the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and all other
applicable Federal or state securities laws, which date shall be deemed to be
the Expiration Date for purposes of Section 11.1(iv) hereof.
5.1 Due Organization. The COMPANY is a corporation duly organized,
----------------
validly existing and in good standing under the laws of the state of its
incorporation, and is duly authorized and qualified to do business under all
applicable laws, regulations, ordinances and orders of public authorities to
carry on its business in the places and in the manner as now conducted except
(i) as disclosed on Schedule 5.1 or (ii) where the cumulative effect of all
failures to be so authorized or qualified would not have a material adverse
effect on the business, operations, properties, assets or condition (financial
or otherwise), of the COMPANY (a "Material Adverse Effect"). Schedule 5.1
contains a list of all jurisdictions in which the COMPANY is authorized or
qualified to do business. True, complete and correct copies of the Certificate
(or Articles) of Incorporation and Bylaws, as amended, of the COMPANY
(collectively, the "Charter Documents"), certified by the Secretary or Assistant
Secretary of the COMPANY, are all attached hereto as part of Schedule 5.1. A
true, complete and correct copy of the Certificate (or Articles) of
Incorporation, as amended, included in the Charter Documents, certified by the
Secretary of State or other appropriate authority of the state of incorporation
of the COMPANY, as applicable, shall be delivered to HDS at the Pre-Closing.
Except as set forth on Schedule 5.1, the minute books of the COMPANY, as
heretofore made available to HDS, are correct and complete in all material
respects.
5.2 Authority and Validity. The representatives of the COMPANY executing
----------------------
this Agreement have the authority to enter into and bind the COMPANY to the
terms of this Agreement and any other agreements contemplated by this Agreement
to which the COMPANY is or is contemplated to be a party. The COMPANY has the
full legal right, power and authority to enter into this Agreement, any other
agreements contemplated by this Agreement, to which the COMPANY is or is
contemplated to be a party, and the Merger. All corporate action necessary for
the authorization, execution, delivery and performance by the COMPANY of the
Agreement, and also any other agreements contemplated by this Agreement to which
the COMPANY is or is contemplated to be a
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party, has been taken. Assuming due authorization, execution and delivery by
HDS, this Agreement and any other agreements contemplated by this Agreement to
which the COMPANY is or is contemplated to be a party are or will be legal,
valid and binding obligations of the COMPANY, enforceable in accordance with
their respective terms, except as may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights generally.
5.3 Capital Stock of the COMPANY. The authorized capital stock of the
----------------------------
COMPANY is as set forth in Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS and in
the amounts set forth in Annex II and further, except as set forth on Schedule
5.3, are owned free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of the COMPANY have
been duly authorized and validly issued, are fully paid and nonassessable, are
owned of record and beneficially by the STOCKHOLDERS and further, such shares
were offered, issued, sold and delivered by the COMPANY in compliance with all
applicable state and federal laws concerning the issuance of securities.
Further, none of such shares were issued in violation of the preemptive rights
of any past or present stockholder.
5.4 Transactions in Capital Stock. Except as set forth on Schedule 5.4,
-----------------------------
the COMPANY has not acquired any COMPANY Stock since January 1, 1993. Except as
set forth on Schedule 5.4, no option, warrant, call, conversion right or
commitment of any kind exists which obligates the COMPANY to issue any
authorized but unissued capital stock. Except as set forth on Schedule 5.4, the
COMPANY has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof. Except as set
forth on Schedule 5.4, there has been no transaction or action taken with
respect to the equity ownership of the COMPANY, in contemplation of the
transactions described in this Agreement.
5.5 No Bonus Shares. Except as set forth in Schedule 5.5, since January
---------------
1, 1995 none of the shares of COMPANY Stock was issued for less than the fair
market value thereof at the time of issuance or was issued in exchange for
consideration other than cash.
5.6 Subsidiaries. The COMPANY does not presently own, of record or
------------
beneficially, or control, directly or indirectly, any capital stock, securities
convertible into capital stock or any other equity interest in any corporation,
association or business entity nor is the COMPANY, directly or indirectly, a
participant in any joint venture, partnership or other non-corporate entity.
5.7 Predecessor Status; etc. Set forth in Schedule 5.7 is a listing of all
------------------------
names under which the COMPANY has done business during the last five years and
all names of all predecessor companies for the past five years of the COMPANY,
including the names of any entities from whom the COMPANY previously acquired
material assets.
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<PAGE>
Except as disclosed in Schedule 5.7, the COMPANY has not been a subsidiary or
division of another corporation or a part of an acquisition which was later
rescinded.
5.8 Spin-off by the COMPANY. Except as set forth on Schedule 5.8, there
-----------------------
has not been any sale, spin-off or split-up of any material assets of the
COMPANY or any other person or entity that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the COMPANY ("COMPANY Affiliates") other than in the ordinary
course of business, within the preceding two years.
5.9 Financial Statements. Attached hereto as Schedule 5.9 to this
--------------------
Agreement are copies of the following financial statements (the "COMPANY
Financial Statements") of the COMPANY: (i) the COMPANY's balance sheet as of
December 31, 1998 and statements of income, cash flows and retained earnings for
the nine month period ended December 31, 1998 (such Balance Sheet as of December
31, 1998 is herein sometimes referred to as the "December 31, 1998 COMPANY
Balance Sheet," and December 31, 1998 is herein sometimes referred to as the
"Balance Sheet Date") and (ii) the COMPANY's balance sheets as of March 31,
1998, 1997, and 1996 and statements of income, cash flows and retained earnings
for each of the years in the three-year period ended March 31, 1998. To the
knowledge of the COMPANY, such Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated (except as noted). Such balance sheets as
of March 31, 1998, 1997, and 1996 present fairly the financial position of the
COMPANY as of the dates indicated thereon, and such Statements of Income, Cash
Flows and Retained Earnings present fairly the results of their respective
operations for the periods indicated thereon.
5.10 Liabilities and Obligations. Schedule 5.10 is an accurate list with
---------------------------
respect to the COMPANY of all liabilities as of a date specified therein, which
date shall not be more than thirty (30) days prior to the date of this
Agreement. Schedule 5.10 shall be amended or supplemented pursuant to Section
7.9 to list (i) all liabilities which were incurred after such date and were
incurred other than in the ordinary course of business or which exceed $10,000
(individually or in the aggregate) if (and only if) such liabilities would
either be accrued on the balance sheet of the COMPANY in accordance with
generally accepted accounting principles consistently applied if such balance
sheet were being prepared immediately prior to Closing or if such liabilities
represent liabilities of the nature described in Section 5.13, Section 5.19,
Section 5.20 and/or Section 5.22 (excluding items that are both not known to the
COMPANY and not covered by any of such sections because of knowledge
qualifications contained in one or more of such sections); and (ii) all
liabilities which were incurred after such date and were incurred other than in
the ordinary course of business or which exceed $100,000 (in the aggregate) and
are not otherwise described in the immediately preceding subclause (i).
Any reference to "all liabilities" in this Section 5.10 shall mean, in
each such instance, all liabilities of the COMPANY of any kind, character or
description, whether accrued, absolute, secured or unsecured, contingent or
otherwise. In the case of those
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<PAGE>
liabilities which are contingent, Schedule 5.10 includes, and each amendment or
supplement pursuant to Section 7.9 will include, a reasonable estimate of the
maximum amount which may be payable. For each such contingent liability, the
COMPANY has provided (or in the case of contingent liabilities listed in an
amendment or supplement pursuant to Section 7.9, will provide) to HDS the
following information:
(a) a summary description of the liability together with the
following:
(1) copies of all relevant documentation relating
thereto;
(2) amounts claimed and any other action or relief
sought; and
(3) name of claimant and all other parties to the
claim, suit or proceeding;
(b) the name of each court or agency before which such claim,
suit or proceeding is pending; and
(c) the date such claim, suit or proceeding was instituted.
5.11 Accounts and Notes Receivable. Schedule 5.11 is an accurate list of
-----------------------------
the accounts and notes receivable of the COMPANY as of the Balance Sheet Date,
including any such amounts which are not reflected in the December 31, 1998
COMPANY Balance Sheet, and including receivables from and advances to employees
and the STOCKHOLDERS. Except to the extent to be reflected on Schedule 5.11,
such accounts and notes are collectible in the amount to be shown in the
December 31, 1998 COMPANY Balance Sheet, net of reserves reflected therein.
5.12 Permits and Intangibles. The COMPANY holds all licenses, franchises,
-----------------------
permits and other governmental authorizations including permits, titles
(including motor vehicle titles and current registrations), licenses,
franchises, certificates, trademarks, trade names, patents, patent applications
and copyrights, the absence of which, either singly or in the aggregate, would
have a Material Adverse Effect. Schedule 5.12 is an accurate list and summary
description of all such licenses, franchises, permits and other governmental
authorizations, provided that, with respect to copyrights, Schedule 5.12 may
include only those copyrights which are registered. To the knowledge of the
COMPANY, the licenses, franchises, permits and other governmental authorizations
listed on Schedule 5.12 are valid, and the COMPANY has not received any notice
that any governmental authority intends to cancel, terminate or not renew any
such license, franchise, permit or other governmental authorization. The
COMPANY has conducted and is conducting its business in compliance with the
requirements, standards, criteria and conditions set forth in applicable
permits, licenses, orders, approvals, variances, rules and regulations and is
not in violation of any of the foregoing except where all such non-compliances
and
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<PAGE>
violations in the aggregate would not have a Material Adverse Effect. Except as
specifically provided in Schedule 5.12, the transactions contemplated by this
Agreement will not result in a default under or a breach or violation of, or
have a Material Adverse Effect upon the rights and benefits afforded to the
COMPANY by, such licenses, franchises, permits or government authorizations,
either singly or in the aggregate.
5.13 Environmental Matters. Except as set forth on Schedule 5.13, and
---------------------
except to the extent that noncompliance with any Environmental Law (as defined
below), either singly or in the aggregate, does not have a Material Adverse
Effect, (i) the COMPANY has complied with and is in compliance with all federal,
state, local and foreign statutes (civil and criminal), laws, ordinances,
regulations, rules, notices, permits, judgments, orders and decrees applicable
to it or any of its properties, assets, operations and businesses relating to
environmental protection (collectively "Environmental Laws") including, without
limitation, Environmental Laws relating to protection of the air, water or land
or to the generation, storage, use, handling, transportation, treatment or
disposal of Solid Wastes, Hazardous Wastes or Hazardous Substances (as such
terms are defined in any applicable Environmental Law); (ii) the COMPANY has
obtained and complied with all necessary permits and other approvals necessary
to treat, transport, store, dispose of or otherwise handle Solid Wastes,
Hazardous Wastes or Hazardous Substances and has reported, to the extent
required by all Environmental Laws, all past and present sites owned and
operated by the COMPANY where Solid Wastes, Hazardous Wastes or Hazardous
Substances have been treated, stored, used, disposed of or otherwise handled;
(iii) there have been no releases (as defined in Environmental Laws) at, from,
under, in or on any property owned or operated by the COMPANY except as
permitted by Environmental Laws; (iv) to the knowledge of the COMPANY there is
no on-site or off-site location to which the COMPANY has transported or disposed
of Solid Wastes, Hazardous Wastes or Hazardous Substances or arranged for the
transportation of Solid Wastes, Hazardous Wastes or Hazardous Substances, which
site is the subject of any federal, state, local or foreign enforcement action
or any other investigation which could lead to any claim against the COMPANY or
HDS for any clean-up cost, remedial work, damage to natural resources or
personal injury, including, but not limited to, any claim under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended; and (v) the COMPANY has no contingent liability in connection with any
release of any Solid Waste, Hazardous Waste or Hazardous Substance into the
environment. Schedule 5.13 lists all releases of Hazardous Wastes or Hazardous
Substances by the COMPANY.
5.14 Real and Personal Property. Schedule 5.14 hereto contains an accurate
--------------------------
list of (x) all real and personal property included on the December 31, 1998
COMPANY Balance Sheet, (y) all other real and personal property of the COMPANY
with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii)
acquired since the Balance Sheet, and (z) all leases for real and personal
property to which the COMPANY is a party involving real or personal property
having a value in excess of $2,500 ("Material Leases"), including true, complete
and correct copies of all Material Leases, and including an indication as to
which real and personal property is currently owned, or was
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<PAGE>
formerly owned, by the STOCKHOLDERS or business or personal affiliates of the
COMPANY or the STOCKHOLDERS. All machinery and equipment of the COMPANY listed
on Schedule 5.14 is in good working order and condition, ordinary wear and tear
excepted, except (i) as disclosed in Schedule 5.14 or (ii) where the cumulative
effect of all failures to be in good working order and condition would not have
a Material Adverse Effect. All Material Leases are in full force and effect and
constitute valid and binding agreements of the COMPANY and to the knowledge of
the COMPANY, constitute valid and binding agreements on the other parties
thereto (and their successors) in accordance with their respective terms. All
fixed assets used by the COMPANY that are material to the operation of their
respective businesses are either owned by the COMPANY or leased under an
agreement set forth on Schedule 5.14. Schedule 5.14 contains true, complete and
correct copies of all title reports received or owned by the COMPANY and title
insurance policies received or owned by the COMPANY with respect to the real
property listed on Schedule 5.14. The COMPANY has also provided in Schedule 5.14
a summary description of all plans or projects that involve the opening of new
operations, expansion of any existing operations or the acquisition of any real
property or existing businesses, with respect to which the COMPANY has made any
expenditure in the two-year period prior to the date of the Agreement in excess
of $10,000, or which if pursued by the COMPANY would require additional
expenditures of capital in excess of $10,000. Except as set forth on Schedule
5.14 and except for liens excepted in Section 7.3(vi)(1) and (3), there are no
liens against the COMPANY's real and personal properties.
5.15 Significant Customers; Material Contracts and Commitments. Schedule
---------------------------------------------------------
5.15 contains an accurate list of (i) all customers representing five percent
(5%) or more of the COMPANY's revenues for the twelve months ended on the
Balance Sheet Date or who have paid to the COMPANY $50,000 or more over any four
consecutive fiscal quarters in the three years ended on the Balance Sheet Date
(collectively, "significant customers") and (ii) all contracts, indentures and
other instruments requiring payment or performance by the COMPANY in an amount
or with a value in excess of $10,000 ("Material Contracts") to which the COMPANY
is a party or by which any of them or any of their respective properties are
bound (including, but not limited to, contracts with significant customers,
joint venture or partnership agreements, contracts with any labor organizations,
loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to
purchase land, leases, liens, pledges or other security agreements) (a) as of
the Balance Sheet Date and (b) entered into since the Balance Sheet Date and in
each case has delivered true, complete and correct copies of such agreements to
HDS, except that leases set forth on Schedule 5.14 need not be set forth on
Schedule 5.15. Except to the extent set forth on Schedule 5.15, (i) none of the
COMPANY's significant customers has cancelled or substantially reduced or, to
the knowledge of the COMPANY, is currently attempting or threatening to cancel
any Material Contract or substantially reduce utilization of the services
provided by the COMPANY, and (ii) no Stockholder or any affiliate of any
Stockholder is a party to any such Material Contract. Except as set forth in
Schedule 5.15, the COMPANY has not been the subject of any election in respect
of union representation of employees and are not bound by or subject to (and
none of its
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<PAGE>
respective assets or properties is bound by or subject to) any arrangement with
any labor union. Except as set forth on Schedule 5.15, no employees of the
COMPANY are represented by any labor union or covered by any collective
bargaining agreement and no campaign to establish such representation has ever
occurred or, to the knowledge of the COMPANY, is in progress. There is no
pending or, to the COMPANY's knowledge, threatened labor dispute involving the
COMPANY and any group of its employees, nor has the COMPANY experienced any
labor interruptions over the past three years, and the COMPANY considers its
relationship with its respective employees to be good.
5.16 Title to Real Property. The COMPANY has good and insurable title to
----------------------
the real property owned and used in its business, including those reflected on
Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales
agreement, encumbrance or charge, except for:
(i) liens set forth on Schedules 5.10 and 5.15 securing specified
liabilities (with respect to which no material default exists);
(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title shown of record in the office of the County Clerk in which the properties,
assets and leasehold estates are located which do not adversely affect the
current use of the property.
5.17 Insurance. Schedule 5.17 sets forth an accurate list of all insurance
---------
policies carried by the COMPANY. Except as set forth on Schedule 5.17, the
Company has delivered to HDS an accurate list (attached to Schedule 5.17) of all
insurance loss runs or worker's compensation claims received for the past three
policy years. The Company has provided HDS with true, complete and correct
copies of all policies currently in effect. Such insurance policies are
currently in full force and effect and shall remain in full force and effect
through the Closing Date. No insurance carried by the COMPANY has ever been
cancelled by the insurance company and the COMPANY has never been denied
coverage.
5.18 Compensation; Employment Agreements. Schedule 5.18 sets forth an
-----------------------------------
accurate schedule showing all officers, directors and key employees of the
COMPANY listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided
to HDS true, complete and correct copies of any employment agreements for
persons listed on Schedule 5.18. Since the Balance Sheet Date there have been no
increases in the compensation, bonus, sales commissions or fee arrangements
payable or to become payable by the COMPANY to
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any officer, director, stockholder, employee, consultant or agent, except as
listed on Schedule 5.18.
5.19 Employee Plans. Schedule 5.19 sets forth complete and accurate lists
--------------
of all employee benefit plans, all employee welfare benefit plans, all employee
pension benefit plans, all multi-employer plans and all multi-employer welfare
arrangements (as defined in Sections 3(3), (1), (2), (37) and (40),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or
to which the COMPANY currently contributes, or has an obligation to contribute
in the future (including, without limitation, benefit plans or arrangements that
are not subject to ERISA, such as employment agreements and any other agreements
containing "golden parachute" provisions and deferred compensation agreements),
together with a classification of employees covered thereby (collectively, the
"Plans"). Schedule 5.19 also sets forth all of the Plans that have been
terminated within the past six years. The COMPANY has heretofore delivered to
HDS correct and complete copies of each of the following:
(i) each Plan and all amendments thereto; the trust agreement
and/or insurance contracts, if any, forming a part of such Plan and all
amendments thereto; and the resolutions and agreements, if any by which the
COMPANY adopted such Plan;
(ii) all written, and descriptions of all oral, employment,
termination, and severance agreements, contracts, arrangements and
understandings listed in Schedule 5.19;
(iii) sample benefit distribution forms that pertain to all Plans
that are intended to qualify (the "Qualified Plans") under Section 401(a) of the
Code;
(iv) the most recent actuarial report and the most recent executed
Form PBGC-1 with respect to each Plan that is a defined benefit pension plan as
defined in Section 414(j) of the Code (a "Defined Benefit Plan");
(v) Forms 5500 or, as applicable Forms 5500-C/R, filed with
respect to the three most recent plan years of each Plan, and all schedules
thereto;
(vi) the most recent determination letter issued by the Internal
Revenue Service regarding the qualified status of each Qualified Plan;
(vii) the most recent accountant's report, if any, with respect to
each Plan;
(viii) the most recent summary plan description, and any subsequent
summaries of material modifications, with respect to each Plan;
(ix) the bond required by Section 412 of ERISA, if any; and
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(x) all documents required to be filed with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation (the "PBGC"), or distributed
to participants and beneficiaries in connection with the termination of any
Qualified Plan listed on Schedule 5.19 as terminated.
5.20 Compliance with ERISA. Except for the Plans, the COMPANY does not
---------------------
maintain or sponsor, and is not a contributing employer to, a pension, profit-
sharing, deferred compensation, stock option, employee stock purchase or other
employee benefit plan, employee welfare benefit plan, or any other arrangement
with their respective employees, whether or not subject to ERISA. All Plans are
in compliance in all material respects with all applicable provisions of ERISA
and the regulations issued thereunder, the Code and the regulations issued
thereunder, as well as with all other applicable laws, and have been
administered, operated and managed in all material respects in accordance with
their governing documents, if any. All Qualified Plans are qualified under
Section 401(a) of the Code and have been determined by the Internal Revenue
Service to be so qualified or application for determination letters have been
timely submitted to the Internal Revenue Service and nothing has occurred since
the date of each Qualified Plan's most recent determination letter that would
adversely affect such Qualified Plan's tax-qualified status. To the extent that
any Qualified Plans have not been amended to comply with applicable law, the
remedial amendment period permitting retroactive amendment of such Qualified
Plans has not expired and will not expire within one hundred twenty (120) days
after the Closing Date. All reports and other documents required to be filed
with any governmental agency or distributed to plan participants or
beneficiaries (including, but not limited to, annual reports, summary annual
reports, actuarial reports, PBGC-1 Forms, audits or tax returns) have been
timely filed or distributed. None of: (i) the STOCKHOLDERS; (ii) any Plan; or
(iii) the COMPANY has engaged in any transaction prohibited under the provisions
of Section 4975 of the Code or Section 406 of ERISA. No Plan has incurred an
accumulated funding deficiency, as defined in Section 412(a) of the Code and
Section 302(1) of ERISA; and no circumstances exist pursuant to which the
COMPANY could have any direct or indirect liability whatsoever (including being
subject to any statutory lien to secure payment of any such liability), to the
PBGC under Title IV of ERISA or to the Internal Revenue Service for any excise
tax or penalty with respect to any plan now or hereafter maintained or
contributed to by the COMPANY or any member of a "controlled group" (as defined
in Section 4001(a)(14) of ERISA) that includes the COMPANY; and neither the
COMPANY nor any member of a "controlled group" (as defined above) that includes
the COMPANY currently has (or at the Closing Date will have) any obligation
whatsoever to contribute to any "multi-employer pension plan" (as defined in
ERISA Section 4001(a)(14)), nor has any withdrawal liability whatsoever (whether
or not yet assessed) arising under or capable of assertion under Title IV of
ERISA (including, but not limited to, Sections 4201, 4202, 4203, 4204, or 4205
thereof) been incurred by any Plan. Further, except as set forth in Schedule
5.20:
(i) there have been no terminations, partial terminations or
discontinuance of contributions to any Qualified Plan without a determination by
the
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Internal Revenue Service that such action does not adversely affect the tax-
qualified status of such Qualified Plan;
(ii) no Plan which is subject to the provisions of Title IV of
ERISA has been terminated;
(iii) there have been no "reportable events" (as defined in Section
4043 of ERISA) with respect to any Plan which were not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of the
Closing Date, shall equal or exceed the actuarial present value of all accrued
pension benefits under any such Qualified Plan in accordance with the
assumptions contained in the Regulations of the PBGC governing the funding of
terminated Defined Benefit Plans;
(v) with respect to Plans which qualify as "group health plans"
under Section 4980B of the Internal Revenue Code and Section 607(l) of ERISA and
related regulations (relating to the benefit continuation rights imposed by
"COBRA"), the COMPANY has complied (and on the Closing Date will have complied)
in all respects with all reporting, disclosure, notice, election and other
benefit continuation requirements imposed thereunder as and when applicable to
such plans, and the COMPANY has not incurred (and will not incur) any direct or
indirect liability and is not (and will not be) subject to any loss, assessment,
excise tax penalty, loss of federal income tax deduction or other sanction,
arising on account of or in respect of any direct or indirect failure by the
COMPANY, at any time prior to the Closing Date, to comply with any such federal
or state benefit continuation requirement, which is capable of being assessed or
asserted before or after the Closing Date directly or indirectly against the
COMPANY or the STOCKHOLDERS with respect to such group health plans;
(vi) The COMPANY is not now nor has it been within the past six
years a member of a "controlled group" as defined in ERISA Section 4001(a)(14);
(vii) there is no pending litigation, arbitration, or disputed
claim, settlement or adjudication proceeding, and to the knowledge of the
COMPANY, there is no threatened litigation, arbitration or disputed claim,
settlement or adjudication proceeding, audit or any governmental or other
proceeding, audit or investigation with respect to any Plan, or with respect to
any fiduciary, administrator, or sponsor thereof (in their capacities as such),
or any party in interest thereof;
(viii) the Financial Statements as of the Balance Sheet Date reflect
the approximate total pension, medical and other benefit expense for all Plans,
and no material funding changes or irregularities are reflected thereon which
would cause such Financial Statements to be not representative of prior periods;
(ix) the COMPANY has not incurred liability under Section 4062 of
ERISA;
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(x) each Qualified Plan that is listed as terminated on Schedule
5.19 was terminated in compliance with all applicable requirements of ERISA and
the Code;
(xi) except for any Qualified Plan that is categorized on Schedule
5.19 as having been merged with another Qualified Plan, no Qualified Plan of the
COMPANY has been merged during the six years immediately before the Closing
Date;
(xii) each Qualified Plan that is categorized on Schedule 5.19 as
having been merged was merged in compliance with all applicable requirements of
ERISA and the Code;
(xiii) apart from health benefits provided to former employees under
Section 4980B of the Code and Part 6 of Title I(B) of ERISA, the COMPANY has no
obligation to provide health or medical benefits to anyone other than its active
employees;
(xiv) the COMPANY does not sponsor, contribute to, or have any
obligation to contribute to any voluntary employees beneficiary association, as
described in Section 501(c)(9) of the Code; and
(xv) except as set forth in Schedule 5.19, the consummation of the
transactions contemplated hereby will not result in any obligation to pay any
employee of the COMPANY severance or termination benefits so long as such
employee remains employed by the COMPANY after the Closing.
5.21 Conformity with Law. Except to the extent set forth on Schedule 5.21,
-------------------
the COMPANY is not in violation of any law or regulation or any order of any
court or federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them
which (either singly or in the aggregate) would have a Material Adverse Effect;
and except to the extent set forth in Schedule 5.10, there are no claims,
actions, suits or proceedings pending or, to the knowledge of the COMPANY,
threatened, against or affecting the COMPANY, at law or in equity, or before or
by any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them
which (either singly or in the aggregate) would have a Material Adverse Effect,
and no notice of any such claim, action, suit or proceeding, whether pending or
threatened, has been received by the COMPANY. The COMPANY has conducted and is
conducting its business in compliance with the requirements, standards, criteria
and conditions set forth in applicable federal, state and local statutes,
ordinances, orders, approvals, variances, rules and regulations and is not in
violation of any of the foregoing which (either singly or in the aggregate)
would have a Material Adverse Effect.
5.22 Taxes. Except as set forth in Schedule 5.22,
-----
(i) All Tax Returns (as defined in Section 10.6(f)) required to
have been filed by or with respect to the COMPANY with any Taxing Authority (as
defined in
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Section 10.6(g)) have been duly filed, and each such Tax Return accurately,
correctly and completely reflects the income, franchise or other Tax liability
and all other information, including the tax basis and recovery periods for
assets, required to be reported thereon. The COMPANY has furnished or made
available to HDS complete and accurate copies of all income and franchise tax
returns, and any amendments thereto, filed by the COMPANY for all taxable years
ending on or after December 31, 1995. All Taxes (whether or not shown on any Tax
Return and whether or not assessed) owed by the COMPANY have been paid. No Tax
payment has been made by the COMPANY to any Taxing Authority which is
inconsistent with the prior practice of the COMPANY, and no Tax payment has been
made by the COMPANY which is in excess of that which is in good faith determined
to be due and owing at the time of such payment.
(ii) The COMPANY is not and has not since January 1, 1995 been a
member of any affiliated, combined, consolidated, unitary or similar group.
(iii) The provisions for Taxes due by the COMPANY (as opposed to
any reserve for deferred Taxes established to reflect timing differences between
book and Tax income) in the COMPANY Financial Statements are sufficient for, and
adequate to cover, all unpaid Taxes.
(iv) The COMPANY is not a party to any current agreement extending
the time within which to file any Tax Return. No claim has ever been made by any
Taxing Authority in a jurisdiction in which the COMPANY does not file Tax
Returns that it is or may be subject to taxation by that jurisdiction.
(v) The COMPANY has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
(vi) To the best of its knowledge, the COMPANY does not expect any
Taxing Authority to assess any additional Taxes against or in respect of it for
any past period. There is no dispute or claim concerning any Tax liability
either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to
the COMPANY. No issues have been raised in any examination by any Taxing
Authority with respect to the COMPANY which, by application of similar
principles, reasonably could be expected to result in a proposed deficiency for
any other period not so examined. Schedule 5.22 attached hereto lists all
federal, state, local and foreign income Tax Returns filed by or with respect to
the COMPANY for all taxable periods ended on or after December 31, 1994,
indicates those Tax Returns, if any, that have been audited, and indicates those
Tax Returns that currently are the subject of audit. The COMPANY has delivered
to HDS complete and correct copies of all federal, state, local and foreign
income Tax Returns filed by, and all Tax examination reports and statements of
deficiencies assessed against or agreed to by, the COMPANY since December 31,
1995.
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<PAGE>
(vii) The COMPANY has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to any Tax
assessment or deficiency.
(viii) The COMPANY has not made any payments, is not obligated to
make any payments, and is not a party to any agreement that under certain
circumstances could require it to make any payments, that would not be
deductible by reason of the application of Section 280G of the Code.
(ix) The COMPANY is not a party to and has no ongoing liability
under any Tax allocation or sharing agreement.
(x) None of the assets of the COMPANY constitutes tax-exempt bond
financed property or tax-exempt use property, within the meaning of Section 168
of the Code. The COMPANY is not a party to any "safe harbor lease" that is
subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as
in effect prior to the Tax Reform Act of 1986, or to any "long-term contract"
within the meaning of Section 460 of the Code.
(xi) The COMPANY is not a party to any joint venture, partnership
or other arrangement that is treated as a partnership for federal income Tax
purposes.
(xii) There are no accounting method changes of the COMPANY that
could give rise to an adjustment under Section 481 of the Code for periods after
the Closing Date.
(xiii) The COMPANY has not received any written ruling of a Taxing
Authority related to Taxes or entered into any written and legally binding
agreement with a Taxing Authority relating to Taxes.
(xiv) The COMPANY has substantial authority for the treatment of,
or has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on
its federal income Tax Returns, all positions taken on its relevant federal
income Tax Returns that could give rise to a substantial understatement of
federal income Tax within the meaning of Section 6662(d) of the Code.
(xv) The COMPANY does not have any liability for Taxes of any
Person other than the COMPANY (i) under Section 1.1502-6 of the Treasury
regulations (or any similar provision of state, local or foreign law), (ii) as a
transferee or successor, (iii) by contract or (iv) otherwise.
(xvi) No consent has been filed relating to the COMPANY pursuant
to Section 341(f) of the Code, nor has the COMPANY made any tax election that
would materially increase the amount of Taxes payable by the COMPANY, as
compared to the amount of Taxes that would be payable in the absence of such tax
election, in any Post-Closing Period (as defined in Section 10.6(d)).
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<PAGE>
(xvii) Intentionally omitted.
(xviii) There is no intercorporate indebtedness existing between HDS
and the COMPANY that was issued, acquired, or will be settled at a discount.
(xix) The COMPANY is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(xx) The fair market value of the assets of the COMPANY acquired
by HDS as a result of the Merger will equal or exceed the sum of the COMPANY's
liabilities assumed by HDS in the Merger, plus the amount of liabilities, if
any, to which the transferred assets of the COMPANY are subject.
(xxi) The liabilities of the COMPANY assumed by HDS and the
liabilities to which the transferred assets of the COMPANY are subject were
incurred by the COMPANY in the ordinary course of its business.
(xxii) The COMPANY is not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
(xxiii) To the knowledge of the COMPANY, none of the compensation
received by any STOCKHOLDER-employees of the COMPANY will be separate
consideration for, or allocable to, any of their shares of the COMPANY; none of
the shares of HDS Stock received by any STOCKHOLDER-employees in the Merger will
be separate consideration for, or allocable to, any employment agreement; and
the compensation paid to any STOCKHOLDER-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's length for similar services.
(xxiv) To the knowledge of the COMPANY, the fair market value of
the HDS Stock and other consideration to be received by each STOCKHOLDER
pursuant to the Merger, will be approximately equal to the fair market value of
the COMPANY Stock surrendered in the Merger.
(xxv) The fair market value of the sum of (i) all dividends paid
and distributions made on or after January 1, 1998 and through the Closing Date
in respect of COMPANY Stock and (ii) all consideration paid by the COMPANY on or
after January 1, 1998 and through the Closing Date in connection with all direct
and indirect redemptions, purchases and other acquisitions of COMPANY Stock is
no greater than $0.
Certain of the defined terms used in this Section 5.22 have the
meaning ascribed to them in Section 10.
5.23 No Violations. Except as set forth in Schedule 5.23, neither the
-------------
COMPANY nor, to the knowledge of the COMPANY, any other party thereto is (i) in
violation of any Charter Document or (ii) in default under any Material Lease or
Material Contract; and,
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<PAGE>
except as set forth in the schedules and documents attached to this Agreement,
(a) the transactions contemplated hereby will not have a Material Adverse Effect
on the rights and benefits of the COMPANY under the Material Leases and Material
Contracts, either singly or in the aggregate, and (b) except as set forth on
Schedule 5.23, the execution of this Agreement and the performance of the
obligations hereunder and the consummation of the transactions contemplated
hereby will not result in any violation or breach or constitute a default under
any of the terms or provisions of the Charter Documents, Material Leases,
Material Contracts, any judgment, decree, order or award of any court,
governmental body or arbitrator, or any law, rule or regulation applicable to
COMPANY. Except as set forth in Schedule 5.23, none of the Material Leases or
Material Contracts requires notice to, or the consent or approval of, any third
party with respect to any of the transactions contemplated hereby in order to
remain in full force and effect, nor does this Agreement or any of the
transactions contemplated hereby give rise to any right to termination,
cancellation or acceleration or loss of any right or benefit under any Material
Lease or Material Contract.
5.24 Government Contracts. Except as set forth on Schedule 5.24, the
--------------------
COMPANY is not now a party to any governmental contracts subject to price
redetermination or renegotiation.
5.25 Absence of Changes. Since December 31, 1998, except as set forth on
------------------
Schedule 5.25, there has not been with respect to the COMPANY:
(i) any event or circumstance (either singly or in the
aggregate)which would constitute a Material Adverse Effect;
(ii) any change in its authorized capital, or securities
outstanding, or ownership interests or any grant of any options, warrants,
calls, conversion rights or commitments;
(iii) any declaration or payment of any dividend or distribution in
respect of its capital stock or any direct or indirect redemption, purchase or
other acquisition of any of its capital stock;
(iv) any increase of more than five percent (5%) in the
compensation, bonus, sales commissions or fee arrangement payable or to become
payable by it to any of its respective officers, directors, stockholders,
employees, consultants or agents, except for ordinary and customary bonuses and
salary increases for employees (other than the STOCKHOLDERS) in accordance with
past practice;
(v) any work interruptions, labor grievances or claims filed, or
any similar event or condition of any character that would have a Material
Adverse Effect;
(vi) any distribution, sale or transfer, or any agreement to sell or
transfer any material assets, property or rights of its business to any person,
including, without limitation, the STOCKHOLDERS and their affiliates, other than
distributions, sales or
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<PAGE>
transfers in the ordinary course of business to persons other than the
STOCKHOLDERS and their affiliates;
(vii) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to it, including without limitation any indebtedness or
obligation of any STOCKHOLDERS or any affiliate thereof, provided that it may
--------
negotiate and adjust bills in the course of good faith disputes with customers
in a manner consistent with past practice, provided, further, that such
-------- -------
adjustments shall not be deemed to be included in Schedule 5.11 unless
specifically listed thereon;
(viii) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property or
rights or requiring consent of any party to the transfer and assignment of any
such assets, property or rights;
(ix) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire any property, rights or assets outside of the
ordinary course of business;
(x) any waiver of any of its material rights or claims;
(xi) any transaction by it outside the ordinary course of its
business; or
(xii) any cancellation or termination of a Material Contract.
5.26 Deposit Accounts; Powers of Attorney. The COMPANY has delivered to
------------------------------------
HDS an accurate schedule (Schedule 5.2 6) as of the date of the Agreement, of:
(i) the name of each financial institution in which the COMPANY
has accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation,
firm or other entity holding a general or special power of attorney from the
COMPANY and a description of the terms of such power.
5.27 Relations with Governments. The COMPANY has not made, offered or
--------------------------
agreed to offer anything of value to any governmental official, political party
or candidate for government office which would cause the COMPANY to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended, or any law
of similar effect.
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<PAGE>
(B) Representations and Warranties of STOCKHOLDERS. Each
----------------------------------------------
STOCKHOLDER severally represents and warrants that the representations and
warranties set forth in this Section 5(B) are true as of the date of this
Agreement and, subject to Section 7.9 hereof, shall be true at the time of Pre-
Closing and on the Closing Date, and that such representations and warranties
survive the Closing Date until the Expiration Date.
5.28 Authority; Validity; Ownership. Such STOCKHOLDER has the full legal
------------------------------
right, power and authority to enter into this Agreement and any other agreements
contemplated by this Agreement to which such STOCKHOLDER is or is contemplated
to be a party. Assuming due authorization, execution and delivery by HDS, this
Agreement and any other agreements contemplated by this Agreement to which such
STOCKHOLDER is or is contemplated to be a party are or will be legal, valid and
binding obligations of each STOCKHOLDER, enforceable in accordance with their
respective terms, except as may be limited by applicable bankruptcy, insolvency,
or similar laws affecting creditors' rights generally. Such STOCKHOLDER owns
beneficially and of record all of the shares of the COMPANY Stock identified on
Annex II as being owned by such STOCKHOLDER, and, except as set forth on
Schedule 5.28 hereto, such COMPANY Stock is owned free and clear of all liens,
encumbrances and claims of every kind.
5.29 Preemptive Rights. Such STOCKHOLDER does not have, or hereby waives,
-----------------
any preemptive or other right to acquire shares of COMPANY Stock or HDS Stock
that such STOCKHOLDER has or may have had, other than rights of any STOCKHOLDER
to acquire HDS Stock pursuant to (i) this Agreement or (ii) any option granted
by HDS.
5.30 No HDS Intention to Reacquire Stock. To the best of such STOCKHOLDER's
-----------------------------------
knowledge, there is no plan or intention by HDS or any HDS affiliate to purchase
or reacquire any of the HDS Stock issued in connection with the Merger.
6. REPRESENTATIONS OF HDS.
HDS represents and warrants that (i) all of the following
representations and warranties are true at the date of this Agreement and shall
be true at the time of Pre-Closing and the Closing Date and that such
representations and warranties shall survive the Closing Date until the
Expiration Date and (ii) solely for purposes of Section 11.2(iv) hereof, and
solely to the extent that in connection with the IPO the STOCKHOLDERS actually
incur liability under the 1933 Act, the 1934 Act, or any other federal or state
securities laws, the representations and warranties set forth herein shall
survive until the expiration of any applicable limitations period.
6.1 Due Organization. HDS and each of the subsidiaries of HDS ("HDS's
----------------
Subsidiaries") set forth in Schedule 6.7 is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and is duly authorized and
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<PAGE>
qualified under all applicable laws, regulations, ordinances and orders of
public authorities to carry on its business in the places and in the manner as
now conducted except for where the cumulative effect of all failures to be so
authorized or qualified would not have a material adverse effect on the
business, operations, affairs, properties, assets or condition (financial or
otherwise), of HDS and HDS's Subsidiaries, taken as a whole (an "HDS Material
Adverse Effect"). True, complete and correct copies of the Certificate of
Incorporation and the Bylaws, each as amended, of HDS and HDS's Subsidiaries
(collectively, the "HDS Charter Documents"), certified by the Secretary or an
Assistant Secretary of HDS, are attached hereto as Annex IV. A true, complete
and correct copy of the Certificate of Incorporation, each as amended, of HDS
and each of HDS's Subsidiaries, certified by the Secretary of State of the State
of Delaware, shall be delivered at the Pre-Closing.
6.2 HDS Stock. The HDS Stock to be delivered to the STOCKHOLDERS on the
---------
Closing Date shall constitute valid and legally issued shares of HDS, fully paid
and nonassessable, and except as set forth in this Agreement, will be owned free
and clear of all liens, security interests, pledges, charges, voting trusts,
restrictions, encumbrances and claims of every kind created by HDS, and will be
legally equivalent in all respects to the HDS Stock issued and outstanding as of
the date hereof. The shares of HDS Stock to be issued to the STOCKHOLDERS
pursuant to this Agreement will not be registered under the 1933 Act.
6.3 Authority and Validity. The representatives of HDS executing this
----------------------
Agreement and any other agreements contemplated by this Agreement have the
corporate authority to enter into and bind HDS to the terms of this Agreement
and any other agreements contemplated by this Agreement to which HDS is or is
contemplated to be a party. HDS has the full legal right, power and authority
to enter into this Agreement, any other agreements contemplated by this
Agreement to which HDS is or is contemplated to be a party, and the Merger. All
corporate action necessary for the authorization, execution, delivery and
performance by HDS of this Agreement, and also any other agreements contemplated
by this Agreement to which HDS is contemplated to be a party, has been taken.
Assuming due authorization, execution and delivery by the COMPANY and the
STOCKHOLDERS, as applicable, this Agreement and any other agreements
contemplated by this Agreement to which HDS is or is contemplated to be a party
are or will be legal, valid and binding obligations of HDS, enforceable against
HDS in accordance with their respective terms, except as may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally.
6.4 Capital Stock of HDS. Immediately prior to the Closing, the authorized
--------------------
capital stock of HDS will be as set forth in Schedule 6.4. All of the issued
and outstanding shares of HDS are owned beneficially and of record by the
persons set forth on Annex III. All issued and outstanding shares of HDS stock
are duly authorized, validly issued, fully paid and nonassessable. There are no
obligations of HDS to repurchase, redeem or otherwise acquire any shares of HDS
stock. Except as described in the Registration Statement, there are no options,
warrants, equity securities, calls, rights, commitments or agreements of any
character to which HDS or any of its
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<PAGE>
subsidiaries are a party or by which they are bound obligating HDS or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of HDS or any of its subsidiaries or
obligating HDS or any of its subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, call, right,
commitment or agreement. To the knowledge of HDS, as of the Closing Date, none
of the STOCKHOLDERS set forth on Annex III will be a party to or subject to any
voting trust, proxy or other agreement or understanding with respect to the
shares of capital stock of HDS owned by such STOCKHOLDER. All of the shares of
HDS Stock to be issued to the STOCKHOLDERS in accordance herewith will be duly
authorized, validly issued, fully paid and nonassessable. All of the shares of
HDS Stock issued to persons set forth on Annex III and, based on the
representations of STOCKHOLDERS contained in this Agreement and in the documents
delivered to HDS pursuant hereto, to STOCKHOLDERS pursuant to this Agreement,
were or will be offered, issued, sold and delivered by HDS in compliance with
all applicable state and federal laws concerning the issuance of securities and
none of such shares were or will be issued in violation of the preemptive rights
of any past or present stockholder. On the Closing Date the capitalization of
HDS will be as set forth in the Registration Statement.
6.5 No Side Agreements. Except as set forth in Schedule 6.5, HDS has not
------------------
entered into any material agreement with any of the Founding Companies or any of
the stockholders of the Founding Companies other than the Other Agreements and
the agreements contemplated by each of the Other Agreements, including the
employment agreements referred to therein. HDS has made available to the
COMPANY copies of all material agreements entered into between (i) HDS and its
affiliates and (ii) HDS and the Founding Companies or any stockholders of the
Founding Companies. Further, HDS will make available to the COMPANY copies of
any of the foregoing agreements entered into between the date hereof and the
Closing Date promptly after such agreements are entered into.
6.6 Subsidiaries. Except for those companies set forth on Schedule 6.6,
------------
HDS does not presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity. HDS is
not, directly or indirectly, a participant in any joint venture, partnership or
other non-corporate entity.
6.7 Business; Financial Information. HDS has not conducted any business
-------------------------------
since the date of its inception, except in connection with this Agreement, the
Other Agreements and the contemplated IPO of HDS Stock. HDS was formed in 1998,
and has historical financial statements only for the partial year ended December
31, 1998. Attached hereto as Schedule 6.7 are HDS's financial statements for
such partial year, 1998. Such HDS financial statements have been prepared in
accordance with generally accepted accounting principles and present fairly the
financial position of HDS as of the dates indicated thereon, and such financial
statements present fairly the results of HDS's operations for the periods
indicated thereon. HDS has no material liabilities, accrued or contingent, other
than those incurred in connection with this Agreement, the Other
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<PAGE>
Agreements and the agreements contemplated thereby, the agreements to be filed
as exhibits to the Registration Statement, and the contemplated IPO of HDS
Stock.
6.8 Conformity with Law. HDS (including HDS's Subsidiaries) is not in
-------------------
violation of any law or regulation or any order of any court or federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them which (either singly or
in the aggregate) would have an HDS Material Adverse Effect. There are no
claims, actions, suits or proceedings, pending or, to the knowledge of HDS
(including HDS's Subsidiaries), threatened, against or affecting HDS (including
HDS's Subsidiaries), at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over any of them and no notice of any claim,
action, suit or proceeding, whether pending or threatened, has been received by
HDS or any of HDS's Subsidiaries. HDS (including HDS's Subsidiaries) has
conducted and is conducting its business in compliance with the requirements,
standards, criteria and conditions set forth in applicable Federal, state and
local statutes, ordinances, orders, approvals, variances, rules and regulations
and is not in violation of any of the foregoing which would have an HDS Material
Adverse Effect.
6.9 No Violations. HDS (including HDS's Subsidiaries) is not (i) in
-------------
violation of any HDS Charter Document or (ii) in default under any material
lease, instrument, agreement, license, or permit to which it is a party or by
which its properties are bound (the "HDS Material Documents"); and, except as
set forth in the Registration Statement, (a) the rights and benefits of HDS
(including HDS's Subsidiaries) under the HDS Material Documents will not be
materially and adversely affected by the transactions contemplated hereby and
(b) the execution of this Agreement and the performance of the obligations
hereunder and the consummation of the transactions contemplated hereby will not
result in any violation or breach or constitute a default under any of the terms
or provisions of the HDS Material Documents, the HDS Charter Documents, any
judgment, decree, order or award of any court, governmental body or arbitrator,
or any law, rule or regulation applicable to HDS or any of HDS's Subsidiaries.
Except as set forth in Schedule 6.9, none of the HDS Material Documents requires
notice to, or the consent or approval of, any third party with respect to any of
the transactions contemplated hereby in order to remain in full force and
effect, nor does this Agreement or any of the transactions contemplated hereby
give rise to any right to termination, cancellation or acceleration or loss of
any right or benefit. The minute books of HDS and each of HDS's subsidiaries as
heretofore made available to the COMPANY are true and correct.
6.10 Taxes.
-----
(i) HDS has no plan or intention for either it or any affiliated
party to purchase or reacquire any of the HDS stock issued in connection with
the Merger.
(ii) HDS and, to the knowledge of HDS, the STOCKHOLDERS and the
COMPANY will each pay their respective expenses, if any, incurred in connection
with the Merger.
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<PAGE>
(iii) There is no intercorporate indebtedness existing between HDS
and the COMPANY that was issued, acquired, or will be settled at a discount.
(iv) HDS is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(v) HDS presently intends after the Closing Date to continue the
historic business of the COMPANY or to use a significant portion of the
COMPANY's historic business assets in operations.
(vi) HDS has no plan or intention to sell or otherwise dispose of
any of the assets of the COMPANY acquired in the transaction, except for
dispositions made in the ordinary course of business or transfers described in
Section 368(a)(2)(C) of the Internal Revenue Code.
(vii) To the knowledge of HDS, none of the compensation received by
any STOCKHOLDER-employees of the COMPANY after the Merger will be separate
consideration for, or allocable to, any of their shares of the COMPANY; none of
the shares of HDS Stock received by any STOCKHOLDER-employees in the Merger will
be separate consideration for, or allocable to, any employment agreement; and
the compensation paid to any STOCKHOLDER-employees after the Merger pursuant to
arrangements entered into after the Merger will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
(viii) The proposed Merger is being undertaken for reasons germane
to the business of HDS.
(ix) To the knowledge of HDS, the fair market value of HDS Stock
and other consideration received by each STOCKHOLDER will be approximately equal
to the fair market value of COMPANY Stock surrendered in the exchange.
7. COVENANTS PRIOR TO CLOSING.
7.1 Access and Cooperation; Due Diligence.
(i) Between the date of this Agreement and the Closing Date, the
COMPANY will afford to the officers and authorized representatives of HDS access
to all of the COMPANY's key employees, sites, properties, books and records and
will furnish HDS with such additional financial and operating data and other
information as to the business and properties of the COMPANY as HDS may from
time to time reasonably request. The COMPANY will cooperate with HDS, its
representatives, auditors and counsel in the preparation of any documents or
other material which may be required by this Agreement. The COMPANY shall
provide reasonable access to the COMPANY's key employees, books, records and
other financial data to all Other Companies and their representatives, auditors
and counsel; provided that, the COMPANY will not be required
-------- ----
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<PAGE>
to disclose competitively-sensitive information to such Other Companies. HDS,
the STOCKHOLDERS and the COMPANY will treat all information obtained in
connection with the negotiation and performance of this Agreement or the due
diligence investigations conducted with respect to the Other Companies as
confidential in accordance with the provisions of Section 14 hereof and will not
use such information for any purpose other than for the evaluation of the
transactions contemplated by this Agreement. In addition, HDS will cause each of
the Other Companies to enter into a provision similar to this Section 7.1
requiring each such Other Company to keep confidential any information obtained
by such Other Company and to not use such information for any purpose other than
for the evaluation of the transactions contemplated by the applicable Other
Agreement. All Other Companies shall be third-party beneficiaries with respect
to the covenant of the COMPANY and the STOCKHOLDERS restricting the use of
information received by the COMPANY and such STOCKHOLDERS, and the COMPANY shall
be a third-party beneficiary with respect to the covenant of the Other Companies
restricting the use of COMPANY information received by such Other Companies.
(ii) Between the date of this Agreement and the Closing Date, HDS
will afford to the officers and authorized representatives of the COMPANY access
to all of HDS's (including HDS's Subsidiaries') sites, properties, books and
records and will furnish the COMPANY with such additional financial and
operating data and other information as to the business and properties of HDS
(including HDS's Subsidiaries) as the COMPANY may from time to time reasonably
request. HDS will cooperate with the COMPANY, its representatives, engineers,
auditors and counsel in the preparation of any documents or other material which
may be required by this Agreement. The COMPANY will cause all information
obtained in connection with the negotiation and performance of this Agreement to
be treated as confidential in accordance with the provisions of Section 14
hereof.
7.2 Conduct of Business Pending Closing. Between the date of this
-----------------------------------
Agreement and the Closing Date, the COMPANY will, except as set forth in
Schedule 7.2:
(i) carry on its business in substantially the same manner as it
has heretofore, maintain inventory at levels substantially equivalent to those
maintained during the 12 months ended December 31, 1998, and not introduce any
material new method of management, operation or accounting;
(ii) maintain its properties, facilities, equipment and other
assets, including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(iii) perform all of its material obligations under agreements to
which it is a party relating to or affecting its assets, properties or rights;
(iv) subject to Section 7.6, keep in full force and effect present
insurance policies or other comparable insurance coverage;
-27-
<PAGE>
(v) use best efforts to maintain and preserve its business
organization intact, retain its present employees and maintain its relationships
with suppliers, customers and others having business relations with it;
(vi) maintain compliance with all permits, laws, rules and
regulations, consent orders, and all other orders of applicable courts,
regulatory agencies and similar governmental authorities applicable to the
COMPANY; and
(vii) maintain compliance with all present debt and lease
instruments and not enter into new or amended debt or lease instruments
involving payments by the COMPANY over $50,000 (individually or in the
aggregate), without the knowledge and consent of HDS (which consent shall not be
unreasonably withheld).
7.3 Prohibited Activities. Except as disclosed in Schedule 7.3, between
---------------------
the date of this Agreement and the Closing Date, the COMPANY has not and,
without the prior written consent of HDS, will not:
(i) make any change in its Articles of Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed on Schedule 5.4;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase, redeem
or otherwise acquire or retire for value any shares of its stock;
(iv) enter into any contract (including any contract to provide
services to customers) or commitment or incur or agree to incur any liability or
make any capital expenditures, except if (x) it is in the ordinary course of
business (consistent with past practice) or (y) when aggregated with all other
such contracts, commitments, liabilities and capital expenditures not in the
normal course of business consistent with past practice, it involves an amount
not in excess of $25,000;
(v) increase the compensation payable or to become payable to
any officer, director, STOCKHOLDER, employee or agent, or make any bonus or
management fee payment to any such person, except (x) bonuses to employees
(other than the STOCKHOLDERS or their affiliates) consistent with past practice
and (y) increases in salaries and commission rates payable to employees (other
than to STOCKHOLDERS and their affiliates), provided that neither the salary nor
any commission rate payable to any employee may increase to more than one
hundred five percent (105%) of such employee's current salary or such commission
rate, whichever is applicable;
(vi) create, assume or permit to exist any mortgage, pledge or
other lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired,
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<PAGE>
except (1) with respect to purchase money liens incurred in connection with the
acquisition of equipment with an aggregate cost not in excess of $10,000
necessary or desirable for the conduct of the business of the COMPANY, or (2)
liens set forth on Schedule 5.14 hereto or (3) liens for taxes either not yet
due or materialmen's, mechanics', workers', repairmen's, employees' or other
like liens arising in the ordinary course of business;
(vii) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the ordinary course of business;
(viii) negotiate for the acquisition of any business or the start-
up of any new business;
(ix) merge or consolidate or agree to merge or consolidate with
or into any other corporation;
(x) waive any material rights or claims of the COMPANY,
provided that the COMPANY may negotiate and adjust bills in the course of good
- --------
faith disputes with customers in a manner consistent with past practice,
provided, further, that such adjustments shall not be deemed to be included in
- -------- -------
Schedule 5.11 unless specifically listed thereon;
(xi) commit a material breach or amend or terminate any Material
Contract, or material permit, license or other right of the COMPANY, or make or
terminate any election involving Taxes which would in any way adversely affect
the Tax liability of the COMPANY (or HDS following the Merger) in any taxable
period; or
(xii) enter into any other transaction outside the ordinary
course of its business or prohibited hereunder.
7.4 No Shop. None of the STOCKHOLDERS, the COMPANY or any agent, officer,
-------
director or any representative of any of the foregoing will, during the period
commencing on the date of this Agreement and ending with the earlier to occur of
the Closing Date or the termination of this Agreement in accordance with its
terms, directly or indirectly: (i) solicit or initiate, either directly or
indirectly, the submission of proposals or offers from any person for, (ii)
participate in any discussions pertaining to or (iii) furnish any information to
any person other than HDS or the Founding Companies relating to, any acquisition
or purchase of all or a material amount of the assets of, or any equity interest
in, the COMPANY or a merger, consolidation or business combination of the
COMPANY.
7.5 Notice to Bargaining Agents. Prior to the Closing Date, the COMPANY
---------------------------
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements, and shall
provide HDS with proof that any required notice has been sent.
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<PAGE>
7.6 Termination of Plans. Prior to the Pricing Date, the COMPANY shall
--------------------
terminate all Plans listed on Schedule 7.6.
7.7 HDS Prohibited Activities. Between the date of this Agreement and the
-------------------------
Closing Date, except as set forth on Schedule 7.7, HDS will not:
(i) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind;
(ii) make any changes in its Certificate of Incorporation or Bylaws
other than one or more amendments to the Certificate of Incorporation to
accomplish a split or reverse split of the HDS Stock (provided that in the event
of any such split or reverse split, the number of shares of HDS Stock to be
delivered to the STOCKHOLDERS, and to the stockholders of the Other Companies,
and the Minimum IPO Price, as set forth on Annex I, will be adjusted
accordingly) or to increase the authorized Capital Stock of HDS to an amount not
to exceed 40 million shares of common stock and 5 million shares of preferred
stock;
(iii) hire or appoint any officer or director or increase the
compensation payable or to become payable to any officer or director; or
(iv) acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial equity interest in or substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to HDS and the HDS Subsidiaries.
7.8 Notification of Certain Matters. The STOCKHOLDERS and the COMPANY
-------------------------------
shall give prompt notice to HDS of (i) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would be likely to cause any
representation or warranty of the COMPANY or the STOCKHOLDERS contained herein
to be untrue or inaccurate in any material respect at or prior to the Closing
and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by such person hereunder. HDS shall give prompt notice to the COMPANY of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty of HDS contained
herein to be untrue or inaccurate in any material respect at or prior to the
Closing and (ii) any material failure of HDS to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. The delivery of any notice pursuant to this Section 7.8 shall not be
deemed to (i) modify the representations or warranties hereunder of the party
delivering such notice, which modification may only be made pursuant to Section
7.9, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
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<PAGE>
7.9 Amendment of Schedules. Each party hereto agrees that, with respect to
----------------------
the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until the Pre-Closing to
supplement or amend promptly the Schedules hereto with respect to any matter
hereafter arising or discovered which, if existing or known at the date of this
Agreement, would have been required to be set forth or described in the
Schedules, provided however, that supplements and amendments to Schedules 5.10,
-------- -------
5.11 and 5.14 shall only have to be delivered at the Pre-Closing Date, unless
such Schedule is to be amended to reflect an event occurring other than in the
ordinary course of business. In the event that the COMPANY amends or supplements
a Schedule pursuant to this Section 7.9 in any material respect, and HDS does
not consent (which consent shall not be unreasonably withheld) to the
effectiveness of such amendment or supplement at or before the Pre-Closing, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof. In the event that HDS amends or supplements a Schedule pursuant
to this Section 7.9 in any material respect and a majority of the Founding
Companies do not consent (which consent shall not be unreasonably withheld) to
the effectiveness of such amendment or supplement at or before the Pre-Closing,
this Agreement shall be deemed terminated by mutual consent as set forth in
Section 12.1(i) hereof. For all purposes of this Agreement, including without
limitation for purposes of determining whether the conditions set forth in
Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed
to be the Schedules as amended or supplemented pursuant to this Section 7.9. In
the event that one of the Other Companies amends or supplements a Schedule
pursuant to Section 7.9 of one of the Other Agreements in any material respect,
HDS shall give the COMPANY notice promptly after it has knowledge thereof. If
HDS and a majority of the Founding Companies excluding such Other Company do not
consent (which consent shall not be unreasonably withheld) to the effectiveness
of such amendment or supplement, at or before the Pre-Closing, this Agreement
shall be deemed terminated by mutual consent as set forth in Section 12.1(i)
hereof. For purposes of this Section 7.9, HDS shall be deemed to have given its
consent to the effectiveness of any amendment or supplement to a Schedule if HDS
does not notify the COMPANY of its disapproval within 48 hours after HDS is
notified of such amendment or supplement, and the COMPANY and each Other Company
shall be deemed to have given its consent to the effectiveness of any amendment
or supplement to a Schedule if the COMPANY or such Other Company, as applicable,
does not notify HDS of its disapproval within 48 hours after the COMPANY or such
Other Company, as applicable, is notified of such amendment or supplement.
Except as otherwise provided herein, no amendment of or supplement to a Schedule
shall be made after the Pre-Closing.
7.10 Cooperation in Preparation of Registration Statement. The COMPANY and
----------------------------------------------------
STOCKHOLDERS shall furnish or cause to be furnished to HDS and the Underwriters
all of the information concerning the COMPANY or the STOCKHOLDERS reasonably
requested by HDS and the Underwriters, and will cooperate with HDS and the
Underwriters in the preparation of the Registration Statement and the prospectus
included therein (including audited financial statements prepared in accordance
with generally accepted accounting principles). The COMPANY and the
STOCKHOLDERS agree
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<PAGE>
promptly to advise HDS if at any time during the period in which a prospectus
relating to the offering is required to be delivered under the 1933 Act, any
information contained in the prospectus concerning the COMPANY or the
STOCKHOLDERS becomes incorrect or incomplete in any material respect, and to
provide the information needed to correct such inaccuracy.
7.11 Examination of Final Financial Statements. To the extent that
-----------------------------------------
financial statements of the COMPANY for any quarter subsequent to the Balance
Sheet Date are required to be included in the Registration Statement, the
COMPANY shall provide, and HDS shall have had sufficient time to review, the
unaudited balance sheet and statements of income, cash flows and retained
earnings of the COMPANY as of the end of such quarter, disclosing no material
adverse change in the financial condition or results of operations of the
COMPANY. Such financial statements, which shall be deemed to be Financial
Statements (as described in Section 5.9), shall have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods indicated (except as noted therein). To the extent such
Financial Statements shall be included or reflected in the Registration
Statement, any events or circumstances reflected therein which might constitute
a Material Adverse Effect with respect to the COMPANY shall be deemed to have
been waived by HDS and HDS shall have no rights in respect of such Material
Adverse Effect.
7.12 Maintenance of Liquidity and Limitation of Debt. As of the Closing
-----------------------------------------------
Date, the COMPANY will have (i) adjusted working capital (defined for this
purpose as current assets, excluding inventory (but not excluding inventory
designated for use in special purchases or special (contract) jobs), less short-
term liabilities, excluding the short-term portion of long-term debt and amounts
outstanding under the line of credit from National Bank of the Redwoods secured
by inventory (the "Line of Credit")) of no less than negative $319,000, and (ii)
adjusted long-term liabilities (defined for this purpose as long-term
liabilities plus the short-term portion of long-term debt plus amounts
outstanding under the Line of Credit) not exceeding $279,000. As used in the
preceding sentence, the terms "cash," "receivables," "receivables reserves,"
"short-term liabilities," "short-term portion of long-term debt," "long-term
liabilities" and "short-term portion of long-term debt" all will have the same
meaning as in generally accepted accounting principles, as applied in the
preparation of the COMPANY Financial Statements.
7.13 Employment Matters. HDS shall offer to enter into three (3) year
------------------
employment agreements with each of David G. Castino and Douglas Castino, on
terms previously agreed between the COMPANY and HDS.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.
The obligations of STOCKHOLDERS and the COMPANY with respect to
actions to be taken on the Pricing Date are subject to the satisfaction or
waiver on or prior to the Pricing Date of all of the following conditions. The
obligations of the STOCKHOLDERS and the COMPANY with respect to actions to be
taken on the
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<PAGE>
Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of the conditions set forth in Sections 8.1, 8.7 and 8.11.
8.1 Representations and Warranties; Performance of Obligations. All
----------------------------------------------------------
representations and warranties of HDS contained in Section 6 shall be true and
correct in all material respects as of the Pricing Date and the Closing Date
with the same effect as though such representations and warranties had been made
as of that date; each and all of the terms, covenants and conditions of this
Agreement to be complied with and performed by HDS on or before the Pricing Date
and the Closing Date shall have been duly complied with and performed in all
material respects; and a certificate to the foregoing effect dated the Pricing
Date and the Closing Date signed by the President or any Vice President of HDS
and certified by the Secretary or Assistant Secretary of HDS shall have been
delivered to the STOCKHOLDERS.
8.2 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be satisfactory to the COMPANY and its counsel. The
STOCKHOLDERS and the COMPANY shall be satisfied that the Registration Statement
and the prospectus forming a part thereof, including any amendments thereof or
supplement thereto, shall not contain any untrue statement of a material fact,
or omit to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that the
--------
condition contained in this sentence shall be deemed satisfied if (i) HDS shall
have made available to the COMPANY copies of the draft (or changed pages of such
draft) of the Registration Statement prior to the initial filing with the
Securities and Exchange Commission (the "SEC"), each amendment thereto prior to
the effectiveness thereof with the SEC and of any amendment or supplement
thereto after the effectiveness thereof (including any prospectus filed pursuant
to Rule 424 under the 1933 Act) and (ii) the COMPANY or STOCKHOLDERS shall have
failed to inform HDS in writing prior to the filing or the effectiveness
thereof, as the case may be, of the existence of an untrue statement of a
material fact or the omission of such a statement of a material fact or other
matter with which they are not satisfied; provided however, that for the period
-------- -------
commencing 72 hours prior to any such filing or effectiveness, HDS can make such
draft or changed pages available by facsimile.
8.3 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock pursuant to
the Registration Statement and no governmental agency or body shall have taken
any other action or made any request of the COMPANY as a result of which the
management of the COMPANY deems it inadvisable to proceed with the transactions
hereunder.
8.4 Stockholders' Release. Each stockholder of HDS immediately prior to
---------------------
the Closing Date who is an officer or director of HDS shall have delivered to
the COMPANY an instrument dated the Closing Date releasing HDS from any and all
claims of such stockholder against HDS and obligations of HDS to such
stockholder other than obligations arising in connection with this Agreement,
the Other Agreements, any
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<PAGE>
employment agreements between such stockholder and HDS, any options to purchase
HDS Stock granted by HDS to such stockholder and any right to the issuance of
the shares of HDS Stock set forth in Annex III hereto.
8.5 Opinion of Counsel. The COMPANY shall have received an opinion from
------------------
counsel for HDS, dated the Closing Date, in the form annexed hereto as Annex V.
8.6 Director Indemnification. HDS shall have obtained directors and
------------------------
officers liability insurance from a reputable insurance company in type and
amount as is customary for companies similarly situated, and HDS shall have
entered into an indemnification agreement with each STOCKHOLDER, if any, who
will become a director of HDS, such indemnification agreement to be
substantially in the form attached as Annex VII.
8.7 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC and the underwriters named therein shall have
agreed to acquire on a firm commitment basis such shares of HDS Stock, subject
to the conditions set forth in an underwriting agreement (the "Underwriting
Agreement"), on terms such that the Effective IPO Price (as defined in Annex I)
is equal to or greater than the Minimum IPO Price (as defined in Annex I).
8.8 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made, no action or
proceeding shall have been instituted or threatened to restrain or prohibit the
Merger, and no governmental agency or body shall have taken any other action or
made any request of the COMPANY as a result of which the COMPANY deems it
inadvisable to proceed with the transactions hereunder.
8.9 Good Standing Certificates. HDS shall have delivered to the COMPANY a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
Date, duly issued by the Delaware Secretary of State and the Secretary of State
of each state in which HDS is authorized to do business, showing that HDS is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for HDS, for all periods prior to the Closing, have
been filed and paid.
8.10 No Waivers. HDS shall not have waived any closing condition under any
----------
Other Agreement, unless such condition does not constitute a Material Adverse
Effect (as defined in such Other Agreement) on the Other Company party to such
Other Agreement.
8.11 No Material Adverse Change. No event or circumstance shall have
--------------------------
occurred which would constitute an HDS Material Adverse Effect; and the COMPANY
shall have received a certificate signed by HDS dated the Pricing Date and the
Closing Date to such effect.
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<PAGE>
8.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an employment agreement with HDS substantially in the
form of Annex VIII (each an "Employment Agreement").
8.13 Consulting Agreements. Each of the persons listed on Schedule 8.13
---------------------
shall have entered into a consulting agreement with HDS substantially in the
form of Annex IX (each a "Consulting Agreement").
8.14 Leases. Each lease listed on Schedule 8.14 and attached as Annex X
------
(collectively, the "Leases") shall have been assumed by HDS.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF HDS.
The obligations of HDS with respect to actions to be taken on the
Pricing Date are subject to the satisfaction or waiver on or prior to the
Pricing Date of all of the following conditions. The obligations of HDS with
respect to actions to be taken on the Closing Date are subject to the
satisfaction or waiver on or prior to the Closing Date of the conditions set
forth in Sections 9.1, 9.3, 9.4 and 9.11.
9.1 Representations and Warranties; Performance of Obligations. All the
----------------------------------------------------------
representations and warranties of the STOCKHOLDERS and the COMPANY contained in
this Agreement shall be true and correct in all material respects as of the
Pricing Date and the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date; each and
all of the terms, covenants and conditions of this Agreement to be complied with
or performed by the STOCKHOLDERS and the COMPANY on or before the Pricing Date
or the Closing Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the STOCKHOLDERS shall have
delivered to HDS a certificate dated the Pricing Date and the Closing Date
signed by them and certified by the Secretary or Assistant Secretary of the
COMPANY to such effect.
9.2 No Litigation. No action or proceeding before a court or any other
-------------
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the offering and sale by HDS of HDS Stock pursuant to
the Registration Statement, and no governmental agency or body shall have taken
any other action or made any request of HDS as a result of which the management
of HDS deems it inadvisable to proceed with the transactions hereunder.
9.3 Financial Statements. Prior to the Closing Date, HDS shall have had
--------------------
sufficient time to review consolidated balance sheets of the COMPANY for the
fiscal quarters beginning after December 31, 1998, and the unaudited
consolidated statement of income, cash flows and retained earnings of the
COMPANY for the fiscal quarters beginning after December 31, 1998, and the same
shall not disclose any material adverse change in the financial condition of the
COMPANY or the results of its operations from the COMPANY financial statements
as of the Balance Sheet Date.
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<PAGE>
9.4 No Material Adverse Effect. No event or circumstance shall have
--------------------------
occurred which would constitute a Material Adverse Effect; and HDS shall have
received a certificate signed by the STOCKHOLDERS dated the Pricing Date to such
effect.
9.5 STOCKHOLDERS' Release. The STOCKHOLDERS shall have delivered to HDS
---------------------
immediately prior to the Pricing Date an instrument substantially in the form of
Annex XI (each a "Stockholder Release") dated the Pricing Date releasing the
COMPANY from any and all claims of the STOCKHOLDERS against the COMPANY and
obligations of the COMPANY to the STOCKHOLDERS, except for (i) items
specifically identified in the Stockholder Release, (ii) continuing obligations
to the STOCKHOLDERS relating to their employment by the Surviving Corporation
and (iii) indemnity and contribution obligations of the COMPANY or its
successors to an officer or director of the COMPANY prior to the Merger.
9.6 Satisfaction. All actions, proceedings, instruments and documents
------------
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to HDS.
9.7 Termination of Related Party Agreements. All existing agreements
---------------------------------------
between the COMPANY and the STOCKHOLDERS or business or personal affiliates of
the COMPANY or the STOCKHOLDERS, other than those set forth on Schedule 9.7,
shall have been cancelled.
9.8 Opinion of COMPANY Counsel. HDS shall have received an opinion from
--------------------------
counsel to the COMPANY and the STOCKHOLDERS, dated the Pricing Date,
substantially in the form annexed hereto as Annex VI, and the Underwriters shall
have received a copy of the same opinion addressed to them. Such counsel shall
have been approved by HDS, such approval not to be unreasonably withheld.
9.9 Consents and Approvals. All necessary consents of and filings with any
----------------------
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; the COMPANY
shall have obtained and delivered to HDS such additional consents to the Merger
as HDS may reasonably request, including, without limitation, HDS's receipt on
or prior to the Pricing Date of (a) consents of third parties to those Material
Contracts and Material Leases listed on Schedule 5.23 pursuant to the last
sentence of Section 5.23 and (b) those licenses, franchises, permits or
governmental authorizations set forth on Schedule 5.12 pursuant to the last
sentence of Section 5.12, or assurances reasonably acceptable to it that such
consents, licenses, franchises, permits or governmental authorizations will be
received on the Closing Date or that the failure to receive such consents,
licenses, franchises, permits or governmental authorizations on the Closing Date
will not adversely affect its ability to conduct the business of the COMPANY as
conducted prior to the Closing Date; no action or proceeding shall have been
instituted or threatened to restrain or prohibit the Merger; and no governmental
agency or body shall have taken any other action or made any request of HDS as a
result of which HDS deems it inadvisable to proceed with the transactions
hereunder.
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<PAGE>
9.10 Good Standing Certificates. The COMPANY shall have delivered to HDS a
--------------------------
certificate, dated as of a date no later than ten days prior to the Pricing
Date, duly issued by the appropriate governmental authority in the COMPANY's
state of incorporation and in each state in which the COMPANY is authorized to
do business, showing the COMPANY is validly existing, and where applicable, in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes due by the COMPANY for all periods prior to the
Pre-Closing have been filed and paid.
9.11 Registration Statement. The Registration Statement shall have been
----------------------
declared effective by the SEC.
9.12 Employment Agreements. Each of the persons listed on Schedule 8.12
---------------------
shall have entered into an Employment Agreement with HDS.
9.13 Consulting Agreements. Each of the STOCKHOLDERS listed on Schedule
---------------------
8.13 shall have entered into a Consulting Agreement with HDS.
9.14 Leases. Each lessor shall have consented to the assumption of the
------
Leases listed in Schedule 8.14.
9.15 Repayment of Indebtedness. Prior to the Closing Date, the
-------------------------
STOCKHOLDERS shall have repaid the COMPANY in full all amounts owing by the
STOCKHOLDERS to the COMPANY.
9.16 FIRPTA Certificate. The COMPANY and each STOCKHOLDER shall have
------------------
delivered to HDS a certificate to the effect that the COMPANY or such
STOCKHOLDER, as applicable, is not a "foreign person" pursuant to
Section 1.1445-2(b) of the Treasury regulations.
9.17 Insurance. HDS shall be designated as an additional named insured on
---------
all of the COMPANY's insurance policies.
9.18 Nondisturbance Agreements. Each of the lienholders and/or ground
-------------------------
lessors listed in Schedule 9.18 shall have entered into nondisturbance
agreements with HDS substantially in the form of Annex XII (collectively the
"Nondisturbance Agreements").
10. CLOSING COVENANTS AND SPECIAL TAX MATTERS.
10.1 Preservation of Tax and Accounting Treatment. After the Closing Date,
--------------------------------------------
none of the parties shall knowingly undertake any act, or knowingly permit any
subsidiary or affiliate to undertake any act, that would jeopardize the status
of the Merger as a reorganization described in Section 368(a)(1)(A) of the Code.
Such prohibited acts shall include, but not be limited to, the following:
(i) the retirement or reacquisition, directly or indirectly, by
HDS of all or part of the HDS Stock issued in connection with the transactions
contemplated hereby;
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<PAGE>
(ii) the provision of any financial and/or economic benefits by HDS
to the STOCKHOLDERS in their capacity as such, except as expressly provided in
this Agreement;
(iii) the disposition of any material part of the assets of the
COMPANY within two years following the Closing Date except (x) in the ordinary
course of business, (y) to eliminate duplicate services or excess capacity or
(z) to address financial matters or performance issues which were not reasonably
expected to occur as of the Closing Date; or
(iv) in the absence of compelling financial concerns not otherwise
present on the Closing Date or other changed circumstances not otherwise
anticipated on the Closing Date, the discontinuance of the historic business of
the COMPANY.
10.2 Disclosure. If, subsequent to the Pricing Date and prior to the
----------
25th day after the date of the final prospectus of HDS utilized in connection
with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or
circumstance which would change (or, if after the Closing Date, would have
changed) a representation or warranty of COMPANY or STOCKHOLDERS in this
Agreement or would affect any document delivered pursuant hereto in any material
respect, the COMPANY and the STOCKHOLDERS shall promptly give notice of such
fact or circumstance to HDS.
10.3 Cooperation in Tax Return Preparation. Each party hereto shall at its
-------------------------------------
own expense cooperate with each other and make available to each other such Tax
data and other information as may be reasonably required in connection with (i)
the preparation or filing of any Tax Return, election, consent or certification,
or any claim for refund, (ii) any determinations of liability for Taxes, or
(iii) an audit, examination or other proceeding with respect to Taxes ("Tax
Data"). Such cooperation shall include, without limitation, making their
respective employees and independent auditors reasonably available on a mutually
convenient basis for all reasonable purposes, including, without limitation, to
provide explanations and background information and to permit the copying of
books, records, schedules, workpapers, notices, revenue agent reports,
settlement or closing agreements and other documents containing the Tax Data
("Tax Documentation"). The Tax Data and the Tax Documentation shall be retained
until one year after the expiration of all applicable statutes of limitations
(including extensions thereof); provided, however, that in the event an audit,
-------- -------
examination, investigation or other proceeding has been instituted prior to the
expiration of an applicable statute of limitations, the Tax Data and Tax
Documentation relating thereto shall be retained until there is a final
determination thereof (and the time for any appeal has expired).
10.4 Tax Return Preparation and Filing.
---------------------------------
(i) HDS will be responsible for preparing and filing (or causing
the preparation and filing of) all income Tax Returns with respect to HDS or the
COMPANY for any taxable period beginning after the Closing Date. The parties
hereto acknowledge
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that the Closing Date shall be the last day of a taxable period of the COMPANY
pursuant to Code Section 381 and the regulations promulgated thereunder.
(ii) STOCKHOLDERS will be responsible for preparing and filing (or
causing the preparation and filing of) all income Tax Returns with respect to
the COMPANY for any taxable period ending on or before the Closing Date. HDS and
the STOCKHOLDERS shall (a) with respect to such income Tax Returns, determine
the income, gain, expenses, losses, deductions, and credits of the COMPANY in a
manner consistent with prior practice and in a manner that apportions such
income, gain, expenses, loss, deductions and credits equitably from period to
period and (b) prepare such Tax Returns in a manner consistent with prior years,
in each case as determined in the good faith judgment of the preparer of such
returns; provided, however, that in all events such Tax Returns shall be
prepared in a manner consistent with applicable laws. HDS shall provide the cash
necessary to pay any Taxes shown to be due on such Tax Returns, but without
prejudice to the right of HDS to seek indemnification for such Taxes from the
STOCKHOLDERS pursuant to Section 11.6, if applicable.
(iii) In order to appropriately apportion any Taxes relating to a
taxable period that includes (but that would not, but for this section, close
on) the Closing Date, the parties hereto will, to the extent permitted by
applicable law, elect with the relevant taxing authority to treat for all
purposes the Closing Date as the last day of a taxable period of the COMPANY,
and such taxable period shall be treated as a Pre-Closing Period (as defined in
Section 10.6(c)) for purposes of this Agreement. In any case where applicable
law does not permit the COMPANY to treat the Closing Date as the last day of a
taxable period, then for purposes of this Agreement, the portion of each such
Tax that is attributable to the operations of the COMPANY for such Interim
Period shall be (i) in the case of a Tax that is not based on income or gross
receipts, the total amount of such Tax for the period in question multiplied by
a fraction, the numerator of which is the number of days in the Pre-Closing
Period portion of such Interim Period, and the denominator of which is the total
number of days in such Interim Period, and (ii) in the case of a Tax that is
based on income or gross receipts, the Tax that would be due with respect to the
Interim Period, if such Interim Period constituted an entire taxable period.
10.5 Reorganization Status Information Reporting. Each of the parties
-------------------------------------------
agrees to file whatever information returns may be required to treat the merger
of HDS and the COMPANY pursuant to this Agreement as a reorganization described
in Section 368(a)(1)(A) of the Code, and, in particular, to comply with the tax
reporting requirements of Section 1.368-3 of the Treasury Regulations.
10.6 Special Definitions Related to Tax Matters. For all purposes of this
------------------------------------------
Agreement related to any Tax matters (including Sections 5.22 and 6.10):
(i) "Affiliate" of a person or entity shall mean a person or
entity that directly or indirectly controls, is controlled by or is under common
control with that person or entity.
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(ii) "Interim Period" shall mean any taxable period commencing
prior to the Closing Date and ending after the Closing Date.
(iii) "Pre-Closing Period" shall mean (i) any taxable period that
begins before the Closing Date and ends on or before the Closing Date and (ii)
the portion of any Interim Period through and including the Closing Date.
(iv) "Post-Closing Period" means any taxable period that begins
after the Closing Date, and, with respect to any Interim Period, the portion of
such Interim Period commencing immediately after the Closing Date.
(v) "Tax" means any federal, state, local, or foreign income, gross
receipts, ad valorem, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including taxes under
Section 59A), customs duties, capital stock, net worth, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
workers compensation, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever imposed by any federal, state, local or foreign government
or any agency or political subdivision of any such government, including any
interest, penalty, or addition thereto, without regard to whether such tax is
disputed or not or arose before, on or after the Closing Date.
(vi) "Tax Returns" means all reports, elections, declarations,
claims for refund, estimates, information statements and returns (including any
schedules and attachments thereto) relating to, or required to be filed in
connection with, any Taxes pursuant to the statutes, rules and regulations of
any federal, state, local or foreign government taxing authority.
(vii) "Taxing Authority" means any governmental agency, board,
bureau, body, department or authority of any United States federal, state or
local jurisdiction, having or purporting to have jurisdiction with respect to
any Tax.
10.7 Directors. The persons named in the Registration Statement shall be
---------
appointed as directors of HDS on or before the Closing Date.
10.8 Release from Guarantees. HDS shall use its best efforts to have the
-----------------------
STOCKHOLDERS released from any and all guarantees of any obligations of the
COMPANY that they personally guaranteed for the benefit of the COMPANY with all
such guarantees of indebtedness being assumed by HDS. HDS agrees to indemnify
the STOCKHOLDERS against any and all claims made by lenders under any such
guarantee which arise as a result of HDS's failure to cause such guarantee to be
released on or prior to the Closing.
10.9 HDS Stock Options. HDS shall prior to the Closing Date adopt an
-----------------
employee stock option plan providing for the grant of options to employees of
HDS as described in the Registration Statement. HDS shall grant stock options to
former employees of the
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COMPANY under such plan (i) having an exercise price equal to the Effective IPO
Price and (ii) having an aggregate exercise price equal to $100,000. In granting
options under such plan to former employees of the COMPANY, the Board of
Directors of HDS or the committee administering such plan, as the case may be,
shall receive recommendations from David Castino as to the employees to receive
such options and the relative size of the awards to the respective employees,
and to the extent deemed reasonable by the Board of Directors or committee, such
recommendations shall be accepted.
10.10 Use of Name. Following the Closing Date, STOCKHOLDERS shall be
-----------
permitted to use the name "Castino" in connection with any business that is
unrelated to the commercial kitchen design, construction and/or supply business,
or any similar business, if the use of such name will not result in a likelihood
of confusion to actual or potential vendors or customers of the Company.
11. INDEMNIFICATION.
The STOCKHOLDERS and HDS each make the following covenants that are
applicable to them, respectively:
11.1 General Indemnification by the STOCKHOLDERS. The STOCKHOLDERS
-------------------------------------------
covenant and agree that they, jointly and severally (except with respect to
Sections 5.28 through 5.30, which shall be several), will indemnify, defend,
protect and hold harmless HDS and the COMPANY, at all times from and after the
date of this Agreement until the Expiration Date as defined in Section 5 above,
from and against all claims, damages, actions, suits, proceedings, demands,
assessments, adjustments, costs and expenses (including specifically, but
without limitation, reasonable attorneys' fees and expenses of investigation)
incurred by HDS and the COMPANY as a result of or arising from (i) any breach of
the representations and warranties of the STOCKHOLDERS or the COMPANY set forth
herein or on the schedules or certificates delivered in connection herewith
(other than the representations and warranties provided in Section 5.22, for
which Section 11.6 provides special indemnity provisions); (ii) any
nonfulfillment of any agreement on the part of the STOCKHOLDERS or the COMPANY
under this Agreement; (iii) any liability not disclosed to HDS whether known,
unknown, contingent or otherwise at the time of Closing, arising out of any
acts, events, omissions or transactions occurring prior to the date of Closing;
and (iv) any liability under the 1933 Act, the 1934 Act or other Federal or
state law or regulation, at common law or otherwise, (x) arising out of or based
upon any untrue statement of a material fact relating to the COMPANY or the
STOCKHOLDERS that is provided to HDS or its counsel by the COMPANY or the
STOCKHOLDERS and contained in any preliminary prospectus relating to the IPO,
the Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or (y) arising out of or based upon any
omission to state therein a material fact relating to the COMPANY or the
STOCKHOLDERS that is required to be stated therein or necessary to make the
statements therein not misleading, and not provided to HDS or its counsel by the
COMPANY or the STOCKHOLDERS; provided, however, that such indemnity shall not
-------- -------
inure to the benefit of HDS, the
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<PAGE>
COMPANY or the Surviving Corporation to the extent that such untrue statement
(or alleged untrue statement) was made in, or omission (or alleged omission)
occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in
writing, corrected information to HDS counsel and to HDS for inclusion in the
final prospectus, and such information was not so included.
11.2 Indemnification by HDS. HDS covenants and agrees that it will
----------------------
indemnify, defend, protect and hold harmless the COMPANY and the STOCKHOLDERS,
at all times from and after the date of this Agreement until the Expiration
Date, from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) incurred by the COMPANY and the STOCKHOLDERS as a result of or
arising from (i) any breach by HDS of its representations and warranties set
forth herein or on the schedules or certificates attached hereto; (ii) any
nonfulfillment of any agreement on the part of HDS under this Agreement; (iii)
any liabilities which the COMPANY or the STOCKHOLDERS may incur due to HDS's
failure to be responsible for the liabilities and obligations of the COMPANY as
provided in Section 1 hereof (except to the extent that HDS has claims against
the STOCKHOLDERS by reason of such liabilities); or (iv) any liability under the
1933 Act, the 1934 Act or other Federal or state law or regulation, at common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact relating to HDS or any of the Founding
Companies other than the COMPANY (with respect to information furnished to HDS
by the COMPANY) contained in any preliminary prospectus, the Registration
Statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact relating to HDS or any of the Founding
Companies other than the COMPANY that is required to be stated therein or
necessary to make the statements therein not misleading.
11.3 Third Person Claims. (i) Promptly after any party hereto (herein the
-------------------
"Indemnified Party") has received notice of or has knowledge of any claim by a
person not a party to this Agreement ("Third Person"), or the commencement of
any action or proceeding by a Third Person (such claim or commencement of such
action or proceeding being a "Third Party Claim") that could give rise to a
right of indemnification under this Agreement, the Indemnified Party shall, as a
condition precedent to a claim with respect thereto being made against any party
obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof
(herein the "Indemnifying Party"), give the Indemnifying Party written notice of
such Third Party Claim describing in reasonable detail the nature of such Third
Party Claim, a copy of all papers served with respect to that Third Party Claim
(if any), an estimate of the amount of damages attributable to the Third Party
Claim to the extent feasible (which estimate shall not be conclusive of the
final amount of such claim) and the basis for the Indemnified Party's request
for indemnification under this Agreement; provided, however, that the failure of
-------- -------
the Indemnified Party to give timely notice hereunder shall relieve the
Indemnifying Party of its indemnification obligations under this Agreement to
the extent, but only to the extent
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that, such failure materially prejudices the Indemnifying Party's ability to
defend such claim. Within fifteen (15) days after receipt of such notice (the
"Election Period"), the Indemnifying Party shall notify the Indemnified Party
(a) whether the Indemnifying Party disputes its potential liability to the
Indemnified Party under this Section 11 with respect to that Third Party Claim
and (b) if the Indemnifying Party does not dispute its potential liability to
the Indemnified Party with respect to that Third Party Claim, whether the
Indemnifying Party desires, at the sole cost and expense of the Indemnifying
Party, to defend the Indemnified Party against that Third Party Claim.
(ii) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim through counsel of its own choosing which is acceptable to the
Indemnified Party, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, that Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 11.3(ii) and the Indemnified
Party will furnish the Indemnifying Party with all information in its possession
with respect to that Third Party Claim and otherwise cooperate with the
Indemnifying Party in the defense of that Third Party Claim; provided, however,
-------- -------
that the Indemnifying Party shall not enter into any settlement with respect to
any Third Party Claim that purports to limit the activities of, or otherwise
restrict in any way, any Indemnified Party or any affiliate of any Indemnified
Party without the prior consent of that Indemnified Party (which consent may be
withheld in the sole discretion of that Indemnified Party). The Indemnified
Party is hereby authorized, at the sole cost and expense of the Indemnifying
Party, to file, during the Election Period, any motion, answer or other
pleadings that the Indemnified Party shall deem necessary or appropriate to
protect its interests or those of the Indemnifying Party. The Indemnified Party
may participate in, but not control, any defense or settlement of any Third
Party Claim controlled by the Indemnifying Party pursuant to this Section
11.3(ii) and will bear its own costs and expenses with respect to that
participation; provided, however, that if the named parties to any such action
-------- -------
(including any impleaded parties) include both the Indemnifying Party and the
Indemnified Party, and the Indemnified Party has been advised by counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the Indemnifying Party, then the Indemnified
Party may employ separate counsel at the expense of the Indemnifying Party, and,
on its written notification of that employment, the Indemnifying Party shall not
have the right to assume or continue the defense of such action on behalf of the
Indemnified Party.
(iii) If the Indemnifying Party (a) within the Election Period (1)
disputes its potential liability to the Indemnified Party under this Section 11,
(2) elects not to defend the Indemnified Party pursuant to Section 11.3(ii) or
(3) fails to notify the Indemnified Party that the Indemnifying Party elects to
defend the Indemnified Party pursuant to Section 11.3(ii) or (b) elects to
defend the Indemnified Party pursuant to Section 11.3(ii) but fails diligently
and promptly to prosecute or settle the Third Party
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<PAGE>
Claim, then the Indemnified Party shall have the right to defend, at the sole
cost and expense of the Indemnifying Party (if the Indemnified Party is entitled
to indemnification hereunder), the Third Party Claim by all appropriate
proceedings, which proceedings shall be promptly and vigorously prosecuted by
the Indemnified Party to a final conclusion or settled. The Indemnified Party
shall have full control of such defense and proceedings. Notwithstanding the
foregoing, if the Indemnifying Party has delivered a written notice to the
Indemnified Party to the effect that the Indemnifying Party disputes its
potential liability to the Indemnified Party under this Section 11 and if such
dispute is resolved in favor of the Indemnifying Party, the Indemnifying Party
shall not be required to bear the costs and expenses of the Indemnified Party's
defense pursuant to this Section 11.3 or of the Indemnifying Party's
participation therein at the Indemnified Party's request. The Indemnifying Party
may participate in, but not control, any defense or settlement controlled by the
Indemnified Party pursuant to this Section 11.3(iii), and the Indemnifying Party
shall bear its own costs and expenses with respect to such participation.
(iv) The parties hereto will make appropriate adjustments for any
Tax benefits, Tax detriments or insurance proceeds in determining the amount of
any indemnification obligation under this Section 11, provided that no
--------
Indemnifying Party shall be obligated to seek any payment pursuant to the terms
of any insurance policy. All indemnification payments under this Section 11
shall be deemed adjustments to the Merger consideration provided for herein.
11.4 Exclusive Remedy. The indemnification provided for in this Section
----------------
11 shall be the exclusive remedy in any action seeking damages or any other form
of monetary relief brought by any party to this Agreement against another party,
provided that nothing herein shall be construed to limit the right of a party,
- --------
in a proper case, to seek injunctive relief for a breach of this Agreement.
11.5 Limitations on Indemnification.
------------------------------
(i) The first amounts otherwise payable by one or more STOCKHOLDERS
(whether jointly and severally or severally) pursuant to Sections 11.1 and 11.3
to HDS and the COMPANY will be offset and reduced (but not below zero) by the
Indemnification Threshold. The "Indemnification Threshold" is an amount equal to
one and one-half percent (1.5%) of the sum of (a) the aggregate amount of Cash
Consideration (as defined in Annex I) for all STOCKHOLDERS and (b) the aggregate
value of all HDS Stock received by all STOCKHOLDERS on the Closing Date pursuant
to Section 2.1 of this Agreement. All such amounts otherwise payable by one or
more STOCKHOLDERS in excess of the amount so offset and reduced shall be paid
without offset or reduction pursuant to this Section 11.5(i). Notwithstanding
the foregoing, this Section 11.5(i) shall not apply to claims for
indemnification for breach of Section 7.12 or pursuant to Section 11.6. For
purposes of determining the Indemnification Threshold pursuant to this Section
11.5(i), the HDS Stock shall be valued at the Effective IPO Price, as defined in
Annex I. Claims paid directly by the STOCKHOLDERS (or third parties
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on behalf of the STOCKHOLDERS) shall be excluded for purposes of calculating the
Indemnification Threshold.
(ii) The first amounts otherwise payable by HDS pursuant to
Sections 11.2 and 11.3 to STOCKHOLDERS and the COMPANY will be offset and
reduced (but not below zero) by an amount equal to the Indemnification
Threshold. All such amounts otherwise payable by HDS in excess of the amount so
offset and reduced shall be paid without offset or reduction pursuant to this
Section 11.5(ii).
(iii) Notwithstanding any other term of this Agreement, in no event
shall any STOCKHOLDER be liable under this Agreement, including this Section 11,
for an amount which exceeds the sum of (a) the amount of Cash Consideration for
such STOCKHOLDER, (b) the net proceeds to such STOCKHOLDER from the sale of such
STOCKHOLDER's HDS Stock received pursuant to Section 2.1 hereof prior to the
date that the indemnity obligation of such STOCKHOLDER is paid and (c) the value
of the shares of HDS Stock received by such STOCKHOLDER on the Closing Date
pursuant to Section 2.1 that have not been sold by such STOCKHOLDER prior to the
date that the indemnity obligation of such STOCKHOLDER is paid, valued at the
closing price per share on the trading day prior to the date the indemnification
obligation is paid.
11.6 Special Tax Indemnity Provisions.
--------------------------------
(i) From and after the Closing Date, the STOCKHOLDERS, jointly and
severally, shall indemnify and save HDS and the COMPANY harmless from any and
all Taxes (including without limitation any obligation to contribute to the
payment of a Tax determined on a consolidated, combined or unitary basis with
respect to a group of corporations that includes or included the COMPANY) which
are (a) imposed on any member (other than the COMPANY) of the consolidated,
unitary or combined group which includes or included the COMPANY or (b) imposed
on the COMPANY in respect of its income, business, property or operations or for
which the COMPANY may otherwise be liable (1) for any Pre-Closing Period, (2)
resulting by reason of the several liability of the COMPANY pursuant to Treasury
Regulations section 1.1502-6 or any analogous state, local or foreign law or
regulation or by reason of the COMPANY having been a member of any consolidated,
combined or unitary group on or prior to the Closing Date, (3) resulting from
the COMPANY ceasing to be a member of any affiliated group (within the meaning
of Section 1504(a) of the Code), (4) in respect of any Post-Closing Period,
attributable to events, transactions, sales, deposits, services or rentals
occurring, received or performed in a Pre-Closing Period, (5) in respect of any
Post-Closing Period, attributable to any change in accounting method employed by
the COMPANY during any of the four previous taxable years, (6) in respect of any
Post-Closing Period, attributable to any items of income or gain of an entity
treated as a partnership reported by the COMPANY as a partner, to the extent
such items are properly attributable to periods of the "partnership" ending on
or before the Closing Date, or (7) attributable to any discharge of indebtedness
that may result from any capital contributions by STOCKHOLDERS (or an affiliate
of STOCKHOLDERS) to the COMPANY of any intercompany indebtedness owed by the
COMPANY to any STOCKHOLDER (or an
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affiliate of any STOCKHOLDER). Notwithstanding the foregoing, the STOCKHOLDERS
shall not be obligated to make indemnity payments pursuant to this Section
11.6(i) for federal and state corporate income taxes imposed on the Company for
the tax period ending on the Closing Date to the extent that, but only to the
extent, such income taxes are included within the definition of "short-term
liabilities" for purposes of calculating adjusted working capital as set forth
in Section 7.12.
(ii) From and after the Closing Date, STOCKHOLDERS shall, jointly
and severally, indemnify and save HDS and the COMPANY harmless from any
liability imposed on HDS or the COMPANY (or any affiliate of such companies)
attributable to any breach of a warranty or representation made by STOCKHOLDERS
in Section 5.22.
(iii) From and after the Closing Date, and except as expressly
provided otherwise in this Section 11.6, HDS and the COMPANY shall indemnify and
hold harmless STOCKHOLDERS (x) with respect to any Taxes imposed on HDS or the
COMPANY with respect to any Post-Closing Period and (y) from any liability
imposed on STOCKHOLDERS attributable to any breach of a warranty or
representation made by HDS in Section 6.10.
(iv) To the extent any party to this Agreement is entitled to
indemnification from another party under this Section 11.6, such claim for
indemnification shall include the right to recover any losses, damages,
liabilities, expenses and costs related thereto, including, without limitation,
reasonable attorney's and expert witness fees and other costs of investigating
or attempting to avoid the same or oppose the imposition thereof, together with
interest thereon at the reference rate in effect from time to time at Bank of
America, NT&SA, or its successor, compounded quarterly from the date incurred.
(v) Except to the extent expressly provided to the contrary in
this Section 11.6, the general procedures regarding notice and pursuit of
indemnification claims set forth in Sections 11.1 through 11.5 shall apply to
all claims for indemnification made under this Section 11.6. Notwithstanding the
immediately preceding sentence and any provision of Section 11 to the contrary,
if a claim for indemnification involves any matter covered in this Section 11.6,
then the contest provisions of Section 11.7, as applicable, shall control
regarding the defense and handling of any such third-party claim that could give
rise to an indemnification obligation on the part of one party to another. In
addition, and notwithstanding anything else in Section 11 to the contrary, the
party with the right to control a contest has the right to choose counsel of its
choice regarding such contest. Furthermore, there shall be no limit on (a) the
time period during which a claim for indemnification may be made under this
Section 11.6 or (b) the minimum or maximum amount of indemnity payments that may
be recovered pursuant to this Section 11.6 (other than (1) each party's
obligation to make claims for indemnification promptly and without undue delay
and (2) the aggregate limit for all indemnity payments imposed on a STOCKHOLDER
provided in Section 11.5(iii).
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(vi) All amounts paid pursuant to this Section 11.6 by one party
to another party (other than interest payments) shall be treated by such parties
as an adjustment to the value of the merger consideration provided pursuant to
this Agreement.
11.7 Special Contest Rights Related to Tax Matters.
---------------------------------------------
(i) The STOCKHOLDERS shall have the sole right (but not the
obligation) to control, defend, settle, compromise or prosecute in any manner
any audit, examination, investigation, hearing or other proceeding with respect
to any Tax Return of the COMPANY involving only Pre-Closing Periods.
(ii) Except as expressly provided to the contrary in this Section
11.7, HDS shall have the sole right (but not the obligation) to control, defend,
settle, compromise, or prosecute in any manner an audit, examination,
investigation, hearing or other proceeding with respect to any Tax Return of the
COMPANY; provided, however, that any liability for Taxes or Tax issues related
-------- -------
to an Interim Period may not be settled or compromised without the consent of
the STOCKHOLDERS, which consent shall not be unreasonably withheld or delayed.
In addition, (i) HDS shall keep the STOCKHOLDERS duly informed of any
proceedings in connection with an Interim Period and (ii) the STOCKHOLDERS shall
be entitled to receive copies of all correspondence and documents relating to
such proceedings and may, at their option, observe such proceedings (including
any associated meetings or conferences).
11.8 Special Notification Requirements Regarding Tax Disputes.
--------------------------------------------------------
HDS a COMPANY shall promptly forward to the STOCKHOLDERS all written
notifications and other written communications from any Tax Authority received
by HDS or the COMPANY relating to any Pre-Closing Period of the COMPANY, and HDS
and the COMPANY shall execute or cause to be executed any power of attorney or
other document or take such actions as requested by the STOCKHOLDERS to enable
the STOCKHOLDERS to take any action STOCKHOLDERS deem appropriate with respect
to any proceedings relating thereto.
1.9 Refunds. A party receiving a refund, credit or similar
-------
offset (or the benefit thereof) with respect to a Tax effectively paid by
another party shall immediately pay an amount equal to such refund, credit,
offset or benefit (including any interest thereon) to the party that effectively
paid the Tax with respect to which the refund, credit, offset or benefit
relates. A party entitled to a deduction on account of a Tax effectively paid by
another party shall pay an amount equal to any Taxes saved by reason of such
deduction to the party that effectively bore the economic cost of the Tax with
respect to which such deduction relates, such amount to be paid immediately
after such saving is realized.
11.10 Optional Payment With Shares. Subject to Section 10.1, any
----------------------------
STOCKHOLDER may make any payment to HDS required by this Section 11 by tendering
shares of HDS Stock obtained by such STOCKHOLDER pursuant to Sections 2 and 3 of
this Agreement, with shares so tendered being valued at the closing price per
share on the trading day prior to the date the indemnification obligation is
paid.
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No STOCKHOLDER will be entitled to make payment with any other shares of
HDS Stock.
12. TERMINATION OF AGREEMENT.
12.1 Termination. This Agreement may be terminated at any time prior to the
-----------
Closing Date solely:
(i) by mutual consent of the boards of directors of HDS and the
COMPANY;
(ii) at or before the Pre-Closing, by STOCKHOLDERS holding a
majority of each class of COMPANY Stock, by the COMPANY, or by HDS, if the Pre-
Closing has not been completed by June 30, 1999, time being of the essence,
unless the failure to complete the Pre-Closing is due to the willful failure of
the party seeking to terminate this Agreement to perform any of its obligations
under this Agreement to the extent required to be performed by it prior to or on
the Pricing Date;
(iii) at or before the Pre-Closing, by STOCKHOLDERS holding a
majority of each class of COMPANY Stock or by the COMPANY if a material breach
or default shall be made by HDS, or by HDS if a material breach or default shall
be made by one or more STOCKHOLDERS or the COMPANY, in the observance or in the
due and timely performance of any of the covenants, agreements or conditions
contained herein, and such default shall not have been cured and shall not
reasonably be expected to be cured on or before the Pricing Date;
(iv) at or before the Pre-Closing pursuant to Section 7.9 hereof;
(v) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Underwriting Agreement is terminated;
(vi) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock if the Minimum
IPO Price (as defined in Annex I) is not attained at the time of the IPO; or
(vii) after the Pre-Closing and before the Closing Date, by
STOCKHOLDERS holding a majority of each class of COMPANY Stock, by the COMPANY,
or by HDS, if the Closing Date does not occur within ten (10) days after the
Pricing Date, time being of the essence.
12.2 Liabilities in Event of Termination. In the event of termination of
-----------------------------------
this Agreement as provided in this Section there shall be no liability or
obligation on the part of any party hereto except to the extent that such
liability is based on the breach by a party of any of its representations,
warranties or covenants set forth in this Agreement, provided however, that
there shall be no liability for a breach of representation or
48
<PAGE>
warranty if such representation or warranty was made in good faith and with
no reason to know such representation or warranty was not true at the time made.
13. NONCOMPETITION.
13.1 Prohibited Activities. Except as set forth on Schedule 13.1, the
---------------------
STOCKHOLDERS will not, for a period of four (4) years following the Closing Date
(except that (v) below shall apply to the period ending at the Closing Date if
this Agreement is not terminated prior to the Closing Date, and June 30, 1999 if
this Agreement is terminated prior to the Closing Date), for any reason
whatsoever, directly or indirectly, for themselves or on behalf of or in
conjunction with any other person, persons, company, partnership, corporation or
business of whatever nature:
(i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in a managerial capacity, whether as an employee,
independent contractor, consultant or advisor, or as a sales representative, in
any business selling any products or services in direct competition with HDS or
any of the subsidiaries thereof, within one hundred (100) miles of where the
COMPANY conducted business prior to the effectiveness of the Merger (the
"Territory");
(ii) contact or solicit any person who is, at that time, an
employee of HDS (including the subsidiaries thereof) in a managerial capacity
for the purpose or with the intent of enticing such employee away from or out of
the employ of HDS (including the subsidiaries thereof), provided that any
--------
STOCKHOLDER shall be permitted to solicit and hire any member of his or her
immediate family;
(iii) contact any person or entity which is, at that time, or
which has been, within one (1) year prior to that time, a customer of HDS
(including the subsidiaries thereof), or any affiliate of such a person or
entity, for the purpose of soliciting or selling products or services in direct
competition with HDS;
(iv) contact any prospective acquisition candidate, on any
STOCKHOLDER's own behalf or on behalf of any competitor within the Territory in
the commercial kitchen design and/or supply business, which candidate was either
called upon by HDS (including the subsidiaries thereof) or for which HDS (or any
subsidiary thereof) made an acquisition analysis, for the purpose of acquiring
such entity, provided that no STOCKHOLDER shall be charged with a violation of
--------
this Section unless and until such STOCKHOLDER shall have knowledge or notice
that such prospective acquisition candidate was called upon, or that an
acquisition analysis was made, for the purpose of acquiring such entity;
(v) engage, directly or indirectly, through any intermediary or
otherwise, in any conversations or negotiations with any Other Company regarding
a possible business combination between or among them; provided that such
-------------
prohibition shall not preclude the COMPANY from conducting business in the
ordinary course with
49
<PAGE>
any Other Company or from having business combination discussions with any other
party subject to the provisions in this Agreement; or
(vi) except in furtherance of HDS's business, disclose customers,
whether in existence or proposed, of the COMPANY to any person, firm,
partnership, corporation or business for any reason or purpose whatsoever
excluding disclosure to HDS or any of HDS's Subsidiaries.
Notwithstanding the above, the foregoing covenant shall not be
deemed to prohibit any STOCKHOLDER from acquiring as an investment not more than
one percent (1%) of the capital stock of any business whose stock is traded on a
national securities exchange or over-the-counter.
13.2 Damages. Because of the difficulty of measuring economic losses
-------
to HDS as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to HDS for which it would
have no other adequate remedy, each STOCKHOLDER agrees that the foregoing
covenant may be enforced by HDS, in the event of breach by such STOCKHOLDER, by
injunctions and restraining orders.
13.3 Reasonable Restraint. It is agreed by the parties hereto that the
--------------------
foregoing covenants in this Section 13 impose a reasonable restraint on the
STOCKHOLDERS in light of the activities and business of HDS (including the
subsidiaries thereof) on the date of the execution of this Agreement and the
current plans of HDS; but it is also the intent of HDS and the STOCKHOLDERS that
such covenants be construed and enforced in accordance with the changing
activities and business of HDS (including the subsidiaries thereof) throughout
the term of this covenant.
It is further agreed by the parties hereto that, in the event that
any STOCKHOLDER who has entered into an Employment Agreement shall thereafter
cease to be employed thereunder, and such STOCKHOLDER shall enter into a
business or pursue other activities not in competition with HDS and/or any
subsidiary thereof, or similar activities or business in locations the operation
of which, under such circumstances, does not violate clause (i) of Section 13.1,
and in any event such new business, activities or location are not in violation
of this Section 13 or of such STOCKHOLDER's obligations under this Section 13,
if any, such STOCKHOLDER shall not be chargeable with a violation of this
Section 13 if HDS and/or any subsidiary thereof shall thereafter enter the same,
similar or a competitive (i) business, (ii) course of activities or (iii)
location, as applicable.
13.4 Severability; Reformation. The covenants in this Section 13 are
-------------------------
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the
50
<PAGE>
fullest extent which the court deems reasonable, and the Agreement shall thereby
be reformed.
13.5 Independent Covenant. All of the covenants in this Section 13
--------------------
shall be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any STOCKHOLDER
against HDS (including the subsidiaries thereof), whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by HDS
of such covenants. It is specifically agreed that the period of four (4) years
stated at the beginning of this Section 13, during which the agreements and
covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall
be computed by excluding from such computation any time during which such
STOCKHOLDER is in violation of any provision of this Section 13. The covenants
contained in this Section 13 shall not be affected by any breach of any other
provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 Materiality. The COMPANY and the STOCKHOLDERS hereby agree that
----------
the covenants in this Section 13 are a material and substantial part of this
transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.
14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that
------------
they had in the past, currently have, and in the future may possibly have,
access to certain confidential information of the COMPANY, the Other Companies
and/or HDS, such as lists of customers, operational policies, and pricing and
cost policies that are valuable, special and unique assets of the COMPANY's, the
Other Companies' and/or HDS's respective businesses. The STOCKHOLDERS agree that
they will not disclose such confidential information to any person, firm,
corporation, association or other entity for any purpose or reason whatsoever,
except (a) to authorized representatives of HDS, (b) following the Closing, as
required in the course of performing their duties for HDS, and (c) to counsel
and other advisers, provided that such advisers (other than counsel) agree to
--------
the confidentiality provisions of this Section 14.1; provided, further, that
-------- -------
confidential information shall not include (i) such information which becomes
known to the public generally through no fault of the STOCKHOLDERS, (ii)
information required to be disclosed by law or the order of any governmental
authority under color of law, provided that prior to disclosing any information
--------
pursuant to this clause (ii), the STOCKHOLDERS shall, if possible, give prior
written notice thereof to HDS and provide HDS with the opportunity to contest
such disclosure, or (iii) the disclosing party reasonably believes that such
disclosure is required in connection with the defense of a lawsuit against the
COMPANY, the Other Companies and/or HDS. In the event of a breach or threatened
breach by any of the STOCKHOLDERS of the provisions of this section, HDS shall
be entitled to an injunction restraining such STOCKHOLDERS from disclosing, in
whole or in part, such confidential information. Nothing herein shall be
construed as prohibiting HDS from pursuing any other available remedy for such
breach or threatened breach, including the recovery of damages.
51
<PAGE>
14.2 HDS. HDS recognizes and acknowledges that it had in the past and
---
currently has access to certain confidential information of the COMPANY, such as
lists of customers, operational policies, and pricing and cost policies that are
valuable, special and unique assets of the COMPANY's business. HDS agrees that,
prior to the Closing, it will not disclose such confidential information to any
person, firm, corporation, association or other entity for any purpose or reason
whatsoever, except (a) to authorized representatives of the COMPANY, (b) to
counsel and other advisers, provided that such advisers (other than counsel)
--------
agree to the confidentiality provisions of this Section 14.2 and (c) to the
Other Companies and their representatives pursuant to Section 7.1(i), unless (i)
such information becomes known to the public generally through no fault of HDS
(ii) disclosure is required by law or the order of any governmental authority
under color of law, provided that prior to disclosing any information pursuant
--------
to this clause (ii), HDS shall, if possible, give prior written notice thereof
to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the COMPANY and/or STOCKHOLDERS. In the event of a
breach or threatened breach by HDS of the provisions of this section, the
COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining HDS
from disclosing, in whole or in part, such confidential information. Nothing
herein shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from
pursuing any other available remedy for such breach or threatened breach,
including the recovery of damages.
14.3 Damages. Because of the difficulty of measuring economic losses
-------
as result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach by any of them of the foregoing covenants, the covenant may be
enforced against the other parties by injunctions and restraining orders.
14.4 Survival. The obligations of the parties under this Article 14
--------
shall survive the termination of this Agreement.
15. TRANSFER RESTRICTIONS.
---------------------
15.1 Transfer Restrictions. Except for transfers as set forth in
---------------------
Section 15.2 below to persons or entities who agree to be bound by the
restrictions set forth in this Section 15.1, for a period of one year from the
Closing Date, none of the STOCKHOLDERS shall (i) sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint, or otherwise dispose of (a) any
shares of HDS Stock received by the STOCKHOLDERS in the Merger, or (b) any
interest (including, without limitation, an option to buy or sell) in any such
shares of HDS Stock, in whole or in part, and no such attempted transfer shall
be treated as effective for any purpose; or (ii) engage in any transaction,
whether or not with respect to any shares of HDS Stock or any interest therein,
the intent or effect of which is to reduce the risk of owning the shares of HDS
Stock acquired pursuant to Section 2 hereof (including, by way of example and
not limitation, engaging in put, call,
52
<PAGE>
short-sale, straddle or similar market transactions). The certificates
evidencing the HDS Stock delivered to the STOCKHOLDERS pursuant to Section 3 of
this Agreement will bear a legend substantially in the form set forth below and
contain such other information as HDS may deem necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR
OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION
PRIOR TO THE FIRST ANNIVERSARY OF THE CLOSING DATE. UPON THE WRITTEN
REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER
AGENT) AFTER THE DATE SPECIFIED ABOVE.
15.2 Permitted Transferees. Notwithstanding the provisions of Section
---------------------
15.1, a STOCKHOLDER shall have the right to transfer some or all of the shares
of HDS stock to any one or more of the following, provided that the transferee
agrees to be bound (in a form satisfactory to HDS and its counsel) by the terms
and conditions of this Agreement with respect to any further transfer of such
shares: (a) any family member of a STOCKHOLDER (including, without limitation,
any transfer to a custodian under any gift to minors statute), with family
members being defined as any spouse, lineal descendant or ancestor of a
STOCKHOLDER, (b) any trust which is for the benefit of one or more family
members of a STOCKHOLDER and (c) any corporation, partnership, limited liability
company or other entity (x) of which a majority of the interests therein by
value is owned by the STOCKHOLDER and members of the STOCKHOLDER's family, and
(y) which is and continues to be controlled by the STOCKHOLDER and members of
the STOCKHOLDER'S family for the period set forth in Section 15.1.
16. FEDERAL SECURITIES ACT REPRESENTATIONS.
The STOCKHOLDERS acknowledge that the shares of HDS Stock to be
delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will
not be registered under the 1933 Act and therefore may not be resold without
compliance with the 1933 Act. The HDS Stock to be acquired by such STOCKHOLDERS
pursuant to this Agreement is being acquired solely for their own respective
accounts, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution.
16.1 Compliance with Law. The STOCKHOLDERS covenant, warrant and
-------------------
represent that none of the shares of HDS Stock issued to such STOCKHOLDERS will
be
53
<PAGE>
offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the 1933 Act and the rules and regulations of the SEC. All the HDS Stock
shall bear the following legend in addition to the legend required under Section
15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "1933 ACT") AND MAY ONLY BE SOLD OR
OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE 1933 ACT
AND APPLICABLE SECURITIES LAWS.
16.2 Accredited Investors; Economic Risk; Sophistication. Except as
---------------------------------------------------
disclosed in Schedule 16.2, each STOCKHOLDER represents and warrants that such
STOCKHOLDER is an "accredited investor," as that term is defined in Regulation D
promulgated by the SEC under the 1933 Act. The STOCKHOLDERS are able to bear the
economic risk of an investment in the HDS Stock acquired pursuant to this
Agreement and can afford to sustain a total loss of such investment and have
such knowledge and experience in financial and business matters that they are
capable of evaluating the merits and risks of the proposed investment in the HDS
Stock. The STOCKHOLDERS or their respective purchaser representatives have
received all information they deemed material and had an adequate opportunity to
ask questions and receive answers from the officers of HDS concerning any and
all matters relating to the transactions described herein including, without
limitation, the background and experience of the current and proposed officers
and directors of HDS, the plans for the operations of the business of HDS, the
business, operations and financial condition of the Founding Companies other
than the COMPANY, and any plans for additional acquisitions and the like. All
STOCKHOLDERS who are not "accredited investors" have been represented by
qualified purchaser representatives.
17. REGISTRATION RIGHTS.
17.1 Piggyback Registration Rights. At any time following one year
-----------------------------
after the Closing Date, whenever HDS proposes to register any HDS Stock for its
own or others' account under the 1933 Act for a public offering, other than (i)
registrations of shares to be used as consideration for acquisitions of
additional businesses by HDS and (ii) registrations relating to employee benefit
plans, HDS shall give each of the STOCKHOLDERS prompt written notice of its
intent to do so. Upon the written request of any of the STOCKHOLDERS given
within thirty (30) days after receipt of such notice, HDS shall cause to be
included in such registration all of the HDS Stock issued pursuant to this
Agreement which any such STOCKHOLDER requests; provided that HDS shall have the
-------- ----
right to reduce the number of shares included in such registration to the extent
that inclusion of such shares could, in the opinion of tax counsel to HDS or its
independent auditors, jeopardize the status of the transactions contemplated
hereby and by the Registration Statement as a reorganization described in
Section 368(a)(1)(A) of the Code. In addition, if HDS is advised in writing in
good faith by any managing
54
<PAGE>
underwriter of an underwritten offering of the securities being offered pursuant
to any registration statement under this Section 17.1 that the number of shares
to be sold by persons other than HDS is greater than the number of such shares
which can be offered without adversely affecting the offering, HDS may reduce
the number of shares offered for the accounts of such persons to a number deemed
satisfactory by such managing underwriter; provided that such reduction shall be
-------- ----
made first by reducing the number of shares to be sold by persons other than
HDS, the stockholders named on Annex III hereto, the stockholders of the
Founding Companies (the "Founding Stockholders"), and any person or persons who
have required such registration pursuant to "demand" registration rights granted
by HDS; thereafter, if a further reduction is required, it shall be made first
by reducing the number of shares to be sold by the stockholders named on Annex
III hereto and the Founding Stockholders, with such further reduction being made
so that to the extent any shares can be sold by stockholders named in Annex III
hereto and the Founding Stockholders, each such stockholder will be permitted to
sell a number of shares proportionate to the number of shares of HDS Stock owned
by such stockholder immediately after the Closing, provided that if any
stockholder does not wish to sell all shares such stockholder is permitted to
sell, the opportunity to sell additional shares shall be reallocated in the same
manner to those stockholders named in Annex III hereto and the Founding
Stockholders who wish to sell more shares until no more shares can be sold by
such stockholders.
17.2 Demand Registration Rights. At any time after the date one year
--------------------------
after the Closing Date, Founding Stockholders holding shares of HDS Stock issued
pursuant to this Agreement and the Other Agreements which shares have (i) not
been previously registered or sold, (ii) which are not entitled to be sold under
Rule 144(k) (or any similar or successor provision) and (iii) which have an
aggregate market value in excess of $5 million (based on the average closing
price on the five days prior to the date of such request) may request in writing
that HDS file a registration statement under the 1933 Act covering such shares
of HDS Stock then held by such Founding Stockholders (a "Demand Registration");
provided that the aggregate value of HDS Stock proposed to be sold under such
registration statement is not less than $5 million (based on the closing market
price of the HDS Stock within five (5) business days of the date of such
request), and provided further that HDS shall have the right to reduce the
----------------
number of shares included in such registration to the extent that inclusion of
such shares could, in the opinion of tax counsel to HDS or its independent
auditors, jeopardize the status of the transactions contemplated hereby and by
the Registration Statement as a reorganization described in Section 368(a)(1)(A)
of the Code. Within ten (10) days of the receipt of such request, HDS shall
give written notice of such request to all other Founding Stockholders and
shall, as soon as practicable, file and use its best efforts to cause to become
effective a registration statement covering all such shares. HDS will use its
best efforts to keep such Demand Registration current and effective for one
hundred twenty (120) days (or such shorter period during which holders shall
have sold all HDS Stock which they requested to be registered). HDS shall be
obligated to effect only two (2) Demand Registrations for all Founding
Stockholders, and the second request may not be
55
<PAGE>
made until at least one (1) year after the effective date of the registration
statement for the first Demand Registration.
Notwithstanding the foregoing paragraph, following such a demand a
majority of the COMPANY's disinterested directors (i.e, directors who have not
---
demanded or elected to sell shares in any such public offering) may postpone the
filing of the registration statement for a thirty (30) day period beyond the
period provided above.
If at the time of any request by the Founding Stockholders for a
Demand Registration HDS has fixed plans to file within sixty (60) days after
such request a registration statement covering the sale of any of its
securities, no registration of the Founding Stockholders' HDS Stock shall be
initiated under this Section 17.2 until ninety (90) days after the effective
date of such registration unless HDS is no longer proceeding diligently to
effect such registration; provided that HDS shall provide the Founding
--------
Stockholders the right to participate in such public offering pursuant to, and
subject to, Section 17.1 hereof.
17.3 Registration Procedures. All expenses incurred in connection
-----------------------
with the registrations under this Article 17 (including all registration,
filing, qualification, legal, printer and accounting fees, but excluding
underwriting commissions and discounts) shall be borne by HDS. In connection
with registrations under Sections 17.1 and 17.2, HDS shall (i) prepare and file
with the SEC as soon as reasonably practicable, a registration statement with
respect to the HDS Stock and use its best efforts to cause such registration to
promptly become and remain effective for a period of at least one hundred twenty
(120) days (or such shorter period during which holders shall have sold all HDS
Stock which they requested to be registered); (ii) use its best efforts to
register and qualify the HDS Stock covered by such registration statement under
applicable state securities laws as the holders shall reasonably request for the
distribution for the HDS Stock; and (iii) take such other actions as are
reasonable and necessary to comply with the requirements of the 1933 Act and the
regulations thereunder.
17.4 Underwriting Agreement. In connection with each registration
----------------------
pursuant to Sections 17.1 and 17.2 covering an underwritten registered public
offering, HDS and each participating holder agree to enter into a written
agreement with the managing underwriters in such form and containing such
provisions as are customary in the securities business for such an arrangement
between such managing underwriters and companies of HDS's size and investment
stature, including indemnification. In a registration under Section 17.1, the
managing underwriters shall be selected by HDS (or, if required by a "demand"
registration right of a stockholder requiring such registration, by such
requiring stockholder), and in a registration under Section 17.2, may be
selected by the holders of a majority of the shares that have demanded to be
included in such registration pursuant to Section 17.2, provided the managing
underwriters so selected by such majority are reasonably acceptable to HDS.
17.5 HDS Stock. For the purposes of this Section 17, HDS Stock issued
---------
pursuant to this Agreement shall include shares issued as a stock dividend or
stock split, or
56
<PAGE>
otherwise distributed by HDS to its stockholders without consideration, in
respect of shares of HDS Stock previously issued pursuant to this Agreement.
17.6 Availability of Rule 144. HDS shall not be obligated to register
------------------------
shares of HDS Stock held by any STOCKHOLDER at any time when the resale
provisions of Rule 144(k) (or any similar or successor provision) promulgated
under the 1933 Act are available to such STOCKHOLDER.
17.7 Survival. The provisions of this Section 17 shall survive the Pre-
--------
Closing and Closing Date until December 31, 2002.
18. GENERAL.
18.1 Cooperation. Except as otherwise provided in Section 12, the
-----------
COMPANY, STOCKHOLDERS and HDS shall each (i) attempt in good faith (without
being required to incur unreasonable expense) to cause all conditions to actions
to be taken on the Pricing Date and the Closing Date to be satisfied, and (ii)
deliver or cause to be delivered to the other on the Pricing Date and Closing
Date, and at such other times and places as shall be reasonably agreed to, such
additional instruments, and take such additional actions as can be taken without
unreasonable expense, as any other may reasonably request for the purpose of
carrying out this Agreement. The COMPANY will cooperate and use its reasonable
efforts to have the present officers, directors and employees of the COMPANY
cooperate with HDS on and after the Closing Date in furnishing information,
evidence, testimony and other assistance in connection with any Tax Return
filing obligations, actions, proceedings, arrangements or disputes of any nature
with respect to matters pertaining to all periods prior to the Closing Date.
18.2 Successors and Assigns. This Agreement and the rights of the
----------------------
parties hereunder may not be assigned (except by operation of law) and shall be
binding upon and shall inure to the benefit of the parties hereto, the
successors of HDS, and the heirs and legal representatives of the STOCKHOLDERS.
18.3 Entire Agreement. This Agreement (including the schedules, exhibits
----------------
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the STOCKHOLDERS, the
COMPANY and HDS and supersede any prior agreement and understanding relating to
the subject matter of this Agreement. This Agreement, upon execution,
constitutes a valid and binding agreement of the parties hereto enforceable in
accordance with its terms. Except as otherwise stated herein, this Agreement and
the Annexes hereto may be modified or amended only by a written instrument
executed by the STOCKHOLDERS, the COMPANY and HDS, acting through their
respective officers, duly authorized by their respective Boards of Directors.
Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to
have been disclosed for purposes of any other Schedule required hereby.
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18.4 Counterparts. This Agreement may be executed simultaneously in
------------
two (2) or more counterparts, each of which shall be deemed an original and all
of which together shall constitute but one and the same instrument.
18.5 Brokers and Agents. Except as disclosed on Schedule 18.5, each
------------------
party represents and warrants that it employed no broker or agent in connection
with this transaction and agrees to indemnify the other against all loss, cost,
damages or expense arising out of claims for fees or commission of brokers
employed or alleged to have been employed by such indemnifying party.
18.6 Expenses. Whether or not the transactions herein contemplated
--------
shall be consummated, (i) HDS will pay the fees, expenses and disbursements of
HDS and its agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement and any amendments thereto,
including all costs and expenses incurred in the performance and compliance with
all conditions to be performed by HDS under this Agreement, including the fees
and expenses of Arthur Andersen, LLP, and Howard, Rice, and the costs of
preparing the Registration Statement, and (ii) prior to the Closing, the COMPANY
will pay the fees, expenses and disbursements of counsel and accountants for the
STOCKHOLDERS and the COMPANY incurred in connection with the subject matter of
this Agreement or the Registration Statement. Set forth on Schedule 18.6 hereto
is the estimated amount of such fees, expenses and disbursements to be paid by
the COMPANY pursuant to the foregoing clause (ii). The STOCKHOLDERS shall pay
all sales, use, transfer, real property transfer, recording, gains, stock
transfer and other similar taxes and fees ("Transfer Taxes") incurred in
connection with the transactions contemplated by this Agreement. The
STOCKHOLDERS shall file all necessary documentation and Tax Returns with respect
to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and
not the COMPANY or HDS, will pay all taxes due upon receipt of the consideration
payable to such STOCKHOLDER pursuant to Section 2 hereof.
18.7 Notices. All notices and other communications required or
-------
permitted hereunder shall be effective upon receipt (or refusal of receipt) and
shall be in writing and delivered by depositing the same in United States mail,
addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, by delivering the same in person to
such party or to an officer or agent of such party or by facsimile transmission
(followed by delivery by United States mail).
If mailed to HDS addressed to it at:
Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, Chief Executive Officer
Fax: (310) 253-9734
58
<PAGE>
with copies to:
Howard, Rice, Nemerovski, Canady, Falk & Rabkin
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111-4065
Attn: Raymond P. Haas
Fax: (415) 217-5910
(a) If mailed to the STOCKHOLDERS, addressed to them at their
addresses set forth on Annex II, with copies to such counsel, if any, as is set
forth with respect to each STOCKHOLDER on such Annex II; if mailed to the
COMPANY, addressed to it at its address set forth on Annex II marked "Personal
and Confidential" with copies to the COMPANY's counsel as set forth on Annex II,
provided that notice to the COMPANY shall only be for notices or communications
- --------
required or permitted hereunder prior to the Effective Time of the Merger; or to
such other address or counsel as any party hereto shall specify pursuant to this
Section 18.7 from time to time.
18.8 Governing Law; Forum. This Agreement shall be governed by and
--------------------
construed in accordance with the laws of the State of California, without giving
effect to laws concerning choice of law or conflicts of law. All disputes
arising out of this Agreement or the obligations of the parties hereunder,
including disputes that may arise following termination of this Agreement, shall
be subject to the exclusive jurisdiction and venue of the California State
courts of the City and County of San Francisco, California (or, if there is
federal jurisdiction, then the exclusive jurisdiction and venue of the United
States District Court having jurisdiction over the City and County of San
Francisco). Each party hereby irrevocably and unconditionally consents to the
personal and exclusive jurisdiction and venue of said courts and any objection
that it may now or hereafter have to the venue of any such action or proceeding
in any such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same. THE PARTIES HERETO
EACH HEREBY KNOWINGLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING, CLAIM OR COUNTER-CLAIM, WHETHER IN CONTRACT OR TORT OR OTHERWISE,
ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR ANY OTHER AGREEMENTS
EXECUTED IN CONNECTION HEREWITH.
18.9 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties, covenants and agreements of the parties made herein, or in writing
delivered pursuant to the provisions of this Agreement shall survive the
consummation of the transactions contemplated hereby and any examination on
behalf of the parties until the applicable Expiration Date.
18.10 Exercise of Rights and Remedies. Except as otherwise provided
-------------------------------
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair
59
<PAGE>
any such right, power, or remedy, nor shall it be construed as a waiver of or
acquiescence in any such breach or default, or of any similar breach or default
occurring later; nor shall any waiver of any single breach or default be deemed
a waiver of any other breach or default occurring before or after that waiver.
18.11 Time. Time is of the essence with respect to this Agreement.
----
18.12 Reformation and Severability. In case any provision of this
----------------------------
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
18.13 Remedies Cumulative. Except as otherwise provided in Section 11,
-------------------
no right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
18.14 Construction. This Agreement has been negotiated among HDS, the
------------
COMPANY, the STOCKHOLDERS and their respective legal counsel, and legal or
equitable principles that might require the construction of this Agreement or
any provision of this Agreement against the party drafting this Agreement will
not apply in any construction or interpretation of this Agreement.
18.15 Captions. The headings of this Agreement are inserted for
--------
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
60
<PAGE>
HOSPITALITY DESIGN & SUPPLY, INC.
By /s/ Roger Laverty
------------------------------
Name: Roger Laverty
Title: Chief Executive Officer
STOCKHOLDER:
/s/ David Castino
---------------------------------
DAVID CASTINO
CASTINO RESTAURANT EQUIPMENT
AND SUPPLY, INC.
By /s/ David Castino
------------------------------
Name: David Castino
Title: President
61
<PAGE>
ANNEX I
CONSIDERATION TO FOUNDING COMPANY STOCKHOLDERS
Part I
A. Aggregate consideration to be paid to STOCKHOLDERS:
1. COMPANY Stock will be converted into 83,333 shares of common stock of
HDS and $1,000,000 in cash, subject to the hold back of the Reserved
Amount, as set forth in Paragraph B below.
2. The STOCKHOLDERS and the COMPANY will not be obligated to consummate the
Merger if the initial public offering price per share when the
Registration Statement goes effective (the "Effective IPO Price") is
less than $10 per share (the "Minimum IPO Price").
3. The amount of cash paid to STOCKHOLDERS will be offset and reduced by
the amount of any receivables from STOCKHOLDERS as of the Effective
Time.
B. Hold Back of Reserved Amount
1. STOCKHOLDERS and HDS agree that on the Closing Date, HDS shall hold back
from the aggregate purchase price payable to STOCKHOLDERS $162,500 in
cash and 13,542 shares of common stock of HDS (collectively, the
"Reserved Amount"). If the Attributed Pre-Tax Earnings (as defined
herein) are at least $50,000 for the months of March through May, 1999,
the entire Reserved Amount shall be paid to STOCKHOLDER within sixty
(60) days of the date that financial statements become available for
such period. If the Attributed Pre-Tax Earnings are less than $50,000
for such period, then a portion of the Reserved Amount shall be retained
by HDS in an amount equal to 6.5 times the amount by which $50,000
exceeds the Attributed Pre-Tax Earnings, and the remainder, if any,
shall be paid to STOCKHOLDER within said sixty-day period. Payment of
such remainder of the Reserved Amount shall be made in equal proportions
of cash and stock, with the stock valued for such purpose at $12 per
share.
2. "Attributed Pre-Tax Earnings" shall mean that portion of the pre-tax
earnings generated by HDS directly attributable to the operations of the
Castino Restaurant Equipment and Supply, Inc. division (formerly the
operations of the COMPANY), as shown on the financial statements of such
division, calculated in accordance with generally accepted accounting
principles, with respect to the period beginning March 1, 1999 and
ending May 31, 1999.
<PAGE>
3. The Reserved Amount, if any, will be paid without interest (even though
interest may be imputed for purposes such as income taxes).
4. Any disputes concerning the amount of the Reserved Amount to be paid to
STOCKHOLDERS or retained by HDS will be finally determined by Arthur
Andersen, LLP; and the STOCKHOLDERS and HDS each will bear one-half of
the fees of Arthur Andersen, LLP, for making such determination.
<PAGE>
C Consideration to be paid to each STOCKHOLDER:
<TABLE>
<CAPTION> Percentage
Cash Before Allocation of Any
Shares of Common Offsets & Offsets and
STOCKHOLDER Stock of HDS Reductions(1) Reductions(2)
- ----------- ---------------- ------------- ------------------
<S> <C> <C> <C>
David Castino 83,333 $1,000,000 100%
---------- ----------- -----
TOTALS: 83,333 $1,000,000 100%
</TABLE>
____________________
(1)For purposes of Section 11.5(i) and 11.5(iii) of the Agreement, the term
"Cash Consideration" means, as to each STOCKHOLDER, the Cash Before Offsets and
Reductions shown for such STOCKHOLDER in this column.
(2)Excluding offsets and reductions pursuant to Part I, paragraph A.3. of
this Annex I.
<PAGE>
EXHIBIT 3.2
BYLAWS OF
HOSPITALITY DESIGN AND SUPPLY, INC.
ARTICLE I
OFFICES
Section 1.01. Registered Office. The registered office of Hospitality
-----------------
Design and Supply, Inc. (hereafter called the "Corporation") in the State of
Delaware shall be at 15 East North Street, Dover, County of Kent, and the name
of the registered agent at that address shall be Incorporating Services, Ltd.
Section 1.02. Principal Office. The principal office for the
----------------
transaction of the business of the Corporation shall be at 15 East North Street,
Dover, County of Kent. The Board of Directors (hereafter called the "Board") is
hereby granted full power and authority to change said principal office from one
location to another.
Section 1.03. Other Offices. The Corporation may also have an office
-------------
or offices at such other place or places, either within or without the State of
Delaware, as the Board may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. Annual Meetings. Annual meetings of the stockholders of
---------------
the Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings shall be held on a
specific date and at a time designated by the Board.
Section 2.02. Special Meetings. Stockholders are not permitted to call
----------------
a special meeting of stockholders or to require the Board of Directors or
officers of the Corporation to call such a special meeting. A special meeting
of the stockholders for any purpose or purposes may only be called by a majority
of the Board of Directors or by the Chief Executive Officer. The business
permitted to be conducted at a special meeting of stockholders shall be limited
to matters properly brought before the meeting by or at the direction of the
Board of Directors.
Section 2.03. Place of Meetings. All meetings of the stockholders
-----------------
shall be held at such places, within or without the State of Delaware, as may
from time to time be designated by the person or persons calling the respective
meeting and specified in the respective notices or waivers of notice thereof.
Section 2.04. Notice of Meetings. Except as otherwise required by law,
------------------
notice of each meeting of the stockholders, whether annual or special, shall be
given not less than ten (10)
<PAGE>
nor more than sixty (60) days before the date of the meeting to each stockholder
of record entitled to vote at such meeting by delivering a typewritten or
printed notice thereof to him personally, or by depositing such notice in the
United States mail, in a postage prepaid envelope, directed to him at their post
office address furnished by him to the Secretary of the Corporation for such
purpose or, if he shall not have furnished to the Secretary his address for such
purpose, then at his post office address last known to the Secretary, or by
transmitting a notice thereof to him at such address by telegraph, cable, or
wireless. Except as otherwise expressly required by law, no publication of any
notice of a meeting of the stockholders shall be required. Every notice of a
meeting of the stockholders shall state the place, date and hour of the meeting,
and, in the case of a special meeting, shall also state the purpose or purposes
for which the meeting is called. Notice of any meeting of stockholders shall not
be required to be given to any stockholder who shall have waived such notice and
such notice shall be deemed waived by any stockholder who shall attend such
meeting in person or by proxy, except a stockholder who shall attend such
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Except as otherwise expressly required by law, notice of any adjourned
meeting of the stockholders need not be given if the time and place thereof are
announced at the meeting at which the adjournment is taken.
Section 2.05. Advance Notification of Director Nomination. Only
-------------------------------------------
persons who are nominated in accordance with the following procedures shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the Corporation at the annual meeting may be made at such
meeting by or at the direction of the Board of Directors, by any committee
appointed by the Board of Directors or by any common stockholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 2.05. Such
nominations, other than those made by or at the direction of the Board of
Directors or by any committee appointed by the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not later than the close of
business on the 75th day nor earlier than the close of business on the 90th day
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 75th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made by the Corporation. Such stockholder's notice to the
Secretary shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class, series and number of shares of
capital stock of the Corporation which are beneficially owned by the person and
(iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to the
Rules and Regulations of the Securities and Exchange Commission under Section 14
of the Securities Exchange Act of 1934, as amended; and (b) as to the
stockholder giving the notice (i) the name and record address of the
stockholder, (ii) the class, series and number of shares of capital stock of the
Corporation which are beneficially owned by the stockholder and (iii) a
description of all
2
<PAGE>
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder. Such notice shall
be accompanied by the executed consent of each nominee to serve as a director if
so elected. The Corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the Corporation to determine
the eligibility of such proposed nominee to serve as a director of the
Corporation. No person shall be eligible for election as a director of the
Corporation by the holders of Common Stock of the Corporation unless nominated
in accordance with the procedures set forth herein. The officer of the
Corporation presiding at an annual meeting shall, if the facts warrant,
determine that a nomination was not made in accordance with the foregoing
procedure and, if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
Section 2.06. Advance Notification of Business to be Transacted at
----------------------------------------------------
Stockholder Meetings. To be properly brought before the annual meeting of
- --------------------
stockholders, business must be either (a) specified in the notice of meeting (or
any supplement or amendment thereto) given by or at the direction of the Board
of Directors or any committee appointed by the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before an annual meeting by a
stockholder. In addition to any other applicable requirements, for business to
be properly brought before any annual meeting of stockholders by a stockholder,
the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not later than the close of business on the 75th day nor earlier
than the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the 75th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. Such stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of the stockholder proposing such business, (iii) the class, series and
number of shares of capital stock of the Corporation which are beneficially
owned by the stockholder, and (iv) any material interest of the stockholder in
such business.
No business shall be conducted at the annual meeting of stockholders unless
it is properly brought before the meeting in accordance with the procedures set
forth in this Section 2.06, provided, however, that nothing in this Section 2.06
-------- -------
shall be deemed to preclude discussion by any stockholder of any business
properly brought before the meeting in accordance with the procedures set forth
in this Section 2.06. The officer of the Corporation presiding at the meeting
shall, if the facts warrant, determine that business was not properly brought
before the meeting in accordance with the provisions of this Section 2.06 and,
if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
3
<PAGE>
Section 2.07. Quorum. Except in the case of any meeting for the
------
election of directors summarily ordered as provided by law, the holders of
record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders of the Corporation or any adjournment thereof. Where a separate
vote by a class or classes is required, a majority of the outstanding shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and the affirmative vote of the majority of the shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class. In the absence of a quorum at any meeting or any adjournment
thereof, a majority in voting interest of the stockholders present in person or
by proxy and entitled to vote thereat or, in the absence therefrom of all the
stockholders, any officer entitled to preside at, or to act as secretary of,
such meeting may adjourn such meeting from time to time. At any such adjourned
meeting at which a quorum is present any business may be transacted which might
have been transacted at the meeting as originally called. No business may be
transacted at a meeting in the absence of a quorum other than the adjournment of
such meeting, except that if a quorum is present at the commencement of a
meeting, business may be transacted until the meeting is adjourned even though
the withdrawal of stockholders results in less than a quorum.
Section 2.08. Voting.
------
(a) Each stockholder shall, at each meeting of the stockholders, be
entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation having voting rights on the matter in question and
which shall have been held by him and registered in his name on the books of the
Corporation:
(i) on the date fixed pursuant to Section 6.05 of these Bylaws as
the record date for the determination of stockholders entitled to
notice of and to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then (a) at
the close of business on the day next preceding the day on which
notice of the meeting shall be given or (b) if notice of the meeting
shall be waived, at the close of business on the day next preceding
the day on which the meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors in such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Nothing in this section shall be construed as limiting the right of
the Corporation to vote stock, including but not limited to its own stock, held
by it in a fiduciary capacity. Persons holding stock of the Corporation in a
fiduciary capacity shall be entitled to vote such stock. Persons whose stock is
pledged shall be entitled to vote, unless in the transfer by the pledgor on the
books of the Corporation he shall have expressly empowered the pledgee to vote
thereon, in which case only the pledgee, or their proxy, may represent such
stock and vote thereon. Stock having voting power standing of record in the
names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same
4
<PAGE>
fiduciary relationship, shall be voted in accordance with the provisions of the
General Corporation Law of the State of Delaware.
(c) Any such voting rights may be exercised by the stockholder
entitled thereto in person or by their proxy appointed by an instrument in
writing, subscribed by such stockholder or by their attorney thereunto
authorized and delivered to the secretary of the meeting; provided, however,
that no proxy shall be voted or acted upon after three years from its date
unless said proxy shall provide for a longer period. The attendance at any
meeting of a stockholder who may theretofore have given a proxy shall not have
the effect of revoking the same unless he shall in writing so notify the
secretary of the meeting prior to the voting of the proxy. At any meeting of
the stockholders all matters, except as otherwise provided in the Certificate of
Incorporation, in these Bylaws or by law, shall be decided by the vote of a
majority of the shares present in person or by proxy and entitled to vote
thereat and thereon, a quorum being present. The vote at any meeting of the
stockholders on any questions need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot each ballot shall be signed by the
stockholder voting, or by their proxy, if there be such proxy, and it shall
state the number of shares voted.
Section 2.09. List of Stockholders. The Secretary of the Corporation
--------------------
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the duration thereof, and may be inspected by any stockholder who is
present.
Section 2.10. Judges. If at any meeting of the stockholders a vote by
------
written ballot shall be taken on any question, the chairman of such meeting may
appoint a judge or judges to act with respect to such vote. Each judge so
appointed shall first subscribe an oath faithfully to execute the duties of a
judge at such meeting with strict impartiality and according to the best of
their ability. Such judges shall decide upon the qualification of the voters
and shall report the number of shares represented at the meeting and entitled to
vote on such questions, shall conduct and accept the votes, and, when the voting
is completed, shall ascertain and report the number of shares voted respectively
for and against the question. Reports of judges shall be in writing and
subscribed and delivered by them to the Secretary of the Corporation. The
judges need not be stockholders of the Corporation, and any officer of the
Corporation may be a judge on any question other than a vote for or against a
proposal in which he shall have a material interest.
Section 2.11. Prohibition of Action by Written Consent. Following the
----------------------------------------
consummation by the Corporation of an initial public offering of the
Corporation's Common Stock that is registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (an "IPO"), any action
required or permitted to be taken by the stockholders must be taken at a duly
called and convened annual meeting or special meeting of stockholders and cannot
be taken by consent in writing.
5
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. General Powers. The property, business and affairs of
--------------
the Corporation shall be managed by or under the direction of the Board.
Section 3.02. Number; Qualifications. The Board of Directors shall
----------------------
consist of one or more members. The number of the directors of the Board of the
Corporation shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies. Directors need not be
stockholders of the Corporation.
Section 3.03. Election of Directors. The directors shall be elected by
---------------------
the stockholders of the Corporation at each annual meeting of stockholders or,
prior to completion by the Corporation of an IPO, by written consent pursuant to
Section 2.11 hereof, and at each election the persons receiving the greatest
number of votes, up to the number of directors then to be elected, shall be the
persons then elected. The election of directors is subject to any provisions
contained in the Certificate of Incorporation relating thereto, including any
provisions for a classified board or cumulative voting.
Unless the Board of Directors otherwise determines, vacancies resulting from
death, resignation, retirement, disqualification, removal from office or other
cause, and newly created directorships resulting from any increase in the
authorized number of directors, may be filled only by the affirmative vote of a
majority of the remaining directors, though less than a quorum of the Board of
Directors, and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such director's successor shall have
been duly elected and qualified. No decrease in the number of authorized
directors constituting the Board of Directors of the Corporation shall shorten
the term of any incumbent director.
Section 3.04. Resignations. Any director of the Corporation may resign
------------
at any time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately upon
its receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3.05. Place of Meeting, Etc. The Board may hold any of its
----------------------
meetings at such place or places within or without the State of Delaware as the
Board may from time to time by resolution designate or as shall be designated by
the person or persons calling the meeting or in the notice or a waiver of notice
of any such meeting. Directors may participate in any regular or special
meeting of the Board by means of conference telephone or similar communications
equipment pursuant to which all persons participating in the meeting of the
Board can hear each other, and such participation shall constitute presence in
person at such meeting.
Section 3.06. First Meeting. The Board shall meet as soon as
-------------
practicable after each annual election of directors and notice of such first
meeting shall not be required.
6
<PAGE>
Section 3.07. Regular Meetings. Regular meetings of the Board shall be
----------------
held at such time and place as the Board shall from time to time by resolution
determine. If any day fixed for a regular meeting shall be a legal holiday at
the place where the meeting is to be held, then the meeting shall be held at the
same hour and place on the next succeeding business day not a legal holiday.
Except as provided by law, notice of regular meetings need not be given.
Section 3.08. Special Meetings. Special meetings of the Board may be
----------------
called by the Chairman of the Board of Directors, the Chief Executive Officer,
or the President and shall be called by the President or Secretary on the
written request of two directors. Notice of all special meetings of the Board
shall be given to each director at their address as it appears on the records of
the Corporation, as follows:
(a) by first-class mail, postage prepaid, deposited in the United
States mail in the city where the principal office of the Corporation is located
at least five (5) days before the date of such meeting; or
(b) by telegram, charges prepaid, such notice to be delivered to the
telegraph company in the city of the principal office of the Corporation at
least forty-eight (48) hours before the time of holding such meeting; or
(c) by personal delivery, or by telex, telecopy or other facsimile
transmission, at least twenty-four (24) hours prior to the time of holding such
meeting.
Such notice may be waived by any director and any meeting shall be a
legal meeting without notice having been given if all the directors shall be
present thereat or if those not present shall, either before or after the
meeting, sign a written waiver of notice of, or a consent to, such meeting or
shall after the meeting sign the approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or be
made a part of the minutes of the meeting.
Section 3.09. Quorum and Manner of Acting. Except as otherwise
---------------------------
provided in the Certificate of Incorporation or these Bylaws or by law, the
presence of a majority of the total number of directors then in office shall be
required to constitute a quorum for the transaction of business at any meeting
of the Board. Except as otherwise provided in the Certificate of Incorporation
or these Bylaws or by law, all matters shall be decided at any such meeting, a
quorum being present, by the affirmative votes of a majority of the directors
present. In the absence of a quorum, a majority of directors present at any
meeting may adjourn the same from time to time until a quorum shall be present.
Notice of any adjourned meeting need not be given. The directors shall act only
as a Board, and the individual directors shall have no power as such.
Section 3.10. Action by Consent. Any action required or permitted to
-----------------
be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
Section 3.11. Compensation. The directors shall receive only such
------------
compensation for their services as directors as may be allowed by resolution of
the Board. The Board may also
7
<PAGE>
provide that the Corporation shall reimburse each such director for any expense
incurred by him on account of their attendance at any meetings of the Board or
Committees of the Board. Neither the payment of such compensation nor the
reimbursement of such expenses shall be construed to preclude any director from
serving the Corporation or its subsidiaries in any other capacity and receiving
compensation therefor.
Section 3.12. Executive Committee. There may be an Executive Committee
-------------------
of two or more directors appointed by the Board, who may meet at stated times,
or pursuant to a notice to all by any of their own number, during the intervals
between the meetings of the Board; they shall advise and aid the officers of the
Corporation in all matters concerning its interest and the management of its
business, and generally perform such duties and exercise such powers as may be
directed or delegated by the Board from time to time. The Board of Directors
may also designate, if it desires, other directors as alternate members who may
replace any absent or disqualified member of the Executive Committee at any
meeting thereof. To the full extent permitted by law, the Board may delegate to
such committee authority to exercise all the powers of the Board while the Board
is not in session. Vacancies in the membership of the committee shall be filled
by the Board at a regular meeting or at a special meeting for that purpose. In
the absence or disqualification of any member of the Executive Committee and any
alternate member in such member's place, the member or members of the Executive
Committee present at the meeting and not disqualified from voting, whether or
not he or she or they constitute a quorum, may, by unanimous vote, appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member. The Executive Committee shall keep written
minutes of its meeting and report the same to the Board when required. The
provisions of Sections 3.07, 3.08, 3.09 and 3.10 of these Bylaws shall apply,
mutatis mutandis, to any Executive Committee of the Board.
- ------- --------
Section 3.13. Other Committees. The Board may, by resolution passed by
----------------
a majority of the whole Board, designate one or more other committees, each such
committee to consist of one or more of the directors of the Corporation. The
Board of Directors may also designate, if it desires, other directors as
alternate members who may replace any absent or disqualified member of any such
committee at any meeting thereof. To the full extent permitted by law, any such
committee shall have and may exercise such powers and authority as the Board may
designate in such resolution. Vacancies in the membership of a committee shall
be filled by the Board at a regular meeting or a special meeting for that
purpose. Any such committee shall keep written minutes of its meetings and
report the same to the Board when required. In the absence or disqualification
of any member of any such committee and any alternate member in such member's
place, the member or members of any such committee present at the meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may, by unanimous vote, appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member. The
provisions of Sections 3.07, 3.08, 3.09 and 3.10 of these Bylaws shall apply,
mutatis mutandis, to any such committee of the Board.
- ------- --------
8
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ARTICLE IV
OFFICERS
Section 4.01. Number. The officers of the corporation shall be a
------
Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial
Officer, and a Secretary. The Board may also elect one or more Vice Presidents
and Assistant Secretaries. A person may hold more than one office providing the
duties thereof can be consistently performed by the same person.
Section 4.02. Other Officers. The Board may appoint such other
--------------
officers as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4.03. Election. Each of the officers of the Corporation,
--------
except such officers as may be appointed in accordance with the provisions of
Section 4.02 or Section 4.05 of this Article, shall be chosen annually by the
Board and shall hold their office until he or she shall resign or shall be
removed or otherwise disqualified to serve, or their successor shall be elected
and qualified.
Section 4.04. Salaries. The salaries of all executive officers of the
--------
Corporation shall be fixed by the Board or by such committee of the Board as may
be designated from time to time by a resolution adopted by a majority of the
Board.
Section 4.05. Removal; Vacancies. Subject to the express provisions of
------------------
a contract authorized by the Board, any officer may be removed, either with or
without cause, at any time by the Board or by any officer upon whom such power
of removal may be conferred by the Board. Any vacancy occurring in any office
of the Corporation shall be filled by the Board.
Section 4.06. The Chairman of the Board. The Chairman of the Board
-------------------------
shall preside at all meetings of the stockholders and directors and shall have
such other powers and duties as may be prescribed by the Board or by applicable
law. The Chairman shall be an ex-officio member of standing committees, if so
provided in the resolutions of the Board appointing the members of such
committees.
Section 4.07. Powers and Duties of Officers. The chief executive
-----------------------------
officer of the Corporation shall have such powers in the management of the
Corporation as may be prescribed in a resolution by the Board of Directors and,
to the extent not so provided, as generally pertain to such office. The chief
executive officer shall see that all orders and resolutions of the Board of
Directors are carried into effect.
The other officers of the Corporation shall have such powers and duties in
the management of the Corporation as may be prescribed in a resolution by the
Board of Directors or delegated to them by the chief executive officer and, to
the extent not so provided or delegated, as generally pertain to their
respective offices, subject to the control of the Board of Directors and the
chief executive officer. Without limiting the foregoing, the Secretary shall
have the duty to record the proceedings of the meetings of the stockholders and
directors in a book to be kept for that purpose.
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ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
Section 5.01. Checks, Drafts, Etc. All checks, drafts or other orders
--------------------
for payment of money, notes or other evidence of indebtedness payable by the
Corporation and all contracts or agreements shall be signed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such person or persons shall give such bond, if
any, as the Board may require.
Section 5.02. Deposits. All funds of the Corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may select, or
as may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the
purpose of collection for the account of the Corporation, the President, any
Vice President or the Treasurer (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation.
Section 5.03. General and Special Bank Accounts. The Board may from
---------------------------------
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI
SHARES AND THEIR TRANSFER
Section 6.01. Certificates for Stock. Every owner of stock of the
----------------------
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by such person. The certificates
representing shares of such stock shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
Chairman, or President or a Vice President, and by the Secretary or the
Treasurer, or any Assistant Secretary or Treasurer. Any or all of the
signatures on the certificates may be a facsimile. In case any officer,
transfer agent or registrar who has signed, or whose facsimile signature has
been placed upon, any such certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, such certificate
may nevertheless be issued by the Corporation with the same effect as though the
person who signed such certificate, or whose facsimile signature shall have been
placed thereupon, were such officer, transfer agent or registrar at the date of
issue. A record shall be kept of the respective names of the persons, firms or
corporations owning the stock represented by such certificates, the number and
class of shares represented by such certificates, respectively, and the
respective dates thereof, and in case of cancellation, the respective dates of
cancellation. Every certificate surrendered to the Corporation for exchange or
10
<PAGE>
transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled, except in cases provided for in Section 6.04.
Section 6.02. Transfers of Stock. Transfers of shares of stock of the
------------------
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by their attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary, or with a transfer clerk or a
transfer agent appointed as provided in Section 6.03, and upon surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all taxes thereon. The person in whose name shares of stock stand on the books
of the Corporation shall be deemed the owner thereof for all purposes as regards
the Corporation. Whenever any transfer of shares shall be made for collateral
security, and not absolutely, such fact shall be so expressed in the entry of
transfer if, when the certificate or certificates shall be presented to the
Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
Section 6.03. Regulations. The Board may make such rules and
-----------
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
Section 6.04. Lost, Stolen, Destroyed, and Mutilated Certificates. In
---------------------------------------------------
any case of loss, theft, destruction or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft, destruction
or mutilation and upon the giving of a bond of indemnity to the Corporation in
such form and in such sum as the Board may direct; provided, however, that a new
certificate may be issued without requiring any bond when, in the judgment of
the Board, it is proper so to do.
Section 6.05. Fixing Date for Determination of Stockholders of Record.
-------------------------------------------------------
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders, or to receive payment of any
dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action except, prior to completion by the
Corporation of an IPO, for consenting to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which shall not precede
the date the resolution fixing the record date is adopted and which record date
shall not be more than 60 nor less than 10 days before the date of any meeting
of stockholders, nor more than 60 days prior to the time for such other action
as herein before described; provided, however, that if no record date is fixed
by the Board of Directors, the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day preceding the day on which notice is given or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held and, for determining stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or any other
lawful action except, prior to completion by the Corporation of an IPO, for
consenting to corporate action in writing without a meeting, the
11
<PAGE>
record date shall be the close of business on the day on which the Board of
Directors adopts a resolution relating thereto.
For purposes of determining the stockholders entitled, prior to completion
by the Corporation of an IPO, to consent to corporate action in writing without
a meeting, the Board of Directors may fix a record date, which shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which record date shall not be more than 10 days after
the date upon which the resolution fixing the record date is adopted, as of
which shall be determined the stockholders of record entitled to consent to
corporate action in writing without a meeting. If no record date has been fixed
by the Board of Directors and no prior action by the Board of Directors is
required by the Delaware General Corporation Law, the record date shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation. If no record date has
been fixed by the Board of Directors and prior action by the Board of Directors
is required by the Delaware General Corporation Law with respect to the proposed
action, the record date for determining stockholders entitled to consent to
corporate action in writing shall be the close of business on the day in which
the Board of Directors adopts the resolutions taking such prior action.
ARTICLE VII
INDEMNIFICATION
Section 7.01. Indemnification of Officers, Directors, Employees and
Agents; Insurance.
(a) Right to Indemnification. The Corporation shall have the right to
------------------------
indemnify any person (the "Indemnitee") to the fullest extent permitted by law
if Indemnitee was or is or becomes a party to or witness or other participant
in, or is threatened to be made a party to or witness or other participant in,
any threatened, pending or completed action, suit, proceeding or alternative
dispute resolution mechanism, or any hearing, inquiry or investigation that
Indemnitee in good faith believes might lead to the institution of any such
action, suit, proceeding or alternative dispute resolution mechanism, whether
civil, criminal, administrative, investigative or other (hereinafter a "Claim")
by reason of (or arising in part out of) any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Corporation, or any subsidiary of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee, agent or
fiduciary of another corporation, partnership, limited liability company, joint
venture, trust or other enterprise, or by reason of any action or inaction on
the part of Indemnitee while serving in such capacity against any and all
expenses (including attorneys' fees and all other costs, expenses, and
obligations incurred in connection with investigating, defending, being a
witness in or participating in (including on appeal), or preparing to defend, be
a witness in or participate in, any such action, suit, proceeding, alternative
dispute resolution mechanism, hearing, inquiry or investigation), judgments,
fines, penalties and amounts paid in settlement (if such settlement is approved
in advance by the Corporation, which approval shall not be unreasonably
withheld) of such Claim and any federal, state, local or foreign taxes imposed
on the Indemnitee as a result of the actual or deemed receipt of any payments
under this Agreement (collectively, hereinafter "Expenses"),
12
<PAGE>
including all interest assessments and other charges paid or payable in
connection with or in respect of such Expenses.
(b) Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law, provided that such
--------
insurance is available on acceptable terms, which determination shall be made by
the Board of Directors or by a committee thereof.
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Seal. The Board shall provide a corporate seal, which
----
shall be in the form of a circle and shall bear the name of the Corporation and
words and figures showing that the Corporation was incorporated in the State of
Delaware and the year of incorporation.
Section 8.02. Waiver of Notices. Whenever notice is required to be
-----------------
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
Section 8.03. Fiscal Year. The fiscal year of the Corporation shall be
-----------
fixed by resolution of the Board.
Section 8.04. Voting Stock. Any person so authorized by the Board, and
------------
in the absence of such authorization, the Chairman of the Board, the President
or any Vice President, shall have full power and authority on behalf of the
Corporation to attend and to act and vote at any meeting of the stockholders of
any corporation in which the Corporation may hold stock and at any such meeting
shall possess and may exercise any and all rights and powers which are incident
to the ownership of such stock and which as the owner thereof the Corporation
might have possessed and exercised if present. The Board by resolution from
time to time may confer like powers upon any other person or persons.
13
<PAGE>
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
This Agreement is entered February 26, 1999, between Hospitality Design
& Supply, Inc., a Delaware corporation ("HDS") and the stockholders of HDS named
on the signature pages hereof ("Stockholders").
WHEREAS, the Stockholders have acquired prior to the date hereof ___
shares of Common Stock, .001 par value, of HDS ("HDS Stock").
WHEREAS, HDS is entering into acquisition agreements with six companies
("Founding Companies") for HDS' acquisition of such companies in conjunction
with HDS' initial public offering, and these agreements contemplate that the
Stockholders will have registration rights in respect of their HDS Stock similar
to those granted to the Founding Company shareholders in such acquisition
agreements.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Piggyback Registration Rights. At any time following one year
-----------------------------
after the closing date of HDS' initial public offering of HDS Stock ("Closing
Date"), whenever HDS proposes to register any HDS Stock for its own or others'
account under the 1933 Act for a public offering, other than (i) registrations
of shares to be used as consideration for acquisitions of additional businesses
by HDS and (ii) registrations relating to employee benefit plans, HDS shall give
each of the Stockholders prompt written notice of its intent to do so. Upon the
written request of any of the Stockholders given within thirty (30) days after
receipt of such notice, HDS shall cause to be included in such registration all
of the HDS Stock issued to the Stockholder prior to the Closing Date which any
such Stockholder requests. In addition, if HDS is advised in writing in good
faith by any managing underwriter of an underwritten offering of the securities
being offered pursuant to any registration statement under this Section 1 that
the number of shares to be sold by persons other than HDS is greater than the
number of such shares which can be offered without adversely affecting the
offering, HDS may reduce the number of shares offered for the accounts of such
persons to a number deemed satisfactory by such managing underwriter; provided
that such reduction shall be made first by reducing the number of shares to be
sold by persons other than HDS, the Stockholders, the stockholders of the
Founding Companies (the "Founding Stockholders"), and any person or persons who
have required such registration pursuant to "demand" registration rights granted
by HDS; thereafter, if a further reduction is required, it shall be made first
by reducing the number of shares to be sold by the Stockholders and the Founding
Stockholders, with such further reduction being made so that to the extent any
shares can be sold by Stockholders and the Founding Stockholders, each such
stockholder will be permitted to sell a number of shares proportionate to the
number of shares of HDS Stock owned by such stockholder immediately after the
Closing Date, provided that if any stockholder does not wish to sell all shares
such stockholder is permitted to sell, the opportunity to sell additional shares
shall be
-1-
<PAGE>
reallocated in the same manner to those Stockholders and the Founding
Stockholders who wish to sell more shares until no more shares can be sold by
such stockholders.
2. Demand Registration Rights. At any time after the date one year
--------------------------
after the Closing Date, Stockholders holding shares of HDS Stock issued to the
Stockholder prior to the Closing Date which shares have (i) not been previously
registered or sold, (ii) which are not entitled to be sold under Rule 144(k) (or
any similar or successor provision) and (iii) which have an aggregate market
value in excess of $5 million (based on the average closing price on the five
days prior to the date of such request) may request in writing that HDS file a
registration statement under the 1933 act covering such shares of HDS Stock then
held by such Stockholders (a "Demand Registration"); provided that the aggregate
value of HDS Stock proposed to be sold under such registration statement is not
less than $5 million (based on the average closing price on the five days prior
to the date of such request). Within ten (10) days of the receipt of such
request, HDS shall give written notice of such request to all other Stockholders
and shall, as soon as practicable, file and use its best efforts to cause to
become effective a registration statement covering all such shares. HDS will use
its best efforts to keep such Demand Registration current and effective for one
hundred twenty (120) days (or such shorter period during which holders shall
have sold all HDS Stock which they requested to be registered). HDS shall be
obligated to effect only two (2) Demand Registrations for all Stockholders, and
the second request may not be made until at least one (1) year after the
effective date of the registration statement for the first Demand Registration.
Notwithstanding the foregoing paragraph, following such a demand a
majority of the Company's disinterested directors (i.e., directors who have not
----
demanded or elected to sell shares in any such public offering) may postpone the
filing of the registration statement for a period of up to thirty (30) days.
If at the time of any request by the Founding Stockholders for a Demand
Registration HDS has fixed plans to file within sixty (60) days after such
request a registration statement covering the sale of any of its securities, no
registration of the Stockholders' HDS Stock shall be filed under this Section 2
until ninety (90) days after the effective date of such registration unless HDS
is no longer proceeding diligently to effect such registration; provided that
HDS shall provide the Stockholders the right to participate in such public
offering pursuant to, and subject to, Section 1 hereof.
3. Registration Procedures. All expenses incurred in connection with
-----------------------
the registrations under this Agreement (including all registration, filing,
qualification, legal, printer and accounting fees, but excluding underwriting
commissions and discounts) shall be borne by HDS. In connection with
registrations under Sections 1 and 2, HDS shall (i) prepare and file with the
SEC as soon as reasonably practicable, a registration statement with respect to
the HDS Stock and use its best efforts to cause such registration to promptly
become and remain effective for a period of at least one hundred twenty (120)
days (or such shorter period during which holders shall have sold all HDS Stock
which they requested to be registered); (ii) use its best efforts to register
and qualify the HDS Stock covered by such registration statement under
applicable state securities laws
-2-
<PAGE>
as the holders shall reasonably request for the distribution for the HDS Stock;
and (iii) take such other actions as are reasonable and necessary to comply with
the requirements of the 1933 Act and the regulations thereunder.
4. Underwriting agreement. In connection with each registration
----------------------
pursuant to sections 1 and 2 covering an underwritten registered public
offering, HDS and each participating holder agree to enter into a written
agreement with the managing underwriters in such form and containing such
provisions as are customary in the securities business for such an arrangement
between such managing underwriters and companies of HDS's size and investment
stature, including indemnification. In a registration under section 1, the
managing underwriters shall be selected by HDS (or, if required by a "demand"
registration right of a stockholder requiring such registration, by such
requiring stockholder), and in a registration under Section 2, may be selected
by the holders of a majority of the shares that have demanded to be included in
such registration pursuant to Section 2, provided the managing underwriters so
selected by such majority are reasonably acceptable to HDS.
5. HDS Stock. For the purposes of this Agreement, HDS Stock issued
---------
prior to the Closing Date shall include shares issued as a stock dividend or
stock split, or otherwise distributed by HDS to its stockholders without
consideration, in respect of shares of HDS Stock previously issued prior to the
Closing Date.
6. Availability of Rule 144. HDS shall not be obligated to register
------------------------
shares of HDS Stock held by any Stockholder at any time when the resale
provisions of Rule 144(K) (or any similar or successor provision) promulgated
under the 1933 act are available to enable such Stockholder to sell all shares
of HDS Stock issued prior to the Closing Date and then held by such Stockholder
within a consecutive 90 day period.
7. Survival. The provisions of this Agreement shall survive the
--------
until December 31, 2002.
8. Counterparts. This Agreement may be executed simultaneously in two
------------
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
9. Notices. All notices and other communications required or permitted
-------
hereunder shall be effective upon receipt (or refusal of receipt) and shall be
in writing and delivered by depositing the same in United States mail, addressed
to the party to be notified, postage prepaid and registered or certified with
return receipt requested, by delivering the same in person to such party or to
an officer or agent of such party or by facsimile transmission (followed by
delivery by United States mail). The address of the Company shall be that of
its principal executive offices and that of each respective stockholder shall be
as set forth in the records of the Company or its transfer agents as the case
may be.
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<PAGE>
10. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the provisions of the laws of the State of California,
without giving effect to laws concerning choice of law or conflicts of the law.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
HOSPITALITY DESIGN & SUPPLY, INC.
By /s/ Roger Laverty, CEO
---------------------------------
STOCKHOLDERS
/s/ Ross Berner
------------------------------------
ROSS BERNER
/s/ Mark McKinney
------------------------------------
MARK McKINNEY
/s/ Roger Laverty
------------------------------------
ROGER LAVERTY
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<PAGE>
EXHIBIT 10.1
Hospitality Design & Supply, Inc.
1998 Stock Option Plan
1. Adoption and Purpose of the Plan. This stock option plan, to be
--------------------------------
known as the "Hospitality Design & Supply, Inc. 1998 Stock Option Plan" (but
referred to herein as the "Plan") has been adopted by the board of directors
(the "Board") of Hospitality Design & Supply, Inc., a Delaware corporation (the
"Company"), and is subject to the approval of its shareholders pursuant to
section 7 below. The purpose of this Plan is to advance the interests of the
Company and its shareholders by enabling the Company to attract and retain
qualified directors, officers, employees, independent contractors, consultants
and advisers by providing them with an opportunity for investment in the
Company. The options that may be granted hereunder ("Options") represent the
right by the grantee thereof (each, including any permitted transferee, an
"Optionee") to acquire shares of the Company's common stock ("Shares," which if
acquired pursuant to the exercise of an Option will be referred to as "Option
Shares") subject to the terms and conditions of this Plan and a written
agreement between the Company and the Optionee to evidence each such Option (an
"Option Agreement").
2. Certain Definitions. The defined terms set forth in Exhibit A
------------------- ---------
attached hereto and incorporated herein (together with other capitalized terms
defined elsewhere in this Plan) will govern the interpretation of this Plan.
3. Eligibility. The Company may grant Options under this Plan only to
-----------
(i) persons who, at the time of such grant, are directors, officers and/or
employees of the Company, and/or any of its Subsidiaries, including persons who
are directors, officers and/or employees of any companies or other entities
whose business the Company has agreed to acquire by way of merger, stock
purchase or other similar transaction, (ii) persons under written agreements
with the Company to commence employment with the Company upon a specified date
or within a specified period, and (iii) persons who, and entities which, at the
time of such grant, are independent contractors, consultants or advisers of the
Company and/or any of its Subsidiaries (collectively, "Eligible Participants").
No person or entity will be an Eligible Participant following his, her or its
Termination of Eligibility Status and no Option may be granted to any person or
entity other than an Eligible Participant. There is no limitation on the number
of Options that may be granted to an Eligible Participant.
4. Option Pool; Shares Reserved for Options. In no event will the
----------------------------------------
Company issue, in the aggregate, more than Five Hundred Thousand (500,000)
Shares (the "Option Pool") pursuant to the exercise of all Options granted under
this Plan, exclusive of those Option Shares that may be reacquired by the
Company by repurchase or otherwise. At all times while Options granted under
this Plan are outstanding, the Company will reserve for issuance for the
purposes hereof a sufficient number of authorized and unissued Shares to fully
satisfy the Company's obligations under all such outstanding Options.
5. Administration. This Plan will be administered and interpreted by
--------------
the Board, or by a committee consisting of two or more members of the Board,
appointed by the Board for such purpose (the Board, or such committee, referred
to herein as the "Administrator"; the Board
1
<PAGE>
members, or such committee members, referred to herein as the "Administrator
Members"). Subject to the express terms and conditions hereof, the Administrator
is authorized to prescribe, amend and rescind rules and regulations relating to
this Plan, and to make all other determinations necessary or advisable for its
administration and interpretation. Specifically, the Administrator will have
full and final authority in its discretion, subject to the specific limitations
on that discretion as are set forth herein and in the Articles of Incorporation
and Bylaws of the Company, at any time:
(a) to select and approve the Eligible Participants to whom Options
will be granted from time to time hereunder;
(b) to determine the Fair Market Value of the Shares as of the Grant
Date for any Option that is granted hereunder;
(c) with respect to each Option it decides to grant, to determine the
terms and conditions of that Option, to be set forth in the Option Agreement
evidencing that Option (the form of which also being subject to approval by
the Administrator), which may vary from the "default" terms and conditions
set forth in section 6 below, except to the extent otherwise provided in
this Plan, including, without limitation, as follows:
(i) the total number of Option Shares that may be acquired by
the Optionee pursuant to the Option;
(ii) if the Option satisfies the conditions under Section 422(b)
of the Code, whether the Option will be treated as an ISO;
(iii) the per share purchase price to be paid to the Company by
the Optionee to acquire the Option Shares issuable upon exercise of the
Option (the "Option Price");
(iv) the maximum period or term during which the Option will be
exercisable (the "Option Term");
(v) the maximum period following any Termination of Eligibility
Status, whether resulting from an Optionee's death, disability or any
other reason, during which period (the "Grace Period") the Option will
be exercisable, subject to Vesting and to the expiration of the Option
Term;
(vi) whether to accept a promissory note or other form of legal
consideration in addition to cash as payment of all or a portion of the
Option Price and/or Tax Withholding Liability to be paid by the Optionee
upon the exercise of an Option granted hereunder;
(vii) the conditions (e.g., the passage of time or the occurrence
of events), if any, that must be satisfied prior to the vesting of the
right to exercise all or specified portions of an Option (such portions
being described as the number of Option Shares, or the percentage of the
total number of Option Shares that may be acquired by the Optionee
pursuant to the Option; the vested portion being referred to as a
"Vested Option" and the unvested portion being referred to as an
"Unvested Option"); and
(d) to delegate all or a portion of the Administrator's authority under
sections 5(a), (b) and (c) above to one or more members of the Board who
also are executive officers of the
2
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Company, and subject to such restrictions and limitations as the
Administrator may decide to impose on such delegation.
Notwithstanding anything to the contrary in this section 5, no Administrator
Member may participate, either directly or indirectly, in any determination
regarding any Option held by, or granted to, such Administrator Member. No
Administrator Member shall be liable for any action taken, or determination
made, by such individual in good faith pursuant to the authority described
herein with respect to the Plan or any Options granted hereunder.
6. Default Terms and Conditions of Option Agreements. Unless otherwise
-------------------------------------------------
expressly provided in an Option Agreement based on the Administrator's
determination pursuant to section 5(c) above or in any contract of employment or
engagement between Optionee and the Company, the following terms and conditions
will be deemed to apply to each Option as if expressly set forth in the Option
Agreement:
6.1 ISO. No Option will be treated as an ISO unless treatment as an ISO is
---
expressly provided for in an Option Agreement and such Option satisfies the
conditions of Section 422(b) of the Code.
6.2 Option Term. The Option Term will be for a period of 10 years
-----------
beginning on the Grant Date (or 5 years in the case of an ISO granted to a 10%
shareholder).
6.3 Grace Periods. Subject to the Option Term, following a Termination of
-------------
Eligibility Status:
(a) the Grace Period will be thirty (30) days, unless the Termination
of Eligibility Status is a result of a Termination for Cause or the death or
disability of the Optionee;
(b) the Grace Period will be one year if the Termination of Eligibility
Status is a result of the death or disability of the Optionee; and
(c) the Option will terminate, and there will be no Grace Period,
effective immediately as of the date and time of a Termination for Cause of
the Optionee, regardless of whether the Option is Vested or Unvested.
6.4 Vesting. The Option initially will be deemed an entirely Unvested
-------
Option, but portions of the Option will become a Vested Option on the following
schedule:
(a) thirty-three and one-third percent (33-1/3%) will become a Vested
Option as of the first anniversary of the "Vesting Start Date" specified in
the Option Agreement (which may be earlier but may not be later than the
Grant Date specified therein); and
(b) thirty-three and one-third percent (33-1/3%) of the Option will
become a Vested Option as of each anniversary thereafter;
provided that the Optionee does not suffer a Termination of Eligibility
Status prior to each such vesting date and provided further that additional
vesting will be suspended during any period while the Optionee is on a leave of
absence from the Company or its Subsidiaries, as determined by the
Administrator.
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<PAGE>
6.5 Exercise of the Option; Issuance of Share Certificate.
(a) The portion of the Option that is a Vested Option may be exercised
by giving written notice thereof to the Company, on such form as may be
specified by the Administrator, but in any event stating: the Optionee's
intention to exercise the Option; the date of exercise; the number of full
Option Shares to be purchased; the amount and form of payment of the Option
Price; and such assurances of the Optionee's investment intent as the Company
may require to ensure that the transaction complies in all respects with the
requirements of the 1933 Act and other applicable securities laws. The notice
of exercise will be signed by the person or persons exercising the Option. In
the event that the Option is being exercised by the representative of the
Optionee, the notice will be accompanied by proof satisfactory to the Company of
the representative's right to exercise the Option. The Option may be exercised
by a securities broker acting on behalf of the Optionee pursuant to
authorization instructions approved by the Company. The notice of exercise will
be accompanied by full payment of the Option Price for the number of Option
Shares to be purchased, in United States dollars, in cash, by check made payable
to the Company, or by delivery of such other form of payment (if any) as
approved by the Administrator. Payment may also be made by delivering a copy of
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds sufficient to pay the Option Price and, if
required, the amount of any Tax Withholding Liability.
(b) To the extent required by applicable federal, state, local or
foreign law, and as a condition to the Company's obligation to issue any Shares
upon the exercise of the Option in full or in part, the Optionee will make
arrangements satisfactory to the Company for the payment of any applicable Tax
Withholding Liability that may arise by reason of or in connection with such
exercise. Such arrangements may include, in the Company's sole discretion, that
the Optionee tender to the Company the amount of such Tax Withholding Liability,
in cash, by check made payable to the Company, by delivery of irrevocable
instructions to a broker as described in the last sentence of section (a) above,
or in the form of such other payment as may be approved by the Administrator, in
its discretion pursuant to section 5(c)(vi) above.
(c) After receiving a proper notice of exercise and payment of the
applicable Option Price and Tax Withholding Liability, the Company will cause to
be issued a certificate or certificates for the Option Shares as to which the
Option has been exercised, registered in the name of the person rightfully
exercising the Option and the Company will cause such certificate or
certificates to be delivered to such person.
6.6 Compliance with Law. Notwithstanding any other provision of this
-------------------
Plan, Options may be granted pursuant to this Plan, and Option Shares may be
issued pursuant to the exercise thereof by an Optionee, only after and on the
condition that there has been compliance with all applicable federal and state
securities laws. The Company will not be required to list, register or qualify
any Option Shares upon any securities exchange, under any applicable state,
federal or foreign law or regulation, or with the Securities and Exchange
Commission or any state agency, or secure the consent or
4
<PAGE>
approval of any governmental regulatory authority, except that if at any time
the Board determines, in its discretion, that such listing, registration or
qualification of the Option Shares, or any such consent or approval, is
necessary or desirable as a condition of or in connection with the exercise of
an Option and the purchase of Option Shares thereunder, that Option may not be
exercised, in whole or in part, unless and until such listing, registration,
qualification, consent or approval is effected or obtained free of any
conditions that are not acceptable to the Board, in its discretion. However, the
Company will seek to register or qualify with, or as may be provided by
applicable local law, file for and secure an exemption from such registration or
qualification requirements from, the applicable securities administrator and
other officials of each jurisdiction in which an Eligible Participant would be
granted an Option hereunder prior to such grant.
6.7 Restrictions on Transfer.
------------------------
(a) Options Nontransferable. No Option will be transferable by an
-----------------------
Optionee otherwise than by will or the laws of descent and distribution. During
the lifetime of a natural person who is granted an Option under this Plan, the
Option will be exercisable only by him or her. Notwithstanding anything else in
this Plan to the contrary, no Option Agreement will contain any provision which
is contrary to, or which modifies, the provisions of this section 6.7(a).
(b) Prohibited Transfers. Prior to the Initial Public Offering,
--------------------
no Holder of any Option Shares may Transfer such Shares, or any interest
therein: (i) except as expressly provided in this Plan; and (ii) in full
compliance with all applicable securities laws and any applicable restrictions
on Transfer provided in the Company's Articles of Incorporation and/or Bylaws,
which will be deemed incorporated by reference into this Plan. All Transfers of
Option Shares not complying with the specific limitations and conditions set
forth in this section 6.7 are expressly prohibited. Any prohibited Transfer is
void and of no effect, and no purported transferee in connection therewith will
be recognized as a Holder of Option Shares for any purpose whatsoever. Should
such a Transfer purport to occur, the Company may refuse to carry out the
Transfer on its books, attempt to set aside the Transfer, enforce any
undertakings or rights under this Plan, or exercise any other legal or equitable
remedy.
(c) Conditions to Transfer. It will be a condition to any
----------------------
Transfer of any Option Shares that:
(i) the transferee of the Shares will execute such
documents as the Company may reasonably require to ensure that the Company's
rights under this Plan, and any applicable Option Agreement, are adequately
protected with respect to such Shares, including, without limitation, the
transferee's agreement to be bound by all of the terms and conditions of
this Plan and such Agreement, as if he or she were the original Holder of
such Shares; and
(ii) the Company is satisfied that such Transfer complies in
all respects with the requirements imposed by applicable state and federal
securities laws and regulations.
(d) Market Standoff. If in connection with any public offering of
---------------
securities of the Company (or any Successor Entity), the underwriter or
underwriters managing such offering so requests, then each Optionee and each
Holder of Option Shares will agree to not sell or otherwise Transfer any such
Shares (other than Shares included in such underwriting) without the prior
written consent of such underwriter, for such period of time as may be
reasonably requested by the underwriter commencing on the effective date of the
registration statement filed with the Securities and Exchange Commission in
connection with such offering.
6.8 Change of Control Transactions. Except as otherwise provided in
------------------------------
the Option Agreement, or any contract of employment or engagement between
Optionee and the Company, in the event of a Change of Control Transaction, the
Company shall endeavor to cause the Successor
5
<PAGE>
Entity in such transaction either to assume all of the Options which
have been granted hereunder and which are outstanding as of the consummation of
such transaction ("Closing"), or to issue (or cause to be issued) in
substitution thereof comparable options of such Successor Entity (or of its
parent or its Subsidiary). If the Successor Entity is unwilling to either assume
such Options or grant comparable options in substitution for such Options, on
terms that are acceptable to the Company as determined by the Board in the
exercise of its discretion, then with respect to each outstanding Option, that
portion of the Option which remains Unvested will become Vested immediately
prior to such Closing; and the Board may cancel all outstanding Options, and
terminate this Plan, effective as of the Closing, provided that it will notify
all Optionees of the proposed Change of Control Transaction a reasonable amount
of time prior to the Closing so that each Optionee will be given the opportunity
to exercise the Vested portion of his or her Option (after giving effect to the
acceleration of such vesting discussed above) prior to the Closing. For purposes
of this section 6.8, the term "Change of Control Transaction" means (a) the sale
of all or substantially all of the assets of the Company to any person or entity
that, prior to such sale, did not control, was not under common control with, or
was not controlled by, the Company, or (b) the Company's merger or consolidation
with or into another entity, regardless of which entity survives such merger or
consolidation, unless at least fifty percent (50%) of the outstanding voting
securities of the surviving or parent corporation, as the case may be,
immediately following such transaction are beneficially held by such persons and
entities in the same proportion as such persons and entities beneficially held
the outstanding voting securities of the Company immediately prior to such
transaction, or (c) the acquisition of at least fifty percent (50%) of the
outstanding voting securities of the Company by any person, or any "group" as
contemplated under Section 13(d) of the Securities Act of 1934, as amended;
provided that the issuances of shares to the stockholders of the founding
companies consolidating with the Company at the time of the Initial Public
Offering, and the issuances of shares in the Initial Public Offering, shall in
no event constitute a Change of Control Transaction.
6.9 Additional Restrictions on Transfer; Investment Intent. By
------------------------------------------------------
accepting an Option and/or Option Shares under this Plan, the Optionee will be
deemed to represent, warrant and agree that, unless a registration statement is
in effect with respect to the offer and sale of Option Shares: (i) neither the
Option nor any such Shares will be freely tradeable and must be held
indefinitely unless such Option and such Shares are either registered under the
1933 Act or an exemption from such registration is available; (ii) the Company
is under no obligation to register the Option or any such Shares; (iii) upon
exercise of the Option, the Optionee will purchase the Option Shares for his or
her own account and not with a view to distribution within the meaning of the
1933 Act, other than as may be effected in compliance with the 1933 Act and the
rules and regulations promulgated thereunder; (iv) no one else will have any
beneficial interest in the Option Shares; (v) the Optionee has no present
intention of disposing of the Option Shares at any particular time; and (vi)
neither the Option nor the Shares have been qualified under the securities laws
of any state and may only be offered and sold pursuant to an exception from
qualification under applicable state securities laws.
6.10 Stock Certificates; Legends. Certificates representing Option
---------------------------
Shares will bear all legends required by law and necessary or appropriate in the
Administrator's discretion to effectuate the provisions of this Plan and of the
applicable Option Agreement. The Company may place a "stop transfer" order
against Option Shares until full compliance with all restrictions and conditions
set forth in this Plan, in any applicable Option Agreement and in the legends
referred to in this section 6.10.
6.11 Notices. Any notice to be given to the Company under the terms
-------
of an Option Agreement will be addressed to the Company at its principal
executive office, Attention: Secretary,
6
<PAGE>
or at such other address as the Company may designate in writing. Any notice to
be given to an Optionee will be addressed to him or her at the address provided
to the Company by the Optionee. Any such notice will be deemed to have been duly
given if and when enclosed in a properly sealed envelope, addressed as
aforesaid, deposited, postage prepaid, in a post office or branch post office
regularly maintained by the local postal authority.
6.12 Other Provisions. Each Option Agreement may contain such other
----------------
terms, provisions and conditions, including restrictions on the Transfer of
Option Shares, and rights of the Company to repurchase such Shares, not
inconsistent with this Plan and applicable law, as may be determined by the
Administrator in its sole discretion.
6.13 Specific Performance. Under those circumstances in which the
--------------------
Company chooses to timely exercise its rights to repurchase Option Shares as
provided herein or in any Option Agreement, the Company will be entitled to
receive such Shares in specie in order to have the same available for future
issuance without dilution of the holdings of other shareholders of the Company.
By accepting Option Shares, the Holder thereof therefore acknowledges and agrees
that money damages will be inadequate to compensate the Company and its
shareholders if such a repurchase is not completed as contemplated hereunder and
that the Company will, in such case, be entitled to a decree of specific
performance of the terms hereof or to an injunction restraining such holder (or
such Holder's personal representative) from violating this Plan or Option
Agreement, in addition to any other remedies that may be available to the
Company at law or in equity.
7. Term of the Plan. This Plan will become effective on the date of
----------------
its adoption by the Board. This Plan will expire on the tenth (10th)
anniversary of the date of its adoption by the Board or its approval by the
shareholders of the Company, whichever is earlier, unless it is terminated
earlier pursuant to section 11 of this Plan, after which no more Options may be
granted under this Plan, although all outstanding Options granted prior to such
expiration or termination will remain subject to the provisions of this Plan,
and no such expiration or termination of this Plan will result in the expiration
or termination of any such Option prior to the expiration or early termination
of the applicable Option Term.
8. Adjustments Upon Changes in Stock. In the event of any change in
---------------------------------
the outstanding Shares of the Company from and after consummation of the
Company's Initial Public Offering, as a result of a stock split, reverse stock
split, stock bonus or distribution, recapitalization, combination or
reclassification, appropriate proportionate adjustments will be made in: (i)
the aggregate number of Shares that are reserved for issuance in the Option Pool
pursuant to section 4 above, under outstanding Options or future Options granted
hereunder; (ii) the Option Price and the number of Option Shares that may be
acquired under each outstanding Option granted hereunder; and (iii) other rights
and matters determined on a per share basis under this Plan or any Option
Agreement evidencing an outstanding Option granted hereunder. Any such
adjustments will be made only by the Board, and when so made will be effective,
conclusive and binding for all purposes with respect to this Plan and all
Options then outstanding. No such adjustments will be required by reason of the
issuance or sale by the Company for cash or other consideration of additional
Shares or securities convertible into or exchangeable for Shares.
9. Modification, Extension and Renewal of Options. Subject to the
----------------------------------------------
terms and conditions and within the limitations of this Plan, the Administrator
may modify, extend or renew outstanding Options granted under this Plan, or
accept the surrender of outstanding Options (to the extent not theretofore
exercised) and authorize the granting of new Options in substitution therefor
7
<PAGE>
(to the extent not theretofore exercised). Notwithstanding the foregoing,
however, no modification of any Option will, without the consent of the
Optionee, alter or impair any rights or obligations under any outstanding
Option.
10. Governing Law. The internal laws of the State of California
-------------
(irrespective of its choice of law principles) will govern the validity of this
Plan, the construction of its terms and the interpretation of the rights and
duties of the parties hereunder and under any Option Agreement.
11. Amendment and Discontinuance. The Board may amend, suspend or
----------------------------
discontinue this Plan at any time or from time to time; provided that any
amendment to the Plan shall be subject to the approval of the Company's
shareholders to the extent required by applicable laws, rules or regulations.
However, no such action may alter or impair any Option previously granted under
this Plan without the consent of the Optionee, nor may the number of Option
Shares in the Option Pool be reduced to a number that is less than the aggregate
number of Option Shares (i) that may be issued pursuant to the exercise of all
outstanding and unexpired Options granted hereunder, and (ii) that have been
issued and are outstanding pursuant to the exercise of Options granted
hereunder.
12. No Shareholder Rights. No rights or privileges of a shareholder in
---------------------
the Company are conferred by reason of the granting of an Option. No Optionee
will become a shareholder in the Company with respect to any Option Shares
unless and until the Option has been properly exercised and the Option Price
fully paid as to the portion of the Option exercised.
13. Copies of Plan. A copy of this Plan will be delivered to each
--------------
Optionee at or before the time he, she or it executes an Option Agreement.
Date Plan Adopted by Board of Directors: July 20, 1998
Date Plan Approved by the Shareholders: July 27, 1998
8
<PAGE>
United Road Services, Inc.
1998 Executive Stock Option Plan
Exhibit A
Definitions
-----------
1. "10% shareholder" means a person who owns, either directly or
indirectly by virtue of the ownership attribution provisions set forth in
Section 424(d) of the Code at the time he or she is granted an Option, stock
possessing more than 10% of the total combined voting power or value of all
classes of stock of the Company and/or of its Subsidiaries.
2. "1933 Act" means the Securities Act of 1933, as amended.
3. "Administrator" has the meaning set forth in section 5 of the Plan.
4. "Board" has the meaning set forth in section 1 of the Plan.
5. "Change of Control Transaction" has the meaning set forth in section
6.8 of the Plan.
6. "Closing" has the meaning set forth in section 6.8 of the Plan.
7. "Code" means the Internal Revenue Code of 1986, as amended
(references herein to Sections of the Code are intended to refer to Sections of
the Code as enacted at the time of the Plan's adoption by the Board and as
subsequently amended, or to any substantially similar successor provisions of
the Code resulting from recodification, renumbering or otherwise).
8. "Company" has the meaning set forth in section 1 of the Plan.
9. "disability" means any physical or mental disability which results
in a Termination of Eligibility Status under applicable law, except that for
purposes of section 6.3 of the Plan, the term "disability" means permanent and
total disability within the meaning of Section 22(e)(3) of the Code.
10. "Donative Transfer" with respect to Option Shares means any
voluntary Transfer by a transferor other than for value or the payment of
consideration to the transferor.
11. "Eligible Participants" has the meaning set forth in section 3 of
the Plan.
12. "Fair Market Value" means, with respect to the Shares and as of the
date that is relevant to such a determination (e.g., on the Grant Date), the
market price per share of such Shares determined by the Administrator,
consistent with the requirements of Section 422 of the Code and to the extent
consistent therewith, as follows: (a) if the Shares are traded on a stock
exchange on the date in question, then the Fair Market Value will be equal to
the closing price reported by the applicable composite-transactions report for
such date; (b) if the Shares are traded over-the-counter on the date in question
and are classified as a national market issue, then the Fair Market Value will
be equal to the last-transaction price quoted by the NASDAQ system for such
date; (c) if the Shares are traded over-the-counter on the date in question but
are not classified as a national market issue, then the Fair Market Value will
be equal to the mean between the last reported representative bid and asked
prices quoted by the NASDAQ system for such date; and (d) if none of the
foregoing provisions is applicable, then the Fair Market Value will be
determined by the Administrator in good
9
<PAGE>
faith on such basis as it deems appropriate.
13. "Grace Period" has the meaning set forth in section 5(c)(v) of the
Plan.
14. "Grant Date" means, with respect to an Option, the date on which
the Option Agreement evidencing that Option is entered into between the Company
and the Optionee, or such other date as may be set forth in that Option
Agreement as the "Grant Date" which will be the effective date of that Option
Agreement.
15. "Holder" means the holder of any Option Shares.
16. "Initial Public Offering" means the closing of the first sale of
securities of the Company, or of any Successor Entity, to the public, through a
firm commitment underwriting, pursuant to an effective registration statement
filed with the Securities and Exchange Commission under the 1933 Act.
17. "Involuntary Transfer" with respect to Option Shares includes,
without limitation, any of the following: (A) an assignment of the Shares for
the benefit of creditors of the transferor; (B) a Transfer by operation of law;
(C) an execution of judgment against the Shares or the acquisition of record or
beneficial ownership of Shares by a lender or creditor; (D) a Transfer pursuant
to any decree of divorce, dissolution or separate maintenance, any property
settlement, any separation agreement or any other agreement with a spouse
(except for bona fide estate planning purposes) under which any Shares are
Transferred or awarded to the spouse of the transferor or are required to be
sold; or (E) a Transfer resulting from the filing by the transferor of a
petition for relief, or the filing of an involuntary petition against the
transferor, under the bankruptcy laws of the United States or of any other
nation.
18. "ISO" means an "incentive stock option" as defined in Section 422
of the Code.
19. "Option Agreement" has the meaning set forth in section 1 of the
Plan.
20. "Option Pool" has the meaning set forth in section 4 of the Plan.
21. "Option Price" has the meaning set forth in section 5(c)(iii) of
the Plan.
22. "Option Shares" has the meaning set forth in section 1 of the Plan,
provided that for purposes of section 6.7 of the Plan, the term "Option Shares"
includes all Shares issued by the Company to a Holder (or his, her or its
predecessor) by reason of such holdings, including any securities which may be
acquired as a result of a stock split, stock dividend, and other distributions
of Shares in the Company made upon, or in exchange for, other securities of the
Company.
23. "Option Term" has the meaning set forth in section 5(c)(iv) of the
Plan.
24. "Optionee" has the meaning set forth in section 1 of the Plan.
25. "Options" has the meaning set forth in section 1 of the Plan.
26. "Plan" has the meaning set forth in section 1 of the Plan.
27. "Shares" has the meaning set forth in section 1 of the Plan.
10
<PAGE>
28. "Subsidiary" has the same meaning as "subsidiary corporation" as
defined in Section 424(f) of the Code.
29. "Successor Entity" means a corporation or other entity that
acquires all or substantially all of the assets of the Company, or which is the
surviving or parent entity resulting from a merger, consolidation or other
reorganization of which the Company is a merging party or the sale or other
change of beneficial ownership of at least 50% of the outstanding voting
securities of the Company.
30. "Tax Withholding Liability" in connection with the exercise of any
Option means all federal and state income taxes, social security tax, and any
other taxes applicable to the compensation income arising from the transaction
required by applicable law to be withheld by the Company.
31. "Termination of Eligibility Status" means (i) in the case of any
employee of the Company and/or any of its Subsidiaries, a termination of his or
her employment, whether by the employee or employer, and whether voluntary or
involuntary, including without limitation as a result of the death or disability
of the employee, (ii) in the case of any advisor, consultant, or independent
contractor of the Company and/or any of its Subsidiaries, the termination of the
services relationship pursuant to any contract between the parties or otherwise
under applicable law, and (iii) in the case of any director of the Company
and/or any of its Subsidiaries, the death of or resignation by the director or
his or her removal from the board in the manner provided by the articles of
incorporation, bylaws or other organic instruments of the Company or Subsidiary
or otherwise in accordance with applicable law.
32. "Termination for Cause" means (i) in the case of an Optionee who is
an employee of the Company and/or any of its Subsidiaries, a termination by the
employer of the Optionee's employment for "cause" as defined by any applicable
contract of employment, or if not defined therein (or following termination of
any such contract of employment or in the event that no such contract exists),
pursuant to the "For Cause Standard" set forth below, (ii) in the case of an
Optionee who is or which is an advisor, consultant or independent contractor to
the Company and/or any of its Subsidiaries, a termination of the services
relationship by the hiring party for "cause" or breach of contract, as defined
by any applicable contract of engagement between the parties, or if not defined
therein (or following termination of any such contract of engagement or if no
such contract exists), pursuant to the "For Cause Standard" set forth below, and
(iii) in the case of an Optionee who is a director, but not an employee, of the
Company, removal of him or her from the board of directors by action of the
shareholders or, if permitted by applicable law and the articles, bylaws or
other organic documents of the Company, by the other directors, in connection
with the good faith determination of the board of directors (or of the Company's
shareholders if so required, but in either case excluding the vote of the
subject individual if he or she is a director or a shareholder) that the "For
Cause Standard" set forth below has been satisfied. For purposes hereof, the
"For Cause Standard" means that one or more of the following has occurred: (a)
the commission by Optionee of any act materially detrimental to the Company,
including fraud, embezzlement, theft, bad faith, gross negligence, recklessness
or willful misconduct; (b) incompetence or repeated failure or refusal to
perform the duties required of Optionee by the Company; (c) conviction of a
felony or of any crime of moral turpitude to the extent materially detrimental
to the Company; or (d) any material misrepresentation by Optionee to the Company
regarding the operation of the business, provided that the action or conduct
described in clause (b) above will constitute "Cause" only if such action or
conduct continues after the Company has provided Optionee with written notice
thereof and a
11
<PAGE>
reasonable opportunity (to be not less than 30 days) to cure the same.
33. "Transfer" with respect to Option Shares, includes, without
limitation, a voluntary or involuntary sale, assignment, transfer, conveyance,
pledge, hypothecation, encumbrance, disposal, loan, gift, attachment or levy of
those Shares, including any Involuntary Transfer, Donative Transfer or transfer
by will or under the laws of descent and distribution.
34. "Unvested Option" has the meaning set forth in section 5(c)(vii) of
the Plan.
35. "Vested Option" has the meaning set forth in section 5(c)(vii) of
the Plan.
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<PAGE>
EXHIBIT 10.2
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is entered into as of this _____ day of
_________, 1999, by and between Hospitality Design & Supply, Inc., a Delaware
corporation, (the "Company"), and _____________ ("Indemnitee").
RECITALS
--------
A. The Company is aware that because of the increased exposure to
litigation costs, talented and experienced persons are increasingly reluctant to
serve or continue serving as directors and officers of corporations unless they
are protected by comprehensive liability insurance and indemnification.
B. The statutes and judicial decisions regarding the duties of
directors and officers are often difficult to apply, ambiguous, or conflicting,
and therefore fail to provide such directors and officers with adequate guidance
regarding the proper course of action.
C. The Company believes that it is fair and proper to protect the
Company's directors and certain of its officers, from the risk and judgments,
settlements and other expenses which may occur as a result of their service to
the Company, even in cases in which such persons received no personal profit or
were not otherwise culpable.
D. The Board of Directors of the Company (the "Board") has concluded
that, to retain and attract talented and experienced individuals to serve as
officers and directors of the Company and to encourage such individuals to take
the business risks necessary for the success of the Company, the Company should
contractually indemnify its officers and directors, in connection with claims
against such officers and directors in connection with their services to the
Company, and has further concluded that the failure to provide such contractual
indemnification could be detrimental to the Company, and its stockholders.
NOW, THEREFORE, the parties, intending to be legally bound, hereby
agree as follows:
1. Definitions:
-----------
(a) Agent. "Agent" means any person who is or was a director,
-----
officer, fiduciary employee or other agent of the Company; or is
or was serving at the request of, for the convenience of, or to
represent the interests of, the Company as a director, officer,
employee or agent of another entity or enterprise; or was a
director, officer, employee or agent of a predecessor corporation
of the Company, or was a director, officer, employee or Agent of
another enterprise at the request of, for the convenience of, or
to represent the interests of such predecessor corporation.
(b) Expenses. "Expenses" means all direct and indirect costs
--------
of any type or nature whatsoever including, without limitation:
<PAGE>
(i) Any expense, liability, or loss, including
attorneys' fees and costs, judgments, fines, ERISA excise
taxes and penalties, amounts paid or to be paid in
settlement;
(ii) Any interest, assessments, or other charges imposed
on any of the items in part (i) of this subsection (b);
and
(iii) Any federal, state, local, or foreign taxes imposed
as a result of the actual or deemed receipt of any
payments under this Agreement paid or incurred in
connection with investigating, defending, being a witness
in, or participating in (including on appeal), or
preparing for any of the foregoing in, any proceeding
relating to any indemnifiable event; provided, however,
-------- -------
that in calculating any "taxes imposed" within the meaning
of this subsection (b)(iii), there shall be taken into
account whether and to what extent any Expense for which
indemnification is sought gave, or will give, rise to a
tax benefit, deduction or any other reduction of income in
any, including any future, taxable period.
(c) Proceeding. "Proceeding" means any threatened, pending,
----------
or completed claim, suit or action, whether civil, criminal,
administrative, investigative or otherwise.
2. Maintenance of Liability Insurance.
----------------------------------
(a) The Company hereby covenants and agrees with Indemnitee
that, subject to Section (b), the Company shall obtain and
maintain in full force and effect directors' and officers'
liability insurance ("D&O Insurance") in reasonable amounts as
the Board of Directors shall determine from established and
reputable insurers, but no less than the amounts in effect upon
initial procurement of the D&O Insurance. In all policies of D&O
Insurance, Indemnitee shall be named as an insured and such
policies shall require (provided that the insurer is willing to
include such requirement without charge or for a commercially
reasonable premium or surcharge) the insurer to provide
Indemnitee with thirty days advance written notice of a policy
change or cancellation.
(b) Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain D&O Insurance if the Company
determines in good faith that the premium costs for such
insurance are (i) disproportionate to the amount of coverage
provided after giving effect to exclusions, and (ii)
---
substantially more burdensome to the Company than the premiums
charged to the Company for its initial D&O Insurance.
3. Mandatory Indemnification. The Company shall defend, indemnify
-------------------------
and hold harmless Indemnitee:
(a) Third Party Actions. If Indemnitee is a person who was or
-------------------
is a party or is threatened to be made a party to any proceeding
(other than an action by or in the right of the Company) by
reason of the fact that Indemnitee is or was or is
2
<PAGE>
claimed to be an Agent, or by reason of anything done or not done
by Indemnitee in any such capacity, or by reason of the fact that
Indemnitee personally guaranteed any obligation of the Company at
any time, against any and all Expenses and liabilities or any
type whatsoever (including, but not limited to, legal fees,
judgments, fines, ERISA excise taxes or penalties, and amounts
paid in settlement) incurred by such person in connection with
the investigation, defense, settlement or appeal of such
proceeding, so long as the Indemnitee acted in good faith and in
a manner the Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, or, with respect to
any criminal action or Proceeding, had no reasonable cause to
believe such person's conduct was unlawful.
(b) Derivative Actions. If Indemnitee is a person who was or
------------------
is a party or is threatened to be made a party to any Proceeding
by or in the right of the Company by reason of the fact that
Indemnitee is or was an Agent, or by reason of anything done or
not done by Indemnitee in any such capacity, against any amounts
paid in settlement of any such Proceeding, and all other Expenses
incurred by such person in connection with the investigation,
defense, settlement or appeal of such Proceeding so long as the
Indemnitee acted in good faith and in a manner the Indemnitee
reasonably believed to be in or not opposed to the best interests
of the Company; except that no indemnification under this
subsection shall be made, and Indemnitee shall repay all amounts
previously advanced by the Company, in respect of any claim,
issue or matter for which such person is judged in a final, non-
appealable decision to be liable to the Company by a court of
competent jurisdiction due to willful misconduct in the
performance of such person's duties to the Company, unless and
only to the extent that the court in which such Proceeding was
brought shall determine that Indemnitee is fairly and reasonably
entitled to indemnity.
(c) Actions Where Indemnitee is Deceased. If Indemnitee is a
------------------------------------
person who was or is a party or is threatened to be made a party
to any Proceeding by reason of the fact that Indemnitee is or was
an Agent, or by reason of anything done or not done by Indemnitee
in any such capacity, and prior to, during the pendency of, or
after completion of, such Proceeding, the Indemnitee shall die,
then the Company shall defend, indemnify and hold harmless the
estate, heirs and legatees of the Indemnitee against any and all
Expenses and liabilities incurred by or for such persons or
entities in connection with the investigation, defense,
settlement or appeal of such Proceeding on the same basis as
provided for the Indemnitee in Sections 3(a) and 3(b) above.
The Expenses and liabilities covered hereby shall be net of any
payments by D&O Insurance carriers or others, but if such payments are revocable
and recouped in whole or in part by the carriers or others, the Expenses and
liabilities covered hereby shall be increased by the amount so recouped.
4. Partial Indemnification. If Indemnitee is found under Section
-----------------------
3(b), 6 or 9 hereof not to be entitled to indemnification for all of the
Expenses relating to a Proceeding, the
3
<PAGE>
Company shall indemnify the Indemnitee for any portion of such Expenses not
specifically precluded by the operation of such Section 3(b), 6 or 9.
5. Indemnification Procedures; Mandatory Advancement of Expenses.
-------------------------------------------------------------
(a) Promptly after receipt by Indemnitee of notice to him or
her of the commencement or threat of any Proceeding covered
hereby, Indemnitee shall notify the Company of the commencement
or threat thereof, provided that any failure to so notify shall
not relieve the Company of any of its obligations hereunder.
(b) If, at the time of the receipt of a notice pursuant to
Section 5(a) above, the Company has D&O Insurance in effect, the
Company shall give prompt notice of the Proceeding or claim to
its insurers in accordance with the procedures set forth in the
applicable policies. The Company shall thereafter take all
necessary or desirable action to cause such insurers to pay all
amounts payable as a result of such Proceeding in accordance with
the terms of such policies.
(c) Indemnitee shall be entitled to retain one or more counsel
from time to time selected by him or her in such person's sole
discretion to act as his or her counsel in and for the
investigation, defense, settlement or appeal of each Proceeding.
(d) The Company shall bear all fees and Expenses (including
invoices for advance retainers) of such counsel, and all fees and
Expenses invoiced by other persons or entities, in connection
with the investigation, defense, settlement or appeal of each
such Proceeding. Such fees and Expenses are referred to herein as
"Covered Expenses."
(e) Until a determination to the contrary under Section 6
hereof is made, the Company shall advance all Covered Expenses in
connection with each Proceeding. If required by law, as a
condition to such advances, Indemnitee shall, at the request of
the Company, agree to repay such amounts advanced if it shall
ultimately be determined by a final order of a court that
Indemnitee is not entitled to be indemnified by the Company by
the terms hereof or under applicable law.
(f) Each advance to be made hereunder shall be paid by the
Company to Indemnitee within 10 days following delivery of a
written request therefor by Indemnitee to the Company.
(g) The Company acknowledges the potentially severe damage to
Indemnitee should the Company fail timely to make such advances
to Indemnitee.
6. Determination of Right to Indemnification.
-----------------------------------------
(a) To the extent Indemnitee has been successful on the merits
or otherwise in defense of any Proceeding, claim, issue or matter
covered hereby, Indemnitee
4
<PAGE>
need not repay any of the Expenses advanced in connection with
the investigation, defense or appeal of such Proceeding.
(b) If Section 6(a) is inapplicable, the Company shall remain
obligated to indemnify Indemnitee, and Indemnitee need not repay
Expenses previously advanced, unless the Company, by motion
before a court of competent jurisdiction, obtains an order for
preliminary or permanent relief suspending or denying the
obligation to advance or indemnify for Expenses.
(c) Notwithstanding a determination by a court that Indemnitee
is not entitled to indemnification with respect to a specific
Proceeding, Indemnitee shall have the right to apply to the Court
of Chancery of Delaware for the purpose of enforcing Indemnitee's
right to indemnification pursuant to this Agreement.
(d) Notwithstanding any other provision in this Agreement to the
contrary, the Company shall indemnify Indemnitee against all
Expenses incurred by Indemnitee in connection with any Proceeding
under Section 6(b) or 6(c) and against all Expenses incurred by
Indemnitee in connection with any other Proceeding between the
Company and Indemnitee involving the interpretation or
enforcement of the rights of Indemnitee under this Agreement
unless a court of competent jurisdiction finds that the material
claims and/or defenses of Indemnitee in any such Proceeding were
frivolous or made in bad faith.
7. Certificate of Incorporation and By-Laws. The Company agrees
----------------------------------------
that the Company's Certificate of Incorporation and Bylaws in effect on the date
hereof shall not be amended to reduce, limit, hinder or delay (i) the rights of
Indemnitee granted hereby, or (ii) the ability of the Company to indemnify
Indemnitee as required hereby. The Company further agrees that it shall exercise
the powers granted to it under its Certificate of Incorporation, its Bylaws and
by applicable law to indemnify Indemnitee to the fullest extent possible as
required hereby.
8. Witness Expenses. The Company agrees to compensate Indemnitee
----------------
for the reasonable value of his or her time spent, and to reimburse Indemnitee
for all Expenses (including attorneys' fees and travel costs) incurred by him or
her, in connection with being a witness, or if Indemnitee is threatened to be
made a witness, with respect to any proceeding, by reason of Indemnitee's
serving or having served as an Agent of the Company.
9. Exceptions. Notwithstanding any other provision hereunder to
----------
the contrary, the Company shall not be obligated pursuant to the terms of this
Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance
------------------------------
Expenses to Indemnitee with respect to Proceedings or claims
initiated or brought voluntarily by Indemnitee and not by way of
defense (other than Proceedings brought to establish or enforce a
right to indemnification under this Agreement or the provisions
of the Company's Certificate of Incorporation or Bylaws unless a
court of competent jurisdiction determines that each of the
material assertions made by Indemnitee in such Proceeding were
not made in good faith or were frivolous).
5
<PAGE>
(b) Unauthorized Settlements. To indemnify Indemnitee under
------------------------
under this Agreement for any amounts paid in settlement of any
Proceeding covered hereby without the prior written consent of
the Company to such settlement, which consent shall not be
unreasonably withheld.
10. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any provision of this Agreement,
-----
in the event of any change, after the date of this Agreement, in
any applicable law, statute or rule which expands the right of a
Delaware corporation to indemnify a member of its board of
directors or an officer, employee or agent, such changes shall
be, ipso facto, within the purview of Indemnitee's rights and
---- -----
the Company's obligations, under this Agreement. In the event of
any change in any applicable law, statute or rule which narrows
the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, employee or agent, such
changes, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement shall have no
effect on this Agreement or the parties' rights and obligations
hereunder.
(b) Nonexclusivity. The indemnification by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee
may be entitled under the Company's Certificate of Incorporation,
its Bylaws, any agreement, any vote of shareholders or
disinterested directors, the General Corporation Law of the State
of Delaware, or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while
holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or
not taken while serving in an indemnified capacity even though he
may have ceased to serve in such capacity at the time of any
action or other covered proceeding.
11. Continuation After Term. Indemnitee's rights hereunder shall
-----------------------
continue after the Indemnitee has ceased acting as a director or Agent of the
Company and the benefits hereof shall inure to the benefit of the heirs,
executors and administrators of Indemnitee.
12. Interpretation of Agreement. This Agreement shall be
---------------------------
interpreted and enforced so as to provide indemnification to Indemnitee to the
fullest extent now or hereafter permitted by law.
13. Severability. If any provision or provisions of this Agreement
------------
shall be held to be invalid, illegal or unenforceable, provisions of the
Agreement shall not in any way be affected or impaired thereby, and to the
fullest extent possible, the provisions of this Agreement shall be construed or
altered by the court so as to remain enforceable and to provide Indemnitee with
as many of the benefits contemplated hereby as are permitted under law.
14. Counterparts, Modifications and Waiver. This Agreement may be
--------------------------------------
signed in counterparts. This Agreement constitutes a separate Agreement between
the Company and Indemnitee and may be supplemented or amended as to Indemnitee
only by a written instrument
6
<PAGE>
signed by the Company and Indemnitee, with such amendment binding only the
Company and Indemnitee. All waivers must be in a written document signed by the
party to be charged. No waiver of any of the provisions of this Agreement shall
be imposed by the conduct of the parties. A waiver of any right hereunder shall
not constitute a waiver of any other right hereunder.
15. Notices. All notices, demands, consents, requests, approvals
-------
and other communications required or permitted hereunder shall be in writing and
shall be deemed to have been properly given if hand delivered (effective upon
receipt or when refused), or if sent by a courier freight prepaid (effective
upon receipt or when refused), in the case of the Company, at the address listed
below, and in the case of Indemnitee, at Indemnitee's address of record at the
office of the Company, or to such other addresses as the parties may notify each
other in writing.
To Company: Hospitality Design & Supply, Inc.
P. O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, Chief Executive Officer
With a copy to: Daniel J. Winnike, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin, A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, CA 94111
To Indemnitee: At the Indemnitee's residence address on the records
of the Company from time to time.
With a copy to:
16. Evidence of Coverage. Upon request by Indemnitee, the Company
--------------------
shall provide evidence of the liability insurance coverage required by this
Agreement. The Company shall notify Indemnitee thirty days in advance of any
change in the Company's D&O Insurance coverage.
17. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of the State of Delaware.
18. Attorneys' Fees. In the event that any action is instituted
---------------
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, a court of competent jurisdiction
expressly determines that each of the material assertions made by Indemnitee as
a basis for such action was not made in good faith or was frivolous. in the
event of an action instituted by or in the name of the Company under this
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee in defense of such
action (including with respect to Indemnitee's counterclaims and cross-claims
made in such action), unless as a part of such action the court of competent
jurisdiction expressly determines that each of Indemnitee's material defenses to
such action was made in bad faith or was frivolous.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this
Indemnification Agreement effective as of the date first above written.
HOSPITALITY DESIGN & SUPPLY, INC.
By: ____________________________________
Title: _________________________________
INDEMNITEE:
________________________________________
8
<PAGE>
EXHIBIT 10.3
Executive Employment Agreement
------------------------------
This Executive Employment Agreement ("Agreement") is made and entered into
as of July 20, 1998 (the "Effective Date") by and between Hospitality Design &
Supply, Inc., a Delaware corporation (the "Company") and Roger M. Laverty, an
individual resident of the State of California ("Executive"), with reference to
the following:
B A C K G R O U N D
A. The Company is a newly formed entity that intends to pursue
consolidation opportunities in the restaurant equipment distribution
business (the "Business").
B. Executive has previously served in senior management capacities with
other businesses.
C. The Company now desires to retain the full-time services of Executive
as Chief Executive Officer of the Company, and Executive is willing to
be employed by the Company in that capacity on the terms and conditions
set forth in this Agreement.
NOW THEREFORE, the Company and Executive hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive on the terms set forth
----------
herein and Executive hereby accepts such employment effective immediately (the
"Commencement Date"). The term of this employment shall be for three years
following the date of filing of a Registration Statement with the Securities
Exchange Commission in connection with the Company's Initial Public Offering
for a term (the "Employment Term") of three years unless sooner terminated under
Section 7 below. For purposes of this Agreement, "Initial Public Offering" means
the Company's first firm commitment underwritten offering of its securities
pursuant to a registration statement under the Securities Act of 1933, as
amended.
2. DUTIES. During the period of his employment with the Company hereunder,
------
Executive will be employed as Chief Executive Officer of the Company and
Executive will:
(a) devote his full business time, ability, knowledge and attention,
and give his best effort and skill, solely to the Company's business affairs and
interests;
(b) perform such services and assume such duties and responsibilities
appropriate to the positions identified above as well as those which may from
time to time be reasonably assigned to him by the Board of Directors of the
Company, to whom Executive will directly report; and
(c) in all respects use his best efforts to further, enhance and
develop the Company's business affairs, interests and welfare.
3. COMPENSATION. In consideration of Executive's services to the Company
------------
during the Employment Term, Executive will receive the following:
(a) Commencing upon the consummation of the Initial Public Offering,
the Company will pay Executive a gross base salary of $200,000 per annum until
the conclusion of the
<PAGE>
Employment Term. Executive's base salary will be paid in equal installments (pro
rated for portions of a pay period) on the Company's regular pay days and the
Company will withhold from such compensation all applicable federal and state
income, social security, and disability and other taxes as required by
applicable laws. The Company may also pay Executive such bonuses as are
determined from time to time by the Board of Directors.
(b) From time to time following the Initial Public Offering, in the
sole discretion of the Company's Board of Directors, stock options to purchase
additional shares of Common Stock of the Company in accordance with a stock
option plan to be adopted by the Company which will contain, among other things,
provisions for vesting of the shares subject to options granted thereunder.
4. COMPANY SHARES.
--------------
(a) Executive shall as soon as reasonably practicable after the
execution of this Agreement purchase at the fair market value shares of Common
Stock of the Company expected to represent 4% of the outstanding shares on the
consummation of the Initial Public Offering. If Executive voluntarily
terminates his employment hereunder prior to the commencement of the Employment
Term, or if Executive is discharged under Section 7.3 hereof prior to the
commencement of the Employment Term, then the Company may, during the 30 day
period following such termination, repurchase such shares at the price paid by
Executive; if Executive voluntarily terminates his employment hereunder during
the first 18 months of the Employment Term, or if Executive is discharged under
Section 7.3 hereof during such 18 month period, then the Company may, during the
30 day period following such termination, repurchase one-half of such shares at
the price paid by Executive. The Company may exercise its repurchase right by
written notice to the Executive and within five business days of delivery of
such notice Executive shall deliver the certificate(s) representing the shares
so repurchased to the Company's Secretary at the executive offices of the
Company and the Company shall deliver its cashier's or certified check in the
amount of such purchase price to Executive at such offices.
(b) As soon as reasonably practicable after the consummation of the
Company's first sale of its Common Stock to private investors, in one
transaction or a series of transactions, the Company will grant to Executive an
option to purchase at the then fair market value shares of Common Stock of the
Company expected to represent an additional 2% of the outstanding shares on the
consummation of the Initial Public Offering. Such option will vest (i.e. become
exercisable) as follows: One-half of the option will vest as of the
commencement of the Employment Term and the remainder of the option will vest
upon the completion of the first 18 months of the Employment Term.
5. CHANGE OF CONTROL. In the event of any Change of Control of the
-----------------
Company, then (i) any and all of Executive's stock options that are unvested as
of the effective date of such Change of Control will become vested immediately
prior to such event and (ii) Executive will receive from the Company an
aggregate payment equal to three (3) times his gross base salary, payable in
accordance with the provisions of Section 3(a) above if Executive ceases for any
reason to be employed by the Company within six (6) months following the date of
such Change of Control; provided however, that in the event that the Company
determines, in its sole discretion, that any portion of the same constitutes an
excess parachute payment under (S)280G of the Internal Revenue Code of 1986, as
amended, then the Company will have no obligation to provide such portion to
Executive. For purposes of this Agreement, a "Change of Control" means (a) the
sale of all or substantially all of the assets of the Company to any person or
entity that, prior to such sale, did not
2
<PAGE>
control, was not under common control with, or was not controlled by, the
Company, or (b) the Company's merger or consolidation with or into another
entity, regardless of which entity survives such merger or consolidation, unless
at least fifty percent (50%) of the outstanding voting securities of the
surviving or parent corporation, as the case may be, immediately following such
transaction are beneficially held by such persons and entities in the same
proportion as such persons and entities beneficially held the outstanding voting
securities of the Company immediately prior to such transaction, or (c) the
acquisition of at least fifty percent (50%) of the outstanding voting securities
of the Company by any person, or any "group" as contemplated under Section 13(d)
of the Securities Exchange Act of 1934, as amended.
6. BENEFITS AND REIMBURSEMENTS.
---------------------------
6.1 Executive will, during the Employment Term, have the right to receive
such benefits as are generally made available to full-time executive officers of
the Company, including the right to participate in any retirement plan or
executive bonus plan that the Company may create. In addition, the Company will
provide Executive with the following:
(a) the opportunity to apply for coverage under the Company's medical,
life and disability plans, if any. If Executive is accepted for coverage
under such plans, the Company will provide to Executive and his immediate
family such coverage on the same terms as is customarily provided by the
Company to the plan participants as modified from time to time.
(b) in addition to normal holidays recognized by the Company, Executive
will be entitled to three weeks paid vacation annually, provided that any
vacation may be taken by Executive at any time Executive deems appropriate,
upon consultation with the Board of Directors, which may determine that the
best interests of the Company require otherwise.
6.2 The Company will reimburse Executive for travel and other out-of-pocket
expenses reasonably incurred by Executive in the performance of his duties
hereunder, provided that all such expenses will be reimbursed only (i) upon the
presentation by Executive to the Company of such documentation as may be
reasonably necessary to substantiate that all such expenses were incurred in the
performance of his duties, and (ii) if such expenses are consistent with all
policies of the Company in effect from time to time as to the kind and amount of
such expenses.
7. TERMINATION OF EMPLOYMENT.
-------------------------
7.1 EXPIRATION OF THE TERM OF AGREEMENT. This Agreement will terminate
-----------------------------------
automatically upon the expiration of the Employment Term.
7.2 DEATH OR PERMANENT DISABILITY OF EXECUTIVE. This Agreement will
------------------------------------------
terminate upon the death or permanent disability of Executive. Executive will
be deemed permanently disabled for the purpose of this Agreement if, in the good
faith determination of the Board of Directors, based on independent medical
advice, Executive has become physically or mentally incapable of performing his
duties hereunder for a continuous period of one hundred eighty (180) days, in
which event Executive will be deemed permanently disabled upon the expiration of
such one hundred eighty (180) day period.
7.3 EXECUTIVE'S DISCHARGE FOR CAUSE. The Company will have the right to
-------------------------------
terminate Executive's employment hereunder for "Cause" at any time effective
upon its giving of written
3
<PAGE>
notice setting forth with particularity the facts and circumstances constituting
such Cause. For such purposes, "Cause" means the occurrence of one or more of
the following: (i) the commission by Executive of any act materially detrimental
to the Company, including fraud, embezzlement, theft, bad faith, gross
negligence, recklessness or willful misconduct; (ii) repeated failure or refusal
to perform the duties required by this Agreement and as may be assigned to
Executive by the Company's Board of Directors from time to time; (iii)
conviction of a felony or of any crime of moral turpitude that is not a felony
but that the Board of Directors determines materially adversely affects the
business, reputation or prospects of the Company; (iv) any material
misrepresentation by Executive to the Company regarding the operation of the
business; or (v) breach of any covenant of this Agreement, provided that the
action or conduct described in clauses (ii) or (v) above will constitute "Cause"
only if such action or conduct continues after the Company has provided
Executive with written notice thereof and a reasonable opportunity (to be not
less than 30 days) to cure the same.
7.4 THE COMPANY'S RIGHT TO TERMINATE AT WILL. Subject to the payment to
----------------------------------------
Executive of the applicable severance payments as provided in Section 7.5 below,
the Company will have the right (in addition to its right of termination under
Section 7.1 above), exercisable at any time during the term of this Agreement,
to terminate Executive's employment with the Company without "Cause" (as defined
in Section 7.3 above), immediately upon written notice to Executive.
7.5 COMPENSATION UPON TERMINATION.
-----------------------------
(a) Upon termination of Executive's employment pursuant to this Section
7, Executive will be entitled to only: (i) the compensation provided for in
Section 3(a) hereof for the period of time ending with the date of termination;
(ii) compensation for any unused vacation that Executive may have accrued, as
well as all earned benefits, up to and including the date of termination; (iii)
"COBRA" benefits to the extent required by applicable law; and (iv)
reimbursement for such expenses as Executive may have properly incurred on
behalf of the Company as provided in Section 7.2 above prior to the date of
termination. Notwithstanding the foregoing, if the Executive's employment is
terminated pursuant to Section 7.1, Executive will have the right to retain the
coverage provided in Section 6.1(a) above, at no charge to Executive, for a
period of two years following the effective date of such termination.
(b) If the Company terminates Executive's employment pursuant to
Section 7.4 above only, in addition to the amounts payable in Section 7.5(a)
above, Executive will be entitled to receive a severance payment in an amount
equal to the aggregate base salary that otherwise would have been payable to
Executive by the Company pursuant to Section 3(a) above during the remainder of
the Employment Term.
(c) The payments set forth in this Section 7.5 will fully discharge all
responsibilities of the Company to Executive under this Agreement or relating to
or arising out of the termination of Executive's employment.
8. UNFAIR COMPETITION BY EXECUTIVE.
-------------------------------
8.1 Executive agrees that all trade secrets, confidential or proprietary
information with respect to the activities and businesses of the Company,
including, without limitation, personnel information, secret processes, know-
how, customer lists, databases, ideas, techniques, processes, inventions
(whether patentable or not), and other technical plans, business plans,
marketing plans, product plans,
4
<PAGE>
forecasts, contacts, strategies and information (collectively "Proprietary
Information") which were learned by Executive in the course of his employment by
the Company, and any other Proprietary Information received, developed or
learned by Executive hereafter in the course of his future employment by or in
association with the Company, are confidential and will be kept and held in
confidence and trust as a fiduciary by Executive. Executive will not use or
disclose Proprietary Information of the Company except as necessary in the
normal course of the business of the Company for its sole and exclusive benefit,
unless Executive is compelled so to disclose under process of law, in which case
Executive will first notify the Company promptly after receipt of a demand to so
disclose.
8.2 Executive and the Company acknowledge that: (i) each covenant and
restriction contained in Sections 8.1 and 9 of this Agreement is necessary,
fundamental, and required for the protection of the Company's business; (ii)
such relate to matters which are of a special, unique, and extraordinary
character that gives each of them a special, unique, and extraordinary value;
and (iii) a breach of any such covenant or restriction will result in
irreparable harm and damage to the Company which cannot be compensated
adequately by a monetary award. Accordingly, it is expressly agreed that, in
addition to all other remedies available at law or in equity, and
notwithstanding anything to the contrary in Section 11 below, the Company will
be entitled to the immediate remedy of a temporary restraining order,
preliminary injunction, or such other form of injunctive or equitable relief as
may be used by any court of competent jurisdiction to restrain or enjoin any of
the parties hereto from breaching any such covenant or restriction, or otherwise
specifically to enforce the provisions contained in Sections 8.1 and 9 of this
Agreement.
8.3 Except for activities expressly permitted by the prior written approval
of the Board of Directors of the Company, during the Employment Term, the
Executive will not: (a) engage in business independent of the Executive's
employment by the Company that requires any substantial portion of the
Executive's time; (b) serve as an officer, general partner or member in any for-
profit corporation, partnership or firm; (c) serve as a director, or in a
similar capacity, of any corporation, partnership or other having the Business
as its principal enterprise; or (d) directly, indirectly or through any
Affiliate, invest in, participate in or acquire an interest in any entity
engaged in the Business. For purposes of this Agreement, the terms: (i)
"Affiliate" means as to any Person, each other Person that directly or
indirectly (through one (1) or more intermediaries) controls, is controlled by
or is under common control with such person; and (ii) "Person" means an
individual, corporation, partnership, limited liability company, association,
joint stock company, trust, associate (as defined in regulations promulgated by
the Securities Exchange Commission) or other legally recognizable entity. The
limitation in this paragraph will not prohibit any investment by the Executive
in securities that are listed on a public exchange or the National Association
of Securities Dealers Automated Quotation National Market System, provided such
investment does not represent more than one percent of the aggregate outstanding
securities of such issuer.
8.4 During the term of this Agreement and for a period of one year
following its termination for any reason, Executive will not contact or solicit
any employees of the Company for the purposes of hiring them.
9. PROPRIETARY MATTERS. Executive expressly understands and agrees that
-------------------
any and all improvements, inventions, discoveries, processes, or know-how that
are generated or conceived by Executive during the term of this Agreement,
whether so generated or conceived during Executive's regular working hours or
otherwise, will be the sole and exclusive property of the Company, and Executive
will, whenever requested to do so by the Company (either during the term of this
5
<PAGE>
Agreement or thereafter), execute and assign any and all applications,
assignments and/or other instruments and do all things which the Company may
deem necessary or appropriate in order to apply for, obtain, maintain, enforce
and defend patents, copyrights, trade names or trademarks of the United States
or of foreign countries for said improvements, inventions, discoveries,
processes, or know-how, or in order to assign and convey or otherwise make
available to the Company the sole and exclusive right, title, and interest in
and to said improvements, inventions, discoveries, processes, know-how,
applications, patents, copyrights, trade names or trademarks, subject to
California Labor Code (S)2870, which reads as follows:
"(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information
except for those inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable."
10. KEY-PERSON INSURANCE. Executive agrees to make himself available and
--------------------
to undergo, at the Company's request and expense, any physical examination or
other procedure necessary to allow the Company to obtain a key-person insurance
policy on Executive. If the Company obtains such policy, it will maintain the
policy at its expense and all proceeds will be the sole property of the Company.
11. RESOLUTION OF DISPUTES. The parties will attempt in good faith
----------------------
promptly by negotiations to resolve any dispute or controversy arising out of or
relating to this Agreement or to the employment or termination of Executive by
the Company. If a party intends to be accompanied at a negotiation meeting by
an attorney, the other party will be given at least three working days' notice
of such intention and may also be accompanied by an attorney. All negotiations
pursuant to this clause are confidential and will be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and state
rules of evidence.
12. MISCELLANEOUS.
-------------
12.1 Governing Law; Interpretation. This Agreement will be governed by the
-----------------------------
substantive laws of the State of California applicable to contracts entered into
and fully performed in such jurisdiction. The headings and captions of the
Sections of this Agreement are for convenience only and in no way define, limit
or extend the scope or intent of this Agreement or any provision hereof. This
Agreement will be construed as a whole, according to its fair meaning, and not
in favor of or against any party, regardless of which party may have initially
drafted certain provisions set forth herein.
6
<PAGE>
12.2 Assignment. This Agreement is personal to Executive and he may not
----------
assign any of his rights or delegate any of his obligations hereunder.
12.3 Notices. Any notice, request, claim or other communication required
-------
or permitted hereunder will be in writing and will be deemed to have been duly
given if delivered by hand or if sent by certified mail, postage and
certification prepaid, to Executive at his residence (as noted in the Company's
records), or to the Company at its address as set forth below its signature on
the signature page of this Agreement, or to such other address or addresses as
either party may have furnished to the other in writing in accordance herewith.
12.4 Severability. If any provision of this Agreement or the application
------------
of any such provision to either of the parties is held by a court of competent
jurisdiction to be contrary to law, such provision will be deemed amended to the
extent necessary to comply with such law, and the remaining provisions of this
Agreement will remain in full force and effect unless the result would be
manifestly unjust or would deprive either party of the benefit of its bargain.
12.5 Entire Agreement; Amendments. This Agreement and any other exhibits
----------------------------
and attachments hereto constitutes the final and complete expression of all of
the terms of the understanding and agreement between the parties hereto with
respect to the subject matter hereof, and this Agreement replaces and supersedes
any and all prior or contemporaneous negotiations, communications,
understandings, obligations, commitments, agreements or contracts, whether
written or oral, between the parties respecting the subject matter hereof.
Except as provided in Section 12.4 above, this Agreement may not be modified,
amended, altered or supplemented except by means of the execution and delivery
of a written instrument mutually executed by both parties.
12.6 Attorneys' Fees. If it becomes necessary for any party to initiate
---------------
legal action or any other proceeding to enforce, defend or construe such party's
rights or obligations under this Agreement, the prevailing party will be
entitled to its reasonable costs and expenses, including attorneys' fees,
incurred in connection with such action or proceeding.
13. Executive Acknowledgment. Executive acknowledges that he has been given
------------------------
the opportunity to consult with legal counsel concerning the rights and
obligations arising under this Agreement, that he has read and understands each
and every provision of this Agreement, and that he is fully aware of the legal
effect and implications of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
7
<PAGE>
<TABLE>
<CAPTION>
Company: Executive:
<S> <C>
HOSPITALITY DESIGN & SUPPLY, INC.
By: /s/ Ross Berner By: /s/ Roger Laverty
------------------------------ -------------------------------
Name: Ross Berner Name: Roger M. Laverty
Title: President
Address: 1360 Lombard Street #302 Address: 700 The Strand
San Francisco, CA 94109 Manhattan Beach, CA 90266
Fax: (415) 923-9667 Fax: (310) 318-1663
</TABLE>
8
<PAGE>
EXHIBIT 10.4
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
as of November 16, 1998 (the "Effective Date") by and between HOSPITALITY DESIGN
& SUPPLY, INC., a Delaware corporation (the "Company") and JAMES CASTLEBERRY, an
individual resident of the State of California ("Executive"), with reference to
the following:
B a c k g r o u n d
A. The Company is a newly formed entity that intends to pursue
consolidation opportunities in the restaurant design and supply
business (the "Business").
B. The Company now desires to retain the full-time services of Executive
as Executive Vice President and Chief Financial Officer of the
Company, and Executive is willing to be employed by the Company in
that capacity on the terms and conditions set forth in this Agreement.
NOW THEREFORE, the Company and Executive hereby agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive on the terms set
----------
forth herein and Executive hereby accepts such employment commencing on the
Effective Date for a term of three years (the "Employment Term"), unless sooner
terminated under Section 6 below.
2. DUTIES. During the period of his employment with the Company
------
hereunder, Executive will be employed as Executive Vice President and Chief
Financial Officer of the Company. Executive's primary place of employment will
be the Company's principal offices, located in Los Angeles County, California.
Executive will:
(a) devote his full business time, ability, knowledge and attention,
and give his best effort and skill solely to the Company's business affairs and
interests;
(b) perform such services and assume such duties and responsibilities
appropriate to the positions identified above as well as those which may from
time to time be reasonably assigned to him by the Chief Executive Officer of the
Company; and
(c) in all respects use his best efforts to further, enhance and
develop the Company's business affairs, interests and welfare.
3. COMPENSATION. In consideration of Executive's services to the Company
------------
during the Employment Term, Executive will receive the following:
(a) the Company will pay Executive a minimum gross base salary of
$175,000 per annum during the Employment Term. Executive's base salary will be
paid in equal installments (pro rated for portions of a pay period) on the
Company's regular pay days and the Company will withhold from such compensation
all applicable federal and state income, social security, and
<PAGE>
disability and other taxes as required by applicable laws. The Company may also
pay Executive such bonuses as are determined from time to time by the Board of
Directors.
(b) As soon as reasonably practicable after the consummation of the
Company's first sale in one transaction or a series of related transactions of
Preferred Stock for an aggregate purchase price paid to the Company of not less
than five hundred thousand dollars ($500,000), the Company will grant to
Executive an option to purchase one hundred thirty thousand (130,000) shares of
Common Stock of the Company at an exercise price per share equal to the price at
which the Preferred Stock issued in such sale would convert into one share of
Common Stock at the time of such grant. Such option will vest (i.e. become
exercisable) as follows: One-half of the option will vest upon the consummation
of the earlier of (i) the Initial Public Offering (as defined herein), or (ii)
the Private Financing (as defined herein), and one-half of the option will vest
upon the completion of the first eighteen (18) months of the Employment Term.
For purposes of this Agreement, "Initial Public Offering" means the Company's
first firm commitment underwritten offering of its securities pursuant to a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), which results in aggregate net cash proceeds to the Company
of not less than ten million dollars ($10,000,000) and "Private Financing" means
the Company's first sale in one transaction or a series of related transactions,
not registered under the Securities Act, of Common Stock, Preferred Stock and/or
debt securities of the Company which results in aggregate net cash proceeds to
the Company of not less than ten million dollars ($10,000,000).
4. CHANGE OF CONTROL. In the event of any Change of Control of the
-----------------
Company, then (i) any and all of Executive's stock options that are unvested as
of the effective date of such Change of Control will become vested immediately
prior to such event and (ii) Executive will receive from the Company an
aggregate payment equal to three (3) times his gross base salary, payable in
accordance with the provisions of Section 3 above if Executive ceases for any
reason to be employed by the Company within six (6) months following the date of
such Change of Control; provided however, that in the event that the Company
determines, in its sole discretion, that any portion of the same constitutes an
excess parachute payment under (S)280G of the Internal Revenue Code of 1986, as
amended, then the Company will have no obligation to provide such portion to the
Executive. For purposes of this Agreement, a "Change of Control" means (a) the
sale of all or substantially all of the assets of the Company to any person or
entity that, prior to such sale, did not control, was not under common control
with, or was not controlled by, the Company, or (b) the Company's merger or
consolidation with or into another entity, regardless of which entity survives
such merger or consolidation, unless at least fifty percent (50%) of the
outstanding voting securities of the surviving or parent corporation, as the
case may be, immediately following such transaction are beneficially held by
such persons and entities in the same proportion as such persons and entities
beneficially held the outstanding voting securities of the Company immediately
prior to such transaction, or (c) the acquisition of at least fifty percent
(50%) of the outstanding voting securities of the Company by any person, or any
"group" as contemplated under Section 13(d) of the Securities Exchange Act of
1934, as amended; it being agreed, in any event, that the issuances of shares to
the stockholders of the founding companies consolidating with the Company on or
about the time of either the Initial Public Offering or the Private Financing,
as the case may be, and the issuance of shares in such Initial Public Offering
or Private Financing, shall in no event constitute a Change of Control.
5. BENEFITS AND REIMBURSEMENTS.
---------------------------
5.1 Executive will, during the Employment Term, have the right to
receive such benefits as are generally made available to full-time executive
officers of the Company, including the right to
2
<PAGE>
participate in any retirement plan or executive bonus plan that the Company may
create. In addition, or inclusive of such benefits, the Company will provide
Executive with the following:
(a) reimbursement of all "COBRA" payments paid by Executive for the
continuation of medical, dental or similar coverage for Executive and his
immediate family arising from the cessation of his employment with BDK
Holdings, Inc. to the extent that (i) such payments are not otherwise
reimbursable to Executive and (ii) such coverage is not available to
Executive under any benefits plan provided by the Company;
(b) the opportunity to apply for coverage under the Company's
medical, life and disability plans, to the extent the same are established
by the Company. If the Executive is accepted for coverage under such plans,
the Company will provide to Executive and his immediate family such
coverage on the same terms as is customarily provided by the Company to the
plan participants as modified from time to time.
(c) in addition to normal holidays recognized by the Company,
Executive will be entitled to three weeks paid vacation annually, provided
that any vacation may be taken by Executive at any time Executive deems
appropriate, upon consultation with the Board of Directors, which may
determine that the best interests of the Company require otherwise.
5.2 The Company will reimburse Executive for travel and other out-of-
pocket expenses reasonably incurred by Executive in the performance of his
duties hereunder, provided that all such expenses will be reimbursed only (i)
upon the presentation by Executive to the Company of such documentation as may
be reasonably necessary to substantiate that all such expenses were incurred in
the performance of his duties, and (ii) if such expenses are consistent with all
policies of the Company in effect from time to time as to the kind and amount of
such expenses.
6. TERMINATION OF EMPLOYMENT.
-------------------------
6.1 Expiration of the Term of Agreement. This Agreement will terminate
-----------------------------------
automatically upon the expiration of the Employment Term.
6.2 Death or Permanent Disability of Executive. This Agreement will
------------------------------------------
terminate upon the death or permanent disability of Executive. Executive will
be deemed permanently disabled for the purpose of this Agreement if, in the good
faith determination of the Board of Directors, based on sound medical advice,
Executive has become physically or mentally incapable of performing his duties
hereunder for a continuous period of one hundred eighty (180) days, in which
event Executive will be deemed permanently disabled upon the expiration of such
one hundred eighty (180) day period.
6.3 Executive's Discharge for Cause. The Company will have the right to
-------------------------------
terminate Executive's employment hereunder for "Cause" at any time effective
upon its giving of written notice setting forth with particularity the facts and
circumstances constituting such Cause. For such purposes, "Cause" means the
occurrence of one or more of the following: (i) the commission by Executive of
any act materially detrimental to the Company, including fraud, embezzlement,
theft, bad faith, gross negligence, recklessness or willful misconduct; (ii)
repeated failure or refusal to perform the duties required by this Agreement and
as may be assigned to Executive by the Chief Executive Officer of the Company;
(iii) conviction of a felony or of any crime of moral turpitude to the extent
materially detrimental to the Company; (iv) any material misrepresentation by
Executive
3
<PAGE>
to the Company regarding the operation of the business; or (v) breach of any
covenant of this Agreement, provided that the action or conduct described in
clauses (ii) or (v) above will constitute "Cause" only if such action or conduct
continues after the Company has provided Executive with written notice thereof
and a reasonable opportunity (to be not less than 30 days) to cure the same.
6.4 The Company's Right to Terminate At Will. Subject to the payment to
----------------------------------------
Executive of the applicable severance payment as provided in Section 6.7 below,
the Company will have the right (in addition to its right of termination under
Section 6.1 above), exercisable at any time during the term of this Agreement,
to terminate Executive's employment with the Company without "Cause" (as defined
in Section 6.3 above), immediately upon written notice to Executive.
6.5 Termination for Lack of Successful Financing. Subject to the payment
--------------------------------------------
to Executive of the applicable severance payment as provided in Section 6.7
below, each party will have the right (in addition to the Company's right of
termination under Section 6.1 above), exercisable at any time after June 30,
1999 to terminate this Agreement in the event that the Company has not
consummated either an Initial Public Offering or a Private Financing by such
date.
6.6 Termination by Executive. Except as otherwise provided in this
------------------------
Section 6, Executive shall have the right to voluntarily terminate his
employment at any time for any reason. In the event he does so, Executive shall
receive no severance compensation.
6.7 Compensation Upon Termination.
-----------------------------
(a) Upon termination of Executive's employment pursuant to this
Section 6, Executive will be entitled to only: (i) the compensation provided for
in Section 3 above for the period of time ending with the date of termination;
(ii) compensation for any unused vacation that Executive may have accrued, as
well as all earned benefits, up to and including the date of termination; (iii)
"COBRA" benefits to the extent required by applicable law; and (iv)
reimbursement for such expenses as Executive may have properly incurred on
behalf of the Company as provided in Section 5.2 above prior to the date of
termination.
(b) If the Company terminates Executive's employment pursuant to
Section 6.4 above, in addition to the amounts payable in Section 6.7(a) above,
Executive will be entitled to receive a severance payment in an amount equal to
the base salary paid to Executive by the Company pursuant to Section 3 above for
a period of one year following the date of termination of the Agreement. Such
severance payment will be paid in periodic payments in accordance with the
payment schedule set forth in Section 3 above. Notwithstanding anything to the
contrary in this Section 6.7(b), Executive's severance payment from the Company
will be reduced by the amount of any salary received by Executive as a result of
Executive's new employment with any person, persons, company, partnership,
corporation or business of whatever nature.
(c) If either party terminates this Agreement pursuant to Section 6.5
above, in addition to the amounts payable in Section 6.7(a) above, Executive
will be entitled to receive a severance payment in an amount equal, in the
Company's sole discretion, to either (i) the base salary paid to Executive by
the Company pursuant to Section 3 above for a period of six (6) months following
the date of termination of the Agreement, payable in periodic payments in
accordance with the payment schedule set forth in Section 3 above, or (ii)
$85,000, payable in one lump sum payment. Notwithstanding anything to the
contrary in this Section 6.6(c), Executive's severance payment from the Company
immediately will be reduced by the amount of any salary received by Executive as
a
4
<PAGE>
result of Executive's new employment with any person, persons, company,
partnership, corporation or business of whatever nature.
(d) The payments set forth in this Section 6.7 will fully discharge
all responsibilities of the Company to Executive under this Agreement or
relating to or arising out of the termination of Executive's employment.
7. UNFAIR COMPETITION BY EXECUTIVE.
-------------------------------
7.1 Executive agrees that all trade secrets, confidential or
proprietary information with respect to the activities and businesses of the
Company, including, without limitation, personnel information, secret processes,
know-how, customer lists, sales distribution territories, databases, ideas,
techniques, processes, inventions (whether patentable or not), and other
technical plans, business plans, marketing plans, product plans, forecasts,
contacts, strategies and information (collectively "Proprietary Information")
which were learned by Executive in the course of his employment by the Company,
and any other Proprietary Information received, developed or learned by
Executive hereafter in the course of his future employment by or in association
with the Company, are confidential and will be kept and held in confidence and
trust as a fiduciary by Executive. Executive will not use or disclose
Proprietary Information of the Company except as necessary in the normal course
of the business of the Company for its sole and exclusive benefit, unless
Executive is compelled so to disclose under process of law, in which case
Executive will first notify the Company promptly after receipt of a demand to so
disclose.
7.2 During the term of this Agreement, directly or on behalf of or in
conjunction with any other person, persons, company, partnership, corporation or
business of whatever nature, Executive will not engage as an officer, director,
shareholder, owner, partner, joint venturer, financier, or in a managerial
capacity, whether as an employee, independent contractor, consultant, advisor,
or sales representative, in any corporation, partnership, firm or other entity
engaged in the Business that is within 100 miles of the principal places of
business of the Company or any of the Company's subsidiaries, or of any
geographic location in which Executive has represented the interests of the
Company or any of its subsidiaries. During the term of this Agreement and for a
period of one year following its termination for any reason, directly or on
behalf of or in conjunction with any other person, persons, company,
partnership, corporation or business of whatever nature, Executive will not:
(a) call upon any prospective acquisition candidate engaged in the
Business on Executive's own behalf or on behalf of any competitor of the Company
or any of its subsidiaries, which candidate was either called upon by the
Company (including its subsidiaries) for the purpose of acquiring such entity.
(b) contact or solicit any employees of the Company or its
subsidiaries for the purposes of hiring them.
7.3 Except for activities expressly permitted by the prior written
approval of the Board of Directors of the Company, during the term of this
Agreement, the Executive will not: (a) engage in business independent of the
Executive's employment by the Company that requires any substantial portion of
the Executive's time; (b) serve as an officer, general partner or member in any
for-profit corporation, partnership or firm; (c) serve as a director of any
corporation, partnership or firm having the Business as its principal
enterprise; or (d) directly, indirectly or through any Affiliate, invest in,
5
<PAGE>
participate in or acquire an interest in any entity engaged in the Business. For
purposes of this Agreement, the terms: (i) "Affiliate" means as to any Person,
each other Person that directly or indirectly (through one (1) or more
intermediaries) controls, is controlled by or is under common control with such
person; and (ii) "Person" means an individual, corporation, partnership, limited
liability company, association, joint stock company, trust, associate (as
defined in regulations promulgated by the Securities Exchange Commission) or
other legally recognizable entity. The limitation in this paragraph will not
prohibit any investment by the Executive in securities that are listed on a
public exchange or the National Association of Securities Dealers Automated
Quotation National Market System and issued by a company, firm, corporation,
partnership, trust or other entity involved in the Business or otherwise.
7.4 Executive and the Company acknowledge that: (i) each covenant and
restriction contained in Sections 7.1, 7.2 and 8 of this Agreement is necessary,
fundamental, and required for the protection of the Company's business; (ii)
such relate to matters which are of a special, unique, and extraordinary
character that gives each of them a special, unique, and extraordinary value;
and (iii) a breach of any such covenant or restriction will result in
irreparable harm and damage to the Company which cannot be compensated
adequately by a monetary award. Accordingly, it is expressly agreed that, in
addition to all other remedies available at law or in equity, and
notwithstanding anything to the contrary in Section 10 below, the Company will
be entitled to the immediate remedy of a temporary restraining order,
preliminary injunction, or such other form of injunctive or equitable relief as
may be used by any court of competent jurisdiction to restrain or enjoin any of
the parties hereto from breaching any such covenant or restriction, or otherwise
specifically to enforce the provisions contained in Sections 7.1, 7.2 and 8 of
this Agreement.
8. PROPRIETARY MATTERS. Executive expressly understands and agrees that
-------------------
any and all improvements, inventions, discoveries, processes, or know-how that
are generated or conceived by Executive during the term of this Agreement,
whether so generated or conceived during Executive's regular working hours or
otherwise, will be the sole and exclusive property of the Company, and Executive
will, whenever requested to do so by the Company (either during the term of this
Agreement or thereafter), execute and assign any and all applications,
assignments and/or other instruments and do all things which the Company may
deem necessary or appropriate in order to apply for, obtain, maintain, enforce
and defend patents, copyrights, trade names or trademarks of the United States
or of foreign countries for said improvements, inventions, discoveries,
processes, or know-how, or in order to assign and convey or otherwise make
available to the Company the sole and exclusive right, title, and interest in
and to said improvements, inventions, discoveries, processes, know-how,
applications, patents, copyrights, trade names or trademarks.
9. KEY-PERSON INSURANCE. Executive agrees to make himself available and
--------------------
to undergo, at the Company's request and expense, any physical examination or
other procedure necessary to allow the Company to obtain a key-person insurance
policy on Executive. If the Company obtains such policy, it will maintain the
policy at its expense and all proceeds will be the sole property of the Company.
10. RESOLUTION OF DISPUTES. The parties will attempt in good faith
----------------------
promptly by negotiations to resolve any dispute or controversy arising out of or
relating to this Agreement or to the employment or termination of Executive by
the Company. If a party intends to be accompanied at a negotiation meeting by
an attorney, the other party will be given at least three working days' notice
of such intention and may also be accompanied by an attorney. All negotiations
pursuant to
6
<PAGE>
this clause are confidential and will be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and state rules of
evidence.
11. MISCELLANEOUS.
-------------
11.1 Governing Law; Interpretation. This Agreement will be governed by
-----------------------------
the substantive laws of the State of California applicable to contracts entered
into and fully performed in such jurisdiction. The headings and captions of the
Sections of this Agreement are for convenience only and in no way define, limit
or extend the scope or intent of this Agreement or any provision hereof. This
Agreement will be construed as a whole, according to its fair meaning, and not
in favor of or against any party, regardless of which party may have initially
drafted certain provisions set forth herein.
11.2 Assignment. This Agreement is personal to Executive and he may not
----------
assign any of his rights or delegate any of his obligations hereunder without
first obtaining the prior written consent of the Board of Directors of the
Company.
11.3 Notices. Any notice, request, claim or other communication required
-------
or permitted hereunder will be in writing and will be deemed to have been duly
given if delivered by hand or if sent by certified mail, postage and
certification prepaid, to Executive at his residence (as noted in the Company's
records), or to the Company at its address as set forth below its signature on
the signature page of this Agreement, or to such other address or addresses as
either party may have furnished to the other in writing in accordance herewith.
11.4 Severability. In the event any court of competent jurisdiction shall
------------
determine that the scope, time or territorial restrictions of any provision of
this Agreement are unreasonable, then it is the intention of the parties that
such restrictions be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed. The remaining
provisions of this Agreement will remain in full force and effect unless the
result would be manifestly unjust or would deprive either party of the benefit
of its bargain.
11.5 Entire Agreement; Amendments. This Agreement and any other exhibits
----------------------------
and attachments hereto constitutes the final and complete expression of all of
the terms of the understanding and agreement between the parties hereto with
respect to the subject matter hereof, and this Agreement replaces and supersedes
any and all prior or contemporaneous negotiations, communications,
understandings, obligations, commitments, agreements or contracts, whether
written or oral, between the parties respecting the subject matter hereof.
Except as provided in Section 11.4 above, this Agreement may not be modified,
amended, altered or supplemented except by means of the execution and delivery
of a written instrument mutually executed by both parties.
11.6 Attorneys' Fees. If it becomes necessary for any party to initiate
---------------
legal action or any other proceeding to enforce, defend or construe such party's
rights or obligations under this Agreement, the prevailing party will be
entitled to its reasonable costs and expenses, including reasonable attorneys'
fees, incurred in connection with such action or proceeding.
12. Executive Acknowledgment. Executive acknowledges that he has been
------------------------
given the opportunity to consult with legal counsel concerning the rights and
obligations arising under this Agreement, that he has read and understands each
and every provision of this Agreement, and that he is fully aware of the legal
effect and implications of this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
Company: Executive:
HOSPITALITY DESIGN & SUPPLY, INC. JAMES CASTLEBERRY
By: /s/ Ross Berner /s/ James Castleberry
----------------------------- ---------------------------------
Name: Ross Berner
---------------------------
Title: President
--------------------------
Address:
-----------------------
-----------------------
Address: Fax:
----------------------- ----------------------------
-----------------------
Fax:
----------------------------
8
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between Hospitality
Design & Supply, Inc., a Delaware corporation (the "Company"), and Ygal
Sonenshine ("Founder") is hereby entered into and effective as of the date of
the consummation of the initial public offering of the common stock of the
Company. This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between the Company and Founder.
RECITALS
A. As of the date of this Agreement, the Company is engaged primarily
in the commercial kitchen design and/or supply industry.
B. Founder is employed hereunder by the Company in a confidential
relationship wherein Founder, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
AGREEMENTS
1. Employment and Duties. The Company hereby employs Founder as President
---------------------
of the Raygal division and a member of the executive operating committee of the
Company. As such, Founder shall have responsibilities, duties and authority
reasonably accorded to and expected of the president of a division and will
report directly to the Chief Executive Officer of the Company or such other
officer as shall be determined by the Chief Executive Officer of the Company.
Founder hereby accepts this employment upon the terms and conditions herein
contained and agrees to devote his working time, attention and efforts to
promote and further the business of the Company.
2. Compensation. For all services rendered by Founder, the Company shall
------------
compensate Founder as follows:
(a) Base Salary. The base salary payable to Founder shall be $150,000
-----------
per year, payable on a regular basis in accordance with the Company's standard
payroll procedures, but not less than monthly. On at least an annual basis, the
board of directors of the Company (the "Board") will review Founder's
performance and may make increases to such base salary if,
-1-
<PAGE>
in the Board's discretion, any such increase is warranted. Founder shall be
eligible for such bonuses, if any, as may be granted to him from time to time by
the Board.
(b) Founder Benefits and Other Compensation. During the term of this
---------------------------------------
Agreement, Founder will have the right to receive such benefits as are generally
made available to full-time officers of the Company, including the right to
participate in any retirement plan or bonus plan that the Company may create. In
addition to, or inclusive of, such benefits, the Company will provide Founder
with the following:
(i) the opportunity to apply for coverage under the Company's
medical, life and disability plans, if any. If Founder is accepted for coverage
under such plans, the Company will provide to Founder and his immediate family
such coverage on the same terms as are customarily provided by the Company to
the plan participants as modified from time to time; and
(ii) in addition to normal holidays recognized by the Company, paid
vacation consistent with past practice of Raygal Design Associates, Inc. No more
than six weeks of unused vacation time may accrue. Once six weeks of unused
vacation time has accrued, no additional vacation time will accrue until Founder
has used at least one day of the accrued vacation time.
(iii) reimbursement by Company for all reasonable and ordinary
business expenses incurred by Founder upon his submission of appropriate
documentation to Company's comptroller or CEO.
(iv) as long as Founder remains employed by Company, Founder shall
be eligible for all stock plans, stock options plans, bonuses and benefits, if
any, for which similarly situated executives of Company are eligible. Company
will have complete discretion in determining whether or not to grant or award
stock, stock options, bonuses and benefits to Founder, provided only that in
determining (i) whether or not Founder is similarly situated to those executives
of Company who are eligible for such stock plans, stock option plans, bonuses
and benefits, if any, and (ii) whether or not to make such grants or awards,
Company shall not take into account or take as a credit options granted pursuant
to Section 10.9 of the Reorganization Agreement, as defined in Section 5 of this
Agreement.
3. Term; Termination; Rights on Termination. The term of this Agreement
----------------------------------------
shall begin on the date hereof and continue for three (3) years (the "Initial
Term"), and, unless terminated sooner as herein provided, shall continue
thereafter on a year-to-year basis on the same terms and conditions contained
herein unless either party gives to the other party written notice of nonrenewal
of the Agreement at least ninety (90) days prior to the end of the then-current
term. This Agreement and Founder's employment may be terminated in any one of
the following ways:
(a) Death. The death of Founder shall immediately terminate the
-----
Agreement with no severance compensation due to Founder's estate.
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<PAGE>
(b) Disability. This Agreement will terminate upon the permanent
----------
disability of Founder. Founder will be deemed permanently disabled for the
purpose of this Agreement if, in the good faith determination of the Board,
based on sound medical advice, Founder has become physically or mentally
incapable of performing his duties hereunder for a continuous period of one
hundred eighty (180) days, in which event Founder will be deemed permanently
disabled upon the expiration of such one hundred eighty (180) day period. Also,
Founder may terminate his employment hereunder if his health should become
impaired to an extent that makes the continued performance of his duties
hereunder hazardous to his physical or mental health, provided that Founder
shall have furnished the Company with a written statement from a qualified
doctor to such effect; and provided further that, at the Company's request made
within thirty (30) days of the date of such written statement, Founder shall
submit to an examination by a doctor selected by the Company who is reasonably
acceptable to Founder or Founder's doctor and such doctor shall have concurred
in the conclusion of Founder's doctor. In the event this Agreement is terminated
as a result of Founder's permanent disability, Founder shall receive from the
Company, in a lump-sum payment due within thirty (30) days of the effective date
of termination, an amount equal to the difference between (a) the base salary at
the rate then in effect for the lesser of (i) whatever time period is remaining
under the Initial Term of this Agreement and (ii) one (1) year, minus (b) all
payments in respect of Founder's salary payable to Founder under the Company's
disability insurance, if any, for the same period.
(c) Good Cause. The Company may terminate this Agreement ten (10) days
----------
after written notice to Founder, for good cause, which shall be: (1) Founder's
material and irreparable breach of this Agreement; (2) Founder's gross
negligence in the performance or intentional nonperformance (continuing for ten
(10) days after receipt of the written notice) of any of Founder's material
duties and responsibilities hereunder; (3) Founder's dishonesty or fraud with
respect to the business or affairs of the Company which materially and adversely
affects the operations or reputation of the Company; (4) Founder's conviction of
a felony crime; (5) chronic alcohol abuse or illegal drug abuse by Founder; or
(6) any other good faith determination of the Board that Founder has engaged in
any act that has a material adverse effect on the business, affairs or
reputation of the Company. In the event of a termination for good cause, as
enumerated above, Founder shall have no right to any severance compensation.
(d) Termination by Founder Without Cause. If Founder resigns or
------------------------------------
otherwise terminates his employment Founder shall receive no severance
compensation.
Upon termination of this Agreement for any reason provided in this
Section 3, Founder shall be entitled to receive all compensation earned and all
benefits and reimbursements vested or due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Founder only to the extent and in the manner expressly
provided above. All other rights and obligations of the Company and Founder
under this Agreement shall cease as of the effective date of termination, except
that the Company's obligations under paragraph 8 herein and Founder's
obligations under paragraphs 4, 5, 6, 7, 8 and 9 herein shall survive such
termination.
4. Return of Company Property. All records, designs, patents, business
--------------------------
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by
-3-
<PAGE>
Founder by or on behalf of the Company or its representatives, vendors or
customers which pertain to the business of the Company shall be and remain the
property of the Company, and be subject at all times to its discretion and
control. All correspondence, reports, records, charts, advertising materials and
other similar data pertaining to the business, activities or future plans of the
Company in the possession of Founder shall be delivered promptly to the Company
without request by it upon termination of Founder's employment.
5. Noncompetition. During the term of this Agreement (the "Noncompetition
--------------
Period"), Founder agrees to be bound by each of the provisions set forth in
Section 13 of that certain Agreement and Plan of Reorganization dated of even
date herewith by and among the Company and the "Stockholders" named therein (the
"Reorganization Agreement"), to the extent that such Noncompetition Period
extends beyond the four (4) year time period provided for in the Reorganization
Agreement.
6. Inventions. Founder shall disclose promptly to the Company any and all
----------
significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Founder,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are either directly related to the business or
activities of the Company or conceived by Founder as a result of his work for
the Company. Founder hereby assigns and agrees to assign all his interests
therein to the Company or its nominee. Whenever requested to do so by the
Company, Founder shall execute any and all applications, assignments or other
instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. Trade secrets. Founder agrees that he will not, during or after the term
-------------
of this Agreement, disclose the specific terms of the Company's relationships or
agreements with its respective significant vendors or customers or any other
significant and material trade secret of the Company, whether in existence or
proposed, to any person, firm, partnership, corporation or business for any
reason or purpose whatsoever.
8. Indemnification. In the event Founder is made a party to any threatened,
---------------
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by the Company against
founder), by reason of the fact that he is or was performing services within the
course and scope of his employment with the Company under this Agreement, then
the Company shall indemnify Founder against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, as actually and
reasonably incurred by Founder in connection therewith. Without limiting the
requirement above that Founder be performing services within the course and
scope of his employment, activities constituting violations of law or Company
policy shall not constitute services within the course and scope of Founder's
employment. In the event that both Founder and the Company are made a party to
the same third-party action, complaint, suit or proceeding, the Company agrees
to engage competent legal representation, and Founder agrees to use the same
representation, provided that if counsel selected by the Company shall have a
conflict of interest that prevents such counsel from representing Founder,
founder may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel.
-4-
<PAGE>
9. No Prior Agreements. Founder hereby represents and warrants to the
-------------------
Company that the execution of this Agreement by Founder and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Founder agrees to indemnify the Company for any claim,
including, but not limited to, Company's attorneys' fees and expenses of
investigation, by any third party that such third party may now have or may
hereafter have against the Company based upon or arising out of any non-
competition agreement, invention agreement or secrecy agreement between Founder
and such third party which was in existence as of the date of this Agreement.
10. Assignment; Binding Effect. Founder understands that he has been
--------------------------
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Founder agrees, therefore, that he cannot
assign all or any portion of his performance under this Agreement. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
11. Complete Agreement. This Agreement is not a promise of future
------------------
employment. Founder has no oral understandings or agreements with the Company or
any of its officers, directors or representatives covering the same subject
matter as this Agreement. This written Agreement is the final, complete and
exclusive statement and expression of the agreement between the Company and
Founder and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral or
written representations or agreements. This written Agreement may not be later
modified except by a further writing signed by a duly authorized officer of the
Company and Founder, and no term of this Agreement may be waived except by
writing signed by the party waiving the benefit of such term.
12. Notice. Whenever any notice is required hereunder, it shall be given in
------
writing addressed as follows:
To the Company: Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty,
Chief Executive Officer
with a copy to: Daniel J. Winnike, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111
-5-
<PAGE>
To Founder: Ygal Sonenshine
Raygal Design Associates, Inc.
2719 White Road
Irvine, CA 92714
with a copy to: Perry S. Silver
Silver & Freedman APLC
1925 Century Park East
Suite 2100
Century City, CA 90067
Notice shall be deemed given and effective three (3) days after the deposit
in the U.S. mail of a writing addressed as above and sent first class mail,
certified, return receipt requested, or when actually received. Either party may
change the address for notice by notifying the other party of such change in
accordance with this Section 12.
13. Severability; Headings. In the event any court of competent
----------------------
jurisdiction shall determine that the scope, time or territorial restrictions
set forth herein are unreasonable, then it is the intention of the parties that
such restrictions be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed. The paragraph headings
herein are for reference purposes only and are not intended in any way to
describe, interpret, define or limit the extent or intent of the Agreement or of
any part hereof.
14. Governing Law; Forum. This Agreement shall be governed by and construed
--------------------
in accordance with the laws of the State of California, without giving effect to
laws concerning choice of law or conflicts of law. All disputes arising out of
this Agreement or the obligations of the parties hereunder, including disputes
that may arise following termination of this Agreement, shall be subject to the
exclusive jurisdiction and venue of the California State Courts of Orange
County, California (or, if there is federal jurisdiction, then the exclusive
jurisdiction and venue of the United States District Court having jurisdiction
over Orange County). Each party hereby irrevocably and unconditionally consents
to the personal and exclusive jurisdiction and venue of said courts and any
objection that may now or hereafter have to the venue of any such action or
proceeding in any such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same. THE PARTIES HERETO
EACH HEREBY KNOWINGLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING, CLAIM OR COUNTER-CLAIM, WHETHER IN CONTRACT OR TORT OR OTHERWISE,
ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR ANY OTHER AGREEMENTS
EXECUTED IN CONNECTION HEREWITH.
15. Counterparts. This Agreement may be executed simultaneously in two (2)
------------
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
16. Option to Purchase Automobile. For a period ending sixty (60) days
-----------------------------
after the effective date of this Agreement, Founder will have an option to
purchase from company the viper automobile presently owned by Raygal Design
Associates, Inc. The option may be
-6-
<PAGE>
exercised by paying Company cash equal to the low Blue Book value of such
automobile. in addition, after such 60-day period, if Founder elects not to
purchase such automobile, Founder will have the right to use such automobile for
so long as Company owns it; provided that Company shall have no obligation to
keep such automobile beyond such 60-day period.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE COMPANY:
HOSPITALITY DESIGN & SUPPLY, INC.
By: ______________________________
Title: ___________________________
FOUNDER:
__________________________________
YGAL SONENSHINE
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<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between Hospitality
Design & Supply, Inc., a Delaware corporation (the "Company"), and John
Breznikar ("Founder") is hereby entered into and effective as of the date of the
consummation of the initial public offering of the common stock of the Company.
This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between the Company and Founder.
R E C I T A L S
A. As of the date of this Agreement, the Company is engaged primarily in
the commercial kitchen design and/or supply industry.
B. Until the date of this Agreement, Founder was employed by East Bay
Restaurant Supply, which is being merged into the Company on the date of this
Agreement.
C. Founder is employed hereunder by the Company in a confidential
relationship wherein Founder, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
A G R E E M E N T S
1. Employment and Duties. The Company hereby employs Founder as the
---------------------
President of the East Bay division and a member of the executive operating
committee of the Company. As such, Founder shall have responsibilities, duties
and authority reasonably accorded to and expected of the president of a division
and will report directly to the Chief Executive Officer of the Company. Founder
hereby accepts this employment upon the terms and conditions herein contained
and agrees to devote his working time, attention and efforts to promote and
further the business of the Company; provided, however, that Founder may serve
on the boards of charitable organizations and, subject to Section 5 hereof,
other corporations.
2. Compensation. For all services rendered by founder, the company
------------
shall compensate founder as follows:
(a) Base Salary. The base salary payable to Founder shall be
-----------
$150,000 per year, payable on a regular basis in accordance with the
Company's standard payroll procedures, but not less than monthly. On at
least an annual basis, the board of directors of the Company (the
"Board") will review Founder's performance and may make increases to
such base salary if, in the Board's discretion, any such increase is
warranted. Founder shall be eligible for such bonuses, if any, as may be
granted to him from time to time by the Board.
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<PAGE>
(b) Founder Benefits and Other Compensation. Founder will,
---------------------------------------
during the Employment Term, have the right to receive such benefits as
are generally made available to full-time executive officers of the
Company, including the right to participate in any retirement plan or
bonus plan that the Company may create. In addition to, or inclusive
of, such benefits, the Company will provide Founder with the following:
(i) the opportunity to apply for coverage under the Company's
medical, life and disability plans, if any. If Founder is accepted
for coverage under such plans, the Company will provide to Founder
and his immediate family such coverage on the same terms as are
customarily provided by the Company to the plan participants as
modified from time to time; and
(ii) in addition to normal holidays recognized by the
Company, four weeks paid vacation annually or such other greater
amount as may be afforded executive officers and key employees
generally under the Company's policies in effect from time to time
(pro rated for any year in which Founder is employed for less than
the full year).
(iii) reimbursement for travel and other out-of-pocket
expenses reasonably incurred by Executive in the performance of
his duties hereunder, provided that all such expenses will be
reimbursed only (A) upon the presentation by Founder to the
Company of such documentation as may be reasonably necessary to
substantiate that all such expenses were incurred in the
performance of his duties, and (B) if such expenses are consistent
with all policies of the Company in effect from time to time as to
the kind and amount of such expenses.
3. Term; Termination; Rights on Termination. The term of this
----------------------------------------
Agreement shall begin on the date hereof and continue for three (3) years. Upon
the first anniversary of the date hereof and each anniversary thereafter, the
term of this Agreement shall be extended for an additional year to a total of
three (3) years unless, at least ninety (90) days prior to any such anniversary,
either party gives to the other party written notice of nonrenewal of the
Agreement. This Agreement and Founder's employment may be terminated in any one
of the followings ways:
(a) Death. The death of Founder shall immediately terminate the
-----
Agreement with no severance compensation due to Founder's estate.
(b) Disability. This Agreement will terminate upon the permanent
----------
disability of Founder. Founder will be deemed permanently disabled for
the purpose of this Agreement if, in the good faith determination of the
Board, based on sound medical advice, Founder has become physically or
mentally incapable of performing his duties hereunder for a continuous
period of one hundred eighty (180) days, in which event Founder will be
deemed permanently disabled upon the expiration of such one hundred
eighty (180) day period. Also, Founder may terminate his employment
hereunder if his health should become impaired to an extent that makes
the continued performance of his duties hereunder hazardous to his
physical or mental health, provided that Founder shall have furnished
the Company with a written statement from a qualified doctor to such
effect; and provided further that, at the Company's request made within
thirty (30) days of the date of such written statement, Founder shall
submit to an examination by
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<PAGE>
a doctor selected by the Company who is reasonably acceptable to Founder
or Founder's doctor and such doctor shall have concurred in the
conclusion of Founder's doctor. In the event this Agreement is
terminated as a result of Founder's permanent disability, Founder shall
receive from the Company, in a lump-sum payment due within thirty (30)
days of the effective date of termination, an amount equal to the
difference between (a) the base salary at the rate then in effect for
the lesser of (i) whatever time period is remaining under the current
term of this Agreement and (ii) one (1) year, minus (b) all payments in
respect of Founder's salary payable to Founder under the Company's
disability insurance, if any, for the same period.
(c) Good Cause. The Company may terminate this Agreement ten
----------
(10) days after written notice to Founder, for good cause, which shall
be: (1) Founder's irreparable breach of this Agreement resulting in the
Company suffering a material adverse effect; (2) Founder's gross
negligence in the performance or Founder's nonperformance (continuing
for ten (10) days after receipt of the written notice) of any of
Founder's material duties and responsibilities hereunder; (3) Founder's
dishonesty, fraud or misconduct with respect to the business or affairs
of the Company which materially and adversely affects the operations or
reputation of the Company; (4) Founder's conviction of a felony crime;
(5) chronic alcohol abuse or illegal drug abuse by Founder; or (6) any
other good faith determination of the Board that Founder has engaged in
any act that has a material adverse effect on the business, affairs or
reputation of the Company. In the event of a termination for good cause,
as enumerated above, Founder shall have no right to any severance
compensation.
(d) Without Cause. At any time after the commencement of
-------------
employment, the Company may, without cause, terminate this Agreement and
Founder's employment effective at any time by paying to Founder a lump
sum payment due on the effective date of termination in an amount equal
to Founder's base salary at the rate then in effect for the greater of
(i) whatever time period is remaining under the current term of this
Agreement and (ii) one year .
(e) Termination by Founder Without Cause. If Founder resigns
------------------------------------
or terminates his employment other than for Good Reason (as defined
below) Founder shall receive no severance compensation.
(f) Termination by Founder For Good Reason.
--------------------------------------
(i) Definition of "Good Reason". "Good Reason" shall mean:
--------------------------
(A) the assignment of Founder to any duties materially
inconsistent with, or any material adverse change in,
Founder's titles or positions, duties, responsibilities or
status with the Company, or the removal of Founder from, or
failure to reelect Founder to, any of such positions without
reelecting Founder to an equivalent position, which
assignment, change, removal or failure is not cured within
ten (10) days of notice thereof by Founder to Company; or
(B) the failure, for any reason other than his
resignation or death, for Founder to be elected to the Board
of Directors within one month after the date of this
Agreement, or the removal of Founder from, or failure to
reelect Founder to, the Board of Directors for any reason
other than his resignation or death; or
(C) any reduction in his base salary; or
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<PAGE>
(D) the Company requiring Founder to be based outside of
the San Francisco area, except for travel on Company
business; or
(E) the failure of the Company to provide support,
information, assistance and staffing reasonably appropriate
for Founder to carry out Founder's positions, duties and
responsibilities which is not cured within ten (10) days of
notice thereof by Founder to Company; or
(F) any material breach by the Company of that certain
Indemnification Agreement of even date herewith between the
parties hereto (the "Indemnification Agreement") which is not
cured within ten (10) days of notice thereof by Founder to
Company; or
(G) any other material breach by the Company of this
Agreement which is not cured within ten (10) days of notice
thereof by Founder to Company; or
(H) A Change in Control. A "Change in Control" means
-------------------
(a) the sale of all or substantially all of the assets of the
Company to any person or entity that, prior to such sale, did
not control, was not under common control with, or was not
controlled by, the Company, or (b) the Company's merger or
consolidation with or into another entity, regardless of
which entity survives such merger or consolidation, unless at
least fifty percent (50%) of the outstanding voting
securities of the surviving or parent corporation, as the
case may be, immediately following such transaction are
beneficially held by such persons and entities in the same
proportion as such persons and entities beneficially held the
outstanding voting securities of the Company immediately
prior to such transaction, or (c) the acquisition of at least
fifty percent (50%) of the outstanding voting securities of
the Company by any person, or any "group" as contemplated
under Section 13(d) of the Securities Exchange Act of 1934,
as amended; it being agreed, in any event, that the issuances
of shares to the stockholders of the founding companies
consolidating with the Company on or about the time of either
the initial public offering of the Company, and the issuance
of shares in such initial public offering, shall in no event
constitute a Change of Control.
(ii) Termination. Founder may terminate his employment for
-----------
Good Reason at any time upon providing written notice of
termination to the Company. In the event of termination of
Founder's employment for Good Reason, the Company shall pay
Founder all of the consideration the Company would be obliged to
pay to Founder under Section 3(d) of this Agreement if Founder
were terminated Without Cause, and Founder shall have no
obligation to mitigate damages by seeking employment or otherwise.
Upon termination of this Agreement for any reason provided in this
Section 3, Founder shall be entitled to receive all compensation earned and all
benefits and reimbursements vested or due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Founder only to the extent and in the manner expressly
provided above. All other rights and obligations of the Company and Founder
under this Agreement shall cease as of the effective date of termination, except
that the Company's obligations under paragraph 8 herein and Founder's
obligations under paragraphs 4, 5, 6, 7, 8 and 9 herein shall survive such
termination.
-4-
<PAGE>
Upon termination of Founder's employment pursuant to this Agreement for
any reason other than termination by Founder without Good Reason, or termination
by expiration of the current term: (i) each option to purchase stock of Company
then held by Founder which could not be exercised immediately before termination
of employment shall become exercisable upon termination and for a period of
thirty (30) days thereafter unless the terms of such option or the plan pursuant
to which such option was granted provides that such option will become
exercisable upon termination of employment and for a period thereafter longer
than thirty (30) days, and (ii) if any shares of stock of Company then owned by
Founder are subject to a right or option of the Company to repurchase such
shares upon termination of employment at a price which is less than the fair
market value of such shares upon termination of employment, each such right or
option shall expire, effective immediately prior to termination of employment.
4. Return of Company Property. All records, designs, patents, business
--------------------------
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Founder by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, and be subject at all
times to its discretion and control. All correspondence, reports, records,
charts, advertising materials and other similar data pertaining to the business,
activities or future plans of the Company in the possession of Founder shall be
delivered promptly to the Company without request by it upon termination of
Founder's employment.
5. Noncompetition. During his employment by the company (including the
--------------
subsidiaries thereof) pursuant to this agreement (the "Noncompetition Period"),
founder agrees to be bound by each of the provisions set forth in Section 13 of
that certain Agreement and Plan of Reorganization dated of even date herewith by
and among the Company and the "Stockholders" named therein (the "Reorganization
Agreement"), to the extent that such Noncompetition Period extends beyond the
four (4) year time period provided for in the Reorganization Agreement, provided
that during the entirety of the Noncompetition Period Founder shall receive his
base salary and all other benefits and compensation set forth in Section 2.
6. Inventions. Founder shall disclose promptly to the Company any and
----------
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Founder,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are either directly related to the business or
activities of the company or conceived by Founder as a result of his work for
the Company. Founder hereby assigns and agrees to assign all his interests
therein to the Company or its nominee. Whenever requested to do so by the
Company, Founder shall execute any and all applications, assignments or other
instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. Trade secrets. founder agrees that he will not, during or after the
-------------
term of this agreement, disclose the specific terms of the company's
relationships or agreements with its respective significant vendors or customers
or any other significant and material trade secret of the company, whether in
existence or proposed, to any person, firm, partnership, corporation or business
for any reason or purpose whatsoever.
-5-
<PAGE>
8. Indemnification. The Company shall be obligated to enter into and
---------------
keep in force the Indemnification Agreement until expiration of the term or
prior termination of this Agreement.
9. No prior agreements. Founder hereby represents and warrants to the
-------------------
Company that the execution of this Agreement by Founder and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Founder agrees to indemnify the Company for any claim,
including, but not limited to, Company's Attorneys' fees and expenses of
investigation, by any third party that such third party may now have or may
hereafter have against the Company based upon or arising out of any non-
competition agreement, invention agreement or secrecy agreement between Founder
and such third party which was in existence as of the date of this Agreement.
10. Assignment; Binding Effect. Founder understands that he has been
--------------------------
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Founder agrees, therefore, that he cannot
assign all or any portion of his performance under this Agreement. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
11. Complete agreement. Founder has no oral understandings or agreements
------------------
with the Company or any of its officers, directors or representatives covering
the same subject matter as this Agreement. This written Agreement is the final,
complete and exclusive statement and expression of the agreement between the
Company and Founder and of all the terms of this agreement, and it cannot be
varied, contradicted or supplemented by evidence of any prior or contemporaneous
oral or written representations or agreements. This written Agreement may not be
later modified except by a further writing signed by a duly authorized officer
of the Company and Founder, and no term of this agreement may be waived except
by writing signed by the party waiving the benefit of such term.
12. Notice. whenever any notice is required hereunder, it shall be
------
given in writing addressed as follows:
To the Company: Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, Chief Executive Officer
with a copy to: Daniel J. Winnike, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111
-6-
<PAGE>
To Founder: John Breznikar
49 Fourth Street
Oakland, CA 94607
with a copy to: Joseph S. Radovsky
Greene, Radovsky, Maloney & Share
Four Embarcadero Center, Suite 4000
San Francisco, CA 94111
Notice shall be deemed given and effective three (3) days after the
deposit in the U.S. mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received. Either
party may change the address for notice by notifying the other party of such
change in accordance with this Section 12.
13. Severability; Headings. In the event any court of competent
----------------------
jurisdiction shall determine that the scope, time or territorial restrictions
set forth herein are unreasonable, then it is the intention of the parties that
such restrictions be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed. The paragraph headings
herein are for reference purposes only and are not intended in any way to
describe, interpret, define or limit the extent or intent of the Agreement or of
any part hereof.
14. Governing Law. This Agreement shall in all respects be construed
-------------
according to the laws of the State of California, as applied to agreements
entered into and performed wholly in California.
15. Counterparts. This Agreement may be executed simultaneously in
------------
two (2) or more counterparts, each of which shall be deemed an original and
all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE COMPANY:
HOSPITALITY DESIGN & SUPPLY, INC.
By:__________________________________
Title:_______________________________
FOUNDER:
_____________________________________
John Breznikar
-7-
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") dated ________________, 1999
by and between Hospitality Design & Supply, Inc., a Delaware corporation (the
"Company"), and Michael Weinstock ("Founder") is hereby entered into and
effective as of the date of the consummation of the initial public offering of
the common stock of the Company. This Agreement hereby supersedes any other
employment agreements or understandings, written or oral, between the Company
and Founder.
R E C I T A L S
A. As of the date of this Agreement, the Company is engaged primarily
in the commercial kitchen design and/or supply industry.
B. Founder is employed hereunder by the Company in a confidential
relationship wherein Founder, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
A G R E E M E N T S
1. Employment and Duties. The Company hereby employs Founder as the
---------------------
President of the Economy subsidiary of the Company. As such, Founder shall have
responsibilities, duties and authority reasonably accorded to and expected of
the president of a subsidiary and will report directly to the Chief Executive
Officer of the Company or such other officer as shall be determined by the Chief
Executive Officer of the Company. Founder hereby accepts this employment upon
the terms and conditions herein contained and agrees to devote his working time,
attention and efforts to promote and further the business of the Company.
2. Compensation. For all services rendered by Founder, the Company
------------
shall compensate Founder as follows:
(a) Base Salary. The base salary payable to Founder shall be
-----------
$25,000 per year,payable on a regular basis in accordance with the Company's
standard payroll procedures, but not less than semi-monthly. On at least an
annual basis, the board of directors of the Company (the "Board") will review
Founder's performance and may make increases to such base salary if, in the
Board's discretion, any such increase is warranted. Founder shall be eligible
for such bonuses, if any, as may be granted to him from time to time by the
Board.
<PAGE>
(b) Founder Benefits and Other Compensation. Founder will, during
---------------------------------------
the Employment Term, have the right to receive such benefits as are generally
made available to full-time officers of the Company, including the right to
participate in any retirement plan or bonus plan that the Company may create. In
addition to, or inclusive of, such benefits, the Company will provide Founder
with the following:
(i) the opportunity to apply for coverage under the Company's
medical, life and disability plans, if any. If Founder is accepted for coverage
under such plans, the Company will provide to Founder and his immediate family
such coverage on the same terms as are customarily provided by the Company to
the plan participants as modified from time to time; and
(ii) in addition to normal holidays recognized by the Company,
three weeks paid vacation annually or such other amount as may be afforded
officers and key employees generally under the Company's policies in effect
from time to time (pro rated for any year in which Founder is employed for
less than the full year).
3. Term; Termination; Rights on Termination. The term of this
----------------------------------------
Agreement shall begin on the date hereof and continue for three (3) years (the
"Initial Term"), and, unless terminated sooner as herein provided, shall
continue thereafter on a year-to-year basis on the same terms and conditions
contained herein unless either party gives to the other party written notice of
nonrenewal of the Agreement at least ninety (90) days prior to the end of the
then-current term. This Agreement and Founder's employment may be terminated in
any one of the following ways:
(a) Death. The death of Founder shall immediately terminate the
-----
Agreement with no severance compensation due to Founder's estate.
(b) Disability. This Agreement will terminate upon the permanent
----------
disability of Founder. Founder will be deemed permanently disabled for the
purpose of this Agreement if, in the good faith determination of the Board,
based on sound medical advice, Founder has become physically or mentally
incapable of performing his duties hereunder for a continuous period of one
hundred eighty (180) days, in which event Founder will be deemed permanently
disabled upon the expiration of such one hundred eighty (180) day period. Also,
Founder may terminate his employment hereunder if his health should become
impaired to an extent that makes the continued performance of his duties
hereunder hazardous to his physical or mental health provided that Founder
shall have furnished the Company with a written statement from a qualified
doctor to such effect; and provided further that, at the Company's request made
within thirty (30) days of the date of such written statement, Founder shall
submit to an examination by a doctor selected by the Company who is reasonably
acceptable to Founder or Founder's doctor and such doctor shall have concurred
in the conclusion of Founder's doctor. In the event this Agreement is
terminated as a result of Founder's permanent disability, Founder shall receive
from the Company, in a lump-sum payment due within thirty (30) days of the
effective date of termination, an amount equal to the difference between (a)
the base salary at the rate then in effect for the lesser of (i) whatever time
period is remaining under the Initial Term of this Agreement and (ii) one (1)
year, minus (b) all payments in respect of Founder's salary payable to Founder
under the Company's disability insurance, if any, for the same period.
2
<PAGE>
(c) Good Cause. The Company may terminate this Agreement ten
----------
(10) days after written notice to Founder, for good cause, which shall be: (1)
Founder's material and irreparable breach of this Agreement; (2) Founder's gross
negligence in the performance or intentional nonperformance (continuing for ten
(10) days after receipt of the written notice) of any of Founder's material
duties and responsibilities hereunder; (3) Founder's dishonesty, fraud or
misconduct with respect to the business or affairs of the Company which
materially and adversely affects the business or reputation of the Company; (4)
Founder's conviction of a felony crime; (5) chronic alcohol abuse or illegal
drug abuse by Founder; or (6) any other good faith determination of the Board
that Founder has engaged in any act, other than acts which Employee reasonably
believed to be in or not opposed to the best interests of the Company, that has
a material adverse effect on the business or reputation of the Company. In the
event of a termination for good cause, as enumerated above, Founder shall have
no right to any severance compensation.
(d) Without Cause. At any time after the commencement of
-------------
employment, the Company may, without cause, terminate this Agreement and
Employee's employment, effective upon written notice to Employee, provided that
Employee shall receive from the Company compensation for the shorter period of
(i) twelve months from the date of written notice; or (ii) the remaining term of
this Agreement, at the rate then in effect, in a lump sum payment due on the
effective date of termination.
(e) Termination by Founder Without Cause. If Founder resigns or
------------------------------------
otherwise terminates his employment Founder shall receive no severance
compensation.
Upon termination of this Agreement for any reason provided in this
Section 3, Founder shall be entitled to receive all compensation earned and all
benefits and reimbursements vested or due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Founder only to the extent and in the manner expressly
provided above. All other rights and obligations of the Company and Founder
under this Agreement shall cease as of the effective date of termination, except
that the Company's obligations under paragraph 8 herein and Founder's
obligations under paragraphs 4, 5, 6, 7, 8 and 9 herein shall survive such
termination.
4. Return of Company Property. All records, designs, patents,
--------------------------
business plans, financial statements, manuals, memoranda, lists and other
property delivered to or compiled by Founder by or on behalf of the Company or
its representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, and be subject at all
times to its discretion and control. All correspondence, reports, records,
charts, advertising materials and other similar data pertaining to the business,
activities or future plans of the Company in the possession of Founder shall be
delivered promptly to the Company without request by it upon termination of
Founder's employment.
5. Noncompetition. During the term of his employment with the Company
--------------
(including the subsidiaries thereof) (the "Noncompetition Period"), founder
agrees to be bound by each of the provisions set forth in Section 13 of that
Certain Agreement and plan of Reorganization dated of even date herewith by and
among the Company and the "Stockholders"
3
<PAGE>
named therein (the "Reorganization Agreement"), to the extent that such
noncompetition period extends beyond the four (4) year time period provided for
in the Reorganization Agreement.
6. Inventions. Founder shall disclose promptly to the Company any
----------
and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made by
Founder, solely or jointly with another, during the period of employment or
within one (1) year thereafter, and which are either directly related to the
business or activities of the company or conceived by founder as a result of his
work for the company. founder hereby assigns and agrees to assign all his
interests therein to the company or its nominee. whenever requested to do so by
the company, founder shall execute any and all applications, assignments or
other instruments that the company shall deem necessary to apply for and obtain
letters patent of the united states or any foreign country or to otherwise
protect the company's interest therein.
7. Trade Secrets. Founder agrees that he will not, during or after
-------------
the term of this Agreement, disclose the specific terms of the Company's
relationships or agreements with its respective significant vendors or customers
or any other significant and material trade secret of the company, whether in
existence or proposed, to any person, firm, partnership, corporation or business
for any reason or purpose whatsoever.
8. Indemnification. In the event Founder is made a party to any
---------------
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against founder), by reason of the fact that he is or was performing services
within the course and scope of his employment with the Company under this
Agreement, then the company shall indemnify founder against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement, as
actually and reasonably incurred by founder in connection therewith. Without
limiting the requirement above that founder be performing services within the
course and scope of his employment, activities constituting violations of law or
Company policy shall not constitute services within the course and scope of
Founder's employment. In the event that both founder and the company are made a
party to the same third-party action, complaint, suit or proceeding, the Company
agrees to engage competent legal representation, and founder agrees to use the
same representation, provided that if counsel selected by the Company shall have
a conflict of interest that prevents such counsel from representing Founder,
Founder may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel.
9. No Prior Agreements. Founder hereby represents and warrants to
-------------------
the Company that the execution of this Agreement by Founder and his employment
by the Company and the performance of his duties hereunder will not violate or
be a breach of any agreement with a former employer, client or any other person
or entity. Further, Founder agrees to indemnify the Company for any claim,
including, but not limited to, Company's attorneys' fees and expenses of
investigation, by any third party that such third party may now have or may
hereafter have against the Company based upon or arising out of any non-
competition agreement, invention agreement or secrecy agreement between Founder
and such third party which was in existence as of the date of this Agreement.
4
<PAGE>
10. Assignment; Binding Effect. Founder understands that he has been
--------------------------
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Founder agrees, therefore, that he cannot
assign all or any portion of his performance under this Agreement. This
agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
11. Complete Agreement. This Agreement is not a promise of future
------------------
employment. Founder has no oral understandings or agreements with the Company or
any of its officers, directors or representatives covering the same subject
matter as this Agreement. This written Agreement is the final, complete and
exclusive statement and expression of the agreement between the Company and
Founder and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral or
written representations or agreements. This written Agreement may not be later
modified except by a further writing signed by a duly authorized officer of the
Company and Founder, and no term of this Agreement may be waived except by
writing signed by the party waiving the benefit of such term.
12. Notice. whenever any notice is required hereunder, it shall be
------
given in writing addressed as follows:
To the Company: Hospitality Design & Supply, Inc.
P. O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, CEO
with a copy to: Daniel J. Winnike, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111
To Founder: Michael Weinstock
580 La Mesa Drive
Menlo Park, CA 94028
with a copy to: L. William Caraccio
Pillsbury Madison & Sutro LLP
2550 Hanover Street
Palo Alto, CA 94304-1115
Notice shall be deemed given and effective three (3) days after the
deposit in the U.S. mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received. Either
party may change the address for notice by notifying the other party of such
change in accordance with this Section 12.
5
<PAGE>
13. Severability; Headings. In the event any court of competent
----------------------
jurisdiction shall determine that the scope, time or territorial restrictions
set forth herein are unreasonable, then it is the intention of the parties that
such restrictions be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed. The paragraph headings
herein are for reference purposes only and are not intended in any way to
describe, interpret, define or limit the extent or intent of the Agreement or of
any part hereof.
14. Governing Law. This Agreement shall in all respects be construed
-------------
according to the laws of the State of California, as applied to agreements
entered into and performed wholly in California.
15. Counterparts. This Agreement may be executed simultaneously in
------------
two (2) or more counterparts, each of which shall be deemed an original and all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE COMPANY:
HOSPITALITY DESIGN & SUPPLY, INC.
By:_________________________________
Title:______________________________
FOUNDER:
____________________________________
Michael Weinstock
6
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between Hospitality
Design & Supply, Inc., a Delaware corporation (the "Company"), and Michael
Curtis ("Founder"), is hereby entered into and effective as of the date of the
consummation of the initial public offering of the common stock of the Company.
This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between the Company and Founder.
R E C I T A L S
A. As of the date of this Agreement, the Company is engaged primarily
in the commercial kitchen design and/or supply industry.
B. Founder is employed hereunder by the Company in a confidential
relationship wherein Founder, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
A G R E E M E N T S
1. Employment and Duties. The Company hereby employs Founder as the
---------------------
President of the Curtis division of the Company. As such, Founder shall have
responsibilities, duties and authority reasonably accorded to and expected of a
president of a division and will report directly to the Chief Executive Officer
of the Company or such other officer as shall be determined by the Chief
Executive Officer of the Company. Founder hereby accepts this employment upon
the terms and conditions herein contained and agrees to devote his working time,
attention and efforts to promote and further the business of the Company.
2. Compensation. For all services rendered by Founder, the Company
------------
shall Compensate Founder as follows:
(a) Base Salary. The base salary payable to Founder shall be
-----------
$100,000 per year, payable on a regular basis in accordance with the Company's
standard payroll procedures, but not less often than monthly. On at least an
annual basis, the board of directors of the Company (the "Board") will review
Founder's performance and may make increases to such base salary if, in the
Board's discretion, any such increase is warranted. Founder shall be eligible
for such bonuses, if any, as may be granted to him from time to time by the
Board.
<PAGE>
(b) Founder Benefits and Other Compensation. In addition to the
---------------------------------------
compensation provided for under subparagraph (a) above, Founder will, during the
Employment Term, have the right to receive such benefits as are generally made
available to full-time officers of the Company, including the right to
participate in any retirement plan or bonus plan that the Company may create. In
addition to, or inclusive of, such benefits, the Company will provide Founder
with the following:
(i) the opportunity to apply for coverage under the Company's
medical, life and disability plans, if any. If Founder is accepted for coverage
under such plans, the Company will provide to Founder and his immediate family
such coverage on the same terms as are customarily provided by the Company to
the plan participants as modified from time to time; and
(ii) in addition to normal holidays recognized by the Company,
three weeks paid vacation annually or such other amount as may be afforded
officers and key employees generally under the Company's policies in effect from
time to time (pro rated for any year in which Founder is employed for less than
the full year).
3. Term; Termination; Rights on Termination. The term of this Agreement
----------------------------------------
shall begin on the date hereof and continue for three (3) years (the "Initial
Term"), and, unless terminated sooner as herein provided, shall continue
thereafter on a year-to-year basis on the same terms and conditions contained
herein unless either party gives to the other party written notice of nonrenewal
of the Agreement at least ninety (90) days prior to the end of the then-current
term. This Agreement and Founder's employment may be terminated in any one of
the following ways:
(a) Death. The death of Founder shall immediately terminate the
-----
Agreement with no severance compensation due to Founder's estate.
(b) Disability. This Agreement will terminate upon the permanent
----------
disability of Founder. Founder will be deemed permanently disabled for the
purpose of this Agreement if, in the good faith determination of the Board,
based on sound medical advice, Founder has become physically or mentally
incapable of performing his duties hereunder for a continuous period of one
hundred eighty (180) days, in which event Founder will be deemed permanently
disabled upon the expiration of such one hundred eighty (180) day period. Also,
Founder may terminate his employment hereunder if his health should become
impaired to an extent that makes the continued performance of his duties
hereunder hazardous to his physical or mental health provided that Founder shall
have furnished the Company with a written statement from a qualified doctor to
such effect; and provided further that, at the Company's request made within
thirty (30) days of the date of such written statement, Founder shall submit to
an examination by a doctor selected by the Company who is reasonably acceptable
to Founder or Founder's doctor and such doctor shall have concurred in the
conclusion of Founder's doctor. In the event this Agreement is terminated as a
result of Founder's permanent disability, Founder shall receive from the
Company, in a lump-sum payment due within thirty (30) days of the effective date
of termination, an amount equal to the difference between (a) the base salary at
the rate then in effect for the lesser of (i) whatever time period is remaining
under the Initial Term of this
2
<PAGE>
Agreement and (ii) one (1) year, minus (b) all payments in respect of Founder's
salary payable to Founder under the Company's disability insurance, if any, for
the same period.
(c) Good Cause. The Company may terminate this Agreement ten (10)
----------
days after written notice to Founder, for good cause, which shall be: (1)
Founder's material and irreparable breach of this Agreement; (2) Founder's gross
negligence in the performance or intentional nonperformance (continuing for ten
(10) days after receipt of the written notice) of any of Founder's material
duties and responsibilities hereunder; (3) Founder's dishonesty, fraud or
misconduct with respect to the business or affairs of the Company which
materially and adversely affects the operations or reputation of the Company;
(4) Founder's conviction of a felony crime; (5) chronic alcohol abuse or illegal
drug abuse by Founder; or (6) any other good faith determination of the Board
that Founder has engaged in any act that has a material adverse effect on the
business, affairs or reputation of the Company. In the event of a termination
for good cause, as enumerated above, Founder shall have no right to any
severance compensation.
(d) Without Cause. At any time after the commencement of employment,
-------------
the Company may, without cause, terminate this Agreement and Founder's
employment effective sixty (60) days after written notice is provided to
Founder, or if the effective date of termination, as determined in the sole
discretion of the Company, is less than sixty (60) days after written notice is
provided to Founder, then Founder shall receive from the Company compensation
for sixty (60) days from the date of written notice at the rate then in effect,
in a lump sum payment due on the effective date of termination.
(e) Termination by Founder Without Cause. If Founder resigns or
------------------------------------
otherwise terminates his employment Founder shall receive no severance
compensation.
Upon termination of this Agreement for any reason provided in this
Section 3, Founder shall be entitled to receive all compensation earned and all
benefits and reimbursements vested or due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Founder only to the extent and in the manner expressly
provided above. All other rights and obligations of the Company and Founder
under this Agreement shall cease as of the effective date of termination, except
that the Company's obligations under paragraph 8 herein and Founder's
obligations under paragraphs 4, 5, 6, 7, 8 and 9 herein shall survive such
termination.
4. Return of Company Property. All records, designs, patents, business
--------------------------
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Founder by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, and be subject at all
times to its discretion and control. All correspondence, reports, records,
charts, advertising materials and other similar data pertaining to the business,
activities or future plans of the Company in the possession of Founder shall be
delivered promptly to the Company without request by it upon termination of
Founder's employment.
5. Noncompetition. During the term of his employment with the Company
--------------
(including the subsidiaries thereof) (the "Noncompetition Period"), Founder
agrees to be bound by each of the provisions set forth in Section 13 of that
certain Agreement and Plan of
3
<PAGE>
Reorganization dated of even date herewith by and among the Company and the
"Stockholders" named therein (the "Reorganization Agreement"), to the extent
that such Noncompetition Period extends beyond the four (4) year time period
provided for in the Reorganization Agreement.
6. Inventions. Founder shall disclose promptly to the Company any and all
----------
significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Founder,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are either directly related to the business or
activities of the Company or conceived by founder as a result of his work for
the Company. Founder hereby assigns and agrees to assign all his interests
therein to the Company or its nominee. Whenever requested to do so by the
Company, Founder shall execute any and all applications, assignments or other
instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. Trade Secrets. Founder agrees that he will not, during or after the
-------------
term of this Agreement, disclose the specific terms of the Company's
relationships or agreements with its respective significant vendors or customers
or any other significant and material trade secret of the Company, whether in
existence or proposed, to any person, firm, partnership, corporation or business
for any reason or purpose whatsoever.
8. Indemnification. In the event Founder is made a party to any threatened,
---------------
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by the Company against
Founder), by reason of the fact that he is or was performing services within the
course and scope of his employment with the Company under this Agreement, then
the Company shall indemnify Founder against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, as actually and
reasonably incurred by Founder in connection therewith. without limiting the
requirement above that Founder be performing services within the course and
scope of his employment, activities constituting violations of law or Company
policy shall not constitute services within the course and scope of Founder's
employment. In the event that both Founder and the Company are made a party to
the same third-party action, complaint, suit or proceeding, the Company agrees
to engage competent legal representation, and Founder agrees to use the same
representation, provided that if counsel selected by the Company shall have a
conflict of interest that prevents such counsel from representing Founder,
Founder may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel.
9. No Prior Agreements. Founder hereby represents and warrants to the
-------------------
Company that the execution of this Agreement by Founder and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Founder agrees to indemnify the Company for any claim,
including, but not limited to, Company's attorneys' fees and expenses of
investigation, by any third party that such third party may now have or may
hereafter have against the Company based upon or arising out of any non-
competition agreement, invention agreement or secrecy agreement between Founder
and such third party which was in existence as of the date of this Agreement.
4
<PAGE>
10. Assignment; Binding Effect. Founder understands that he has been
--------------------------
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Founder agrees, therefore, that he cannot
assign all or any portion of his performance under this Agreement. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
11. Complete Agreement. This Agreement is not a promise of future
------------------
employment. Founder has no oral understandings or agreements with the Company or
any of its officers, directors or representatives covering the same subject
matter as this Agreement. This written Agreement is the final, complete and
exclusive statement and expression of the Agreement between the Company and
Founder and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral or
written representations or agreements. This written Agreement may not be later
modified except by a further writing signed by a duly authorized officer of the
Company and Founder, and no term of this Agreement may be waived except by
writing signed by the party waiving the benefit of such term.
12. Notice. Whenever any notice is required hereunder, it shall be given in
------
writing addressed as follows:
To the Company: Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
with a copy to: Daniel J. Winnike, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111
To Founder: Michael Curtis
4033 Brea Burn Drive
Eugene, OR 97405
with a copy to: Don Churnside
Gaydos, Churnside & Baker
440 East Broadway, Suite 300
Eugene, OR 97401
Notice shall be deemed given and effective three (3) days after the
deposit in the U.S. mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received. Either
party may change the address for notice by notifying the other party of such
change in accordance with this Section 12.
13. Severability; Headings. In the event any court of competent jurisdiction
----------------------
shall determine that the scope, time or territorial restrictions set forth
herein are unreasonable, then it
5
<PAGE>
is the intention of the parties that such restrictions be enforced to the
fullest extent which the court deems reasonable, and the Agreement shall thereby
be reformed. The paragraph headings herein are for reference purposes only and
are not intended in any way to describe, interpret, define or limit the extent
or intent of the Agreement or of any part hereof.
14. Governing Law. This Agreement shall in all respects be construed
-------------
according to the laws of the State of California, as applied to agreements
entered into and performed wholly in California.
15. Counterparts. This agreement may be executed simultaneously in two (2)
------------
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE COMPANY:
HOSPITALITY DESIGN & SUPPLY, INC.
By: ____________________________
Title: __________________________
FOUNDER:
_________________________________
Michael Curtis
6
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between Hospitality
Design & Supply, Inc., a Delaware corporation (the "Company"), and Daniel Curtis
("Founder"), is hereby entered into and effective as of the date of the
consummation of the initial public offering of the common stock of the Company.
This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between the Company and Founder.
R E C I T A L S
A. As of the date of this Agreement, the Company is engaged primarily
in the commercial kitchen design and/or supply industry.
B. Founder is employed hereunder by the Company in a confidential
relationship wherein Founder, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
A G R E E M E N T S
1. Employment and Duties. The Company hereby employs Founder as the
---------------------
Executive Vice President of the Curtis division of the Company. As such, Founder
shall have responsibilities, duties and authority reasonably accorded to and
expected of an executive vice president of a division and will report directly
to the Chief Executive Officer of the Company or such other officer as shall be
determined by the Chief Executive Officer of the Company. Founder hereby accepts
this employment upon the terms and conditions herein contained and agrees to
devote his working time, attention and efforts to promote and further the
business of the Company.
2. Compensation. For all services rendered by Founder, the Company
------------
shall compensate founder as follows:
(a) Base Salary. The base salary payable to Founder shall be
-----------
$100,000 per year, payable on a regular basis in accordance with the Company's
standard payroll procedures, but not less often than monthly. On at least an
annual basis, the board of directors of the Company (the "Board") will review
Founder's performance and may make increases to such base salary if, in the
Board's discretion, any such increase is warranted. Founder shall be eligible
for such bonuses, if any, as may be granted to him from time to time by the
Board.
<PAGE>
(b) Founder Benefits and Other Compensation. In addition to the
---------------------------------------
compensation provided for under subparagraph (a) above, Founder will, during the
Employment Term, have the right to receive such benefits as are generally made
available to full-time officers of the Company, including the right to
participate in any retirement plan or bonus plan that the Company may create. In
addition to, or inclusive of, such benefits, the Company will provide Founder
with the following:
(i) the opportunity to apply for coverage under the Company's
medical, life and disability plans, if any. If Founder is accepted for coverage
under such plans, the Company will provide to Founder and his immediate family
such coverage on the same terms as are customarily provided by the Company to
the plan participants as modified from time to time; and
(ii) in addition to normal holidays recognized by the Company,
three weeks paid vacation annually or such other amount as may be afforded
officers and key employees generally under the Company's policies in effect from
time to time (pro rated for any year in which Founder is employed for less than
the full year).
3. Term; Termination; Rights on Termination. The term of this
----------------------------------------
Agreement shall begin on the date hereof and continue for three (3) years (the
"Initial Term"), and, unless terminated sooner as herein provided, shall
continue thereafter on a year-to-year basis on the same terms and conditions
contained herein unless either party gives to the other party written notice of
nonrenewal of the Agreement at least ninety (90) days prior to the end of the
then-current term. This Agreement and Founder's employment may be terminated in
any one of the following ways:
(a) Death. The death of Founder shall immediately terminate the
-----
Agreement with no severance compensation due to Founder's estate.
(b) Disability. This Agreement will terminate upon the permanent
----------
disability of Founder. Founder will be deemed permanently disabled for the
purpose of this Agreement if, in the good faith determination of the Board,
based on sound medical advice, Founder has become physically or mentally
incapable of performing his duties hereunder for a continuous period of one
hundred eighty (180) days, in which event Founder will be deemed permanently
disabled upon the expiration of such one hundred eighty (180) day period. Also,
Founder may terminate his employment hereunder if his health should become
impaired to an extent that makes the continued performance of his duties
hereunder hazardous to his physical or mental health provided that Founder shall
have furnished the Company with a written statement from a qualified doctor to
such effect; and provided further that, at the Company's request made within
thirty (30) days of the date of such written statement, Founder shall submit to
an examination by a doctor selected by the Company who is reasonably acceptable
to Founder or Founder's doctor and such doctor shall have concurred in the
conclusion of Founder's doctor. In the event this Agreement is terminated as a
result of Founder's permanent disability, Founder shall receive from the
Company, in a lump-sum payment due within thirty (30) days of the effective date
of termination, an amount equal to the difference between (a) the base salary at
the rate then in effect for the lesser of (i) whatever time period is remaining
under the Initial Term of this
2
<PAGE>
Agreement and (ii) one (1) year, minus (b) all payments in respect of Founder's
salary payable to Founder under the Company's disability insurance, if any, for
the same period.
(c) Good Cause. The Company may terminate this Agreement ten (10)
----------
days after written notice to Founder, for good cause, which shall be: (1)
Founder's material and irreparable breach of this Agreement; (2) Founder's gross
negligence in the performance or intentional nonperformance (continuing for ten
(10) days after receipt of the written notice) of any of Founder's material
duties and responsibilities hereunder; (3) Founder's dishonesty, fraud or
misconduct with respect to the business or affairs of the Company which
materially and adversely affects the operations or reputation of the Company;
(4) Founder's conviction of a felony crime; (5) chronic alcohol abuse or illegal
drug abuse by Founder; or (6) any other good faith determination of the Board
that Founder has engaged in any act that has a material adverse effect on the
business, affairs or reputation of the Company. In the event of a termination
for good cause, as enumerated above, Founder shall have no right to any
severance compensation.
(d) Without Cause. At any time after the commencement of
-------------
employment, the Company may, without cause, terminate this Agreement and
Founder's employment effective sixty (60) days after written notice is provided
to Founder, or if the effective date of termination, as determined in the sole
discretion of the Company, is less than sixty (60) days after written notice is
provided to Founder, then Founder shall receive from the Company compensation
for sixty (60) days from the date of written notice at the rate then in effect,
in a lump sum payment due on the effective date of termination.
(e) Termination by Founder Without Cause. If Founder resigns or
------------------------------------
otherwise terminates his employment Founder shall receive no severance
compensation.
Upon termination of this Agreement for any reason provided in this Section
3, Founder shall be entitled to receive all compensation earned and all benefits
and reimbursements vested or due through the effective date of termination.
Additional compensation subsequent to termination, if any, will be due and
payable to Founder only to the extent and in the manner expressly provided
above. All other rights and obligations of the Company and Founder under this
Agreement shall cease as of the effective date of termination, except that the
Company's obligations under paragraph 8 herein and Founder's obligations under
paragraphs 4, 5, 6, 7, 8 and 9 herein shall survive such termination.
4. Return of Company Property. All records, designs, patents, business
--------------------------
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Founder by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, and be subject at all
times to its discretion and control. All correspondence, reports, records,
charts, advertising materials and other similar data pertaining to the business,
activities or future plans of the Company in the possession of Founder shall be
delivered promptly to the Company without request by it upon termination of
Founder's employment.
5. Noncompetition. During the term of his employment with the company
--------------
(including the subsidiaries thereof) (the "Noncompetition Period"), Founder
agrees to be bound by each of the provisions set forth in Section 13 of that
certain Agreement and Plan of
3
<PAGE>
Reorganization dated of even date herewith by and among the Company and the
"Stockholders" named therein (the "Reorganization Agreement"), to the extent
that such noncompetition period extends beyond the four (4) year time period
provided for in the Reorganization Agreement.
6. Inventions. Founder shall disclose promptly to the Company any
----------
and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made by
Founder, solely or jointly with another, during the period of employment or
within one (1) year thereafter, and which are either directly related to the
business or activities of the Company or conceived by Founder as a result of his
work for the Company. Founder hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Founder shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. Trade Secrets. Founder agrees that he will not, during or after the
-------------
term of this Agreement, disclose the specific terms of the Company's
relationships or agreements with its respective significant vendors or customers
or any other significant and material trade secret of the Company, whether in
existence or proposed, to any person, firm, partnership, corporation or business
for any reason or purpose whatsoever.
8. Indemnification. In the event Founder is made a party to any
---------------
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Founder), by reason of the fact that he is or was performing services
within the course and scope of his employment with the Company under this
Agreement, then the Company shall indemnify Founder against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement, as
actually and reasonably incurred by Founder in connection therewith. Without
limiting the requirement above that Founder be performing services within the
course and scope of his employment, activities constituting violations of law or
Company policy shall not constitute services within the course and scope of
Founder's employment. In the event that both Founder and the Company are made a
party to the same third-party action, complaint, suit or proceeding, the Company
agrees to engage competent legal representation, and Founder agrees to use the
same representation, provided that if counsel selected by the Company shall have
a conflict of interest that prevents such counsel from representing Founder,
Founder may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel.
9. No Prior Agreements. Founder hereby represents and warrants to the
-------------------
Company that the execution of this Agreement by Founder and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Founder agrees to indemnify the Company for any claim,
including, but not limited to, Company's attorneys' fees and expenses of
investigation, by any third party that such third party may now have or may
hereafter have against the Company based upon or arising out of any non-
competition agreement, invention agreement or secrecy agreement between Founder
and such third party which was in existence as of the date of this Agreement.
4
<PAGE>
10. Assignment; Binding Effect. Founder understands that he has been
--------------------------
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Founder agrees, therefore, that he cannot
assign all or any portion of his performance under this Agreement. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
11. Complete Agreement. This Agreement is not a promise of future
------------------
employment. Founder has no oral understandings or agreements with the Company or
any of its officers, directors or representatives covering the same subject
matter as this Agreement. This written Agreement is the final, complete and
exclusive statement and expression of the Agreement between the Company and
Founder and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral or
written representations or agreements. This written Agreement may not be later
modified except by a further writing signed by a duly authorized officer of the
Company and Founder, and no term of this Agreement may be waived except by
writing signed by the party waiving the benefit of such term.
12. Notice. Whenever any notice is required hereunder, it shall be
------
given in writing addressed as follows:
To the Company: Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
with a copy to: Daniel J. Winnike, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111
To Founder: Daniel Curtis
85080 Ridgetop Road
Eugene, OR 97405
with a copy to: Don Churnside
Gaydos, Churnside & Baker
440 East Broadway, Suite 300
Eugene, OR 97401
Notice shall be deemed given and effective three (3) days after the
deposit in the U.S. mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received. Either
party may change the address for notice by notifying the other party of such
change in accordance with this Section 12.
13. Severability; Headings. In the event any court of competent
----------------------
jurisdiction shall determine that the scope, time or territorial restrictions
set forth herein are unreasonable, then it
5
<PAGE>
is the intention of the parties that such restrictions be enforced to the
fullest extent which the court deems reasonable, and the Agreement shall thereby
be reformed. The paragraph headings herein are for reference purposes only and
are not intended in any way to describe, interpret, define or limit the extent
or intent of the Agreement or of any part hereof.
14. Governing Law. This Agreement shall in all respects be construed
-------------
according to the laws of the State of California, as applied to agreements
entered into and performed wholly in California.
15. Counterparts. This Agreement may be executed simultaneously in two
------------
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE COMPANY:
HOSPITALITY DESIGN & SUPPLY, INC.
By: ______________________________________
Title: ___________________________________
FOUNDER:
__________________________________________
Daniel Curtis
6
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between Hospitality
Design & Supply, Inc., a Delaware corporation (the "Company"), and William A.
Williams ("Founder") is hereby entered into and effective as of the date of the
consummation of the initial public offering of the common stock of the Company.
This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between the Company and Founder.
R E C I T A L S
A. As of the date of this Agreement, the Company is engaged primarily
in the commercial kitchen design and/or supply industry.
B. Founder is employed hereunder by the Company in a confidential
relationship wherein Founder, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
A G R E E M E N T S
1. Employment and Duties. The Company hereby employs Founder as the
---------------------
President of the Bintz division of the Company. As such, Founder shall have
responsibilities, duties and authority reasonably accorded to and expected of a
president of a division and will report directly to the Chief Executive Officer
of the Company or such other officer as shall be determined by the Chief
Executive Officer of the Company. Founder hereby accepts this employment upon
the terms and conditions herein contained. It is anticipated by the parties
that, typically, Founder will devote not less than twenty (20) hours and not
more than forty (40) hours a week to his employment with the Company. Founder
agrees to devote his working time, attention and efforts to promote and further
the business of the Company.
2. Compensation. For all services rendered by Founder, the Company
------------
shall compensate Founder as follows:
(a) Base Salary. The base salary payable to Founder shall be
-----------
$30,000 per year, payable on a regular basis in accordance with the Company's
standard payroll procedures, but not less than monthly.
<PAGE>
(b) Founder Benefits and Other Compensation. Founder will, during
---------------------------------------
the Employment Term, have the right to receive such benefits as are generally
made available to full-time officers of the Company, including the right to
participate in any retirement plan or bonus plan that the Company may create. In
addition to, or inclusive of, such benefits, the Company will provide Founder
with, in addition to normal holidays recognized by the Company, three weeks paid
vacation annually or such other amount as may be afforded officers and key
employees generally under the Company's policies in effect from time to time
(pro rated for any year in which Founder is employed for less than the full
year).
3. Term; Termination; Rights on Termination. The term of this
----------------------------------------
Agreement shall begin on the date hereof and continue for eighteen (18) months
(the "Initial Term"), and, unless terminated sooner as herein provided, shall
continue thereafter on a month-to-month basis on the same terms and conditions
contained herein unless either party gives to the other party written notice of
nonrenewal of the Agreement at least thirty (30) days prior to the end of the
then-current term. This Agreement and Founder's employment may be terminated in
any one of the following ways:
(a) Death. The death of Founder shall immediately terminate the
-----
Agreement with no severance compensation due to Founder's estate.
(b) Disability. This Agreement will terminate upon the permanent
----------
disability of Founder. Founder will be deemed permanently disabled for the
purpose of this Agreement if, in the good faith determination of the board of
directors of the Company (the "Board"), based on sound medical advice, Founder
has become physically or mentally incapable of performing his duties hereunder
for a continuous period of one hundred eighty (180) days, in which event Founder
will be deemed permanently disabled upon the expiration of such one hundred
eighty (180) day period. Also, Founder may terminate his employment hereunder if
his health should become impaired to an extent that makes the continued
performance of his duties hereunder hazardous to his physical or mental health,
provided that Founder shall have furnished the Company with a written statement
from a qualified doctor to such effect; and provided further that, at the
Company's request made within thirty (30) days of the date of such written
statement, Founder shall submit to an examination by a doctor selected by the
Company who is reasonably acceptable to Founder or Founder's doctor and such
doctor shall have concurred in the conclusion of Founder's doctor. In the event
this Agreement is terminated as a result of Founder's permanent disability,
Founder shall receive from the Company, in a lump-sum payment due within thirty
(30) days of the effective date of termination, an amount equal to the
difference between (a) the base salary at the rate then in effect for the lesser
of (i) whatever time period is remaining under the Initial Term of this
Agreement and (ii) one (1) year, minus (b) all payments in respect of Founder's
salary payable to Founder under the Company's disability insurance, if any, for
the same period.
(c) Good Cause. The Company may terminate this Agreement ten (10)
----------
days after written notice to Founder, for good cause, which shall be: (1)
Founder's material and irreparable breach of this Agreement; (2) Founder's gross
negligence in the performance or intentional nonperformance (continuing for ten
(10) days after receipt of the written notice) of any of Founder's material
duties and responsibilities hereunder; (3) Founder's dishonesty, fraud or
misconduct with respect to the business or affairs of the Company which
materially and
2
<PAGE>
adversely affects the operations or reputation of the Company; (4) Founder's
conviction of a felony crime; (5) chronic alcohol abuse or illegal drug abuse by
Founder; or (6) any other good faith determination of the Board that Founder has
engaged in any act that has a material adverse effect on the business, affairs
or reputation of the Company. In the event of a termination for good cause, as
enumerated above, Founder shall have no right to any severance compensation.
(d) Without Cause. At any time after the commencement of
-------------
employment, the Company may, without cause, terminate this Agreement and
Founder's employment effective sixty (60) days after written notice is provided
to Founder, or if the effective date of termination, as determined in the sole
discretion of the Company, is less than sixty (60) days after written notice is
provided to Founder, then Founder shall receive from the Company compensation
for sixty (60) days from the date of written notice at the rate then in effect,
in a lump sum payment due on the effective date of termination.
(e) Termination by Founder Without Cause. If Founder resigns or
------------------------------------
otherwise terminates his employment Founder shall receive no severance
compensation.
Upon termination of this Agreement for any reason provided in this
Section 3, Founder shall be entitled to receive all compensation earned and all
benefits and reimbursements vested or due through the effective date of
termination. Additional compensation subsequent to termination, if any, will be
due and payable to Founder only to the extent and in the manner expressly
provided above. All other rights and obligations of the Company and Founder
under this Agreement shall cease as of the effective date of termination, except
that the Company's obligations under paragraph 8 herein and Founder's
obligations under paragraphs 4, 5, 6, 7, 8 and 9 herein shall survive such
termination.
4. Return of Company Property. All records, designs, patents,
--------------------------
business plans, financial statements, manuals, memoranda, lists and other
property delivered to or compiled by Founder by or on behalf of the Company or
its representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, and be subject at all
times to its discretion and control. All correspondence, reports, records,
charts, advertising materials and other similar data pertaining to the business,
activities or future plans of the Company in the possession of Founder shall be
delivered promptly to the Company without request by it upon termination of
Founder's employment.
5. Noncompetition. During the term of his employment with the Company
--------------
(including the subsidiaries thereof) (the "Noncompetition Period"), Founder
agrees to be bound by each of the provisions set forth in Section 13 of that
certain Agreement and Plan of Reorganization dated of even date herewith by and
among the Company and the "Stockholders" named therein (the "Reorganization
Agreement"), to the extent that such Noncompetition Period extends beyond the
four (4) year time period provided for in the Reorganization Agreement.
6. Inventions. Founder shall disclose promptly to the Company any and
----------
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Founder,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are either directly related to the business or
activities of the Company or conceived by Founder as a result
3
<PAGE>
of his work for the Company. Founder hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Founder shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. Trade Secrets. Founder agrees that he will not, during or after
-------------
the term of this Agreement, disclose the specific terms of the Company's
relationships or agreements with its respective significant vendors or customers
or any other significant and material trade secret of the Company, whether in
existence or proposed, to any person, firm, partnership, corporation or business
for any reason or purpose whatsoever.
8. Indemnification. In the event Founder is made a party to any
---------------
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Founder), by reason of the fact that he is or was performing services
within the course and scope of his employment with the Company under this
Agreement, then the Company shall indemnify Founder against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement, as
actually and reasonably incurred by Founder in connection therewith. Without
limiting the requirement above that Founder be performing services within the
course and scope of his employment, activities constituting violations of law or
Company policy shall not constitute services within the course and scope of
Founder's employment. In the event that both Founder and the Company are made a
party to the same third-party action, complaint, suit or proceeding, the Company
agrees to engage competent legal representation, and Founder agrees to use the
same representation, provided that if counsel selected by the Company shall have
a conflict of interest that prevents such counsel from representing Founder,
Founder may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel.
9. No Prior Agreements. Founder hereby represents and warrants to
-------------------
the Company that the execution of this agreement by Founder and his employment
by the Company and the performance of his duties hereunder will not violate or
be a breach of any agreement with a former employer, client or any other person
or entity. Further, Founder agrees to indemnify the Company for any claim,
including, but not limited to, the Company's attorneys' fees and expenses of
investigation, by any third party that such third party may now have or may
hereafter have against the Company based upon or arising out of any non-
competition agreement, invention agreement or secrecy agreement between Founder
and such third party which was in existence as of the date of this Agreement.
10. Assignment; Binding Effect. Founder understands that he has been
--------------------------
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Founder agrees, therefore, he cannot
assign all or any portion of his performance under this Agreement. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
11. Complete Agreement. This Agreement is not a promise of future
------------------
employment. Founder has no oral understandings or agreements with the Company or
any of its officers,
4
<PAGE>
directors or representatives covering the same subject matter as this Agreement.
This written Agreement is the final, complete and exclusive statement and
expression of the agreement between the Company and Founder and of all the terms
of this Agreement, and it cannot be varied, contradicted or supplemented by
evidence of any prior or contemporaneous oral or written representations or
agreements. This written Agreement may not be later modified except by a further
writing signed by a duly authorized officer of the Company and Founder, and no
term of this Agreement may be waived except by writing signed by the party
waiving the benefit of such term.
12. Notice. Whenever any notice is required hereunder, it shall be
------
given in writing addressed as follows:
To the Company: Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: Roger M. Laverty, CEO
with a copy to: Daniel J. Winnike, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111
To Founder: William A. Williams
990 Oak Hills Way
Salt Lake City, UT 84108
with a copy to: Jay Bullock, Esq.
Bullock Law Firm
353 East 300 South
Salt Lake City, UT 84111
Notice shall be deemed given and effective three (3) days after the
deposit in the U.S. mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received. Either
party may change the address for notice by notifying the other party of such
change in accordance with this Section 12.
13. Severability; Headings. In the event any court of competent
----------------------
jurisdiction shall determine that the scope, time or territorial restrictions
set forth herein are unreasonable, then it is the intention of the parties that
such restrictions be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed. The paragraph headings
herein are for reference purposes only and are not intended in any way to
describe, interpret, define or limit the extent or intent of the Agreement or of
any part hereof.
5
<PAGE>
14. Governing Law. This Agreement shall in all respects be construed
-------------
according to the laws of the State of California, as applied to agreements
entered into and performed wholly in California.
15. Counterparts. This Agreement may be executed simultaneously in
------------
two (2) or more counterparts, each of which shall be deemed an original and all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE COMPANY:
HOSPITALITY DESIGN & SUPPLY, INC.
By:
-----------------------------
Title:
--------------------------
FOUNDER:
--------------------------------
William A. Williams
6
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between Hospitality
Design & Supply, Inc., a Delaware corporation (the "Company"), and David Castino
("Founder") is hereby entered into and effective as of the date of the
consummation of the initial public offering of the common stock of the Company
(the "Effective Date"). This Agreement hereby supersedes any other employment
agreements or understandings, written or oral, between the Company and Founder.
R E C I T A L S
A. As of the date of this Agreement, the Company is engaged primarily
in the commercial kitchen design and/or supply industry.
B. Founder is employed hereunder by the Company in a confidential
relationship wherein Founder, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed as
follows:
A G R E E M E N T S
1. Employment and Duties. The Company hereby employs Founder as the
---------------------
General Manager of the Castino Restaurant Equipment and Supply division of the
Company. As such, Founder shall have responsibilities, duties and authority
reasonably accorded to and expected of a president and will report directly to
the Chief Executive Officer of the Company or such other officer as shall be
determined by the Chief Executive Officer of the Company. Founder hereby
accepts this employment upon the terms and conditions herein contained and
agrees to devote his working time, attention and efforts to promote and further
the business of the Company.
2. Compensation. For all services rendered by Founder, the Company
------------
shall compensate Founder as follows:
(a) Base Salary. The base salary payable to Founder shall be
-----------
$55,000 per year, payable on a regular basis in accordance with the Company's
standard payroll procedures, but not less than monthly. On at least an annual
basis, the board of directors of the Company (the "Board") will review Founder's
performance and may make increases to such base salary if, in the Board's
discretion, any such increase is warranted. Founder shall be eligible for such
bonuses, if any, as may be granted to him from time to time by the Board.
<PAGE>
Notwithstanding the foregoing, the Base Salary shall be adjusted on each
anniversary of the Effective Date during the term of this Agreement (each such
date being referred to herein as an "Adjustment Date"), as follows: the base
for computing the adjustment is the Consumer Price Index ("CPI") for all Urban
Consumers--All Items for the West, 1982-84 = 100, published by the United States
Department of Labor, Bureau of Labor Statistics (the "Index"), which is in
effect for (x) the month prior to the month in which the Effective Date occurs,
in the case of the first adjustment, and (y) the month prior to the month in
which the prior Adjustment Date occurs for each adjustment thereafter (in each
case, the "Beginning Index"). The percentage increase in the Index published
for the calendar month immediately prior to the Adjustment Date over the
Beginning Index shall constitute the percentage by which the Base Salary shall
increase on the Adjustment Date.
(b) Founder Benefits and Other Compensation. Founder will,
---------------------------------------
during the Employment Term, have the right to receive health, dental and life
insurance benefits substantially similar to those Founder was receiving
immediately prior to his Employment or such other benefits having a value
reasonably equivalent to such benefits, and those benefits that are generally
made available to full-time officers of the Company, including the right to
participate in any retirement plan or bonus plan that the Company may create. In
addition to, or inclusive of, such benefits, the Company will provide Founder
with the following:
(i) the opportunity to apply for coverage under the Company's
medical, life and disability plans, if any. If Founder is accepted for
coverage under such plans, the Company will provide to Founder and his
immediate family such coverage on the same terms as are customarily provided
by the Company to the plan participants as modified from time to time; and
(ii) in addition to normal holidays recognized by the Company,
three weeks paid vacation annually or such other amount as may be afforded
officers and key employees generally under the Company's policies in effect
from time to time (pro rated for any year in which Founder is employed for
less than the full year).
Founder shall be compensated for reasonable business related expenses including,
but not limited to, reasonable business related expenses in connection with the
attendance of conventions, transportation and other reasonable expenses
associated with business related entertainment.
3. Term; Termination; Rights on Termination. The term of this
----------------------------------------
Agreement shall begin on the date hereof and continue for three (3) years (the
"Initial Term"), and, unless terminated sooner as herein provided, shall
continue thereafter on a year-to-year basis on the same terms and conditions
contained herein unless either party gives to the other party written notice of
nonrenewal of the Agreement at least ninety (90) days prior to the end of the
then-current term. This Agreement and Founder's employment may be terminated in
any one of the following ways:
(a) Death. The death of Founder shall immediately terminate the
-----
Agreement with no severance compensation due to Founder's estate.
2
<PAGE>
(b) Disability. This Agreement will terminate upon the permanent
----------
disability of Founder. Founder will be deemed permanently disabled for the
purpose of this Agreement if, in the good faith determination of the Board,
based on sound medical advice, Founder has become physically or mentally
incapable of performing his duties hereunder for a continuous period of one
hundred eighty (180) days, in which event Founder will be deemed permanently
disabled upon the expiration of such one hundred eighty (180) day period. Also,
Founder may terminate his employment hereunder if his health should become
impaired to an extent that makes the continued performance of his duties
hereunder hazardous to his physical or mental health, provided that Founder
shall have furnished the Company with a written statement from a qualified
doctor to such effect; and provided further that, at the Company's request made
within thirty (30) days of the date of such written statement, Founder shall
submit to an examination by a doctor selected by the Company who is reasonably
acceptable to Founder or Founder's doctor and such doctor shall have concurred
in the conclusion of Founder's doctor. In the event this Agreement is
terminated as a result of Founder's permanent disability, Founder shall receive
from the Company, in a lump-sum payment due within thirty (30) days of the
effective date of termination, an amount equal to the difference between (a) the
base salary at the rate then in effect for the lesser of (i) whatever time
period is remaining under the Initial Term of this Agreement and (ii) one (1)
year, minus (b) all payments in respect of Founder's salary payable to Founder
under the Company's disability insurance, if any, for the same period.
(c) Good Cause. The Company may terminate this Agreement ten (10)
----------
days after written notice to Founder, for good cause, which shall be: (1)
Founder's material and irreparable breach of this Agreement; (2) Founder's gross
negligence in the performance or intentional nonperformance (continuing for ten
(10) days after receipt of the written notice) of any of Founder's material
duties and responsibilities hereunder; (3) Founder's dishonesty, fraud or
intentional misconduct with respect to the business or affairs of the Company
which materially and adversely affects the operations or reputation of the
Company; (4) Founder's conviction of a felony crime; (5) chronic alcohol abuse
or illegal drug abuse by Founder; or (6) any other good faith determination of
the Board that Founder has engaged in any act that has a material adverse effect
on the business, affairs or reputation of the Company, provided that a good
-------------
faith dispute between the parties regarding the conduct of the business of the
Company shall not constitute good cause hereunder. In the event of a
termination for good cause, as enumerated above, Founder shall have no right to
any severance compensation.
(d) Without Cause. At any time after the commencement of
-------------
employment, the Company may, without cause, terminate this Agreement and
Founder's employment effective upon written notice provided to Founder, or such
later date set forth in such written notice. Founder shall receive from the
Company compensation at the rate then in effect and on the dates such amounts
are payable pursuant to Section 2(a) above and shall continue to receive full
employee benefits pursuant to Section 2(b) above for one year following the
effective date of termination.
(e) Termination by Founder Without Cause. If Founder resigns or
------------------------------------
otherwise terminates his employment Founder, shall receive no severance
compensation.
Upon termination of this Agreement for any reason provided in this
Section 3, Founder shall be entitled to receive all compensation earned and all
benefits and reimbursements
3
<PAGE>
vested or due through the effective date of termination. Additional compensation
subsequent to termination, if any, will be due and payable to Founder only to
the extent and in the manner expressly provided above. All other rights and
obligations of the Company and Founder under this Agreement shall cease as of
the effective date of termination, except that the Company's obligations under
paragraph 8 herein and Founder's obligations under paragraphs 4, 5, 6, 7, 8 and
9 herein shall survive such termination; and the provisions of paragraphs 11,
12, 13 and 14 shall survive, to the extent applicable following such
termination.
4. Return of Company Property. All records, designs, patents, business
--------------------------
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Founder by or on behalf of the Company or its
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, and be subject at all
times to its discretion and control. All correspondence, reports, records,
charts, advertising materials and other similar data pertaining to the business,
activities or future plans of the Company in the possession of Founder shall be
delivered promptly to the Company without request by it upon termination of
Founder's employment.
5. Noncompetition. During the term of his employment with the Company
--------------
(including the subsidiaries thereof) (the "Noncompetition Period"), Founder
agrees to be bound by each of the provisions set forth in Section 13 of that
certain Agreement and Plan of Reorganization dated of even date herewith by and
among the Company and the "Stockholders" named therein (the "Reorganization
Agreement"), to the extent that such Noncompetition Period extends beyond the
four (4) year time period provided for in the Reorganization Agreement.
6. Inventions. Founder shall disclose promptly to the Company any and
----------
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Founder,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are either directly related to the business or
activities of the Company or conceived by Founder as a result of his work for
the Company. Founder hereby assigns and agrees to assign all his interests
therein to the Company or its nominee. Whenever requested to do so by the
Company, Founder shall execute any and all applications, assignments or other
instruments that the Company shall deem necessary to apply for and obtain
Letters Patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. Trade Secrets. Founder agrees that he will not, during or after the
-------------
term of this Agreement, disclose the specific terms of the Company's
relationships or agreements with its respective significant vendors or customers
or any other significant and material trade secret of the Company, whether in
existence or proposed, to any person, firm, partnership, corporation or business
for any reason or purpose whatsoever; except that Founder may make such a
disclosure (i) to the extent such disclosure is required by law, and (ii) to his
attorneys and other professional advisors.
8. Indemnification. In the event Founder is made a party to any
---------------
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Founder), by reason of the fact that he is or was performing services
within the course and scope of his employment with the Company under this
4
<PAGE>
Agreement, then the Company shall indemnify Founder against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement, as
actually and reasonably incurred by Founder in connection therewith. Without
limiting the requirement above that Founder be performing services within the
course and scope of his employment, activities constituting violations of law or
Company policy shall not constitute services within the course and scope of
Founder's employment; unless, with respect to violations of Company policy,
Founder reasonably had a good faith belief that his activities were within
Company policy. In the event that both Founder and the Company are made a party
to the same third-party action, complaint, suit or proceeding, the Company
agrees to engage competent legal representation, and Founder agrees to use the
same representation, provided that if counsel selected by the Company shall have
a conflict of interest that prevents such counsel from representing Founder,
Founder may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel.
9. No Prior Agreements. Founder hereby represents and warrants to the
-------------------
Company that the execution of this Agreement by Founder and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Founder agrees to indemnify the Company for any claim,
including, but not limited to, Company's attorneys' fees and expenses of
investigation, by any third party that such third party may now have or may
hereafter have against the Company based upon or arising out of any non-
competition agreement, invention agreement or secrecy agreement between Founder
and such third party which was in existence as of the date of this Agreement.
10. Assignment; Binding Effect. Founder understands that he has been
--------------------------
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Founder agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective heirs, legal representatives, successors
and assigns.
11. Complete Agreement. This Agreement is not a promise of future
------------------
employment. Founder has no oral understandings or agreements with the Company
or any of its officers, directors or representatives covering the same subject
matter as this Agreement. This written Agreement is the final, complete and
exclusive statement and expression of the agreement between the Company and
Founder and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral or
written representations or agreements. This written Agreement may not be later
modified except by a further writing signed by a duly authorized officer of the
Company and Founder, and no term of this Agreement may be waived except by
writing signed by the party waiving the benefit of such term.
12. Notice. Whenever any notice is required hereunder, it shall be
------
given in writing addressed as follows:
5
<PAGE>
To the Company: Hospitality Design & Supply, Inc.
P.O. Box 5016
Culver City, CA 90231
Attn: James Castleberry
with a copy to: Daniel J. Winnike, Esq.
Howard, Rice, Nemerovski, Canady,
Falk & Rabkin
A Professional Corporation
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111
To Founder: David Castino
---------------------------------
---------------------------------
Santa Rosa, CA
-------------------
with a copy to: Kirt Ziegler
Anderson & Ziegler
Bayview Bank Building, 5th Floor
50 Old Courthouse Square
P.O. Box 1498
Santa Rosa, CA 95402
Notice shall be deemed given and effective three (3) days after the
deposit in the U.S. mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received. Either
party may change the address for notice by notifying the other party of such
change in accordance with this Section 12.
13. Severability; Headings. In the event any court of competent
----------------------
jurisdiction shall determine that the scope, time or territorial restrictions
set forth herein are unreasonable, then it is the intention of the parties that
such restrictions be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed. The paragraph headings
herein are for reference purposes only and are not intended in any way to
describe, interpret, define or limit the extent or intent of the Agreement or of
any part hereof.
14. Governing Law. This Agreement shall in all respects be construed
-------------
according to the laws of the State of California, as applied to agreements
entered into and performed wholly in California.
15. Counterparts. This Agreement may be executed simultaneously in two
------------
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute one and the same instrument.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE COMPANY:
HOSPITALITY DESIGN & SUPPLY, INC.
By:
------------------------------
Title:
---------------------------
FOUNDER:
---------------------------------
David Castino
7
<PAGE>
EXHIBIT 10.12
CONSULTING AGREEMENT
--------------------
This Agreement by and between Hospitality Design & Supply, Inc.,
("Company") and Ross Berner ("Consultant") is entered into as of the
consummation of the initial public offering of the Company.
1. Engagement and Scope. The Company hereby engages Consultant and Consultant
--------------------
hereby accepts the engagement upon the terms and conditions hereinafter set
forth. Consultant shall consult, advise and assist the Company with respect to
commercial kitchen design and/or supply and related opportunities and its
efforts to identify, locate, evaluate, and acquire entities or their assets in
these businesses. Consultant shall perform such duties in connection with this
engagement as the Company or corporations affiliated with the Company may
reasonably require.
2. Term. Subject only to the provisions for termination set forth in Paragraph
----
6 below, the term of Consultant's engagement hereunder to acquire commercial
kitchen design and/or supply and related businesses shall be for a period of
three years beginning on the date hereof, which will be automatically renewed
for additional one year terms thereafter unless the Company or Consultant
terminates the Agreement with at least thirty (30) days advance written notice.
3. Compensation.
------------
a. The Company shall reimburse Consultant for all ordinary and necessary
business expenses lawfully and reasonably incurred by Consultant in the
performance of his services pursuant to this Agreement. Such expenses may
include but are not necessarily limited to (i) telephone, photocopying, and
facsimile charges as well as postal and courier charges incurred on behalf of
the Company, (ii) economy class airfare, and (iii) reasonable hotel, meals, and
automobile travel expenses exclusively incurred for the benefit of the Company.
For the avoidance of doubt, all such expenses are subject to allocation if
incurred in part for third parties, personal purposes, or otherwise not
specifically and directly related to or exclusively incurred in furtherance of
Consultant's objectives under this Agreement.
b. All reimbursable expenses shall be appropriately documented in
reasonable detail by Consultant upon submission of any request for
reimbursement, which submission shall be submitted monthly for any such expenses
incurred in the prior month. All documented expenses will be available and
subject to review and audit from time to time upon request by the Company.
c. In addition to the reimbursement of expenses provided for in
subparagraph (a) above, the Company agrees to pay Consultant a bonus consulting
fee after the Company's completion of each acquisition of an entity, division,
or substantially all assets of an entity or division (an "Acquisition") that
resulted directly from the services and efforts of Consultant during the term of
this Agreement. The amount of such bonus consulting fee shall be equal to one
percent (1.0%) of the aggregate purchase price, including debt assumed by the
Company, in such Acquisition. Notwithstanding anything in this Paragraph to the
contrary, Consultant's bonus consulting agreement shall not exceed one hundred
thousand dollars ($100,000) in respect of any Acquisition. To the extent that
any acquisition is consummated by the Company and there is a
<PAGE>
dispute between Consultant and any other party or parties regarding the payment
of the above-stated bonus consulting fee for such acquisition, then the Company,
in its sole discretion, will allocate such bonus consulting fee between
Consultant and such other party or parties to reflect the respective effort of
each such party in bringing such acquisition to completion. The above-mentioned
bonus consulting fees shall be distributed to Consultant within 30 days after
closing.
d. Any payment to Consultant contemplated hereunder shall be net of
applicable taxes, if any, whether income, sales, or otherwise which the Company
is required by law to withhold.
4. Extent of Service. Within the scope of the engagement, Consultant shall
-----------------
devote such time, attention and energy to the business of the Company, and
corporations affiliated with the Company, as shall be reasonably required in
order for Consultant to meet his objectives hereunder. The Company anticipates
that Consultant's efforts hereunder on an annual basis shall result in completed
acquisitions with an annual revenue goal which is mutually agreeable to
Consultant and Company. Consultant shall not commit any act, or make any
statement, which would be deleterious to the reputation and goodwill of the
Company or corporations affiliated with the Company.
5. Disclosure of Information. Consultant recognizes and acknowledges that he
-------------------------
will have access to certain confidential information of the Company, and of
corporations affiliated with the Company, and that such information constitutes
valuable, special, and unique property of the Company, and such other
corporations. Consultant will not, during or after the term of this Agreement,
disclose any of such confidential information to any person, firm, corporation,
association or other entity, unless it is in the public domain or required by
law, except to authorized representatives of the Company and corporations
affiliated with the Company, for any reason or purpose whatsoever, or use such
information, other than in furtherance of this Agreement upon the written
authorization of the Company. In the event of a breach or threatened breach by
Consultant of the provisions of this paragraph, the Company, and corporations
affiliated with the Company, shall be entitled to injunctive relief or other
judicial restraint prohibiting Consultant from disclosing, or using, in whole or
in part, such confidential information. Nothing herein shall be construed as
prohibiting the Company, and corporations affiliated with the Company, from
pursuing any other remedies available to them for such breach or threatened
breach, including the recovery of damages from Consultant. The provisions of
this Paragraph 5 shall survive the dissolution or termination of this Agreement.
6. Termination.
-----------
a. In the event Consultant materially fails to observe or perform any of
the written duties required of him under this Agreement, or otherwise violates
the provisions of the Agreement, the Company may immediately terminate
Consultant's engagement under this Agreement subsequent to a written
notification of the material failure to perform, as per Paragraph 11, and a
reasonable period of time for corrective action.
b. Without cause, the Company may terminate Consultant upon six (6) months
prior written notice by the Company. In such event, the Company shall continue
to pay Consultant the compensation reflected in subparagraph 3(c) accrued prior
to such termination.
2
<PAGE>
c. In the event of change in control of the Company, this Agreement shall
immediately terminate, provided, however, all outstanding amounts of advance
draw, bonus consulting fees, and expenses that arose prior to such change of
control shall become due and payable. For the purposes of this Agreement, a
"change in control" of the Company shall be deemed to have occurred if: (i) any
person (other than any employee benefit plan of the Company and its subsidiaries
of the Company or any person organized, appointed, or established pursuant to
the terms of any such benefit plan) is or becomes the beneficial owner of
securities of the Company representing at least 50% of the combined voting power
of the Company's then outstanding securities, or (ii) there shall be consummated
(x) any consolidation, merger, share exchange or other business combination of
the Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's capital stock would be converted
into cash, securities, or other property, other than any of the foregoing events
in which the holders of the Company's capital stock immediately prior to such
event own not less than fifty percent (50%) of the capital stock of the
surviving corporation immediately after such event, or (y) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the consolidated assets of the
Company.
d. In the event of a termination of Consultant's engagement in accordance
with the provisions of subparagraph (a) above, the Company shall have no further
obligation to Consultant, other than the amount owed to Consultant under 3(a)
and 3(c) through the date of such termination..
e. In the event of a pending acquisition which has not been consummated
prior to termination of Consultant's engagement by the Company in accordance
with the provisions of (b) or (c) above, and the acquisition is in fact
consummated no later than six (6) months after the termination of this
Agreement, the obligation of the Company to pay the bonus consulting fee
described in paragraph 3(c) with respect to such acquisition above shall survive
the termination of this Agreement. For the avoidance of doubt, after said six
(6) month period, any outstanding obligation to Consultant pertaining to a
pending acquisition shall terminate.
f. Upon termination of this Agreement, for whatever reason, Consultant will
promptly deliver to Company all originals and copies, whether in note, memo, or
other document form or on film, video, audio, or computer tapes or discs or
otherwise of confidential information of the Company and of corporations
affiliated with the Company that are in Consultant's possession, custody, or
control whether prepared by Consultant or others. Confidential information
includes, but is not limited to, the name of any person, entity, company, or
business all or any part of which is or at any time was a candidate for a
potential acquisition by or joint undertaking with the Company (whether or not
through the introduction or efforts of Consultant), together with all analysis
and other information which Consultant or the Company has generated, received,
compiled, or otherwise obtained or possesses with respect to such potential
acquisition or joint undertaking.
7. Limit of Engagement. This Agreement does not and shall not be construed to
-------------------
create any partnership or agency whatsoever beyond the purposes set forth in
Paragraph 1 above. Consultant acknowledges and agrees that he is an independent
contractor vis-a-vis the Company and that Consultant shall not be deemed to be a
partner, employee, agent, or legal representative of the Company for any purpose
other than the purposes of this Agreement set forth in said
3
<PAGE>
Paragraph 1, nor shall Consultant have any authority or power to act for, or to
undertake any obligation or responsibility on behalf of, the Company, or
corporations affiliated with the Company, other than as expressly herein
provided. Consultant represents and warrants that he is engaged independently in
the field of business prospect qualification and the service sought by the
Company under this Agreement, and conducts a business enterprise independent of
the Company. Further, Consultant acknowledges and agrees that the amounts paid
under Paragraph 3 hereof are in full satisfaction of all amounts due by the
Company for services rendered by Consultant hereunder and the Consultant
disclaims any right, title, or interest in employee benefits offered by the
Company or other compensation without regard to the reclassification or other
characterization of Consultant's relationship with the Company at a future point
in time by any Federal, State, or local government or agency.
8. Unauthorized Acts.
-----------------
a. Consultant represents and agrees with the Company that he will make no
disbursement or other payment of any kind or character out of the compensation
paid to him hereunder or with any other fund, or take or authorize the taking of
any other action which contravenes any statute or rule, regulation, or order of
any jurisdiction. Consultant further agrees to indemnify and save harmless the
Company, its subsidiaries and affiliates and their directors, officers, and
employees from any and all liabilities, obligations, claims, penalties, fines or
losses resulting from any unauthorized or unlawful acts of Consultant (or from
any violations by Consultant of any laws or regulations, whether willful or not)
except to the extent such acts were undertaken at the direction of the Company.
Consultant further represents and warrants that under no circumstances shall
Consultant solicit or accept either directly or indirectly any form of
remuneration from any third party including but not limited to any business
owner or broker for or related to the performance of Consultant's service
hereunder. The provisions of this Paragraph 8 shall survive the dissolution or
termination of this Agreement.
b. The Consultant agrees to disclose honestly and fully all information and
documentation in his possession concerning all transactions or events relating
to or affecting the Company or any affiliate of the Company as and to the extent
such information or documentation (i) was acquired or developed by Consultant
during his engagement under this Agreement and (ii) is requested by the Company
or the authorized representative thereof.
9. Conflict of Interest. Company may engage other consultants and Consultant
--------------------
may otherwise be engaged by third parties outside of the scope of Consultant's
engagement hereunder.
10. Pending Acquisitions and Geographical Noncompetition. It is recognized that
----------------------------------------------------
pending acquisitions may not have been consummated prior to the expiration or
termination of this Agreement. Therefore, it is mutually agreed that the
parties shall identify in writing on or about the date of expiration or
termination of the Agreement, all geographical areas in which such acquisitions
have been actively pursued by Consultant and in which such acquisitions may be
pending. Consultant agrees that he will not consult with, represent, or be
employed by any competition of the Company with respect to (i) such geographical
areas (determined by county together with a buffer zone of 20 miles from the
outside perimeter thereof); and (ii) any pending acquisition prior to one (1)
year after the expiration or termination of the Agreement, without
4
<PAGE>
first obtaining the written approval of the Company. Notwithstanding the
foregoing, in the event of change in control of the Company (as defined above
herein), the restrictions reflected in this Paragraph 10 shall be null and void.
11. Notices. Any notice required or permitted to be given under this Agreement
-------
shall be in writing and shall be deemed to have been given seven (7) days after
deposited with the United States postal service in a postage prepaid envelope
addressed, if to the Consultant, at 1360 Lombard Street, #302, San Francisco, CA
94109 and if to the Company, c/o CEO, Hospitality Design & Supply, Inc., P.O.
Box 5016, Culver City, CA 90231 or to such other address as either party shall
designate by written notice to the other.
12. Assignment. Consultant may not assign his rights or obligations hereunder.
----------
The rights and obligations of the Company hereunder shall insure to the benefit
of, and shall be binding upon the successors and assigns of the Company.
13. Miscellaneous.
-------------
a. This Agreement shall be subject to and governed by the laws of the State
of California. The parties submit to the exclusive jurisdiction of the State
and Federal Courts located in the State of California if a lawsuit is filed by
Consultant and to the exclusive jurisdiction of the State and Federal Courts
located in the State of California if a lawsuit is filed by the Company.
b. Failure to insist upon strict compliance with any provision hereof shall
not be deemed a waiver of such provision or any other provision hereof.
c. This Agreement may not be modified except by an agreement in writing
executed by the parties hereto.
d. The invalidity or unenforceability of any provision hereof shall not
affect the validity or enforceability of any other provision.
e. Consultant represents and warrants that entering into this Agreement and
the performance of Consultant's services hereunder shall not be in violation of
any other agreement with any third party to the best knowledge of Consultant.
f. If Company breaches Paragraph 3 of this agreement, Consultant will have
the right to terminate the agreement immediately, upon written notice, according
to Paragraph 11, and the Company remains responsible for any payment for
remuneration referred to in Paragraph 3, until the date of termination.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.
<TABLE>
<CAPTION>
<S> <C>
"Consultant" Hospitality Design & Supply, Inc.
By: _______________________ By:______________________________
Ross Berner Roger M. Laverty
Title: Chief Executive Officer
</TABLE>
6
<PAGE>
EXHIBIT 10.13
CONSULTING AGREEMENT
--------------------
This Agreement by and between Hospitality Design & Supply, Inc.,
("Company") and Charles Rothkopf ("Consultant") is entered into as of the
consummation of the initial public offering of the Company.
1. Engagement and Scope. The Company hereby engages Consultant and Consultant
--------------------
hereby accepts the engagement upon the terms and conditions hereinafter set
forth. Consultant shall consult, advise and assist the Company with respect to
commercial kitchen design and/or supply and related opportunities and its
efforts to identify, locate, evaluate, and acquire entities or their assets in
these businesses. Consultant shall perform such duties in connection with this
engagement as the Company or corporations affiliated with the Company may
reasonably require.
2. Term. Subject only to the provisions for termination set forth in Paragraph
----
6 below, the term of Consultant's engagement hereunder to acquire commercial
kitchen design and/or supply and related businesses shall be for a period of
three years beginning on the date hereof, which will be automatically renewed
for additional one year terms thereafter unless the Company or Consultant
terminates the Agreement with at least thirty (30) days advance written notice.
3. Compensation.
------------
a. The Company shall reimburse Consultant for all ordinary and necessary
business expenses lawfully and reasonably incurred by Consultant in the
performance of his services pursuant to this Agreement. Such expenses may
include but are not necessarily limited to (i) telephone, photocopying, and
facsimile charges as well as postal and courier charges incurred on behalf of
the Company, (ii) economy class airfare, and (iii) reasonable hotel, meals, and
automobile travel expenses exclusively incurred for the benefit of the Company.
For the avoidance of doubt, all such expenses are subject to allocation if
incurred in part for third parties, personal purposes, or otherwise not
specifically and directly related to or exclusively incurred in furtherance of
Consultant's objectives under this Agreement.
b. All reimbursable expenses shall be appropriately documented in
reasonable detail by Consultant upon submission of any request for
reimbursement, which submission shall be submitted monthly for any such expenses
incurred in the prior month. All documented expenses will be available and
subject to review and audit from time to time upon request by the Company.
c. In addition to the reimbursement of expenses provided for in
subparagraph (a) above, the Company agrees to pay Consultant a bonus consulting
fee after the Company's completion of each acquisition of an entity, division,
or substantially all assets of an entity or division (an "Acquisition") that
resulted directly from the services and efforts of Consultant during the term of
this Agreement. The amount of such bonus consulting fee shall be equal to one
percent (1.0%) of the last twelve months revenues of the entity or division
which was the subject of such Acquisition. Notwithstanding anything in this
Paragraph to the contrary, Consultant's bonus
<PAGE>
consulting agreement shall not exceed one hundred thousand dollars ($100,000) in
respect of any Acquisition. To the extent that any acquisition is consummated by
the Company and there is a dispute between Consultant and any other party or
parties regarding the payment of the above-stated bonus consulting fee for such
acquisition, then the Company, in its sole discretion, will allocate such bonus
consulting fee between Consultant and such other party or parties to reflect the
respective effort of each such party in bringing such acquisition to completion.
The above-mentioned bonus consulting fees shall be distributed to Consultant
within 30 days after closing. The Company shall pay Consultant a nonrefundable
advance against the bonus consulting fee of $50,000, payable monthly. Upon the
completion of any Acquisition, the amount of bonus consulting fee payable shall
be reduced by the amount of any of such nonrefundable advance paid through the
date of such Acquisition, and no further advance shall be paid after the
aggregate amount of bonus consulting fees and advances paid in any one year
equals $50,000.
d. Any payment to Consultant contemplated hereunder shall be net of
applicable taxes, if any, whether income, sales, or otherwise which the Company
is required by law to withhold.
4. Extent of Service. Within the scope of the engagement, Consultant shall
-----------------
devote such time, attention and energy to the business of the Company, and
corporations affiliated with the Company, as shall be reasonably required in
order for Consultant to meet his objectives hereunder. The Company anticipates
that Consultant's efforts hereunder on an annual basis shall result in completed
acquisitions with an annual revenue goal which is mutually agreeable to
Consultant and Company. Consultant shall not commit any act, or make any
statement, which would be deleterious to the reputation and goodwill of the
Company or corporations affiliated with the Company.
5. Disclosure of Information. Consultant recognizes and acknowledges that he
-------------------------
will have access to certain confidential information of the Company, and of
corporations affiliated with the Company, and that such information constitutes
valuable, special, and unique property of the Company, and such other
corporations. Consultant will not, during or after the term of this Agreement,
disclose any of such confidential information to any person, firm, corporation,
association or other entity, unless it is in the public domain or required by
law, except to authorized representatives of the Company and corporations
affiliated with the Company, for any reason or purpose whatsoever, or use such
information, other than in furtherance of this Agreement upon the written
authorization of the Company. In the event of a breach or threatened breach by
Consultant of the provisions of this paragraph, the Company, and corporations
affiliated with the Company, shall be entitled to injunctive relief or other
judicial restraint prohibiting Consultant from disclosing, or using, in whole or
in part, such confidential information. Nothing herein shall be construed as
prohibiting the Company, and corporations affiliated with the Company, from
pursuing any other remedies available to them for such breach or threatened
breach, including the recovery of damages from Consultant. The provisions of
this Paragraph 5 shall survive the dissolution or termination of this Agreement.
6. Termination.
-----------
a. In the event Consultant materially fails to observe or perform any of
the written duties required of him under this Agreement, or otherwise violates
the provisions of the Agreement, the Company may immediately terminate
Consultant's engagement under this
<PAGE>
Agreement subsequent to a written notification of the material failure to
perform, as per Paragraph 11, and a reasonable period of time for corrective
action.
b. Without cause, the Company may terminate Consultant upon six (6) months
prior written notice by the Company. In such event, the Company shall continue
to pay Consultant the compensation reflected in subparagraph 3(c) accrued prior
to such termination.
c. In the event of change in control of the Company, this Agreement shall
immediately terminate, provided, however, all outstanding amounts of advance
draw, bonus consulting fees, and expenses that arose prior to such change of
control shall become due and payable, in addition to a severance payment equal
to sixty (60) days pro-rata share of annual advance draw compensation. For the
purposes of this Agreement, a "change in control" of the Company shall be deemed
to have occurred if: (i) any person (other than any employee benefit plan of
the Company and its subsidiaries of the Company or any person organized,
appointed, or established pursuant to the terms of any such benefit plan) is or
becomes the beneficial owner of securities of the Company representing at least
50% of the combined voting power of the Company's then outstanding securities,
or (ii) there shall be consummated (x) any consolidation, merger, share exchange
or other business combination of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the Company's
capital stock would be converted into cash, securities, or other property, other
than any of the foregoing events in which the holders of the Company's capital
stock immediately prior to such event own not less than fifty percent (50%) of
the capital stock of the surviving corporation immediately after such event, or
(y) any sale, lease, exchange, or other transfer (in one transaction or a series
of related transactions) of all, or substantially all, of the consolidated
assets of the Company.
d. In the event of a termination of Consultant's engagement in accordance
with the provisions of subparagraph (a) above, the Company shall have no further
obligation to Consultant, other than the amount owed to Consultant under 3(a)
and 3(c) through the date of such termination..
e. In the event of a pending acquisition which has not been consummated
prior to termination of Consultant's engagement by the Company in accordance
with the provisions of (b) or (c) above, and the acquisition is in fact
consummated no later than six (6) months after the termination of this
Agreement, the obligation of the Company to pay the bonus consulting fee
described in paragraph 3(c) with respect to such acquisition above shall survive
the termination of this Agreement. For the avoidance of doubt, after said six
(6) month period, any outstanding obligation to Consultant pertaining to a
pending acquisition shall terminate.
f. Upon termination of this Agreement, for whatever reason, Consultant will
promptly deliver to Company all originals and copies, whether in note, memo, or
other document form or on film, video, audio, or computer tapes or discs or
otherwise of confidential information of the Company and of corporations
affiliated with the Company that are in Consultant's possession, custody, or
control whether prepared by Consultant or others. Confidential information
includes, but is not limited to, the name of any person, entity, company, or
business all or any part of which is or at any time was a candidate for a
potential acquisition by or joint undertaking with the Company (whether or not
through the introduction or efforts of Consultant), together with all analysis
and other information which Consultant or the Company has generated, received,
<PAGE>
compiled, or otherwise obtained or possesses with respect to such potential
acquisition or joint undertaking.
7. Limit of Engagement. This Agreement does not and shall not be construed to
-------------------
create any partnership or agency whatsoever beyond the purposes set forth in
Paragraph 1 above. Consultant acknowledges and agrees that he is an independent
contractor vis-a-vis the Company and that Consultant shall not be deemed to be a
partner, employee, agent, or legal representative of the Company for any purpose
other than the purposes of this Agreement set forth in said Paragraph 1, nor
shall Consultant have any authority or power to act for, or to undertake any
obligation or responsibility on behalf of, the Company, or corporations
affiliated with the Company, other than as expressly herein provided.
Consultant represents and warrants that he is engaged independently in the field
of business prospect qualification and the service sought by the Company under
this Agreement, and conducts a business enterprise independent of the Company.
Further, Consultant acknowledges and agrees that the amounts paid under
Paragraph 3 hereof are in full satisfaction of all amounts due by the Company
for services rendered by Consultant hereunder and the Consultant disclaims any
right, title, or interest in employee benefits offered by the Company or other
compensation without regard to the reclassification or other characterization of
Consultant's relationship with the Company at a future point in time by any
Federal, State, or local government or agency.
8. Unauthorized Acts.
-----------------
a. Consultant represents and agrees with the Company that he will make no
disbursement or other payment of any kind or character out of the compensation
paid to him hereunder or with any other fund, or take or authorize the taking of
any other action which contravenes any statute or rule, regulation, or order of
any jurisdiction. Consultant further agrees to indemnify and save harmless the
Company, its subsidiaries and affiliates and their directors, officers, and
employees from any and all liabilities, obligations, claims, penalties, fines or
losses resulting from any unauthorized or unlawful acts of Consultant (or from
any violations by Consultant of any laws or regulations, whether willful or not)
except to the extent such acts were undertaken at the direction of the Company.
Consultant further represents and warrants that under no circumstances shall
Consultant solicit or accept either directly or indirectly any form of
remuneration from any third party including but not limited to any business
owner or broker for or related to the performance of Consultant's service
hereunder. The provisions of this Paragraph 8 shall survive the dissolution or
termination of this Agreement.
b. The Consultant agrees to disclose honestly and fully all information and
documentation in his possession concerning all transactions or events relating
to or affecting the Company or any affiliate of the Company as and to the extent
such information or documentation (i) was acquired or developed by Consultant
during his engagement under this Agreement and (ii) is requested by the Company
or the authorized representative thereof.
9. Conflict of Interest. Consultant acknowledges that he was the beneficial
--------------------
owner of capital stock of Economy Restaurant Fixtures, Inc. ("Economy") at the
time of its merger into a subsidiary of the Company pursuant to the Agreement
and Plan of Reorganization ("Reorganization Agreement") by and among the
Company, its subsidiary, Economy and the shareholders of Economy, which
shareholders included a revocable trust established by
<PAGE>
Consultant and his spouse. Consultant acknowledges that the Company and he
intend that Consultant be bound by the provisions of Section 13 of the
Reorganization Agreement, and Consultant acknowledges and agrees that he is so
bound and will remain so regardless of any termination of this Agreement.
Company may engage other consultants and Consultant may otherwise be engaged by
third parties (subject to said Section 13) outside of the scope of Consultant's
engagement hereunder.
10. Pending Acquisitions and Geographical Noncompetition. It is recognized that
----------------------------------------------------
pending acquisitions may not have been consummated prior to the expiration or
termination of this Agreement. Therefore, it is mutually agreed that the
parties shall identify in writing on or about the date of expiration or
termination of the Agreement, all geographical areas in which such acquisitions
have been actively pursued by Consultant and in which such acquisitions may be
pending. Consultant agrees that, subject to Section 13 of the Reorganization
Agreement, he will not consult with, represent, or be employed by any
competition of the Company with respect to (i) such geographical areas
(determined by county together with a buffer zone of 20 miles from the outside
perimeter thereof); and (ii) any pending acquisition prior to one (1) year after
the expiration or termination of the Agreement, without first obtaining the
written approval of the Company. Notwithstanding the foregoing, in the event of
change in control of the Company (as defined above herein), the restrictions
reflected in this Paragraph 10 shall be null and void.
11. Notices. Any notice required or permitted to be given under this Agreement
-------
shall be in writing and shall be deemed to have been given seven (7) days after
deposited with the United States postal service in a postage prepaid envelope
addressed, if to the Consultant, at Economy Restaurant Fixtures, Inc., 580 La
Mesa Drive, Menlo Park, CA 94028 and if to the Company, c/o CEO, Hospitality
Design & Supply, Inc., P.O. Box 5016, Culver City, CA 90231 or to such other
address as either party shall designate by written notice to the other.
12. Assignment. Consultant may not assign his rights or obligations hereunder.
----------
The rights and obligations of the Company hereunder shall insure to the benefit
of, and shall be binding upon the successors and assigns of the Company.
13. Miscellaneous.
-------------
a. This Agreement shall be subject to and governed by the laws of the State
of California. The parties submit to the exclusive jurisdiction of the State
and Federal Courts located in the State of California if a lawsuit is filed by
Consultant and to the exclusive jurisdiction of the State and Federal Courts
located in the State of California if a lawsuit is filed by the Company.
b. Failure to insist upon strict compliance with any provision hereof shall
not be deemed a waiver of such provision or any other provision hereof.
c. This Agreement may not be modified except by an agreement in writing
executed by the parties hereto.
d. The invalidity or unenforceability of any provision hereof shall not
affect the validity or enforceability of any other provision.
<PAGE>
e. Consultant represents and warrants that entering into this Agreement and
the performance of Consultant's services hereunder shall not be in violation of
any other agreement with any third party to the best knowledge of Consultant.
f. If Company breaches Paragraph 3 of this agreement, Consultant will have
the right to terminate the agreement immediately, upon written notice, according
to Paragraph 11, and the Company remains responsible for any payment for
remuneration referred to in Paragraph 3, until the date of termination.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.
<TABLE>
<CAPTION>
<S> <C>
"Consultant" Hospitality Design & Supply, Inc.
By: _______________________ By: ____________________________
Charles Rothkopf Roger M. Laverty
Title: Chief Executive Officer
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 20, 1999 on our audit of the balance sheet of Hospitality
Design & Supply, Inc. as of December 31, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the period from June 17,
1998 (inception) through December 31, 1998 (and to all references to our Firm)
included in or made a part of this Form S-1 registration statement. We also
consent to the reference to our Firm under the caption "Experts."
ARTHUR ANDERSEN LLP
Los Angeles, California
March 4, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 12, 1999 on our audits of the balance sheets of Raygal, Inc. as
of December 31, 1998 and 1997, and the related statements of income,
stockholders' equity, and cash flows for the three years in the period ended
December 31, 1998 (and to all references to our Firm) included in or made a
part of this Form S-1 registration statement. We also consent to the reference
to our Firm under the caption "Experts."
ARTHUR ANDERSEN LLP
Orange County, California
March 4, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated January 15, 1999 on our audits of the balance sheets of East Bay
Restaurant Supply, Inc. as of September 30, 1998 and 1997 and the related
statements of income, stockholders' equity and cash flows for the three years
during the period ended September 30, 1998 (and to all references to our Firm)
included in or made a part of this Form S-1 registration statement. We also
consent to the reference to our Firm under the captions "Experts."
ARTHUR ANDERSEN LLP
San Francisco, California
March 4, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 12, 1999 on our audits of the balance sheets of Economy
Restaurant Fixtures, Inc. as of December 31, 1998 and 1997, and the related
statements of income, stockholders' equity, and cash flows for the years then
ended (and to all references to our Firm) included in or made a part of this
Form S-1 registration statement. We also consent to the reference to our Firm
under the caption "Experts."
ARTHUR ANDERSEN LLP
San Francisco, California
March 4, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 15, 1999 on our audits of the balance sheets of Bintz
Distributing Co. as of December 31, 1998 and 1997, and the related statements
of operations, stockholders' equity and cash flows for the years then ended
(and to all references to our Firm) included in or made a part of this Form S-
1 registration statement. We also consent to the reference to our Firm under
the caption "Experts."
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 4, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 5, 1999 on our audits of the balance sheets of Castino
Restaurant Equipment and Supply, Inc. as of December 31, 1998 and March 31,
1998, and the related statements of income, stockholders' equity and cash
flows for the nine months ended December 31, 1998, and for the year ended
March 31, 1998 (and to all references to our Firm) included in or made a part
of this Form S-1 registration statement. We also consent to the reference to
our Firm under the caption "Experts."
ARTHUR ANDERSEN LLP
San Francisco, California
March 4, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 17, 1999 on our audits of the balance sheets of Curtis
Restaurant Equipment, Inc. as of December 31, 1998 and 1997 and the related
statements of income, stockholders' equity and cash flows for the years then
ended (and to all references to our Firm) included in or made a part of this
Form S-1 registration statement. We also consent to the reference to our Firm
under the caption "Experts."
ARTHUR ANDERSEN LLP
Portland, Oregon
March 4, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HOSPITALITY
DESIGN & SUPPLY, INC.'S FINANCIAL STATEMENTS FOR THE PERIOD FROM JUNE 17, 1998
(INCEPTION) THROUGH DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-17-1998
<PERIOD-END> DEC-31-1998
<CASH> 211
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,191
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,191
<CURRENT-LIABILITIES> 460
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 729
<TOTAL-LIABILITY-AND-EQUITY> 1,191
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 52
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (52)
<INCOME-TAX> 0
<INCOME-CONTINUING> (52)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
<PAGE>
EXHIBIT 99.1
CONSENT
In connection with its forthcoming initial public offering (the
"Offering"), Hospitality Design & Supply, Inc. (the "Company") expects to file a
Registration Statement on Form S-1 with the Securities and Exchange Commission
on or about March 2, 1999 (the "Registration Statement"). In anticipation of
the undersigned being appointed to the Company's Board of Directors (the
"Board") upon consummation of the Offering, the undersigned hereby consents to
being named as a member of the Board in the Registration Statement.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective as
of the _____ day of _________________, 1999.
______________________________
Executed By:
John M. Richman
Donald S. Perkins
Cyrus F. Freidheim, Jr.
John Breznikar
Mark Levy
Jerry K. Pearlman
Chuck Rothkopf
Kenneth W. Slutsky
