<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)........ June 4, 1996
NORSTAN, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 0-8141 41-0835746
- ---------------------------- ------------------------ ---------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification Number)
609 North Highway 169
Plymouth, MN 55441
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code ....... (612) 513-5000
Not Applicable
------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 4, 1996, (the "Closing Date"), the Registrant, Norstan, Inc., a
Minnesota corporation ("Norstan"), completed the acquisition of Connect Computer
Company, a privately held Minnesota corporation ("Connect"), pursuant to that
certain Agreement and Plan of Merger, dated May 24, 1996, by and among Norstan,
CCC Acquisition Subsidiary, a Minnesota corporation and a wholly owned
subsidiary of Norstan ("CCC") and Connect (the "Merger Agreement"). Pursuant to
the Merger Agreement, CCC was merged with and into Connect and Connect, as the
surviving corporation, became a wholly owned subsidiary of Norstan. Connect is a
regional provider of consulting, design and implementation services for local
and wide area networks, internets and intranets, client server applications and
workgroup computing with offices in Minneapolis, Milwaukee and Des Moines.
Norstan intends to continue the business of Connect within such states.
The merger consideration consisted of approximately $8,200,000, in cash,
$1,000,000 payable to certain former shareholders and employees of Connect in
consideration of noncompetition covenants, and $2,000,000 of Norstan Common
Stock, or an aggregate of 68,879 shares of Common Stock, representing the
quotient derived by dividing $2,000,000 by the product of (X) the average
closing price for Norstan Common Stock on the NASDAQ National Market during the
twenty trading days ending on May 28, 1996 and (Y) the total number of shares of
Connect Common Stock outstanding on the Closing Date or 3,287,157. Such Common
Stock will be held in escrow for a period of two years to secure the Connect
shareholders' indemnity obligations under the Agreement. In addition, Norstan
paid $2,700,000 in exchange for the cancellation of all outstanding Connect
stock options and further agreed to pay $1,100,000 in bonuses to Connect
management and employees. Norstan may also become obligated to pay up to an
aggregate of $4,000,000 in contingent purchase payments based upon the future
operating results of Connect during the succeeding three fiscal years. Norstan
financed the cash portion of the acquisition through borrowings under its
existing credit facility with First Bank National Association. The terms of the
merger are more fully described in the Agreement and Plan of Merger by and among
the parties which is filed as an exhibit herewith. The Registrant agrees to
furnish supplementally to the Commission a copy of any omitted schedule or
exhibit thereto upon its request.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Report of Independent Accountants
Balance Sheets as of December 31, 1995 and 1994
Statements of Operations for the years ended December 31, 1995 and
1994
Statements of Stockholders' Equity for the years ended December 31,
1995 and 1994
Statements of Cash Flows for the years ended December 31, 1995 and
1994
Notes to Financial Statements
Unaudited Balance Sheets as of March 31, 1996 and 1995
Unaudited Statements of Operations for the quarter ended
March 31, 1996 and 1995
Unaudited Statements of Stockholders' Equity for the quarter
ended March 31, 1996 and 1995
Unaudited Statements of Cash Flows for the quarter ended
March 31, 1996 and 1995
(b) PRO FORMA FINANCIAL INFORMATION.
Pro Forma Consolidated Balance Sheet as of January 27, 1996
(unaudited)
Pro Forma Consolidated Statements of Operations for the year ended
April 30, 1995 and for the nine months ended January 27, 1996
(unaudited)
Notes to Pro Forma Consolidated Financial Statements
(c) EXHIBITS. The following documents are filed as an exhibit to this Form
8-K and are is incorporated herein by reference:
EXHIBIT NO. DESCRIPTION
----------- -----------
2 Agreement and Plan of Merger, dated May 24, 1996,
by and among Norstan, Inc., CCC Acquisition
Subsidiary and Connect Computer Company.
23 Consent of Coopers & Lybrand LLP
-1-
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors of
Connect Computer Company:
We have audited the accompanying balance sheets of Connect Computer Company as
of December 31, 1995 and 1994, 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 Connect Computer Company as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Minneapolis, Minnesota
February 20, 1996, except as to Note 8,
Subsequent Event, for which the
date is March 1, 1996.
-2-
<PAGE>
<TABLE>
<CAPTION>
CONNECT COMPUTER COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
<S> <C> <C>
Current assets:
Cash $ 18,374
Accounts receivable, net $3,909,318 2,241,786
Inventories 247,456 225,274
Prepaid expenses 159,715 112,191
Deferred income taxes 54,000 21,000
Note receivable 58,077
----------- -----------
Total current assets 4,370,489 2,676,702
Furniture and equipment, net 2,010,871 1,220,228
Deferred income taxes 33,000 41,000
Other assets 78,038 21,200
----------- -----------
Total assets $6,492,398 $3,959,130
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank 1,000,000 500,000
Current portion of long-term debt 129,996 171,912
Current portion of capital lease obligations 344,711 74,498
Accounts payable, including cash overdraft of $30,688 as of
December 31, 1995 1,184,653 1,138,967
Accrued expenses 514,062 277,319
Income taxes payable 300,213 10,713
Deferred revenues 463,634 380,858
----------- -----------
Total current liabilities 3,937,269 2,554,267
----------- -----------
Long-term debt, less current portion 476,652 603,341
Capital lease obligations, less current portion 649,248 93,902
Deferred rent 87,744 85,748
Deferred compensation 59,500 19,500
Deferred gain on sale of equipment 15,418
Commitments
Stockholders' equity:
Common stock, $.01 par value; 100,000,000 shares authorized; shares
issued and outstanding 3,353,100 and 3,348,500 at December 31,
1995 and 1994, respectively 33,531 33,485
Additional paid-in capital 8,287 8,000
Retained earnings 1,255,665 579,117
----------- -----------
1,297,483 620,602
Less: Promissory notes receivable from sale of common stock (15,498) (33,648)
----------- -----------
Total stockholders' equity 1,281,985 586,954
----------- -----------
Total liabilities and stockholders' equity $6,492,398 $3,959,130
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
-3-
<PAGE>
<TABLE>
<CAPTION>
CONNECT COMPUTER COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
<S> <C> <C>
Revenues:
Technical and consulting services $ 17,234,329 $ 10,278,345
Product sales 6,068,987 5,916,591
------------- -------------
23,303,316 16,194,936
------------- -------------
Costs and expenses:
Cost of services 11,922,865 6,973,119
Cost of products sold 5,154,871 4,844,339
------------- -------------
17,077,736 11,817,458
------------- -------------
Gross profit 6,225,580 4,377,478
Selling, general and administrative 4,918,274 3,857,566
------------- -------------
Operating income 1,307,306 519,912
Other income (expense):
Interest expense (179,416) (120,512)
Interest and other income, net 62,658 6,115
------------- -------------
Income before income taxes 1,190,548 405,515
Income taxes 514,000 180,000
------------- -------------
Net income $ 676,548 $ 225,515
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
-4-
<PAGE>
<TABLE>
<CAPTION>
CONNECT COMPUTER COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Additional Promissory
Common Paid-In Note Retained
Stock Capital Receivable Earnings Total
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1993 $ 32,985 $ (28,960) $ 353,602 $ 357,627
Sale of common stock 500 $ 8,000 (8,500)
Proceeds from payments of promissory notes receivable 3,812 3,812
1994 net income 225,515 225,515
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1994 33,485 8,000 (33,648) 579,117 586,954
Exercise of stock options 46 287 333
Proceeds from payments of promissory notes receivable 18,150 18,150
1995 net income 676,548 676,548
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1995 $ 33,531 $ 8,287 $ (15,498) $1,255,665 $1,281,985
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
-5-
<PAGE>
<TABLE>
<CAPTION>
CONNECT COMPUTER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 676,548 $ 225,515
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 638,173 484,075
Recognition of deferred gain on sale of equipment (15,418) (19,175)
Deferred income taxes (25,000) (44,000)
Deferred rent 1,996 49,717
Provision for write-down of inventories 35,736
Deferred compensation 40,000 19,500
Other 2,662 (21,200)
Changes in operating assets and liabilities:
Accounts receivable (1,667,532) (342,670)
Inventories (22,182) 44,085
Prepaid expenses (47,524) (34,205)
Accounts payable 14,998 66,945
Accrued expenses 236,743 168,607
Income taxes payable 289,500 10,713
Deferred revenues 82,776 (141,456)
-------------- --------------
Net cash provided by operating activities 205,740 502,187
-------------- --------------
Cash flows from investing activities:
Purchase of furniture and equipment (462,190) (817,127)
Proceeds from payments of note receivable 58,077 72,226
Purchase of investments to fund deferred compensation liability (59,500)
-------------- --------------
Net cash used in investing activities (463,613) (744,901)
-------------- --------------
Cash flows from financing activities:
Payments of note payable, bank (8,250,000) (4,105,000)
Borrowings under note payable, bank 8,750,000 4,105,000
Payments of long-term debt (818,605) (438,272)
Payments of capital lease obligation (141,067) (58,872)
Proceeds from long-term debt 650,000 750,000
Increase in cash overdraft 30,688
Proceeds from the sale of common stock 333
Proceeds from payments of promissory notes receivable 18,150 3,812
-------------- --------------
Net cash provided by financing activities 239,499 256,668
-------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
-6-
<PAGE>
<TABLE>
<CAPTION>
CONNECT COMPUTER COMPANY
STATEMENTS OF CASH FLOWS, CONTINUED
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
<S> <C> <C>
Net (decrease) increase in cash $ (18,374) $ 13,954
------------ ------------
Cash, beginning of year 18,374 4,420
------------ ------------
Cash, end of year - $18,374
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid for interest $175,600 $120,512
------------ ------------
------------ ------------
Cash paid for income taxes $ 249,500 $ 200,000
------------ ------------
------------ ------------
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
The Company acquired equipment under capital leases with an initial
carrying value of $966,626 and $50,584 in 1995 and 1994, respectively.
During 1994, the Company acquired $13,075 of leasehold improvements in
exchange for a $13,075 interest-bearing note.
During 1994, the Company issued 50,000 shares of common stock to an
employee of the Company for a $8,500 interest-bearing note.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
-7-
<PAGE>
CONNECT COMPUTER COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
Connect Computer Company (the Company) provides support, technical
consulting, training and development services for personal computer
communications and local area networking technologies primarily to
customers in the midwestern region of the United States. The Company also
markets certain related hardware and software products.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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. The most significant area which requires the use of management
estimates relates to the allowance for doubtful accounts receivable.
INVENTORIES:
Inventories, primarily consisting of finished goods, are valued at the
lower of cost or market with cost determined using a method which
approximates the first-in, first-out (FIFO) method.
FURNITURE AND EQUIPMENT:
Furniture and equipment are recorded at cost. Depreciation is computed
using straight-line and accelerated methods over the estimated useful lives
of the assets. Maintenance and repairs are charged to expense as incurred.
Expenditures that result in enhancement of asset value are capitalized.
Upon retirement or other disposition of furniture or equipment, the
applicable cost and accumulated depreciation are removed from the accounts
and any gain or loss on disposition is included in current operations.
REVENUE RECOGNITION:
Service contracts: Revenue from service contracts and related expenses,
such as commissions, are deferred and recognized ratably over related
contract periods commensurate with the performance of services.
Training fees: Revenues from fees charged to customers for training are
recognized during the period the customers attend the training.
Product revenues: Revenues from product sales are generally recognized
when the related hardware or software products are shipped.
-8-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES:
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end based on enacted tax
laws and statutory tax rates applicable to the periods in which differences
are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax currently payable
for the period and the change during the period in deferred tax assets and
liabilities.
2. SELECTED BALANCE SHEET INFORMATION:
ACCOUNTS RECEIVABLE:
Accounts receivable at December 31, 1995 and 1994 consisted of the
following:
1995 1994
Accounts receivable $3,912,318 $2,244,786
Less allowance for uncollectible accounts 3,000 3,000
----------- -----------
$3,909,318 $2,241,786
----------- -----------
----------- -----------
FURNITURE AND EQUIPMENT:
Furniture and equipment at December 31, 1995 and 1994 consisted of the
following:
1995 1994
Furniture and equipment, at cost $3,791,968 $2,363,152
Less accumulated depreciation and amortization 1,781,097 1,142,924
----------- -----------
$2,010,871 $1,220,228
----------- -----------
----------- -----------
OTHER ASSETS:
Other assets at December 31, 1995 and 1994 consisted of the following:
1995 1994
Investments (Note 7) $59,500
Lease deposits 18,538 $21,200
-------- --------
$78,038 $21,200
-------- --------
-------- --------
-9-
<PAGE>
2. SELECTED BALANCE SHEET INFORMATION, CONTINUED:
ACCRUED EXPENSES:
Accrued expenses at December 31, 1995 and 1994 consisted of the following:
1995 1994
Compensation $252,521 $116,321
Vacation 119,281 66,921
Other 142,260 94,077
---------- ----------
$514,062 $277,319
---------- ----------
---------- ----------
3. FINANCING ARRANGEMENTS:
NOTE PAYABLE AND LONG-TERM DEBT, BANK:
The Company has a revolving line of credit expiring in May 1997 that bears
interest at the bank's reference rate plus .5% (the reference rate was 8.5%
at December 31, 1995 and 1994). The line of credit agreement provides for
borrowings of up to $1,000,000, limited to 80% of the Company's eligible
accounts receivable balance, as defined.
This note and the term note described below are collateralized by
substantially all property and equipment, accounts receivable, inventories
and term insurance policies with a combined benefit of $1,000,000 on the
life of a stockholder of the Company. The notes are also personally
guaranteed by an officer and stockholder of the Company.
The agreement for this note and the term note described below contain
certain restrictive covenants which, among other things, requires the
Company to maintain tangible net worth, as defined, of not less than
$500,000; requires the Company to maintain a debt to net worth ratio of not
more than 6.5 to 1.0, 4.5 to 1.0 and 3.5 to 1.0 as of December 31, 1995,
December 31, 1996 and May 31, 1997, respectively; and prohibits the
payment of dividends.
-10-
<PAGE>
3. FINANCING ARRANGEMENTS, CONTINUED:
LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Term note payable, bank: Payable in monthly principal installments of
$10,833 plus interest computed at the bank's reference rate plus
2%. The bank's reference rate was 8.5% at December 31, 1995. $ 606,648
Small Business Administration loan payable:
Payable in monthly installments of $11,995 including principal and
interest computed at the bank's reference rate plus 2.75%, balance
due February 2001. $ 684,649
Note payable, warrant repurchase. 83,100
Note payable, corporation: Payable in monthly installments of $785
including principal and interest at 10%, balance due October 1, 1995. 7,504
---------- ----------
Total long-term debt 606,648 775,253
Less current portion 129,996 171,912
---------- ----------
Long-term debt, less current portion $ 476,652 $ 603,341
---------- ----------
---------- ----------
</TABLE>
The scheduled maturity of long-term debt as of December 31, 1995 are as follows:
1996
1997 $129,996
1998 129,996
1999 129,996
2000 129,996
Thereafter 86,664
----------
$ 606,648
----------
----------
NOTE PAYABLE, WARRANT REPURCHASE:
During 1993, the Company repurchased warrants to purchase 1,500,000 shares of
common stock, at $.13 per share, from a former stockholder in exchange for an
unsecured $270,000 note that was payable in monthly installments, with interest
at 8%. This note was repaid in August 1995.
-11-
<PAGE>
4. LEASE COMMITMENTS:
CAPITAL LEASES:
The Company leases certain furniture and equipment under capital lease
agreements. Monthly lease payments are due through November 2000 with
interest at rates ranging from 5% to 14.25%. The original cost of
equipment under capital leases was $977,181 and $158,555, net of
accumulated amortization of $234,000 and $86,000 at December 31, 1995 and
1994, respectively.
OPERATING LEASES:
The Company leases its facilities and certain equipment under operating
lease agreements which expire at various dates through March 1999. The
facilities leases require the Company to pay a pro rata share of the
lessor's operating costs. Rent expense, including a pro rata share of the
lessor's facilities operating costs, was approximately $596,828 and
$482,000 for the years ended December 31, 1995 and 1994, respectively.
Future minimum lease payments under noncancellable capital and operating
lease agreements are as follows:
CAPITAL OPERATING
LEASES LEASES
1996 $ 420,327 $ 329,065
1997 360,110 223,315
1998 270,731 188,783
1999 48,374 47,191
2000 26,693
----------- ---------
Total lease payments 1,126,235 $ 788,354
----------
----------
Less interest (132,276)
-----------
Present value of capital lease obligation 993,959
Less current portion (344,711)
-----------
Capital lease obligation, less current portion $ 649,248
-----------
-----------
-12-
<PAGE>
5. STOCKHOLDERS' EQUITY:
COMMON STOCK:
In 1994, the Company's Board of Director and stockholders amended the
Articles of Incorporation of the Company, increasing the authorized $.01
par value common stock to 100,000,000 shares, and declared a stock dividend
of 30 common shares for each share of common stock outstanding. The Board
also approved a proportionate adjustment of outstanding stock options.
This action was reflected in these financial statements as a stock split
effected in the form of a dividend.
On August 1, 1993, the Company granted an employee options to purchase
173,730 shares of common stock at $.12 per share, the estimated fair market
value of the Company's common stock on the date of grant (as determined by
the Board of Directors). The options, which expire if not exercised by
August 1, 2003, vest 33% after the first year and 33% annually thereafter.
1994 STOCK OPTION PLAN:
In May 1994, the Company's stockholders approved an incentive stock option
plan (the Plan) under which 1,000,000 shares of common stock were reserved
for grants of incentive and nonqualified stock options to directors,
officers and employees at exercise prices not less than 100% of the fair
market value, as determined by the Board of Directors, on the date of grant
(110% in the case of a 10% or greater stockholder). All options granted
under the Plan become exercisable over periods established at the time of
grant, however, certain options may vest earlier if certain financial
performance benchmarks are achieved by the Company.
A summary of selected information regarding the 1994 Stock Option Plan
activity for the years ended December 31, 1995 and 1994 is as follows:
SHARES PRICE PER SHARE
Balance, December 31, 1993 - -
Granted 303,666 $.17
Exercised - -
----------- -----------------
Balance, December 31, 1994 303,666 $.17
Granted 350,541 $.17 - $.37
Exercised (1,797) $.17
Cancelled (140,706) $.17 - $.30
----------- -----------------
Balance, December 31, 1995 511,704 $.17 - $.37
----------- -----------------
----------- -----------------
As of December 31, 1995, 84,942 of these options were exercisable.
-13-
<PAGE>
5. STOCKHOLDERS' EQUITY, CONTINUED:
ACCOUNTING FOR STOCK BASED COMPENSATION:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, "Accounting for Stock Based
Compensation" (SFAS No. 123). As permitted by SFAS No. 123, the Company
will adopt the new standard in 1996. Management has not selected from the
implementation alternatives and therefore has not determined the impact, if
any, this standard will have on the Company's 1996 financial position or
results of operations.
6. INCOME TAXES:
The components of the income tax provision (benefit) for the years ended
December 31, 1995 and 1994 are as follows:
1995 1994
Current:
Federal $412,000 $168,000
State 127,000 56,000
Deferred:
Federal (19,000) (33,000)
State (6,000) (11,000)
---------- ----------
$ 514,000 $ 180,000
---------- ----------
---------- ----------
The effective rates for income taxes for the years ended December 31, 1995 and
1994, differ from the statutory federal corporate income tax rate principally
due to state income taxes, net of the federal income tax benefit.
The net deferred income tax assets of approximately $87,000 and $62,000, as of
December 31, 1995 and 1994, respectively, resulted primarily from future
taxable temporary differences related to the difference in the book and tax
bases of property, plant and equipment, and future deductible temporary
differences related to rent and deferred compensation recognized for financial
reporting purposes that is not recognized for tax reporting purposes, allowances
for bad debts and inventory obsolescence reserves established for financial
reporting purposes, and certain inventory costs capitalized for tax reporting
purposes.
Management expects that the Company will fully realize the benefits attributable
to these future deductible temporary differences. Therefore, no valuation
allowance has been recorded at December 31, 1995 or 1994, related to the
deferred tax asset.
-14-
<PAGE>
7. EMPLOYEE BENEFIT PLANS:
The Company offers a defined contribution savings plan to all of its
employees. Participants may contribute up to 15% of their compensation per
year. At the discretion of the Board of Directors, the Company may match
up to a maximum of 10% of the first 10% of each participant's
contributions. Company contributions to the plan were $20,824 and $19,096
for the years ended December 31, 1995 and 1994, respectively.
The Company also offers a nonqualified, deferred compensation plan to
certain employees. Participants may elect to defer and contribute a
portion of their annual compensation to the plan. The Company may, at its
sole discretion, elect to make an annual contribution to each participant's
deferred compensation account. Contributions to the plan accrue interest
at rates defined by the plan. Upon attainment of age 65 or upon a
participant's death, the participant or their beneficiary shall receive
monthly payments from the plan totaling contributions to the participant's
account plus accrued interest.
During 1995 and 1994, the Company contributed $40,000 and $19,500 to the
deferred compensation plan, respectively. The Company has purchased
investments in certain mutual funds to fund these Company contributions.
As of December 31, 1995, these investments, which include debt and equity
securities and are considered by management to be "available for sale," are
carried at cost which approximates fair value based upon quoted market
prices.
8. SUBSEQUENT EVENT:
On March 1, 1996, the Company signed a letter of intent to sell all of the
issued and outstanding capital stock of the Company for $14,000,000,
including cash and stock of the acquiring company, plus contingent cash
consideration of up to $4,000,000, dependent on the Company's future
performance. The letter of intent, which expires on April 30, 1996, may
be terminated at any time by the mutual agreement of the potential buyer
and the Company's stockholders, and provides that the proposed structure
may be adjusted.
-15-
<PAGE>
Connect Computer
Balance Sheet
Quarter Ending March 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Current Assets:
Cash $ 82,027
Accounts Receivable, net 4,910,538
Inventories 379,255
Prepaid Expenses 152,687
Deferred Income Taxes 54,000
------------
Total Current Assets 5,578,506
Furniture & Equipment, net 2,209,416
Deferred Income Taxes 33,000
------------
Total Assets $ 7,820,921
------------
------------
Current Liabilities:
Note Payable, Bank 700,000
Current Portion of Long-Term Debt 130,155
Current Portion of Capital Lease Obligations 447,101
Accounts Payable 3,090,738
Accrued Expenses 257,886
Income Taxes Payable 171,713
Deferred Revenues 431,990
------------
Total Current Liabilities 5,229,583
Long-Term Debt, less current portion 433,320
Capital lease obligations, less current portion 543,440
Deferred Rent 84,937
Deferred Compensation 72,250
------------
Total Liabilities 6,363,531
Stockholder's Equity:
Common Stock 33,503
Additional Paid-in-Capital 8,287
Retained Earnings, Prior 1,255,665
Retained Earnings, Current 172,233
------------
1,469,688
Less: Promissory Notes Receivable (12,298)
------------
Total Stockholder's Equity 1,457,390
------------
Total Liabilities & Stockholder's Equity $ 7,820,921
------------
------------
</TABLE>
-16-
<PAGE>
Connect Computer
Balance Sheet
Quarter Ending March 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Current Assets:
Cash $ 16,882
Accounts Receivable, net 2,734,347
Inventories 273,534
Prepaid Expenses 213,480
Deferred Income Taxes 13,000
------------
Total Current Assets 3,251,243
Furniture & Equipment, net 1,336,846
Deferred Income Taxes 33,000
------------
Total Assets $4,621,089
------------
------------
Current Liabilities:
Note Payable, Bank 500,000
Current Portion of Long-Term Debt 129,371
Current Portion of Capital Lease Obligations 132,958
Accounts Payable 1,745,983
Accrued Expenses 177,443
Income Taxes Payable 21,000
Deferred Revenues 458,596
------------
Total Current Liabilities 3,165,351
Long-Term Debt, less current portion 656,706
Capital lease obligations, less current portion 42,939
Deferred Rent 96,168
Deferred Compensation 29,500
------------
Total Liabilities 3,990,664
Stockholder's Equity:
Common Stock 33,485
Additional Paid-in-Capital 7,999
Retained Earnings, Prior 579,117
Retained Earnings, Current 37,841
------------
658,443
Less: Promissory Notes Receivable (28,018)
------------
Total Stockholder's Equity 630,425
------------
Total Liabilities & Stockholder's Equity $ 4,621,089
------------
------------
</TABLE>
-17-
<PAGE>
Connect Computer
Statements of Operations
Quarter ended March 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Technical & Consulting Services 5,682,495
Product Sales 3,151,617
----------
Total Revenue 8,834,112
----------
Costs & Expenses
Cost of Services 3,910,997
Cost of Products Sold 2,707,753
----------
Total Cost of Revenue 6,618,750
----------
Gross Profit 2,215,362
SG&A Expenses 1,812,648
----------
Operating Income 402,714
Interest Expense 60,980
----------
Income before income taxes 341,734
Income Taxes 169,500
----------
Net Income 172,234
----------
----------
</TABLE>
-18-
<PAGE>
Connect Computer
Statements of Operations
Quarter ended March 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Technical & Consulting Services 3,710,036
Product Sales 1,466,382
----------
Total Revenue 5,176,418
----------
Costs & Expenses
Cost of Services 2,614,041
Cost of Products Sold 1,330,593
----------
Total Cost of Revenue 3,944,634
----------
Gross Profit 1,231,784
SG&A Expenses 1,124,354
----------
Operating Income 107,430
Interest Expense 42,589
----------
Income before income taxes 64,841
Income Taxes 27,000
----------
Net Income 37,841
----------
----------
</TABLE>
-19-
<PAGE>
CONNECT COMPUTER COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
for the three months ended March 31, 1996
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Common Additional Retained N/R to
Stock Paid In Earnings Purchase C/S Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 33,531 $ 8,287 $ 1,255,665 $ (15,498) $ 1,281,985
Proceeds from promissory N/R 3,200 3,200
Misc. Adjustment to o/s shares (28) (28)
Net Income for three months ended 3-31-95 172,233 172,233
---------------------------------------------------------------------
Balance, March 31, 1996 $ 33,503 $ 8,287 $ 1,427,898 $ (12,298) $ 1,457,390
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
-20-
<PAGE>
CONNECT COMPUTER COMPANY
STATEMENT OF STOCKHOLDER'S EQUITY
for the three months ended March 31, 1995
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Common Additional Retained N/R to
Stock Paid In Earnings Purchase C/S Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 33,485 $ 8,000 $ 579,117 $ (33,648) $ 586,954
Proceeds from promissory N/R 5,630 5,630
Net Income for three months ended 3-31-95 37,841 37,841
---------------------------------------------------------------------
Balance, March 31, 1995 $ 33,485 $ 8,000 $ 616,958 $ (28,018) $ 630,425
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
-21-
<PAGE>
CONNECT COMPUTER COMPANY
Statements of Cash Flow
Increase in cash
Quarter ended March 31, 1996 and 1995
Audited Financials (12-31-95) to Internal Financials (3-31-96)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Beginning Cash Balance $0 $ 18,374
Cash flows from Operating Activities:
Net Income 172,234 37,841
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 264,113 132,090
Deferred Rent (2,807) 10,420
Deferred Compensation 12,750 10,000
Changes in operating assets/liabilities:
Trust Account/Other Assets 5,788 21,200
Accounts Receivable (1,001,220) (434,484)
Inventory (131,827) (48,260)
Prepaid Expenses 7,028 (101,289)
Accounts Payable 1,936,773 607,016
Accrued Expenses (213,456) (160,880)
Deferred Taxes 87,000 62,000
Income Taxes Payable (300,213) (10,713)
Commissions Payable 41,993 36,004
Deferred Revenues (31,644) 62,320
---------- ----------
Net cash provided by operating activities $ 846,513 $ 223,265
---------- ----------
Cash flows from investing activities:
Purchase of furniture and equipment (462,658) (248,708)
---------- ----------
Net cash used in investing activities $ (462,658) $ (248,708)
---------- ----------
Cash flows from financing activities:
Payments of note payable, bank (2,000,000) (2,600,000)
Borrowings under note payable, bank 1,700,000 2,600,000
Payments of long term debt (Net of additions) (43,173) 10,825
Payments of capital lease obligation (3,418) 7,497
Proceeds from promissory notes receivable 3,200 5,530
Decrease in cash overdraft (30,688)
---------- ----------
Net cash used in financing activities $ (374,079) $ 23,952
---------- ----------
Net increase in cash $ 9,776 $ (1,492)
-------- --------
Cash, end of period $ 9,776 $ 16,882
-------- --------
-------- --------
</TABLE>
-22-
<PAGE>
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma unaudited consolidated financial information consists
of Pro Forma Unaudited Statements of Operations for the year ended April 30,
1995 and for the nine months ended January 27, 1996 and a Pro Forma Unaudited
Consolidated Balance Sheet as of January 27, 1996. The Unaudited Pro Forma
Consolidated Financial Statements give effect to the proposed acquisition of
CCC. The Pro Forma Unaudited Consolidated Statements of Operations give
effect to such transaction (the Transaction) as if it had occurred on May 1,
1994. The Pro Forma Unaudited Consolidated Balance sheet gives effect to the
Transaction as if it had occurred on January 27, 1996.
On May 24, 1996, Norstan executed an agreement pursuant to which it would
acquire all of the issued and outstanding common stock of Connect, in exchange
for $8.2 million in cash and $2 million of Norstan common stock, to be valued
at the average closing price for Norstan common stock during the twenty days
ending on May 28, 1996 at the date the Transaction is consummated. The
agreement also contains a provision whereby Connect shareholders can receive
up to $4 million in contingent consideration over a three year period ending
April 30, 1999, if certain operating income levels are achieved. Norstan has
also agreed to pay $2.7 million in exchange for all outstanding Connect stock
options, and $1.1 million in bonuses to Connect management and employees.
Further, Norstan will pay $1 million to certain members of Connect management
under non-compete agreements. The Pro Forma Unaudited Consolidated Financial
Statements give effect to certain adjustments related to the acquisition,
including (i) Norstan's issuance of long-term debt and the related interest
expense; (ii) the issuance of 68,879 shares of Norstan common stock; (iii)
goodwill created by the acquisition and related amortization; (iv) the
recording of payments for non-compete agreements and bonuses, and for
cancellation of stock options, as described above; and (v) adjustments to
eliminate amounts attributable to a division of Connect that will be sold to
its majority shareholder prior to the acquisition.
The Pro Forma Unaudited Consolidated Financial Statements and accompanying
notes should be read in conjunction with the consolidated financial
statements and notes thereto incorporated by reference in this information
statement. The Pro Forma Unaudited Consolidated Financial Statements do not
purport to represent what the results of operations or financial position of
Norstan would actually have been if the aforementioned Transaction in fact
had occurred on May 1, 1994 or on January 27, 1996 or at any future date.
-23-
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JANUARY 27, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma
ASSETS Norstan Connect Adjustments Pro Forma
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash $ 2,566 $ 12 $ (550) (1) $ 2,028
Accounts receivable 58,536 3,776 (350) (6) 61,962
Current lease receivables 14,920 - - 14,920
Inventories 11,892 288 (50) (6) 12,130
Costs and estimated earnings in excess of billings 8,245 - - 8,245
Deferred income tax benefits 3,486 - - 3,486
Prepaid expenses, deposits and other 3,407 170 - 3,577
---------- ---------- ---------- ----------
Total current assets 103,052 4,246 (950) 106,348
Property and equipment, net 32,513 2,040 (300) (6) 34,253
---------- ---------- ---------- ----------
Other assets:
Lease receivables, net 24,467 - - 24,467
Franchise rights and other intangible assets, net 7,434 - 13,798 (3) 22,232
1,000 (4)
Other 578 - - 578
---------- ---------- ---------- ----------
Total other assets 32,479 - 14,798 47,277
---------- ---------- ---------- ----------
$ 168,044 $ 6,286 $ 13,748 $ 188,078
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 715 $ - $ 715
Current maturities of discounted lease rentals 12,887 - - 12,887
Accounts payable 13,642 2,256 (550) (6) 15,348
Accrued liabilities 35,086 934 1,096 (7) 36,020
(1,096) (1)
Income taxes payable 568 - - 568
Billings in excess of costs and estimated earnings 4,093 - - 4,093
---------- ---------- ---------- ----------
Total current liabilities 66,276 3,905 (550) 69,631
Long-term debt, net of current maturities 12,050 1,079 13,000 (1) 26,729
(50) (6)
650 (4)
Discounted lease receivables, net of current maturities 16,618 - - 16,618
Deferred income taxes 8,758 - - 8,758
---------- ---------- ---------- ----------
Shareholders' equity:
Common stock 433 34 7 (2) 440
(34) (5)
Capital in excess of par value 27,697 8 1,993 (2) 29,690
(8) (5)
Retained earnings 37,361 1,275 (79) (5) 37,361
(100) (6)
(1,096) (7)
Notes receivable from sale of stock - (15) 15 (5) -
Unamortized cost of stock (128) - - (128)
Foreign currency translation adjustments (1,021) - - (1,021)
---------- ---------- ---------- ----------
Total shareholders' equity 64,342 1,302 698 66,342
---------- ---------- ---------- ----------
$ 168,044 $ 6,286 $ 13,748 $ 188,078
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
-24-
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma
Norstan Connect Adjustments Pro Forma
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Sales of products and systems $ 166,675 $ 6,293 $ - $ 172,968
Telecommunications services 118,569 12,216 (3,315) (1) 127,470
Financial services 5,001 - - 5,001
--------- --------- --------- ---------
Total revenues 290,245 18,509 (3,315) 305,439
Cost of sales:
Products and systems 123,158 5,046 - 128,204
Telecommunications services 76,641 8,591 (2,250) (1) 82,982
Financial services 2,308 - - 2,308
--------- --------- --------- ---------
Total cost of sales 202,107 13,637 (2,250) 213,494
--------- --------- --------- ---------
Gross margin 88,138 4,872 (1,065) 91,945
Selling, general and administrative expenses 74,725 4,379 (591) (1) 79,663
250 (2)
900 (3)
--------- --------- --------- ---------
Operating income 13,413 493 (1,624) 12,282
Interest expense (1,587) - (1,040) (4) (2,627)
Interest and other income (expense), net (54) - - (54)
--------- --------- --------- ---------
Income before provision for income taxes 11,772 493 (2,664) 9,601
Provision for income taxes 4,709 217 (209) (1) 4,201
(516) (5)
--------- --------- --------- ---------
Net income $ 7,063 $ 276 $ (1,939) $ 5,400
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and common equivalent share $ 1.61 $ 1.22
--------- ---------
--------- ---------
Weighted average number of common and common
equivalent shares outstanding 4,375 - 69 (6) 4,444
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
financial statement.
-25-
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JANUARY 27, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma
Norstan Connect Adjustments Pro Forma
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Sales of products and systems $ 129,112 $ 5,240 $ - $ 134,352
Telecommunications services 99,464 14,169 (3,060) (1) 110,573
Financial services 4,161 - - 4,161
--------- --------- --------- ---------
Total revenues 232,737 19,409 (3,060) 249,086
Cost of sales:
Products and systems 96,001 4,413 - 100,414
Telecommunications services 69,105 9,824 (2,241) (1) 76,688
Financial services 1,725 - - 1,725
--------- --------- --------- ---------
Total cost of sales 166,831 14,237 (2,241) 178,827
--------- --------- --------- ---------
Gross margin 65,906 5,172 (819) 70,259
Selling, general and administrative expenses 55,015 4,037 (560) (1) 59,370
188 (2)
690 (3)
--------- --------- --------- ---------
Operating income 10,891 1,135 (1,137) 10,889
Interest expense (1,165) - (780) (4) (1,945)
Interest and other income (expense), net 65 - - 65
--------- --------- --------- ---------
Income before provision for income taxes 9,791 1,135 (1,917) 9,009
Provision for income taxes 3,916 492 (112) (1) 3,909
(387) (5)
--------- --------- --------- ---------
Net income $ 5,875 $ 643 $ (1,418) $ 5,100
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and common equivalent share $ 1.31 $ 1.12
--------- ---------
--------- ---------
Weighted average number of common and common
equivalent shares outstanding 4,495 - 69 (6) 4,564
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
financial statement.
-26-
<PAGE>
NOTES TO PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF JANUARY 27, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. Reflects the borrowing on Norstan's line of credit and the payment for
CCC's common stock and transaction related expenses. The adjustment also
reflects the first payment to certain members of Connect management under
non-compete agreements. The net cash used for the transaction is as
follows:
Borrowing on line of credit $13,000
Payment for common stock (8,178)
Cancellation of Connect stock options (2,726)
Payment for bonuses summarized in 7. (1,096)
First payment for non-compete agreements (350)
Payment for transaction expenses (1,000)
--------
Total Adjustment $(350)
------
2. Reflects the issuance of 68,879 shares of Norstan common stock assuming a
market value of $29.03 per share, for total consideration of $2,000.
3. Reflects the cost exceeding the identifiable assets acquired of Connect.
The final allocation of the purchase price will be determined upon
consummation of the Transaction or shortly thereafter.
4. Reflects the assigned value for the non-compete agreements. The first
payment of approximately $350 to be made pursuant to these agreements is
reflected in 1. above; the remaining $650 has been recorded as a long-term
liability in the accompanying balance sheet.
5. Reflects the elimination of Connect's shareholders' equity.
6. Reflects that upon the closing of the Transaction, a division, Connect
Education Services (CES), will be sold to the majority shareholder of
Connect. These pro forma adjustments reflect the elimination of CES's
assets, liabilities and shareholders' equity as of January 27, 1996.
7. Reflects the recording of bonuses by Connect prior to the close of the
Transaction.
-27-
<PAGE>
NOTES TO PRO FORMA UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1995 AND THE NINE MONTHS ENDED JANUARY 27, 1996:
1. Reflects that upon the closing of the Transaction, a division, Connect
Education Services (CES), will be sold to the majority shareholder of
Connect. These pro forma adjustments reflect the elimination of the
results of operations of CES for the respective periods.
2. Reflects amortization expense relating to the $1 million non-compete
agreement arising from the Transaction. These costs are being amortized on
a straight-line basis over the four year term of the agreement.
3. Reflects amortization expense relating to the $13.8 million of goodwill
arising from the Transaction amortized on a straight-line basis over 15
years. The final allocation of the purchase price will be determined upon
consummation of the Transaction or shortly thereafter.
4. Reflects the additional interest expense from the line of credit borrowing
computed at Norstan's current borrowing rate of approximately 8.0%.
5. Reflects the income tax effect on pro forma adjustments at a 40% tax rate
adjusted for the pro forma effect of non-deductible goodwill amortization.
6. Reflects the issuance of 68,879 shares of common stock for consideration in
the Transaction.
-28-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: June 19, 1996 NORSTAN, INC.
By /s/ Richard Cohen
--------------------------------------
Its Chief Financial Officer
-29-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2 Agreement and Plan of Merger, dated May
24, 1996, by and among Norstan, Inc.,
CCC Acquisition Subsidiary and Connect
Computer Company
23 Consent of Coopers & Lybrand LLP
-30-
<PAGE>
AGREEMENT AND PLAN OF MERGER
dated as of
May 24, 1996
among
NORSTAN, INC.,
CONNECT COMPUTER COMPANY
and
CCC ACQUISITION SUBSIDIARY, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE I - THE MERGER AND RELATED MATTERS . . . . . . . . . . . . . . . . . . 1
1.01 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Effective Time of the Merger. . . . . . . . . . . . . . . . . . . . 2
1.03 Conversion of Common Shares . . . . . . . . . . . . . . . . . . . . 2
1.04 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.05 Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.06 Payment of Cash and Exchange of Company Common Shares . . . . . . . 3
1.07 The Earn-Out Component. . . . . . . . . . . . . . . . . . . . . . . 5
1.08 The Escrow Account. . . . . . . . . . . . . . . . . . . . . . . . . 9
1.09 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . .10
2.01 Incorporation and Corporate Power . . . . . . . . . . . . . . . . .10
2.02 Execution, Delivery; Valid and Binding Agreements . . . . . . . . .11
2.03 No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.04 Governmental Authorities; Consents. . . . . . . . . . . . . . . . .11
2.05 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .11
2.06 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.07 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .12
2.08 Absence of Undisclosed Liabilities. . . . . . . . . . . . . . . . .12
2.09 No Material Adverse Changes . . . . . . . . . . . . . . . . . . . .13
2.10 Absence of Certain Developments . . . . . . . . . . . . . . . . . .13
2.11 Title to Properties . . . . . . . . . . . . . . . . . . . . . . . .14
2.12 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . .16
2.13 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
2.14 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
2.15 Contracts and Commitments . . . . . . . . . . . . . . . . . . . . .19
2.16 Intellectual Property Rights. . . . . . . . . . . . . . . . . . . .20
2.17 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
2.18 Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
2.19 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
2.20 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . .21
2.21 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
2.22 Affiliate Transactions. . . . . . . . . . . . . . . . . . . . . . .23
2.23 Customers and Suppliers . . . . . . . . . . . . . . . . . . . . . .24
2.24 Officers and Directors; Bank Accounts . . . . . . . . . . . . . . .24
2.25 Compliance with Laws; Permits . . . . . . . . . . . . . . . . . . .24
2.26 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . .25
2.27 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
2.28 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
<PAGE>
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGER SUBSIDIARY. .28
3.01 Incorporation and Corporate Power . . . . . . . . . . . . . . . . .28
3.02 Execution, Delivery; Valid and Binding Agreement. . . . . . . . . .28
3.03 No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
3.04 Governmental Authorities; Consents. . . . . . . . . . . . . . . . .28
3.05 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
3.06 Validity of Buyer's Common Shares . . . . . . . . . . . . . . . . .29
ARTICLE IV - COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . .29
4.01 Conduct of the Business . . . . . . . . . . . . . . . . . . . . . .29
4.02 Access. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
4.03 Regulatory Filings. . . . . . . . . . . . . . . . . . . . . . . . .31
4.04 Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
4.05 No Negotiations, etc. . . . . . . . . . . . . . . . . . . . . . . .31
ARTICLE V - COVENANTS OF BUYER . . . . . . . . . . . . . . . . . . . . . . . .32
5.01 Regulatory Filings. . . . . . . . . . . . . . . . . . . . . . . . .32
5.02 Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
5.03 Release of Guarantees . . . . . . . . . . . . . . . . . . . . . . .32
5.04 Director and Officer Indemnification. . . . . . . . . . . . . . . .32
ARTICLE VI - CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . .33
6.01 Conditions to Buyer's Obligations . . . . . . . . . . . . . . . . .33
6.02 Conditions to the Company's Obligations . . . . . . . . . . . . . .37
ARTICLE VII - TERMINATION AND REMEDIES . . . . . . . . . . . . . . . . . . . .38
7.01 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
7.02 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . .39
7.03 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
7.04 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
7.05 Litigation Expense. . . . . . . . . . . . . . . . . . . . . . . . .39
ARTICLE VIII - ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . .40
8.01 Non-Competition and Employment Agreements . . . . . . . . . . . . .40
8.02 Powers of Attorney. . . . . . . . . . . . . . . . . . . . . . . . .40
8.03 Securities and Blue Sky Laws. . . . . . . . . . . . . . . . . . . .40
8.04 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
<PAGE>
ARTICLE IX - SURVIVAL; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . .40
9.01 Survival of Representations and Warranties. . . . . . . . . . . . .40
9.02 Indemnification of Buyer. . . . . . . . . . . . . . . . . . . . . .41
9.03 Procedure for Indemnification of Buyer. . . . . . . . . . . . . . .41
9.04 Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
9.05 Indemnification of the Company. . . . . . . . . . . . . . . . . . .43
9.06 Procedure for Indemnification of the Company. . . . . . . . . . . .43
9.07 Indemnification Threshold . . . . . . . . . . . . . . . . . . . . .43
ARTICLE X - MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . .44
10.01 Press Releases and Announcements. . . . . . . . . . . . . . . . . .44
10.02 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
10.03 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . .44
10.04 Amendment and Waiver. . . . . . . . . . . . . . . . . . . . . . . .44
10.05 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
10.06 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
10.07 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . .46
10.08 Complete Agreement. . . . . . . . . . . . . . . . . . . . . . . . .46
10.09 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . .46
10.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Exhibit A Subscription Agreement and Letter of Investment Intent . . . . . . .
Exhibit B Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit C Disclosure Schedule. . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit D Opinion of Company Counsel . . . . . . . . . . . . . . . . . . . . .
Exhibit E Form of Shareholder Indemnification Agreement . . . . . . . . . . .
Exhibit F Form of Kieffer Indemnification Agreement . . . . . . . . . . . . .
Exhibit G Opinion of Counsel of Buyer. . . . . . . . . . . . . . . . . . . . .
Exhibit H Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . . . .
Exhibit I Form of Employment Agreement . . . . . . . . . . . . . . . . . . . .
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of May 24, 1996 among CONNECT
COMPUTER COMPANY, a Minnesota corporation (the "Company"), NORSTAN, INC., a
Minnesota corporation ("Buyer") and CCC ACQUISITION SUBSIDIARY, INC., a
Minnesota corporation and a wholly-owned subsidiary of Buyer ("Merger
Subsidiary").
A. The respective Boards of Directors of Buyer, the Company and Merger
Subsidiary have approved the acquisition of the Company pursuant to the terms
of this Agreement.
B. The respective Boards of Directors of Merger Subsidiary and the
Company have each duly approved the merger of Merger Subsidiary and the
Company (the "Merger") in accordance with the Minnesota Business Corporation
Act, upon the terms and subject to the conditions set forth below.
C. The Board of Directors of the Company has determined to recommend
to the shareholders of the Company that it is advisable and in the best
interests of the Company and its shareholders to approve the Merger.
D. The parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also
to prescribe various conditions to the Merger.
ARTICLE I
THE MERGER AND RELATED MATTERS
Accordingly, and in consideration of the representations, warranties,
agreements and conditions herein contained, the parties hereto agree as
follows:
1.01 THE MERGER.
(a) Subject to the terms and conditions of this Agreement, at the
Effective Time (as hereinafter defined), Merger Subsidiary shall be merged
with and into the Company, the separate existence of Merger Subsidiary shall
cease (except as may be continued by operation of law) and the Company shall
continue as the surviving corporation (the "Surviving Corporation").
(b) (i) From and after the Effective Time, the Articles of
Incorporation of the Surviving Corporation shall be the Articles of
Incorporation of Merger Subsidiary as in effect immediately prior to the
Effective Time; (ii) the Bylaws of the Surviving Corporation shall be the
Bylaws of Merger Subsidiary as in effect immediately prior to the Effective
Time; (iii) the directors and officers of Merger Subsidiary shall become the
directors and officers of
<PAGE>
the Surviving Corporation at and as of the Effective Time (retaining their
respective positions and terms of office); and (iv) the name of the Surviving
Corporation shall be the name of the Company immediately prior to the
Effective Time.
1.02 EFFECTIVE TIME OF THE MERGER. As soon as practicable after each of
the conditions set forth in Article 6 hereof (other than the condition that
articles of merger be filed and become effective) have been satisfied or
waived, the Company and Merger Subsidiary will file, or cause to be filed,
articles of merger with the Secretary of State of the State of Minnesota
which articles of merger shall be in the form required by and executed in
accordance with the applicable provisions of Minnesota law. The Merger shall
become effective at the time the articles of merger for such merger are filed
with the Secretary of State of Minnesota (the "Effective Time").
1.03 CONVERSION OF COMMON SHARES.
(a) At the Effective Time, each share of common stock of the
Company, par value $0.01 per share (a "Company Common Share"), issued and
outstanding immediately prior thereto (except for Dissenting Shares as
defined in Section 1.04 hereof) shall, by virtue of the Merger and without
any action on the part of the holder thereof, be converted into the right to
receive each of (i) an amount equal to $8,177,885 multiplied by the quotient
of (X) 1 and (Y) the total number of Company Common Shares outstanding at the
Effective Time, in cash and without interest (the "Cash Component"), (ii) a
portion of a share of common stock of Buyer, par value $0.10 per share ( a
"Buyer Common Share"), equal to the quotient derived by dividing $2,000,000
by the product of (X) the average closing price for Buyer Common Shares on
the NASDAQ National Market during the twenty trading days ending on the
earlier of the date of the parties' mutual public announcement of the
transaction in accordance with Section 10 hereof or the Closing Date (the
"Average Price"), and (Y) the total number of Company Common Shares
outstanding at the Effective Time (the "Stock Component") and (iii) an amount
equal to any Earn Out Consideration (as defined below) that may become owing
pursuant to Section 1.07 hereof, multiplied by the quotient of (X) 1 and (Y)
the total number of Company Common Shares outstanding at the Effective Time
(the "Earn Out Component"). The sum of each of the Cash Component, the Stock
Component and the Earn Out Component is referred to herein as the "Merger
Consideration."
(b) At and as of the Effective Time, each share of common stock
of Merger Subsidiary shall be converted into one share of Company common
stock. The holders of certificates representing Company Common Shares at the
Effective Time (collectively, the "Shareholders") shall cease to have any
rights as shareholders of the Company, except such rights, if any, as they
may have pursuant to Minnesota law. Except as provided above, until
certificates representing Company Common Shares are surrendered for exchange,
each such certificate shall, after the Effective Time, represent for all
purposes only the right to receive the Merger Consideration, as provided
above and the right to receive the cash value of any fraction of a Buyer
Common Share as provided below.
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(c) Prior to the Effective Time, the Board of Directors of Buyer
shall reserve for issuance a sufficient number of Buyer Common Shares
representing the aggregate Stock Component for the purpose of issuing its
shares to the Shareholders in accordance herewith.
(d) If, between the date of this Agreement and the Effective Time,
the outstanding Buyer Common Shares or Company Common Shares shall have been
changed into a different number of shares or a different class by reason of
any reclassification, recapitalization, split-up, combination, exchange of
shares or stock dividend, each of the components of the Merger Consideration
shall be appropriately adjusted.
1.04 DISSENTING SHARES. Any Company Common Shares held by a holder who
dissents from the Merger and becomes entitled to obtain payment for the value
of such Company Common Shares pursuant to the applicable provisions of
Minnesota law shall be herein called "Dissenting Shares." Any Dissenting
Shares shall not, after the Effective Time, be entitled to vote for any
purpose or receive any dividends or other distributions and shall not be
converted into a right to receive the Merger Consideration; PROVIDED,
HOWEVER, that Company Common Shares held by a dissenting shareholder who
subsequently withdraws a demand for payment, fails to comply fully with the
requirements of Minnesota law, or otherwise fails to establish the right of
such Shareholder to be paid the value of such Shareholder's shares under
Minnesota law shall be deemed to be converted into the right to receive the
Merger Consideration pursuant to the terms and conditions referred to above.
1.05 STOCK OPTIONS. At the Effective Time, the Company shall cancel and
settle, by cash payment to the holders thereof, all outstanding options with
respect to Company Common Shares whether or not exercisable at the Effective
Time. All outstanding options granted under each of the Company's 1988
Incentive Stock Option Plan and 1994 Stock Option Plan shall be cancelled by
the payment of an amount by the Company with respect to each share subject to
an option thereunder equal to $4.52 less the exercise price of such option.
To ensure that the Company will obtain a tax deduction for the compensation
element of the stock options, the Company shall deduct and withhold taxes as
provided by Section 3402 of the Internal Revenue Code of 1986, as amended
(the "Code").
1.06 PAYMENT OF CASH AND EXCHANGE OF COMPANY COMMON SHARES.
(a) After the Effective Time, each Shareholder shall be entitled,
upon surrender of a certificate or certificates which immediately prior to
the Effective Time represented outstanding Company Common Shares (the
"Certificates"), along with a fully executed Subscription Agreement and
Letter of Investment Intent, in the form of Exhibit A attached hereto, to
receive the Merger Consideration from Buyer (subject to the escrow provisions
of Section 1.08 hereof) through such reasonable procedures as Buyer may
adopt.
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<PAGE>
(b) Promptly after the Effective Time, each Shareholder shall
surrender to Buyer each Certificate which immediately prior to the Effective
Time represented outstanding Company Common Shares together with a letter of
transmittal (which shall specify that delivery shall be effected and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificate to Buyer, and shall also authorize Buyer to deliver that number
of Buyer Common Shares to which the holder thereof would otherwise be
entitled pursuant to Section 1.03 for deposit into the Escrow Account (as
defined in Section 1.08 hereof), as partial security for the performance of
such holder's indemnification obligations hereunder, all in such form and
with such other provisions as Buyer may reasonably specify) duly completed
and validly executed in accordance with the instructions thereto. Upon
surrender of the Certificate for cancellation to Buyer, together with the
letter of transmittal, duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor (i) a certified or official bank
check representing the aggregate amount of the Cash Component owing to such
Shareholder and (ii) a certificate to be deposited with the Escrow Agent,
representing that number of whole Buyer Common Shares into which the Company
Common Shares previously represented by the Certificate so surrendered shall
have been converted by the Merger, and the Certificate so surrendered shall
be canceled. No interest shall accrue or be payable with respect to any
amounts which any person shall be so entitled to receive.
(c) All Buyer Common Shares and the aggregate amount of the Cash
Component and any amount of cash payable for any fractional share issued and
paid upon the surrender for exchange of Company Common Shares in accordance
with the above terms and conditions shall be deemed to have been issued in
full satisfaction of all rights pertaining to such Company Common Shares
(other than with respect to such holder's right to receive the Earn Out
Component of the Merger Consideration, if any).
(d) No certificates or scrip representing fractional Buyer Common
Shares shall be issued upon the surrender for exchange of Certificates, no
dividend or distribution of Buyer shall relate to any fractional share, and
such fractional share interests shall not entitle the owner thereof to vote
or to any rights of a shareholder of Buyer. In lieu of any fractional share,
Buyer shall pay to each holder of Company Common Shares who otherwise would
be entitled to receive a fractional Buyer Common Share an amount of cash
(without interest) determined by multiplying (a) the Average Price by (b) the
fractional share interest to which such holder would otherwise be entitled.
(e) In the event any Certificates shall have been lost, stolen or
destroyed, Buyer shall deliver in exchange for such lost, stolen or destroyed
Certificate, upon the making of an affidavit of that fact by the holder
thereof, both the Cash Component owing to such holder and Buyer Common Shares
and cash for fractional shares, if any, as may be required pursuant hereto;
provided, however that Buyer may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificate to deliver a bond in such reasonable sum as it may
direct as indemnity against any
4
<PAGE>
claim that may be made against Buyer, Merger Subsidiary, the Company, or any
other party with respect to the Certificate alleged to have been lost, stolen
or destroyed.
(f) From and after the Effective Time, each holder of a stock
option may surrender such stock option to the Company to effect the payment
of such stock option pursuant to this Agreement. After surrender to the
Company of such stock option, Buyer shall distribute to the person in whose
name such stock option shall have been registered a check representing $4.52
per Company Common Share subject to the option, less any payment required
upon exercise of the stock option. Until surrender or written cancellation
of a stock option, no consideration shall be paid with respect thereto.
Buyer shall cause to be distributed to such holders appropriate materials to
facilitate such surrender and will process such materials promptly after
receipt thereof.
(g) If payment of cash is to be made to any person other than the
person in whose name the Certificate surrendered in exchange therefor is
registered, it shall be a condition to such payment that the Certificate so
surrendered shall be properly endorsed and otherwise in proper form for
transfer, and that the person requesting such payment shall pay to Buyer any
transfer and other taxes required by reason of such payment in any name other
than that of the registered holder of the Certificate surrendered or shall
have established to the satisfaction of Buyer that such tax either has been
paid or is not payable.
(h) After the Effective Time, there shall be no transfers on the
stock transfer books of the Surviving Corporation of Company Common Shares
which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates representing such shares are presented to
the Surviving Corporation, they shall be canceled and exchanged for Merger
Consideration as provided in Section 1.03.
1.07 THE EARN-OUT COMPONENT
(a) The Shareholders shall be entitled to the payment of the
Earn-Out Component of the Merger Consideration pursuant to Section 1.07(b)
hereof, pro rata based upon their ownership of Company Common Shares at the
Effective Time, in an amount not to exceed $4,000,000 in the aggregate, (the
"Earn Out Consideration"), if, and to the extent: (i) from May 1, 1996
through, April 30, 1997, the Company's Net Operating Profit (as defined
below) exceeds $1,812,000; and/or (ii) for the twelve month period ended
April 30, 1998, the Company's Net Operating Profit exceeds $2,539,000; and/or
(iii) for the twelve month period ended April 30, 1999, the Company's Net
Operating Profit exceeds $3,434,000 (each such fiscal period is referred to
herein as a "Contract Period").
(b) No later than 120 days after the end of Buyer's fiscal year,
Buyer will pay to each Shareholder, pro rata based upon their ownership of
Company Common Shares at the Effective Time, that portion of the Earn Out
Consideration that is equal to the product of (X) the amount by which Net
Operating Profit exceeds the relevant benchmark for such
5
<PAGE>
Contract Period and (Y) 2.35, representing the ratio equal to the quotient of
$4,000,000 and $1,697,000; PROVIDED, HOWEVER, that the maximum Earn Out
Consideration to be paid for the Contract Period ended April 30, 1997 shall
be $2,000,000, the maximum Earn Out Consideration to be paid for the Contract
Period ended April 30, 1998 shall be $2,500,000 and the maximum Earn Out
Consideration to be paid for the Contract Period ended April 30, 1999 shall
be $4,000,000. In no event, however, will the holders of Company Common
Shares ever receive cumulative Earn Out Consideration in excess of $4,000,000
for the period from May 1, 1996 through April 30, 1999. Earn Out
Consideration shall be paid by check to each holder of Company Common Shares,
pro rata based upon their ownership of Company Common Shares at the Effective
Time, mailed to the last known address of such holder as reflected on the
records of Buyer.
(c) As used herein, "Net Operating Profit" shall mean the net
earnings of the Company, before interest and all state and federal income and
franchise taxes, computed in accordance with generally accepted accounting
principles in a manner consistent with the accounting procedures used by the
Company in the ordinary course of its conduct of the business, at the time of
and during the periods reported on in the Annual Financial Statements (as
defined below), except that the following provisions shall govern the
computation of Net Operating Profit for the purposes of this Agreement:
(i) The costs of the transactions contemplated by this
Agreement, which include, without limitation, any costs, charge or
expense for payments made pursuant to this Agreement, shall be
excluded from the computation.
(ii) Any taxes paid or payable by the Company and which
arise or may become owing for the period from January 1, 1996 through
the Closing Date shall be excluded from the computation.
(iii) Any charge or expense for the amortization of goodwill
arising out of the transactions contemplated by this Agreement shall
be excluded from the computation and any charge or expense for
increased depreciation resulting from any step-up in the value of any
Company assets arising out of the Merger shall be excluded from the
computation, but only to the extent of such increase.
(iv) Allocated Buyer expenses, including but not limited to
general and administrative expenses, shall be excluded from the
computation unless agreed to in writing by the Attorney-in-Fact (as
defined below), based upon the good faith negotiation of
representatives of Buyer and the Attorney-in-Fact.
(v) Budgeted Buyer expenses for the Company which are agreed to
by Buyer and the Attorney-in-Fact and non-budgeted direct expenses
which are traceable to a specific support or service specifically
requested by the Company shall be included in the computation.
6
<PAGE>
(vi) If the Company's Net Operating Profit for any Contract
Period is a loss, then such loss shall be carried forward to the
subsequent Contract Period and shall reduce the Company's Net
Operating Profit during such Contract Period and any future Contract
Periods until such loss is consumed.
(vii) All budgeted working capital and fixed asset
requirements of the Company which are agreed to in writing by Buyer
and the Attorney-in-Fact shall be funded by Buyer, but interest on
such budgeted amounts will be excluded from the computation; PROVIDED,
HOWEVER, interest on any working capital requirements of the Company
in excess of budgeted amounts and any related expenses for working
capital and fixed asset requirements related to such excess, shall be
included in the computation.
(viii) Revenues, costs and expenses associated with geographic
expansion of the Company beyond its business plan and initiated at the
request of Buyer will be included or excluded from the computation
based upon the good faith negotiation of representatives of Buyer and
the Attorney-in-Fact.
(ix) One half of the cost of any wage increases resulting from
union organizing activities or increased costs resulting from union
work rules shall be included in the computation, but only if such
costs and organizing activities extend to and are also incurred at
Norstan Integration Services, Inc. To the extent such wage increases
and costs are incurred solely at the Company, all such costs shall be
included in the computation.
(d) Buyer shall deliver to the Attorney-in-Fact not later than
thirty (30) calendar days before each date on which the Earn Out
Consideration is payable, a written calculation of the Earn Out Consideration
for the prior Contract Period, along with an income statement and relevant
work sheets for the period and the payment required. In the event that the
Attorney-in-Fact does not object to the Earn Out Consideration calculation by
written notice of objection delivered to Buyer within twenty (20) calendar
days after his receipt of such calculation, income statement, and relevant
work papers, setting forth objections thereto in reasonable detail, then the
Earn Out Consideration as calculated by Buyer shall be deemed conclusive and
binding. If the Attorney-in-Fact does so object, then Buyer and the
Attorney-in-Fact shall promptly endeavor in good faith to agree upon all
disputed matters. In the event that a written agreement resolving the
dispute has not been reached within twenty (20) calendar days after one
party's receipt of the other party's notice of objection, then the dispute
with respect to the calculation of the Earn Out Consideration shall be
resolved in accordance with Section 7.03 hereof.
(e) The Shareholders shall also have the option (as evidenced by
the irrevocable written election of the Attorney-in-Fact delivered to Buyer)
to receive Earn Out
7
<PAGE>
Consideration on the terms hereinafter set forth in the event that a Change
in Control (as defined below) of Buyer occurs prior to April 30, 1999. In
the event of any such Change in Control, and as a direct consequence of such
Change in Control (clauses (i) and (ii) or (iii) immediately following being
hereafter defined as a "Triggering Event"), a majority of those Shareholders
executing employment and non-competition agreements pursuant to Section 8.01
hereof (i) are assigned duties or have responsibilities materially
inconsistent with such individuals' titles, positions, duties,
responsibilities and status, as in effect immediately prior to the Change in
Control and as set forth in such individual's relevant employment agreement
and (ii) are required to relocate to any place outside the Twin Cities
metropolitan area (except for reasonably required travel on the business of
Buyer to an extent substantially consistent with such individuals' business
travel obligations at the time of the Change in Control); or (iii) if the
assets of Buyer have been sold in connection with a Change in Control, any
failure by Buyer to obtain the assumption of this Agreement by the purchaser;
then, if such Change in Control shall occur, (X) at any time prior to April
30, 1997, the Shareholders shall be entitled to an amount of Earn Out
Consideration equal to the net present value of the difference between (i) $4
million and (ii) the greater of (a) the amount of Earn Out Consideration that
will be payable for the Contract Period ending April 30, 1997 pursuant to
this Section 1.07 based upon the actual Net Operating Profit generated by the
Company from and after the Effective Time, but prior to the effective date of
the Triggering Event, and (b) $750,000; or (Y) at any time from and after
April 30, 1997 through April 30, 1998, the Shareholders shall be entitled to
an amount of Earn Out Consideration equal to the net present value of the
difference between (i) $4,000,000 and (ii) the greater of (a) the sum of the
amount of Earn Out Consideration paid for the Contract Period ending April
30, 1997 plus the amount of Earn Out Consideration that will be payable for
the Contract Period ending April 30, 1998 pursuant to this Section 1.07 based
upon the actual Net Operating Profit generated by the Company from and April
30, 1997, but prior to the effective date of the Triggering Event, and (b)
$2,000,000; or (Z) at any time from and after April 30, 1998 through April
30, 1999, the Shareholders shall be entitled to an amount of Earn Out
Consideration equal to the net present value of the difference between (i)
$4,000,000 and (ii) the greater of (a) the sum of the amount of Earn Out
Consideration paid for the Contract Periods ending April 30, 1997 and April
30, 1998 plus the amount of Earn Out Consideration that will be payable for
the Contract Period ending April 30, 1999 pursuant to this Section 1.07 based
upon the actual Net Operating Profit generated by the Company from and after
April 30, 1998, but prior to the effective date of the Triggering Event, and
(b) $2,500,000; PROVIDED, HOWEVER, that the Shareholders shall not be
entitled to any payments pursuant to this subsection (e) of Section 1.07 if
the Company has incurred an aggregate net operating loss for the period from
and after the Effective Time, but prior to the effective date of the
Triggering Event.
In determining the net present value of any such accelerated Earn Out
Consideration payment, a discount rate equal to 18% per annum and an assumed
maturity date of April 30, 1999 shall be used in the calculation.
As used herein, a "Change in Control" of Buyer shall occur if any person
(as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the '34
8
<PAGE>
Act")) becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated
pursuant to the '34 Act), directly or indirectly, of fifty percent (50%) or
more of the combined voting power of the then outstanding securities of
Buyer; provided, however, that no Change in Control shall be deemed to occur
if such person: (i) includes any individual, corporation or other entity (or
any Affiliate thereof, as defined below) that is now the beneficial owner of
at least five percent (5%) of such securities; or (ii) became a beneficial
owner of such securities in a transaction after which the Company remains as
the survivor and a majority of the members of Buyer's Board of Directors in
office at the commencement of the transaction causing such Change in Control
remain members of the Buyer's Board of Directors after the closing of the
transaction. For purposes of this subsection, the term "Affiliate" shall mean
any individual, corporation or other entity that controls, is controlled by
or is under common control with (as applicable) any other individual,
corporation or other entity referred to herein.
(f) At any time on and after the Closing Date, Buyer shall have
the option of terminating the payment of future Earn Out Consideration to the
Shareholders by making a lump sum payment equal in amount to the net present
value of the difference between $4,000,000 and any Earn Out Consideration
previously paid by Buyer with respect to prior Contract Periods. In
determining such net present value, Buyer shall use a discount rate of 8% per
annum and an assumed maturity date of April 30, 1999; PROVIDED; HOWEVER, any
amount of Earn Out Consideration against which Buyer has a then existing
offset right pursuant to Article IX hereof shall reduce the total amount of
Earn Out Consideration against which the discount rate shall be multiplied.
(g) Notwithstanding any other provisions herein to the contrary,
the Shareholders' rights to receive Earn Out Consideration hereunder shall
not (i) represent an ownership interest in Buyer, (ii) be deemed to include
any rights common to Buyer's shareholders generally, such as voting or
dividend rights, (iii) shall not be represented by any form of certificate or
instrument and (iv) be assignable or transferable except upon liquidation and
dissolution of the Company or by operation of law or by will or the laws of
descent and distribution.
1.08 THE ESCROW ACCOUNT.
(a) As partial security for the performance of the Shareholders'
indemnification obligations set forth in Article IX hereof, Buyer's Common
Shares (the "Escrow Shares") shall be placed in an escrow account pursuant to
the terms of an escrow agreement to be entered into by and among Buyer, the
Attorney-in-Fact, on behalf of the Shareholders, and an escrow agent (the
"Escrow Agent") to be mutually acceptable to the Attorney-in-Fact and Buyer,
in form and substance substantially as set forth in Exhibit B (the "Escrow
Agreement").
(b) The relative interests of each Shareholder in the Escrow
Shares will be pro rata based upon their proportionate ownership of the
Company as of the Effective Time,
9
<PAGE>
and certificates representing each Shareholder's pro rata Escrow Shares shall
be issued in the name of each Shareholder upon consummation of the Closing
and the execution and delivery by each Shareholder of a stock power endorsed
in blank. Upon consummation of the Closing, each Shareholder shall become a
shareholder of Buyer with respect to such Shareholder's pro rata Escrow
Shares and shall have all of the rights of a shareholder with respect to all
such Shares, including the right to vote such Escrow Shares and to receive
all dividends and other distributions paid with respect thereto; PROVIDED,
HOWEVER, that during the term of the escrow, no Shareholder may sell,
transfer, pledge, hypothecate or otherwise encumber any Escrow Shares. The
Attorney-in-Fact shall be entitled to delivery of certificates representing
the Escrow Shares on the two-year anniversary of the Closing Date, subject to
a pro rata holdback of Escrow Shares then equal in value to 130% of any then
existing indemnification claims as measured by the closing sale price for
Buyer's Common Shares on the two year anniversary of the Closing Date or the
next succeeding trading day if such date is not a day on which Buyer's Common
Shares trade.
1.09 THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Maslon Edelman
Borman & Brand, a Professional Limited Liability Partnership, 3300 Norwest
Center, 90 South Seventh Street, Minneapolis, Minnesota, at 11:00 a.m. on May
31, 1996 (the "Closing Date"), or at such other place and on such other date
as is mutually agreeable to Buyer and the Company . The Closing will be
effective upon filing articles of merger with the Secretary of State of the
State of Minnesota.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Buyer that, except as set forth
in the Disclosure Schedule attached hereto as Exhibit C delivered to Buyer on
the date hereof (the "Disclosure Schedule") (which Disclosure Schedule sets
forth the exceptions to the representations and warranties contained in this
Article II under captions referencing the Sections to which such exceptions
apply):
2.01 INCORPORATION AND CORPORATE POWER. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of
the State of Minnesota and has the corporate power and authority and all
authorizations, licenses, permits and certifications necessary to own and
operate its properties and to carry on its business as now conducted and
presently proposed to be conducted. The copies of the Company's Articles of
Incorporation and Bylaws which have been furnished by the Company to Buyer
prior to the date hereof reflect all amendments made thereto and are correct
and complete as of the date hereof. The Company is qualified to do business
as a foreign corporation in every jurisdiction in which the nature of its
business or its ownership of property requires it to be so qualified except
for those jurisdictions in which the failure to be so qualified would not,
individually or
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in the aggregate, have a material adverse effect on the Company's business,
prospects or results of operations.
2.02 EXECUTION, DELIVERY; VALID AND BINDING AGREEMENTS. The execution,
delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby have been duly and
validly authorized and no other proceedings on its part are necessary to
authorize the execution, delivery and performance of this Agreement. This
Agreement has been and the other Agreements to be executed pursuant hereto
will be at Closing duly executed and delivered by the Company and constitutes
or at Closing will constitute the valid and binding obligations of the
Company, enforceable in accordance with their respective terms. Each
Attorney-in-Fact will have at the Closing the absolute and unrestricted
right, power and authority to carry out the terms of this Agreement and the
transactions contemplated hereby on behalf of each Shareholder.
2.03 NO BREACH. The execution, delivery and performance of this
Agreement and each Related Agreement (as defined in Section 6.01(e)) to be
executed by the Company in connection herewith and the consummation by the
Company of the transactions contemplated hereby do not conflict with or
result in any breach of any of the provisions of, constitute a default under,
result in a violation of, result in the creation of a right of termination or
acceleration or any lien, security interest, charge or encumbrance upon any
assets of the Company, or require any authorization, consent, approval,
exemption or other action by or notice to any court or other governmental
body, under the provisions of the Articles of Incorporation or Bylaws of the
Company or any indenture, mortgage, lease, loan agreement or other agreement
or instrument by which the Company is bound or affected, or any law, statute,
rule or regulation or order, judgment or decree to which the Company is
subject.
2.04 GOVERNMENTAL AUTHORITIES; CONSENTS. The Company is not required to
submit any notice, report or other filing with any governmental authority in
connection with the execution or delivery by it of this Agreement or the
consummation of the transactions contemplated hereby. No consent, approval
or authorization of any governmental or regulatory authority or any other
party or person is required to be obtained by the Company in connection with
its execution, delivery and performance of this Agreement or the transactions
contemplated hereby.
2.05 CAPITAL STOCK. The authorized capital stock of the Company
consists of 100,000,000 shares of common stock, par value $.01 per share, of
which, as of the date hereof, 3,287,157 Company Common Shares are issued and
outstanding, all of which are owned beneficially and of record by the
Shareholders, free and clear of any security interests, claims, liens,
pledges, options, encumbrances, charges, agreements, voting trusts, proxies
or other arrangements, restrictions or other legal or equitable limitations
of any kind. All of the Company Common Shares have been duly authorized and
are validly issued, fully paid and nonassessable. The Company has no other
equity securities or securities containing any equity features authorized,
issued or outstanding. There are no agreements or other rights or
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arrangements existing which provide for the sale or issuance of capital stock
by the Company and there are no rights, subscriptions, warrants, options,
conversion rights or agreements of any kind outstanding to purchase or
otherwise acquire from the Company any shares of capital stock or other
securities of the Company of any kind. There are no agreements or other
obligations (contingent or otherwise) which may require the Company to
repurchase or otherwise acquire any shares of its capital stock.
2.06 SUBSIDIARIES. The Company does not own any stock, partnership
interest, joint venture interest or any other security or ownership interest
issued by any other corporation, organization or entity. All issued and
outstanding shares of capital stock of any of the subsidiaries set forth in
such Disclosure Schedule are owned by the Company, either directly or through
one or more other subsidiaries, free and clear of all liens, charges,
encumbrances, claims and options of any nature. All of the outstanding
shares of capital stock of such subsidiaries have been duly and validly
authorized and issued, and are fully paid and nonassessable. CES Services,
Inc. had as of May 1, 1996 (the date of the transactions described in Section
6.01(m)) no assets or known or contingent liabilities other than those
transferred in connection with the transactions described in Section 6.01(m)
2.07 FINANCIAL STATEMENTS. The Company has delivered to Buyer copies of
(a) the unaudited balance sheet, as of April 30, 1996, of the Company (the
"Latest Balance Sheet") and the unaudited statements of earnings,
shareholders' equity and cash flows of the Company for the four-month period
ended April 30, 1996, (such statements and the Latest Balance Sheet being
herein referred to as the "Latest Financial Statements") and (b) the audited
balance sheets, as of December 31, 1995, December 31, 1994 and December 31,
1993, of the Company and the audited statements of earnings, shareholders'
equity and cash flows of the Company for each of the years ended December 31,
1995, December 31, 1994 and December 31, 1993, (collectively, the "Annual
Financial Statements"). The Latest Financial Statements and the Annual
Financial Statements are true and correct, are based upon the information
contained in the books and records of the Company and fairly present the
financial condition of the Company as of the dates thereof and results of
operations, shareholders' equity and cash flows for the periods referred to
therein. The Annual Financial Statements have been prepared in accordance
with generally accepted accounting principles, consistently applied
throughout the periods indicated. The Latest Financial Statements have been
prepared in accordance with generally accepted accounting principles
applicable to unaudited interim financial statements (and thus may not
contain all notes which are required to be prepared in accordance with
generally accepted accounting principles) consistent with the Annual
Financial Statements and reflect all adjustments necessary to fairly present
the financial position, results of operations and cash flows for the interim
period(s) presented. Neither the Latest Balance Sheet nor the Company's
audited balance sheet dated as of December 31, 1995 evidence total
liabilities at their respective dates materially in excess of $5,953,000 and
$5,210,000, respectively.
2.08 ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in the
Latest Balance Sheet, the Company has no material liabilities (whether
accrued, absolute, contingent,
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unliquidated or otherwise, whether due or to become due, whether known or
unknown, and regardless of when asserted) arising out of transactions or
events heretofore entered into, or any action or inaction, or any state of
facts existing, with respect to or based upon transactions or events
heretofore occurring, except (i) liabilities which have arisen after the date
of the Latest Balance Sheet in the ordinary course of business (none of which
is a material uninsured liability for breach of contract, breach of warranty,
tort, infringement, claim or lawsuit), or (ii) as otherwise set forth in the
Disclosure Schedule under the caption referencing this Section 2.08.
2.09 NO MATERIAL ADVERSE CHANGES. Since December 31, 1995, there has
not been, and the Company has no reason to believe that from the date hereof
through the Closing Date, there will be any material adverse change in the
assets, financial condition, operating results, customer, employee or
supplier relations, business condition or prospects of the Company.
2.10 ABSENCE OF CERTAIN DEVELOPMENTS. Since the date of the Latest
Balance Sheet (the "Balance Sheet Date"), the Company has not:
(a) borrowed any amount or incurred or become subject to any
liability, except (i) current liabilities incurred in the ordinary course
of business and (ii) liabilities under contracts entered into in the
ordinary course of business;
(b) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any of its assets, except (i) liens for current property taxes
not yet due and payable and (ii) liens imposed by law and incurred in the
ordinary course of business for obligations not yet due to carriers,
warehousemen, laborers, materialmen and the like.
(c) discharged or satisfied any lien or encumbrance or paid any
liability, other than current liabilities paid in the ordinary course of
business;
(d) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or Shareholders) any tangible
assets, or canceled any debts or claims, in each case, except in the
ordinary course of business;
(e) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or Shareholders) any patents,
trademarks, trade names, copyrights, trade secrets or other intangible
assets;
(f) disclosed, to any person other than Buyer and authorized
representatives of Buyer, any proprietary confidential information, other
than pursuant to a confidentiality agreement prohibiting the use or further
disclosure of such information, which agreement is identified in the
Disclosure Schedule under the caption referencing this Section 2.10(f) and
is in full force and effect on the date hereof;
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(g) waived any rights of material value or suffered any extraordinary
losses or adverse changes in collection loss experience, whether or not in
the ordinary course of business or consistent with past practice;
(h) declared or paid any dividends or other distributions with
respect to any shares of the Company's capital stock or redeemed or
purchased, directly or indirectly, any shares of the Company's capital
stock or any options;
(i) issued, sold or transferred any of its equity securities,
securities convertible into or exchangeable for its equity securities or
warrants, options or other rights to acquire its equity securities, or any
bonds or debt securities;
(j) taken any other action or entered into any other transaction
other than in the ordinary course of business and in accordance with past
custom and practice, or entered into any transaction with any "Insider" (as
defined in Section 2.22 hereof) other than employment arrangements
otherwise disclosed in this Agreement and the Disclosure Schedule, or the
transactions contemplated by this Agreement;
(k) suffered any material theft, damage, destruction or loss of or to
any property or properties owned or used by it, whether or not covered by
insurance;
(l) made or granted any bonus or any wage, salary or compensation
increase to any director, officer, employee or consultant or made or
granted any increase in any employee benefit plan or arrangement, or
amended or terminated any existing employee benefit plan or arrangement, or
adopted any new employee benefit plan or arrangement or made any commitment
or incurred any liability to any labor organization;
(m) made any single capital expenditure or commitment therefor in
excess of $1,000,000;
(n) made any loans or advances to, or guarantees for the benefit of,
any persons;
(o) made any charitable contributions or pledges in excess of $2,000
in the aggregate; or
(p) made any change in accounting principles or practices or
accounting reserves from those utilized in the preparation of the Annual
Financial Statements.
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2.11 TITLE TO PROPERTIES.
(a) The Company does not own any real property. The real property
demised by the leases (the "Leases") described under the caption
referencing this Section 2.11 in the Disclosure Schedule constitutes all of
the real property used or occupied by the Company (the "Real Property").
The Real Property has access, sufficient for the conduct of the Company's
business as now conducted or as presently proposed to be conducted, to
public roads and to all utilities, including electricity, sanitary and
storm sewer, potable water, natural gas and other utilities, used in the
operation of the business of the Company at those locations.
(b) The Leases are in full force and effect, and the Company holds a
valid and existing leasehold interest under each of the Leases for the term
set forth under such caption in the Disclosure Schedule. The Company has
delivered to Buyer complete and accurate copies of each of the Leases, and
none of the Leases has been modified in any respect, except to the extent
that such modifications are disclosed by the copies delivered to Buyer.
The Company is not in default, and no circumstances exist which, if
unremedied, would, either with or without notice or the passage of time or
both, result in such default under any of the Leases; nor, to the best
knowledge of the Company, is any other party to any of the Leases in
default.
(c) The Company owns good and marketable title to each of the
tangible properties and tangible assets reflected on the Latest Balance
Sheet or acquired since the date thereof, free and clear of all liens and
encumbrances, except for (i) liens for current taxes not yet due and
payable, (ii) the properties subject to the Leases, and (iii) liens imposed
by law and incurred in the ordinary course of business for obligations not
yet due to carriers, warehousemen, laborers and materialmen.
(d) All of the buildings, machinery, equipment and other tangible
assets necessary for the conduct of the Company's business are in good
condition and repair, ordinary wear and tear excepted, and are usable in
the ordinary course of business. There are no defects in such assets or
other conditions relating thereto which, in the aggregate, materially
adversely affect the operation or value of such assets. The Company owns,
or leases under valid leases, all buildings, machinery, equipment and other
tangible assets necessary for the conduct of its business.
(e) The Company is not in violation of any applicable zoning
ordinance or other law, regulation or requirement relating to the operation
of any properties used in the operation of its business, and the Company
has not received any notice of, nor does it have any reason to believe (i)
any such violation exists, or (ii) any condemnation proceeding exists with
respect to any of the Real Property, except, in each case, with respect to
violations the potential consequences of which do not or will not have a
material adverse effect on the Company.
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(f) The Company has no knowledge of any improvements made or
contemplated to be made by any public or private authority, the costs of
which are to be assessed as special taxes or charges against any of the
Real Property, and there are no present assessments.
2.12 ACCOUNTS RECEIVABLE. The accounts receivable reflected on the
Latest Balance Sheet are valid receivables, are not subject to valid
counterclaims or setoffs, and are collectible in accordance with their terms,
except as otherwise described in the Disclosure Schedule under the caption
referencing this Section 2.12, and except to the extent of the bad debt
reserve reflected on the Latest Balance Sheet.
2.13 INVENTORY. The Company's inventory of raw materials, work in
process and finished goods consists of items of a quality and quantity usable
and, with respect to finished goods only, salable at the Company's normal
profit levels, in each case, in the ordinary course of the Company's
business. The Company's inventory of finished goods is not slow-moving as
determined in accordance with past practices, obsolete or damaged and is
merchantable and fit for its particular use. The Company has on hand or has
ordered and expects timely delivery of such quantities of raw materials and
has on hand such quantities of work in process and finished goods as are
reasonably required timely to fill current orders on hand which require
delivery within 60 days and to maintain the shipment of products at its
normal level of operations. As of the date of the Latest Balance Sheet, the
values at which such inventory is carried on the Latest Balance Sheet are in
accordance with generally accepted accounting principles. The reserves for
inventory returns and product obsolescence on the Latest Balance Sheet are
consistent with the Company's prior practices and are fully adequate to cover
all inventory returns and product obsolescence claims made or to be made
against any products of the Company sold prior to the date thereof. The
Disclosure Schedule, under the caption referencing this Section 2.13,
contains a complete and accurate summary of the Company's inventory of raw
materials, work in process and finished goods as of May 15, 1996.
2.14 TAX MATTERS.
Except as set forth under the caption referencing Section 2.14 hereof in
the Disclosure Schedule:
(a) Each of (i) the Company, (ii) its subsidiaries (if any), (iii)
any affiliated, combined or unitary group of which the Company or any such
subsidiary is or was a member for purposes of any Taxes (as defined below),
and (iv) any Plans (as defined in Section 2.20 hereof) has timely filed, been
included in or sent, and will, prior to the Closing, timely file, be included
in or send all returns, declarations and reports and information returns and
statements required to be filed or sent by or relating to any of them prior
to the Closing relating to any Taxes with respect to any income, properties
or operations of the Company or any of its subsidiaries prior to the
Effective Time (collectively, the "Returns");
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(b) as of the time of filing, the Returns:
(i) correctly reflected (and, as to any Returns not filed as of
the date hereof, will correctly reflect) the facts regarding the income,
business, assets, operations, activities and status of the Company and its
subsidiaries and any other information required to be shown therein;
(ii) constitute (and, as to any Returns not filed as of the date
hereof, will constitute) complete and accurate representations of the Tax
liabilities for the periods covered; and
(iii) accurately set forth all items (to the extent required to
be included or reflected in the Returns) relevant to future Tax
liabilities, including the Tax bases of properties and assets;
(c) the Company and each of its subsidiaries have timely paid all
Taxes that have been shown as due and payable on the Returns that have been
filed;
(d) the Company and its subsidiaries have established a reserve
(in accordance with generally accepted principles) on the Latest Balance
Sheet for any Taxes that relate to past periods but are not yet due; and will
establish such a reserve for all other Taxes payable for any periods that end
before the Closing for which no Returns have yet been filed and for any
periods that begin before the Closing and end after the Closing to the extent
such Taxes are attributable to the portion of any such period ending at the
Closing;
(d) the charges, accruals and reserves for Taxes reflected on the
Latest Balance Sheet are adequate to cover the Tax liabilities accruing or
payable by the Company and its subsidiaries in respect of periods prior to
the date hereof;
(e) neither the Company nor any of its subsidiaries is delinquent
in the payment of any Taxes or has requested any extension of time within
which to file or send any Return, which Return has not since been filed or
sent;
(f) no deficiency for any Taxes has been proposed, asserted or
assessed against the Company or any of its subsidiaries (or any member of any
affiliated or combined group of which the Company or any subsidiary is or has
been a member for which either the Company or any subsidiary could be liable
for Taxes);
(g) neither the Company nor any subsidiary has granted any
extension of the limitation period applicable to any Tax claims and neither
the Company nor any subsidiary has waived any such limitation period;
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(h) neither the Company nor any subsidiary is or has been a party
to any tax sharing agreement with any corporation which, as of the Closing,
is not a member of the affiliated group of which the Company is a member;
(i) neither the Company nor any subsidiary has made any election
under either Section 341(f) or Section 1362(a) of the Code;
(j) the Company has not, for the five (5)-year period preceding
the Closing, been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code;
(k) no Tax is required to be withheld pursuant to Section 1445 of
the Code as a result of the transactions contemplated in this Agreement;
(l) Federal and state income tax returns of the Company and its
subsidiaries are closed through the year ended December 31, 1991;
(m) intentionally omitted.
(n) No tax liability will accrue to the Company or any subsidiary
related to or arising out of the disposition of all of the capital stock of
CES, Services, Inc., as the same is described in Section 6.01(k) hereof.
(o) Neither the Company nor any subsidiary or affiliate is a party
to any agreement, contract plan or arrangement that has resulted or would
result, separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code and the
consummation of the transactions contemplated by this Agreement will not be a
factor causing payments to be made by the Company that are not deductible (in
whole or in part) under Section 280G of the Code.
(p) No examinations of the returns of the Company, or any
subsidiary is currently in progress or, to the best knowledge of the Company,
threatened and no deficiencies have been asserted or assessed against either
the Company or any of its subsidiaries as a result of any audit by the
Internal Revenue Service or any other taxing authority and no such deficiency
has been proposed or threatened.
(q) There are no liens for Taxes (other than for current Taxes not
yet due and payable) upon the assets of the Company or any subsidiary.
(r) "Tax" (and with the corresponding meaning "Taxes" and
"Taxable") shall include (i) any net income, gross income, gross receipts,
sales, use, ad valorem, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property or
windfall profit tax, custom duty or other tax, governmental fee or other
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like assessment or charge of any kind whatsoever, together with any interest
and any penalty, addition to tax or additional amount imposed by any taxing
authority (domestic or foreign) and (ii) any liability for the payment of any
amount of the type described in clause (i) as a result of being a member of
an affiliated or combined group.
2.15 CONTRACTS AND COMMITMENTS.
(a) The Disclosure Schedule, under the caption referencing this
Section 2.15, lists each of the following agreements, whether oral or
written, to which the Company is a party, which are currently in effect, and
which relate to the operation of the Company's business: (i) collective
bargaining agreement or contract with any labor union; (ii) bonus, pension,
profit sharing, retirement or other form of deferred compensation plan, other
than as described under the caption referencing Section 2.21 hereof (or
excluded by such Section from inclusion thereunder) in the Disclosure
Schedule; (iii) hospitalization insurance or other welfare benefit plan or
practice, whether formal or informal, other than as described under the
caption referencing Section 2.21 hereof in the Disclosure Schedule (or
excluded by such Section from inclusion thereunder); (iv) stock purchase or
stock option plans; (v) contract for the employment of any officer,
individual employee or other person on a full-time or consulting basis or
relating to severance pay for any such person; (vi) material confidentiality
agreements; (vii) contract, agreement or understanding relating to the
voting of the Company's Common Shares or the election of directors of the
Company; (viii) agreement or indenture relating to the borrowing of money or
to mortgaging, pledging or otherwise placing a lien on any of the assets of
the Company; (ix) guaranty of any obligation for borrowed money or otherwise;
(x) lease or agreement under which it is lessee of, or holds or operates any
property, real or personal, owned by any other party; (xi) lease or agreement
under which it is lessor of, or permits any third party to hold or operate,
any property, real or personal; (xii) contract or group of related contracts
with the same party for the purchase of products or services under which the
undelivered balance of such products or services is in excess of $1,000,000
as of the Latest Balance Sheet Date; (xiii) contract or group of related
contracts with the same party for the sale of products or services under
which the undelivered balance of such products or services has a sales price
in excess of $1,000,000 as of the Latest Balance Sheet Date; (xiv) contract
or group of related contracts with the same party (other than any contract or
group of related contracts for the purchase or sale of products or services)
continuing over a period of more than six months from the date or dates
thereof, not terminable by the Company on 30 days' or less notice without
penalty; (xv) contract which prohibits the Company from freely engaging in
business anywhere in the world; (xvi) contract for the distribution of the
Company's products (including any distributor, sales and original equipment
manufacturer contract); (xvii) franchise agreement; (xviii) license agreement
or agreement providing for the payment or receipt of royalties or other
compensation by the Company in connection with the intellectual property
rights listed under the caption referencing Section 2.16 hereof in the
Disclosure Schedule; (xix) contract or commitment for capital expenditures;
(xx) agreement for the sale of any capital asset; (xxi) contract with any
affiliate which in any way relates to the Company (other than for employment
on customary
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terms); or (xxii) other agreement which is either material to the Company's
business or was not entered into in the ordinary course of business.
(b) The Company has performed all material obligations required to
be performed by it in connection with the contracts or commitments required
to be disclosed in the Disclosure Schedule under the caption referencing this
Section 2.15 and is not in receipt of any claim of default under any contract
or commitment required to be disclosed under such caption and the Company has
no present expectation or intention of not fully performing any material
obligation pursuant to any contract or commitment required to be disclosed
under such caption; and the Company has no knowledge of any breach or
anticipated breach by any other party to any contract or commitment required
to be disclosed under such caption.
(c) Prior to the date of this Agreement, Buyer has been supplied
with a true and correct copy of each written contract or commitment, and a
written description of each oral contract or commitment, referred to under
the caption referencing this Section 2.15 in the Disclosure Schedule,
together with all amendments, waivers or other changes thereto.
2.16 INTELLECTUAL PROPERTY RIGHTS. The Disclosure Schedule describes
under the caption referencing this Section 2.16 all rights in patents, patent
applications, trademarks, service marks, trade names, corporate names,
copyrights, mask works, trade secrets, know-how or other intellectual
property rights owned by, licensed to or otherwise controlled by the Company
or used in, developed for use in or necessary to the conduct of the Company's
business as now conducted or planned to be conducted. The Company owns and
possesses all right, title and interest, or holds a valid license, in and to
the rights set forth under such caption. The Disclosure Schedule describes
under the caption referencing this Section 2.16 all intellectual property
rights which have been licensed to third parties and those intellectual
property rights which are licensed from third parties. The Company has taken
all necessary action to protect the intellectual property rights set forth
under such caption. The Company has not received any notice of, nor are
there any facts known to it which indicate a likelihood of, any infringement
or misappropriation by, or conflict from, any third party with respect to the
intellectual property rights which are listed; no claim by any third party
contesting the validity of any intellectual property rights listed in the
Disclosure Schedule has been made, is currently outstanding or, to the best
knowledge of the Company, is threatened; the Company has not received any
notice of any infringement, misappropriation or violation by the Company of
any intellectual property rights of any third parties and the Company has not
infringed, misappropriated or otherwise violated any such intellectual
property rights; and no infringement, illicit copying, misappropriation or
violation has occurred or will occur with respect to products currently being
sold by the Company or with respect to the conduct of the Company's business
as now conducted.
2.17 LITIGATION. There are no actions, suits, proceedings, orders or
investigations pending or, to the best knowledge of the Company, threatened
against the Company, at law or
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in equity, or before or by any federal, state or municipal court or other
governmental department, commission, board, bureau, agency or instrumentality.
2.18 WARRANTIES. The Disclosure Schedule summarizes under the caption
referencing this Section 2.18 all claims outstanding, pending or, to the best
knowledge of the Company, threatened for breach of any warranty relating to
any products sold by the Company prior to the date hereof. The description
of the Company's product warranties set forth under the caption referencing
this Section 2.18 is correct and complete. The reserves for warranty claims
on the Latest Balance Sheet are consistent with the Company's prior practices
and are fully adequate to cover all warranty claims made or to be made
against any products of the Company sold prior to the date thereof.
2.19 EMPLOYEES. (a) No executive employee of the Company and, to the
best knowledge of the Company, no group of the Company's employees has any
plans to terminate his, her or its employment; (b) the Company has complied
with all laws relating to the employment of labor, including provisions
thereof relating to wages, hours, equal opportunity, collective bargaining
and the payment of social security and other taxes; (c) the Company has no
material labor relations problem pending and its labor relations are
satisfactory; (d) there are no workers' compensation claims pending against
the Company nor is the Company aware of any facts that would give rise to
such a claim; (e) no employee of the Company is subject to any secrecy or
noncompetition agreement or any other agreement or restriction of any kind
that would impede in any way the ability of such employee to carry out fully
all activities of such employee in furtherance of the business of the
Company; and (f) no employee or former employee of the Company has any claim
with respect to any intellectual property rights of the Company set forth
under the caption referencing Section 2.16 hereof in the Disclosure Schedule.
2.20 EMPLOYEE BENEFIT PLANS.
(a) Under the caption referencing Section 2.20 hereof in the
Disclosure Schedule, the Company has listed all employee welfare benefit
plans and all employee pension benefit plans within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
maintained or contributed to by the Company or any subsidiary (collectively,
the "Plans"), and no trust funds are so maintained in connection with any
employee welfare benefit plan. The Company has delivered or made available
to Buyer a true, correct and complete copy of each of the Plans identified on
such list. As to each of such Plans that is funded, the Company has
delivered or made available to Buyer a true, correct and complete copy of the
most recent annual financial report with respect to such plan, and any
subsequent interim report. Each such financial report and interim report is
an accurate description of the financial status of the subject employee
benefit plan, and there have been no adverse changes in the financial status
of any such Plans since the date of the most recent report provided with
respect thereto.
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(b) Under the caption referencing Section 2.20 hereof in the
Disclosure Schedule, the Company has also specifically identified each of the
Plans that is represented to be a qualified plan under Section 401(a) of the
Code. With respect to each of the Plans so identified, the following are
true: (i) the plan, in form and operation, currently satisfies, and for all
years subsequent to the establishment of, such plan has satisfied, the
qualification requirements of Section 401(a) or 403(a) of the Code, as
applicable; and (ii) except as identified on the Disclosure Schedule under
the caption referencing Section 2.20 hereof, the Internal Revenue Service
(the "IRS") has issued a favorable letter of determination with respect to
the plan as amended to date, and all amendments required by the Code as a
condition of retention of such qualified status as of the date hereof have
been or will be adopted within time limits required to maintain such status.
Each of such Plans is and has been operating in compliance with all
amendments required by the Tax Reform Act of 1986 and subsequent legislation
and regulations. The Company has delivered or will deliver a true, correct
and complete copy of all letters of determination with respect to all such
Plans as amended to date.
(c) The Company and each subsidiary does not now maintain or
contribute to, nor, except as set forth under the caption referencing Section
2.20 in the Disclosure Schedule, has the Company or any subsidiary at any
time maintained or contributed to, any employee benefit plan which is subject
to Title IV of ERISA. Except as set forth under the caption referencing
Section 2.20 in the Disclosure Schedule, all contributions payable to any of
the Plans for any plan year ending prior to the date hereof have been paid in
full on a timely basis and no accumulated funding deficiency (as defined in
Section 302(a)(2) of ERISA) has been incurred.
(d) The Company and each subsidiary has not engaged in, nor
entered into any arrangement pursuant to which any person or entity is
contractually bound to enter into, any transaction which could result in
imposition upon either the Company or any subsidiary or Buyer of any excise
tax under Sections 4971 through 4980B, inclusive, and Section 5000 of the
Code or civil liability under Section 502(i) or 502(l) of ERISA or otherwise
incurred a liability for any excise tax, other than excise taxes which have
heretofore been paid or have been accrued on the Latest Balance Sheet.
(e) The Company and each subsidiary has (i) filed or caused to be
filed on a timely basis each and every return, report, statement, notice,
declaration and other document required to be filed with any governmental
agency, federal, state and local (including, without limitation, the IRS, the
Department of Labor, the Pension Benefit Guaranty Corporation and SEC) with
respect to each of the Plans; and the Company delivered or made available to
Buyer all records with respect to the Plans as are required for their proper
administration and proper continued reporting and disclosure; (ii) timely
complied with all applicable participant disclosure requirements of ERISA;
and (iii) has maintained in full force and effect any bond required under
ERISA in connection with such Plans.
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(f) Except in connection with the Company's subsidiaries (if
any), the Company and each subsidiary is not and has never been a member of a
controlled group of corporations, an unincorporated trade or business under
common control, or a member of an affiliated service group (as such terms are
defined in Sections 414(b), 414(c) and 414(m) of the Code), involving any
other entity.
(g) There are no "leased employees" (as defined in Section 414(n)
of the Code) who performed services for the Company or any subsidiary, nor
are there any persons who are anticipated to become leased employees with the
passage of time.
(h) The Company and its subsidiaries do not maintain any employee
benefit plan providing benefits to former employees or directors, other than
health coverage mandated by applicable law.
(i) The Company and its subsidiaries have complied in all respect
with the "COBRA" requirements of Section 4980B of the Code.
(j) There are no actions, suits or claims pending or, to the best
knowledge of the Company, threatened with respect to any of the Plans other
than routine claims for benefits.
(k) Neither the Company nor any of its directors, officers,
employees or other "fiduciaries," as that term is defined in Section 3(21) of
ERISA, has committed any breach of fiduciary responsibility imposed by ERISA
or any other applicable law with respect to the Plans that would subject the
Company, any of its subsidiaries, Buyer, Buyer's subsidiaries or any of
their respective directors, officers or employees to any liability under
ERISA or any other applicable law.
2.21 INSURANCE. The Disclosure Schedule, under the caption referencing
this Section 2.21, lists and briefly describes (i) each insurance policy
maintained by the Company with respect to the Company's properties, assets
and operations (ii) sets forth the date of expiration of each such insurance
policy and (iii) briefly summarizes all material claims currently outstanding
under each such policy. All of such insurance policies are (i) in full force
and effect (ii) provide adequate insurance coverage for the assets and
operations of the Company for all risks normally insured against, in a manner
consistent with the Company's past practices (iii) and are issued by insurers
of recognized responsibility. The Company is not in default with respect to
its obligations under any of such insurance policies. To the best knowledge
of the Company, there has been no threatened termination of, or premium
increase whether retrospective or prospective with respect to any of such
policies.
2.22 AFFILIATE TRANSACTIONS. Except as disclosed in the Disclosure
Schedule under the caption referencing this Section 2.22, and other than
pursuant to this Agreement, no officer, director or employee of the Company
or any member of the immediate family of any such
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officer, director or employee, or any entity in which any of such persons
owns any beneficial interest (other than any publicly-held corporation whose
stock is traded on a national securities exchange or in the over-the-counter
market and less than one percent of the stock of which is beneficially owned
by any of such persons) (collectively "Insiders"), has any agreement with the
Company (other than normal employment arrangements) or any interest in any
property, real, personal or mixed, tangible or intangible, used in or
pertaining to the business of the Company (other than ownership of capital
stock of the Company). None of the Insiders has any direct or indirect
interest in any competitor, supplier or customer of the Company or in any
person, firm or entity from whom or to whom the Company leases any property,
or in any other person, firm or entity with whom the Company transacts
business of any nature. For purposes of this Section 2.22, the members of
the immediate family of an officer, director or employee shall consist of the
spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and
daughters-in-law, and brothers- and sisters-in-law of such officer, director
or employee.
2.23 CUSTOMERS AND SUPPLIERS. The Disclosure Schedule, under the
caption referencing this Section 2.23, lists the 10 largest customers and
suppliers of the Company for the fiscal year ended December 31, 1995, and
for the four-month period ended April 30, 1996, and sets forth opposite the
name of each such customer or supplier the approximate percentage of net
sales or purchases by the Company attributable to such customer or supplier
for each such period. Since the Balance Sheet Date, no customer or supplier
listed on the Disclosure Schedule under the caption referencing this Section
2.23 has indicated that it will stop or decrease the rate of business done
with the Company except for changes in the ordinary course of the Company's
business.
2.24 OFFICERS AND DIRECTORS; BANK ACCOUNTS. The Disclosure Schedule,
under the caption referencing this Section 2.24, lists all officers and
directors of the Company and all of the Company's bank accounts (designating
each authorized signer).
2.25 COMPLIANCE WITH LAWS; PERMITS.
(a) The Company and its officers, directors, agents and employees
have complied in all material respects with all applicable laws, regulations
and other requirements, including, but not limited to, federal, state and
local laws, ordinances, rules, regulations and other requirements pertaining
to product labeling, consumer products safety, equal employment opportunity,
employee retirement, affirmative action and other hiring practices,
occupational safety and health, workers' compensation, unemployment and
building and zoning codes, which materially affect the business of the
Company or the Real Property and to which the Company may be subject, and no
claims have been filed against the Company alleging a violation of any such
laws, regulations or other requirements. The Company has no knowledge of any
such action, and has no reason to believe that any action related to any of
the foregoing is currently pending or threatened, including any proposal to
change the zoning or building ordinances or any other laws, rules,
regulations or ordinances affecting the Real
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Property. The Company is not relying on any exemption from or deferral of
any such applicable law, regulation or other requirement that would not be
available to Buyer after it acquires the Company's properties, assets and
business.
(b) The Company has, in full force and effect, all licenses,
permits and certificates, from federal, state and local authorities
(including, without limitation, federal and state agencies regulating
occupational health and safety) necessary to conduct its business and own and
operate its properties (other than Environmental Permits, as such term is
defined in Section 2.26(c) hereof) (collectively, the "Permits"). A true,
correct and complete list of all the Permits is set forth under the caption
referencing this Section 2.25 in the Disclosure Schedule. The Company has
conducted its business in compliance with all material terms and conditions
of the Permits.
(c) The Company has not made or agreed to make gifts of money,
other property or similar benefits (other than incidental gifts of articles
of nominal value) to any actual or potential customer, supplier, governmental
employee or any other person in a position to assist or hinder the Company in
connection with any actual or proposed transaction.
(d) In particular, but without limiting the generality of the
foregoing, the Company has not violated and has no liability, and has not
received a notice or charge asserting any violation of or liability under,
the federal Occupational Safety and Health Act of 1970 or any other federal
or state acts (including rules and regulations thereunder) regulating or
otherwise affecting employee health and safety.
2.26 ENVIRONMENTAL MATTERS.
(a) As used in this Section 2.26, the following terms shall have
the following meanings:
(i) "Hazardous Materials" means any dangerous, toxic or
hazardous pollutant, contaminant, chemical, waste, material or
substance as defined in or governed by any federal, state or local
law, statute, code, ordinance, regulation, rule or other requirement
relating to such substance or otherwise relating to the environment
or human health or safety, including without limitation any waste,
material, substance, pollutant or contaminant that might cause any
injury to human health or safety or to the environment or might
subject the Company to any imposition of costs or liability under any
Environmental Law.
(ii) "Environmental Laws" means all applicable federal, state
and local laws, rules, regulations, codes, ordinances, orders,
decrees, directives, permits, licenses and judgments relating to
pollution, contamination or protection of the environment
(including, without limitation, all applicable federal, state and
local laws, rules, regulations, codes, ordinances, orders,
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decrees, directives, permits, licenses and judgments relating to
Hazardous Materials in effect as of the date of this Agreement).
(iii) "Release" shall mean the spilling, leaking,
disposing, discharging, emitting, depositing, ejecting, leaching,
escaping or any other release or threatened release, however
defined, whether intentional or unintentional, of any Hazardous
Material.
(b) The Company and the Real Property are in material compliance
with all applicable Environmental Laws.
(c) The Company has obtained, and maintained in full force and
effect, all environmental permits, licenses, certificates of compliance,
approvals and other authorizations necessary to conduct its business and own
or operate the Real Property (collectively, the "Environmental Permits"). A
copy of each such Environmental Permit shall be provided by the Company to
Buyer at least 14 days prior to the Closing. The Company has conducted its
business in compliance with all terms and conditions of the Environmental
Permits. The Company has filed all reports and notifications required to be
filed under and pursuant to all applicable Environmental Laws.
(d) Except as set forth in the Disclosure Schedule under the
caption referencing this Section 2.26: (i) no Hazardous Materials have been
generated, treated, contained, handled, located, used, manufactured,
processed, buried, incinerated, deposited, stored, or released on, under or
about any part of the Company or the Real Property, (ii) the Company and the
Real Property and any improvements thereon, contain no asbestos, urea
formaldehyde, radon at levels above natural background, polychlorinated
biphenyls (PCBs) or pesticides, and (iii) no aboveground or underground
storage tanks are located on, under or about the Real Property, or have been
located on, under or about the Real Property and then subsequently been
removed or filled. If any such storage tanks exist on, under or about the
Real Property, such storage tanks have been duly registered with all
appropriate governmental entities and are otherwise in compliance with all
applicable Environmental Laws.
(e) Except as set forth in the Disclosure Schedule under the
caption referencing this Section 2.26, the Company has not received notice
alleging in any manner that the Company is, or might be potentially
responsible for any Release of Hazardous Materials, or any costs arising
under or from violation of Environmental Laws.
(f) No expenditure will be required in order for Buyer to comply
with any Environmental Laws in effect at the time of the Closing in
connection with the operation or continued operation of the business of the
Company or the Real Property in a manner consistent with the current
operation thereof by the Company.
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(g) The Company and the Real Property are not and have not been
listed on the United States Environmental Protection Agency National
Priorities List of Hazardous Waste Sites, or any other list, schedule, law,
inventory or record of hazardous or solid waste sites maintained by any
federal, state or local agency.
(h) The Company has disclosed and delivered to Buyer all
environmental reports and investigations which the Company has obtained or
ordered with respect to the business of the Company and the Real Property.
(i) No part of the business of the Company or the Real Property
have been used as a landfill, dump or other disposal, storage, transfer,
handling or treatment area for Hazardous Materials, or as a gasoline service
station or a facility for selling, dispensing, storing, transferring,
disposing or handling petroleum and/or petroleum products.
(j) No lien has been attached or filed against the Company or the
Real Property in favor of any governmental or private entity for (i) any
liability or imposition of costs under or violation of any applicable
Environmental Law; or (ii) any Release of Hazardous Materials.
2.27 BROKERAGE. No third party shall be entitled to receive any
brokerage commissions, finder's fees, fees for financial advisory services or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of the
Shareholders or the Company.
2.28 DISCLOSURE. Neither this Agreement, any of the Exhibits hereto,
any of the documents delivered by or on behalf of the Company pursuant to
Article VI hereof or as set forth in Buyer's Information Statement (to the
extent such information pertains to the Company) with respect to the Buyer
Common Shares to be issued hereunder, the Disclosure Schedule nor any of the
financial statements referred to in Section 2.07 hereof, contain any untrue
statement of a material fact regarding the Company or its business or any of
the other matters dealt with in this Article II relating to the Company or
the transactions contemplated by this Agreement or omit to state any material
fact necessary to make the statements contained herein or therein, in light
of the circumstances in which they were made, not misleading, and there is no
fact which has not been disclosed to Buyer of which the Company is aware
which materially affects adversely or could reasonably be anticipated to
materially affect adversely the business, including operating results,
assets, customer relations, employee relations and business prospects, of the
Company.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGER SUBSIDIARY
Buyer and Merger Subsidiary hereby represent and warrant to the Company
that, with respect to itself:
3.01 INCORPORATION AND CORPORATE POWER. Each of Buyer and Merger
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Minnesota, with the requisite
corporate power and authority to enter into this Agreement and perform their
respective obligations hereunder.
3.02 EXECUTION, DELIVERY; VALID AND BINDING AGREEMENT. The execution,
delivery and performance of this Agreement by each of Merger Subsidiary and
Buyer and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all requisite corporate action, and no other
corporate proceedings are necessary to authorize the execution, delivery or
performance of this Agreement. This Agreement has been, and each of the
Related Agreements (as defined below) to be executed by the Company or Merger
Subsidiary at Closing will be, duly executed and delivered by each of Merger
Subsidiary and Buyer and constitute the valid and binding obligation of each,
enforceable in accordance with their respective terms.
3.03 NO BREACH. The execution, delivery and performance of this
Agreement by each of Merger Subsidiary and Buyer and the consummation by them
of the transactions contemplated hereby do not conflict with or result in any
breach of any of the provisions of, constitute a default under, result in a
violation of, result in the creation of a right of termination or
acceleration or any lien, security interest, charge or encumbrance upon any
assets of either, or require any authorization, consent, approval, exemption
or other action by or notice to any court or other governmental body, under
the provisions of the respective Articles of Incorporation or Bylaws of
Merger Subsidiary or Buyer or any indenture, mortgage, lease, loan agreement
or other agreement or instrument by which either is bound or affected, or any
law, statute, rule or regulation or order, judgment or decree to which either
is subject, except with respect to consents or waivers otherwise obtained or
to be obtained by Buyer or Merger Subsidiary prior to the Effective Time.
3.04 GOVERNMENTAL AUTHORITIES; CONSENTS. Other than with respect to any
Buyer or Merger Subsidiary securities law reporting obligation, neither
Merger Subsidiary nor Buyer is required to submit any notice, report or other
filing with any governmental authority in connection with their respective
execution or delivery of this Agreement or the consummation of the
transactions contemplated hereby, and no consent, approval or authorization
of any governmental or regulatory authority or any other party or person is
required to be obtained by either Merger Subsidiary or Buyer in connection
with their respective execution, delivery and performance of this Agreement
or the transactions contemplated hereby.
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3.05 BROKERAGE. No third party shall be entitled to receive any
brokerage commissions, finder's fees, fees for financial advisory services or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of Buyer
or Merger Subsidiary other than the fees and expenses of Dain Bosworth
Incorporated, which fees and expenses will be paid by Buyer.
3.06 VALIDITY OF BUYER'S COMMON SHARES. The Buyer's Common Shares to be
issued to the Shareholders pursuant to Section 1.03 have been duly
authorized, and upon issuance, delivery and payment therefor will be validly
issued, fully paid and nonassessable.
ARTICLE IV
COVENANTS OF THE COMPANY
4.01 CONDUCT OF THE BUSINESS. The Company covenants and agrees that,
except as set forth in the Memorandum referenced in paragraph 2.05 of the
Disclosure Schedule, and except with respect to those transactions reflected
in that certain Capitalization and Bonus Summary delivered by the Company on
the date hereof, from the date hereof until the Effective Time, unless
otherwise consented to by Buyer in writing:
(a) The business of the Company shall be conducted only in, and
the Company shall not take any action except in, the ordinary course of its
business, on an arm's-length basis and in accordance in all material respects
with all applicable laws, rules and regulations and the Company's past custom
and practice;
(b) The Company shall not, directly or indirectly, do or permit to
occur any of the following: (i) issue or sell any additional shares of, or
any options, warrants, conversion privileges or rights of any kind to acquire
any shares of, any of its capital stock, (ii) sell, pledge, dispose of or
encumber any of its assets, except in the ordinary course of business; (iii)
amend or propose to amend its Articles of Incorporation or Bylaws; (iv)
split, combine or reclassify any outstanding Company Common Shares, or
declare, set aside or pay any dividend or other distribution payable in cash,
stock, property or otherwise with respect to Company Common Shares; (v)
redeem, purchase or acquire or offer to acquire any Company Common Shares or
other securities of the Company; (vi) acquire (by merger, exchange,
consolidation, acquisition of stock or assets or otherwise) any corporation,
partnership, joint venture or other business organization or division or
material assets thereof; (vii) incur any indebtedness for borrowed money or
issue any debt securities except the borrowing of working capital in the
ordinary course of business and consistent with past practice; (viii) permit
any accounts payable owed to trade creditors to remain outstanding more than
60 days; (ix) accelerate or defer beyond the normal collection cycle,
collection of accounts receivable; or (x) enter into or propose to enter
into, or modify or propose to modify, any agreement, arrangement or
understanding with respect to any of the matters set forth in this Section
4.01(b);
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(c) The Company shall not, directly or indirectly, (i) enter into
or modify any employment, severance or similar agreements or arrangements
with, or grant any bonuses, salary increases, severance or termination pay
to, any officers or directors or consultants; or (ii) in the case of
employees, officers or consultants, take any action with respect to the grant
of any bonuses, salary increases, severance or termination pay or with
respect to any increase of benefits payable in effect on the date hereof;
(d) The Company shall not adopt or amend any bonus, profit
sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, trust, fund or group
arrangement for the benefit or welfare of any employees or any bonus, profit
sharing, compensation, stock option, pension, retirement, deferred
compensation, employment or other employee benefit plan, agreement, trust,
fund or arrangements for the benefit or welfare of any director;
(e) The Company shall not cancel or terminate its current
insurance policies or cause any of the coverage thereunder to lapse, unless
simultaneously with such termination, cancellation or lapse, replacement
policies providing coverage equal to or greater than the coverage under the
canceled, terminated or lapsed policies for substantially similar premiums
are in full force and effect;
(f) The Company shall (i) use its best efforts to preserve intact
its business organization and goodwill, keep available the services of its
officers and employees as a group and maintain satisfactory relationships
with suppliers, distributors, customers and others having business
relationships with the Company; (ii) confer on a regular and frequent basis
with representatives of Buyer to report operational matters and the general
status of ongoing operations; (iii) not intentionally take any action which
would render, or which reasonably may be expected to render, any
representation or warranty made by it in this Agreement untrue at the
Closing; (iv) notify Buyer of any emergency or other change in the normal
course of the Company's business, prospects, or in the operation of the
Company's properties and of any governmental or third party complaints,
investigations or hearings (or communications indicating that the same may be
contemplated) if such emergency, change, complaint, investigation or hearing
would be material, individually or in the aggregate, to the business,
prospects, operations or financial condition of the Company or to the
Company's or Buyer's ability to consummate the transactions contemplated by
this Agreement; and (v) promptly notify Buyer in writing if the Company shall
discover that any representation or warranty made in this Agreement was when
made, or has subsequently become, untrue in any respect;
(g) The Company shall (i) file any Tax returns, elections or
information statements with respect to any liabilities for Taxes of the Company
or other matters relating to Taxes of the Company which pursuant to applicable
law must be filed prior to the Closing Date; (ii) promptly upon filing provide
copies of any such Tax returns, elections or information statements to Buyer;
(iii) make any such Tax elections or other discretionary
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positions with respect to Taxes taken by or affecting the Company only upon
prior consultation with and consent of Buyer; and (iv) not amend any Return;
and
(h) The Company shall not perform any act referenced by (or omit
to perform any act which omission is referenced by) the terms of Section 2.10.
4.02 ACCESS. Between the date hereof and the Closing Date, Buyer and
its authorized representatives (the "Buyer's Representatives") shall have
full access at all reasonable times and upon reasonable notice to the
offices, properties, books, records, officers, employees and other items of
the Company, and the work papers of Coopers & Lybrand L.L.P., the Company's
independent accountants, relating to work done by Coopers & Lybrand L.L.P.
with respect to the Company for each of the fiscal years ended December 31,
1993, 1994 and 1995, and otherwise provide such assistance as is reasonably
requested by Buyer in order that Buyer may have a full opportunity to make
such investigation and evaluation as it shall reasonably desire to make of
the business and affairs of the Company. In addition, as promptly as
possible after the parties have made a public announcement of the
transactions contemplated by this Agreement in accordance with paragraph
10.01 below, representatives of Buyer and the Company shall jointly meet with
specified customers of the Company as determined by mutual agreement of the
parties. The purpose of such meetings will be to enable Buyer to assess the
likelihood that Buyer will retain the business conducted by the Company with
these customers after the Closing at such sales levels and on such other
terms and conditions as are satisfactory to Buyer.
4.03 REGULATORY FILINGS. As promptly as practicable after the execution
of this Agreement, the Company shall make or cause to be made all filings and
submissions under any laws or regulations applicable to the Company for the
consummation of the transactions contemplated herein. The Company will
coordinate and cooperate with Buyer in exchanging such information, will not
make any such filing without providing to Buyer a final copy thereof for its
review and consent at least two full business days in advance of the proposed
filing and will provide such reasonable assistance as Buyer may request in
connection with all of the foregoing.
4.04 CONDITIONS. The Company shall take all commercially reasonable
actions necessary or desirable to cause the conditions set forth in Section
6.01 to be satisfied and to consummate the transactions contemplated herein
as soon as reasonably possible after the satisfaction thereof (but in any
event within three business days of such date).
4.05 NO NEGOTIATIONS, ETC. The Company shall not, directly or indirectly,
through any officer, director, agent or otherwise, solicit, initiate or
encourage submission of any proposal or offer from any person or entity
(including any of its or their officers or employees) relating to any
liquidation, dissolution, recapitalization, merger, consolidation or acquisition
or purchase of all or a material portion of the assets of, or any equity
interest in, the Company or other similar transaction or business combination
involving the Company, or participate in any
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negotiations regarding, or furnish to any other person any information with
respect to, or otherwise cooperate in any way with, or assist or participate
in, facilitate or encourage, any effort or attempt by any other person or
entity to do or seek any of the foregoing. The Company shall promptly notify
Buyer if any such proposal or offer, or any inquiry from or contact with any
person with respect thereto, is made and shall promptly provide Buyer with
such information regarding such proposal, offer, inquiry or contact as Buyer
may request.
ARTICLE V
COVENANTS OF BUYER
Buyer covenants and agrees with the Company as follows:
5.01 REGULATORY FILINGS. As promptly as practicable after the execution
of the Agreement, Buyer shall make or cause to be made all filings and
submissions under any laws or regulations applicable to Buyer for the
consummation of the transactions contemplated herein. Buyer will coordinate
and cooperate with the Company in exchanging such information, will not make
any such filing without providing the Company with a final copy thereof at
least two full business days in advance of the proposed filing and will
provide such reasonable assistance as the Company may request in connection
with all of the foregoing.
5.02 CONDITIONS. Buyer shall take all commercially reasonable actions
necessary or desirable to cause the conditions set forth in Section 6.02 to
be satisfied and to consummate the transactions contemplated herein as soon
as reasonably possible after the satisfaction thereof (but in any event
within three business days of such date).
5.03 RELEASE OF GUARANTEES. Buyer will use its reasonable best efforts
to obtain releases of any personal guarantees given by any Shareholder in
connection with the Company's current revolving line of credit or any real or
personal property lease. Buyer shall not, however, be required to agree to
change the terms or conditions of any such debt obligations. To the extent
such guarantees cannot be released, Buyer shall indemnify and hold the
relevant officers and Shareholders harmless with respect to such guarantees.
5.04 DIRECTOR AND OFFICER INDEMNIFICATION. Buyer will cause the
Surviving Corporation to indemnify and hold harmless each person who is now,
or has been at any time prior to the Effective Time, an officer or director
of the Company with respect to acts or omissions occurring prior to the
Effective Time (other than with respect to claims brought by Buyer pursuant
to Article IX hereof) to the extent and in the same manner as required by
Article VII of the Company's Articles of Incorporation and Article VI of the
Company's Bylaws, as the same were in effect prior to the Effective Time.
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ARTICLE VI
CONDITIONS TO CLOSING
6.01 CONDITIONS TO BUYER'S OBLIGATIONS. The obligation of Buyer to
consummate the transactions contemplated by this Agreement is subject to the
satisfaction of the following conditions on or before the Closing Date:
(a) The representations and warranties set forth in Article II
hereof shall be true and correct at and as of the Effective Time as though
then made and as though the Effective Time had been substituted for the date
of this Agreement throughout such representations and warranties (without
taking into account any disclosures by the Company of discoveries, events or
occurrences arising on or after the date hereof), except that any such
representation or warranty made as of a specified date (other than the date
hereof) shall only need to have been true on and as of such date;
(b) The Company shall have performed in all material respects all
of the covenants and agreements required to be performed and complied with by
them under this Agreement prior to the Closing;
(c) The Company shall have obtained, or caused to be obtained,
each consent and approval necessary in order that the transactions
contemplated herein not constitute a breach or violation of, or result in a
right of termination or acceleration of, or creation of any encumbrance on
any of the Company's assets pursuant to the provisions of, any agreement,
arrangement or undertaking of or affecting the Company or any license,
franchise or permit of or affecting the Company;
(d) All material governmental filings, authorizations and
approvals that are required for the consummation of the transactions
contemplated hereby will have been duly made and obtained;
(e) There shall not be threatened, instituted or pending any
action or proceeding, before any court or governmental authority or agency,
(i) challenging or seeking to make illegal, or to delay or otherwise directly
or indirectly restrain or prohibit, the consummation of the transactions
contemplated hereby or seeking to obtain material damages in connection with
such transactions, (ii) seeking to prohibit direct or indirect ownership or
operation by Buyer of all or a material portion of the business or assets of
the Company and its subsidiaries, or to compel Buyer or any of its
subsidiaries or the Company to dispose of or to hold separately all or a
material portion of the business or assets of Buyer and its subsidiaries or
of the Company, as a result of the transactions contemplated hereby; (iii)
seeking to invalidate or render unenforceable any material provision of this
Agreement or any of the other agreements attached as exhibits hereto
(collectively, the "Related Agreements"), or
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(iv) otherwise relating to and materially adversely affecting the
transactions contemplated hereby;
(f) There shall not be any action taken, or any statute, rule,
regulation, judgment, order or injunction enacted, entered, enforced,
promulgated, issued or deemed applicable to the transactions contemplated
hereby by any federal or state court, government or governmental authority or
agency, which would reasonably be expected to result, directly or indirectly,
in any of the consequences referred to in Section 6.01(e) hereof;
(g) Buyer shall not have discovered any fact or circumstance
existing as of the Closing Date which has not been disclosed to Buyer as of
the date hereof regarding the business, assets, properties, condition
(financial or otherwise), results of operations or prospects of the Company
which is, individually or in the aggregate with other such facts and
circumstances, materially adverse to the Company;
(h) There shall have been no damage, destruction or loss of or to
any property or properties owned or used by the Company, whether or not
covered by insurance, which, in the aggregate, has, or would be reasonably
likely to have, a material adverse effect on the Company;
(i) Buyer shall have received from counsel for the Company a
written opinion, dated as of the Closing Date, addressed to Buyer and
satisfactory to Buyer's counsel, in form and substance substantially as set
forth in Exhibit D;
(j) Buyer shall have received the individual agreement of each of
Thomas M. Kieffer ("Kieffer"), James Bonneville ("Bonneville"), Theodore
Stortz ("Stortz") and Mark Shirk ("Shirk") to indemnify and hold Buyer
harmless from and against any and all losses or liabilities from and after
the Effective Time through the expiration of any relevant statute of
limitations and related to or arising out of any breach by the Company of its
representation in Section 2.14, as the same shall be evidenced in an
indemnification agreement, in form and substance substantially as set forth
in Exhibit E, to be delivered at Closing by such Shareholders and to be
executed by them in their individual capacity (the "Indemnification
Agreement").
(k) Buyer shall have received the individual agreement of Kieffer
to indemnify and hold Buyer harmless from and against any and all losses or
liabilities from and after the Effective Time through the expiration of any
relevant statute of limitations and related to or arising out of the
transactions described in paragraph (m) immediately below, as the same shall
be evidenced in an indemnification agreement, in form and substance
substantially as set forth in Exhibit F, to be delivered at Closing by
Kieffer and to be executed by him in his individual capacity (the "Kieffer
Indemnification Agreement").
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(l) On the Closing Date, the Company shall have delivered to Buyer
all of the following:
(i) A certificate of the President of the Company, dated the
Closing Date, stating that the conditions precedent set forth in
subsections (a) and (b) above have been satisfied;
(ii) copies of the third party and governmental consents and
approvals referred to in subsections (c) and (d) above;
(iii) the Company's minute books, stock transfer records,
corporate seal and other materials related to the Company's corporate
administration;
(iv) resignations (effective as of the Closing Date) from such
of the Company's officers and members of the Company's Board of
Directors as Buyer shall have requested prior to the Closing Date;
(v) a copy of the Articles of Incorporation of the Company,
certified by the Secretary of State of the State of Minnesota, and
Certificates of Good Standing from the Secretaries of State of the
States of Minnesota and Iowa evidencing the good standing of the
Company in each such jurisdiction;
(vi) a copy of the Bylaws of the Company; along with
certificates executed on behalf of the Company by its corporate
secretary certifying to Buyer that such copy is a true, correct and
complete copies of such bylaws and that such bylaws were duly
adopted and have not been amended or rescinded;
(vii) an executed copy of each of the Related Agreements,
including without limitation the Employment Agreements and
Noncompetition Agreements (as defined in Section 8.01);
(viii) a copy of the text of the resolutions adopted by the
Board of Directors and Shareholders of the Company authorizing the
execution, delivery and performance of this Agreement and the
consummation of all of the transactions contemplated by this
Agreement, along with certificates executed on behalf of the Company
by its corporate secretary certifying to Buyer that such copy is a
true, correct and complete copies of such resolutions and that such
resolutions were duly adopted and have not been amended or rescinded;
(ix) incumbency certificates executed on behalf of the Company
by its corporate secretary certifying the signature and office of
each officer executing this Agreement;
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(x) a certificate of the President of the Company along with a
Capitalization and Bonus Summary reflecting the transactions
identified in the Memorandum included within Exhibit C, dated the
Closing Date, and attesting to the accuracy of such summary; and
(xi) such other certificates, documents and instruments as Buyer
reasonably requests related to the transactions contemplated hereby.
(m) On or prior to the Closing, the Company shall have completed a
spin-off of all of the assets and liabilities of its Connect Education Services
Division (the "Division") into CES Services, Inc., a wholly owned subsidiary of
the Company and shall have completed the sale of all of the capital stock of
CES Services, Inc., to Kieffer;
(n) Completion by Buyer of a full legal and business due diligence
examination of the Company, the result of which shall be satisfactory to
Buyer in its sole discretion;
(o) Receipt of approval of the respective Boards of Directors of
each of Merger Subsidiary and Buyer;
(p) Receipt by Buyer of a clearance certificate or similar
document(s) which may be required by any state taxing authority in order to
relieve Buyer of any obligation to withhold any portion of the Merger
Consideration;
(q) Since January 1, 1996 (and other than with respect to former
employees of the Division) the total number of the Company's management,
sales, and technical employees shall not have been reduced by more than five
percent (5%) in the aggregate and from the date hereof through the Closing
Date no more than fifteen of such employees shall have either (i) terminated
their employment with the Company, (ii) refused to accept employment with
Buyer, in the event such employment is offered to them, or (iii) otherwise
expressed any indication of their intent not to remain in the employ of the
Company following the Closing;
(r) Completion, to Buyer's sole and absolute satisfaction, of the
due diligence interviews with certain specified customers of the Company (as
determined by mutual agreement of the parties), the purpose of which will be
to enable Buyer to assess the likelihood that Buyer will retain the business
conducted by the Company with these customers after the Closing at such sales
levels and on such other terms and conditions as are satisfactory to Buyer;
(s) Buyer shall have received a fairness opinion from Dain Bosworth
Incorporated to the effect that the Merger Consideration to be paid by Buyer
is fair from a financial point of view; and
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(t) No more than aggregate of 1.5% of Company Common Shares
outstanding on the date of this Agreement shall represent Dissenting Shares.
6.02 CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of the
Company to consummate the transactions contemplated by this Agreement are
subject to the satisfaction of the following conditions on or before the
Closing Date:
(a) The representations and warranties set forth in Article III
hereof will be true and correct at and as of the Effective Time as though
then made and as though the Effective Time had been substituted for the date
of this Agreement throughout such representations and warranties;
(b) Buyer shall have performed in all material respects all the
covenants and agreements required to be performed and complied with by it
under this Agreement prior to the Closing;
(c) All material governmental filings, authorizations and
approvals that are required for the consummation of the transactions
contemplated hereby will have been duly made and obtained;
(d) There shall not be threatened, instituted or pending any
action or proceeding, before any court or governmental authority or agency,
(i) challenging or seeking to make illegal, or to delay or otherwise directly
or indirectly restrain or prohibit, the consummation of the transactions
contemplated hereby or seeking to obtain material damages in connection with
such transactions, (ii) seeking to invalidate or render unenforceable any
material provision of this Agreement or any of the Related Agreements, or
(iii) otherwise relating to and materially adversely affecting the
transactions contemplated hereby;
(e) There shall not be any action taken, or any statute, rule,
regulation, judgment, order or injunction, enacted, entered, enforced,
promulgated, issued or deemed applicable to the transactions contemplated
hereby by any federal or state court, government or governmental authority or
agency, which would reasonably be expected to result, directly or indirectly,
in any of the consequences referred to in Section 6.02(d) hereof;
(f) The Company shall have received from counsel for Buyer a
written opinion, dated as of the Closing Date, addressed to the Company, and
satisfactory to the Company's counsel, in form and substance substantially as
set forth in Exhibit G; and
(g) On the Closing Date, Buyer will have delivered to the Company
all of the following:
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(i) a certificate of appropriate officer(s) of Buyer, dated
the Closing Date, stating that the conditions precedent set forth in
subsections (a) and (b) above have been satisfied;
(ii) an executed copy of each of the Related Agreements;
(iii) a copy of each of (X) the text of the resolutions
adopted by the board of directors of Buyer and Merger Subsidiary
authorizing the execution, delivery and performance of this Agreement and
the consummation of all of the transactions contemplated by this Agreement
and (Y) the bylaws of Buyer, along with certificates executed on behalf of
Buyer by its corporate secretary certifying to the Company that such
copies are true, correct and complete copies of such resolutions and
bylaws, respectively, and that such resolutions and bylaws were duly
adopted and have not been amended or rescinded; and
(iv) incumbency certificates executed on behalf of Buyer and
Merger Subsidiary by their respective corporate secretaries certifying the
signature and office of each officer executing this Agreement or any of
the Related Agreements.
ARTICLE VII
TERMINATION AND REMEDIES
7.01 TERMINATION. This Agreement may be terminated at any time prior to
the Closing:
(a) by the mutual consent of Buyer and the Company;
(b) by either Buyer or the Company if there has been a material
misrepresentation, breach of warranty or breach of covenant on the part of
the other in the representations, warranties and covenants set forth in this
Agreement;
(c) by Buyer or the Company if the transactions contemplated
hereby have not been consummated by June 30, 1996; provided that, neither
party will be entitled to terminate this Agreement pursuant to this Section
7.01(c) if its willful breach of this Agreement has prevented the
consummation of the transactions contemplated hereby; or
(d) by Buyer if, after the date hereof, there shall have been a
material adverse change in the assets, financial condition, operating
results, customer, employee or supplier relations, business condition or
prospects of the Company or if, after the date hereof, an event shall have
occurred which, so far as reasonably can be foreseen, would result in any
such change, except to the extent such change is directly caused by Buyer.
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7.02 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either Buyer or the Company as provided in Section 7.01, this
Agreement shall become void and there shall be no liability on the part of
either Buyer or the Company or their respective shareholders, officers, or
directors, except that Sections 10.01 and 10.02 hereof shall survive
indefinitely, and except with respect to willful breaches of this Agreement
prior to the time of such termination.
7.03 ARBITRATION. Any dispute among Merger Subsidiary, Buyer and the
Company under this Agreement shall be resolved by arbitration by an
arbitrator selected under the rules of the American Arbitration Association
(located in Minneapolis, Minnesota) and the arbitration shall be conducted in
that same location under the rules of said Association. Merger Subsidiary,
Buyer and the Company shall each be entitled to present evidence and argument
to the arbitrator. The arbitrator shall have the right only to interpret and
apply the provisions of this Agreement and may not change any of its
provisions. The arbitrator shall permit reasonable pre-hearing discovery of
facts, to the extent necessary to establish a claim or a defense to a claim,
subject to supervision by the arbitrator. The determination of the
arbitrator shall be conclusive and binding upon the parties and judgment upon
the same may be entered in any court having jurisdiction thereof. The
arbitrator shall give written notice to the parties stating his
determination, and shall furnish to each party a signed copy of such
determination. Notwithstanding the foregoing, Buyer shall not be required to
seek arbitration regarding any breach of the Noncompetition Agreements or
Employment Agreements contemplated by Section 8.01 hereof.
7.04 REMEDIES. It is understood that, in the event of any party's
breach of its respective agreements as herein provided or any party's failure
to perform the covenants set forth in this Agreement or any of the Related
Agreements required to be performed by it, the measure of damages at law to
the affected party will be difficult to ascertain and the remedy at law may
be inadequate. Accordingly, it is specifically agreed that either Merger
Subsidiary, Buyer or the Company, as the case may be, shall be entitled to
the remedy of specific performance to enforce the terms and conditions of
this Agreement.
7.05 LITIGATION EXPENSE. In the event any party hereto is made or shall
become a party to any litigation (including arbitration) commenced by or
against the other involving the enforcement of any of the rights or remedies
of such party, or arising on account of a default of the other party in its
performance of any of the other party's obligations hereunder, then each
party shall pay and be solely responsible for any and all costs incurred by
it in connection with such litigation, including the costs, fees and expenses
of any and all attorneys' fees.
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ARTICLE VIII
ADDITIONAL AGREEMENTS
8.01 NON-COMPETITION AND EMPLOYMENT AGREEMENTS. On the Closing Date,
each of Kieffer, Bonneville, Shirk, Stortz, Scott Swanson, Wayne Carlson,
Thomas Suter, Tim Blanski, Brian Harter, Jim Rohde, Jon Luetgers, Joseph
Golemo, Sherry Lee, Marvin Johnson and Glenn Cummins will execute and deliver
to Buyer Employment and Non-competition Agreements substantially in the form
attached hereto as Exhibit I (the "Employment Agreement").
8.02 POWERS OF ATTORNEY. As of the Effective Time, each Shareholder
shall, by virtue of the approval of this Agreement by the requisite vote of
the Shareholders, be deemed, for themselves and their respective heirs,
representatives and successors, to have constituted and appointed, Kieffer,
Bonneville and Stortz, as their agent and attorney-in-fact (each an
"Attorney-in-Fact"), to take all action required or permitted under the
Escrow Agreement or herein with respect to the interests and rights of the
Shareholders. In the event of the death, physical or mental incapacity or
resignation of an Attorney-in-Fact, a replacement may be appointed as
provided in the Escrow Agreement.
Buyer may, for all purposes of this Agreement, assume and treat every
notice or other action directed to or performed by the Attorney-in-Fact as if
such notice or other action has been directed to or performed by each
Shareholder.
8.03 SECURITIES AND BLUE SKY LAWS. Buyer shall take such steps as may
be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable to the issuance of Buyer's Common Shares
hereunder.
8.04 TAX MATTERS. Buyer and the Company and each Shareholder (by
virtue of the approval of this Agreement by the requisite vote of the
Shareholders) shall cooperate fully, as and to the extent reasonably
requested by the other party, in connection with the filing of Tax Returns
and any audit, litigation or other proceedings with respect to Taxes. Such
cooperation shall include the retention and (upon the other party's request)
the provision of records and information which are reasonably relevant to any
such audit, litigation or other proceeding and making employees available on
a mutually convenient basis to provide additional information and explanation
of any material provided hereunder.
ARTICLE IX
SURVIVAL; INDEMNIFICATION
9.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Notwithstanding any
investigation made by or on behalf of any of the parties hereto or the results
of any such investigation and
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notwithstanding the participation of such party in the Closing, the
representations and warranties contained in Article II and Article III hereof
shall survive the Closing for a period of three (3) years following the
Closing Date, except with respect to claims specifically raised by the
aggrieved party or parties in one or more written notices given to the
allegedly offending party or parties prior to the third anniversary of the
Closing Date, and such claims may continue to be asserted by the aggrieved
party or parties after that date, provided that claims based upon any alleged
breach of a representation or warranty contained in Section 2.14 may be
brought at any time on or prior to the expiration of any relevant statute of
limitations governing the underlying claim.
9.02 INDEMNIFICATION OF BUYER. As of the Effective Time, each
Shareholder (other than a holder of Dissenting Shares), by virtue of the
approval of this Agreement by the requisite vote of the Shareholders, agrees
that the Escrow Shares to which such Shareholder becomes entitled upon
consummation of the Merger (disregarding for this purpose any fractional
shares) shall be placed in escrow, as partial security for the performance of
the Shareholders' indemnification obligations hereunder, as provided for in
the Escrow Agreement. The form of letter of transmittal to be signed by each
Shareholder contemplated by Section 1.06 shall specifically authorize the
Escrow Agent from time to time to transfer all or any portion of the
certificates so deposited in satisfaction of such Shareholder's
indemnification obligation hereunder. In connection therewith, Buyer, and
each of Buyer's subsidiaries, and their respective officers, directors,
employees, agents, affiliates and shareholders will be entitled to be
indemnified and held harmless against (subject to the limitations set forth
in Section 9.04 and 9.07 below) and in respect of: (i) any and all losses,
damages or deficiencies (whether as a result of a direct claim by Buyer
against the Company, a third party claim against Buyer or otherwise)
resulting to Buyer from any and all breaches of representations, warranties,
covenants or other terms of this Agreement by the Company made or contained
in this Agreement or in any certification, list, document, exhibit or
schedule delivered to Buyer under or in connection with this Agreement or the
transactions contemplated herein; (ii) all losses (other than any ordinary
course operating losses reflected in the Annual and the Latest Financial
Statements), costs, damages, liabilities, obligations and reasonable expenses
related to or arising out of operation of the Company prior to the Closing
Date; and (iii) all costs and expenses incident to any and all actions,
suits, proceedings, claims, demands, assessments or judgments in respect of
sections (i) and (ii) of this Section 9.02, regardless of the merit thereof,
including Buyer's reasonable legal and accounting fees and expenses (whether
incident to the foregoing or to Buyer's enforcement of said rights of defense
and indemnity).
9.03 PROCEDURE FOR INDEMNIFICATION OF BUYER.
(a) If any action, suit or proceeding shall be commenced against Buyer or
any claim, demand or assessment be asserted against Buyer in respect of which
Buyer proposes to demand indemnification, Buyer shall notify the Attorney-in-
Fact to that effect with reasonable promptness. Shareholders shall thereafter,
severally, but not jointly, reimburse Buyer for all of
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Buyer's expenses, as and when they are incurred, subject to Sections 9.04 and
9.07 and Buyer shall have recourse to the Escrow Shares pursuant to the terms
of the Escrow Agreement for reimbursement of all such amounts or, in the
event the total value of Escrow Shares then remaining in the Escrow Account
is less than the amount of Buyer's expenses, by offset against any Earn Out
Consideration that may then be owing or shall thereafter become owing by
Buyer to any Shareholder pursuant to Section 1.07 hereof; and
(b) In the event of any claim by Buyer under the foregoing
indemnification provisions (or any others provided herein), Buyer shall
notify the Attorney-in-Fact as provided above and shall assert its right to
reimbursement of such amount by release of Escrow Shares pursuant to the
Escrow Agreement having an aggregate value, calculated on the basis of the
fair market value of Buyer Common Shares (as evidenced by the closing sale
price for such shares on the trading day immediately preceding the date of
release of the Escrow Shares from Escrow) equal to the amount of Buyer's
damages or, in the event the total value of Escrow Shares then remaining in
the Escrow Account is less than the amount of Buyer's damages, by offset
against any Earn Out Consideration that may then be owing or shall thereafter
become owing by Buyer to any Shareholder pursuant to Section 1.07 hereof.
9.04 LIMIT.
(a) In the event the Shareholders become liable to Buyer under the
provisions of this Article IX, and except as otherwise provided in an
Indemnification Agreement or the Kieffer Indemnification Agreement, the
aggregate liability of all Shareholders (X) from and after the Effective Time
and through the second anniversary of the Closing Date shall not exceed the
sum of (A) the total value, from time to time, of the Escrow Shares held by
the Escrow Agent and (B) the amount of Earn Out Consideration to which the
Shareholders may become entitled pursuant to Section 1.07 hereof and (Y) from
and after the second anniversary of the Closing Date and through the third
anniversary of the Closing Date, the aggregate liability of all Shareholders
shall not exceed the amount of Earn Out Consideration to which the
Shareholders may become entitled pursuant to Section 1.07 hereof (the
"Indemnification Cap").
(b) Notwithstanding the foregoing, (i) until the second anniversary of
the Closing Date, Buyer's right to reimbursement under this Article IX must
first be satisfied by recourse to the value of the Escrow Shares before it
may offset its right to reimbursement hereunder against any Earn Out
Consideration that may become owing pursuant to Section 1.07 hereof; (ii)
Earn Out Consideration which is actually paid over by Buyer to the
Shareholders shall not thereafter be available to satisfy Buyer's right to
reimbursement hereunder; (iii) following the second anniversary of the
Closing Date or upon the earlier exhaustion of the value of the Escrow
Shares, (A) Buyer shall be entitled to offset any indemnifiable loss
hereunder, on a dollar for dollar basis, against Earn Out Consideration which
is earned by the Shareholders pursuant to Section 1.07 hereof, but with
respect to which Buyer has not yet made payment or (B) to the extent no such
Earn Out Consideration is owing, Buyer shall thereafter be entitled to
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reduce, on a dollar for dollar basis, the aggregate amount of Earn Out
Consideration to which Shareholders may thereafter become entitled pursuant
to Section 1.07 hereof, by the amount of the indemnifiable loss; and (iv)
Escrow Shares which have been distributed to the Shareholders shall not
thereafter be available to satisfy Buyer's right to reimbursement hereunder.
9.05 INDEMNIFICATION OF THE COMPANY. Buyer hereby agrees to defend,
indemnify and hold the Company harmless from, against and in respect of: (i)
any and all losses, damages or deficiencies (whether as a result of a direct
claim by the Company against Buyer, a third party claim against the Company
or otherwise) resulting from any and all breaches of representations,
warranties, covenants or other terms of this Agreement by Buyer made or
contained in this Agreement or in any certification, list, document or
exhibit delivered by Buyer under or in connection with this Agreement or the
transactions contemplated herein; (ii) all costs, damages, liabilities,
obligations and reasonable expenses related to or arising out of Buyer's
operation of the Company on or after the Closing Date; and (iii) all costs
and expenses incident to any and all actions, suits, proceedings, claims,
demands, assessments or judgments in respect of sections (i) and (ii) of this
Section 9.05, regardless of the merit thereof, including the Company's
reasonable legal and accounting fees and expenses (whether incident to the
foregoing or to the Company's enforcement of said rights of defense and
indemnity).
9.06 PROCEDURE FOR INDEMNIFICATION OF THE COMPANY. If any such action,
suit or proceeding shall be commenced against the Company or any such claim,
demand or assessment be asserted against the Company in respect of which the
Company proposes to demand defense and indemnification, Buyer shall be
notified to that effect with reasonable promptness and shall thereafter have
the right, but not the obligation, to assume the entire control of the
defense, compromise or settlement thereof, including, at its own expense,
employment of counsel satisfactory to the Company and, in connection
therewith, the Company shall cooperate fully to make available to Buyer all
pertinent information under its control. If Buyer does not promptly notify
the Company that Buyer will assume the entire control of such defense, Buyer
shall thereafter reimburse the Company for all of its reasonable expenses (as
described herein) for such defense, as and when they are incurred.
9.07 INDEMNIFICATION THRESHOLD. Neither the Shareholders on the
one hand, nor Buyer on the other hand, shall have any indemnification
obligation under this Agreement unless and until the aggregate amount of all
losses, damages, costs, expenses and deficiencies incurred by the aggrieved
party reaches $100,000 (the "Threshold Amount"), at which time the offending
party or parties shall be liable in full for all losses, damages, costs,
expenses and deficiencies in excess of the Threshold Amount; PROVIDED,
HOWEVER, that there shall be no Threshold Amount with respect to any losses,
damages, costs, expenses or deficiencies arising out of claims based on (i) a
violation of the representations contained in Section 2.14, (ii) claims based
on or arising out of any of (W) the Steven Kraft workers' compensation claim
set forth in paragraph 2.17 of the Disclosure Schedule; (X) the Scott
Robertson wrongful termination claim set forth in paragraph 2.17 of the
Disclosure Schedule; (Y) the Connect Computer Company 401(k) Profit Sharing
Plan administered by Lincoln National and set forth
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in paragraph 2.20 of the Disclosure Schedule and (Z) the Connect Computer
Company Deferred Compensation Plan and set forth in paragraph 2.20 of the
Disclosure Schedule, and (iii) claims based on fraud or intentional
misrepresentation.
ARTICLE X
MISCELLANEOUS
10.01 PRESS RELEASES AND ANNOUNCEMENTS. Prior to the Closing Date,
no party hereto shall issue any press release (or make any other public
announcement) related to this Agreement or the transactions contemplated
hereby or make any announcement to the employees, customers or suppliers of
the Company without prior written approval of either the Company or Buyer, as
the case may be, except as may be necessary, in the opinion of counsel to the
party seeking to make disclosure, to comply with the requirements of this
Agreement or applicable law. If any such press release or public
announcement is so required, the party making such disclosure shall consult
with the other party prior to making such disclosure, and the parties shall
use all reasonable efforts, acting in good faith, to agree upon a text for
such disclosure which is satisfactory to both parties.
10.02 EXPENSES. Except as otherwise expressly provided for herein,
the Company and Buyer will pay all of their own expenses (including
attorneys' and accountants' fees) in connection with the negotiation of this
Agreement, the performance of their respective obligations hereunder and the
consummation of the transactions contemplated by this Agreement (whether
consummated or not). Notwithstanding the foregoing, Buyer agrees to pay or
permit the Company to pay (in either case, in Buyer's sole discretion) the
reasonable fees and expenses of the Company's legal counsel and accountants
incurred in connection with the negotiation of this Agreement in an aggregate
amount not to exceed $150,000.
10.03 FURTHER ASSURANCES. The Company agrees that, on and after the
Closing Date, it shall take all appropriate action and execute any documents,
instruments or conveyances of any kind which may be reasonably necessary or
advisable to carry out any of the provisions hereof.
10.04 AMENDMENT AND WAIVER. This Agreement may not be amended or
waived except in a writing executed by the party against which such amendment
or waiver is sought to be enforced. No course of dealing between or among
any persons having any interest in this Agreement will be deemed effective to
modify or amend any part of this Agreement or any rights or obligations of
any person under or by reason of this Agreement.
10.05 NOTICES. All notices, demands and other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when personally delivered or
mailed by first class mail, return receipt requested, or when receipt is
acknowledged, if sent by facsimile, telecopy or other
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electronic transmission device. Notices, demands and communications to Buyer
and the Company will, unless another address is specified in writing, be
sent to the address indicated below:
NOTICES TO BUYER: WITH A COPY TO:
Norstan, Inc. Maslon Edelman Borman & Brand,
609 North Highway 169 a Professional Limited Liability Partnership
Plymouth, MN 55441 90 South Seventh Street
Attention: Paul Lidsky Minneapolis, Minnesota 55402
Telecopy: (612) 513-4537 Attention: Neil I. Sell, Esq.
Telecopy: (612) 672-8397
NOTICES TO THE COMPANY: WITH A COPY TO:
Connect Computer Company Lommen Nelson Cole & Stageberg, P.A.
7101 Metro Boulevard 1800 IDS Center
Minneapolis, MN 55439 Minneapolis, MN 55402
Attention: Thomas Kieffer Attention: Roger V. Stageberg, Esq.
Telecopy: (612) 946-0390 Telecopy: (612) 339-8064
10.06 ASSIGNMENT. This Agreement and all of the provisions hereof
will be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, except that neither this
Agreement nor any of the rights, interests or obligations hereunder may be
assigned by either party hereto without the prior written consent of the
other party hereto, except that Buyer may assign any and all rights it has
under this Agreement or any Related Agreement to a wholly owned subsidiary of
Buyer without the consent of any other party.
10.07 SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
10.08 COMPLETE AGREEMENT. This Agreement and the Related Agreements
and other exhibits hereto, the Disclosure Schedule and the other documents
referred to herein contain the complete agreement between the parties and
supersede any prior understandings, agreements or representations by or
between the parties, written or oral, which may have related to the subject
matter hereof in any way.
10.09 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, any one of which need not contain the signatures of more than
one party, but all such counterparts taken together will constitute one and
the same instrument.
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10.10 GOVERNING LAW. The internal law, without regard to conflicts
of laws principles, of the State of Minnesota will govern all questions
concerning the construction, validity and interpretation of this Agreement
and the performance of the obligations imposed by this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
NORSTAN, INC.
By /s/ Richard Cohen
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Its
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CCC ACQUISITION SUBSIDIARY, INC.
By /s/ Richard Cohen
------------------------------------------
Its
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CONNECT COMPUTER COMPANY
By /s/ Thomas M. Kieffer
------------------------------------------
Its
--------------------------------------
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CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Norstan, Inc. on Form S-8 relating to the 1986 Long-Term Incentive Plan of
Norstan, Inc. (File Nos. 33-30323 and 33-72928), the 1990 Employee Stock
Purchase and Bonus Plan of Norstan, Inc. (File Nos. 33-32310, 33-44470 and
33-72926), the 1995 Long-Term Incentive Plan of Norstan, Inc. (File No.
33-62957), and the Restated Non-Employee Directors' Stock Plan of Norstan, Inc.
(File No. 33-62971) of our report dated February 20, 1996, except as to Note 8,
Subsequent Event, for which the date is March 1, 1996, on our audits of the
financial statements of Connect Computer Company as of December 31, 1995 and
1994, and for the years then ended, which report is included in this Form 8-K.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
June 19, 1996