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Securities and Exchange Commission
WASHINGTON, D.C. 20549
Form 8-K
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 22, 1997
WATSON GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation)
0-16011 95-2873758
(Commission File No.) (IRS Employer Identification No.)
32-B Mauchly
Irvine, California 92718
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714)-727-4020
N.A.
(Former name or former address, if changed since last report.)
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Item 1. Changes in Control of Registrant
See Item 2 below, which is incorporated herein by this reference.
Item 2. Acquisition or Disposition of Assets
On May 22, 1997, Watson General Corporation (the "Company") acquired
all of the outstanding capital stock of USTMAN Industries, Inc. ("USTMAN"), a
subsidiary of NDE Environmental Corporation ("NDE"), pursuant to a Stock
Purchase Agreement between the Company and NDE. USTMAN provides statistical
inventory reconciliation services for owners of underground storage tanks. The
purchase price was $5.25 million in cash and a $500,000 promissory note. The
note bears interest at the rate of 8.5% per annum, payable quarterly, with all
principal due on June 1, 1998. Repayment of the note has been guaranteed by
USTMAN and by two other subsidiaries of the Company, Watson Systems, Inc. and
EnvirAlert, Inc. Immediately prior to the closing, all cash and cash
equivalents of USTMAN on the close of business on May 21, 1997 were transferred
to NDE. In addition, the Stock Purchase Agreement provides for an adjustment to
the purchase price within 60 days after the closing to reflect the difference,
if any, between the working capital balance of USTMAN at the closing (after
taking into account the transfer of cash and cash equivalents to NDE on May 21)
and $424,271 (representing the working capital balance of USTMAN as of December
31, 1996). The amount of consideration for USTMAN was determined by negotiation
based upon the customer base, licenses and revenues of USTMAN. A copy of the
Stock Purchase Agreement is attached to this Form 8-K as Exhibit 2.1 hereto and
is incorporated herein by this reference.
The Company obtained $7,000,000 of financing for the USTMAN
acquisition and for working capital from Sagaponack Partners, L.P.
("Sagaponack"), a private investment firm based in San Francisco and New York,
and its foreign affiliate, Sagaponack International Partners, L.P.
(collectively, the "Investors"), pursuant to a Securities Purchase Agreement
dated May 22, 1997. Senior Subordinated Notes in the aggregate principal
amount of $7,000,000 were issued to the Investors, and are due and payable in
five years, subject to mandatory prepayment in certain circumstances. Interest
on the notes is 10% per annum for the first year, payable quarterly, and
increases by one percent each year during the term of the Notes, subject to
further adjustment in specified instances. The notes are secured by the assets
of the Company, including the stock of its subsidiaries, and by the assets of
the principal subsidiaries of the Company, including USTMAN and Watson Systems,
Inc. The notes are subject to mandatory prepayment in the event that the
Company completes a public offering of newly-issued shares of Common Stock (a
"Stock Offering"), or in the event that one or more persons (other than the
Investors or their transferees) acquire at least 50% of the outstanding Common
Stock or of the operating assets of the Company (a "Company Sale"). In
addition, the Company must apply toward reduction of principal at least 50% of
any excess cash (defined as cash and cash equivalents of the Company existing
at the end of a calendar quarter after expenses of the Company have been paid
for or provided for and less any sums which the Company in good faith has
reserved for expenditures in the next two calendar quarters). The Company may
elect to prepay all or a portion (in multiples of $250,000) of the outstanding
principal balance at any time.
During the time that the Senior Subordinated Notes remain outstanding,
the Company is subject to a number of negative covenants, as set forth in the
Securities Purchase Agreement. In addition, upon the occurrence of an Event of
Default, as defined in the Securities Purchase Agreement, the Senior
Subordinated Notes can become immediately due and payable.
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Pursuant to the Securities Purchase Agreement, Sagaponack was issued
7,304,520 shares of the Company's Common Stock, representing 40% of the total
number of shares of Common Stock outstanding immediately after such issuance,
and warrants to purchase shares of Common Stock in an amount sufficient, upon
the exercise of any outstanding options and warrants, for Sagaponack to
maintain its 40% ownership of the outstanding Common Stock of the Company.
Such warrants will be at the same price and term as the options or warrants
exercised by third parties. The Company has granted Sagaponack two demand
registration rights with respect to its Common Stock, warrants and shares
issuable upon the exercise of warrants, as well as "piggyback" registration
rights with respect to such securities.
If, upon the occurrence of the first Event of Liquidity (as defined),
the Company's cumulative adjusted Earnings Before Taxes, Depreciation and
Appreciation (EBTDA) per share is not greater than 90% of the amount calculated
for such date on certain projections provided to the Investors, then the
Company will be obligated to issue additional shares of Common Stock to
Sagaponack in an amount sufficient to increase the percentage of the Company's
Common Stock issued to Sagaponack from 40% to the Adjusted Base Ownership
Percentage, as defined. However, in no event shall the Adjusted Base
Ownership Percentage be greater than 49.999%. If the Company pays all
principal of and interest on the Senior Subordinated Notes prior to October 30,
1998(other than where such repayment is required as a result of a Stock
Offering, Company Sale or acceleration of the indebtedness pursuant to the
Securities Purchase Agreement), then no adjustment pursuant to the foregoing
shall be required.
If, on a Warrant Adjustment Date (as defined), the Company's
performance is less than 70% of that anticipated at the time that the
Securities Purchase Agreement was executed, warrants to purchase shares of
Common Stock will be issued to the Investors based upon the amount of such
deficiency. The warrants issued will have an exercise price of $0.001 per
share and will be exercisable at any time. A "Warrant Adjustment Date" is
defined as the earlier of (a) the third anniversary of the date of the
Securities Purchase Agreement or such other date thereafter designated by the
Investors, (b) the date of a Stock Offering, and (c) a Company Sale.
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The Securities Purchase Agreement obligates the Company to cause
USTMAN to be merged into the Company immediately and to cause Watson Systems,
Inc. to be merged into the Company within 15 days after the closing. In
addition, the Company is obligated to sell Toxguard Fluid Technologies and
Toxguard Systems, Inc. as soon as possible.
Pursuant to the Securities Purchase Agreement, the Company has entered
into a five-year financial advisory agreement with Sagaponack Management Co.
Inc. ("SMC"), pursuant to which SMC has been engaged on an exclusive basis to
render financial advisory services to the Company. If, during the term of the
agreement, the Company determines to undertake a public or private sale of debt
or equity securities, other than a financing provided by SMC or its affiliated
entities, with respect to which the Company uses the services of a financial
intermediary, the Company has agreed to retain SMC as a co-managing underwriter
or placement agent if SMC is licensed to perform and is reasonably capable of
performing such services. In addition, if the Company during the term of the
agreement determines to undertake certain business transactions and requires the
services of a financial advisor, the Company shall retain SMC as the financial
advisor.
Pursuant to the Securities Purchase Agreement, the Company has entered
into a Company Agreement with the Investors pursuant to which the Company has
agreed that the Board of Directors will at all times consist of five members,
and that the Company will nominate to become members of the Board two persons
designated by the Investors and one person selected from a list of persons.
The Company also agreed to nominate Dan R. Cook as a member of the Board of
Directors. In addition, pursuant to a Shareholders Agreement entered into
among the Investors and certain shareholders of the Company, including Charles
A Watson, Ronald G. Crane and Dan R. Cook, the shareholders are obligated to
vote their shares during any election of directors of the Company for the two
nominees of the Investors and for the person nominated from the list of persons
specified in the Company Agreement, unless Investors have sufficient votes to
cause the election of such persons. Such obligation shall terminate at such
time as the aggregate number of shares of Common Stock owned by an Investor or
under the direct or indirect control of an Investor is less than 10% of the
total outstanding number of shares of Common Stock.
Upon the closing of the Securities Purchase Agreement Joseph L.
Christoffel, Dennis Mulligan, James Smathers, and Charles Watson resigned as
Directors of the Company. Ronald G. Crane as the sole remaining director
elected Barry Rosenstein, Marc Weisman, and Dan Cook to the Board. The then
Board elected Don Phillips as Director, in accordance with the Company
Agreement.
Copies of the Securities Purchase Agreement, Warrant Agreement, Stock
Pledge Agreement, Security Agreement, financial advisory agreement, Company
Agreement and Shareholders Agreement are attached to this Current Report on
Form 8-K as exhibits hereto and are incorporated herein by this reference.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
As of the date of filing of this Current Report on Form 8-K, it is
impracticable for the Registrant to provide the financial statements required
by this Item 7(a). In accordance with Item 7(a)(4) of Form 8-K, such financial
statements shall be filed by amendment to this Form 8-K no later that 60 days
after June 6, 1997.
(b) Pro Forma Financial Information.
As of the date of filing of this Current Report on Form 8-K, it is
impracticable for the Registrant to provide the pro forma financial information
required by this Item 7(b). In accordance with Item 7(b) of Form 8-K, such
financial statements shall be filed by amendment to this Form 8-K no later than
60 days after June 6, 1997.
(c) Exhibits.
Exhibit 10.1 Stock Purchase Agreement
Exhibit 10.2 Securities Purchase Agreement
Exhibit 10.3 Warrant Agreement
Exhibit 10.4 Stock Pledge Agreement
Exhibit 10.5 Security Agreement
Exhibit 10.6 Financial Advisory Agreement
Exhibit 10.7 Company Agreement
Exhibit 10.8 Shareholder Agreement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has dully caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Watson General Corporation
Date 6/6/97 By: /s/ Joseph L. Christoffel
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Joseph L. Christoffel,
Chief Financial Officer
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EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of
May 22, 1997, is entered into by and between Watson General Corporation, a
California corporation ("Buyer"), and NDE Environmental Corporation, a Delaware
corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller owns all of the outstanding capital stock
consisting of 1,000 shares of common stock represented by share certificate no.
3 in the name of Seller (the "Shares") of USTMAN Industries, Inc. ("USTMAN"), a
Delaware corporation with its principal place of business at 12265 W. Bayaud
Ave., Lakewood, CO 80225; and
WHEREAS, Buyer desires to acquire the Shares from Seller, and
Seller desires to sell the Shares to Buyer, upon the terms and subject to the
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the
respective representations, warranties, covenants, agreements and conditions
contained herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
The terms set forth below in this Article I shall have the
meanings ascribed to them below:
Affiliate: with respect to any person, means any person that
directly or indirectly controls, is controlled by or is under common control
with such person.
Applicable Law: means any and all federal, national, state,
regional, local, municipal or foreign laws, statutes, rules, regulations,
guidelines, ordinances, licenses, Permits or judicial or administrative
decisions of any country, or any political subdivision, agency,
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commission, official or court thereof having jurisdiction over Seller or
USTMAN.
best efforts: means a party's efforts in accordance with
reasonable commercial practice and without the incurrence of unreasonable
expense.
Business: means all of the business and operations conducted
by USTMAN.
Code: means the United States Internal Revenue Code of 1986,
as amended, or any amending or superseding Tax laws of the United States.
Environmental Law: means any applicable law (including common
law) regulating or prohibiting Releases into any part of the workplace or the
environment, or pertaining to the protection or improvement of natural
resources or wildlife, the environment or public and employee health and safety
including, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") (42 U.S.C. Section 9601 et seq.),
the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 et seq.),
the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.),
the Clean Water Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42
U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C.
Section 7401 et seq.), the Atomic Energy Act of 1954 (42 U.S.C. Section 2014 et
seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C.
Section 136 et seq.), the Occupational Safety and Health Act (29 U.S.C.
Section 651 et seq.) ("OSHA") and the regulations promulgated pursuant thereto,
and any such applicable state or local statutes, and the regulations
promulgated pursuant thereto, as such laws have been and may be amended or
supplemented.
Excluded Assets: shall mean (a) all cash and cash equivalents
of USTMAN at Closing and (b) amounts owed to USTMAN by other Affiliates of
Seller at Closing.
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Forms 8023-A: means IRS Form 8023-A (including the required
schedules thereto) and any other form required to be filed with any
jurisdiction so that such jurisdiction will recognize the Section 338(h)(10)
Election.
Hazardous Material: means any substance, material or waste
which is regulated pursuant to any Environmental Law by any public or
governmental authority in any jurisdiction in which Seller or USTMAN conducts
business, or the United States, including, without limitation, any material or
substance which is defined as a "hazardous waste," "hazardous material,"
"hazardous substance," "extremely hazardous waste," "restricted hazardous
waste," "contaminant," "toxic waste," "toxic substance," "source material,"
"special nuclear material," "byproduct material," "high-level radioactive
waste," "low-level radioactive waste" or "spent nuclear material" under any
provision of Environmental Law.
IRS: means the United States Internal Revenue Service.
Lien: means any lien, pledge, claim, charge, security
interest, mortgage or other encumbrance, option or other rights of any third
person of any nature whatsoever.
Permit: means any and all federal, national, state, regional,
local, municipal or foreign licenses, permits, variances, waivers, riders,
registrations or any other governmental authorizations or approvals necessary
or appropriate for USTMAN to conduct its Business.
person: means any individual, firm, corporation, partnership,
limited liability company, joint venture, association, trust, unincorporated
organization, government or agency or subdivision thereof or any other entity.
Regulation: means a United States Department of Treasury
regulation issued with respect to the Code.
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Release: means any release, spill, effluent, emission,
leaking, pumping, pouring, emptying, escaping, dumping, injection, deposit,
disposal, discharge, dispersal, leaching or migration into the indoor or
outdoor environment, or into or out of any property currently or formerly
owned, operated or leased by Seller or USTMAN.
Remedial Action: means all actions, including, without
limitation, any capital expenditures, required by a governmental entity or
required under any Environmental Law, or voluntarily undertaken to (a) clean
up, remove, treat, or in any other way ameliorate or address any Hazardous
Materials or other substance in the indoor or outdoor environment; (b) prevent
the Release or threat of Release, or minimize the further Release of any
Hazardous Material so it does not endanger or threaten to endanger the public
or employee health or welfare of the indoor or outdoor environment; (c) perform
pre-remedial studies and investigations or post-remedial monitoring and care
pertaining or relating to a Release; or (d) bring the applicable party into
compliance with any Environmental Law.
Section 338(h)(10) Election: shall have the meaning set forth
at Section 6.13.
Taxes: means all United States federal, state, county and
local, foreign and all other taxes, charges, fees, levies or other assessments,
including, without limitation, all net income, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits, profit share, license,
lease, service, service use, value added, withholding, payroll, employment,
excise, estimated, severance, stamp, occupation, premium, real and personal
property, windfall profits, gains, capital stock, production, business and
occupation, disability, custom duties or other taxes of any kind whatsoever,
together with any interest, penalties, additions to tax, fines or other
additional amounts imposed thereon or related thereto, and the term "Tax" means
any one of the
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foregoing Taxes.
Tax Certificate: shall have the meaning set forth at Section
6.12.
Tax Returns: means all United States federal, local and state
and all foreign returns, declarations, reports, estimates, information returns,
statements and other documents of, relating to, or required to be filed in
respect of, any and all Taxes.
ARTICLE II
PURCHASE AND SALE
Section II.1 The Sale. Upon the terms and subject to the
conditions of this Agreement, at the Closing, as defined below under Article
III, Seller will sell, assign, transfer and deliver the Shares to Buyer
(together with a stock power or powers executed in blank), and Buyer will
purchase and acquire the Shares from Seller.
Section II.2 Purchase Price. The purchase price for all
the Shares (the "Purchase Price") shall be $5,750,000. The Purchase Price
shall be subject to adjustment only pursuant to Section 2.4. The Purchase
Price shall be paid by Buyer at Closing by (i) wire transfer of $5,250,000 in
immediately available funds to an account or accounts designated in writing by
Seller at Closing and (ii) delivery of the Purchase Note to Seller as defined
in Section 2.3.
Section II.3 Note and Subsidiary Guarantees. At the
Closing, Buyer shall deliver to Seller an unsecured senior note validly
executed by Buyer in substantially the form attached hereto as Exhibit A (the
"Purchase Note"). The Purchase Note shall be in the aggregate principal amount
of $500,000 and shall bear interest at a rate of 8.5% per annum. Accrued
interest on the outstanding principal balance of the Purchase Note shall be
payable quarterly on September 1, 1997, December 1, 1997 and March 1, 1998. The
unpaid principal balance of, and
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all accrued and unpaid interest on, the Purchase Note shall be due and payable
in full on June 1, 1998. Immediately following the Closing, Buyer shall cause
USTMAN, Watson Systems, Inc., a Missouri corporation and a wholly-owned
subsidiary of Buyer, and EnvirAlert, Inc., a Delaware corporation and a
wholly-owned subsidiary of Buyer, to each execute the guaranty (the "Subsidiary
Guaranty") of Buyer's obligations under the Purchase Note in substantially the
form attached hereto as Exhibit B. Seller hereby recognizes and acknowledges
that, in connection with the transactions described herein, Buyer has obtained
certain acquisition financing and that such financing may be secured by some or
all of the assets of Buyer and its subsidiaries at or after Closing.
Section II.4 Post Closing Adjustment.
(a) Within 60 calendar days following the Closing, Buyer
shall prepare and deliver to Seller a balance sheet (the "Balance
Sheet") of USTMAN as of the Closing Date, as defined below under
Article III (prior to the effects of the transactions occurring at the
Closing) and a statement (the "Statement"), reflecting the calculation
of the adjustment, if any, to the Purchase Price pursuant to Section
2.4(b). The Balance Sheet shall be prepared in accordance with
generally accepted accounting principles consistently applied in the
United States and the financial reporting policies and procedures
utilized by Seller prior to the Closing ("GAAP"). Seller shall have a
period of 30 calendar days after delivery of the Balance Sheet and the
Statement to review such documents and make any objections it may have
in writing to Buyer. If written objections are delivered to Buyer by
Seller within such 30-day
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period, then Buyer and Seller shall attempt to resolve the matter or
matters in dispute. If no written objections are made by Seller
within such 30-day period, then the Balance Sheet and the Statement
shall be final and binding on the parties hereto. If disputes with
respect to the Balance Sheet or the Statement cannot be resolved by
Buyer and Seller within 30 calendar days after the delivery of the
objections thereto, then, at the request of Buyer or Seller, the
specific matters in dispute shall be submitted to Arthur Andersen &
Co. or such other independent accounting firm as may be approved by
Seller and Buyer (the "Auditors"), which firm shall render its opinion
as to such matters. Based on such opinion, such independent
accounting firm will then send to Seller and Buyer its determination
of the specified matters in dispute, which determination shall be
final and binding on the parties hereto. The fees and expenses of the
Auditors shall be borne one-half by Seller and one-half by Buyer.
(b) The Purchase Price shall be adjusted to reflect the
difference, if any, between the working capital balance of USTMAN as
of the opening of business on the date of Closing after taking into
account the transactions set forth in Section 2.5 (the "Closing
Balance") and $424,271 (representing the working capital balance of
USTMAN as of December 31, 1996); provided that for purposes of this
Section 2.4, working capital balance shall mean the difference between
(i) current assets (excluding cash and cash equivalents) and (ii)
current liabilities (excluding income tax payable and amounts due Seth
Hunt) each as determined in accordance with GAAP. To the extent the
Closing Balance is greater than $424,271, the Purchase Price shall be
adjusted upward by an amount equal to the difference; and to the
extent the Closing Balance is less than $424,271, the Purchase Price
shall be adjusted downward by an amount equal to the difference. If
the adjustment to Purchase Price is upward, then within five days
following
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the final determination thereof, Buyer shall pay Seller by wire
transfer in immediately available funds to the account or accounts
designated by Seller the amount by which the Purchase Price is
adjusted upward. If the aggregate adjustment to Purchase Price is
downward, then within five days following the final determination
thereof, Seller shall pay Buyer by wire transfer in immediately
available funds to the account or accounts designated by Buyer the
amount by which the Purchase Price is adjusted downward. Any amount
otherwise payable as a result of an adjustment to the Purchase Price
pursuant to this Section 2.4 may not be offset against any other
obligation (whether such obligation results from the indemnification
provisions set forth in Article VII hereof, the Purchase Note, the
Subsidiary Guaranty, or otherwise), but shall be paid promptly.
Section II.5 Transactions Prior to Closing.
(a) At or prior to the Closing, Seller shall cause USTMAN
to transfer to Seller all cash and cash equivalents of USTMAN measured
as of the close of business on the day immediately prior to the date
of Closing. In the event that within 60 calendar days following the
Closing either party determines that the amount of such transfer, at
the time made, was not equal to the cash and cash equivalents of
USTMAN immediately prior to Closing, either party shall remit the
difference to the other, as appropriate. If a dispute with respect to
the amount of such transfer cannot be resolved by Buyer and Seller
within 30 calendar days after notice, then, at the request of Buyer or
Seller, the specific matters in dispute shall be submitted to the
Auditors, which firm shall render its opinion as to such matters,
which determination shall be final and binding on the parties. The
fees and expenses of the Auditors shall be borne one-half by Seller
and one-half by Buyer. The
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payment of any amounts following Closing pursuant to this Section
2.5(a) shall not be subject to any set off rights of either party.
Buyer hereby recognizes and acknowledges that such transfer shall not
affect the Purchase Price, the Initial Balance, the calculation of the
Closing Balance or the calculation of the Purchase Price adjustment
provided for pursuant to Section 2.4.
(b) Prior to Closing, Seller shall eliminate or cause its
Affiliates to eliminate all intercompany account balances between
Seller and its Affiliates, on one hand, and USTMAN on the other.
(c) At or prior to Closing, Seller shall execute
assumption agreements reasonably acceptable to Buyer assuming from
USTMAN any and all income Taxes for the period through the Closing
Date.
ARTICLE III
CLOSING
The closing of the transactions contemplated hereby (the
"Closing") shall take place at such time and at such date as are mutually
agreed to by Buyer and Seller at the offices of Baker & Botts, L.L.P., Houston,
Texas, or New York, New York but in no event later than May 22, 1997 except as
otherwise agreed by Seller. The date on which the Closing is held is referred
to in this Agreement as the "Closing Date".
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
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Buyer and Seller acknowledge and agree that Seller has owned
the Shares only since the closing (the "October Closing") on October 25, 1996,
of the acquisition thereof pursuant to the Stock Purchase Agreement dated
October 7, 1996 (the "October Agreement"), between Seller and Tanknology
Environmental, Inc. ("TEI"). Notwithstanding the foregoing, Seller represents
and warrants to Buyer the following:
Section IV.1 Organization and Good Standing of the
Company. Each of Seller and USTMAN is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has full corporate power and authority to own, operate and
lease its assets in the manner currently owned, operated and leased by it and
to carry on its business as now conducted. USTMAN is duly qualified to do
business as a foreign corporation in all jurisdictions in which the nature of
its business requires such qualification and where the failure to do so would
have a material adverse effect on USTMAN. Schedule 4.1 is a complete list of
all jurisdictions in which USTMAN is currently licensed or qualified to
transact business as a foreign entity.
Section IV.2 Corporate Records. Copies of the certificate
of incorporation and by-laws of USTMAN have been delivered to Buyer and are
complete and correct as of the date hereof. The minute book and stock book of
USTMAN have been exhibited to Buyer, and each is a complete and accurate record
of the material corporate actions of the stockholders and directors (and any
committees thereof) of USTMAN through the date hereof and all issuances,
cancellations and transfers of the capital stock thereof.
Section IV.3 Authorization. Seller has full corporate
power and authority under its certificate or articles of incorporation and
by-laws, and all necessary corporate action has been taken to authorize it, to
execute and deliver this Agreement and the exhibits and schedules hereto,
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to consummate the transactions contemplated herein and to take all actions
required to be taken by it pursuant to the provisions hereof, and each of this
Agreement and the exhibits hereto constitutes the valid and binding obligation
of Seller enforceable against Seller in accordance with its terms, except as
such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights and general principles of equity.
Section IV.4 Non-Contravention. Except as set forth in
Schedule 4.4, neither the execution and delivery of this Agreement or any
documents executed in connection herewith, nor the consummation of the
transactions contemplated herein or therein, does or will violate, conflict
with, result in breach of or require notice or consent under any Applicable
Law, the charter or by-laws of Seller or USTMAN or any provision of any
agreement or instrument to which Seller or USTMAN is a party or result in the
creation of any Lien upon the capital stock, properties or assets of USTMAN.
Except as set forth in Schedule 4.4, no consent, approval, exemption,
authorization or other action of, or notice to or filing with, any third party,
court or administrative or other governmental or regulatory body is required by
Seller or USTMAN to execute, deliver or perform this Agreement and to
consummate the transactions contemplated herein and to take all actions
required to be taken by it pursuant to the provisions hereof.
Section IV.5 Validity. There are no pending or threatened
judicial or administration actions, proceedings or investigations which
question the validity of this Agreement or any action taken or contemplated by
Seller in connection with this Agreement.
Section IV.6 Broker Involvement. Neither Seller nor
USTMAN has hired, retained or dealt with any broker or finder in connection
with the transactions contemplated by this Agreement.
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Section IV.7 Litigation. Except as set forth in Schedule
4.7, there is no investigation, claim or proceeding or litigation of any type
pending or threatened involving Seller or USTMAN or that would have an adverse
effect on USTMAN, and Seller is unaware after reasonable investigation of any
judgment, order, writ, injunction or decree of any court, government,
governmental agency or arbitral tribunal against or involving Seller or USTMAN
or that would have an adverse effect on USTMAN or Buyer.
Section IV.8 Title to Shares. All of the outstanding
Shares were duly authorized for issuance and are validly issued, fully paid and
nonassessable, and none of such Shares are held in treasury. Seller owns, or
will own prior to Closing, the Shares beneficially and of record, free and
clear of all Liens, and such Shares are not, or will not be prior to Closing,
subject to any agreements or understandings with respect to the voting or
transfer of any of the Shares. There are no outstanding subscriptions,
options, convertible securities, warrants or calls of any kind issued or
granted by, or binding upon, Seller to purchase or otherwise acquire or to sell
or otherwise dispose of any security of or equity interest in USTMAN. Seller
has the requisite legal right to sell, assign and transfer the Shares owned by
it to Buyer and will, upon delivery of a certificate or certificates
representing such Shares to Buyer pursuant to the terms hereof, transfer to
Buyer title to such Shares, free and clear of any Liens.
Section IV.9 Contracts and Commitments. Schedule 4.9
lists all agreements, leases, commitments, contracts, undertakings or
understandings, oral or written, to which USTMAN is a party as of the date of
execution of this Agreement, including but not limited to trademark, trade name
or patent license agreements, service agreements, lease, purchase or sale
agreements, supply agreements, distribution or distributor agreements, purchase
orders, customer orders and equipment rental agreements, that are either
material to USTMAN or involve
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consideration with a value of $50,000 or more. USTMAN is not in breach of or
default under any agreement, lease, contract or commitment listed or of a type
required to be listed (without regard to the date thereof) in Schedule 4.9
(collectively, the "Agreements"). Each Agreement is a valid, binding and
enforceable agreement of USTMAN and, to the knowledge of Seller after
reasonable investigation, the other parties thereto, enforceable except as such
enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights and general principles of equity. There has not occurred any
breach or default under any Agreement on the part of the other parties thereto,
and no event has occurred which with the giving of notice or the lapse of time,
or both, would constitute a default under any Agreement. There is no dispute
between the parties to any Agreement as to the interpretation thereof or as to
whether any party is in breach or default thereunder, and no party to any
Agreement has indicated its intention to, or suggested it may evaluate whether
to, terminate any Agreement. USTMAN is not a party to any covenant or
obligation of any nature limiting the freedom of USTMAN to compete in any line
of business after the Closing. No notice has been given under any lease to
extend the term hereof beyond its current term.
Section IV.10 Taxes.
(a) USTMAN and any affiliated, combined or unitary group
of which USTMAN is or was a member has (i) timely (taking into account
any extensions) filed all Tax Returns required to be filed or sent by
or with respect to it in respect of any Taxes, (ii) timely paid all
Taxes (including estimated Taxes) that are due and payable for which
USTMAN may be liable, (iii) established reserves that are adequate for
the payment of all
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Taxes not yet due and payable with respect to the results of
operations of USTMAN through the Closing Date and (iv) complied in all
respects with all applicable laws, rules and regulations relating to
the payment and withholding of Taxes and has in all respects timely
withheld from employee wages and paid over to the proper taxing and
other governmental authorities all amounts required to be so withheld
and paid over, based on the manner in which USTMAN has classified its
employees under the Fair Labor Standards Act and Department of
Transportation regulations.
(b) Schedule 4.10 sets forth any affiliated,
consolidated, combined, unitary or similar group Tax Return in which
USTMAN is or has been a member or is or has joined in the filing.
Except to the extent being contested in good faith, all deficiencies
asserted as a result of such examinations have been paid, fully
settled or adequately provided for in accordance with GAAP as
reflected in Seller's most recent audited financial statements. No
Tax audits or other administrative proceedings or court proceedings
are presently pending with regard to any Taxes for which USTMAN would
be liable, and no deficiency for any such Taxes has been proposed,
asserted or assessed pursuant to such examination against USTMAN by
any taxing authority with respect to any period.
(c) USTMAN has not executed or entered into with the IRS
or any other taxing authority (i) any agreement or other document
extending or having the effect of extending the period for assessments
or collection of any Tax for which USTMAN would be liable or (ii) a
closing agreement pursuant to Section 7121 of the Code that relates to
the assets or operations of USTMAN other than the items noted on
Schedule 4.10. There are no Tax liens upon any assets of USTMAN.
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(d) USTMAN has not made an election under Section 341(f)
of the Code or agreed to have Section 341(f)(2) of the Code apply to
any disposition of a subsection (f) asset (as such term is defined in
Section 341(f)(4) of the Code) owned by USTMAN.
(e) USTMAN is not a party to, is bound by or has any
obligation under any Tax sharing agreement or similar agreement or
arrangement.
Section IV.11 Title to Properties. Except as set forth in
Schedule 4.11 hereto, USTMAN has good and indefeasible title to all of its
assets, free and clear of all Liens.
Section IV.12 Trademarks, Trade Names and Intellectual
Property. Schedule 4.12 contains an accurate and complete list of (a) all
patents, pending patent applications and invention memoranda owned by USTMAN or
relating to the Business of USTMAN, (b) all registered United States and
foreign trademarks, trade names and logos owned or used by USTMAN and all
registrations thereof and (c) all unregistered United States and foreign
trademarks, trade names and logos used by USTMAN. USTMAN has the right to use
all trademarks, trade names, logos, patents, pending patent applications and
invention memoranda referred to herein. Except as expressly set forth in
Schedule 4.7 hereto, there is no pending or threatened action or claim that
would impair any such right. Except as set forth in Schedule 4.12 hereto,
USTMAN is the sole and exclusive owner of, with all right, title and interest
in and to, each item described in Schedule 4.12 and has sole and exclusive
rights to the use thereof or the material covered thereby.
Section IV.13 Financial Records; Budget. The unaudited
financial statements of USTMAN as of and for the year ended December 31, 1996
as set forth on Schedule 4.13 (the "Financial Statements") are each accurate,
complete, true and correct in all material respects, were prepared in
accordance with GAAP (except as set forth therein), and fairly present in all
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material respects the financial condition and results of operations of USTMAN.
Section IV.14 Condition of Assets and Inventory. All the
assets of USTMAN are in good, serviceable condition and fit for the particular
purposes for which they are used in the business of the owner thereof, subject
only to normal maintenance requirements and normal wear and tear reasonably
expected in the ordinary course of business. All items of inventory of USTMAN
are merchantable or (in the case of raw materials, supplies and work in
process) suitable and useable for the production or completion of merchantable
products, for sale in the ordinary course of business as first quality goods at
mark-ups consistent with past practice, none of such items is below standard
quality, obsolete or obsolescent, and each item is reflected in the Financial
Statements on the basis of a physical count and is valued at the lower of cost
or market in accordance with GAAP (including any required reduction for
impaired value or slow-moving inventory). Such inventory includes a sufficient
but not an excess quantity of each type of such inventory to meet the normal
requirements of USTMAN.
Section IV.15 Liabilities. Except as set forth in Schedule
4.15 or in the financial statements and notes thereto referred to in Section
4.13, there is no existing, contingent or, to Seller's knowledge after
reasonable investigation, material threatened liability, obligation, lien or
claim of any nature (absolute, accrued, contingent or otherwise) that relates
to or has been or may be asserted against USTMAN.
Section IV.16 Employees and Related Matters.
(a) Set forth on Schedule 4.16 is a complete list of all
employees of USTMAN, listing the title or position held, base salary,
any commissions or other compensation paid or payable in 1996 as
reflected on such Schedule, all employee benefits received by such
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employees and any other terms of any oral or written agreement between
any such employee and USTMAN. Seller has heretofore delivered to
Buyer true and correct copies of each management or employment
contract or contract for personal services and a complete description
of any other understanding or commitment between USTMAN (or Seller on
behalf of USTMAN) and any officer, consultant, director, employee,
independent contractor or other person or entity.
(b) USTMAN is not a party to any collective bargaining
agreement or labor contract.
(c) Based on the assumption that Buyer intends to retain
all of the current employees of USTMAN, USTMAN has taken all necessary
actions to comply with the Worker Adjustment and Retraining
Notification Act (the "WARN Act") through the Closing Date, to the
extent it is subject to such act, and Buyer shall not have any
disclosure or announcement obligations under the WARN Act as a result
of the transaction contemplated by this Agreement.
Section IV.17 No Material Change. There has been no
material adverse change in the business, results of operations, assets or
financial position of USTMAN from December 31, 1996 to and including the
Closing Date, and no event has occurred which could be expected to lead to or
cause such a material adverse change.
Section IV.18 Compliance With Law. USTMAN is not in
violation of any provision of Applicable Law, including any Environmental Law,
and USTMAN has not received any notice of any alleged violation of such
Applicable Law, which in either case would result in a material adverse effect
on USTMAN.
Section IV.19 Tangible Personal Property. Except for the
Excluded Assets, all of
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the fixtures, machinery and equipment reflected in the Financial Statements
and/or used in connection with the Business of USTMAN are in the possession and
under the operating control of USTMAN ("Tangible Personal Property"). Except
as set forth in Schedule 4.19 hereto, no item of Tangible Personal Property
requires repairs in excess of $2,500 to be in good, serviceable condition and
fit for the particular purpose for which it is currently used, subject only to
normal maintenance requirements and normal wear and tear reasonably expected in
the ordinary course of business.
Section IV.20 Insurance. Schedule 4.20 contains a list of
all insurance policies of Seller or USTMAN or relating to the conduct of the
Business and the status of prepayments. Seller has heretofore delivered to
Buyer a copy of all such policies. Such policies are in full force and effect,
and Seller and USTMAN are not in default under any of them.
Section IV.21 Government Licenses, Permits and Related
Approvals. Schedule 4.21 sets forth a list of all Permits required for the
conduct of Business by USTMAN, all of which are in full force and effect and
are not being violated in any manner which would have a material adverse effect
on USTMAN.
Section IV.22 Distributed Products. Schedule 4.22 sets
forth a complete listing of all products (a) distributed by USTMAN (and the
manufacturer thereof and the person, if different, for whom USTMAN distributes
such product) or (b) manufactured or sold by USTMAN and distributed by others
(and the name of such distributor). Such Schedule also sets forth the terms of
each such distribution arrangement. USTMAN has full right to distribute all
products referred to in clause (a) of this Section.
Section IV.23 Safety Reports. Schedule 4.23 sets forth a
complete listing of all insurance loss runs, worker's compensation reports and
claims, safety citations and reports,
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OSHA reports and all documents respecting USTMAN and relating to any of the
foregoing since July 1, 1993.
Section IV.24 Transactions with Certain Persons. Except as
set forth in Schedule 4.24, since October 25, 1996, USTMAN has not, directly or
indirectly, purchased, leased or otherwise acquired any property or obtained
any services from, or sold, leased or otherwise disposed of any property or
furnished any services to, or otherwise dealt with (except with respect to
remuneration for services rendered as a director, officer or employee of
USTMAN), in the ordinary course of business or otherwise, with a value of or in
a transaction or series of transactions with a value of $60,000 or more, (a)
any officer, director or shareholder of Seller or any Affiliate thereof other
than USTMAN or (b) any person, firm or corporation which, directly or
indirectly, alone or together with others, controls, is controlled by or is
under common control with Seller or any shareholder thereof. Except as set
forth in Schedule 4.24, USTMAN does not owe any amount to, or have any contract
with or commitment to, any of its shareholders, directors, officers, employees
or consultants (other than compensation for current services not yet due and
payable and reimbursement of expenses arising in the ordinary course of
business not in excess of $1,000 in the aggregate), and none of such persons
owes any amount to USTMAN.
Section IV.25 Accounts Receivable. All the accounts
receivable of USTMAN are valid, genuine and subsisting, arise out of bona fide
sales and deliveries of goods, performance of services or other business
transactions in the ordinary course of business, are owned free and clear and
not subject to any Lien, and are current and collectible net of any reserves
shown on the Financial Statements as of December 31, 1996 (which reserves are
adequate and were calculated consistently with past practice).
Section IV.26 Studies, Etc. Schedule 4.26 sets forth a
complete list of all studies,
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reports, plans, analyses or similar documents of a material nature (whether
prepared by employees of Seller or USTMAN or others) in the possession or
control of Seller or USTMAN thereof relating to safety, the environment,
Hazardous Material, intellectual property, markets, competitors, strategic
planning, product liability, warranties or otherwise relating directly to
USTMAN.
Section IV.27 Disclosure. All schedules to this Agreement
are complete and accurate in all material respects or will be on the Closing
Date. No representation or warranty by Seller in this Agreement or in any
schedule or exhibit to this Agreement, or in any statement or certificate or
other document furnished to Buyer by Seller or any representative of Seller,
contains or will contain any untrue statement of a material fact or omits or
will omit a material fact necessary to make the statements therein not
misleading. The information concerning Seller in Seller's filings, reports and
submissions under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), does not contain any untrue statement of a material fact or
omit a material fact necessary to make the statements therein not misleading.
Section IV.28 Employee Benefits.
(a) For purposes of Section 4.28, all references to
Seller shall be deemed to refer to Seller, USTMAN and any trade or
business, whether or not incorporated, that together with Seller or
USTMAN would be deemed or treated as a "single employer" within the
meaning of Section 4001 of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") or Code Section 414.
The term "Seller Plan" shall mean any stock purchase, stock
option, pension, profit-sharing, retirement, bonus, deferred
compensation, incentive compensation,
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commission, severance or termination pay, hospitalization, medical,
dental, disability, life or other insurance, or supplemental
unemployment benefits plan or agreement or policy or contract or other
arrangement that is or ever has been maintained or contributed to by
Seller for the purpose of providing employment-related compensation or
benefits to any current or former officer, consultant, director,
annuitant, employee, retiree or independent contractor of Seller or
members of their respective families (other than directors' and
officers' liability policies), whether or not insured, including
without limitation "employee benefit plans" as defined in ERISA and
the rules and regulations thereunder.
The term "USTMAN Plan" shall mean any Seller Plan that
formerly provided, provides or is intended to provide compensation or
benefits to any person or member of a person's family as a consequence
of that person's current or former relationship to USTMAN.
(b) As of the Closing Date, no Seller Plan is or has been
(i) covered by Title IV of ERISA, (ii) subject to the minimum funding
requirements of Section 412 of the Code, (iii) a "multi-employer plan"
as defined in Section 3(37) of ERISA, (iv) subject to Section 4063 or
4064 of ERISA, or (v) a voluntary employees' beneficiary association
within the meaning of Code Section 501(c)(9).
(c) Seller has no commitment or obligation to establish
or adopt any new or additional plans or other arrangements that would
constitute an USTMAN Plan if adopted, or to increase materially the
benefits under any existing USTMAN Plan. Schedule 4.28 sets forth
true and correct copies of the following:
(i) each written USTMAN Plan and all amendments
thereto as of the date hereof;
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(ii) a complete written description of each other
USTMAN Plan;
(iii) all current summary plan descriptions
provided to employees regarding the USTMAN Plans;
(iv) each trust agreement and annuity contract (or
any other funding instruments), and each insurance contract,
pertaining to any of the USTMAN Plans, including all
amendments to such documents to the date hereof;
(v) the most recent IRS Form 5500 for any USTMAN
Plan and schedules thereto; and
(vi) the most recent determination letter issued
by the IRS with respect to any USTMAN Plan qualified under
Section 401(a) of the Code.
(d) Each USTMAN Plan is in compliance with the provisions
of all applicable laws, rules and regulations, including, without
limitation, ERISA and the Code. No person has engaged in any
prohibited transaction (within the meaning of Section 4975 of the Code
or Section 406 of ERISA) that could subject USTMAN to a liability.
(e) All contributions and premiums required of USTMAN (or
of Seller on behalf of USTMAN) by any legal requirement or by the
terms of any Seller Plan or any contract relating thereto have been
timely made (without regard to any waivers granted with respect
thereto) or accrued. All obligations of USTMAN (and of Seller on
behalf of USTMAN) with respect to each Seller Plan have been paid or
performed.
(f) Except as provided in Schedule 4.28, no Seller Plan
nor USTMAN Plan provides for medical, life insurance or health
benefits or death benefits after an employee's
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termination of employment (including retirement) except for
continuation coverage required pursuant to Section 4980B of the Code
and Part 6 of Title I of ERISA and the regulations thereunder.
(g) USTMAN has no obligation to make any payments that
would be "excess parachute payments" under Section 280G of the Code.
Except as set forth on Schedule 4.24, consummation of the transactions
contemplated by this Agreement will not (A) entitle any current or
former employee of USTMAN to severance pay, employment compensation or
any other payment, benefit or award (whether under an USTMAN Plan or
otherwise) or (B) accelerate the time of payment or vesting, or
increase the amount of any benefit, award (including stock options,
restricted stock and similar awards) or compensation due any such
employee or former employee.
(h) There are no pending, threatened or anticipated
claims or proceedings against any USTMAN Plan, the assets of any
USTMAN Plan or USTMAN, or the plan administrator or fiduciary of any
USTMAN Plan with respect to the operation of any such plan (other than
routine, uncontested benefit claims), and there are no facts or
circumstances that could form the basis for any such claim or
proceeding.
Section IV.29 Environmental Matters.
(a) The operations of USTMAN have been and, as of the
Closing Date, will be, in compliance with all Environmental Laws in
all material respects;
(b) USTMAN has obtained and will, as of the Closing Date,
maintain all Permits and has made and will, as of the Closing Date,
make all material filings, reports and notices required under
applicable Environmental Law in connection with the
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operations of their respective businesses;
(c) As of the date hereof, USTMAN is not subject to any
outstanding written orders, contracts or agreements with any
governmental entity or other person respecting (i) Environmental Law,
(ii) Remedial Action, (iii) any Release or threatened Release of
Hazardous Material or (iv) an assumption of responsibility for
environmental claims of another entity;
(d) USTMAN has not received any written communication
alleging, with respect to any such party, a material violation of or
material liability under any Environmental Law or requesting, with
respect to any such party, information with respect to an
investigation pursuant to CERCLA or any other Environmental Law;
(e) USTMAN has no material contingent liability in
connection with the Release of any Hazardous Material into the indoor
or outdoor environment (whether on-site or off-site) or employee or
third-party exposure to Hazardous Materials;
(f) The operations of USTMAN involving the generation,
transportation, treatment, storage or disposal of hazardous waste, as
defined and regulated under 40 C.F.R. parts 260-270 or any state
equivalent, are in compliance with applicable Environmental Laws in
all material respects; and
(g) Except as described on Schedule 4.29, there is not
now, nor, to the best knowledge of Seller as of the date hereof, or
has there ever been, on or in any property owned, operated, leased or
under option by, USTMAN or for which USTMAN has assumed responsibility
for material environmental claims, any of the following: (i) any
underground storage tanks or surface impoundments, (ii) any on-site
disposal of solid
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waste or Hazardous Materials, (iii) any asbestos-containing materials
or (iv) any polychlorinated biphenyls.
Section IV.30 Knowledge of Seller. Notwithstanding (but
without limiting) the other representations and warranties of Seller set forth
in this Agreement, except for the liabilities of USTMAN to Seth Hunt, Seller
has no actual knowledge of any error, inaccuracy, breach or misrepresentation
of any representation or warranty relating to USTMAN contained in the October
Agreement.
Section IV.31 Conduct of the Business. Since December 31,
1996, USTMAN has complied with the provisions set forth below:
(a) USTMAN has operated its Business in the ordinary
course;
(b) Except as set forth in Schedule 4.31, neither Seller
nor USTMAN has (i) granted or agreed to grant any bonuses to any
employee, officer, director, representative or agent of USTMAN, (ii)
granted any general increase in the rates of salaries or compensation
of employees, officers, directors, representatives or agents of USTMAN
or any material specific increase to any employee, officer, director,
representative or agent of USTMAN, (iii) provided for any new pension,
retirement or other employment benefits to any employee, officer,
director, representative or agent of any of USTMAN or any increase in
any existing benefits, (iv) terminated or amended in any material
respect or provide for any material increase in benefits under any
Seller Plan or (v) executed any employment agreement, severance
arrangement, consulting arrangement, sales agency agreement,
representation agreement or distribution agreement with any employee,
officer, director, representative or agent of USTMAN;
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(c) USTMAN has not amended its certificate of
incorporation or by-laws and neither Seller nor USTMAN has entered
into any merger or consolidation agreement involving USTMAN or its
assets;
(d) Neither Seller nor USTMAN has authorized for
issuance, issued, sold, delivered or agreed or commited to issue, sell
or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise)
any capital stock of any class or any other securities or equity
equivalents of USTMAN or amended any of the terms of any such
securities or agreements;
(e) USTMAN has not sold, assigned or disposed of any of
its material assets or properties, tangible or intangible, or incured
or assumed any liabilities or entered into any sale/leaseback or
similar transaction, except for sales and dispositions made, or
liabilities incurred, in the ordinary course of business consistent
with past practices;
(f) Seller has used its best efforts to (i) maintain and
preserve the Business, (ii) retain USTMAN's employees and (iii)
maintain USTMAN's relationships with customers, suppliers and others;
(g) USTMAN has not assumed, guaranteed, endorsed or
otherwise become liable or responsible (whether directly, contingently
or otherwise) for the obligations of any other person or made any
loans, advances or capital contributions to or investments in any
other person, with the exception of certain purchase orders and
related cash deposits with Caldwell Systems; and
(h) Seller and USTMAN have not implemented or adopted (i)
any change in its accounting methods or principles or the application
thereof (including depreciation lives)
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or (ii) any material change in its tax methods or principles or the
application thereof (including depreciation lives).
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller the following:
Section V.1 Corporate Status and Good Standing. Buyer is
a corporation duly organized, validly existing and in good standing under the
laws of California, with full corporate power and authority under its articles
certificate of incorporation and by-laws to conduct its business as the same
exists on the date hereof and on the Closing Date.
Section V.2 Authorization. Buyer has full corporate
power and authority under its articles of incorporation and by-laws, and all
necessary corporate action has been taken to authorize it, to execute and
deliver this Agreement, the Purchase Note and the exhibits and schedules
hereto, to consummate the transactions contemplated herein and to take all
actions required to be taken by it pursuant to the provisions hereof or
thereof, and each of this Agreement and the exhibits hereto constitutes the
valid and binding obligation of Buyer enforceable against Buyer in accordance
with its terms, except as such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter
in effect relating to creditors' rights and general principles of equity.
Section V.3 Non-Contravention. Neither the execution and
delivery of this Agreement and the schedules and exhibits hereto, nor the
consummation of the transactions contemplated herein or therein, does or will
violate, conflict with or result in breach of or require notice or consent
under any Applicable Law, the charter or by-laws of Buyer or any provision of
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any agreement or instrument to which Buyer is a party or result in the creation
of any Lien upon the capital stock, property or assets of Buyer, such that
there would be a material adverse effect on any benefit to Seller hereunder.
Except as set forth in Schedule 5.3, no consent, approval, exemption,
authorization or other action of, or notice to or filing with, any third party,
court or administrative or other governmental or regulatory body is required by
Buyer to execute, deliver or perform this Agreement and to consummate the
transactions contemplated herein and to take all actions required to be taken
by it pursuant to the provisions hereof.
Section V.4 Validity. There are no pending or threatened
judicial or administrative actions, proceedings or investigations which
question the validity of this Agreement or any action taken or contemplated by
Buyer in connection with this Agreement.
Section V.5 Broker Involvement. Buyer has not hired,
retained or dealt with any broker or finder in connection with the transactions
contemplated by this Agreement.
Section V.6 Litigation. There is no investigation, claim
or proceeding or litigation of any type pending or threatened involving Buyer
and Buyer is unaware of any judgment, order, writ, injunction or decree of any
court, government or governmental agency or arbitral tribunal against or
involving Buyer, that would have a material adverse effect on any benefit to
Seller hereunder.
Section V.7 Investment Intention. The Shares are being
purchased by Buyer for investment purposes, and not with a view to, or for
resale in connection with, the distribution or other disposition thereof.
Section V.8 Disclosure of Information. Buyer agrees and
acknowledges that it and its employees, officers and agents have been permitted
full and complete access to the books and records, plants, facilities,
equipment, tax returns, contracts, inventories and other assets and
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information of USTMAN which it and its employees, officers and agents have
desired to review. Buyer further acknowledges that it has conducted such
investigation of USTMAN, its assets, liabilities, operations and financial
conditions, as it has deemed necessary and advisable for purposes of
determining to enter into this Agreement. Except to the extent of the express
representations, warranties and agreements contained in this Agreement, Buyer
is purchasing the Shares in reliance upon its own investigation of USTMAN.
Buyer agrees and acknowledges that it is experienced in the statistical
inventory reconciliation business and has the knowledge and ability to conduct
a full investigation of USTMAN and to evaluate USTMAN's business, operations,
financial conditions, assets and liabilities. Buyer expressly represents and
warrants that it has not relied on any projections or representations (oral or
written) except as set out herein, which Buyer has obtained from Seller or
USTMAN and/or any of their respective directors, officers, employees or agents.
Section V.9 Financial Condition. At Closing, Buyer's
financial condition will be adequate to bear the economic risks of this
acquisition. Except as set forth on Schedule 5.9, at Closing Buyer will be in
compliance with all financial and other covenants related to all of its
outstanding credit agreements including the facilities being utilized to
consummate this transaction and will not be in default on any credit agreement
or facility.
Section V.10 Restricted Securities. Buyer understands
that the Shares are characterized as "restricted securities" under the United
States federal securities laws and that under such laws and applicable rules
and regulations promulgated thereunder the Shares may be resold without
registration under the Securities Act of 1933, as amended (the "Act") only in
certain circumstances. Buyer understands that the certificates evidencing the
Shares may contain a legend restricting transfer as provided under the Act and
applicable rules and regulations
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promulgated thereunder.
ARTICLE VI
ADDITIONAL AGREEMENTS AND COVENANTS
Section VI.1 Other Offers. From and after the date hereof
until Closing, Seller and each of its officers, directors, stockholders,
employees, affiliates, representatives or agents shall not, directly or
indirectly, (a) solicit, enter into or conduct discussions relating to,
initiate or knowingly encourage any offer or proposal for, or any indication of
interest in, directly or indirectly, a merger or business combination involving
USTMAN or the acquisition of an equity interest in, or a substantial portion of
the assets of, USTMAN or (b) unless required by law, regulation or judicial
compulsion, disclose any nonpublic information relating to USTMAN or the
Business of USTMAN, or afford access to the properties, books or records of
USTMAN, to any person.
Section VI.2 Public Announcements. Prior to Closing,
neither party shall make any public announcement, issue any press release,
mention the transaction provided for herein to any analyst or any stockholder
who is not also an officer or director of either party, or otherwise reveal the
existence of this Agreement or the transaction provided for herein without the
prior written consent of the other party, unless, on written advice of counsel,
management of the releasing entity determines the release is required to comply
with applicable federal securities laws. In the event of a required release,
the releasing party shall deliver a copy of the written advice of counsel and
the proposed release to the other party two business days prior to an intended
release.
Section VI.3 Further Assurances. Seller and Buyer each
shall execute,
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acknowledge and deliver or cause to be executed, acknowledged and delivered to
Buyer or Seller, as the case may be, such assignments or other instruments of
transfer, assignment and conveyance, in form and substance reasonably
satisfactory to Buyer or Seller, as the case may be, on advice of their
respective counsel, as shall be necessary to vest in Buyer all of the right,
title and interest in and to the Shares free and clear of all liens, charges,
encumbrances, rights of others, mortgages, pledges or security interests, and
any other document reasonably requested by Buyer in connection with this
Agreement. Seller and Buyer each agree that, from time to time, whether
before, at or after the Closing Date, it will execute and deliver such further
instruments and take such other action as may be reasonably necessary to carry
out the purposes and intent of this Agreement.
Section VI.4 Covenant Against Competition.
(a) As an essential consideration for the obligations of
the parties under this Agreement, Buyer and Seller hereby agree and
covenant, subject to Section 6.4(c) below, as follows:
(i) for a period of five years following the
Closing Date, in the United States, Seller and/or its
Affiliates shall not develop or license software that provides
Statistical Inventory Reconciliation certified pursuant to
protocols of the United States Environmental Protection Agency
("Certified SIR"), nor will it enter into joint ventures,
affiliations or other agreements with third parties to
develop, market or sell Certified SIR; provided, that this
provision shall not restrict Seller and/or its Affiliates from
(A) developing, marketing or distributing automatic tank
gauges, tank level monitors or other equipment based at an
underground storage
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tank site that offers a Certified SIR product as an integral
component ("Imbedded SIR"), (B) becoming affiliated or
entering into joint ventures with any other person selling
and/or distributing products with Imbedded SIR, (C) remotely
monitoring products with Imbedded SIR or (D) developing
products for inventory purposes not associated with Certified
SIR. In the event Seller and/or its Affiliates develops any
products pursuant to (A) above, Seller will give Buyer the
first right of refusal to license the Certified SIR system to
be imbedded in such products and/or for any statistical
evaluation services in connection therewith.
(ii) For a period of five years after the Closing
Date, in the United States, Buyer and/or its Affiliates shall
not own or operate vehicles for servicing underground storage
tank sites ("Site Services"), other than for the limited
purpose of installing or marketing in-tank gauges which are
manufactured or distributed by Buyer; provided that this
provisions shall not restrict Buyer and/or its Affiliates from
(A) marketing or distributing any Site Services of any person
other than Buyer or an
Affiliate of Buyer, (B) becoming affiliated or entering into joint ventures
with any other person which owns or operates vehicles for Site Services or (C)
operating remote monitoring systems and utilizing any other person's Site
Services for responses.
(b) If either party believes the other party or any
Affiliate of the other party has violated the provisions of Section
6.4(a), such party shall have the right to seek relief from any court
of competent jurisdiction. The parties acknowledge that money damages
alone will not provide adequate compensation in the event of a breach
of the covenants of this
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Section. Therefore, the parties agree that in addition to all
remedies available at law, in equity or under this Agreement, the
non-breaching party shall be entitled to injunctive relief for the
enforcement of this covenant. The parties agree that the covenants in
this Section are reasonable with respect to their duration, scope and
geographical area. If, at the time of enforcement of this Section, a
court should hold that the restrictions herein are unreasonable under
the circumstances then existing or otherwise, the parties agree that
the maximum duration, scope or geographical area legally permissible
under such circumstances will be substituted for the duration, scope
or area stated herein.
(c) Notwithstanding Section 6.4(a)(ii):
(i) For a period of twelve months after the
Closing Date, Toxguard Systems, Inc. a Nevada corporation and
a majority-owned subsidiary of Buyer ("Toxguard"), shall not
be prohibited by the terms of this Agreement from conducting
its business as conducted at the Closing Date, provided that
Toxguard shall not own or operate any vehicles for the
provision of Site Services not owned and operated at the
Closing Date except as specifically permitted pursuant to
Section 6.4(a)(ii).
(ii) Seller hereby recognizes and acknowledges
that Buyer is considering the acquisition of the business (the
"Target Business") of the person set forth on Schedule 6.4
("Target"), either through the purchase of substantially all
of the assets or all of the issued and outstanding stock of
Target, and that certain activities in connection with the
Target Business would be in violation of Section 6.4(a)(ii) if
such activities were conducted by Buyer or an Affiliate of
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Buyer. Seller hereby consents to the acquisition by Buyer of
the Target Business and agrees that the provisions of Section
6.4(a)(ii) shall not restrict Buyer or Target from conducting
the Target Business as conducted at the date of the
acquisition of the Target Business by Buyer (the "Target
Acquisition Date") for a period of 3 years from the Target
Acquisition Date; provided that neither Buyer nor Target shall
(A) enter into any contracts (not including any renewals or
extensions of existing contracts) for the provision of Site
Services after the Target Acquisition Date, (B) provide Site
Services in any geographical area not served prior to the date
of Closing or (C) own or operate any vehicles for the
provision of Site Services in addition to the number of
vehicles so owned and operated at the date of Closing, in any
case whether in connection with the Target Business or
otherwise.
Section VI.5 Governmental Filings. As promptly as
practicable after the execution of this Agreement, each party shall, in
cooperation with the other, file any reports or notifications that may be
required to be filed by it under applicable law and shall furnish to the other
all such information in its possession as may be necessary for the completion
of the reports or notifications to be filed by the other.
Section VI.6 Access to Information. Prior to Closing,
Buyer may make such investigation of the business and properties of USTMAN as
Buyer may desire and, upon reasonable notice, Seller and USTMAN shall give to
Buyer and its counsel, accountants and other representatives reasonable access,
during normal business hours throughout the period prior to the Closing, to the
property, books, commitments, agreements, records, files and personnel of
Seller and USTMAN related to USTMAN, and Seller shall furnish to Buyer during
that period all
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copies of documents and information concerning the Business of USTMAN as Buyer
may reasonably request, subject to applicable law. Buyer shall hold, and shall
cause its counsel, accountants and other agents and representatives to hold,
all such information and documents in confidence. Seller will cooperate with
Buyer's transition planning for the acquisition by providing access to key
executives of Seller and USTMAN.
Section VI.7 Use of Name. Prior to or at Closing, Seller
shall eliminate, and cease and desist from, any use of any designation
indicating an affiliation with USTMAN, and immediately following Closing, Buyer
shall cause USTMAN to eliminate, and cease and desist from, any use of any
designation indicating an affiliation with Seller.
Section VI.8 Other Action. Each of the parties shall use
its best efforts to cause the fulfillment at the earliest practicable date but,
in any event, prior to the Closing Date of all conditions to their respective
obligations to consummate the transactions under this Agreement.
Section VI.9 Employee Benefit Matters. Effective as of the
Closing Date, Seller shall amend all USTMAN Plans except stock options plans of
Seller to terminate the participation of USTMAN therein, and shall further
amend Seller's defined contribution USTMAN Plans except stock option plans of
Seller to provide for full vesting of the accounts of all current and former
employees of USTMAN participating therein.
Section VI.10 Cooperation with Financings and Financial
Reporting. Seller acknowledges and understands that in the event Buyer
conducts certain offerings of its securities or is subject to reporting
requirements under the Exchange Act, Buyer may be required to obtain certain
information relating to Seller, USTMAN or the Business, including, but not
limited to, audited or unaudited financial statements of USTMAN, and disclose
such information in registration statements and other documents filed with the
Securities and Exchange Commission
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under the federal securities laws or in disclosure documents given investors in
certain securities offerings. Seller agrees to use its best efforts to
cooperate fully and promptly, and shall cause its Affiliates, accountants,
counsel and other agents and representatives to cooperate fully and promptly,
with Buyer in connection therewith.
Section VI.11 Consents. Each party will cooperate with the
other and proceed, as promptly as is practicable, to seek to obtain all
necessary consents and approvals set forth in Schedule 4.4 or Schedule 5.3, and
to endeavor to comply with all other legal or contractual requirements for or
preconditions to the execution and consummation of this Agreement.
Section VI.12 Tax Certificate. On or before the Closing
Date, Seller will provide to Buyer a certificate ("Tax Certificate") that sets
forth the following information as of the date for each particular item of
information which is as close to the Closing Date as is reasonably practicable:
(a) The following information shall be provided in
accordance with the reporting of such information on the most recently
filed Tax Return for each such Tax:
(i) The adjusted basis for Tax purposes of the
assets of USTMAN, and
(ii) The amounts of the net operating loss, net
capital loss, foreign Tax credit and Tax credit carry
forwards, the overall foreign losses and the foreign Taxes
paid or accrued in excess of the applicable foreign Tax credit
limitations of or allocable to USTMAN;
(b) All current consents and elections with respect to
Taxes of or with respect to USTMAN that have been filed with any
taxing authority;
(c) All taxable periods for which the income and
franchise Tax Returns of or
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with respect to USTMAN are open; and
(d) All Tax partnerships in which USTMAN is a member.
Section VI.13 Certain Tax Elections. Buyer and Seller
shall make a timely and effective joint election (the "Section 338(h)(10)
Election") under Section 338(h)(10) of the Code for USTMAN with respect to the
purchase of the Shares. Moreover, Buyer shall prepare completed Forms 8023-A
for USTMAN providing for the Section 338(h)(10) Elections. If Buyer and Seller
disagree as to any information (including but not limited to the valuation of
any asset) required to be provided on any Form 8023-A (including any schedule
attached thereto), the specific matters in dispute shall be submitted to the
Auditors, which firm shall render its opinion as to such matters. Based on
such opinion, such independent accounting firm will then send to Seller and
Buyer its determination of the specified matters in dispute, which
determination shall be final and binding on the parties hereto. The parties
agree to represent such information on Form 8023-A consistent with such
Auditors' opinion. The fees and expenses of the Auditors shall be borne
one-half by Seller and one-half by Buyer. At the Closing Date or as soon as
practicable thereafter, Seller and Buyer will jointly execute such Forms
8023-A, and thereafter Buyer, on behalf of Buyer and Seller, will timely file
such Forms 8023-A with the relevant taxing authority and will provide proof of
such filing to Seller.
Section VI.14 Liability for Taxes.
(a) Seller shall be liable for, and shall defend,
indemnify and hold Buyer harmless against, (i) any Taxes incurred by
USTMAN for any taxable period ending on or before the Closing Date,
(ii) any income Taxes caused by, or arising from, the Section
338(h)(10) Election, (iii) any transfer or sales Taxes arising from
the transactions
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contemplated in this Agreement, other than transfer or sales Taxes
that are imposed because of the Section 338(h)(10) Election if such
Taxes are in excess of the transfer or sales Taxes that would have
been imposed if the Section 338(h)(10) Election had not been made,
(iv) any Taxes imposed with respect to any payment from Seller under
this sentence and (v) any Taxes for a Consolidated Group with Seller
of which USTMAN is determined to be a part. Any Tax refunds received
by Buyer relating to the Tax liability of USTMAN for a period ending
on or before the Closing Date shall be the property of Seller other
than Tax refunds generated because of a Buyer tax attribute. Seller
will ensure that with respect to any Tax partnership listed on the Tax
Certificate, the appropriate party has made or will make a valid
election under Section 754 of the Code with respect to each such Tax
partnership in the time and in the manner provided in Regulation
Section 1.754-1(b) such that each such election is in effect for the
taxable year of each such Tax partnership that includes the Closing
Date.
(b) Seller shall prepare, or cause USTMAN to prepare, and
submit to Buyer all Tax Returns of USTMAN (and any Tax partnerships in
which (i) USTMAN owns an interest and (ii) Seller or USTMAN has
responsibility for preparing and filing partnership Tax Returns) for
Taxes for any taxable period ending on or before the Closing Date and
for which the due date of any such Tax Return is subsequent to the
Closing Date. Any such Tax Return shall be prepared on a basis
consistent with Tax Returns prepared with respect to USTMAN for prior
taxable periods, unless otherwise required by law, and shall be
submitted to Buyer not later than (i) in the case of any United States
federal income Tax Return, 60 days before the due date of such Tax
Return, and (ii) in the case of any
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other Tax Return, 30 days before the due date of such Tax Return.
Seller is responsible for filing any such Tax Return and for preparing
and filing any other Tax Return of USTMAN for Taxes for any taxable
period ending on or before the Closing Date.
(c) Buyer and its Affiliates, including USTMAN, are
responsible for preparing and filing with the appropriate taxing
authorities all Tax Returns which relate to the Taxes of USTMAN other
than those described in Section 6.14(c), except that Tax Returns which
relate to a Post-Closing Period shall be completed by Buyer. Seller
shall cooperate with Buyer and shall make available all necessary
records and timely take all action necessary to allow Buyer to file,
or prepare and file, as the case may be, the Tax Returns described in
this paragraph (including, without limitation, providing or causing to
be provided to Buyer any powers of attorney which Buyer shall request
for purposes of filing any such Tax Returns). Such Tax Returns shall
be prepared on a basis consistent with those prepared with respect to
USTMAN for taxable periods ending on or before the Closing Date,
unless otherwise required by law.
Section VI.15 Cooperation and Exchange of Information. The
parties will provide each other with such cooperation and information as they
may reasonably request of each other in preparing or filing any Tax Return,
amended Tax Return or claim for refund, in determining a liability or a right
to refund or in conducting any audit or other proceeding, in respect of Taxes
imposed on the parties or their respective Affiliates. USTMAN and each party
will preserve and retain all Tax Returns, schedules, work papers and other
documents relating to any such Tax Returns, claims, audits or other proceedings
until the expiration of the statutory period of limitations (including
extensions) of the taxable periods to which such documents relate and until the
final determination of any payments which may be required with respect to such
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periods under this Agreement and shall make such documents available to
representatives of Seller upon reasonable notice and at reasonable times, it
being understood that such representatives shall be entitled to make copies of
any such books and records as they shall deem necessary. Any information
obtained pursuant to this Section 6.15 shall be kept confidential, except as
may be otherwise necessary in connection with the filing of Tax Returns or
claims for refund or in conducting any audit or other proceeding.
Section VI.16 Conflict. In the event of a conflict between
the provisions of Sections 6.12, 6.13, 6.14 or 6.15 and any other provision of
this Agreement, the provisions of this Article VI shall control.
Section VI.17 Insurance. Buyer agrees to procure and
maintain for three years after the Closing Date commercial general liability
insurance and environmental liability insurance covering contractors' legal
liability and professional errors and omissions liability with no pollution
exclusion with policy terms, conditions, exclusions, limits and deductibles not
materially less favorable than such insurance maintained by Seller, as
described in Schedule 4.20, and shall name Seller as an additional insured.
ARTICLE VII
EXTENT AND SURVIVAL OF REPRESENTATIONS,
WARRANTIES, COVENANTS AND AGREEMENTS; INDEMNIFICATION
Section VII.1 Indemnification of Buyer.
(a) Subject to and to the extent provided in Section
7.1(b), Seller agrees to defend, indemnify and hold harmless Buyer
(including its officers, directors, employees
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and agents and Affiliates) from and against, any and all claims,
actions, causes of action, arbitrations, proceedings, losses, damages,
liabilities, judgments and expenses (including, without limitation,
reasonable attorneys' fees) ("Claim") incurred by Buyer, any Affiliate
of Buyer, Seller or USTMAN, net of the amount of insurance coverage
required pursuant to Section 6.18 (regardless of whether Buyer
maintains such Insurance), as a result of (i) any error, inaccuracy,
breach or misrepresentation in any of the representations and
warranties made by or on behalf of Seller in this Agreement or in any
certificate or other instrument delivered by or on behalf of Seller in
connection with this Agreement (including the Schedules hereto), (ii)
any violation or breach by Seller of or default by Seller under the
terms of this Agreement, (iii) any act or omission occurring, or
condition or circumstances existing, prior to the Closing, or any
condition or circumstances caused by any act or omission occurring
prior to the Closing, by Seller or USTMAN or otherwise with respect to
Seller or USTMAN, (iv) the past or present presence, release,
remediation or clean-up of, or exposure to, Hazardous Material
relating to or located on, within or under any assets owned, leased or
used by Seller or USTMAN, or (v) any product liability, strict
liability or other claims concerning (A) products sold or services
provided by Seller or USTMAN prior to the Closing or (B) inventory
owned by Seller or USTMAN at the Closing.
(b) The maximum amount of all liability of Seller to
Buyer pursuant to Section 7.1(a), other than any liability arising
from any fraudulent acts of Seller or in respect of Taxes, shall be as
follows:
(i) In the event of any Claim pursuant to Section
7.1(a)(i) where
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Seller, at the time of Closing, had actual knowledge of, and
did not disclose to Buyer, the error, inaccuracy, breach or
misrepresentation giving rise to such Claim, Seller's
obligation to indemnify Buyer shall be unlimited as to amount.
(ii) In the event of one or more Claims pursuant
to (A) Section 7.1(a)(i) where the error, inaccuracy, breach
or misrepresentation giving rise to such Claim or Claims
existed at the time of the October Closing (other than a Claim
described in Section 7.1(b)(i) above), (B) Section 7.1(a)(iii)
where the act or omission giving rise to the Claim or Claims
occurred, or the condition or circumstances existed, at or
prior to the October Closing, (C) Section 7.1(a)(iv) where the
presence, release, remediation or clean-up of, or exposure to,
Hazardous Material giving rise to the Claim or Claims occurred
or existed at or prior to the October Closing or (D) Section
7.1(a)(v) where the liability giving rise to the Claim or
Claims relates to products sold or services provided by USTMAN
prior to the October Closing (any Claims described in (A) -
(D) of this Section 7.1(b)(ii) being referred to as "Prior
Period Claims"), then Seller shall be obligated to proceed
against TEI in accordance with the procedures set forth in
Section 7.5 and Seller shall pay to Buyer any and all amounts
recovered from TEI in connection with such Prior Period Claim.
In the event that the amount of the any Prior Period Claim is
determined in accordance with the procedures set forth in the
October Agreement to be subject to indemnification by TEI
thereunder and the amount thereof is in excess of the
indemnification obligations of TEI under the October
Agreement, then Seller shall be liable for the amount of such
excess up to
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a maximum aggregate amount, for all Prior Period Claims, of
$1,000,000.
(iii) The maximum amount of liability of Seller to
Buyer for any Claim not covered by Section 7.1(b)(i) or (ii),
shall be limited to the aggregate amount of $5,750,000.
Section VII.2 Indemnification of Seller. Buyer agrees to
defend, indemnify and hold harmless Seller (including its officers, directors,
employees and agents and Affiliates) from and against, any and all Claims
incurred by Seller, any Affiliate of Seller, Buyer or USTMAN as a result of (a)
any error, inaccuracy, breach or misrepresentation in any of the
representations and warranties made by or on behalf of Buyer in this Agreement
or in any certificate or other instrument delivered by or on behalf of Buyer in
connection with this Agreement (including the Schedules hereto), (b) any
violation or breach by Buyer of or default by Buyer under the terms of this
Agreement, (c) any act or omission occurring, or condition or circumstances
existing, after the Closing, or any condition or circumstances caused by any
act or omission occurring after the Closing, by Buyer or USTMAN or otherwise
with respect to Buyer or USTMAN, (d) the post-Closing presence, release,
remediation or clean-up of, or exposure to, Hazardous Material relating to or
located on, within or under any assets owned, leased or used by Buyer or
USTMAN, or (e) any product liability, strict liability or other claims
concerning (i) products sold or services provided by Buyer or USTMAN after the
Closing or (ii) inventory owned by Buyer or USTMAN after the Closing. Seller
shall be entitled to recover its reasonable and necessary attorneys' fees and
litigation expenses incurred in connection with successful enforcement of its
rights under this Section. Buyer's obligation to indemnify Seller pursuant to
this Section 7.2 shall be unlimited as to time or amount.
Section VII.3 Survival.
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(a) The representations, warranties and covenants of
Seller in this Agreement and in any certificate or instrument
delivered in connection herewith shall be continuing and shall survive
the Closing until two years after the Closing Date (the period during
which the representations and warranties shall survive being referred
to herein with respect to such representations and warranties as the
"Survival Period"), but shall thereafter terminate and be of no
further force and effect unless a written notice asserting a claim
shall have been made pursuant to this Article VII within the Survival
Period with respect to such matter. Any claim for indemnification of
a Claim of the type set forth in Section 7.1(a)(i)-(iv) of this
Agreement made during the Survival Period shall remain in effect for
purposes of such indemnification notwithstanding such Claim may not be
resolved within the Survival Period.
(b) Any claim for indemnification of Buyer for a Claim of
the type set forth in Section 7.1(a)(v) of this Agreement must be made
no later than three years after the Closing Date. Any such Claim
shall remain in effect for purposes of such indemnification even if
the Claim is not resolved within three years after the Closing Date.
Section VII.4 Indemnification Procedures. Subject to
Section 7.5, all claims for indemnification under this Agreement shall be
asserted and resolved as follows:
(a) A party claiming indemnification under this Agreement
(an "Indemnified Party") shall with reasonable promptness (i) notify
the party from whom indemnification is sought (the "Indemnifying
Party") of any third-party claim or claims asserted against the
Indemnified Party ("Third Party Claim") for which indemnification is
sought and (ii) transmit to the Indemnifying Party a copy of all
papers served with respect to such claim
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(if any) and a written notice ("Claim Notice") containing a
description in reasonable detail of the nature of the Third Party
Claim, an estimate of the amount of damages attributable to the Third
Party Claim to the extent feasible (which estimate shall not be
conclusive of the final amount of such claim) and the basis of the
Indemnified Party's request for indemnification under this Agreement.
Within 15 days after receipt of any Claim Notice (the
"Election Period"), the Indemnifying Party shall notify the
Indemnified Party whether the Indemnifying Party disputes its
potential liability to the Indemnified Party with respect to such
Third Party Claim and, if the Indemnifying Party does not dispute its
potential liability to the Indemnified Party with respect to such
Third Party Claim, whether the Indemnifying Party elects to defend the
Indemnified Party with respect to such Third Party Claim.
If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party within the Election Period and
notifies the Indemnified Party that it elects to defend such Third
Party Claim, the Indemnified Party shall control negotiations toward
resolution of such claim without the necessity of litigation, and if
litigation ensues, to defend the same with counsel reasonably
acceptable to both parties, at the Indemnifying Party's expense, and
the Indemnified Party shall extend reasonable cooperation in
connection with such defense. The Indemnified Party shall be entitled
to elect to participate in, but not to control, the defense of any
Third Party Claim resulting in litigation, at its own cost and
expense; provided, however, that if the parties to any suit or
proceeding shall include the Indemnifying Party as well as the
Indemnified Party and the Indemnified Party shall have been advised by
counsel that one or more legal defenses may be available to it that
may
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not be available to the Indemnifying Party, then the Indemnified Party
shall be entitled to elect to control such suit or proceeding, but the
Indemnifying Party shall be obligated to bear the fees and expenses of
counsel of the Indemnified Party, which shall be selected by the
Indemnified Party in its complete and sole discretion. If the
Indemnifying Party does not dispute its potential liability to the
Indemnified Party within the Election Period and the Indemnified Party
fails to assume control of the negotiations prior to litigation or to
defend such action within a reasonable time, the Indemnifying Party
shall be entitled, but not obligated, to assume control of such
negotiations or defense of such action, and the Indemnifying Party
shall be liable to the Indemnified Party for its expenses reasonably
incurred or amounts paid in connection therewith. If the Indemnifying
Party disputes its potential liability to the Indemnified Party within
the Election Period or does not elect to defend such Third Party
Claim, then the Indemnified Party shall be entitled to assume control
of such negotiations or defense of action and the liability for the
expense thereof, as well as any liability with respect to such Third
Party Claim, shall be determined as provided in Section 7.6 below.
If the Indemnifying Party fails to notify the Indemnified
Party within the Election Period that the Indemnifying Party elects to
defend the Indemnified Party pursuant to the preceding paragraph, or
if the Indemnifying Party elects to defend the Indemnified Party but
fails to prosecute or settle the Third Party Claim as herein provided,
then the Indemnified Party shall have the right to defend, at the sole
cost and expense of the Indemnifying Party (if the Indemnified Party
is entitled to indemnification hereunder), the Third Party Claim by
all appropriate proceedings, which proceedings shall be promptly
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and vigorously prosecuted by the Indemnified Party to a final
conclusion or settled. The Indemnified Party shall have full control
of such defense and proceedings. Notwithstanding the foregoing, if
the Indemnifying Party has delivered a written notice to the
Indemnified Party to the effect that the Indemnifying Party disputes
its potential liability to the Indemnified Party under this Article
VII and if such dispute is resolved in favor of the Indemnifying
Party, the Indemnifying Party shall not be required to bear the costs
and expenses of the Indemnified Party's defense pursuant to this
Section or of the Indemnifying Party's participation therein at the
Indemnified Party's request, and the Indemnified Party shall reimburse
the Indemnifying Party in full for all costs and expenses of such
litigation. The Indemnifying Party may participate in, but not
control, any defense or settlement controlled by the Indemnified Party
pursuant to this Section, and the Indemnifying Party shall bear its
own costs and expenses with respect to such participation.
Neither the Indemnifying Party nor the Indemnified Party shall
settle, compromise, or make any other disposition of any Third Party
Claim which would or might result in any liability to the Indemnified
Party or the Indemnifying Party under this Article VII without the
written consent of such other party.
(b) In the event any Indemnified Party should have a
claim against any Indemnifying Party hereunder that does not involve a
Third Party Claim, the Indemnified Party shall transmit to the
Indemnifying Party a written notice (the "Indemnity Notice")
describing in reasonable detail the nature of the claim, an estimate
of the amount of damages attributable to such claim to the extent
feasible (which estimate shall not be
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conclusive of the final amount of such claim) and the basis of the
Indemnified Party's request for indemnification under this Agreement.
If the Indemnifying Party does not notify the Indemnified Party within
15 days from its receipt of the Indemnity Notice that the Indemnifying
Party disputes such claim, the claim specified by the Indemnified
Party in the Indemnity Notice shall be deemed a liability of the
Indemnifying Party hereunder.
Section VII.5 Indemnification Procedures for Prior Period
Claims. Any claim by Buyer for indemnification in connection with any Prior
Period Claim shall be asserted and resolved as follows:
(a) Buyer shall deliver to Seller a Claim Notice or
Indemnity Notice as set forth in Section 7.4.
(b) Within 15 days after receipt of such notice, Seller
shall notify Buyer of Seller's determination that such claim for
indemnification is based on a Prior Period Claim. Unless Buyer
objects to Seller's determination within 10 business days after
Seller's notice to Buyer, the claim for indemnification shall be
deemed to be based on a Prior Period Claim. If Buyer objects to
Seller's determination, Seller and Buyer agree to promptly negotiate
in good faith to determine whether such claim for indemnification is
based on a Prior Period Claim. If the parties have failed to agree
within 15 days after the date of Buyer's objection to Seller's
determination, such dispute shall be submitted to arbitration in
accordance with Section 7.6. The decision of the arbitrator regarding
the classification of the claim as a Prior Period Claim shall be
binding on the parties.
(c) Once the parties have determined that a claim for
indemnification is based on a Prior Period Claim, Seller shall
promptly notify TEI of the Prior Period Claim in
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accordance with the provisions of Section 7.3 of the October
Agreement. Seller covenants and agrees that it shall exercise its
rights under the October Agreement as directed by Buyer and at Buyer's
expense and shall extend reasonable cooperation in connection
therewith. With the exception of the liability of Seller for amounts
in excess of the limitations on liability of TEI under the October
Agreement as described in Section 7.1(b)(ii), Seller shall have no
other obligation with respect to any Prior Period Claim. Seller shall
have the right, but not the obligation, to engage Seller's own counsel
at Seller's own expense to participate in the prosecution of any Prior
Period Claims against TEI or to participate in the defense of any
Third Party Claim against Buyer based on a Prior Period Claim.
(d) Following any recovery from TEI pursuant to this
Section 7.5, Seller shall be obligated to pay an amount equal to the
amount of any funds received from TEI to Buyer promptly after receipt
thereof, together with any additional amounts as required by Section
7.1(b)(ii).
Section VII.6 Arbitration of Disputes. If the Indemnifying
Party disputes, either as to the amount or liability, that any claim described
in a Claim Notice or an Indemnity Notice, as the case may be, is covered by
such Indemnifying Party's covenant to indemnify contained in this Article VII,
then the Indemnifying Party and the Indemnified Party agree to promptly
negotiate in good faith to resolve their differences and to mutually agree upon
an amount, if any, owed to Indemnified Party by the Indemnifying Party
hereunder. If Indemnifying Party and Indemnified Party fail to agree within 30
days thereafter, the dispute shall be resolved by binding and final arbitration
of a single arbitrator mutually agreed to by Buyer and Seller conducted in
Houston, Texas in accordance with the rules of commercial arbitration of the
American Arbitration
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Association. The prevailing party in any such arbitration proceeding shall be
entitled to attorneys' fees and other out-of-pocket expenses reasonably and
necessarily incurred in connection with such proceeding, the amounts of which
shall be contained in the award of the arbitrator. After a final arbitration
decision with respect to a Claim by Buyer against Seller, Buyer shall have a
limited right of set off against the Purchase Note.
Section VII.7 General. THE COVENANTS AND AGREEMENTS
ENTERED INTO PURSUANT TO THIS AGREEMENT TO BE PERFORMED AFTER THE CLOSING SHALL
SURVIVE THE CLOSING WITHOUT LIMITATION. THE INDEMNIFICATION OBLIGATIONS UNDER
THIS ARTICLE VII SHALL APPLY REGARDLESS OF WHETHER ANY CLAIM RESULTS SOLELY OR
IN PART FROM THE ACTIVE, PASSIVE OR CONCURRENT NEGLIGENCE OF THE INDEMNIFIED
PARTY PRIOR TO THE CLOSING DATE. THE PARTIES AGREE THAT THIS ARTICLE VII DOES
NOT ENTITLE EITHER PARTY TO INDEMNIFICATION FOR EITHER PARTY'S ACT OR OMISSION
AFTER THE CLOSING DATE. ALL REPRESENTATIONS, WARRANTIES AND COVENANTS AND
AGREEMENTS MADE BY THE PARTIES SHALL NOT BE DEEMED MERGED INTO ANY INSTRUMENTS
OR AGREEMENTS DELIVERED IN CONNECTION WITH THE CLOSING OR OTHERWISE IN
CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY.
ARTICLE VIII
CONDITIONS TO CLOSING
Section VIII.1 Conditions Precedent to Obligations of Buyer.
The obligation of Buyer to consummate the purchase under this Agreement is
subject to the fulfillment, prior to or at the Closing, of each of the
following conditions (any or all of which may be waived by Buyer):
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(a) all representations and warranties of Seller
contained in this Agreement including all Schedules to this Agreement
shall be true and correct in all respects at and as of the time of the
Closing with the same effect as though made again at, and as of, that
time, except such as will not have a material adverse effect and
except such as would not reasonably be expected to have a material
adverse effect on Seller's ability to perform its obligations under
this Agreement;
(b) Seller shall have performed and complied in all
material respects with all obligations and covenants required by this
Agreement to be performed or complied with by Seller prior to or at
the Closing;
(c) Buyer shall have been furnished with a certificate,
dated the Closing Date, executed by an officer of Seller certifying to
the fulfillment of the conditions specified in Sections 8.1(a) and
8.1(b) hereof;
(d) no provision of any Applicable Law shall prohibit,
and there shall not be in effect any injunction, restraining order or
decree issued by a court of competent jurisdiction or any governmental
body that shall prohibit the consummation of this Agreement and there
shall be no action or proceeding pending or threatened seeking any
such injunction, order or decree;
(e) Seller shall have received all consents, approvals
and Permits to execute this Agreement and to consummate the
transactions contemplated hereby; and
(f) Buyer shall be furnished with an opinion of counsel
to Seller and USTMAN, as to the due execution and delivery of this
Agreement and the documents delivered by Seller at Closing and
substantially as to the matters set forth in Sections 4.1,
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4.3, 4.4, 4.7 and 4.8 hereof (qualified appropriately as to knowledge)
and such other matters as Buyer may reasonably request.
Section VIII.2 Conditions Precedent to Obligations of
Seller. The obligation of Seller to consummate the sale under this Agreement
is subject to the fulfillment, prior to or at the Closing, of each of the
following conditions (any or all of which may be waived by Seller):
(a) all representations and warranties of Buyer contained
in this Agreement, including all Schedules to this Agreement, shall be
true and correct in all respects at and as of the time of the Closing
with the same effect as though made again at, and as of, that time,
except such as will not have a material adverse effect and except such
as would not reasonably be expected to have a material adverse effect
on Buyer's ability to perform its obligations under this Agreement;
(b) Buyer shall have performed and complied in all
material respects with all obligations and covenants required by this
Agreement to be performed or complied with by Buyer prior to or at the
Closing;
(c) Seller shall have been furnished with a certificate,
dated the Closing Date, executed by an officer of Buyer certifying to
the fulfillment of the conditions specified in Sections 8.2(a) and
8.2(b) hereof; and
(d) no provision of any Applicable Law shall prohibit,
and there shall not be in effect any injunction or restraining order
issued by a court of competent jurisdiction in any action or
proceeding against, the consummation of this Agreement.
(e) Seller shall be furnished with an opinion of counsel
to Buyer, as to the due execution and delivery of this Agreement and
the documents delivered by Buyer at
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Closing and substantially as to the matters set forth in Sections 5.1,
5.2, 5.3 and 5.6 hereof (qualified appropriately as to knowledge) and
such other matters as Seller may reasonably request, including without
limitation the authorization, due execution, delivery and
enforceability of the Purchase Note and the Subsidiary Guarantees.
ARTICLE IX
ACTIONS TO BE TAKEN AT CLOSING
Section IX.1 Actions to be Taken by Seller at the Closing.
Seller shall take the following actions at the Closing:
(a) Seller shall deliver to Buyer copies certified by its
Secretary of resolutions duly adopted by the board of directors of
Seller authorizing and approving the execution and delivery of this
Agreement, including the exhibits and schedules hereto, and the
consummation of the transactions contemplated herein;
(b) Seller shall endorse and deliver to Buyer a stock
certificate representing the Shares;
(c) Seller shall deliver the officer's certificate
referred to in Section 8.1(c);
(d) Buyer shall have been furnished with a legal opinion
as provided in Section 8.1(f) hereof; and
(e) Seller shall have delivered to Buyer a letter of
resignation from each noncontinuing officer and director of USTMAN.
Section IX.2 Actions to be Taken by Buyer at the Closing.
Buyer shall take the following actions at the Closing:
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(a) Buyer shall deliver to Seller a copy certified by its
Secretary of resolutions duly adopted by the board of directors of
Buyer authorizing and approving the execution and delivery of this
Agreement, including the exhibits and schedules hereto, and the
consummation of the transactions contemplated herein;
(b) Buyer shall make the payment of funds specified for
payment at Closing under Section 2.2;
(c) Buyer shall deliver the Purchase Note and the
Subsidiary Guaranty to Seller as set forth in Section 2.3;
(d) Buyer shall deliver the officer's certificate
referred to in Section 8.2(c); and
(e) Seller shall have been furnished with a legal opinion
as provided in Section 8.2(e).
ARTICLE X
GENERAL PROVISIONS
Section X.1 Termination.
(a) This Agreement may be terminated at any time prior to
the Closing:
(i) by mutual written agreement executed by
Seller and Buyer; or
(ii) if the Board of Directors of Seller in the
exercise of its fiduciary duties under applicable laws as
advised in writing by counsel withdraws or modifies its
approval or recommendation of the proposed acquisition of
Shares by Buyer on the terms and conditions set forth herein
in any manner adverse to Buyer and recommends or approves a
Competing Transaction, or resolves to do the
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foregoing. For purposes of this Agreement, "Competing
Transaction" shall mean any merger, consolidation, share
exchange, business combination or similar transaction
involving USTMAN, or the acquisition in any manner, directly
or indirectly, of a material interest in any voting securities
of, or a material interest in a substantial portion of the
assets of, USTMAN, other than the transactions contemplated by
this Agreement.
(b) Upon termination of this Agreement, neither of the
parties nor any other person shall have any liability or further
obligation arising out of this Agreement except for any liability
resulting from its breach of this Agreement prior to termination and
as stated in Section 10.1(c) hereof, except that the provisions of
Sections 10.2, 10.3, 10.9 and 10.11 shall continue to apply.
(c) In the event Seller terminates this Agreement
pursuant to Section 10.1(a)(ii) hereof and enters into a Competing
Transaction, Seller shall reimburse Buyer for its reasonable costs
related to Buyer's proposed acquisition of the Shares, not to exceed
$250,000.
Section X.2 Confidentiality; Publicity; Books and
Records.
(a) Neither party nor any Affiliate thereof will,
directly or indirectly, disclose or provide to any other person any
non- public information of a confidential nature concerning the other
party or their business or operations, and neither Seller nor any
Affiliate thereof will directly or indirectly, disclose or provide to
any other person any non-public information of a confidential nature
concerning USTMAN or its business or operations, except as is required
in governmental filings or judicial, administrative or
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arbitration proceedings. In the event that a party or its Affiliate
becomes legally required to disclose any such information in any
governmental filings or judicial, administrative or arbitration
proceedings, that party shall, and shall cause such Affiliate to,
provide the other party with prompt notice of such requirement so that
the other party may seek a protective order or other appropriate
remedy. In the event that such protective order or other remedy is
not obtained, the disclosing party shall, and shall cause such
Affiliate to, furnish only that portion of the information that the
disclosing party or such Affiliate, as the case may be, is advised by
its counsel is legally required and such disclosure shall not result
in any liability hereunder unless such disclosure was caused by or
resulted from a previous disclosure by the other party which was not
permitted by this Agreement, by that certain Confidentiality Agreement
between the parties dated as of November 19, 1996. Subject to
applicable securities law or stock exchange requirements, the parties
hereto will promptly advise, and obtain the approval of, the other
parties before issuing any press release with respect to this
Agreement or the transactions contemplated hereby.
(b) If the parties fail to close the acquisition of
Shares contemplated in this Agreement, each party shall, and shall
cause its officers, directors, employees, representatives and agents
(the "Representatives") to return all copies of the other party's
confidential non-public information in its possession or in the
possession of its Representatives, and destroy all copies of any
analyses, compilations, studies or other documents prepared by that
party or its Representatives or for its use containing or reflecting
any such information.
For purposes of this Agreement, non-public information of a
confidential nature
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shall not include any information which (i) at the time of disclosure
or thereafter is generally available to and known by the public (other
than as a result of a disclosure directly or indirectly by a party,
its Affiliate or its Representatives), (ii) was available to a party
on a nonconfidential basis from a source other than the other party,
its Affiliate or Representatives, provided that such source is not and
was not directly or indirectly bound by a confidentiality agreement
with the nondisclosing party, its Affiliate or Representatives with
respect to that information or (iii) has been independently acquired
or developed by the other party, its Affiliate or Representatives,
without violating any obligations under this agreement, that certain
Confidentiality Agreement between the parties dated as of November 19,
1996.
(c) For a period of five years after the Closing Date,
Buyer will preserve and retain the books and records of USTMAN and
make such books and records available at the then current
administrative headquarters of Buyer to Seller and its officers,
employees and agents, upon reasonable notice and at reasonable times,
at Seller's cost and expense, it being understood that Seller shall be
entitled to make copies of any such books and records as shall be
reasonably necessary.
Section X.3 Expenses. Buyer and Seller shall pay their
own respective expenses, including the fees and disbursements of their
respective counsel in connection with the negotiation, preparation and
execution of this Agreement and the consummation of the transactions
contemplated herein.
Section X.4 Entire Agreement. This Agreement, including
all schedules and exhibits hereto, constitutes the entire agreement of the
parties and supersedes any prior oral or written agreements with respect to the
subject matter hereof, and may not be modified, amended
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or terminated except by a written instrument specifically referring to this
Agreement signed by all the parties hereto.
Section X.5 Waivers and Consents. All waivers and
consents given hereunder shall be in writing. No waiver by any party hereto of
any breach or anticipated breach of any provision hereof by any other party
shall be deemed a waiver of any other contemporaneous, preceding or succeeding
breach or anticipated breach, whether or not similar.
Section X.6 Notices. All notices and other
communications hereunder shall be in writing and shall be deemed to have been
received only if and when (a) personally delivered (b) if mailed, on the third
day after mailing, by United States mail, first class, postage prepaid, by
certified mail, return receipt requested, addressed in each case as follows (or
to such other address as may be specified by like notice) or (c) delivered by
overnight courier or facsimile:
(i) if to Buyer, to:
Watson General Corporation
32-B Mauchly
Irvine, California 92718
Facsimile: 714-753-7986
Attention: President
(ii) if to Seller, to:
NDE Environmental Corporation
8900 Shoal Creek Blvd.
Bldg. 200
Austin, Texas 78758
P.O. Box 140795
Austin, Texas 78714
Facsimile: 512-459-1459
Attention: President
Section X.7 Successors and Assigns. This Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors, legal representatives
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and assigns. No third party shall have any rights hereunder.
Section X.8 Performance. Seller agrees to cause USTMAN
to perform all its obligations and agreements under this Agreement and hereby
guarantees performance by USTMAN of all such obligations and agreements.
Section X.9 Choice of Law; Section Headings; Table of
Contents. This Agreement shall be governed by the internal laws of the State
of Texas (without regard to the choice of law provisions thereof). The section
headings and any table of contents contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.
Section X.10 Counterparts. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original and all of which together shall be deemed to be one and the same
instrument.
Section X.11 Jurisdiction and Venue. Seller and Buyer
hereby consent to personal jurisdiction in any action brought with respect to
this Agreement and the transactions contemplated hereunder in any federal or
state court in Harris County, Texas and agree that service of process may be
accomplished pursuant to Section 10.6 above.
Section X.12 Severability. The invalidity or
unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement which shall
remain in full force and effect.
Section X.13 Assignment. This Agreement and each
party's rights hereunder may not be assigned without the prior written consent
of the other parties; provided that no such consent shall be required by Buyer
or Seller to assign all or part of its rights to USTMAN or Affiliate but no
such assignment shall relieve the assigning party of any of its obligations
under
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this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
WATSON GENERAL CORPORATION
By: /s/ RONALD G. CRANE
-------------------------------------
Ronald G. Crane
President and Chief Executive Officer
NDE ENVIRONMENTAL CORPORATION
By: /s/ JAY ALLEN CHAFFEE
-------------------------------------
Jay Allen Chaffee
Chairman of the Board of Directors
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SCHEDULES
Schedule 4.1 Foreign Qualifications
Schedule 4.4 Seller Non-Contravention
Schedule 4.7 Seller Litigation
Schedule 4.9 Contracts and Commitments
Schedule 4.10 Taxes
Schedule 4.11 Title to Properties
Schedule 4.12 Trademarks, Trade Names and Intellectual Property
Schedule 4.13 Financial Statements
Schedule 4.15 Liabilities
Schedule 4.16 Employees
Schedule 4.19 Tangible Personal Property
Schedule 4.20 Insurance Policies
Schedule 4.21 Permits
Schedule 4.22 Distributed Products
Schedule 4.23 Safety Reports
Schedule 4.24 Transactions with Certain Persons
Schedule 4.26 Studies
Schedule 4.28 Employee Benefit Plans
Schedule 4.29 Environmental Matters
Schedule 4.31 Changes to Employee Benefits
Schedule 5.3 Buyer Non-Contravention
Schedule 5.9 Financial Condition
Schedule 6.4 Noncompetition
<PAGE> 1
EXHIBIT 10.2
================================================================================
SECURITIES PURCHASE AGREEMENT
DATED AS OF
MAY 22, 1997
AMONG
WATSON GENERAL CORPORATION,
SAGAPONACK PARTNERS, L.P.,
AND
SAGAPONACK INTERNATIONAL PARTNERS, L.P.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
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SECTION 1
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.3 Other Definitional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 2
THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1 The Senior Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1.1 The Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1.2 Form of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2 The Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2.1 Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.2 Execution of Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.3 Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.4 Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.5 Mutilated or Missing Share Certificates . . . . . . . . . . . . . . . . . . . . . 15
2.2.6 Payment of Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.7 Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.8 Adjustment in Base Ownership Percentage . . . . . . . . . . . . . . . . . . . . . 16
2.3 The Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.3.1 Issuance of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.4 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4.1 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4.2 Mechanics of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4.3 Further Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4.4 Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.5 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.5.1 Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.5.2 Interest Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.5.3 Interest Payment Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6 Mandatory Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6.1 Scheduled Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6.2 Mandatory Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.7 Overdue Payments; Business Days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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2.8 Optional Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.8.1 At Any Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.8.2 Effect of Notice of Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.9 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.9.1 Demand Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.9.2 Incidental Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.9.3 Registration Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.9.4 Preparation; Reasonable Investigation. . . . . . . . . . . . . . . . . . . . . . 24
2.9.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.10 Issuance of Adjustment Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 3
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1 Representations and Warranties of Investors . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.1 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.2 Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.3 Legal Status; Qualification. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.4 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.5 Corporate Power and Authority; Governmental or Other Consents . . . . . . . . . . 27
3.1.6 Due Authorization; Validity; Enforceability . . . . . . . . . . . . . . . . . . . 28
3.1.7 Truth and Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . 28
3.2 Representations and Warranties of Company . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.2.1 Legal Status; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.2.2 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.2.3 Corporate Power and Authority; Governmental or Other Consents . . . . . . . . . . 29
3.2.4 Due Authorization; Validity; Enforceability . . . . . . . . . . . . . . . . . . . 29
3.2.5 Ownership of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2.7 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.8 Truth and Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.9 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.10 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2.11 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2.13 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2.14 Debt Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.2.15 Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.2.16 Certain Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2.17 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2.18 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.2.19 Hazardous Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.2.20 No Subordination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
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<TABLE>
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3.2.21 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2.22 Regulations G, U, T and X. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2.23 Investment Company Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.24 Foreign Investment in Real Property Tax Act. . . . . . . . . . . . . . . . . . . 36
3.2.25 Foreign Corrupt Practices Act. . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.26 Valid Issuance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.27 Acquisition Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.28 Employment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.2.29 Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.2.30 Deposit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 4
CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.1 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.2 Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.3 Executed Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.4 Certified Documents, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4.6 Other Acts, Conditions, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4.7 Documents in Satisfactory Form. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
4.8 Transaction Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.9 Pro Forma Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.10 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.11 Fees and Disbursements of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
4.12 California Permit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.13 Waiver of Demand Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 5
AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.1 Punctual Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.2 Accounting Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.3 Reporting Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.4 Existence; Compliance With Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.6 Facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.7 Taxes and Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.8 Notice to Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.9 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.10 Notice to Investors Regarding ERISA Matters. . . . . . . . . . . . . . . . . . . . . . . . . 44
5.11 Visitation Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.12 Performance of Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
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<TABLE>
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5.13 Worker Adjustment Retraining and Notification Act Notice. . . . . . . . . . . . . . . . . . 45
5.14 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.15 Divestitures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.16 Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 6
NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.1 Use of Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.2 Dividends, Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.3 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.4 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.5 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.6 Subsidiaries; Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.7 Guaranteed Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.8 Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.9 Restrictions on Sales of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.10 Management or Consulting Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.11 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.12 Amendments of Corporate Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
6.13 Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
6.14 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
6.15 Sale or Issuance of Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.16 Lease Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.17 Deposit Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 7
EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.3 No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
7.4 Set-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 8
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.2 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.3 Costs, Expenses, Management and Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . 56
8.4 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.5 Entire Agreement, Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.6 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
</TABLE>
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8.7 Severability of Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.8 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.9 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.10 Incorporation of Exhibits and Schedules by Reference. . . . . . . . . . . . . . . . . . . . 58
8.11 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.12 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
</TABLE>
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SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT is entered into as of this
22nd day of May, 1997, by and among WATSON GENERAL CORPORATION, a California
corporation ("Company"), and SAGAPONACK PARTNERS, L.P., a Delaware limited
partnership and SAGAPONACK INTERNATIONAL PARTNERS, L.P., a Cayman Islands
limited partnership (each, an "Investor" and together, the "Investors").
BACKGROUND
Company currently owns three active Subsidiaries, Toxguard
Fluid, Toxguard Systems and Watson Systems. It wishes to divest itself of
Toxguard Fluid and Toxguard Systems and to merge Watson Systems into itself.
In addition, it wishes to acquire all of the shares of stock of Ustman from
Seller and thereupon to merge Ustman into itself. In order to finance these
transactions, Company wishes to borrow $7,000,000. Investors are prepared,
subject to the conditions specified herein, to make such loan.
NOW, THEREFORE, Company and Investors hereby agree as follows:
SECTION
DEFINITIONS
1.1 Certain Defined Terms.
The following terms used in this Agreement have the following
meanings:
"Acquisition" means the acquisition of by Company of all of
the shares of stock of Ustman from Seller pursuant to the Acquisition
Agreement.
"Acquisition Agreement" means an agreement dated May 21, 1997,
pursuant to which Company has agreed to purchase all of the shares of stock of
Ustman from Seller.
"Act" means the Securities Act of 1933, as amended from time
to time, or any successor statute.
"Adjusted Base Ownership Percentage" shall have the meaning
set forth in Section 2.2.8.
"Adjusted Date" shall have the meaning set forth in Section
2.2.8.
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<PAGE> 8
"Adjusted EBTDA" means, at any time, earnings from continuing
operations before taxes, depreciation and amortization for each monthly
accounting period in respect of which Company shall have delivered financial
statements hereunder, computed in accordance with GAAP, but excluding (i) a
one-time restructuring charge of up to $200,000 taken during 1997 in connection
with the closing of Company's Kansas City facility and Company's headquarters
in Irvine, California, (ii) all fees paid from time to time to Management,
(iii) any non-cash accounting charges which in accordance with GAAP arise in
connection with this Agreement, the Acquisition Agreement or the Senior
Subordinated Notes, (iv) any amounts paid to Dan Cook in warrants, options or
common stock pursuant to the Cook Employment Agreement and (v) out-of-pocket
amounts paid in connection with the closing of the transaction contemplated by
the Loan Documents and the Warrant Agreement. If any of the Existing Debt is
repaid prior to the repayment dates set forth in the "Debt Amortization"
schedule set forth in the Projections, an interest expense deduction in the
amount equal to the product of (a) the amount prepaid times (b) the rate at
which the prepared amount bore interest immediately prior to prepayment shall
be made to Adjusted EBTDA.
"Adjusted EBTDA Per Share" means, at any time, Adjusted EBTDA
at such time divided by the average number of shares of stock of Company
outstanding during the immediately preceding twelve-month period on a fully
diluted basis.
"Adjustment Warrants" means the warrants issued pursuant to
Section 2.10.
"Affiliate" means, as to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (including,
with its correlative meanings, "controlled by" and "under common control with")
means possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities,
or partnership or other ownership interests, by contract or otherwise),
provided that, in any event: (a) any Person which owns directly or indirectly
5% or more of the securities having ordinary voting power for the election of
directors or other members of the governing body of a corporation or 5% or more
of the partnership or other ownership interests of any other Person (other than
as a limited partner of such other Person) will be deemed to control such
corporation or other Person and (b) each stockholder, director or officer of
Company or any of its Affiliated Companies shall be deemed to be an Affiliate
of Company and each of such Affiliated Companies.
"Affiliated Companies" of Company means Watson Systems, Inc.
and Ustman, and any Subsidiary of Company or of Watson Systems, Inc. or Ustman
created after the date hereof.
"Agreement" means this Securities Purchase Agreement, as it
may be amended from time to time.
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<PAGE> 9
"Applicable Rate" means (i) for the period from the date
hereof until the first anniversary hereof, 10%; (ii) for the period from said
first anniversary until the second anniversary hereof, 11%; (iii) for the
period from said second anniversary until the third anniversary thereof, 12%;
(iv) for the period from said third anniversary until the fourth anniversary
hereof, 13% and (v) for the period from said fourth anniversary and at all
times thereafter, 14%.
"Balance Sheet Date" has the meaning set forth in Section
3.2.6.
"Bankruptcy Code" means the Bankruptcy Reform Act, Title 11 of
the United States Code, as amended or recodified from time to time, or any
successor statute.
"Base Ownership Percentage" has the meaning set forth in
Section 2.2.1. hereof.
"Board" means the Board of Conveyors of the Federal Reserve
System.
"Business" means the business of Company and its Affiliated
Companies as presently conducted and as proposed to be conducted in the
Business Plan.
"Business Day" means any day on which commercial banks in New
York, New York are required to be open for business.
"Business Plan" means the investment memorandum of Company
dated January 8, 1997, which has been delivered to Investors.
"Capital Expenditure" for any period means the aggregate of
all expenditures (including that portion of Capital Leases which is
capitalized on the consolidated balance sheet of Company and its Affiliated
Companies) by Company and its Affiliated Companies during such period that, in
conformity with GAAP, are included in property, plant and equipment reflected
on the consolidated balance sheet of Company and its Affiliated Companies.
"Capital Lease" as applied to any Person, means any lease of
any property (real, personal or mixed) by that Person as lessee which, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that Person.
"CERCLA" has the meaning set forth in Section 3.2.19.
"Closing Date" means the date on which all of the conditions
precedent set forth in Section 4 have been met and the Loan has been disbursed
to Company hereunder.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute.
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<PAGE> 10
"Common Stock" means Company's Common Stock.
"Company" has the meaning set forth in the first paragraph of
this Agreement.
"Company Agreement" means the Company Agreement between
Company and the Investors.
"Company Pledge Agreement" means an agreement substantially in
the form of Exhibit G, pursuant to which Company has pledged all of the shares
of stock owned by it in its Subsidiaries and all other instruments owned by it
to Investors to secure Company's obligations hereunder and under the Senior
Subordinated Notes.
"Company Sale" means the date on which a Person or group of
Persons (other than the Investors or their transferees) acting in concert shall
have acquired directly or indirectly, and in one or a series of transactions,
at least 50% of (i) the outstanding shares of Common Stock, whether by merger,
purchase or otherwise or (ii) the operating assets of Company.
"Company Security Agreement" means an agreement substantially
in the form of Exhibit H, pursuant to which Company has pledged all of its
personal property including its accounts, contract rights and general
intangibles to Investor to secure Company's obligations hereunder and under the
Senior Subordinated Notes.
"Cook Employment Agreement" means an agreement dated May 21,
1997 between Company and Dan R. Cook.
"Cumulative Adjusted EBTDA" means the total Adjusted EBTDA
from the Closing Date until the first Event of Liquidity.
"Cumulative Adjusted EBTDA Per Share" means the Cumulative
Adjusted EBTDA divided by the average fully diluted number of shares
outstanding from the Closing Dated to the first Event of Liquidity.
"Current Assets" means, at any date of determination thereof,
all amounts that would, in accordance with GAAP, be included as current assets
on a consolidated balance sheet of Company and its Affiliated Companies as of
such date.
"Current Liabilities" means, at any date of determination
thereof, all amounts that would, in accordance with GAAP, be included as
current liabilities on a consolidated balance sheet of Company and its
Affiliated Companies as of such date.
"Deficit Adjustment Factor" means, in the event a Projection
Deficit exists, a rate equal to the sum of (a) the product of (i) 29.76% less
the Stated Base Factor and (ii) the
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<PAGE> 11
Projection Deficit divided by 13.4% and (b) the Stated Base Factor. For
example, if the Stated Base Factor is 11% and the Projection Deficit is 5%, the
Deficit Adjustment Factor shall be 18%, or (a)(i) 29.76% less 11%, or 18.76%,
multiplied by (ii) 5% divided by 13.4%, or 37.31%, the product equal to 7%,
plus (b) 11%.
"Dollars" and "$" mean the lawful money of the United States
of America.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, or any successor statute.
"ERISA Affiliate" means any company which, as of a given
moment, is a member of a "controlled group of corporations" or a group of
"trades or businesses (whether or not incorporated) which are under common
control" (as defined in Sections 414(b) and (c) of the Code, respectively) of
which Company or any of its Affiliated Companies is a member.
"Events of Default" means each of the events set forth in
Section 7.1.
"Events of Liquidity" means each of (i) a Stock Offering, (ii)
a sale of all or substantially all of Company's assets, (iii) any event
pursuant to which any Person other than the Investors acquire the ability,
directly or indirectly, by contract or otherwise (other than as a result of
owning shares of Common Stock issued to Sagaponack Partners, L.P., pursuant to
Section 2.2.1), to elect or to control a majority of the members of Company's
Board of Directors and (iv) the occurrence of May 22, 2000.
"Excess Cash" means, at any time, (i) with respect to payment
of principal, all cash and cash equivalents of Company existing at the end of a
calendar quarter after expenses of Company, including interest payments, have
been paid or provided for less any sums which Company, in good faith, has
reserved for expenditures in the next two succeeding calendar quarters for a
specific business purpose which are not prohibited pursuant to the terms of
this Agreement and (ii) with respect to payment of interest on the Senior
Subordinated Notes, all cash and cash equivalents of Company existing at the
end of a calendar quarter after expenses of Company (other than interest on the
Senior Subordinated Notes) have been paid or provided for less any sums which
Company, in good faith, has reserved for expenditures in the next two
succeeding calendar quarters for a specific business purpose which are not
prohibited pursuant to the terms of this Agreement.
"Existing Debt" means the Indebtedness described on Schedule
1.2 hereof.
"Fair Market Value" means (a) in the case of the third
anniversary of the date hereof or such other date after the third anniversary
of the date hereof designated by the Investors, the average of the bid and ask
price of Company's securities for the 30 days immediately prior to such date,
(b) in the case of a Stock Offering, the per share offering price of the stock
offered, (c) in the case of a Company Sale which is a sale of outstanding
shares of
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<PAGE> 12
Common Stock, the per share price paid for the shares sold in the Company Sale
and (d) in the case of a Company Sale which is a sale of assets of Company, the
per share price paid for such assets adjusted to take into account the
percentage of assets purchased minus liabilities payable were Company to
liquidate immediately after the Company Sale (for example, if 75% of Company's
assets are purchased, the per share price paid for the assets shall be the
total consideration minus liabilities payable were Company to liquidate
immediately after the Company Sale paid for such assets divided by a number
equal to 75% of the then outstanding shares of Common Stock).
"Financial Statements" means for Ustman, the unaudited income
statements and balance sheets for the twelve month period ending December 31,
1995 and December 31, 1996 and the unaudited income statement and balance sheet
for the three month period ending March 31, 1997 and, for Watson, the audited
income statements, balance sheet and cash flow statements for the twelve month
periods ending September 30, 1994 and September 30, 1995, September 30, 1996
and the unaudited income statement and balance sheet for the six month period
ending March 31, 1997.
"Fiscal Year" means the fiscal year of Company, which shall be
the twelve-month period ending on the last day in the month of September, or
such other fiscal years as Company may from time to time elect.
"GAAP" means generally accepted accounting principles and
practices, consistently applied, as promulgated in (i) the documents of Rule
203 of the Code of Professional Conduct of the American Institute of Certified
Public Accountants, (ii) Statement of Accounting Standards No. 43 "Omnibus
Statement on Auditing Standards" of the Auditing Standards Board of the
American Institute of Certified Public Accountants and (iii) any superseding or
supplemental documentation of equal authority promulgating generally accepted
accounting principles and practices, all as in effect from time to time.
Accounting principles and practices are "consistently applied" when the
accounting principles and practices observed in a current period are comparable
in all material respects to the accounting principles and practices applied in
the preceding period.
"Guaranteed Indebtedness" of any Person means all Indebtedness
(x) of any Person other than such Person and either (y) guaranteed directly or
indirectly in any manner by such Person, or in effect guaranteed directly or
indirectly by such Person through an agreement (a) to pay or purchase such
Indebtedness or to advance or supply funds for the payment or purchase of such
Indebtedness, (b) to purchase, sell or lease (as lessee or lessor) property, or
to purchase or sell services, primarily for the purpose of enabling the debtor
to make payment of such Indebtedness or to assure the holder of such
Indebtedness against loss, (c) to supply funds to or in any other manner invest
in the debtor (including any agreement to pay for property or services
irrespective of whether or not such property is received or such services are
rendered and any agreement to maintain working capital or other balance sheet
condition) or (d) otherwise to assure the holder of such Indebtedness against
loss or (z) secured
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<PAGE> 13
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any lien, security interest or other
charge or encumbrance upon or in property (including without limitation
accounts and contract rights) owned by such Person, even though such Person
has not assumed or become liable for the payment of such Indebtedness.
"Hazardous Material" means any hazardous or toxic substance,
material or waste which is or becomes regulated by the State of California, any
regional or local governmental authority within the State of California, or the
United States Government and includes, without limitation, any material or
substance that is or becomes defined as a "hazardous substance," "pollutant,"
"contaminant," "toxic chemical," "hazardous material," "toxic substance," or
"hazardous chemical" under (i) CERCLA; (ii) the Emergency Planning and
Community Right-to-Know Act, 42 U.S.C. Section 1101 et seq.; (iii) the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq.; (iv)
the Toxic Substance Control Act, 15 U.S.C. Section 2601 et seq.; (v) the
Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et seq.; (vi)
the Federal Water Pollution Control Act, 33 U.S.C. Section 1521 et seq.; (vii)
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.;
(viii) regulations promulgated under any of the above statutes; or (ix) any
applicable state, regional or local statute, ordinance, rule or regulation that
has a scope or purpose similar to those identified above, including, but not
limited to, California Health and Safety Code Sections 25115, 25117, 25249.8,
25316, 25501(j), 25501(k) and 25501.1. The term "Hazardous Material" also
means (i) asbestos, polychlorinated biphenyls ("PCBs") and urea-formaldehyde
and (ii) any substance containing petroleum, as defined in Section 9001(8) of
the Resource Conservation and Recovery Act (42 U.S.C. Section 6991(8)), or 40
C.F.R. Section 280.1, or any derivative of such petroleum. References to any
statute, ordinance, rule or regulation in this definition shall be deemed to
refer to such statute, ordinance, rule or regulation as amended from time to
time, or any successor statute, ordinance, rule or regulation.
"Indebtedness" means, for any Person, (i) all indebtedness or
other obligations of such Person for borrowed money or for the deferred
purchase price of property or services, (ii) all indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (iii) all obligations
under leases which shall have been or should be, in accordance with GAAP,
recorded as Capital Leases in respect of which such Person is liable as lessee,
(iv) liabilities in respect of unfunded vested benefits under any Plan, (v) all
obligations owed pursuant to any interest rate hedging arrangement or in
respect of any letter of credit established for the account of such Person
(including without limitation all obligations to reimburse the issuer thereof
in respect of amounts drawn thereunder) and (vi) all Guaranteed Indebtedness.
"Indemnified Liabilities" has the meaning set forth in
Section 8.4.
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<PAGE> 14
"Indemnitees" has the meaning set forth in Section 8.4.
"Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original
issue discount on any Indebtedness and the current interest portion of any
deferred payment obligation) and all but the principal component of rentals in
respect to Capital Leases, paid, accrued or scheduled to be paid or accrued by
Company and its Affiliated Companies during such period, all determined in
accordance with GAAP.
"Investment" as applied to any Person, means any direct or
indirect purchase or other acquisition by that Person of stock or other
securities, or of a beneficial interest in stock or other securities, of any
other Person (other than a Subsidiary), or any direct or indirect loan, advance
(other than advances to employees for moving and travel expenses, drawing
accounts, and similar expenditures in the ordinary course of business) or
capital contribution by that Person to any other Person, including all
Indebtedness and accounts receivable from that other Person which are not
current assets or did not arise from sales of goods or services to that other
Person in the ordinary course of business. The amount of any Investment (other
than loans, advances and accounts receivable) shall be the original cost of
such Investment plus the cost of all additions thereto, and the amount of any
Investment shall be without any adjustments for increases or decreases in
value, or write-ups, write-downs, or write-offs with respect to such
Investment.
"Investor" and "Investors" have the meanings set forth in the
first paragraph of this Agreement.
"Investor's Notice" has the meaning set forth in Section
2.5.3.
"Letter of Intent" means the amended letter of intent dated
April 9, 1997 from the Managing Partner of Investors to the President and Chief
Executive Officer of Company attaching an amended summary term sheet thereto.
"Liabilities" means obligations of any nature, whether
absolute, accrued, contingent or otherwise, whether due or to become due and
whether or not required to be reflected or reserved against on a balance sheet
under GAAP, including without limitation, in the case of Company or any of its
Affiliated Companies, obligations arising from or in connection with the
operation of Company and the Business prior to the consummation of the
Acquisition, for which Company or any of its Affiliated Companies could be
liable after the consummation of the Acquisition, whether or not assumed under
the Acquisition Agreement.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind, whether voluntary or involuntary,
including any conditional sale or other
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<PAGE> 15
title retention agreement, any lease in the nature thereof, and the filing of,
or agreement to give, any financing statement under the Uniform Commercial Code
of any jurisdiction.
"Loan" means the total amount advanced by Investors to Company
pursuant to Section 2.1.
"Loan Documents" means this Agreement, the Pledge Agreement,
each Security Agreement and each Senior Subordinated Note.
"Management" means Sagaponack Management Co. Inc.
"Material Agreements" means the Loan Documents and the Warrant
Agreement.
"Multiemployer Plan" has the meaning set forth in Section
3.2.15.
"NDE Note" means a note of Company payable Seller given in
connection with the Acquisition with a maturity of May 21, 1998 and having a
maximum principal amount of $500,000.
"Net Adjustment Percentage" means, for any quarter, the excess
of the Deficit Adjustment Factor over the Stated Base Factor for such quarter.
"Obligations" means all obligations of every nature of Company
from time to time owed to Investor under any of the Loan Documents, including,
without limitation, all obligations of Company under this Agreement and the
Senior Subordinated Note.
"PBGC" means the Pension Benefit Guaranty Corporation or any
successor to its functions.
"Pension Plan" has the meaning set forth in Section 3.2.15.
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<PAGE> 16
"Permitted Senior Debt" means Senior Debt which is incurred by
Company to institutional lenders or other investors approved by Investors in
aggregate principal outstanding amounts not to exceed the following amounts in
the following years:
<TABLE>
<S> <C>
for the period from, the date hereof
until the first anniversary hereof $0
for the period from said first anniversary
until the second anniversary hereof $1,000,000
for the period from said second
anniversary until the third
anniversary thereof $3,000,000
and for the period from said third
succeeding anniversary until the fifth
anniversary hereof $5,000,000;
</TABLE>
provided that no such Permitted Senior Debt may be incurred in any period in
which Cumulative Adjusted EBTDA Per Share does not equal or exceed the
projected aggregate amount thereof as shown on the Projections.
"Permitted Investments" means Investments in: (i) obligations
issued or guaranteed by the United States of America; (ii) certificates of
deposit, bankers acceptances and other "money market instruments" issued by any
bank or trust company organized under the laws of the United States of America
or any state thereof and having capital and surplus in an aggregate amount not
less than $500,000,000; (iii) open market commercial paper bearing the highest
credit rating issued by Standard & Poor's Corp. or by another nationally
recognized credit rating firm; (iv) repurchase agreements entered into with any
bank or trust company organized under the laws of the United States of America
or any state thereof having capital and surplus in an aggregate amount not less
than $500,000,000; (v) shares of "money market funds", each having net assets
of not less than $500,000,000; in each case maturing or being due or payable in
full not more than 180 days after Company's acquisition thereof and (vi) shares
of stock in Affiliated Companies to the extent such shares are pledged to
Investor pursuant to the Pledge Agreement to secure Company's obligations to
Investors hereunder and under the Senior Subordinated Notes. "Permitted
Investments" also means any Investment in a Person (other than an Affiliate
which is not an Affiliated Company) in the ordinary course of business which
does not exceed $100,000.
"Person" means and includes natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts and other organizations, whether or not legal entities, and
governments and agencies and political subdivisions thereof.
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<PAGE> 17
"Plan" means an "employee benefit plan" (as defined in Section
3(3) of ERISA) maintained or contributed to by Company or any of its Affiliated
Companies.
"Potential Default" means any condition, event or act which,
with the giving of notice, passage of time or both, would constitute an Event
of Default.
"Prepayment Price" has the meaning set forth in Section 2.8.1.
"Process" means the statistical inventory reconciliation
monthly monitoring process of determining leakage from underground storage
tanks.
"Projection Deficit" means, at any time, the percentage equal
to the excess of 70% of the Cumulative EBTDA Per Share forecast in the
Projections over the actual percentage of Cumulative EBTDA Per Share set forth
in the Projections that is achieved. For example, if the amount of Cumulative
EBTDA Per Share as a percent of that projected is 65%, the Projection Deficit
shall be 5%, or 70% less 65%. At no time shall such Projection Deficit exceed
13.4%.
"Projections" shall mean the projections of Company attached
to this Agreement as Schedule 3.2.29.
"Registration" means registration of Registrable Securities
under the Act.
"Registrable Securities" mean each of the shares of Common
Stock issued pursuant hereto, the Warrants and each share of Common Stock
issued or issuable upon exercise of any of the Warrants which can be registered
under the Securities Act.
"Reportable Event" means a "reportable event" (as defined in
Section 4043(b) of ERISA) with respect to which reporting to the PBGC within 30
days of occurrence has not been waived.
"Securities" means the Senior Subordinated Notes, the Common
Stock issued pursuant thereto and the Warrants.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Agreements" shall mean Company Security Agreement,
the Watson Systems Security Agreement, the Toxguard Fluid Security Agreement
and the Toxguard Systems Security Agreement.
"Seller" means NDE Environmental Corporation, a Delaware
corporation.
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<PAGE> 18
"Senior Debt" means Indebtedness of Company which is senior,
in any way, whether in right of payment or security or otherwise, to the
obligation of Company in respect of the Senior Subordinated Notes, excluding
Indebtedness described on Schedule 1.2.
"Senior Subordinated Debt" means the Indebtedness of Company
created pursuant to this Agreement, including the principal amount of the
Senior Subordinated Notes, and any interest payable thereon.
"Senior Subordinated Note" means any promissory notes
evidencing all or any part of the Senior Subordinated Debt, including the notes
to be issued by Company to the Investors on the Closing Date in the principal
amount of $7,000,000, and any note or notes subsequently issued in place of
such notes.
"Share Certificate" means a certificate representing shares of
Common Stock issued to an Investor hereunder pursuant to Section 2.2.1 in the
form of Exhibit I.
"Shareholders Agreement" means an agreement of even date
herewith among certain holders of Common Stock or warrants to purchase Common
Stock, and each Investor.
"Solvent" means, when used with respect to any Person, that:
(a) the fair valuation of all of its property is in excess of the total amount
of its debts (including contingent liabilities as properly valued) as of the
date solvency is determined under the Bankruptcy Code or any applicable
enactment of the Uniform Fraudulent Transfer Act or similar statute; (b) the
present fair salable value of all of its property is more than the amount that
will be required to pay the Person's existing debts (including contingent
liabilities as properly valued) as they become absolute and matured, as
determined in accordance with any applicable enactment of the Uniform
Fraudulent Conveyance Act or similar statute; (c) it does not intend to incur,
nor believe that it will incur, nor reasonably should believe that it will
incur, debts beyond its ability to pay as they mature, as determined in
accordance with the Bankruptcy Code, any applicable enactment of the Uniform
Fraudulent Conveyance Act, any applicable enactment of the Uniform Fraudulent
Transfer Act or any similar statute and (d) is not engaged in a business or a
transaction or about to be engaged in a business or a transaction for which its
property constitutes (i) unreasonably small capital, for purposes of the
Bankruptcy Code and any applicable enactment of the Uniform Fraudulent
Conveyance Act, or similar statute or (ii) unreasonably small assets, for
purposes of any applicable enactment of the Uniform Fraudulent Transfer Act, or
similar statute.
"Stated Base Factor" means (i) for the period from the date
hereof until the first anniversary hereof, 10%; (ii) for the period from said
first anniversary until the second anniversary hereof, 11%; (iii) for the
period from said second anniversary until the third anniversary thereof, 12%;
(iv) for the period from said third anniversary until the fourth anniversary
hereof, 13% and (v) for the period from said fourth anniversary and at all
times thereafter, 14%.
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<PAGE> 19
"Stock Offering" means an offering, by Company after the date
hereof, of newly-issued shares of Common Stock, to the public pursuant to a
registration statement under the Act.
"Subsidiary" of any Person means a corporation of which more
than 50% of the outstanding shares of capital stock of each class having
ordinary voting power is owned by such Person, by one or more Subsidiaries of
such Person, or by such Person and one or more of its Subsidiaries.
"Toxguard Fluid" means Toxguard Fluid Technologies, Inc., a
California corporation and a wholly owned subsidiary of Company.
"Toxguard Fluid Security Agreement" means an agreement
substantially in the form of Exhibit F, pursuant to which Toxguard Fluid has
pledged all of its personal property assets, including its accounts, contract
rights and general intangibles to Investor to secure Company's obligations in
respect of the Loan.
"Toxguard Systems" means Toxguard Systems, Inc., a Nevada
corporation of which Company owns 96% of the common stock and 87% of the
preferred stock.
"Toxguard Systems Security Agreement" means an agreement
substantially in the form of Exhibit F, pursuant to which Toxguard Systems has
pledged all of its personal property assets, including accounts, contract
rights and general intangibles to Investor to secure Company's obligations in
respect of the Loan.
"Transfer" means the sale, pledge, assignment or other
transfer of the Senior Subordinated Notes, Company's Common Stock issued
pursuant hereto, or the Warrants, in whole or in part, and of the rights of the
holder thereof under any of the foregoing and this Agreement.
"Transfer Agent" means US Stock Transfer Corporation or such
other Person Company contractually designates to perform the duties of a
transfer agent on behalf of Company.
"Ustman" means Ustman Industries, Inc., a Delaware
corporation.
"WARN Act" has the meaning set forth in Section 5.14.
"Warrant Adjustment Amount" means at the time of determination
$7,000,000 minus all principal payments made on the Senior Subordinated Notes
prior thereto.
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<PAGE> 20
"Warrant Adjustment Date" shall mean the earlier of (a) the
third anniversary of the date hereof or such other date after the third
anniversary of the date hereof designated by the Investors, (b) the date of a
Stock Offering and (c) Company Sale.
"Warrant Agreement" means the Warrant Agreement issued by
Company to an Investor in the form of Exhibit K.
"Warrants" means the warrants issued pursuant to the Warrant
Agreement.
"Watson Systems" means Watson Systems, Inc., a Missouri
corporation and a wholly owned subsidiary of Company.
"Watson Systems Security Agreement" means an agreement
substantially in the form of Exhibit F, pursuant to which Watson Systems has
pledged all of its personal property, including its accounts, contract rights
and general intangibles to Investor to secure Company's obligations in respect
of the Loan.
"Welfare Plan" has the meaning set forth in Section 3.2.15.
"Working Capital" means the amount by which Current Assets
exceeds Current Liabilities.
1.2 Accounting Terms.
For purposes of this Agreement, all accounting terms not
otherwise defined herein have the meanings assigned to them in conformity with
GAAP.
1.3 Other Definitional Provisions.
Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, to the singular
include the plural, and to the part include the whole. The term "including" is
not limiting and the term "or" has the inclusive meaning represented by the
term "and/or". The words "hereof", "herein", "hereunder", and similar terms
in this Agreement refer to this Agreement as a whole and not to any particular
provision of this Agreement. References to "Sections", "Exhibits" and
"Schedules" are to Sections, Exhibits and Schedules, respectively, of this
Agreement, unless otherwise specifically provided. Terms defined herein may be
used in the singular or the plural.
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<PAGE> 21
SECTION 2
THE SECURITIES
2.1 The Senior Subordinated Note.
2.1.1 The Loan. Investors severally agree to make a term
loan to Company on the Closing Date, upon the terms and conditions of this
Agreement, in the principal amount of $7,000,000. The amount of the Loan shall
be disbursed to Company on the Closing Date, less any fees and expenses payable
by Company pursuant to this Agreement to the extent not otherwise paid by
Company. The amount of the Loan shall be deemed received by Company when such
amount has been wire transferred in accordance with instructions provided by
Company, and each Investor has provided Company with a FedWire identification
number with respect to such wire transfer. Investors and Company agree that
$5,100,000 is the "issue price" for the Senior Subordinated Notes under Section
1273 of the Code, and to report consistently that amount as the "issue price"
of the Senior Subordinated Notes. Investors will provide any independent
appraisal of the "issue price" of the Senior Subordinated Notes required by
Section 1273 of the Code or, in connection with GAAP, any required appraisal of
the fair market value of the Securities, and in such event the appraisal value
shall thereupon be utilized by the Company.
2.1.2 Form of Notes. Company's obligation to repay the Loan
shall be evidenced by a Senior Subordinated Notes in substantially the form of
Exhibit A, in the aggregate principal amount of $7,000,000, registered in the
name of Investors.
2.2 The Common Stock.
2.2.1 Issuance of Common Stock. On the Closing Date, in
consideration of the purchase by Investors of the Senior Subordinated Notes,
Company shall issue to Sagaponack Partners, L.P. 7,304,520 shares of Company's
Common Stock which represent in the aggregate 40% of the issued and outstanding
shares of Company's Common Stock immediately after issuance of such Common
Stock to Sagaponack Partners, L.P. (the "Base Ownership Percentage"). On the
Closing Date, Company shall deliver to Sagaponack Partners, L.P. one or more
Share Certificates representing the Common Stock issued pursuant to this
Section 2.2.1.
2.2.2 Execution of Share Certificates. Share Certificates
may be signed on behalf of Company by any Person, including the Transfer Agent,
authorized by Company to do so. Any Person who, on the actual date of the
execution of a Share Certificate, is authorized by Company to sign the Share
Certificate, may sign on Company's behalf even if such Person was not
authorized to do so on the Closing Date.
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<PAGE> 22
2.2.3 Registration. Company and the Transfer Agent may deem
and treat the registered Investor of a Share Certificate as the absolute owner
for all purposes, notwithstanding any notation of ownership or other writing
thereon made by anyone.
2.2.4 Exchanges. At the option of any Investor, any Share
Certificate issued to such Investor may be exchanged when surrendered at the
principal office of Company or the principal office of the Transfer Agent for
one or more Share Certificates, as the case may be, representing in the
aggregate a shares of Common Stock of a like number and kind in Company by such
Investor. Share Certificates surrendered for exchange shall be canceled by
Company or Company shall cause the Transfer Agent to cancel such Share
Certificates.
2.2.5 Mutilated or Missing Share Certificates. If any of
the Share Certificates shall be mutilated, lost, stolen or destroyed, Company
shall issue, or shall cause the Transfer Agent to issue, in exchange and
substitution for and upon cancellation of such Share Certificates, a new Share
Certificate representing an equivalent number of shares of Common Stock, but
only upon receipt of evidence of such loss, theft or destruction reasonably
satisfactory to Company or, if requested by Company, upon receipt of a duly
executed indemnification agreement reasonably satisfactory to Company or the
Transfer Agent; provided, however, that no Investor shall be required to
deliver an indemnity bond.
2.2.6 Payment of Expenses and Taxes. Company shall pay all
expenses and taxes imposed by law or any governmental agency, including any
documentary stamp taxes, attributable to the issuance of Common Stock pursuant
hereto; provided, that nothing in this Section 2.2.6 shall make Company liable
for any income taxes payable by the Investor and associated with the issuance
of the Common Stock pursuant hereto.
2.2.7 Securities Law Compliance. If the issuance of
any of the Common Stock hereunder requires the registration with, or approval
of, any governmental authority or requires listing on any national securities
exchange or national market system before such Common Stock may be so issued,
Company shall at its own expense cause such Common Stock to be duly registered,
approved or listed, as the case may be, so that such Common Stock may be issued
in accordance with the terms hereof.
2.2.8 Adjustment in Base Ownership Percentage. If upon the
occurrence of the first Event of Liquidity Company has achieved Cumulative
Adjusted EBTDA Per Share not greater than 90% of the Cumulative Adjusted EBTDA
Per Share as calculated for such date with respect to the Projections, the Base
Ownership Percentage shall be changed to a percentage calculated by (i)
determining the percentage by which Cumulative Adjusted EBTDA Per Share was
lower than Cumulative Adjusted EBTDA Per Share as shown for such date on the
Projections (but not lower than 70% of Cumulative Adjusted EBTDA Per Share as
shown for such date on the Projections) and subtracting that percentage from
90%, (ii) dividing such amount by 80%, (iii) adding the result to 100% and (iv)
multiplying such result by the Base Ownership Percentage. The resulting
percentage shall be the "Adjusted Base
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<PAGE> 23
Ownership Percentage". The date upon which the Investor completes this
calculation shall be called the "Adjustment Date". Except as provided below,
on the Adjustment Date Company shall issue to Sagaponack Partners, L.P.
additional shares of Common Stock (the "Adjustment Shares") in an amount that,
together with the shares of Common Stock issued to Sagaponack Partners, L.P. on
the Closing Date, Sagaponack Partners, L.P. will have been issued shares of
Common Stock equal to the Adjusted Base Ownership Percentage. Notwithstanding
the foregoing, if the Adjusted Base Ownership Percentage shall at any time
equal or exceed 50%, the Adjusted Base Ownership Percentage shall thereafter be
49.999%. The Adjustment Shares shall be issued in the same manner as the
shares of Common Stock issued on the Closing Date. Notwithstanding the
foregoing, no adjustment shall be made to the Base Ownership Percentage if
Company pays all principal of and interest on the Senior Subordinated Notes
prior to October 30, 1998 except in the event payment of principal and accrued
interest is required as a result of a Stock Offering, Company Sale or
acceleration of the Indebtedness pursuant hereto.
2.3 The Warrants.
2.3.1 Issuance of Warrants. On the Closing Date Company
shall enter into a Warrant Agreement in the form of Exhibit K and shall issue
to Sagaponack Partners, L.P. Warrants in the amounts set forth in the Warrant
Agreement upon the terms and conditions set forth in the Warrant Agreement.
The aggregate number of Warrants to be issued to Sagaponack Partners, L.P. on
the Closing Date pursuant hereto shall be 2,625,432 (subject to adjustment
pursuant to the terms of the Warrant Agreement) which is an amount which, when
the Warrants are exercised, will keep the aggregate number of shares of Common
Stock plus the shares of Common Stock issuable under the Warrants equal to the
Base Ownership Percentage, assuming all options, warrants and convertible
securities had been exercised or converted, as the case may be. If on the
Adjustment Date an Adjusted Base Ownership Percentage is determined, Company
shall issue to Company additional Warrants such that the total number of
Warrants issued to the Investor which, when exercised, will keep the aggregate
number of shares of Common Stock plus the shares of Common Stock issuable under
the Warrants will be equal to the Adjusted Base Ownership Percentage, assuming
all options, warrants and convertible securities had been exercised or
converted, as the case may be.
2.4 Transfers.
2.4.1 Transfers. After September 21, 1997, either Investor
may make one or more Transfers from time to time to any Person provided that
such Transfer is made in compliance with the Act and any applicable state
securities laws. Company shall cooperate in connection with any such Transfer.
Upon any Transfer, the transferee shall, to the extent of such Transfer, be
entitled to exercise the rights of the Investor making such Transfer and shall
thereafter be deemed an "Investor" under this Agreement.
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<PAGE> 24
2.4.2 Mechanics of Transfer. Company shall keep at its
principal office a register for the registration of any Senior Subordinated
Notes as to both principal and stated interest. If any Investor desires to
make a Transfer, such Investor shall surrender to Company the Senior
Subordinated Note or Notes to be Transferred. Upon such surrender, Company
shall promptly issue a new Senior Subordinated Note or Notes to the transferee
(and to the transferor as to any portion not Transferred) in the form of
Exhibit A in the aggregate principal amount of the Senior Subordinated Note or
Notes surrendered. Company shall register the new Senior Subordinated Notes as
to both principal and stated interest in the names of the transferees (and the
transferor as to any portion not Transferred).
2.4.3 Further Assurance. Company shall, from time to time
at the request of any Investor, execute and deliver to such Investor or to such
party or parties as such Investor may designate, all further instruments as
may, in such Investor's opinion be necessary or advisable to give full force
and effect to any Transfer and shall provide to such Investor or to such party
or parties as such Investor may designate, all such information as such
Investor may request.
2.4.4 Information. In connection with any Transfer, an
Investor may disclose all documents and information which such Investor now has
or may hereafter acquire relating to the Loan, the Loan Documents, Company or
any of its Affiliated Companies or the Business; provided that the Person to
whom such documents and information are disclosed agree to maintain the
confidentiality thereof.
2.5 Interest.
2.5.1 Interest Rate. Except as provided in Sections 2.5.3
and 2.7, each Senior Subordinated Note shall bear interest at a per annum rate
equal to the Applicable Rate in effect from time to time. Interest on the
amount of the Senior Subordinated Notes outstanding from time to time shall be
computed on the basis of a 360-day year, actual days elapsed, from the date of
disbursement of the Loan until repayment.
2.5.2 Interest Payments. The first payment of interest on
the outstanding principal amount of the Senior Subordinated Notes shall be due
and payable by Company to Investors quarterly in arrears commencing on the date
three months after the date hereof and on each subsequent date three months
thereafter until the Loan is paid in full. Notwithstanding the foregoing
unless Company shall have Excess Cash in respect of any quarter it may give
notice to Investor that it wishes to defer the next succeeding interest
payment, and upon the making of such request, the amount of interest then
accrued and unpaid shall be capitalized and bear interest as if it were a
portion of the then outstanding principal amount of the Loan. Each interest
payment hereunder shall be paid by wire transfer in immediately available
funds.
2.5.3 Interest Payment Adjustment. If Company determines
that it is required by the laws or regulations of the United States (or any
political subdivision or taxing authority
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<PAGE> 25
thereof or therein) to withhold any portion of any interest payment to any
Investor, Company shall immediately give such Investor notice of its intention
to withhold (the "Company's Notice"). Within 30 days of receipt of Company's
Notice, such Investor, if it is not a corporation, partnership or other entity
organized under the laws of the United States or any subdivision thereof or is
not otherwise a resident of the United States, may elect, by delivering written
notice to Company (the "Investor's Notice"), to have the amount of such payment
and all succeeding payments increased by an amount such that the amount paid by
Company to such Investor after withholding shall be the same as that which
would have been paid had no withholding occurred. The Investors agree (i) to
take each reasonable measure necessary to avoid Company's obligation to
increase the amount of its payment pursuant to this Section 2.5.3 and (ii) not
to transfer, sell or assign one or more of the Senior Subordinated Notes, or
any portion thereof, to any Person with respect to which Company would be
obligated to increase the amounts of payments pursuant to this Section 2.5.3.
2.6 Mandatory Repayment.
2.6.1 Scheduled Repayments. Company shall repay the
original principal amount of the Senior Subordinated Note together with all
accrued and unpaid interest thereon on the date five (5) years after the date
of this Agreement. Each principal payment hereunder shall be paid by wire
transfer in immediately available funds.
2.6.2 Mandatory Prepayment. Notwithstanding the provisions
of Section 2.6.1, all outstanding principal and interest relating to the Senior
Subordinated Notes shall be due and payable as soon as practicable but in no
event later than 15 Business Days after (i) the closing of a Stock Offering or
(ii) a Company Sale. In addition, at a time when there exists any Excess Cash,
Company shall promptly notify the Investors thereof and shall as soon as
practicable, but in no event later than 15 Business Days thereafter, apply not
less than 50% of such Excess Cash to the prepayment of then outstanding
principal and interest on the Senior Subordinated Notes; provided that
prepayments resulting from Excess Cash shall not be required more than once per
calendar quarter.
2.7 Overdue Payments; Business Days. If any principal amount of,
or interest on, any Senior Subordinated Notes is not paid when due (whether by
acceleration or otherwise), or if any other sum owed to any Investor pursuant
to this Agreement or any other Loan Document is not paid when due, then
interest shall accrue on such delinquent amount from the date such delinquent
amount was due (not giving effect to any grace or cure periods) until paid at a
rate of 4% per annum above the rate on the Senior Subordinated Notes in effect
at the time of the occurrence of such default in payment, compounded quarterly,
or at the maximum rate permitted by law, whichever is less. Whenever any
payment of principal or interest on the Senior Subordinated Notes shall be
stated to be due, or whenever any date specified herein would otherwise occur,
on a day other than a Business Day, such payment shall be made, and such other
date shall be deemed to occur, on the next succeeding Business Day. Any such
extension of time shall be included in the computation of interest payable.
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<PAGE> 26
2.8 Optional Prepayment.
2.8.1 At Any Time. Company may, at its option, prepay all
or any portion of the outstanding principal amount of the Senior Subordinated
Notes, in multiples of $250,000 or the entire principal amount then outstanding
of the Senior Subordinated Notes, upon compliance with the provisions of this
Section 2.8. Upon such prepayment of the Senior Subordinated Notes, Company
shall pay to the holders thereof (i) the amount of principal in respect of the
Senior Subordinated Notes to be prepaid and (ii) the interest relating to such
principal amount which is accrued but unpaid up to and including the date of
prepayment, (the amounts described in clauses (i) and (ii) being collectively
referred to as the "Prepayment Price"). Such prepayment shall be applied to
reduce the principal amounts payable under the Senior Subordinated Notes in the
reverse order in which such amounts are due. At least 30 days written notice
shall be given to the holders of the Senior Subordinated Notes of the election
of Company to prepay the principal amounts, or a permitted portion thereof, of
the Senior Subordinated Notes, specifying the amount to be prepaid and the date
upon which such prepayment is to be made.
2.8.2 Effect of Notice of Prepayment. Once notice of
prepayment is mailed, Senior Subordinated Notes called for prepayment shall
become due and payable on the prepayment date and at the Prepayment Price.
Upon surrender to Company, the Senior Subordinated Notes shall be paid at the
Prepayment Price.
2.9 Registration Rights
2.9.1 Demand Registration
2.9.1.1 Request for Registration. If at any time
Company receives from an Investor or its transferee (the "Initiating Investor")
a written request that Company effect a registration with respect to an
offering of outstanding Registrable Securities, Company shall:
(i) Promptly, but in any event within five
Business Days, give written notice of the proposed Registration to each other
Investor and (ii) as soon as practicable, but in any event within 90 days after
receipt of the request of the Initiating Investor, effect such Registration of
the Registrable Securities of the Initiating Investor together with all or such
portion of the Registrable Securities of any other Investor who has given
written notice to Company within 20 days after receiving such written notice
from Company pursuant to clause (i) above. Such obligation shall include,
without limitation, the execution of an undertaking to file post-effective
amendments and to effect appropriate registrations or qualifications under
applicable blue sky or other state securities laws and appropriate compliance
with exemptive regulations issued under the Act and any other governmental
requirements or regulations. Company shall have the right, exercisable one
time only, to delay the effectiveness of such request of the Initiating
Investor until up to 60 days
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after delivery of the request if the Board of Directors of Company has
determined in good faith that such a Registration would be seriously
detrimental to Company at such time. No further delays after such 60 days
shall be permitted. The Initiating Investor may withdraw the request during
such 60 day period, in which event the Initiating Investor shall not be deemed
to have made the request. Company shall not be obligated to take any action to
effect any Registration pursuant to this Section after the closing of the sale
of Registrable Securities resulting from two previous Registrations effected
pursuant to requests under this Section 2.9.1.1.
2.9.1.2 Underwriting. If the Initiating Investor
intends to use an underwriter to distribute the Registrable Securities covered
by its request, it shall so advise Company in their request and Company shall
include such information in its written notice to the other Investors. In such
event, the right of any Investor to Registration pursuant to this Subsection
shall be conditioned upon such Investor's participation in such underwriting
and the inclusion of all or part of such Investor's Registrable Securities in
the underwriting, unless otherwise mutually agreed by the Initiating Investor
and such Investor. Company shall enter into an underwriting agreement with an
underwriter selected by the Initiating Investor, but subject to the approval of
Company which shall not be unreasonably withheld. The underwriting agreement
may contain provisions regarding indemnification and contribution from Company.
Notwithstanding any other provision of this Subsection, if the underwriter
advises the Initiating Investor and Company in writing that marketing factors
require a limitation of the number of shares to be included in the
underwriting, then shares of Common Stock other than Registrable Securities
shall first be excluded from such Registration to the extent required by such
underwriting limitation. If the underwriter advises the Initiating Investor
that after exclusion of Common Stock other than Registrable Securities, any
portion of the Registrable Securities need to be excluded from the
Registration, then the Initiating Investor shall be entitled, on behalf of all
Investors, either (i) to require that the Registration be deferred for such
period of time as the Initiating Investor, Company and the underwriter may
mutually agree upon, but in no event for more than 90 days from delivery of a
written notice of the Initiating Investor to Company requesting such delay or
(ii) to withdraw the Registration request, in which case it shall not count as
one of the Investors' two demand Registrations. If any Investor Securities
disapproves of the terms of the underwriting, such Investor may elect to
withdraw therefrom by written notice to Company, the underwriter and the
Initiating Investor delivered at least seven days prior to the effective date
of the registration statement. The Registrable Securities so withdrawn also
shall be withdrawn from Registration.
2.9.2 Incidental Registration.
2.9.2.1 If at any time Company proposes to register
any of its securities under the Act, whether or not for sale for its own
account, on a form and in a manner which would permit registration of shares of
Common Stock for sale to the public under the Securities Act, it will each such
time give prompt written notice to the each Investor
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of its intention to do so, describing such securities and specifying the form
and manner and the other relevant facts involved in such proposed registration,
and upon the written request of any Investor delivered to Company within 30
days after the giving of any such notice (which request shall specify the
shares of Common Stock intended to be disposed of by the Investor and the
intended method of disposition thereof), Company will effect the registration
under the Securities Act of all Registrable Securities which Company has been
so requested to register by the Investor to the extent requisite to permit the
disposition (in accordance with the intended methods thereof as aforesaid) of
the Common Stock so to be registered, provided that if, at any time after
giving such written notice of its intention to register any of its securities
and prior to the effective date of the registration statement filed in
connection with such registration, Company shall determine for any reason not
to register such securities, Company may, at its election, give written notice
of such determination to the Investor and thereupon shall be relieved of its
obligation to register any Common Stock in connection with such registration
(but not from its obligation to pay the Registration Expenses already incurred
in connection therewith as provided in Section 2.9.2.2).
2.9.2.2 Company will pay all Registration Expenses in
connection with each Registration of Registrable Securities requested by the
Investor pursuant to this Section 2.9. The term "Registration Expenses" shall
mean all expenses incident to Company's performance of or compliance with this
Section 2.9 including, without limitation, all registration and filing fees;
all fees and expenses of complying with securities or blue sky laws; all
printing expenses; the fees and disbursements of counsel for Company and of its
independent public accountants, including the expenses of any special audits
required by or incident to such performance and compliance; and the reasonable
fees and disbursements of one counsel for each Investor, but excluding any
allocation of Company personnel or other general overhead expenses of Company
or other expenses for the preparation of financial statements or other data
normally prepared by Company in the ordinary course of its business, which
shall be borne by Company in all cases. Registration Expenses shall not
include underwriting discounts and commissions and applicable transfer taxes,
if any, payable pro rata with respect to all shares included in the
distribution; each Investor shall bear its pro rata portion of such discounts,
commissions and taxes.
2.9.3 Registration Procedures.
(a) When Company is required to effect the
Registration of any Registrable Securities as provided in this Section 2.9,
Company will as expeditiously as possible:
(i) prepare and (in any event within 60
days after the end of the period within which requests for registration may be
delivered to Company) file with the Securities and Exchange Commission (the
"Commission") a registration statement on the appropriate form with respect to
such Registrable Securities and cause such registration statement to become
effective as promptly as practicable;
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<PAGE> 29
(ii) prepare and file with Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Securities covered by such
registration statement until the earlier of: (a) such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the seller thereof set forth in such registration
statement or (b) the expiration of nine months after such registration
statement becomes effective;
(iii) furnish to the seller of such
Registrable Securities such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus included in
such registration statement (including each preliminary prospectus and any
summary prospectus), in conformity with the requirements of the Securities Act,
such documents incorporated by reference in such registration statement or
prospectus, and such other documents, as the seller may reasonably request;
(iv) use its best efforts to register or
qualify all Registrable Securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions within the United
States and its territories as the seller shall reasonably request, and do any
and all other acts and things which may be necessary or advisable to enable the
seller to consummate the disposition in such jurisdictions of its covered by
such registration statement, except that Company shall not for any such purpose
be required to qualify generally to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified, or to subject itself to taxation
in any such jurisdiction, or to consent to general service of process in any
such jurisdiction;
(v) furnish to the seller of Registrable
Securities a signed counterpart, addressed to the seller, of (A) an opinion of
counsel for Company, dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, dated the
date of the closing under the underwriting agreement), and (B) a "cold comfort"
letter signed by the independent public accountants who have certified
Company's financial statements included in such registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's
counsel and its accountants' letters delivered to underwriters in underwritten
public offerings of securities and, in the case of the accountants' letter,
such other financial matters, as the seller or any Investor may reasonably
request;
(vi) immediately notify the seller of
Registrable Securities covered by such registration statement, at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of
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<PAGE> 30
which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing, and at
the request of the seller prepare and furnish to the seller a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing; and
(vii) otherwise use its best efforts to
comply with all applicable rules and regulations of the Commission, and make
available to its securities holders, as soon as reasonably practicable, an
earnings statement covering the period of at least 12 months, but not more than
18 months, beginning with the first month of the first fiscal quarter after the
effective date of such registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act.
(b) If Company at any time proposes to register any
of its securities under the Securities Act whether or not for sale for its own
account as contemplated by Section 2.9.2, and such securities are to be
distributed by or through one or more underwriters, Company shall, if requested
by the Investor who requests incidental registration of Registrable Securities
in connection therewith pursuant to Section 2.9.2, arrange for such
underwriters to include such Registrable Securities among those securities to
be distributed by or through such underwriters; provided, however that if the
underwriters shall determine as provided in Section 2.9.2, that the inclusion
of all or a specified portion of such Registrable Securities would adversely
affect such offering, the Investor requesting incidental registration shall
have its Registrable Securities excluded from such underwritten offering on a
pro rata basis with Company's securities. The Investor on whose behalf such
Registrable Securities are to be distributed by such underwriters shall be a
party to any such underwriting agreement and the representations and warranties
by, and the other agreements on the part of, Company to and for the benefit of
such underwriters, shall also be made to and for the benefit of Investor.
(c) If the Investor has requested inclusion of
Registrable Securities in an underwritten offering, such units may be excluded
if all of the following conditions are met:
(i) the managing underwriter shall have
determined (and shall have advised the Investor in writing) that, in its
opinion, the registration and distribution of all or a specified portion of the
Common Stock as part of the proposed distribution of securities by the
underwriters will materially and adversely affect the distribution of such
securities (such opinion to state the specific reasons therefore);
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(ii) Company and the underwriters shall have
first excluded from the proposed offering any securities offered by officers,
directors or holders of securities other than the Investors and
(iii) Company and the underwriters shall
exclude from the proposed offering on a pro-rata basis any securities offered
by Company.
2.9.4 Preparation; Reasonable Investigation.
In connection with the preparation and filing of each
registration statement registering Common Stock under the Securities Act,
Company will give the Investor on whose behalf such units are to be registered
and its underwriter, if any, and its counsel and accountants, the opportunity
to participate in the preparation of such registration statement, each
prospectus included therein or filed with the Commission, and each amendment
thereof or supplement thereto, and will give each of them such access to its
books and records and such opportunities to discuss the business of Company
with its officers and the independent public accountants who have certified its
financial statements as shall be necessary, in the opinion of such Investor and
such underwriters or their respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
2.9.5 Indemnification.
(a) In the event of any registration of any securities of
Company under the Securities Act pursuant to Section 2.9, Company will, and
hereby does, indemnify and hold harmless each Investor selling any Registrable
Securities covered by such registration statement, its directors and officers,
and each other Person, if any, who controls such Investor within the meaning or
the Securities Act, against any losses, claims, damages, liabilities and
expenses (including reasonable legal fees and expenses and costs of
investigation), joint or several, to which such Investor or any such director
or officer or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions or proceedings in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such securities were registered under
the Securities Act, any preliminary prospectus, final prospectus or summary
prospectus included therein, or any amendment or supplement thereto, or any
document incorporated by reference therein or (ii) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and Company will
reimburse such Investor, and each such director, officer, and controlling
person for any legal or any other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, liability,
action or proceeding.
(b) If the indemnification provided for in this Section
2.9.4 is unavailable or insufficient to hold harmless an indemnified party in
respect of any losses, claims, damages,
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liabilities, expenses or action in respect thereof referred to herein, then the
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities,
expenses or actions in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand, and the indemnified
party on the other, in connection with the statement or omissions which
resulted in such losses, claims, damages, liabilities, expenses or actions as
well as any other relevant equitable considerations, including the failure to
give the notice required hereunder. The relative fault of the indemnifying
party and the indemnified party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
relates to information supplied by the indemnifying party or the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. Company and the
Investors agree that it would not be just and equitable if contributions
pursuant to this Section were determined by pro rata allocation or by any other
method of allocation which did not take account of the equitable considerations
referred to above. The amount paid or payable to an indemnified party as a
result of the losses, claims, damages, liabilities or action in respect
thereof, referred to above, shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
contribution provisions of this Section, in no event shall the amount
contributed by any seller of shares exceed the aggregate net offering proceeds
received by such seller from the sale of such shares. No Person guilty of
fraudulent misrepresentations (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who is not
guilty of such fraudulent misrepresentation.
(c) Promptly after receipt by an indemnified party of
notice of the commencement of any action or proceeding involving a claim
referred to in the preceding subdivisions of this Section 2.9.4, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; provided that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding subdivisions of this Section 2.9.4. In case any such
action is brought against an indemnified party, the indemnifying party shall be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified, to the extent that it may wish,
with counsel reasonably satisfactory to such indemnified party, and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not be liable to
such indemnified party for any legal or other expenses subsequently incurred by
the latter in connection with the defense thereof; provided, however, that if
the indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of the
indemnified party or parties in conducting the defense of such action or
proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
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determined by such counsel to be necessary to protect the interests of the
indemnified party or parties (and the indemnifying party or parties shall bear
the reasonable legal and other expenses incurred in connection therewith). No
indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a full and final
release from all liability in respect to such claim or litigation.
(e) Indemnification similar to that specified in the
preceding subdivisions of this Section 2.4 (with appropriate modifications)
shall be given by Company and each seller of Registrable Securities with
respect to any required registration or other qualification of such shares of
Common Stock under any federal or state law or regulation of governmental
authority other than the Securities Act.
2.10 Issuance of Adjustment Warrants.
If on a Warrant Adjustment Date there shall exist a Projection
Deficit, Company shall issue to the Investors, warrants to purchase a number of
shares of Common Stock (the "Adjustment Warrants") equal to the number
determined by (i) determining for each whole or partial fiscal quarter prior to
the Warrant Adjustment Date the amount (the "Net Adjustment Amount") equal to
25% (prorated for a period that is less than a fiscal quarter) of the product
of the Net Adjustment Percentage times the Warrant Adjustment Amount, (ii)
increasing the amount of each Net Adjustment Amount from the end of each such
fiscal quarter through the Warrant Adjustment Date by an amount per annum,
compounded quarterly, equal to the Deficit Adjustment Factor times the Net
Adjustment Amount (such increased amount to be the "Increased Net Adjustment
Amount") (iii) adding together the Increased Net Adjustment Amounts for each
whole or partial fiscal quarter prior to the Warrant Adjustment Date and (iv)
dividing that amount by the Fair Market Value. Exhibit M is an example of the
number of Adjustment Warrants to be issued pursuant to the preceding formula.
Adjustment Warrants issued pursuant to this Section 2.10 shall be issued on the
Warrant Adjustment Date in the same manner and in the same percentage (as
between the Investors) as the Warrants issued pursuant to Section 2.3, except
that the exercise price for the Adjustment Warrants shall be $0.001 per share
and the Adjustment Warrants shall be exercisable at any time after issuance.
SECTION 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Investors.
Each Investor represents and warrants to Company with respect
to its Securities purchase that:
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3.1.1 Investment. The Securities are being acquired for
investment for such Investor's own account, not as a nominee or agent, and not
with a view to the distribution of any part thereof.
3.1.2 Sophistication. Such Investor has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of Investor's investment in the Securities; such Investor has
the ability to bear the economic risks of such investment; such Investor has
the capacity to protect such Investor's own interests in connection with the
transactions contemplated by this Agreement; and Investor has had an
opportunity to obtain such financial and other information from Company as
Investor deems necessary or appropriate in connection with evaluating the
merits of the investment in the Securities; provided, however, that none of
such Investor's representations hereunder are intended in any way to limit the
scope or applicability of Company's representations and warranties in this
Agreement, the truth, accuracy and completeness of which such Investor has
relied upon in its investment in the Securities.
3.1.3 Legal Status; Qualification. Each Investor is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. Each Investor is duly qualified
or licensed to do business and in good standing as a foreign corporation in all
jurisdictions in which such qualification or licensing is required.
3.1.4 No Violation. The execution, delivery and performance
by each Investor of the Loan Documents to which it may be a party: (a) do not
conflict with its articles or certificate of incorporation or bylaws and (b) do
not violate any provision of any law, rule, regulation or ordinance, or any
order or ruling of any court or governmental entity.
3.1.5 Corporate Power and Authority; Governmental or Other
Consents. Each Investor has the requisite corporate power and authority to
execute, deliver and perform its obligations under the Loan Documents to which
it is a party. No governmental or other consents, approvals, authorizations,
registrations, declarations or filings are required for the execution, delivery
and performance of the Loan Documents.
3.1.6 Due Authorization; Validity; Enforceability. The Loan
Documents have been duly authorized, executed and delivered, and constitute
legal, valid and binding obligations of such Investor enforceable in accordance
with their respective terms except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and general principles
of equity (whether considered in an action at law or in equity).
3.1.7 Truth and Accuracy of Information. None of the
documents, instruments and other information furnished to Company by an
Investor contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make any
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statements made therein not misleading. No representation, warranty or
statement made by an Investor in the Loan Documents contains any untrue
statement of a material fact, or omits or will omit to state a material fact
necessary to make any statements made therein not misleading.
3.2 Representations and Warranties of Company.
On and as of the Closing Date, Company represents and warrants
to Investors, which representations and warranties shall survive the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby, notwithstanding any investigation made by Investors, and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all Obligations of Company to Investors, that,
giving effect to the consummation of the transactions contemplated hereunder
and under the other Material Agreements (including without limitation the
Acquisition):
3.2.1 Legal Status; Qualification. The authorized
capitalization and all outstanding shares of capital stock and options,
warrants and similar rights to subscribe to or purchase capital stock of
Company and its Affiliated Companies and all registrations rights and similar
rights are set forth on Exhibit B. Company and each of its Affiliated
Companies is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. Company and
each of its Affiliated Companies are duly qualified or licensed to do business
and in good standing as a foreign corporation in all jurisdictions in which
such qualification or licensing is required.
3.2.2 No Violation. Except as set forth on Schedule 3.2.2,
the execution, delivery and performance by Company and each of its Affiliated
Companies of the Loan Documents and any of the other Material Agreements to
which it may be a party, and any other instruments or documents it executed and
delivered hereunder: (a) do not conflict with its articles or certificate of
incorporation or bylaws, (b) do not violate any provision of any law, rule,
regulation or ordinance, or any order or ruling of any court or governmental
entity and (c) do not result in a breach of or constitute a default (or an
event which with the passage of time or giving of notice, or both, would
constitute a default) under, or cause or permit the acceleration of the
maturity of or give rise to any right of termination, cancellation, imposition
of fees or penalties under, any contract, obligation, debt, note, bond, lease,
mortgage, license, indenture or other instrument to which Company or any of its
Affiliated Companies is a party or by which Company or any of its Affiliated
Companies, or any of their respective properties or assets, may be bound.
3.2.3 Corporate Power and Authority; Governmental or Other
Consents. Company and its Affiliated Companies have all requisite corporate
power and authority to carry on their business as presently conducted and as
proposed to be conducted in the Business Plan, and to own, lease, sell or
operate their properties. Company and its Affiliated Companies have the
requisite corporate power and authority to execute, deliver and perform
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their obligations under the Loan Documents and any of the Material Agreements
to which they are a party, and any other instruments or documents executed and
delivered by them hereunder. No governmental or other consents, approvals,
authorizations, registrations, declarations or filings are required for the
execution, delivery and performance of the Material Agreements by Company and
its Affiliated Companies. Neither Company nor any of its Affiliated Companies
is subject to any law, rule or regulation restricting in any way its ability to
incur indebtedness or to issue shares of its capital stock or rights to acquire
such shares.
3.2.4 Due Authorization; Validity; Enforceability. The
Material Agreements and all other instruments or documents executed by Company
or any of its Affiliated Companies, as the case may be, in connection with the
Material Agreements have been duly authorized, executed and delivered, and
constitute legal, valid and binding obligations of Company or such Affiliated
Company, as the case may be, enforceable in accordance with their respective
terms except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and general principles of equity
(whether considered in an action at law or in equity).
3.2.5 Ownership of Assets. Except as set forth on Schedule
3.2.5, Company and each of its Affiliated Companies (i) is the true and lawful
owner or has the lawful right to use all of the assets used in its business and
(ii) has good and marketable title (and with respect to real property, fee
simple title, and with respect to leased property, a leasehold interest in
accordance with the terms of the lease relating to such property) to its
interest in such assets free and clear of all claims, Liens, title defects and
objections, easements, equities, rights of way, covenants, restrictions,
security interests or other encumbrances other than Liens securing Senior Debt,
Liens permitted to exist pursuant to Section 6.5, and involuntary Liens arising
in the ordinary course of business and securing sums not yet due.
3.2.6 Financial Statements. Company has delivered to
Investors true and complete copies of the Financial Statements, attached as
Exhibit C. The Financial Statements present fairly the consolidated financial
condition and results of operations of Company and its Affiliated Companies,
disclose all liabilities of Company and its Affiliated Companies that are
required to be reflected or reserved against under GAAP, whether liquidated or
unliquidated, fixed, contingent or inchoate, and have been prepared in
accordance with GAAP, except that the unaudited Financial Statements prepared
as of, and for the period ending on, March 31, 1997 (the "Balance Sheet Date")
do not have footnotes and are subject to normal year end adjustments which,
individually and in the aggregate, are not material.
3.2.7 Absence of Undisclosed Liabilities. Neither Company
nor any of its Affiliated Companies has any Liabilities except (i) Liabilities
that are fully reflected or reserved against in the Financial Statements, which
reserves are appropriate and reasonable or (ii) Liabilities incurred in the
ordinary course of business since the Balance Sheet Date.
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3.2.8 Truth and Accuracy of Information. None of the
documents, instruments and other information furnished to Investors by Company,
including without limitation the Business Plan, contains any untrue statement
of a material fact or omits to state any material fact necessary in order to
make any statements made therein not misleading. No representation, warranty
or statement made by Company in the Loan Documents or the other Material
Agreements, or in any document, certificate, exhibit or schedule attached to
any of the Loan Documents or the other Material Agreements, contains or will
contain any untrue statement of a material fact, or omits or will omit to state
a material fact necessary to make any statements made therein not misleading.
There is no fact which materially and adversely affects the condition
(financial or otherwise), results of operations, business, properties or
prospects of Company or any of its Affiliated Companies and which has not been
disclosed in the documents provided to Investors. The projections were
prepared in good faith, there is a reasonable basis for such Projections, and
such Projections represent Company's best estimate of the future performance of
Company and its Affiliated Companies.
3.2.9 Absence of Certain Changes. Except as set forth in
Schedule 3.2.9, since the Balance Sheet Date, neither Company nor any of its
Affiliated Companies has:
(a) suffered any material adverse change in its
financial condition, working capital, assets, Liabilities, earnings, reserves,
business, operations or prospects;
(b) suffered any loss, damage, destruction or
other casualty materially and adversely affecting any of its properties, assets
or business (whether or not covered by insurance);
(c) borrowed or agreed to borrow any funds;
(d) sold, transferred, assigned or otherwise
disposed of any of its property or assets in excess individually of $10,000 or
permitted, or allowed, any of its property or assets to be subjected to any
Lien or restriction of any kind, except for properties and assets sold or
encumbered since the Balance Sheet Date in the ordinary course of business and
consistent with past practice;
(e) declared, paid or set aside for payment any
dividend or other distribution in respect of its capital stock or other
securities or equity interests or, directly or indirectly, redeemed, purchased
or otherwise acquired any shares of its capital stock or other securities or
equity interests or
(f) made any change in any method of accounting
or accounting practice or any change in depreciation or amortization policies
or rates theretofore adopted.
3.2.10 Regulatory Compliance. Company and its Affiliated
Companies possess all permits and other authorizations from federal, foreign,
state and local governmental
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authorities required by applicable provisions of law, including state and
federal securities laws and regulations, to permit them to operate the
Business.
3.2.11 Litigation. Except as set forth in Schedule 3.2.11,
there is no (a) legal, administrative, arbitration or other proceeding, suit,
claim or action of any nature, or investigation, pending or threatened against
Company or any of its Affiliated Companies, whether at law or in equity, or
before or by any arbitrator or any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality;
or (b) judgment, decree, injunction or order of any court, governmental
department, commission, agency, instrumentality or arbitrator against Company
or any of its Affiliated Companies.
3.2.12 Taxes. Company and each of its Affiliated Companies
has duly and timely filed all federal, state, local and foreign tax reports and
returns required to be filed on or before the Closing Date with respect to all
federal, state, local and foreign taxes, including, but not limited to, all
income, property, and sales and use taxes. All taxes and other related charges
due or claimed to be due from Company or any of its Affiliated Companies by
federal, state, local or foreign taxing authorities have been paid. The
federal income tax returns of Company or of any of its Affiliated Companies
have not been examined in the past five years. All deficiencies and
assessments resulting from examination of federal, state, local and foreign
income tax returns have been paid. There are no outstanding agreements or
waivers extending the statutory period of limitation applicable to any federal,
state, local or foreign income tax return or report for any period. Neither
Company nor any of its Affiliated Companies is a "consenting corporation"
within the meaning of Section 341(f)(1) of the Code. There are no pending
assessments or adjustments of taxes payable with respect to any year for
Company or any of its Affiliated Companies. Neither Company nor any of its
Affiliated Companies has any liability for taxes of any kind in connection with
the operation of the Business prior to the Acquisition except as specifically
described on Schedule 3.2.12.
3.2.13 Insurance. There has been maintained for Company and
each of its Affiliated Companies insurance in such amounts and covering such
risks as is usually carried by companies engaged in similar businesses and
owning or leasing similar properties. All such policies are in full force and
effect, and all premiums with respect thereto are currently paid. A complete
list of all such policies is contained in Schedule 3.2.13.
3.2.14 Debt Instruments. Schedule 3.2.14 contains a complete
list of all loan agreements, promissory notes, letters of credit, security
agreements or other financing documents to which Company or any of its
Affiliated Companies is a party or by which Company or any of its Affiliated
Companies or any of their properties or assets (including, without limitation,
equipment subject to any equipment lease), is bound which individually involve
an obligation of $25,000 or more (the "Debt Instruments"), together with a
description of the term and amount owing in respect thereof. Except as set
forth in Schedule 3.2.14, there are no existing defaults by Company or any of
its Affiliated Companies any other obligor under or party to any such Debt
Instrument, and no event has occurred which (whether with
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notice, lapse of time, or both, or the happening or occurrence of any other
event) would constitute a default by Company or any of its Affiliated
Companies.
3.2.15 Benefit Plans. Except as set forth in Schedule
3.2.15:
(a) neither Company nor any of its Affiliated
Companies maintains or contributes to any "employee pension benefit plan", as
such term is defined in Section 3(2) of ERISA; and each such plan set forth in
Schedule 3.2.15 ("Pension Plan") is in substantial compliance with the
applicable provisions of ERISA, the Code, and all other law. Complete copies
of all Pension Plans and all summary plan descriptions of Pension Plans, as in
effect on the date hereof, have been delivered to Investor;
(b) no Pension Plan, fiduciary thereof or trust
created thereunder has engaged in a transaction that might reasonably be
expected to subject Company or any of its Affiliated Companies, directly or
indirectly, to any tax on prohibited transactions imposed by Section 4975 of
the Code or to any civil penalty imposed by Section 502 of ERISA;
(c) neither Company nor any of its Affiliated
Companies maintains or contributes to any "employee welfare benefit plan", as
such term is defined in Section 3(1) of ERISA; and each such plan set forth in
Schedule 3.2.15 ("Welfare Plan") is in substantial compliance with the
applicable provisions of ERISA, the Code, and all other law. Complete copies
of all Welfare Plans, and all summary plan descriptions of Welfare Plans, as in
effect on the date hereof, have been provided to Investor;
(d) neither Company nor any of its Affiliated
Companies maintains or contributes to any bonus, incentive compensation, stock
option, stock purchase, or other fringe benefit plan or program, whether or not
reflected in a written document;
(e) there are no claims, pending or threatened,
involving any Pension Plan, Welfare Plan or plan or program described in
paragraph (d) of this Section 3.2.15 (including, for purposes of this
paragraph, any Plan or any plan or program described in paragraph (d) of this
Section 3.2.15 maintained or contributed to by Company or any of its Affiliated
Companies within 6 years prior to the Closing Date), by any employee or former
employee (or beneficiary thereof) of Company or any of its Affiliated Companies
or current or former ERISA Affiliates (other than claims for benefits), and
there is no reasonable basis upon which to anticipate any such claim;
(f) no Pension Plan has (i) incurred an
"accumulated funding deficiency" (within the meaning of Section 412(a) of the
Code), whether or not waived; (ii) been a plan with respect to which a
Reportable Event has occurred within six years prior to the Closing Date; or
(iii) been a plan with respect to which any termination liability to the PBGC
has been or is expected to be incurred or with respect to which there exist
conditions or events that have occurred presenting a risk of termination by the
PBGC; and
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(g) neither Company nor any of its Affiliated
Companies or current or former ERISA Affiliates: (i) has, since September 26,
1980, incurred a partial or complete withdrawal from a "multiemployer plan"
within the meaning of Section 3(37) of ERISA to which Company or any of its
Affiliated Companies has been obligated to contribute ("Multiemployer Plan")
which resulted in the imposition of withdrawal liability under the
Multiemployer Pension Plan Amendments Act of 1980, as amended, that has not
been assessed and paid in full on the date hereof, or which could result in the
imposition of withdrawal liability under such act; or (ii) participates in any
Multiemployer Plan with respect to which Company or any of its Affiliated
Companies or ERISA Affiliates would have withdrawal liability in the event of a
complete withdrawal on the Closing Date.
3.2.16 Certain Contracts and Commitments. Except as set
forth in Schedule 3.2.16:
(a) neither Company nor any of its Affiliated
Companies has any collective bargaining or union contracts or agreements;
(b) neither Company nor any of its Affiliated
Companies has entered into any written agreement restricting it from carrying
on its business within the United States or any subdivision thereof;
(c) neither Company nor any of its Affiliated
Companies is a party to any "safe harbor lease" as defined in Section 168(f)(8)
of the Internal Revenue Code of 1954 as in effect prior to amendment by the Tax
Equity and Fiscal Responsibility Act of 1982 and
(d) neither Company nor any of its Affiliated
Companies is in default on any Indebtedness, or on any material lease,
commitment, contract, instrument or obligation by which it or its properties or
assets is bound.
3.2.17 Labor Matters. Except to the extent set forth in
Schedule 3.2.17: (a) Company and each of its Affiliated Companies is and has
been in material compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
including, without limitation, any such laws respecting employment
discrimination, occupational safety and health, and unfair labor practices; (b)
there is no unfair labor practice complaint against Company or any of its
Affiliated Companies pending or threatened before the National Labor Relations
Board or any comparable state, local or foreign agency; (c) there is no labor
strike, dispute, slowdown or stoppage actually pending or threatened against or
directly affecting Company or any of its Affiliated Companies; (d) no union
representation question exists or no union organization effort is underway,
respecting the employees of Company or any of its Affiliated Companies; (e) no
grievance or arbitration proceeding arising out of or under collective
bargaining agreements is pending and no claims therefor exist; (f) no
collective bargaining agreement which is binding on Company or any of its
Affiliated Companies restricts it from relocating or closing any of its
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operations; (g) neither Company nor any of its Affiliated Companies has
experienced any material work stoppage in the last 18 months; (h) neither
Company nor any of its Affiliated Companies is delinquent in payments to any of
its employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed by them to the Closing Date or amounts
required to be reimbursed to such employees or (i) upon termination of the
employment of any of the employees of Company or any of its Affiliated
Companies after the Closing Date, neither Company nor any of its Affiliated
Companies will be liable to any of its employees for severance pay.
3.2.18 Compliance with Law. Company and each of its
Affiliated Companies is in compliance with all laws, regulations and orders
applicable to the Business, including, without limitation, applicable building,
zoning or health laws, ordinances and regulations. Neither Company nor any of
its Affiliated Companies has received any notification that it is in violation
of any such laws, regulations or orders and neither Company nor any of its
Affiliated Companies nor any employee thereof (while acting in such capacity),
has made any payment to any Person, which payment violates any statute or law.
3.2.19 Hazardous Material
(a) Except as set forth in Schedule 3.2.19:
(i) neither Company nor any of its
Affiliated Companies has caused, is causing or threatens to cause any disposals
or releases of any Hazardous Material on or under any properties which it owns,
leases or operates, and no such disposals or releases occurred prior to Company
or any of its Affiliated Companies having taken title to (or possession or
operation of) any of such properties; and no such disposals or releases are
migrating or have migrated off of such properties either in subsurface soils or
in groundwater;
(ii) neither Company nor any of its
Affiliated Companies has either (A) arranged for the disposal or treatment of
Hazardous Material at any facility owned or operated by another Person or (B)
accepted any Hazardous Material for transport to disposal or treatment
facilities or other sites selected by Company or any of its Affiliated
Companies from which facilities or sites there has been a release or there is a
release or threatened release of a Hazardous Material;
(iii) Company does not have any actual
knowledge of, or any reason to believe or suspect, that any release or
threatened release of any Hazardous Material originating from a property other
than those owned, leased or operated by Company or any of its Affiliated
Companies has come to be (or may come to be) located on or under properties
owned, leased, occupied or operated by Company or any of its Affiliated
Companies;
(iv) none of the properties of Company or
any of its Affiliated Companies is in material violation of any federal, state
or local law, ordinance or regulation
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relating to industrial hygiene, anti-pollution or to the environmental
conditions on, under or about such properties, including, but not limited to,
soil and ground water condition and
(v) there has been no litigation or any
other actions, claims, demands or requests for information brought or
threatened against Company or any of its Affiliated Companies, or any
settlement reached by Company or any of its Affiliated Companies with, any
party or parties alleging the presence, disposal, release or threatened
release of any Hazardous Material on, from or under any of such properties.
(b) For purposes of this Agreement, the terms
"disposal" and "release" shall have the definitions assigned thereto by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
42 U.S.C. Section 9601 et seq., as amended ("CERCLA").
3.2.20 No Subordination. Except as set forth in Schedule
3.2.20, there is no agreement, indenture, contract or instrument to which
Company or any of its Affiliated Companies is a party or by which it may be
bound that requires the subordination in right of payment of any of the
Obligations to the repayment of any other obligation of Company.
3.2.21 Solvency. Company and each of its Affiliated
Companies is Solvent after giving effect to, the transactions contemplated by
the Material Agreements and the Acquisition Agreement. No transfer of property
is being made and no obligation is being incurred in connection with the
transactions contemplated by the Material Agreements and the Acquisition
Agreement with the intent to hinder, delay or defraud either present or future
creditors of Company or any of its Affiliated Companies.
3.2.22 Regulations G, U, T and X. Neither Company nor any of
its Affiliated Companies is engaged in the business of extending credit for the
purposes of purchasing or carrying margin stock (as defined, from time to time,
in Regulations G and U promulgated by the Board). No part of the proceeds of
the Loan will be used to purchase or carry any margin stock or to extend credit
to others for the purpose of purchasing or carrying any margin stock or for the
purpose of reducing or retiring any Indebtedness which was originally incurred
to purchase or carry margin stock or for any other purpose which might
constitute the Loan a "purpose credit" within the meanings of Regulations G, U,
T or X of the Board.
3.2.23 Investment Company Act. Neither Company nor any of
its Affiliated Companies is an "investment company", or a company "controlled"
by an "investment company", within the meaning of the Investment Company Act of
1940, as amended.
3.2.24 Foreign Investment in Real Property Tax Act. Neither
Company nor any of its Affiliated Companies is now or ever has been a United
States real property holding corporation, as defined in Section 897(c)(2) of
the Code and Section 1.897-2(b) of the regulations promulgated thereunder.
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<PAGE> 43
3.2.25 Foreign Corrupt Practices Act. Neither Company nor
any of its Affiliated Companies has made, offered or agreed to offer anything
of value to any government official, political party, candidate for political
office or any person that Company or any of its Affiliated Companies knows or
has reason to know will offer anything of value to any government official,
political party or candidate for political office, nor has it taken any action
which would cause it to be in violation of any law of any foreign jurisdiction
or the United States of America, including the Foreign Corrupt Practices Act of
1977, as amended. There is not now nor has there ever been any employment of,
or beneficial ownership of Company or any of its Affiliated Companies by, any
foreign governmental or political official.
3.2.26 Valid Issuance. All of the outstanding capital stock
of Company and each of its Affiliated Companies has been duly authorized,
validly issued, is fully paid and non-assessable, and has been issued in
compliance with the Act and all applicable state securities laws.
3.2.27 Acquisition Agreement. Company has delivered to
Investor a true, correct and complete copy of the Acquisition Agreement
(including without limitation all exhibits and schedules thereto) as in effect
on and as of the Closing Date; there are no other agreements or instruments
between the parties thereto pertaining to the Acquisition. To the best
knowledge of Company and its management, each of the representations and
warranties made by Seller in the Acquisition Agreement is true, correct and
complete as of the Closing Date and all such representations and warranties are
incorporated herein by this reference mutatis mutandis as if fully set forth
herein and are hereby confirmed by Company for the benefit of Investors as of
the Closing Date. As of the Closing Date, (i) all of the conditions precedent
to the consummation of the Acquisition, as contemplated by the Acquisition
Agreement, have been satisfied, (ii) none of such conditions has been waived
and (iii) all of the covenants therein to be performed or observed by the
parties thereto prior to the Closing Date have been so performed or observed.
Company hereby assigns to Investor each and every one of Company's rights under
the Acquisition Agreement, including without limitation the right to proceed
directly against Seller in Investors' name and Company's name to enforce
Company's rights under the Acquisition Agreement against Seller or any third
party. Seller has acknowledged that Company has assigned all of its rights
under the Acquisition Agreement to Investor and a copy of such assignment is
attached hereto as Exhibit J.
3.2.28 Employment Agreements. Except as set forth on
Schedule 3.2.28, neither Company nor any of its Affiliated Companies has any
employment or consulting agreement or understanding with respect to any Person
other than the arrangements referred to in Sections 4.8, 8.3 and 6.10.
3.2.29 Projections. Attached hereto as Schedule 3.2.29 are
projections as to the consolidated and consolidating financial performance of
Company and each of its Affiliated Companies from the Closing Date (after
giving effect to the transactions contemplated by the Material Agreements and
the Acquisition Agreement) through the fifth anniversary of the
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Closing Date, which projections have been certified by each of Joseph L.
Christoffel, Ronald G. Crane and Dan Cook, as being their good-faith best
estimate of the financial performance of Company and each Affiliated Company,
during such period.
3.2.30 Deposit Accounts. Schedule 3.2.30 is a complete list
of all deposit or other accounts with a current balance in excess of $5,000
maintained with banks and financial institutions by Company and each Affiliated
Company, other than Ustman. Except as set forth on Schedule 3.2.30, Company
has notified the institution where each such account is maintained of the
existence of a security interest therein in favor of the Investors.
SECTION 4
CONDITIONS PRECEDENT
The obligation of Investor to make the Loan is subject to the
fulfillment of all of the following conditions prior to, or contemporaneously
with, the disbursement of the Loan:
4.1 Legal Matters.
All legal matters incidental to the making of the Loan shall
be satisfactory to Investors.
4.2 Representations and Warranties.
The representations and warranties of Company contained herein
shall be true and correct in all material respects on and as of the Closing
Date, with the same effect as though made on and as of the Closing Date; and as
of the Closing Date, no Event of Default or Potential Default shall have
occurred and be continuing and no Event of Default or Potential Default shall
occur upon the consummation of the transactions contemplated by the Material
Agreements, except as set forth on Schedule 4.2. Investor shall have received
a certificate of an officer of Company certifying the provisions of this
Section 4.2.
4.3 Executed Documents.
Company shall have delivered, or shall have caused to be
delivered, to Investors, the following documents, duly executed by all parties
thereto:
(a) this Agreement;
(b) Senior Subordinated Notes in the principal
amount of the Loan;
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(c) the Pledge Agreement and each together with
the shares of stock of each of Company's Subsidiaries, with stock powers
attached or endorsed to the Investors and each Security Agreement, together
with a file-stamped copy of each appropriate UCC-1 duly executed by each party
to a Security Agreement and such other evidences of the security interest and
created thereby as Investors may reasonably request in order to create a prior
perfected first Lien in all of such parties assets;
(d) the Warrant Agreement;
(e) the Share Certificates;
(f) an opinion of counsel for Company in
substantially the form of Exhibit D;
(g) the Acquisition Agreement and all other
agreements and instruments not otherwise required to be furnished pursuant to
this Section 4.3, relating to any debt or equity investment in Company or any
of its Affiliated Companies in connection with the transactions contemplated by
the Material Agreements;
(h) a letter from Company to the Investors
undertaking to pay certain fees to the Investors under certain circumstances;
(i) the Shareholders Agreement; and
(j) the Company Agreement.
4.4 Certified Documents, Etc.
Company shall have delivered, or shall have caused to be
delivered, to Investors copies of the following documents, duly certified, or
the following certificates, as applicable:
(a) resolutions of the board of directors of
Company and each Affiliated Company of Company which is a party to any of the
Material Agreements authorizing (1) the execution, delivery and performance of
the Material Agreements, (2) the consummation of the transactions contemplated
by the Material Agreements, and (3) all other actions to be taken by Company or
such Affiliated Company, as the case may be, in connection with the Material
Agreements;
(b) certificates, signed by the Secretary or an
Assistant Secretary of Company and each Affiliated Company of Company which is
a party to any of the Material Agreements, dated as of the Closing Date, as to
the incumbency, and containing the specimen signature or signatures, of the
Person or Persons authorized to execute the Material
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Agreements on behalf of Company or such Affiliated Company, as the case may be,
together with evidence of the incumbency of such Secretary or Assistant
Secretary;
(c) the certificates or articles of incorporation
of Company and each Affiliated Company of Company which is a party to any of
the Material Agreements, certified as of a recent date by the Secretary of
State of the state under the laws of which such Person is incorporated, and
copies of the bylaws of Company and each Affiliated Company of Company which is
a party to any of the Material Agreements, each certified as of the Closing
Date by the Secretary or an Assistant Secretary of Company or such Affiliated
Company, as the case may be; and
(d) a certificate of status or good standing of
Company and each Affiliated Company of Company which is a party to any of the
Material Agreements, from the Secretary of State of the state under the laws of
which such Person is incorporated, and of each state or other jurisdiction in
which Company or such Affiliated Company is qualified to do business, dated as
of a recent date.
4.5 Insurance.
Company shall have furnished evidence satisfactory to
Investors that Company and its Affiliated Companies maintain the insurance
required by Section 5.5.
4.6 Other Acts, Conditions, Etc.
All acts, conditions and things (including, without
limitation, the obtaining of any necessary regulatory approvals and the making
of any required filings, recordings or registrations) required to be done and
performed and to have happened precedent to the execution, delivery and
performance of the Material Agreements and the Acquisition Agreement and to
constitute the same legal, valid and binding obligations of the parties
thereto, enforceable in accordance with their respective terms, shall have been
done and performed and shall have happened in due and strict compliance with
all applicable laws; the transactions contemplated by the Acquisition Agreement
and the Credit Agreement shall be ready in all respects to be consummated
simultaneously with the consummation of the transactions contemplated hereby
and by the other Material Agreements.
4.7 Documents in Satisfactory Form.
All documentation, including, without limitation,
documentation for corporate and legal proceedings, and all instruments in
connection with the transactions contemplated by the Material Agreements and
the Acquisition Agreement and all documents executed and delivered in
connection with the Material Agreements and the Acquisition Agreement shall be
reasonably satisfactory in form and substance to Investor (including without
limitation all disclosure schedules prepared in connection with the Material
Agreements and the Acquisition
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Agreement), and Investors shall have received all further information and
documents which Investors may reasonably have requested, such documents where
appropriate to be certified by proper authorities and corporate officials and
parties.
4.8 Transaction Fee.
Company shall have paid to Management a transaction fee of
$210,000 and the first quarterly installment of the annual fee referred to in
the final sentence of Section 8.3.
4.9 Pro Forma Balance Sheet.
Investor shall have received and be satisfied with (i) the
Financial Statements and (ii) pro forma balance sheet of Company and each of
its Affiliated Companies (consolidated and consolidating) at January 31, 1997,
which pro forma balance sheet shall: (a) reflect the effect on Company and each
of its Affiliated Companies of the transactions contemplated by the Material
Agreements and the Acquisition Agreement; (b) contain a certificate of Company
and each of its Affiliated Companies, executed on its behalf by the chief
financial officer of Company or such Affiliated Company, as the case may be, to
the effect that the pro forma balance sheet reflects such chief financial
officer's good-faith best estimate as to the financial position of Company or
such Affiliated Company, as the case may be, at January 31, 1997, after giving
effect to the transactions contemplated by the Material Agreements and the
Acquisition Agreement; and (c) be in form and substance acceptable to
Investors.
4.10 Solvency.
Company shall have furnished evidence satisfactory to
Investors that, after giving effect to the transactions contemplated by the
Material Agreements, Company will be Solvent. Such evidence shall include the
items referred to in Sections 4.9 and 4.10 accompanied by an officer's
certificate substantially in the form of Exhibit E.
4.11 Fees and Disbursements of Counsel.
Heller Ehrman White & McAuliffe, counsel to Investors, shall
have received payment from Company as provided in Section 8.3.
4.12 California Permit.
Company shall have obtained (and delivered to Investor a copy
of) a permit issued by the California Department of Corporations qualifying the
offer and sale by Company of the Senior Subordinated Note and the securities
issued and issuable under the Warrant Agreement, respectively, under the
California Corporate Securities Law of 1968, as amended.
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4.13 Waiver of Demand Rights.
On or before the Closing Date, Ronald G. Crane and Joseph L.
Christoffel shall have executed and delivered to Company a waiver of their
demand registration rights in the form of Exhibit L.
SECTION 5
AFFIRMATIVE COVENANTS
Company covenants that so long as any of the Obligations of
Company to any Investor hereunder or under any of the other Loan Documents
remains outstanding, and until final payment in full of the Senior Subordinated
Notes, Company shall, and shall cause each of Company's Affiliated Companies
to:
5.1 Punctual Payments.
Pay when due: (a) the interest, principal and premium (if
any) on the Senior Subordinated Notes, at the times and place and in the manner
specified therein and (b) any fees or other liabilities due hereunder at the
times and place and in the manner specified herein.
5.2 Accounting Records.
Maintain adequate books and records in accordance with GAAP,
and permit any representative of any Investor, at any reasonable time, to
inspect, copy, audit and examine such books and records and inspect the
properties of Company and its Affiliated Companies, all at the expense of
Company.
5.3 Reporting Requirements.
Provide Investors all of the following:
(a) as soon as available and in any event within
30 days after the end of each month, consolidated balance sheets of Company and
its Affiliated Companies as of the end of such month and statements of income
and retained earnings of Company and its Affiliated Companies for such month
and for the Fiscal Year to date, prepared in accordance with GAAP and certified
in a manner acceptable to Investors by the chief financial officer of Company
or such Affiliated Company, as the case may be, certifying as to the accuracy
and completeness of such balance sheets and statements of income and retained
earnings and further certifying that as of the last day of such month, to the
best of each such officer's knowledge after due and diligent inquiry, no Event
of Default or Potential Default has occurred and is continuing or, if an Event
of Default or Potential Default has occurred and is
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continuing, a statement as to the nature thereof and the action which Company
and its Affiliated Companies propose to take with respect thereto;
(b) as soon as available and in any event within
90 days after and as of the end of each Fiscal Year, audited consolidated
financial statements of Company and its Affiliated Companies, together with an
unqualified report thereon of a certified public accountant satisfactory to
Investors, to include a balance sheet, statements of income, shareholders'
equity and cash flows, and footnotes, all prepared in accordance with GAAP;
(c) as soon as possible and in any event within
five Business Days after Company has knowledge of the occurrence of any Event
of Default or Potential Default, a statement of the chief executive officer or
chief financial officer of Company setting forth details of such event and the
action which Company and its Affiliated Companies propose to take with respect
thereto;
(d) promptly after the filing thereof with the
Secretary of Labor or the PBGC, copies of each annual report filed with respect
to each Plan for each Plan year, if any, certified by independent public
accountants;
(e) as soon as possible and in any event within
five Business Days after acquiring knowledge thereof, written notice of all
litigation, actions, suits or proceedings threatened or commenced affecting
Company or any of its Affiliated Companies or the properties or business of
Company or any of its Affiliated Companies if the relief sought thereunder is
either unspecified as to amount, is for damages in excess of $25,000 or would,
if awarded, materially and adversely affect the business, properties, condition
(financial or otherwise), or operations of Company or any of its Affiliated
Companies; and as soon as possible and in any event within five Business Days
after any material development or change in the status of any such litigation,
action, suit or proceeding, notice of such development or change;
(f) promptly after the furnishing thereof, copies
of any statement or report furnished to any other holder of the debt or equity
securities of Company or any of its Affiliated Companies, including without
limitation any statement or report furnished pursuant to the terms of any
stock purchase, indenture, loan or credit or similar agreement, and not
otherwise required to be furnished to Investor pursuant to any other clause of
this Section 5.3; and
(g) from time to time, such other information or
documents respecting the business, properties or the condition or operations,
financial or otherwise, of Company or any of its Affiliated Companies as
Investors may from time to time reasonably request.
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5.4 Existence; Compliance With Law.
Except for the mergers and divestitures referred to in
Sections 5.14, 5.15 and 5.16, preserve and maintain its corporate existence,
and all of its licenses, permits, governmental approvals, rights, privileges
and franchises necessary or desirable in the normal conduct of its business as
now conducted or presently proposed to be conducted; conduct its business in an
orderly and regular manner; comply with the provisions of all documents
pursuant to which it is organized or which govern its continued existence; and
comply with the requirements of all applicable laws, rules, regulations,
ordinances, orders of any governmental authority and requirements for the
maintenance of its insurance, licenses, permits, governmental approvals,
rights, privileges and franchises, including, but not limited to, all
applicable federal, state, regional or local environmental laws, rules,
regulations, ordinances and orders.
5.5 Insurance.
Maintain and keep in force insurance of the types and in
amounts customarily carried in lines of business similar to its line of
business, including without limitation fire, extended coverage, public
liability, property damage, business interruption, environmental liability,
key-man life insurance and workers' compensation, together with insurance
covering insurable liabilities arising from or in connection the operation of
the Business prior to the consummation of the Acquisition, for which Company or
any of its Affiliated Companies could be liable after the consummation of the
Acquisition, whether or not assumed under the Acquisition Agreement, carried
with companies and in amounts satisfactory to Investors, and deliver to
Investors, from time to time, at any Investor's request, schedules setting
forth all insurance then in effect.
5.6 Facilities.
Maintain and preserve all of its properties useful or
necessary to its business in good repair and condition and from time to time
make necessary repairs, renewals and replacements thereto so that such
properties shall be fully and efficiently preserved and maintained.
5.7 Taxes and Other Liabilities.
Pay and discharge when due any and all Indebtedness,
obligations, assessments and taxes, both real and personal and including
federal and state income taxes, except such as it may in good faith contest or
as to which a bona fide dispute may arise, provided provision is made to the
satisfaction of Investors for eventual payment thereof in the event that it is
found that the same is an enforceable obligation.
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5.8 Notice to Investors.
Promptly (but in no event more than five Business Days after
the occurrence of each such event or matter) give notice in writing to
Investors of: (a) any change in its name, organizational structure or
composition; (b) any termination or cancellation of any insurance policy which
it is required to maintain; (c) any uninsured or partially uninsured loss
through liability or property damage, or through fire, theft or any other cause
affecting its property in excess of an aggregate of $50,000; or (d) any other
matter which has resulted in a material adverse change in its financial
position.
5.9 ERISA.
Comply with the provisions of ERISA and the Code with respect
to each of its Plans and pay and discharge promptly any liability imposed upon
it pursuant to the provisions of Title IV of ERISA; provided, however, that it
shall not be required to pay any such liability if: (a) the amount,
applicability or validity thereof shall be diligently contested in good faith
by appropriate proceedings and (b) it shall have set aside on its books
reserves which, in the opinion of its independent certified public accountants,
are adequate with respect thereto.
5.10 Notice to Investors Regarding ERISA Matters.
Deliver to Investors within 10 days, after: (a) the
occurrence of any Reportable Event with respect to any Plan, a copy of the
materials that are filed with the PBGC in connection therewith, or if no
materials are required to be filed, notice of such Reportable Event; (b) it or
the administrator of any Plan files with participants, beneficiaries or the
PBGC a notice of intent to terminate any Plan, a copy of such notice; (c) the
receipt of notice by it or the administrator of any Plan from the PBGC of the
PBGC's intention to terminate any Plan or to appoint a trustee to administer
any Plan, a copy of such notice; (d) the filing thereof with the Internal
Revenue Service, a copy of each annual report that is filed on Treasury Form
5500 (or derivatives thereof) with respect to any Plan, together with all
attachments, opinions and schedules that are required to accompany such report;
(e) it knows or has reason to know of any event or condition that could
reasonably be expected to constitute grounds for the termination of (or the
appointment of a trustee to administer) any Plan under the provisions of
Section 4042 of ERISA, an explanation of such event or condition; (f) its
receipt of an assessment of withdrawal liability under Section 4201 of ERISA
from a Multiemployer Plan, a copy of such assessment; (g) it knows or has
reason to know that an application is to be, or has been, made to the Secretary
of the Treasury for a waiver of the minimum funding standard under the
provisions of Section 412 of the Code, a copy of such application or an
explanation of the relevant circumstances; (h) it establishes a new Plan or a
plan or program described in paragraph (d) of Section 3.2.15, a copy of such
Plan or, if none, a written description thereof; (i) it becomes obligated to
make contributions to a Multiemployer Plan not described in Schedule 3.2.15, a
statement describing such obligation and an estimate of any potential
withdrawal liability associated with such obligation; (j) it receives notice of
liability for a civil
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penalty imposed under Section 502 of ERISA or for a tax imposed under Section
4975 of the Code, a copy of such notice; or (k) it knows or has reason to know
that a claim described in paragraph (e) of Section 3.2.15 has been or may
reasonably be expected to be made, a copy of such claim or an explanation
thereof.
5.11 Visitation Rights.
At any time upon reasonable notice to Company and from time to
time, permit Investors or any agents or representatives of Investors to examine
and make copies of and abstracts from its records and books of account, and
visit its properties and discuss its affairs, finances and accounts with any of
its officers or directors, all at the expense of Company.
5.12 Performance of Agreements.
Perform all of the obligations to be performed by it under
each lease, indenture, agreement, contract and other instrument to which it is
a party or by which it and its properties may be bound or affected if the
failure to so perform such obligations might materially and adversely affect
its business, properties, condition (financial and otherwise) or operations or
which might materially and adversely affect its ability to perform its
obligations hereunder, under the other Material Agreements or under any other
document, instrument or agreement issued in connection herewith or therewith;
provided, however, that it shall strictly perform each of its obligations under
the Loan Documents.
5.13 Worker Adjustment Retraining and Notification Act Notice.
In connection with termination of employment of any of its
employees, timely provide such employees with adequate notice of termination as
required by the Worker Adjustment Retraining and Notification Act, as amended
from time to time, or any successor statute (the "WARN Act"), and comply with
all other requirements of the WARN Act and any rules and regulations
promulgated thereunder.
5.14 Merger.
Cause Watson Systems to be merged into Company as soon as
possible but in any event not later than 15 days after the Closing Date.
5.15 Divestitures.
Cause the shares of stock of Toxguard Fluid and Toxguard
Systems to be sold as soon as possible upon such terms and for such
consideration as shall be acceptable to Investors.
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5.16 Acquisition.
Cause the Acquisition to be of assets and not of stock unless
immediately after and giving effect thereto, Company shall merge Ustman into
Company leaving Company the sole surviving entity.
SECTION 6
NEGATIVE COVENANTS
Company further covenants that so long as any of the
Obligations of Company to any Investor hereunder or under any of the other Loan
Documents remains outstanding, and until final payment in full of the Senior
Subordinated Notes, without the prior written consent of Investors, Company
shall not, and shall not allow any of Company's Affiliated Companies to:
6.1 Use of Funds.
Use the proceeds of the Loan for any purpose other than (a) to
pay up to $5,250,000 in connection with the transactions contemplated in the
Acquisition Agreement, (b) transaction costs in connection herewith, (c) in the
amounts and for the purposes set forth on Schedule 6.1 hereto and (d) for
working capital purposes.
6.2 Dividends, Distributions.
Declare or pay any dividend or distribution either in cash,
stock or any other property on its capital stock now or hereafter outstanding
or on any warrant, option or other right to acquire capital stock now or
hereafter outstanding (other than the securities issued or issuable under the
Warrant Agreement or the instruments (and in the amounts) set forth on Schedule
6.2 hereof) or redeem, retire, purchase or otherwise acquire any shares of any
class of its capital stock now or hereafter outstanding or any warrant, option
or other right to acquire capital stock now or hereafter outstanding (other
than the securities issued or issuable under the Warrant Agreement or the
instruments (and in the amounts) set forth on Schedule 6.2 hereof), including
without limitation any put, call or other right to payment under any warrant,
option or other right to acquire capital stock now or hereafter outstanding
(other than the securities issued or issuable under the Warrant Agreement or
the instruments (and in the amounts) set forth on Schedule 6.2 hereof).
6.3 Business.
Discontinue the Business or engage in any business activities
or operations substantially different from or unrelated to the Business.
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6.4 Indebtedness.
Create, incur, assume or permit to exist any Indebtedness
(other than the Obligations); provided, however, that this Section 6.4 shall
not prohibit:
(a) the incurrence of Permitted Senior Debt;
(b) unsecured Indebtedness and other liabilities
incurred in the ordinary course of business, excluding, however, Guaranteed
Indebtedness and Indebtedness incurred through the borrowing of money;
(c) Indebtedness for taxes, assessments,
governmental charges or levies to the extent that payment thereof shall not at
the time be required to be made in accordance with the provisions of Section
5.7;
(d) the NDE Note;
(e) Indebtedness of Company and its Affiliated
Companies existing as of the Closing Date, as described on Schedule 6.4 and
approved by Investors; or
(f) Indebtedness which is expressly subordinated
to the Obligations in accordance with terms agreed upon by the Investors.
6.5 Liens.
Create or suffer to exist any Lien or any other type of
preferential arrangement, upon or with respect to any of its properties,
whether now owned or hereafter acquired, or assign any right to receive income
to secure any Indebtedness of any Person except:
(a) Liens created or permitted by the Loan
Documents;
(b) leases permitted under Section 6.16 and
lessor interests in security deposits given pursuant to leases of real property
entered into by Company or any of its Affiliated Companies, as lessee, in the
ordinary course of business within the limits of Section 6.16;
(c) Liens for current taxes (except United States
income taxes), assessments or other governmental charges (i) which are not
delinquent or remain payable without any penalty or (ii) the validity of which
is contested in good faith by appropriate proceedings upon stay of execution of
the enforcement thereof and which are in respect of claims for current taxes,
assessments or other governmental charges not exceeding an aggregate amount of
$50,000 for Company and its Affiliated Companies;
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(d) Liens, for charges not exceeding an aggregate
amount of $25,000 for Company and its Affiliated Companies, incurred in the
ordinary course of business in connection with worker's compensation,
unemployment insurance or other forms of governmental insurance or benefits, or
to secure performance of tenders, statutory obligations, leases and contracts
(other than for borrowed money) entered into in the ordinary course of business
or to secure obligations on surety or appeal bonds;
(e) Liens of attachment and judgment respecting
claims, the validity of which is being contested in good faith by appropriate
proceedings upon stay of execution of the enforcement thereof (i) in an
aggregate amount not exceeding $50,000 for Company and its Affiliated Companies
or (ii) which shall be vacated within 30 days after the creation thereof; and
(f) mechanics', materialmen's or other similar
Liens arising in the ordinary course of business which either (i) are inchoate
and relate to an obligation which is not yet due and payable or (ii) are being
contested in good faith by appropriate proceedings upon stay of execution of
the enforcement thereof and are in an aggregate amount not exceeding $50,000
for Company and its Affiliated Companies.
6.6 Subsidiaries; Investments.
Create any Subsidiary, make any capital contribution to or
other investment in any of Company's Affiliates or Affiliated Companies or make
any Investment, except for Permitted Investments. Notwithstanding the
provisions of the preceding sentence, Company may, with the prior written
consent of Investors, create a Subsidiary provided that (i) Company shall not
make any capital contribution to or other investment in any such Subsidiary
unless such contribution or investment is approved in advance by Investors,
(ii) each of the terms, covenants and conditions of the Material Agreements
applicable to the business and operations of Company shall be applicable to the
business and operations of such Subsidiary, including without limitation all
financial covenants and reporting requirements which, unless otherwise required
by Investors, shall be applied on a consolidated basis, (iii) all financial
statements shall be prepared on a consolidated and consolidating basis and (iv)
Company shall own 100% of the capital stock of such Subsidiary and Company
shall not permit such Subsidiary to sell or issue shares of capital stock of
such Subsidiary to any Person other than Company.
6.7 Guaranteed Indebtedness.
Create, assume, incur, or be or become liable for any
Guaranteed Indebtedness except: (a) it may endorse negotiable instruments for
deposit or collection in the ordinary course of business; (b) any of Company's
Affiliated Companies may guaranty or become jointly liable with respect to the
Obligations; and (c) it may guaranty or become jointly liable
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on any Indebtedness or Lien which such guarantor would have been permitted to
incur under Sections 6.4 and 6.5.
6.8 Mergers.
Except for mergers required by Sections 5.14 and 5.16, merge
with or into or consolidate with or into another Person; acquire all or
substantially all of the assets or capital stock of any Person; or, in the case
of Company, except in the event of a public offering pursuant to a registration
statement under the Act, permit any sale, transfer or other disposition of 50%
or more of its outstanding voting stock, whether in one transaction or a series
of related transactions, to any Person or Persons other than the Acquisition.
6.9 Restrictions on Sales of Assets.
Sell or otherwise dispose of any property except:
(a) sales, leases, rentals or dispositions of
property as a result of a constructive loss of the property or a decision to
dispose under a fix/sell analysis;
(b) sales, leases, rentals or dispositions of
property in the ordinary course of business and for consideration not less than
the fair market value thereof, so long as at the time of such transaction no
Event of Default or Potential Default has occurred and is continuing and such
transaction would not cause an Event of Default or Potential Default; and
(c) the sale of not less than all of the issued
and outstanding shares of stock of Toxguard Fluid and Toxguard Systems owned by
Company upon terms and conditions and for such consideration as shall be
acceptable to Investors.
6.10 Management or Consulting Fees.
Pay fees to any Person for consulting services or the
management of the Business or of any assets of Company or any of its Affiliated
Companies except for (a) the management of Plan assets, (b) the fees payable
pursuant to Section 4.8 and 8.3 and (c) fees payable to the Persons and in the
amounts set forth on Schedule 6.10.
6.11 Transactions with Affiliates.
Lend or advance money to, or contract with or engage in any
other transactions with Affiliates, except in the ordinary course of business
and on terms and for consideration which are no less favorable than the terms
and consideration which Company or such Affiliated Company, as the case may be,
would be obligated to pay or entitled to receive in an arm's length transaction
except for the fees payable under Sections 4.8 and 8.3.
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6.12 Amendments of Corporate Documents.
Amend its articles or certificate of incorporation or bylaws.
6.13 Executive Compensation.
Allow any of its officers, directors or employees to use any
assets or property of Company or any of its Affiliated Companies for personal
purposes. Neither Company nor any of its Affiliated Companies shall increase
the salary or other compensation or benefits paid or provided to any officer
or director of Company or such Affiliated Company except to the extent that
such increase (a) is commercially reasonable and in accordance with industry
standards and (b) is approved by a majority of the non-employee members of the
Board of Directors of Company or such Affiliated Company, as the case may be.
6.14 Compliance with ERISA.
Do any of the following:
(a) engage in any transaction in connection with which it
could be subject to either a material civil penalty assessed pursuant to the
provisions of Section 502 of ERISA or a material tax imposed under the
provisions of Section 4975 of the Code;
(b) terminate any Plan in a "distress termination" under
Section 4041 of ERISA, or take any other action which could result in a
material liability of it to participants, beneficiaries or the PBGC;
(c) take any action (including a failure to act) that
would result in a complete or partial withdrawal from any Multiemployer Plan,
if such withdrawal could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise) or operations of Company and
its Affiliated Companies viewed as a whole; or
(d) take any action (including a failure to act) that
would cause any Pension Plan that is qualified under Section 401(a) of the Code
to cease to be so qualified.
6.15 Sale or Issuance of Stock.
Issue any shares of capital stock of Company or any option,
warrant, convertible security or any right to purchase any shares of capital
stock of Company or permit to remain outstanding any shares of capital stock of
Company or any option, warrant convertible security or any right to purchase
any shares of capital stock other than the securities set forth on Schedule B.
Except for the pledge to Investors of the shares of the Affiliated Companies
pursuant to the Pledge Agreement and the divestitures required by Section 5.15,
sell, pledge, or otherwise transfer any shares of capital stock of any
Subsidiary;
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or issue any class or series of capital stock which requires (by its terms,
pursuant to separate agreement or upon shareholder request) the payment of
dividends thereon or redemption thereof prior to the final payment in full of
the Senior Subordinated Notes.
(c) Lease Obligations.
Create or suffer to exist any obligations for the payment of
rent for any property under leases or agreements to lease which would cause the
direct or contingent aggregate liabilities of Company and its Affiliated
Companies (a) in respect of any such obligation to exceed $250,000 payable over
the term of such obligation or (b) in respect of all such obligations to exceed
$100,000 payable in any period of 12 months.
(d) Deposit Accounts.
Maintain balances in excess of $10,000 in the aggregate in any
depository facility located outside of the State of California; provided,
however that Company may maintain balances at a commercial bank in Denver,
Colorado in amount as necessary to develop and maintain a banking relationship
with such commercial bank. Promptly upon the creation of any account of any
deposit or other account with any depository institution, Company shall, and
shall cause each Affiliated Company to, notify the depository institution of
the security interest of Investors in said account and to use best efforts to
promptly obtain the acknowledgment of the security interest Investors therein
by such depository and deliver such acknowledgment to Investors.
SECTION 7
EVENTS OF DEFAULT
7.1 Events of Default.
The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Company shall fail (i) to pay when due any principal
payable under the Loan Documents, (ii) to pay any interest payment under the
Loan Documents within five days after the date such payment is due or (iii) to
pay any other amount payable under the Loan Documents within 10 days after the
earlier of Company's knowledge that such amount is due or notice to Company
from any Investor that such amount is due;
(b) any representation or warranty made by Company in the
Loan Documents shall at any time prove to be incorrect in any material respect
on or as of the date made or deemed
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made and which, if correctable, is not corrected within 30 days after the date
the representation or warranty was made or deemed made;
(c) Company shall fail (i) to observe or perform any
obligation, covenant or other provision contained in the Loan Documents which
failure is not cured within 30 days after the earlier of Company's knowledge
thereof or notice thereof from any Investor or (ii) to cause any of Company's
Affiliated Companies to observe and perform any such obligation, covenant or
provision where required to do so by the Loan Documents which failure is not
cured within 30 days after the earlier of Company's knowledge thereof or notice
thereof from any Investor;
(d) (i) any default or event which with the passage of
time or giving of notice or both would constitute a default by Company or any
of Company's Affiliated Companies in the Payment of any principal or interest
on any other Indebtedness other than a default under item (4) of the second
paragraph on page 2 of the U.S. Small Business Administration Note, dated May
17,1995, in favor of Boatman's First National Bank of Kansas City in the
original principal amount of $500,000, which Indebtedness in the aggregate
exceeds $250,000, or (ii) any breach or default or event which with the passage
of time or giving of notice or both would constitute a default with respect to
any other material term of any evidence of any such Indebtedness, or of any
loan agreement, mortgage, indenture or other agreement relating thereto, if the
effect of such default, event or breach is to give the holder or holders of
that Indebtedness (or a trustee or other agent on behalf of such holder or
holders) the right to accelerate such Indebtedness, regardless of whether such
holder has in fact accelerated such Indebtedness which breach or default or
event specified in this subparagraph (i) shall remain unremedied for a period
of 30 days after the earlier of Company's knowledge thereof or notice thereof
from any Investor.
(e) any breach or default by Company or any of Company's
Affiliated Companies with respect to any material term of any of the Material
Agreements other than the Loan Documents, which breach or default is not cured
within 30 days after the earlier of Company's knowledge thereof or notice
thereof from any Investor;
(f) the entry of any judgment, order or decree against
Company or any of its Affiliated Companies; or the filing of a notice of
judgment lien against Company or any of its Affiliated Companies; or the
recording of any abstract of judgment against Company or any of its Affiliated
Companies in any county in which Company or such Affiliated Company has an
interest in real property; or the service of a notice of levy or of a writ of
attachment or execution, or other like process, against the assets of Company
or any of its Affiliated Companies; and such judgment, judgment lien, levy,
attachment or execution shall exceed $100,000 individually or in the aggregate
and shall not have been vacated, discharged or stayed within 60 days from the
entry thereof;
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(g) Company or any of its Affiliated Companies shall
become insolvent, or shall suffer or consent to or apply for the appointment of
a receiver, trustee, custodian or liquidator of itself or any of its property,
or shall generally fail to pay its debts as they become due, or shall make a
general assignment for the benefit of creditors; Company or any of its
Affiliated Companies shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors
or any other relief under the Bankruptcy Code, or under any state or federal
law granting relief to debtors, whether now or hereafter in effect; or any
involuntary petition or proceeding pursuant to the Bankruptcy Code or any other
applicable state or federal law relating to bankruptcy, reorganization or other
relief for debtors is filed or commenced against Company or any of its
Affiliated Companies, which petition or proceeding (i) results in the entry of
an order for relief or any such adjudication of relief, or (ii) remains
unreleased, undischarged, or unbonded for a period of 60 days or (iii) Company
or such Affiliated Company file an answer admitting jurisdiction of the court
and the material allegations of the petition; or Company or any of its
Affiliated Companies shall be adjudicated a bankrupt, or an order for relief
shall be entered by any court of competent jurisdiction under the Bankruptcy
Code or any other applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors;
(h) the dissolution or liquidation of Company or any of
its Affiliated Companies; or Company or any of its Affiliated Companies or any
of the directors or shareholders of Company or any of its Affiliated Companies
shall take action seeking to effect the dissolution or liquidation of Company
or any of its Affiliated Companies;
(i) the occurrence of one or more of the events described
in Section 5.10 which could be reasonably expected to have a material adverse
effect on the condition (financial or otherwise) or operations of Company or
any of its Affiliated Companies;
(j) any of the Loan Documents or any of the other Material
Agreements shall, at any time, cease to be in full force and effect except in
accordance with its terms or shall be declared null and void pursuant to a
judicial or other governmental act, or the validity or enforceability thereof
shall be contested by any party thereto;
(k) except in the event of a public offering pursuant to a
registration statement under the Act, any Person or Persons other than the
Investors and any Person to which an Investor Transfers shares of Common Stock
shall acquire 50% or more of Company's voting stock;
(l) any breach or default by Company or any of its
Affiliated Companies of any term of any lease, commitment, contract, instrument
or obligation to which it is a party, or by which its properties or assets are
bound, which breach or default has, or is reasonably expected to have, a
material adverse effect on the condition (financial or otherwise) or operations
of Company and its Affiliated Companies taken as a whole and such breach or
default is not cured within 30 days after the occurrence thereof;
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(m) Company or any of its Affiliated Companies shall be
served with or receive a notice from any federal, state, regional or local
environmental regulatory agency alleging that Company or any of its Affiliated
Companies may be liable for the costs of investigation or remediation of a
release or threatened release of any Hazardous Material originating from or
affecting property or properties owned, leased or operated by Company or any of
its Affiliated Companies which liability could be material to Company and
either (i) any such agency has obtained a judgment or other remedial action
with respect to the subject matter of notice or (ii) 90 days shall have elapsed
since Company's receipt of such notice and such agency has not rescinded such
notice in writing in its entirety;
(n) the Environmental Protection Agency or any successor
to its rule making or enforcement authority shall cease to approve of the
Process as means of determining leakage from underground storage tanks; or
(o) on or before the earlier of the date that is third
anniversary of the date hereof and the Warrant Adjustment Date, Company shall
not have authorized the issuance of shares of Common Stock in a number in
excess of the sum of (i) the shares of Common Stock outstanding on that date,
(ii) the options, warrants, convertible securities and other rights to purchase
shares of Common Stock outstanding on that date, (iii) the shares of Common
Stock issuable pursuant to the Warrants, (iv) the shares of Common Stock
issuable under the Adjustment Warrants issued pursuant to Section 2.10 and (v)
shares of Common Stock to be issued pursuant to Section 2.2.8 hereof or Company
shall not have on or before such date taken all acts necessary or appropriate
to permit Company to perform each of its obligations hereunder. Investors
agree to vote the Shares of Common Stock held by them to accomplish each item
set forth in this clause (o).
7.2 Remedies.
If an Event of Default shall occur, any Indebtedness of
Company under the Loan Documents, any term of the Senior Subordinated Notes to
the contrary notwithstanding, shall (i) in the case of an Event of Default
described in clause (a) of Section 7.1, at the option of Investor, and (ii) in
the case of any other Event of Default, at the option of the holders of a
majority in interest of the then outstanding principal amount of the Senior
Subordinated Notes, and without notice, become immediately due and payable
without presentment, demand, protest or notice of dishonor, all of which are
hereby expressly waived by Company, and Investor or holders shall have all
rights, powers and remedies available under any of the Loan Documents, or
accorded by law; provided, however, that upon the occurrence of an Event of
Default described in clause (g) of Section 7.1, such Indebtedness shall become
immediately due and payable without any election on the part of the holders.
All rights, powers and remedies of Investors may be exercised by Investors at
any time and from time to time after the occurrence of an Event of Default.
All rights, powers and remedies of Investors in connection with the Loan
Documents are cumulative and not exclusive and shall be in addition to any
other rights, powers or remedies provided by law or equity, including, without
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limitation, the right to set-off any liability owing by Investors to Company
against any liability of Company to Investors as provided in Section 7.4.
7.3 No Waiver.
No delay, failure or discontinuance of Investors, or any
holder of any of the Senior Subordinated Notes, in exercising any right, power
or remedy under the Loan Documents shall affect or operate as a waiver of such
right, power or remedy; nor shall any single or partial exercise of any such
right, power or remedy preclude, waive or otherwise affect any other or further
exercise thereof or the exercise of any other right, power or remedy. Any
waiver, permit, consent or approval of any kind by Investors, or any holder of
any Senior Subordinated Note, of any breach of or default under the Loan
Documents must be in writing and shall be effective only to the extent set
forth in such writing.
7.4 Set-Off.
In addition to any rights, powers or remedies now or hereafter
granted under this Agreement or applicable law, and not by way of limitation of
any such rights, powers or remedies, upon the occurrence and during the
continuance of any Event of Default, each Investor is hereby authorized by
Company at any time or from time to time, without notice to Company or to any
other Person (any such notice being hereby expressly waived), to the fullest
extent permitted by law, to set off, appropriate and apply all indebtedness or
obligations owing by such Investor to or for account of Company against all of
the obligations of Company to such Investor now or hereafter arising under this
Agreement or any of the other Loan Documents.
SECTION 8
MISCELLANEOUS
8.1 Notices.
In order to be effective, any notice or other communication
required or permitted hereunder, shall, unless otherwise stated herein, be in
writing and shall be transmitted by messenger, delivery service, mail, telex,
telegram, telecopy or cable, if to Company, at Company's address set forth
under its name on the signature page, and if to an Investor, to the address set
forth under its name on the signature page hereof or at such other address as a
party shall designate in a written notice to the other parties hereto given in
accordance with this Section 8.1. All notices and other communications shall
be effective (i) if sent by messenger or delivery service, when delivered, (ii)
if sent by mail, five days after having been sent by certified mail, with
return receipt requested, (iii) if sent by telegraph or cable, when delivered
to the telegraph or cable company or (iv) if sent by telex or telecopier,
- 56 -
<PAGE> 63
when sent. In order to be effective, any notice transmitted to an address
outside the United States of America by any means other than telex or
telecopier shall at the time of transmittal be duplicated by counterpart telex
or telecopier notice.
8.2 Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns, except that
neither Company nor any of its Affiliated Companies may assign or transfer its
rights hereunder or any interest herein or delegate its duties hereunder
without the prior written consent of Investors.
8.3 Costs, Expenses, Management and Attorneys' Fees.
Company shall reimburse Investors for all out-of-pocket costs
and expenses, including, without limitation, reasonable attorneys' fees
(including, without limitation, the reasonable allocated cost of in-house legal
counsel), expended or incurred by Investors in investigation, due diligence of
Company, Ustman and the negotiation and preparation of the Loan Documents and
the Warrant Agreement, the closing of the transactions contemplated by the Loan
Documents and the Warrant Agreement, the administration of the Loan, the
enforcement of any of the Loan Documents or the Warrant Agreement, the
prosecution or defense of actions for declaratory relief in any way related to
any of the Loan Documents or the Warrant Agreement or the collection of any sum
which becomes due pursuant to any of the Loan Documents or the Warrant
Agreement; provided that Company shall not be obligated to reimburse Investors
for costs and expenses under this Section 8.3 for the Administration of the
Loan in excess of $10,000 for any 12 month period. On the Closing Date,
Company shall pay all fees and expenses of Investors' counsel incurred in
connection with the negotiation and preparation of the Loan Documents and the
Warrant Agreement and the closing of the transactions contemplated by the Loan
Documents and the Warrant Agreement, plus an amount estimated by such counsel
to be sufficient to pay the fees and expenses which will be incurred in
connection with such transactions after the Closing Date; any additional fees
and expenses will be billed as incurred and shall be paid by Company within 30
days of receipt by Company of the invoice therefor. In addition, Company shall
pay to Management an annual fee of $100,000 payable quarterly with the first
such payment due on the date hereof and payable thereafter on each quarterly
date until the fifth anniversary hereof.
8.4 Indemnity.
In addition to the payment of expenses pursuant to Section
8.3, and whether or not the transactions contemplated hereby shall be
consummated, Company agrees to indemnify, pay and hold each Investor and any
subsequent holder of any Senior Subordinated Note, and the officers, directors,
employees, attorneys and agents of Investors and such subsequent holders
(collectively, the "Indemnitees") harmless from and against all other
liabilities, obligations, losses, damages, penalties, claims, costs, expenses
and disbursements
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<PAGE> 64
of any kind or nature whatsoever (including, without limitation, the reasonable
'fees and disbursements of counsel chosen for such Indemnitee by such
Indemnitee, in connection with any investigative, administrative or judicial
proceeding, whether or not such Indemnitee shall be designated a party
thereto), which may be imposed on, incurred by, or asserted against
Indemnitees, in any manner relating to or arising out of: (a) this Agreement,
the other Loan Documents or any of the other Material Agreements; (b)
Investor's agreement to make the Loan; (c) the making of the Loan; (d) the use
or intended use of the proceeds of the Loan; (e) the violation of any
securities law by Company; (f) the failure of any of the parties to the
Material Agreements to comply with any law, rule or regulation applicable to
the transactions contemplated thereby or (g) the Business (the "Indemnified
Liabilities"); provided that Company shall have no obligation to an Indemnitee
hereunder with respect to any Indemnified Liability arising from the gross
negligence or willful misconduct on the part of such Indemnitee in respect of
any act related thereto. To the extent that the undertaking to indemnify, pay
and hold harmless set forth in the preceding sentence may be unenforceable
because it is violative of any law or public policy, Company shall contribute
the maximum portion which it is permitted to pay and satisfy under applicable
law, to the payment and satisfaction of all Indemnified Liabilities incurred by
the Indemnitees or any of them. The obligations under this Section 8.4 shall
survive the expiration or termination of this Agreement.
8.5 Entire Agreement, Amendment.
The Loan Documents (including the Exhibits and Schedules
thereto) executed by Company in connection with, or as required by, this
Agreement constitute the entire agreement between Company and Investors with
respect to the Loan; supersede all prior or contemporaneous negotiations,
communications, discussions and correspondence concerning the subject matter
hereof; and may be amended or modified only with the written consent of the
holders of a majority in principal amount of the Senior Subordinated Notes then
outstanding, except that no such amendment or modification shall become
effective if it extends the maturity or reduces the rate of interest payable
with respect to the Senior Subordinated Notes, alters the terms of payment of
the principal, interest and premium (if any) under the Senior Subordinated
Notes, or reduces the percentage of holders of principal amount of' the Senior
Subordinated Notes necessary to approve modifications or amendments to this
Agreement without the consent of each holder of the Senior Subordinated Notes
affected thereby. Whenever the consent or approval of the Investor is
required, such consent or approval must be given in writing by the holders of a
majority in principal amount of the Senior Subordinated Notes then outstanding.
8.6 Time.
Time is of the essence of each and every provision of the Loan
Documents.
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<PAGE> 65
8.7 Severability of Provisions.
If any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision or 'any remaining provisions of this Agreement.
8.8 Governing Law.
This Agreement and the Senior Subordinated Notes shall be
governed by and construed in accordance with the law of the State of New York
applicable to contracts entered into and to be performed wholly within New York
by New York residents. The parties consent to the non-exclusive jurisdiction
of any state or federal court in New York, New York.
8.9 Arbitration.
Any controversy or claim arising out of or relating to this
contract, or the breach thereof, including any issues pertaining to the
arbitrability of such controversy or claim, shall be settled by arbitration
administered by the American Arbitration Association under its Commercial
Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may
be entered in any court having jurisdiction thereof. All such arbitration
proceedings shall be held in New York, New York. The arbitrator shall have the
right to grant reasonable attorneys fees to the prevailing party.
8.10 Incorporation of Exhibits and Schedules by Reference.
All Exhibits and Schedules to this Agreement are incorporated
herein by this reference.
8.11 Counterparts.
This Agreement may be executed in separate counterparts, each
of which, when so executed, shall be deemed to be an original and all of which,
when taken together, shall constitute but one and the same agreement.
8.12 Survival.
The representations, warranties, covenants and agreements made
herein shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, notwithstanding any
investigation made by Investor, its agents or representatives. All statements
as to factual matters contained in any certificate, exhibit or
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<PAGE> 66
other instrument delivered by or on behalf of Company pursuant hereto or in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties of Company hereunder as of the date of such
certificate, exhibit or schedule.
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<PAGE> 67
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in the Borough of Manhattan, State of New York the day and year first
written above.
WATSON GENERAL CORPORATION
By: /s/ RONALD G. CRANE
--------------------------------
Title: President & CEO
---------------------------
Address for Notice:
32-B Mauchly
Irvine, California 92718
Telecopier: 714-753-7986
Attn: Mr. Ronald G. Crane
SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner
By: /s/ BARRY S. ROSENSTEIN
-------------------------------
Title:
----------------------------
Address for Notice:
645 5th Avenue
8th Floor
New York, New York 10022
Tel: 212-848-0276
Fax: 212-355-5056
Attn: Marc Weisman, Esquire
<PAGE> 68
SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: RSP Capital L.L.C., its supervising
general partner
By: /s/ BARRY S. ROSENSTEIN
-----------------------------
Title:
-------------------------
Address for Notices:
645 5th Avenue
8th Floor
New York, New York 10022
Tel: 212-848-0276
Fax: 212-355-5056
Attn: Marc Weisman, Esquire
<PAGE> 69
EXHIBITS
Exhibit A: Form of Senior Subordinated Promissory Note
Exhibit B: Capitalization
Exhibit C: Financial Statements
Exhibit D: Form of Legal Opinion
Exhibit E: Form of Financial Condition Certificate
- 63 -
<PAGE> 1
EXHIBIT 10.3
===============================================================================
WARRANT AGREEMENT
DATED AS OF
MAY 22, 1997
BY AND BETWEEN
WATSON GENERAL CORPORATION
AND
SAGAPONACK PARTNERS, L.P.
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 2 THE WARRANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Issuance of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Manner of Exercise of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Issuance of Shares Upon Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.4 Payment of Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Reservation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.7 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.8 Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 3 ANTI-DILUTION PROTECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1.1 Change in Covered Options . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1.2 Change in Base Ownership Percentage. . . . . . . . . . . . . . . . . . . . . . 7
SECTION 4 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.1 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.3 Costs of Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.4 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.6 Consent to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.7 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.8 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.9 Incorporation of Exhibits and Schedules by Reference . . . . . . . . . . . . . . . . . . 9
4.10 Entire Agreement; Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
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<PAGE> 3
WARRANT AGREEMENT
This WARRANT AGREEMENT is entered into as of this 22nd day of May, 1997,
by and between Watson General Corporation, a California corporation (the
"Company") and Sagaponack Partners, L.P., a California limited partnership (the
"Investor").
BACKGROUND
The Company is authorized to issue one class of Common Stock. The Common
Stock is not convertible.
Pursuant to this Agreement, the Company shall issue 2,625,432 warrants
to the Investor entitling the Investor to purchase an aggregate of 2,625,432
shares of common stock of the Company, subject to adjustment as set forth
herein. Such warrants shall entitle the Investor to purchase shares of Common
Stock.
AGREEMENT
NOW, THEREFORE, the Company and the Investor agree as follows:
SECTION 1
DEFINITIONS
1.1 Certain Defined Terms. The following terms used in this
Agreement have the following meanings:
"Accredited Investor" has the meaning given to that term in
Section 501(a) of Regulation D promulgated under the Act.
"Act" means the Securities Act of 1933, as amended from time
to time, or any successor statute.
"Adjusted Base Ownership Percentage" shall have the meaning
given such term in the Securities Purchase Agreement.
"Applicable Percentage" means the Base Ownership Percentage or
the Adjusted Base Ownership Percentage, whichever is applicable at the time of
determination.
- 1 -
<PAGE> 4
"Base Ownership Percentage" shall have the meaning given such
term in the Securities Purchase Agreement.
"Closing Date" means the date on which the proceeds of the
Senior Secured Notes are disbursed to the Company pursuant to the Securities
Purchase and Security Agreement.
"Common Stock" means any class or series of common stock
issued by the Company.
"Covered Exercise" means any exercise of a Covered Option.
"Covered Option" means any warrant, option or right to
purchase shares of Common Stock, including, without limitation, pursuant to any
of the documents or instruments set forth on Schedule 1 hereto, whether granted
prior or subsequent to the date of this Warrant Agreement, other than any
option or warrant granted pursuant to this Warrant Agreement or pursuant to the
Securities Purchase Agreement.
"Exercisable Warrants" shall have the meaning given such term
in Section 2.2 hereof.
"Exercise Notice" shall mean a written notice to the Company
stating the number of Exercisable Warrants being exercised and the number of
shares of Common Stock with respect to which the Exercisable Warrants are being
exercised.
"Exercise Price" means with respect to any Covered Exercise,
the exercise price per share of the Covered Option.
"Fair Value" of a share of Common Stock on any specified date
means:
(i) If shares of Common Stock are then listed or admitted to
trading on any national securities exchange or traded on any national market
system, the average of the daily closing prices for the thirty (30) trading
days before such date, excluding any trades which are not bona fide, arm's
length transactions. The closing price for each day shall be the last sale
price on such date or, if no such sale takes place on such date, the average of
the closing bid and asked prices on such date, in each case as officially
reported on the principal national securities exchange or national market
system on which such shares are then listed, admitted to trading or traded.
(ii) If no shares of Common Stock are then listed or admitted
to trading on any national securities exchange or traded on any national market
system, the average of the reported closing bid and asked prices thereof on
such date in the over-the-counter market as shown by the National Association
of Securities Dealers automated quotation system or, if
- 2 -
<PAGE> 5
such shares are not then quoted in such system, as published by the National
Quotation Bureau, Incorporated or any similar successor organization, and in
either case as reported by any member firm of the New York Stock Exchange
selected by the Holder.
(iii) If no shares of Common Stock are then listed or admitted
to trading on any national exchange or traded on any national market system,
and if no closing bid and asked prices thereof are then so quoted or published
in the over-the-counter market, the fair value of a share of Common Stock shall
be as mutually agreed by the Company and the Holder; provided, however that if
the Company and such Holder are unable to mutually agree upon the fair value,
the Company and such Holder shall, within five (5) days from the date that
either party determines that they cannot agree and so notifies the other party
in writing, jointly retain an investment banking firm, or a nationally
recognized accounting firm or other firm providing similar valuation services,
satisfactory to each of them. If the Company and such Holder are unable to
agree on the selection of such a firm within such five (5) day period, the
Company and such Holder shall, within twenty (20) days after expiration of such
five (5) day period, each retain a separate independent investment banking firm
(which firm, in either case, shall not be the investment banking firm regularly
retained by the Company or such Holder). If either the Company or such Holder
fail to retain such an investment banking firm during such twenty (20) day
period, then the independent investment banking firm retained by such Holder or
the Company, as the case may be, shall alone take the actions described below.
Such firms shall determine within thirty (30) days of being retained the fair
value of a share of Common Stock and deliver their opinion in writing to the
Company and to such Holder as to such fair value. If such firms cannot jointly
agree upon such fair value, then, unless otherwise directed in writing by both
the Company and such Holder, such firms, in their sole discretion, shall choose
another investment banking firm independent of the Company and such Holder,
which firm shall make such determination, and render such an opinion as
promptly as practicable. In either case, the determination so made shall be
conclusive and binding on the Company and such Holder. The fees and expenses
for such determination made by any and all such investment banking or other
firms shall be paid by the Company. In the determination of the fair value of
a share of Common Stock, there shall not be taken into consideration any
premium for shares representing control of the Company or any discount related
to shares representing a minority interest therein or related to any
illiquidity or lack of marketability of shares arising from contractual
restrictions on the transfer of shares of Common Stock or restrictions on
transfer under federal and applicable state securities laws.
"Holder" means any registered holder of Warrants or Warrant
Shares.
"Person" means and includes natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts and other organizations, whether or not legal entities, and
governments and agencies and political subdivisions thereof.
- 3 -
<PAGE> 6
"Securities Purchase Agreement" means the Securities Purchase
Agreement between the Company and the Investor of even date herewith.
"Transfer" means the sale, pledge, assignment or other
transfer of the Warrants or the Warrant Shares, in whole or in part, and of the
rights of the Holders under this Agreement.
"Warrants" means the warrants issued pursuant to this
Agreement, which, when exercised, give the Holder thereof the right to obtain
one share of Common Stock per warrant, subject to adjustment as provided
herein.
1.2 Interpretation
Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, to the singular
include the plural, and to the part include the whole. The term "including" is
not limiting and the term "or" has the inclusive meaning represented by the term
"and/or." The words "hereof," "herein," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. References to "Articles", "Sections," "Subsections,"
"Exhibits," and "Schedules" are to Articles, Sections, Subsections, Exhibits and
Schedules, respectively, of this Agreement, unless otherwise specifically
provided. Terms defined herein may be used in the singular or the plural. Any
capitalized terms used herein which are not specifically defined herein have the
meaning given to them in the Loan Agreement.
SECTION 2
THE WARRANTS
2.1 Issuance of Warrants
The Company hereby grants and issues to the Investor 2,625,432
Warrants to purchase 2,625,432 shares of Common stock. The number of Warrants
issued pursuant hereto shall (i) increase or decrease, as the case may be,
pursuant to Section 3 hereof and (ii) increase from time to time as more Covered
Options are issued so that at all times the number of Warrants issuable
hereunder is not less than (a) the sum of (i) the number of Warrants issuable
hereunder at such time plus (ii) the number of Covered Options outstanding at
such time, times (b) the Applicable Percentage.
2.2 Manner of Exercise of Warrants
The Investor may exercise the Warrants only after a Covered Exercise
has occurred. The number of Warrants which shall become exercisable whenever a
Covered
- 4 -
<PAGE> 7
Exercise occurs (the "Exercise Warrants") shall be determined by multiplying
(i) the number of shares of Common Stock issued upon such Covered Exercise
times (ii) the Percentage determined by dividing (x) the Applicable Percentage
by (y) the number obtained by subtracting the Applicable Percentage from one.
The Company shall notify the Holder within five (5) days of each Covered
Exercise. The Holder shall have the right to purchase from the Company, and
the Company shall issue and sell to such Holder, one share of Common Stock for
each Warrant exercised, upon delivery to the Company at its principal office of
an Exercise Notice and upon payment to the Company of the Exercise Price in
lawful money of the United States of America.
At the election of the Holder, the Holder may elect to exercise its
option for a cashless exercise of Warrants by notifying the Company of such
election and the Company shall issue to the Holder a number of shares of Common
Stock equal to the product of (a) the excess of the Fair Market Value per share
over the Exercise Price and (b) the number of Warrants to be exercised, such
product to be divided by (c) the Fair Market Value per share. For purposes of
calculating the Adjusted Base Ownership Percentage under Section 2.2.8 of the
Securities Purchase Agreement, the number of shares of Common Stock issued
pursuant to a Covered Exercise shall be deemed to be the number of shares of
Common Stock that would have been issued had such exercise been for cash,
notwithstanding whether or not the Covered Exercise was for cash or was
cashless.
2.3 Issuance of Shares Upon Exercise
Upon exercise of a Warrant, the Company shall issue and cause to be
delivered to the Holder, registered in such name or names as the Holder may
designate a certificate representing the share or shares of Common Stock
issuable upon the exercise of such Warrant. Such certificate shall be deemed to
have been issued and any person so designated shall be deemed to have become a
holder of record of such Common Stock as of the date of delivery of the Exercise
Notice to the Company and payment of the Exercise Price. The Warrants may be
exercised, at the election of the Holder thereof, for all or any portion of the
number of Warrants which have become exercisable pursuant to Section 2.2.
2.4 Payment of Expenses and Taxes
The Company shall pay all expenses and taxes imposed by law or any
governmental agency, including any documentary stamp taxes, attributable to the
issuance of Warrant Shares upon the exercise of Warrants; provided, that nothing
in this Section 2.4 shall make the Company liable for any income taxes payable
by the Holder and associated with the issuance of the Warrants or the exercise
thereof.
- 5 -
<PAGE> 8
2.5 Reservation of Shares
The Company covenants and agrees that, so long as any Warrants remain
outstanding, the Company shall (i) at all times have authorized and reserved a
number of shares of Common Stock sufficient to provide for the exercise of the
Warrants and (ii) take all such action as may be required to assure that the par
value, if any, per share of Common Stock is at all times equal to or less than
the average Exercise Price of all Covered Options as in effect from time to
time.
2.6 Securities Law Compliance
If the issuance of any shares of Common Stock required to be reserved
for purposes of the exercise of any Warrants requires the registration with, or
approval of, any governmental authority or requires listing on any national
securities exchange or national market system before such shares may be so
issued, the Company shall at its expense use its best efforts to cause such
shares to be duly registered, approved or listed, as the case may be, so that
such shares may be issued in accordance with the terms hereof; provided,
however, that the foregoing shall not apply to the extent that such issuance
would require registration or qualification as a public offering solely due to
the Transfer of the Warrants by one or more Holders to Persons who are not
Accredited Investors.
2.7 Fractional Shares
The Company need not issue fractional shares upon the exercise of
Warrants but in lieu thereof may pay to the Holder the Fair Value of such
fractional shares; provided, however, that in the event that the Company
undertakes a reduction in the number of shares of Common Stock outstanding, it
shall be required to issue fractional shares to any Holder which exercises all
or any part of its Warrants.
2.8 Exchanges
At the option of the Holder, this Warrant Agreement Certificate may be
exchanged when surrendered at the principal office of the Company for one or
more Warrant Agreement representing in the aggregate a Warrant or Warrants to
acquire a like number and kind of shares of Common Stock in the Company by the
Holder.
- 6 -
<PAGE> 9
SECTION 3
ANTI-DILUTION PROTECTION
3.1 Adjustments
If all or any portion of Exercisable Warrants issued pursuant hereto is
exercised subsequent to any stock dividend, split-up, recapitalization,
combination or exchange of shares, merger, consolidation, acquisition of
property for stock, separation, reorganization, or liquidation, as a result of
which shares of any class shall be issued in respect of outstanding shares of
Common Stock, or shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes, the Investor
exercising such Exercisable Warrants shall receive, upon the exercise of such
exercise right, the aggregate number and class of shares which, if the
Exercisable Warrants had been exercised at the date hereof and the shares
acquired thereby had not been disposed of, such Investor would be holding as a
result of any such stock dividend, split-up, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property for stock,
separation, reorganization, or liquidation; provided however, that no fractional
share shall be issued upon any such exercise if the Company pays the Holder the
Fair Value of any fractional shares which would have been issued to such Holders
but for this clause.
In the event that the Applicable Percentage should increase at any time
during the term of this Agreement, then the Investor shall be entitled to
exercise, with respect to any Exercisable Warrants then exercisable and on the
same terms and conditions thereof, an additional number of Warrants such that,
when aggregated with the Exercisable Warrants, shall equal the number of
Exercisable Warrants that would have been issued to Investor pursuant to this
Warrant Agreement had the increased Applicable Percentage been in effect as the
time that the applicable Covered Exercise occurred. Such additional Warrants
shall be deemed Exercisable Warrant for purposes of this Warrant Agreement.
3.1.1 Change in Covered Options. If the number of shares of Common Stock
issued and/or issuable under or in connection with any Covered Option increase,
then the number of Warrants issuable hereunder shall increase by a number which
is an equal percentage of the warrants to the percentage increase or decrease of
the number of warrants issued or issuable under the Covered Options.
3.1.2 Change in Base Ownership Percentage. If an Adjusted Base Ownership
Percentage is determined, the number of Warrants issuable hereunder shall
increase by a percentage equal to the percentage by which the Adjusted Ownership
Percentage is greater than the Base Ownership Percentage.
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<PAGE> 10
SECTION 4
MISCELLANEOUS
4.1 Transfers
After September 21, 1997, the Holder may make one or more Transfers from
time to time to any Person provided that such Transfer is made in compliance
with the Act and any state securities laws. Upon any Transfer, the transferee
shall, to the extent of such Transfer, be entitled to exercise the rights of the
Investor making such Transfer and thereafter be deemed an "Investor" under this
Warrant Agreement. The Company shall effect each such Transfer in the manner
described in Section 2.4.2 of the Securities Purchase Agreement.
4.2 Notices
In order to be effective, any notice or other communication required or
permitted hereunder shall, unless otherwise stated herein, be in writing and
shall be transmitted by messenger, delivery service, mail, telegram, telecopy or
cable, at its address set forth on Schedule 4.2 or at such other address as a
party shall designate in a written notice to the other parties hereto given in
accordance with this Section. All notices and other communications shall be
effective (i) if sent by messenger or delivery service, when delivered, (ii) if
sent by mail, five days after having been sent by certified mail, with return
receipt requested, (iii) if sent by telegraph or cable, when delivered to the
telegraph or cable company or (iv) if sent by telecopier, when sent. In order to
be effective, any notice transmitted to an address outside the United States of
America by any means other than telecopier shall at the time of transmittal be
duplicated by counterpart telecopier notice.
4.3 Costs of Enforcement
If any party to this Agreement seeks to enforce its rights under this
Agreement by legal proceedings or otherwise, the non-prevailing party shall pay
all reasonable costs and expenses incurred by the prevailing party, including,
without limitation, all reasonable attorneys' fees.
4.4 Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, except that the
Company may not assign or transfer its rights hereunder or any interest herein
or delegate its duties hereunder except (i) as permitted by the Securities
Purchase Agreement or (ii) with the prior written consent of the Holders.
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<PAGE> 11
4.5 Governing Law
This Agreement shall be governed by and construed in accordance
with the laws of the State of New York applicable to contracts entered into and
to be performed wholly within New York by New York residents.
4.6 Consent to Jurisdiction
The Company hereby consents to the non-exclusive jurisdiction,
venue and forum of any state or federal court in New York, New York with respect
to any action, whether commenced by the Investor or any other Person, which, in
whole or in part, in any way arises under or relates to this Agreement.
4.7 Execution in Counterparts
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which, when so
executed, shall be deemed to be an original and all of which, when taken
together, shall constitute but one and the same agreement.
4.8 Remedies
In the event of a breach by the Company of this Agreement, any
Holder injured by such breach, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, shall be entitled to
specific performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach of this Agreement by the Company and hereby waives the
defense in any action for specific performance that a remedy at law would be
adequate.
4.9 Incorporation of Exhibits and Schedules by Reference
All Exhibits and Schedules to this Agreement are incorporated
herein by this reference.
4.10 Entire Agreement; Amendment
This Agreement (including the Exhibits, Schedules and the parts
of the Loan Agreement incorporated by reference herein) constitute the entire
agreement between the Company and the Investor with respect to the subject
matter hereof, superseding all prior or contemporaneous negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be modified or amended or any provision
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<PAGE> 12
hereof may be waived only with the written consent of the Company and the
Holders of at least two-thirds (2/3) of the aggregate number of Warrants then
outstanding.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Company
Agreement as of the date and year first above written.
The Company: WATSON GENERAL CORPORATION
a California corporation
By: /s/ RONALD G. CRANE
-----------------------------------------
President & CEO
The Investors: SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general partner
By: /s/ BARRY S. ROSENSTEIN
-----------------------------------------
Title:
SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: RSP Capital L.L.C., its supervising
general partner
By: /s/ BARRY S. ROSENSTEIN
-----------------------------------------
Title:
<PAGE> 1
EXHIBIT 10.4
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of
May 22, 1997, is made between Watson General Corporation, a California
corporation (the "Company"), and Sagaponack Partners, L.P., a Delaware limited
partnership and Sagaponack International Partners, L.P., a Cayman Islands
limited partnership (collectively, the "Investors").
The Company and the Investors are parties to a Securities
Purchase Agreement dated as of May 22, 1997 (as amended, modified, renewed or
extended from time to time, the "Securities Purchase Agreement"). It is a
condition precedent to the consummation of the transactions provided for in the
Securities Purchase Agreement that the Company enter into this Agreement and
pledge to the Investors the shares of the common stock of Watson Systems, Inc.,
a Missouri corporation; Toxguard Fluid Technologies, Inc., a California
corporation; Toxguard Systems, Inc., a Nevada corporation; and Ustman
Industries, Inc., a Delaware corporation (collectively, the "Subsidiaries"),
owned by the Company, to secure the obligations of the Company described below.
Accordingly, the parties hereto agree as follows:
SECTION 1. Definitions; Interpretation.
(a) Terms Defined in Securities Purchase Agreement. All
capitalized terms used in this Agreement and not otherwise defined herein shall
have the meanings assigned to them in the Securities Purchase Agreement.
(b) Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings:
"Additional Collateral" means any and all (i) capital stock or
other equity securities issued by the Subsidiaries in addition to the Pledged
Shares, whether certificated or uncertificated, (ii) warrants, options or other
rights entitling the Company to acquire any interest in capital stock or other
equity securities of the Subsidiaries, (iii) securities, property, interest,
dividends and other payments and distributions issued as an addition to, in
redemption of, in renewal or exchange for, in substitution or upon conversion
of, or otherwise on account of, the Pledged Shares or such additional capital
stock or other equity securities, and (iv) cash and non-cash proceeds of the
Pledged Shares and any of the foregoing, in
<PAGE> 2
each case from time to time received or receivable by, or otherwise paid or
distributed to or acquired by, the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Pledged Collateral" has the meaning set forth in Section
2(a).
"Pledged Shares" means all of the issued and outstanding
shares of the capital stock, whether certificated or uncertificated, of the
Subsidiaries now owned by the Company.
"Secured Obligations" means the indebtedness, liabilities and
other obligations of the Company to the Investors under or in connection with
the Securities Purchase Agreement, the Senior Subordinated Notes and the other
Material Agreements, all indebtedness, liabilities and other obligations of the
Company to the Investors, whether created under, arising out of or in
connection with the Securities Purchase Agreement, the Notes or any of the
other Material Agreements or otherwise, including all unpaid principal of the
Loan, all fees due under the Material Agreements and all other amounts payable
by the Company to the Investors thereunder or in connection therewith, whether
now existing or hereafter arising, and whether due or to become due, absolute
or contingent, liquidated or unliquidated, determined or undetermined.
"Securities Act" means the Securities Act of 1933, as amended.
"UCC" means the Uniform Commercial Code as the same may, from
time to time, be in effect in the State of California; provided, however, in
the event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of the security interest in any Pledged
Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of California, the term "UCC" shall mean the
Uniform Commercial Code as in effect in such other jurisdiction for purposes of
the provisions hereof relating to such attachment, perfection or priority and
for purposes of definitions related to such provisions.
(c) Terms Defined in UCC. Where applicable and except as
otherwise defined herein, terms used in this Agreement shall have the meanings
assigned to them in the UCC.
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<PAGE> 3
(d) Interpretation. The rules of interpretation set
forth in Section 1.03 of the Securities Purchase Agreement shall be applicable
to this Agreement and are incorporated herein by this reference.
SECTION 2. Security Interest.
(a) Grant of Security Interest. As security for the
payment and performance of the Secured Obligations, the Company hereby pledges,
assigns, transfers, hypothecates and sets over to the Investors, and hereby
grants to the Investors a security interest in, all of the Company's right,
title and interest in, to and under (i) the Pledged Shares and the Additional
Collateral and any certificates and instruments now or hereafter representing
the Pledged Shares and the Additional Collateral, (ii) all rights, interests
and claims with respect to the Pledged Shares and Additional Collateral,
including under any and all related agreements, instruments and other
documents, and (iii) all books, records and other documentation of the Company
related to the Pledged Shares and Additional Collateral, in each case whether
presently existing or owned or hereafter arising or acquired (collectively, the
"Pledged Collateral").
(b) Delivery of Pledged Shares. Except as set forth in
Schedule 2 hereto, the Company hereby agrees to deliver to or for the account
of the Investors, at the address and to the Person or Persons to be designated
by the Investors, the certificates representing the Pledged Shares, which shall
be in suitable form for transfer by delivery, or shall be accompanied by duly
executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to the Investors.
(c) Delivery of Additional Collateral. If the Company
shall become entitled to receive or shall receive any Additional Collateral,
the Company shall accept any such Additional Collateral as the Investors'
agent, shall hold it in trust for the Investors, shall segregate it from other
property or funds of the Company, and shall deliver all Additional Collateral
and all certificates, instruments and other writings representing such
Additional Collateral forthwith to or for the account of the Investors, at the
address and to the Person to be designated by the Investors, which shall be in
suitable form for transfer by delivery, or shall be accompanied by duly
executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to the Investors, to be held by the Investors subject to
the terms hereof, as part of the Pledged Collateral.
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<PAGE> 4
(d) Transfer of Security Interest other than by Delivery.
If for any reason Pledged Collateral cannot be delivered to or for the account
of the Investors as provided in subsections (b) and (c), the Company shall
promptly take such other steps as shall be requested from time to time by the
Investors to effect a transfer of a perfected first priority security interest
in and pledge of the Pledged Collateral to the Investors pursuant to the UCC.
To the extent practicable, the Company shall thereafter deliver the Pledged
Collateral to or for the account of the Investors as provided in subsections
(b) and (c).
(e) Continuing Security Interest. The Company agrees
that this Agreement shall create a continuing security interest in and pledge
of the Pledged Collateral which shall remain in effect until terminated in
accordance with Section 21.
SECTION 3. Representations and Warranties.
In addition to the representations and warranties of the
Company set forth in the Securities Purchase Agreement, which are incorporated
herein by this reference, the Company represents and warrants to the Investors
that:
(a) Valid Issuance of Pledged Collateral. All the
Pledged Shares have been, and upon issuance any Additional Collateral will be,
duly and validly issued, and are and will be fully paid and non-assessable.
(b) Ownership of Pledged Collateral. With respect to the
Pledged Shares the Company is, and with respect to any Additional Collateral
the Company will be, the legal record and beneficial owner thereof, and has and
will have good and marketable title thereto, subject to no Lien except for the
pledge and security interest created by this Agreement and except as disclosed
in Schedule 2 hereto.
(c) Capitalization of the Subsidiaries. Except as
disclosed in Schedule 2, the Pledged Shares constitute 100% of the issued and
outstanding shares of capital stock of the Subsidiaries.
(d) Options, Warrants, Etc. No securities convertible
into or exchangeable for any shares of capital stock of the Subsidiaries, or
any options, warrants or other commitments entitling any Person to purchase or
otherwise acquire any shares of capital stock of the Subsidiaries, are issued
and outstanding.
(e) Transfer Restrictions. Except as disclosed in
Schedule 2, there are no restrictions on the
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<PAGE> 5
transferability of the Pledged Collateral to the Investors or with respect to
the foreclosure, transfer or disposition thereof by the Investors.
(f) Shareholders Agreements. There are no shareholders
agreements, voting trusts, proxy agreements or other agreements or
understandings which affect or relate to the voting or giving of written
consents with respect to any of the Pledged Collateral.
(g) No Violation of Securities Laws. None of the Pledged
Shares has been transferred in violation of the securities registration,
securities disclosure or similar laws of any jurisdiction to which such
transfer may be subject.
(h) Location of Chief Executive Office. The Company's chief
executive office and place of business, and all books and records concerning
the Pledged Collateral, are located at 32-B Mauchly, Irvine, California 92718.
(i) Enforceability; Priority of Security Interest. This
Agreement (i) creates an enforceable perfected and first priority security
interest in and pledge of the Pledged Collateral upon delivery thereof pursuant
to Section 2(b), and (ii) will create an enforceable perfected and first
priority security interest in and pledge of the Additional Collateral upon
delivery thereof pursuant to Section 2(c) (or upon the taking of such other
action with respect thereto as may be requested by the Investors pursuant to
Section 2(d)), in each case securing the payment and performance of the Secured
Obligations.
The Company agrees that the foregoing representations and
warranties shall be deemed to have been made by it on the date of each delivery
of Pledged Collateral hereunder.
SECTION 4. Covenants.
In addition to the covenants of the Company set forth in the
Securities Purchase Agreement, which are incorporated herein by this reference,
so long as any of the Secured Obligations remain unsatisfied or the Investors
shall have any Commitment, the Company agrees that:
(a) Defense of Pledged Collateral. The Company will, at
its own expense, appear in and defend any action, suit or proceeding which
purports to affect title to the Pledged Collateral or the security interest of
the Investors therein and the pledge to the Investors thereof.
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<PAGE> 6
(b) Preservation of Collateral. The Company will do and
perform all reasonable acts that may be necessary and appropriate to maintain,
preserve and protect the Pledged Collateral.
(c) Compliance with Laws, Etc. The Company will comply
with all laws, regulations and ordinances relating in a material way to the
possession, maintenance and control of the Pledged Collateral.
(d) Location of Books and Chief Executive Office. The Company
will: (i) keep all books and records pertaining to the Pledged Collateral at
the location set forth in Section 3(h); and (ii) give at least 30 days' prior
written notice to the Investors of (A) any changes in any such location where
books and records pertaining to the Pledged Collateral are kept, or (B) any
change in the location of the Company's chief executive office and place of
business.
(e) Disposition of Pledged Collateral. Except as set
forth in Schedule 2, the Company will not surrender or lose possession of
(other than to the Investors or, with the prior consent of the Investors, to a
depositary or financial intermediary), exchange, sell, convey, transfer, assign
or otherwise dispose of or transfer the Pledged Collateral or any right, title
or interest therein.
(f) Liens. The Company will not create, incur or permit
to exist any Liens upon or with respect to the Pledged Collateral, other than
the security interest of and pledge to the Investors created by this Agreement.
(g) Shareholders Agreements. The Company will not enter
into any shareholders agreement, voting trust, proxy agreement or other
agreement or understanding which affects or relates to the voting or giving of
written consents with respect to any of the Pledged Collateral.
(h) Issuance of Additional Shares. The Company will not
consent to or approve, or allow the Subsidiaries to consent to or approve, the
issuance to any Person of any additional shares of any class of capital stock
of the Subsidiaries, or of any securities convertible into or exchangeable for
any such shares, or any warrants, options or other rights to purchase or
otherwise acquire any such shares, except as permitted under the Securities
Purchase Agreement.
(i) Notices. The Company will deliver promptly to the
Investors all reports and notices received by the Company from the Subsidiaries
in respect of any of the Pledged Collateral.
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<PAGE> 7
(j) Further Assurances. The Company will promptly, upon
the written request from time to time of the Investors, execute, acknowledge
and deliver, and file and record, all such financing statements and other
documents and instruments, and take all such action, as shall be reasonably
necessary to carry out the purposes of this Agreement.
SECTION 5. Administration of the Pledged Collateral.
(a) Distributions and Voting Prior to an Event of
Default. Unless an Event of Default shall have occurred: (i) the Company
shall be entitled to receive and retain for its own account any cash dividend
on or other cash distribution, if any, in respect of the Pledged Collateral;
and (ii) the Company shall have the right to vote the Pledged Collateral and to
retain the power to control the direction, management and policies of the
Subsidiaries to the same extent as the Company would if the Pledged Collateral
were not pledged to the Investors pursuant to this Agreement; provided,
however, that except as described in Schedule 2 hereto, the Company shall not
be entitled to receive (A) cash paid, payable or otherwise distributed in
redemption of, or in exchange for or in substitution of, any Pledged
Collateral, or (B) dividends and other distributions paid or payable in cash in
respect of any Pledged Collateral in connection with a partial or total
liquidation or dissolution of the Subsidiaries or in connection with a
reduction of capital, capital surplus or paid-in-surplus or any other type of
recapitalization involving the Subsidiaries; and provided further, however,
that no vote shall be cast or consent, waiver or ratification given or action
taken which would have the effect of impairing the position or interest of the
Investors in respect of the Pledged Collateral or which would alter the voting
rights with respect to the stock of the Subsidiaries or be inconsistent with or
violate any provision of this Agreement, the Securities Purchase Agreement or
any other Material Agreements. If applicable, the Company shall be deemed the
beneficial owner of all Pledged Collateral for purposes of Sections 13 and 16
of the Exchange Act and agrees to file all reports required to be filed by
beneficial owners of securities thereunder. The Investors shall execute and
deliver (or cause to be executed and delivered) to the Company all such proxies
and other instruments as the Company may reasonably request for the purpose of
enabling the Company to exercise the voting and other rights which it is
entitled to exercise, and to receive distributions which it is authorized to
receive and retain, pursuant to this subsection (a).
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<PAGE> 8
(b) General Authority upon an Event of Default. Upon and
after the occurrence of any Event of Default:
(i) the Investors shall be entitled to receive all
distributions and payments of any nature with respect to the Pledged
Collateral, to be held by the Investors as part of the Pledged Collateral;
(ii) the Investors shall have the right following
prior written notice to the Company to vote or consent to take any action with
respect to the Pledged Collateral and exercise all rights of conversion,
exchange, subscription or any other rights, privileges or options pertaining to
the Pledged Collateral as if the Investors were the absolute owner thereof; and
(iii) the Investors shall have the right, for and in
the name, place and stead of the Company, to execute endorsements, assignments
or other instruments of conveyance or transfer with respect to all or any of
the Pledged Collateral, to endorse any checks, drafts, money orders and other
instruments relating thereto, to sue for, collect, receive and give acquittance
for all moneys due or to become due in connection with the Pledged Collateral
and otherwise to file any claims, take any action or institute, defend, settle
or adjust any actions, suits or proceedings with respect to the Pledged
Collateral, execute any and all such other documents and instruments, and do
any and all such acts and things, as the Investors may deem necessary or
desirable to protect, collect, realize upon and preserve the Pledged
Collateral, to enforce the Investors' rights with respect to the Pledged
Collateral and to accomplish the purposes of this Agreement.
(c) Distributions to be Held for Investors.
Distributions and other payments which are received by the Company but which it
is not entitled to retain as a result of the operation of subsection (a) or (b)
shall be held in trust for the benefit of the Investors, be segregated from the
other property or funds of the Company, and be forthwith paid over or delivered
to the Investors in the same form as so received.
(d) Certain Other Administrative Matters. At any time
and from time to time, the Investors may cause any of the Pledged Collateral to
be transferred into its name or into the name of its nominee or nominees
(subject to the revocable rights specified in subsection (a)). The Investors
shall at all times have the right to exchange uncertificated Pledged Collateral
for certificated Pledged Collateral, and to exchange certificated Pledged
Collateral
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<PAGE> 9
for certificates of larger or smaller denominations, for any purpose consistent
with this Agreement.
(e) Appointment of Investors as Attorney-in-Fact. For
the purpose of enabling the Investors to exercise its rights under this Section
5 or otherwise in connection with this Agreement, the Company hereby (i)
constitutes and appoints the Investors (and any of the Investors' officers,
employees or agents designated by the Investors) its true and lawful
attorney-in-fact, with full power and authority to execute any notice,
assignment, endorsement or other instrument or document, and to do any and all
acts and things for and on behalf of the Company, which the Investors may deem
necessary or desirable to protect, collect, realize upon and preserve the
Pledged Collateral, to enforce the Investors' rights with respect to the
Pledged Collateral and to accomplish the purposes hereof, and (ii) revokes all
previous proxies with regard to the Pledged Collateral and appoints the
Investors as its proxyholder with respect to the Pledged Collateral to attend
and vote at any and all meetings of the shareholders of the Subsidiaries held
on or after the date of this proxy and prior to the termination hereof, with
full power of substitution to do so and agrees, if so requested, to execute or
cause to be executed appropriate proxies therefor. Each such appointment is
coupled with an interest and irrevocable so long as the Investors has any
Commitment or the Secured Obligations have not been paid and performed in full.
SECTION 6. Investors Performance of Company Obligations.
The Investors may perform or pay any obligation which the
Company has agreed to perform or pay under or in connection with this
Agreement, and the Company shall reimburse the Investors on demand for any
amounts paid by the Investors pursuant to this Section 6.
SECTION 7. Investors' Duties.
Notwithstanding any provision contained in this Agreement, the
Investors shall have no duty to exercise any of the rights, privileges or
powers afforded to it and shall not be responsible to the Company or any other
Person for any failure to do so or delay in doing so. Beyond the exercise of
reasonable care to assure the safe custody of the Pledged Collateral while held
hereunder and the accounting for moneys actually received by the Investors
hereunder, the Investors shall have no duty or liability to exercise or
preserve any rights, privileges or powers pertaining to the Pledged Collateral.
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<PAGE> 10
SECTION 8. Remedies.
(a) Remedies. Upon the occurrence of any Event of
Default, the Investors shall have, in addition to all other rights and remedies
granted to it in this Agreement, the Securities Purchase Agreement or any other
Loan Document, all rights and remedies of a secured party under the UCC and
other applicable laws. Without limiting the generality of the foregoing, the
Company agrees that any item of the Pledged Collateral may be sold for cash or
other value in any number of lots at the same or different times, at any
exchange, brokers' board or elsewhere, by public or private sale, and at such
times and on such terms as the Investors shall determine; provided, however,
that the Company shall be credited with the net proceeds of sale only when such
proceeds are finally collected by the Investors. The Company hereby agrees
that the sending of notice by ordinary mail, postage prepaid, to the address of
the Company set forth in the Securities Purchase Agreement, of the place and
time of any public sale or of the time after which any private sale or other
intended disposition is to be made, shall be deemed reasonable notice thereof
if such notice is sent ten days prior to the date of such sale or other
disposition or the date on or after which such sale or other disposition may
occur, provided that the Investors may provide the Company shorter notice or no
notice, to the extent permitted by the UCC or other applicable law. The
Company recognizes that the Investors may be unable to make a public sale of
any or all of the Pledged Collateral, by reason of prohibitions contained in
applicable securities laws or otherwise, and expressly agrees that a private
sale to a restricted group of purchasers for investment and not with a view to
any distribution thereof shall be considered a commercially reasonable sale.
At any sale or sales of the Pledged Collateral (except at private sale) the
Investors or any Person acting on its behalf or its assigns may bid for and
purchase the whole or any part of the Pledged Collateral so sold and upon
compliance with the terms of such sale may hold and dispose of such Pledged
Collateral without further accountability to the Company, except for the
proceeds of such sale or sales.
(b) Application of Proceeds. The cash proceeds actually
received from the sale or other disposition or collection of Pledged
Collateral, and any other amounts of the Pledged Collateral (including any cash
contained in the Pledged Collateral) the application of which is not otherwise
provided for herein, shall be applied as the Investors may, from time to time,
determine. Any surplus thereof which exists after payment and performance in
full of the Secured Obligations shall be promptly paid over to the Company or
otherwise disposed of in accordance with the
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UCC or other applicable law. The Company shall remain liable to the Investors
for any deficiency which exists after any sale or other disposition or
collection of Pledged Collateral.
SECTION 9. Registration Rights.
(a) Registration of Pledged Collateral. If the Investors
shall determine to exercise its right to sell any or all of the Pledged
Collateral pursuant to Section 8, and if the Investors shall determine that it
is necessary or advisable to have the Pledged Collateral, or that portion
thereof to be sold, registered under the provisions of the Securities Act, the
Company shall execute and deliver, and shall cause the Subsidiaries and the
Company's and the Subsidiaries's respective directors and officers to execute
and deliver, all such instruments and documents, and to do or cause to be done
all such other acts and things as may, in the view of the Investors, be
advisable to register such Pledged Collateral under the provisions of the
Securities Act and to cause the registration statement relating thereto to
become effective and to remain effective for such period as prospectuses are
required by law to be furnished and to make all amendments and supplements
thereto and to the related prospectus which, in the view of the Investors, are
necessary or be necessary or advisable, all in conformity with the requirements
of the Securities and Exchange Commission applicable thereto. The Company
agrees to comply, and to cause the Subsidiaries to comply, with the provisions
of the securities or "Blue Sky" laws of any jurisdiction which the Investors
shall designate, and to cause the Subsidiaries to make available to its
security holders, as soon as practicable, an earnings statement (which need not
be audited) which shall satisfy the provisions of Section 11(a) of the
Securities Act. The Company shall cause to be furnished to the Investors such
number of copies as the Investors may request of each preliminary prospectus
and prospectus, shall promptly notify the Investors of the happening of any
event (upon becoming aware thereof) as a result of which any then effective
prospectus includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of then existing circumstances and shall
cause the Investors to be furnished with such number of copies as the Investors
may reasonably request of such supplement to or amendment of such prospectus as
is necessary to eliminate such untrue statement or correct such omission.
(b) No Obligation to Delay Private Sale. The Investors
shall be under no obligation to delay a private
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sale of any of the Pledged Collateral (as contemplated by subsection (a)) for
the period of time necessary to permit the issuer thereof to register such
Pledged Collateral for public sale under the Securities Act, or under
applicable state securities laws, even if such issuer would agree to do so.
(c) Further Acts. The Company further agrees to do or to
use its best efforts to cause to be done all such other acts and things as may
be necessary to make any sales of all or any portion of the Pledged Collateral
pursuant to subsections (a) and (b) valid and binding and in compliance with
any and all applicable laws (including the Exchange Act), regulations, orders,
writs, injunctions, decrees or awards of any and all Governmental Authorities
having jurisdiction over any such sale or sales.
(d) Equitable Relief. The Company acknowledges that a
breach of any of the covenants contained in this Section 9 will cause
irreparable injury to the Investors, that the Investors has no adequate remedy
at law in respect of such breach and, as a consequence, agrees that each and
every covenant contained in this Section 9 shall be specifically enforceable
against the Company, and the Company hereby waives and agrees not to assert any
defenses against an action for specific performance of such covenants except
for a defense that no Event of Default has occurred under the provisions of the
Securities Purchase Agreement.
(e) Costs and Expenses. The Company shall bear all costs
and expenses of carrying out its obligations under this Section 9.
SECTION 10. Certain Waivers.
The Company waives any right to require the Investors (i) to
proceed against any Person; (ii) to exhaust any other collateral or security
for any of the Secured Obligations; (iii) to pursue any remedy in the
Investors' power; or (iv) to make or give any presentments, demands for
performance, notices of nonperformance, protests, notices of protests or
notices of dishonor in connection with any of the Pledged Collateral.
SECTION 11. Notices.
All notices or other communications hereunder shall be given
in the manner and to the addresses specified in the Securities Purchase
Agreement. All such notices and other communications shall be effective (i) if
delivered by hand, when delivered; (ii) if sent by mail, upon the earlier of
the date of receipt or five Business Days after deposit
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in the mail, first class, postage prepaid; (iii) if sent by telex, upon receipt
by the sender of an appropriate answerback; and (iv) if sent by facsimile
transmission, when sent.
SECTION 12. No Waiver; Cumulative Remedies.
No failure on the part of the Investors to exercise, and no
delay in exercising, any right, remedy, power or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, remedy, power or privilege preclude any other or further exercise
thereof or the exercise of any other right, remedy, power or privilege. The
rights and remedies under this Agreement are cumulative and not exclusive of
any rights, remedies, powers and privileges that may otherwise be available to
the Investors.
SECTION 13. Costs and Expenses; Indemnification; Other
Charges.
(a) Costs and Expenses. The Company agrees to pay on
demand:
(i) the reasonable out-of-pocket costs and expenses
of the Investors and any of their respective affiliates, and the reasonable
fees and disbursements of counsel to the Investors (including allocated costs
of internal counsel), in connection with the negotiation, preparation,
execution, delivery and administration of this Agreement, and any amendments,
modifications or waivers of the terms thereof, and the custody of the Pledged
Collateral;
(ii) all title, appraisal (including the allocated
costs of internal appraisal services), survey, audit, consulting, search,
recording, filing and similar costs, fees and expenses incurred or sustained by
the Investors or any of its affiliates in connection with this Agreement or the
Pledged Collateral; and
(iii) all costs and expenses of the Investors and
its affiliates, and the fees and disbursements of counsel (including the
allocated costs of internal counsel), in connection with the enforcement or
attempted enforcement of, and preservation of any rights or interest under,
this Agreement, any out-of-court workout or other refinancing or restructuring
or in any bankruptcy case, and the protection, sale or collection of, or other
realization upon, any of the Pledged Collateral, including any and all losses,
costs and expenses sustained by the Investors as a
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<PAGE> 14
result of any failure by the Company to perform or observe its obligations
contained herein.
(b) Indemnification. The Company hereby agrees to
indemnify the Investors, any affiliate thereof, and their respective directors,
officers, employees, agents, counsel and other advisors (each an "Indemnified
Person") against, and hold each of them harmless from, any and all liabilities,
obligations, losses, claims, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever, including
the reasonable fees and disbursements of counsel to an Indemnified Person
(including allocated costs of internal counsel), which may be imposed on,
incurred by, or asserted against any Indemnified Person, in any way relating to
or arising out of this Agreement or the transactions contemplated hereby, or
any action taken or omitted to be taken by it hereunder, including caused by,
arising out of or by reason of any alleged untrue statement of a material fact
contained in any registration statement (or any amendment thereto) or in any
preliminary prospectus or prospectus (or any amendment or supplement thereto)
contemplated by Section 8(a), or any alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except to the extent that any such liabilities, obligations,
losses, claims, damages, penalties, actions, judgments, suits, costs, expenses
or disbursements are caused by, arise solely out of or by reason of any such
alleged untrue statement made or such alleged omission to state a material fact
included or excluded on the written direction of the Investors (including
information supplied by the Investors) (the "Indemnified Liabilities");
provided that the Company shall not be liable to any Indemnified Person for any
portion of such Indemnified Liabilities to the extent they are found by a final
decision of a court of competent jurisdiction to have resulted from such
Indemnified Person's gross negligence or willful misconduct. If and to the
extent that the foregoing indemnification is for any reason held unenforceable,
the Company agrees to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
(c) Other Charges. The Company agrees to indemnify the
Investors against and hold it harmless from any and all present and future
stamp, transfer, documentary and other such taxes, levies, fees, assessments
and other charges made by any jurisdiction by reason of the execution,
delivery, performance and enforcement of this Agreement.
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<PAGE> 15
(d) Interest. Any amounts payable to any Investors under
this Section 13 or otherwise under this Agreement if not paid upon demand shall
bear interest from the date of such demand until paid in full, at the rate of
interest set forth in Section 2.7 of the Securities Purchase Agreement.
SECTION 14. Binding Effect.
This Agreement shall be binding upon, inure to the benefit of
and be enforceable by the Company, the Investors and their respective
successors and assigns.
SECTION 15. Governing Law.
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, EXCEPT AS REQUIRED BY
MANDATORY PROVISIONS OF LAW AND TO THE EXTENT THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR THE REMEDIES HEREUNDER, IN RESPECT OF ANY
PLEDGED COLLATERAL ARE GOVERNED BY THE LAW OF A JURISDICTION OTHER THAN NEW
YORK.
SECTION 16. Entire Agreement; Amendment.
This Agreement contains the entire agreement of the parties
with respect to the subject matter hereof and shall not be amended except by
the written agreement of the parties as provided in the Securities Purchase
Agreement.
SECTION 17. Severability.
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under all applicable
laws and regulations. If, however, any provision of this Agreement shall be
prohibited by or invalid under any such law or regulation in any jurisdiction,
it shall, as to such jurisdiction, be deemed modified to conform to the minimum
requirements of such law or regulation, or, if for any reason it is not deemed
so modified, it shall be ineffective and invalid only to the extent of such
prohibition or invalidity without affecting the remaining provisions of this
Agreement, or the validity or effectiveness of such provision in any other
jurisdiction.
SECTION 18. Counterparts.
This Agreement may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed shall be deemed
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<PAGE> 16
to be an original and all of which taken together shall constitute but one and
the same agreement.
SECTION 19. Incorporation of Provisions of the Securities
Purchase Agreement.
To the extent the Securities Purchase Agreement contains
provisions of general applicability to the Loan Documents, such provisions are
incorporated herein by this reference.
SECTION 20. No Inconsistent Requirements.
The Company acknowledges that this Agreement and the other
Loan Documents may contain covenants and other terms and provisions variously
stated regarding the same or similar matters, and agrees that all such
covenants, terms and provisions are cumulative and all shall be performed and
satisfied in accordance with their respective terms.
SECTION 21. Termination.
Upon payment and performance in full of all Secured
Obligations, this Agreement shall terminate and the Investors shall promptly
redeliver to the Company any of the Pledged Collateral in the Investors'
possession and shall execute and deliver to the Company such documents and
instruments reasonably requested by the Company as shall be necessary to
evidence termination of all security interests
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<PAGE> 17
given by the Company to the Investors hereunder; provided, however, that the
obligations of the Company under Sections 9(e) and 13 shall survive such
termination.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as of the date first above written.
THE COMPANY
WATSON GENERAL CORPORATION
By: /s/ RONALD G. CRANE
--------------------------
Title:
THE INVESTORS
SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general
partner
By: /s/ BARRY S. ROSENSTEIN
--------------------------------
Name:
--------------------------
Title:
--------------------------
SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By RSP Capital L.L.C., its supervisory
general partner
By: /s/ BARRY S. ROSENSTEIN
--------------------------------
Name:
--------------------------
Title:
--------------------------
17
<PAGE> 18
SCHEDULES
Schedule 1 Pledged Shares
Schedule 2 Subsidiary Shares Owned
<PAGE> 1
EXHIBIT 10.5
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement"), dated as of May
22, 1997, is made between Watson General Corporation, a California corporation
(the "Company") and Sagaponack Partners, L.P., a Delaware limited partnership
and Sagaponack International Partners, L.P., a Cayman Islands limited
partnership (collectively, the "Investors").
The Company and the Investors are parties to a Securities
Purchase Agreement dated as of May 22, 1997 (as amended, modified, renewed or
extended from time to time, the "Securities Purchase Agreement"). It is a
condition precedent to the consummation of the transactions provided for
therein that the Company enter into this Agreement and grant to the Investors
the security interests hereinafter provided to secure the obligations of the
Company described below.
Accordingly, the parties hereto agree as follows:
SECTION 1 Definitions; Interpretation.
(a) Terms Defined in Securities Agreement. All
capitalized terms used in this Agreement and not otherwise defined herein shall
have the meanings assigned to them in the Securities Purchase Agreement.
(b) Certain Defined Terms. As used in this Agreement,
the following terms shall have the following meanings:
"Accounts" means any and all accounts of the Company, whether
now existing or hereafter acquired or arising, and in any event includes all
accounts receivable, contract rights, rights to payment and other obligations
of any kind owed to the Company arising out of or in connection with the sale
or lease of merchandise, goods or commodities or the rendering of services or
arising from any other transaction, however evidenced, and whether or not
earned by performance, all guaranties, indemnities and security with respect to
the foregoing, and all letters of credit relating thereto, in each case whether
now existing or hereafter acquired or arising.
"Assigned Agreement" means the Stock Purchase Agreement dated
as of May 22, 1997 by and between the
<PAGE> 2
Company and NDE Environmental Corporation, as amended, modified, renewed or
extended from time to time, including (i) all rights of the Company to receive
moneys and other payments and distributions due or to become due thereunder or
with respect thereto, (ii) all rights of the Company to receive proceeds of any
insurance, indemnity, warranty, letter of credit or guaranty with respect
thereto, (iii) all claims of the Company for damages arising out of any breach
or default thereunder or in respect thereof; and (iv) the right of the Company
to terminate, amend, supplement or modify any such agreement, contract,
instrument or other document, to perform thereunder and to compel performance
and otherwise exercise all rights and remedies thereunder or in respect
thereof.
"Books" means all books, records and other written, electronic
or other documentation in whatever form maintained now or hereafter by or for
the Company in connection with the ownership of its assets or the conduct of
its business or evidencing or containing information relating to the
Collateral, including: (i) ledgers; (ii) records indicating, summarizing, or
evidencing the Company's assets (including Inventory and Rights to Payment),
business operations or financial condition; (iii) computer programs and
software; (iv) computer discs, tapes, files, manuals, spreadsheets; (v)
computer printouts and output of whatever kind; (vi) any other computer
prepared or electronically stored, collected or reported information and
equipment of any kind; and (vii) any and all other rights now or hereafter
arising out of any contract or agreement between the Company and any service
bureau, computer or data processing company or other Person charged with
preparing or maintaining any of the Company's books or records or with credit
reporting, including with regard to the Company's Accounts.
"Chattel Paper" means all writings of whatever sort which
evidence a monetary obligation and a security interest in or lease of specific
goods, whether now existing or hereafter arising.
"Collateral" has the meaning set forth in Section 2.
"Deposit Account" means any demand, time, savings, passbook or
like account now or hereafter maintained by or for the benefit of the Company
with a bank, savings and loan association, credit union or like organization
(including
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<PAGE> 3
the Investors) and all funds and amounts therein, whether or not restricted or
designated for a particular purpose.
"Documents" means any and all documents of title, bills of
lading, dock warrants, dock receipts, warehouse receipts and other documents of
the Company, whether or not negotiable, and includes all other documents which
purport to be issued by a bailee or agent and purport to cover goods in any
bailee's or agent's possession which are either identified or are fungible
portions of an identified mass, including such documents of title made
available to the Company for the purpose of ultimate sale or exchange of goods
or for the purpose of loading, unloading, storing, shipping, transshipping,
manufacturing, processing or otherwise dealing with goods in a manner
preliminary to their sale or exchange, in each case whether now existing or
hereafter acquired or arising.
"Equipment" means all now existing or hereafter acquired
equipment of the Company in all of its forms, wherever located, and in any
event includes any and all machinery, furniture, equipment, furnishings and
fixtures in which the Company now or hereafter acquires any right, and all
other goods and tangible personal property (other than Inventory), including
tools, parts and supplies, automobiles, trucks, tractors and other vehicles,
computer and other electronic data processing equipment and other office
equipment, computer programs and related data processing software, and all
additions, substitutions, replacements, parts, accessories, and accessions to
and for the foregoing, now owned or hereafter acquired, and including any of
the foregoing which are or are to become fixtures on real property.
"Financing Statements" has the meaning set forth in Section 3.
"General Intangibles" means all general intangibles of the
Company, now existing or hereafter acquired or arising, and in any event
includes: i) all tax and other refunds, rebates or credits of every kind and
nature to which the Company is now or hereafter may become entitled; (ii) all
good will, choses in action and causes of action, whether legal or equitable,
whether in contract or tort and however arising; (iii) all Intellectual
Property Collateral; (iv) all uncertificated securities and interests in
limited and general partnerships; (v) all rights of stoppage in transit,
replevin and reclamation; (vi) all
3
<PAGE> 4
licenses, permits, consents, indulgences and rights of whatever kind issued in
favor of or otherwise recognized as belonging to the Company by any
Governmental Authority; and (vii) all indemnity agreements, guaranties,
insurance policies and other contractual, equitable and legal rights of
whatever kind or nature; in each case whether now existing or hereafter
acquired or arising.
"Instruments" means any and all negotiable instruments,
certificated securities and every other writing which evidences a right to the
payment of money, in each case whether now existing or hereafter acquired.
"Intellectual Property Collateral" means the following
properties and assets owned or held by the Company or in which the Company
otherwise has any interest, now existing or hereafter acquired or arising:
(i) all patents and patent applications, domestic
or foreign, all licenses relating to any of the foregoing and all income and
royalties with respect to any licenses (including such patents, patent
applications and patent licenses as described in Schedule 1), all rights to sue
for past, present or future infringement thereof, all rights arising therefrom
and pertaining thereto and all reissues, divisions, continuations, renewals,
extensions and continuations-in-part thereof;
(ii) all copyrights and applications for
copyright, domestic or foreign, together with the underlying works of
authorship (including titles), whether or not the underlying works of
authorship have been published and whether said copyrights are statutory or
arise under the common law, and all other rights and works of authorship, all
rights, claims and demands in any way relating to any such copyrights or works,
including royalties and rights to sue for past, present or future infringement,
and all rights of renewal and extension of copyright;
(iii) all state (including common law), federal and
foreign trademarks, service marks and trade names, and applications for
registration of such trademarks, service marks and trade names, all licenses
relating to any of the foregoing and all income and royalties with respect to
any licenses (including such marks, names, applications and licenses as
described in Schedule 1), whether registered or unregistered and wherever
registered, all rights to sue for past, present or future infringement or
unconsented
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<PAGE> 5
thereof, all rights arising therefrom and pertaining thereto and all reissues,
extensions and renewals thereof;
(iv) all trade secrets, confidential information,
customer lists, license rights, advertising materials, operating manuals,
methods, processes, know-how, sales literature, drawings, specifications, blue
prints, descriptions, inventions, name plates and catalogs; and
(v) the entire goodwill of or associated with the
businesses now or hereafter conducted by the Company connected with and
symbolized by any of the aforementioned properties and assets.
"Inventory" means any and all of the Company's inventory in
all of its forms, wherever located, whether now owned or hereafter acquired,
and in any event includes all goods (including goods in transit) which are held
for sale, lease or other disposition, including those held for display or
demonstration or out on lease or consignment or to be furnished under a
contract of service, or which are raw materials, work in process, finished
goods or materials used or consumed in the Company's business, and the
resulting product or mass, and all repossessed, returned, rejected, reclaimed
and replevied goods, together with all parts, components, supplies, packing and
other materials used or usable in connection with the manufacture, production,
packing, shipping, advertising, selling or furnishing of such goods; and all
other items hereafter acquired by the Company by way of substitution,
replacement, return, repossession or otherwise, and all additions and
accessions thereto, and any Document representing or relating to any of the
foregoing at any time.
"Proceeds" means whatever is receivable or received from or
upon the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of the
Company, including "proceeds" as defined at UCC Section 9306, any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to or for
the account of the Company from time to time with respect to any of the
Collateral, any and all payments (in any form whatsoever) made or due and
payable to the Company from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any Person acting under color of
governmental authority), any and all other amounts
5
<PAGE> 6
from time to time paid or payable under or in connection with any of the
Collateral or for or on account of any damage or injury to or conversion of any
Collateral by any Person, any and all other tangible or intangible property
received upon the sale or disposition of Collateral, and all proceeds of
proceeds.
"Rights to Payment" means all Accounts, and any and all rights
and claims to the payment or receipt of money or other forms of consideration
of any kind in, to and under all Chattel Paper, Documents, General Intangibles,
Instruments, Assigned Agreements and Proceeds.
"Secured Obligations" means the indebtedness, liabilities and
other obligations of the Company to the Investors under or in connection with
the Securities Purchase Agreement, the Senior Subordinated Notes and the other
Material Agreements, all indebtedness, liabilities and other obligations of the
Company to the Investors, whether created under, arising out of or in
connection with the Securities Purchase Agreement, the Senior Subordinated
Notes or any of the other Material Agreements or otherwise, including all
unpaid principal of the Loan, all interest accrued thereon, all fees due under
the Securities Purchase Agreement and all other amounts payable by the Company
to the Investors thereunder or in connection therewith, whether now existing or
hereafter arising, and whether due or to become due, absolute or contingent,
liquidated or unliquidated, determined or undetermined.
"UCC" means the Uniform Commercial Code as the same may, from
time to time, be in effect in the State of New York; provided, however, in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of the security interest in any Collateral
is governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, the term "UCC" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.
(c) Terms Defined in UCC. Where applicable and except as
otherwise defined herein, terms used in this Agreement shall have the meanings
assigned to them in the UCC.
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<PAGE> 7
(d) Interpretation. The rules of interpretation set
forth in the Securities Purchase Agreement shall be applicable to this
Agreement and are incorporated herein by this reference.
SECTION 2 Security Interest.
(a) Grant of Security Interest. As security for the
payment and performance of the Secured Obligations, the Company hereby pledges,
assigns, transfers, hypothecates and sets over to the Investors, and hereby
grants to the Investors a security interest in, all of the Company's right,
title and interest in, to and under the following property, wherever located
and whether now existing or owned or hereafter acquired or arising
(collectively, the "Collateral"): (i) all Accounts; (ii) the Assigned
Agreement; (iii) all Chattel Paper; (iv) Deposit Accounts; (v) all Documents;
(vi) all Equipment; (vii) all General Intangibles; (viii) all Instruments; (ix)
all Inventory; (x) all Books; and (xi) all products and Proceeds of any and all
of the foregoing.
(b) Company Remains Liable. Anything herein to the
contrary notwithstanding, (i) the Company shall remain liable under any
contracts, agreements and other documents included in the Collateral (including
the Assigned Agreement), to the extent set forth therein, to perform all of its
duties and obligations thereunder to the same extent as if this Agreement had
not been executed, (ii) the exercise by the Investors of any of the rights
hereunder shall not release the Company from any of its duties or obligations
under such contracts, agreements and other documents included in the Collateral
and (iii) the Investors shall not have any obligation or liability under any
contracts, agreements and other documents included in the Collateral by reason
of this Agreement, nor shall the Investors be obligated to perform any of the
obligations or duties of the Company thereunder or to take any action to
collect or enforce any such contract, agreement or other document included in
the Collateral hereunder.
(c) Continuing Security Interest. The Company agrees
that this Agreement shall create a continuing security interest in the
Collateral which shall remain in effect until terminated in accordance with
Section 22.
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<PAGE> 8
SECTION 3 Financing Statements, Etc.
The Company shall execute and deliver to the Investors
concurrently with the execution of this Agreement, and at any time and from
time to time thereafter, all financing statements, continuation financing
statements, termination statements, security agreements, chattel mortgages,
assignments, patent, copyright and trademark collateral assignments, fixture
filings, warehouse receipts, documents of title, affidavits, reports, notices,
schedules of account, letters of authority and all other documents and
instruments, in form satisfactory to the Investors (the "Financing
Statements"), and take all other action, as the Investors may request, to
perfect and continue perfected, maintain the priority of or provide notice of
the Investors' security interest in the Collateral and to accomplish the
purposes of this Agreement.
SECTION 4 Representations and Warranties.
In addition to the representations and warranties of the
Company set forth in the Securities Purchase Agreement, which are incorporated
herein by this reference, the Company represents and warrants to the Investors
that:
(a) Location of Chief Executive Office and Collateral.
The Company's chief executive office and principal place of business is located
at the address set forth in Schedule 1, and all other locations where the
Company conducts business or Collateral is kept are set forth in Schedule 1.
(b) Locations of Books. All locations where Books
pertaining to the Rights to Payment are kept, including all equipment necessary
for accessing such Books and the names and addresses of all service bureaus,
computer or data processing companies and other Persons keeping any Books or
collecting Rights to Payment for the Company, are set forth in Schedule 1.
(c) Trade Names and Trade Styles. All trade names and
trade styles under which the Company presently conducts its business operations
are set forth in Schedule 1, and, except as set forth in Schedule 1, the
Company has not, at any time during the preceding five years: (i) been known
as or used any other corporate, trade or fictitious name; (ii) changed its
name; (iii) been the surviving or resulting corporation in a merger or
8
<PAGE> 9
consolidation; or (iv) acquired through asset purchase or otherwise any
business of any Person.
(d) Ownership of Collateral. The Company is, and, except
as permitted by Section 5(i), will continue to be, the sole and complete owner
of the Collateral (or, in the case of after-acquired Collateral, at the time
the Company acquires rights in such Collateral, will be the sole and complete
owner thereof), free from any Lien other than the Liens disclosed in Schedule
4(d) ("Permitted Liens").
(e) Enforceability; Priority of Security Interest. (i)
This Agreement creates a security interest which is enforceable against the
Collateral in which the Company now has rights and will create a security
interest which is enforceable against the Collateral in which the Company
hereafter acquires rights at the time the Company acquires any such rights; and
(ii) the Investors have a perfected and (except as disclosed in Schedule 4(e))
first priority security interest in the Collateral, in which the Company now
has rights, and will have a perfected and first priority security interest in
the Collateral in which the Company hereafter acquires rights at the time the
Company acquires any such rights, in each case securing the payment and
performance of the Secured Obligations.
(f) Other Financing Statements. Other than (i) financing
statements disclosed to the Investors and (ii) Financing Statements in favor of
the Investors, no effective Financing Statement naming the Company as debtor,
assignor, grantor, mortgagor, pledgor or the like and covering all or any part
of the Collateral is on file in any filing or recording office in any
jurisdiction.
(g) Rights to Payment.
(i) The Rights to Payment represent valid,
binding and enforceable obligations of the account debtors or other Persons
Obligated thereon, representing undisputed, bona fide transactions completed in
accordance with the terms and provisions contained in any documents related
thereto, and are and will be genuine, free from Liens, and not subject to any
adverse claims, counterclaims, setoffs, defaults, disputes, defenses,
discounts, or conditions precedent of any kind of character, except to the
extent reflected by the Company's reserves for uncollectible Rights to Payment
or to the extent, if any, that such account debtors or other Persons may be
entitled to normal and
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<PAGE> 10
ordinary course trade discounts, returns, adjustments and allowances in
accordance with Section 5(m), or as otherwise disclosed to the Investors in
writing;
(ii) to the best of the Company's knowledge and
belief, all account debtors and other obligors on the Rights to Payment are
solvent and generally paying their debts as they come due;
(iii) all Rights to Payment comply with all
applicable laws concerning form, content and manner of preparation and
execution, including where applicable any federal or state consumer credit
laws;
(iv) the Company has not assigned any of its rights
under the Rights to Payment except as provided in this Agreement or as set
forth in the other Loan Documents;
(v) all statements made, all unpaid balances and all
other information in the Books and other documentation relating to the Rights
to Payment are true and correct and in all respects what they purport to be;
and
(vi) the Company has no knowledge of any fact or
circumstance which would impair the validity or collectibility of any of the
Rights to Payment.
(h) Inventory. No Inventory is stored with any bailee,
warehouseman or similar Person, nor has any Inventory been consigned to the
Company or consigned by the Company to any Person or is held by the Company for
any Person under any "bill and hold" or other arrangement, except as set forth
in Schedule 1.
(i) Intellectual Property.
(i) Except as set forth in Schedule 1, the Company
(directly or through any Subsidiary) does not own, possess or use under any
licensing arrangement any patents, copyrights, trademarks, service marks or
trade names, nor is there currently pending before any Governmental Authority
any application for registration of any patent, copyright, trademark, service
mark or trade name;
(ii) all patents, copyrights, trademarks, service
marks and trade names are subsisting and have not been adjudged invalid or
unenforceable in whole or in part;
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(iii) all maintenance fees required to be paid on
account of any patents have been timely paid for maintaining such patents in
force, and, to the best of the Company's knowledge, each of the patents is
valid and enforceable and the Company has notified the Investors in writing of
all prior art (including public uses and sales) of which it is aware;
(iv) to the best of the Company's knowledge after
due inquiry, no material infringement or unauthorized use presently is being
made of any Intellectual Property Collateral by any Person;
(v) the Company is the sole and exclusive owner of
the Intellectual Property Collateral and the past, present and contemplated
future use of such Intellectual Property Collateral by the Company has not,
does not and will not infringe or violate any right, privilege or license
agreement of or with any other Person; and
(vi) the Company owns, has material rights under, is
a party to, or an assignee of a party to all material licenses, patents, patent
applications, copyrights, service marks, trademarks, trademark applications,
trade names and all other Intellectual Property Collateral necessary to
continue to conduct its business as heretofore conducted.
(j) Equipment.
(i) none of the Equipment or other Collateral is
affixed to real property, except Collateral with respect to which the Company
has supplied the Investors with all information and documentation necessary to
make all fixture filings required to perfect and protect the priority of the
Investors' security interest in all such Collateral which may be fixtures as
against all Persons having an interest in the Premises to which such property
may be affixed; and
(ii) none of the Equipment is leased from or to any
Person, except as set forth at Schedule 1 or as otherwise disclosed to the
Investors.
(k) Deposit Accounts. The names and addresses of all
financial institutions at which the Company maintains its Deposit Accounts, and
the account numbers and account names of such Deposit Accounts, are set forth
in Schedule 1.
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SECTION 5 Covenants.
So long as any of the Secured Obligations remain unsatisfied,
the Company agrees that:
(a) Defense of Collateral. The Company will appear in
and defend any action, suit or proceeding which may affect to a material extent
its title to, or right or interest in, or the Investors' right or interest in,
the Collateral.
(b) Preservation of Collateral. The Company will do and
perform all reasonable acts that may be necessary and appropriate to maintain,
preserve and protect the Collateral.
(c) Compliance with Laws, Etc. The Company will comply
with all laws, regulations and ordinances, and all policies of insurance,
relating in a material way to the possession, operation, maintenance and
control of the Collateral.
(d) Location of Books and Chief Executive Office. The
Company will: (i) keep all Books pertaining to the Rights to Payment at the
locations set forth in Schedule 1; and (ii) give at least 30 days' prior
written notice to the Investors of (A) any changes in any such location where
Books pertaining to the Rights to Payment are kept, including any change of
name or address of any service bureau, computer or data processing company or
other Person preparing or maintaining any Books or collecting Rights to Payment
for the Company or (B) any changes in the location of the Company's chief
executive office or principal place of business.
(e) Location of Collateral. The Company will: (i) keep
the Collateral at the locations set forth in Schedule 1 and not remove the
Collateral from such locations (other than disposals of Collateral permitted by
subsection (i)) except upon at least 30 days' prior written notice of any
removal to the Investors; and (ii) give the Investors at least 30 days' prior
written notice of any change in the locations set forth in Schedule 1.
(f) Change in Name, Identity or Structure. The Company
will give at least 30 days' prior written notice of (i) any change in name,
(ii) any changes in, additions to or other modifications of its trade names and
trade styles set
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forth in Schedule 1, and (iii) any changes in its identity or structure in any
manner which might make any Financing Statement filed hereunder incorrect or
misleading.
(g) Maintenance of Records. The Company will keep
separate, accurate and complete Books with respect to the Collateral,
disclosing the Investors' security interest hereunder.
(h) Invoicing of Sales. The Company will invoice all of
its sales upon forms customary in the industry and to maintain proof of
delivery and customer acceptance of goods.
(i) Disposition of Collateral. The Company will not
surrender or lose possession of (other than to the Investors), sell, lease,
rent, or otherwise dispose of or transfer any of the Collateral or any right or
interest therein, except to the extent permitted by the Securities Purchase
Agreement and except for sales of Inventory in the ordinary course of business.
(j) Liens. The Company will keep the Collateral free of
all Liens except Permitted Liens. Without limiting the generality of the
foregoing, the Company will not make any other assignment (other than to the
Investors) of its rights under the Assigned Agreement.
(k) Expenses. The Company will pay all expenses of
protecting, storing, warehousing, insuring, handling and shipping the
Collateral.
(l) Leased Premises. At the Investors' request, the
Company will obtain from each Person from whom the Company leases any Premises
at which any Collateral is at any time present such subordination, waiver,
consent and estoppel agreements as the Investors may require, in form and
substance satisfactory to the Investors.
(m) Rights to Payment. The Company will:
(i) with such frequency as the Investors may
require, furnish to the Investors (A) master customer listings, including all
names and addresses, together with copies or originals (as requested by the
Investors) of documents, customer statements, repayment histories and present
status reports relating to the Accounts; (B) accurate records and summaries of
Accounts, including detailed agings specifying the name, face value and date of
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each invoice, and listings of Accounts that are disputed or have been
cancelled; and (C) such other matters and information relating to the Accounts
as the Investors shall reasonably request;
(ii) give only normal discounts, allowances and
credits as to Accounts and other Rights to Payment, in the ordinary course of
business, according to normal trade practices utilized by the Company in the
past, and enforce all Accounts and other Rights to Payment strictly in
accordance with their terms, and take all such action to such end as may from
time to time be reasonably requested by the Investors, except that the Company
may grant any extension of the time for payment or enter into any agreement to
make a rebate or otherwise to reduce the amount owing on or with respect to, or
compromise or settle for less than the full amount thereof, any Account or
other Right to Payment, in the ordinary course of business, according to normal
trade practices utilized by the Company in the past, or where the Account or
Right to Payment would not be materially impaired;
(iii) if any discount, allowance, credit, extension
of time for payment, agreement to make a rebate or otherwise to reduce the
amount owing on, or compromise or settle, an Account or other Right to Payment
exists or occurs, or if, to the knowledge of the Company, any dispute, setoff,
claim, counterclaim or defense exists or has been asserted or threatened with
respect to an Account or other Right to Payment, disclose such fact fully to
the Investors in the Books relating to such Account or other Right to Payment
and in connection with any invoice or report furnished by the Company to the
Investors relating to such Account or other Right to Payment;
(iv) if any Accounts arise from contracts with the
United States or any department, agency or instrumentality thereof, immediately
notify the Investors thereof and execute any documents and instruments and take
any other steps requested by the Investors in order that all monies due and to
become due thereunder shall be assigned to the Investors and notice thereof
given to the Federal authorities under the Federal Assignment of Claims Act;
(v) in accordance with its sound business judgment
perform and comply in all material respects with its obligations in respect of
the Accounts and other Rights to Payment;
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(vi) upon the request of the Investors (A) at any
time, notify all or any designated portion of the account debtors and other
obligors on the Rights to Payment of the security interest hereunder, and (B)
upon the occurrence of an Event of Default, notify the account debtors and
other obligors on the Rights to Payment or any designated portion thereof that
payment shall be made directly to the Investors or to such other Person or
location as the Investors shall specify; and
(vii) upon the occurrence of any Event of Default,
establish such lockbox or similar arrangements for the payment of the Accounts
and other Rights to Payment as the Investors shall require.
(n) Documents, Etc. Upon the request of the Investors,
the Company will (i) immediately deliver to the Investors, or an agent
designated by it, appropriately endorsed or accompanied by appropriate
instruments of transfer or assignment, all Documents, Instruments and Chattel
Paper, and all other Rights to Payment at any time evidenced by promissory
notes, trade acceptances or other instruments, and (ii) mark all Documents and
Chattel Paper with such legends as the Investors shall specify.
(o) Inventory. The Company will:
(i) at least once per calendar quarter, and at such
other times as the Investors shall request,] prepare and deliver to the
Investors a report of all Inventory, in form and substance satisfactory to the
Investors;
(ii) upon the request of the Investors, but at least
every six months, take a physical listing of the Inventory and promptly deliver
a copy of such physical listing to the Investors; and
(iii) not store any Inventory with a bailee,
warehouseman or similar Person, nor dispose of any Inventory on a bill-
and-hold, guaranteed sale, sale and return, sale on approval, consignment or
similar basis, nor acquire any Inventory from any Person on any such basis,
without in each case giving the Investors prior written notice thereof.
(p) Equipment. The Company will, at least once a year or
upon the Investors' request, deliver to the Investors a report of each item of
Equipment, in form and substance satisfactory to the Investors.
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(q) Intellectual Property Collateral. The Company will:
(i) not enter into any agreement (including any
license or royalty agreement) pertaining to any Intellectual Property
Collateral except in the ordinary course of business without in each case the
prior consent of the Investors;
(ii) not allow or suffer any Intellectual Property
Collateral to become abandoned, nor any registration thereof to be terminated,
forfeited, expired or dedicated to the public;
(iii) promptly give the Investors notice of any
rights the Company may obtain to any new patentable inventions, copyrightable
works or other new Intellectual Property Collateral, prior to the filing of any
application for registration thereof; and
(iv) diligently prosecute all applications for
patents, copyrights and trademarks, and file and prosecute any and all
continuations, continuations-in-part, applications for reissue, applications
for certificate of correction and like matters as shall be reasonable and
appropriate in accordance with prudent business practice, and promptly and
timely pay any and all maintenance, license, registration and other fees, taxes
and expenses incurred in connection with any Intellectual Property Collateral.
(r) Notices, Reports and Information. The Company will
(i) notify the Investors of any material claim made or asserted against the
Collateral by any Person and of any change in the composition of the Collateral
or other event which could materially adversely affect the value of the
Collateral or the Investors' Lien thereon; (ii) furnish to the Investors such
statements and schedules further identifying and describing the Collateral and
such other reports and other information in connection with the Collateral as
the Investors may reasonably request, all in reasonable detail; and (iii) upon
request of the Investors make such demands and requests for information and
reports as the Company is entitled to make in respect of the Collateral.
(s) Assigned Agreement. (i) The Company will furnish to
the Investors promptly upon receipt thereof
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copies of (A) all amendments or modifications to the Assigned Agreement entered
into by the Company and (B) all material notices, requests and other documents
received by the Company in respect of the Assigned Agreement. (ii) The Company
will perform and observe in all material respects all terms and provisions of
the Assigned Agreement to be performed or observed by it, maintain the Assigned
Agreement in full force and effect, enforce the Assigned Agreement in
accordance with their terms, and take all such action to such end as may be
from time to time be reasonably requested by the Investors. (iii) The Company
will not without the prior consent of the Investors (A) cancel or terminate any
of the Assigned Agreement or consent to or accept any cancellation or
termination thereof; (B) amend or otherwise modify in any material respect the
Assigned Agreement or give any material consent, waiver or approval thereunder;
(C) waive any material default under or breach of the Assigned Agreement; or
(D) take any other action in connection with the Assigned Agreement that would
impair the value of the interest or rights of the Company thereunder or that
would impair the interest or rights of the Investors.]
SECTION 6 Collection of Rights to Payment.
Until the Investors exercise their rights hereunder to collect
Rights to Payment, the Company shall endeavor in the first instance diligently
to collect all amounts due or to become due on or with respect to the Rights to
Payment. At the request of the Investors, upon and after the occurrence of any
Event of Default, all remittances received by the Company shall be held in
trust for the Investors and, in accordance with the Investors' instructions,
remitted to the Investors or deposited to an account with the Investors in the
form received (with any necessary endorsements or instruments of assignment or
transfer).
SECTION 7 Authorization; Investors Appointed Attorney-in-Fact.
The Investors shall have the right to, in the name of the
Company, or in the name of the Investors or otherwise, without notice to or
assent by the Company, and the Company hereby constitutes and appoints the
Investors (and any of the Investors' officers, employees or agents designated
by the Investors) as the Company's true and lawful attorney-in-fact, with full
power and authority to:
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(i) sign any of the Financing Statements which must
be executed or filed to perfect or continue perfected, maintain the priority of
or provide notice of the Investors' security interest in the Collateral;
(ii) take possession of and endorse any notes,
acceptances, checks, drafts, money orders or other forms of payment or security
and collect any Proceeds of any Collateral;
(iii) sign and endorse any invoice or bill of lading
relating to any of the Collateral, warehouse or storage receipts, drafts
against customers or other obligors, assignments, notices of assignment,
verifications and notices to customers or other obligors;
(iv) notify the Postal Service authorities to change
the address for delivery of mail addressed to the Company to such address as
the Investors may designate and, without limiting the generality of the
foregoing, establish with any Person lockbox or similar arrangements for the
payment of the Rights to Payment;
(v) receive, open and dispose of all mail addressed
to the Company;
(vi) send requests for verification of Rights to
Payment to the customers or other obligors of the Company;
(vii) contact, or direct the Company to contact, all
account debtors and other obligors on the Rights to Payment and instruct such
account debtors and other obligors to make all payments directly to the
Investors;
(viii) assert, adjust, sue for, compromise or
release any claims under any policies of insurance;
(ix) exercise dominion and control over, and refuse
to permit further withdrawals from, Deposit Accounts maintained with the
Investors;
(x) notify each Person maintaining lockbox or
similar arrangements for the payment of the Rights to Payment to remit all
amounts representing collections on the Rights to Payment directly to the
Investors;
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(xi) ask, demand, collect, receive and give
acquittances and receipts for any and all Rights to Payment, enforce payment or
any other rights in respect of the Rights to Payment and other Collateral,
grant consents, agree to any amendments, modifications or waivers of the
agreements and documents governing the Rights to Payment and other Collateral,
and otherwise file any claims, take any action or institute, defend, settle or
adjust any actions, suits or proceedings with respect to the Collateral, as the
Investors may deem necessary or desirable to maintain, preserve and protect the
Collateral, to collect the Collateral or to enforce the rights of the Investors
with respect to the Collateral;
(xii) execute any and all applications, documents,
papers and instruments necessary for the Investors to use the Intellectual
Property Collateral and grant or issue any exclusive or non-exclusive license
or sublicense with respect to any Intellectual Property Collateral;
(xiii) execute any and all endorsements, assignments
or other documents and instruments necessary to sell, lease, assign, convey or
otherwise transfer title in or dispose of the Collateral; and
(xiv) execute any and all such other documents and
instruments, and do any and all acts and things for and on behalf of the
Company, which the Investors may deem necessary or advisable to maintain,
protect, realize upon and preserve the Collateral and the Investors' security
interest therein and to accomplish the purposes of this Agreement.
The Investors agrees that, except upon and after the
occurrence of an Event of Default, they shall not exercise the power of
attorney, or any rights granted to the Investors, pursuant to clauses (ii)
through (xiii) and, with respect to realization upon the Collateral and the
Investors' security interest therein, clause (xiv). The foregoing power of
attorney is coupled with an interest and irrevocable so long as the Investors
has any Commitment or the Secured Obligations have not been paid and performed
in full. The Company hereby ratifies, to the extent permitted by law, all that
the Investors shall lawfully and in good faith do or cause to be done by virtue
of and in compliance with this Section 7.
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SECTION 8 Investors' Performance of Company Obligations.
The Investors may perform or pay any obligation which the
Company has agreed to perform or pay under or in connection with this
Agreement, and the Company shall reimburse the Investors on demand for any
amounts paid by the Investors pursuant to this Section 8.
SECTION 9 Investors' Duties.
Notwithstanding any provision contained in this Agreement, the
Investors shall have no duty to exercise any of the rights, privileges or
powers afforded to them and shall not be responsible to the Company or any
other Person for any failure to do so or delay in doing so. Beyond the
exercise of reasonable care to assure the safe custody of Collateral in the
Investors' possession and the accounting for moneys actually received by the
Investors hereunder, the Investors shall have no duty or liability to exercise
or preserve any rights, privileges or powers pertaining to the Collateral.
SECTION 10 Remedies.
(a) Remedies. Upon the occurrence of any Event of
Default, the Investors shall have, in addition to all other rights and remedies
granted to it in this Agreement, the Securities Purchase Agreement or any other
Material Agreement, all rights and remedies of a secured party under the UCC
and other applicable laws. Without limiting the generality of the foregoing,
the Company agrees that:
(i) The Investors may peaceably and without notice
enter any Premises of the Company, take possession of any the Collateral,
remove or dispose of all or part of the Collateral on any Premises or
elsewhere, or, in the case of Equipment, render it nonfunctional, and otherwise
collect, receive, appropriate and realize upon all or any part of the
Collateral, and demand, give receipt for, settle, renew, extend, exchange,
compromise, adjust, or sue for all or any part of the Collateral, as the
Investors may determine.
(ii) The Investors may require the Company to
assemble all or any part of the Collateral and make it available to the
Investors at any place and time designated by the Investors.
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(iii) The Investors may use or transfer any of the
Company's rights and interests in any Intellectual Property Collateral, by
license, by sublicense (to the extent permitted by an applicable license) or
otherwise, on such conditions and in such manner as the Investors may
determine.
(iv) The Investors may secure the appointment of a
receiver of the Collateral or any part thereof (to the extent and in the manner
provided by applicable law).
(v) The Investors may withdraw (or cause to be
withdrawn) any and all funds from Deposit Accounts.
(vi) The Investors may sell, resell, lease, use,
assign, transfer or otherwise dispose of any or all of the Collateral in its
then condition or following any commercially reasonable preparation or
processing (utilizing in connection therewith any of the Company's assets,
without charge or liability to the Investors therefor) at public or private
sale, by one or more contracts, in one or more parcels, at the same or
different times, for cash or credit, or for future delivery without assumption
of any credit risk, all as the Investors deem advisable; provided, however,
that the Company shall be credited with the net proceeds of sale only when such
proceeds are finally collected by the Investors. The Investors shall have the
right upon any such public sale, and, to the extent permitted by law, upon any
such private sale, to purchase the whole or any part of the Collateral so sold,
free of any right or equity of redemption, which right or equity of redemption
the Company hereby releases, to the extent permitted by law. The Company hereby
agrees that the sending of notice by ordinary mail, postage prepaid, to the
address of the Company set forth in the Securities Purchase Agreement, of the
place and time of any public sale or of the time after which any private sale
or other intended disposition is to be made, shall be deemed reasonable notice
thereof if such notice is sent ten days prior to the date of such sale or other
disposition or the date on or after which such sale or other disposition may
occur, provided that the Investors may provide the Company shorter notice or no
notice, to the extent permitted by the UCC or other applicable law.
(b) License. For the purpose of enabling the Investors
to exercise their rights and remedies under this Section 10 or otherwise in
connection with this Agreement,
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the Company hereby grants to the Investors an irrevocable, non-exclusive and
assignable license (exercisable without payment or royalty or other
compensation to the Company) to use, license or sublicense any Intellectual
Property Collateral.
(c) Proceeds Account. To the extent that any of the
Secured Obligations may be contingent, unmatured or unliquidated at such time
as there may exist an Event of Default, the Investors may, at their election,
(i) retain the proceeds of any sale, collection, disposition or other
realization upon the Collateral (or any portion thereof) in a special purpose
non-interest-bearing restricted deposit account (the "Proceeds Account")
created and maintained by the Investors for such purpose (which shall
constitute a Deposit Account included within the Collateral hereunder) until
such time as the Investors may elect to apply such proceeds to the Secured
Obligations, and the Company agrees that such retention of such proceeds by the
Investors shall not be deemed strict foreclosure with respect thereto; (ii) in
any manner elected by the Investors, estimate the liquidated amount of any such
contingent, unmatured or unliquidated claims and apply the proceeds of the
Collateral against such amount; or (iii) otherwise proceed in any manner
permitted by applicable law.
(d) Application of Proceeds. The cash proceeds actually
received from the sale or other disposition or collection of Collateral, and
any other amounts received in respect of the Collateral the application of
which is not otherwise provided for herein, shall be applied as the Investors
may, from time to time, determine; provided that any amounts applied to
interest or principal shall be applied promptly. Any surplus thereof which
exists after payment and performance in full of the Secured Obligations shall
be promptly paid over to the Company or otherwise disposed of in accordance
with the UCC or other applicable law. The Company shall remain liable to the
Investors for any deficiency which exists after any sale or other disposition
or collection of Collateral.
SECTION 11 Certain Waivers.
The Company waives, to the fullest extent permitted by law,
(i) any right of redemption with respect to the Collateral, whether before or
after sale hereunder, and all rights, if any, of marshalling of the Collateral
or other collateral or security for the Secured Obligations;
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(ii) any right to require the Investors (A) to proceed against any Person, (B)
to exhaust any other collateral or security for any of the Secured Obligations,
(C) to pursue any remedy in the Investors' power, or (D) to make or give any
presentments, demands for performance, notices of nonperformance, protests,
notices of protests or notices of dishonor in connection with any of the
Collateral; and (iii) all claims, damages, and demands against the Investors
arising out of the repossession, retention, sale or application of the proceeds
of any sale of the Collateral
SECTION 12 Notices.
All notices or other communications hereunder shall be given
in the manner and to the addresses specified in the Securities Purchase
Agreement. All such notices and other communications shall be effective (i) if
delivered by hand, when delivered; (ii) if sent by mail, upon the earlier of
the date of receipt or five Business Days after deposit in the mail, first
class, postage prepaid; (iii) if sent by telex, upon receipt by the sender of
an appropriate answerback; and (iv) if sent by facsimile transmission, when
sent.
SECTION 13 No Waiver; Cumulative Remedies.
No failure on the part of the Investors to exercise, and no
delay in exercising, any right, remedy, power or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, remedy, power or privilege preclude any other or further exercise
thereof or the exercise of any other right, remedy, power or privilege. The
rights and remedies under this Agreement are cumulative and not exclusive of
any rights, remedies, powers and privileges that may otherwise be available to
the Investors.
SECTION 14 Costs and Expenses; Indemnification; Other
Charges.
(a) Costs and Expenses. The Company agrees to pay on
demand:
(i) the reasonable out-of-pocket costs and expenses
of the Investors and any of their respective affiliates, and the reasonable
fees and disbursements of counsel to the Investors (including allocated costs
of internal counsel), in connection with the negotiation,
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preparation, execution, delivery and administration of this Agreement, and any
amendments, modifications or waivers of the terms thereof, and the custody of
the Collateral;
(ii) all title, appraisal (including the allocated
costs of internal appraisal services), survey, audit, consulting, search,
recording, filing and similar costs, fees and expenses incurred or sustained by
the Investors or any of their respective affiliates in connection with this
Agreement or the Collateral; and
(iii) all costs and expenses of the Investors and
their respective affiliates, and the fees and disbursements of counsel
(including the allocated costs of internal counsel), in connection with the
enforcement or attempted enforcement of, and preservation of any rights or
interests under, this Agreement, including in any out-of-court workout or other
refinancing or restructuring or in any bankruptcy case, and the protection,
sale or collection of, or other realization upon, any of the Collateral,
including all expenses of taking, collecting, holding, sorting, handling,
preparing for sale, selling, or the like, and other such expenses of sales and
collections of Collateral, and any and all losses, costs and expenses sustained
by the Investors as a result of any failure by the Company to perform or
observe its obligations contained herein.
(b) Indemnification. The Company hereby agrees to
indemnify the Investors, any affiliate thereof, and their respective directors,
officers, employees, agents, counsel and other advisors (each an "Indemnified
Person") against, and hold each of them harmless from, any and all liabilities,
obligations, losses, claims, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever, including
the reasonable fees and disbursements of counsel to an Indemnified Person
(including allocated costs of internal counsel), which may be imposed on,
incurred by, or asserted against any Indemnified Person, in any way relating to
or arising out of this Agreement or the transactions contemplated hereby or any
action taken or omitted to be taken by it hereunder (the "Indemnified
Liabilities"); provided that the Company shall not be liable to any Indemnified
Person for any portion of such Indemnified Liabilities to the extent they are
found by a final decision of a court of competent jurisdiction to have resulted
from such Indemnified Person's gross negligence or willful
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misconduct. If and to the extent that the foregoing indemnification is for any
reason held unenforceable, the Company agrees to make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.
(c) Other Charges. The Company agrees to indemnify the
Investors against and hold it harmless from any and all present and future
stamp, transfer, documentary and other such taxes, levies, fees, assessments
and other charges made by any jurisdiction by reason of the execution,
delivery, performance and enforcement of this Agreement.
(d) Interest. Any amounts payable to the Investors under
this Section 14 or otherwise under this Agreement if not paid upon demand shall
bear interest from the date of such demand until paid in full, at the rate of
interest set forth in Section 2.7 of the Securities Purchase Agreement.
SECTION 15 Binding Effect.
This Agreement shall be binding upon, inure to the benefit of
and be enforceable by the Company, the Investors and their respective
successors and assigns.
SECTION 16 Governing Law.
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, EXCEPT AS REQUIRED BY
MANDATORY PROVISIONS OF LAW AND TO THE EXTENT THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR THE REMEDIES HEREUNDER, IN RESPECT OF ANY
COLLATERAL ARE GOVERNED BY THE LAW OF A JURISDICTION OTHER THAN NEW YORK.
SECTION 17 Entire Agreement; Amendment.
This Agreement contains the entire agreement of the parties
with respect to the subject matter hereof and shall not be amended except by
the written agreement of the parties as provided in the Securities Purchase
Agreement.
SECTION 18 Severability.
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under all applicable
laws and
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regulations. If, however, any provision of this Agreement shall be prohibited
by or invalid under any such law or regulation in any jurisdiction, it shall,
as to such jurisdiction, be deemed modified to conform to the minimum
requirements of such law or regulation, or, if for any reason it is not deemed
so modified, it shall be ineffective and invalid only to the extent of such
prohibition or invalidity without affecting the remaining provisions of this
Agreement, or the validity or effectiveness of such provision in any other
jurisdiction.
SECTION 19 Counterparts.
This Agreement may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together
shall constitute but one and the same agreement.
SECTION 20 Incorporation of Provisions of the Securities
Purchase Agreement.
To the extent the Securities Purchase Agreement contains
provisions of general applicability to the Loan Documents, including any such
provisions contained in Article VIII thereof, such provisions are incorporated
herein by this reference.
SECTION 21 No Inconsistent Requirements.
The Company acknowledges that this Agreement and the other
Loan Documents may contain covenants and other terms and provisions variously
stated regarding the same or similar matters, and agrees that all such
covenants, terms and provisions are cumulative and all shall be performed and
satisfied in accordance with their respective terms.
SECTION 22 Termination.
Upon payment and performance in full of all Secured
Obligations, this Agreement shall terminate and the Investors shall promptly
execute and deliver to the Company such documents and instruments reasonably
requested by the Company as shall be necessary to evidence the reconveyance and
termination of all security interests given by the Company to the Investors
hereunder and redeliver to Pledgor any Collateral then in Investors'
possession; provided,
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however, that the obligations of the Company under Section 14 shall survive
such termination.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, as of the date first above written.
THE COMPANY
WATSON GENERAL CORPORATION
By /s/ RONALD G. CRANE
--------------------------------------
Title:
THE INVESTORS
SAGAPONACK PARTNERS, L.P.
By: RSP Capital L.L.C., its general
partner
By /s/ BARRY S. ROSENSTEIN
--------------------------------------
Name: Barry S. Rosenstein
Title:
------------------------------
SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By /s/ BARRY S. ROSENSTEIN
--------------------------------------
Name: Barry S. Rosenstein
Title:
------------------------------
28
<PAGE> 29
SCHEDULES
Schedule 1 Location of Offices
Trade Names, Styles, Other Names
Inventory Locations
Patents, Copyrights, Trademarks
Leased Equipment
Deposit Accounts
<PAGE> 1
EXHIBIT 10.6
May 21, 1997
Mr. Ronald G. Crane
President
Watson General Corporation
32-B Mauchly
Irvine, California 92718
Re: WATSON GENERAL CORPORATION LETTER AGREEMENT
Dear Mr. Crane:
Sagaponack Management Co. Inc. ("SMC") is pleased to act as the
financial advisor to Watson General Corporation (the "Company") pursuant to the
terms of this letter agreement (this "Letter Agreement"). For purposes of this
Letter Agreement, SMC shall include any successor entity formed by SMC in which
Barry Rosenstein has a controlling interest. For purposes of this Letter
Agreement, the term "Company" shall include any affiliates, subsidiaries,
predecessors and successors of the Company, and to any other entities which may
be formed and/or utilized in connection with a Financing. All obligations
hereunder shall be guaranteed by, and shall be deemed to be joint and several
obligations of, USTMAN Industries, Inc. and Watson Systems, Inc. until such
time as they are merged with and into the Company.
1. NATURE OF ENGAGEMENT.
a. SMC is hereby engaged, on an exclusive basis, to
render financial advisory services to the Company, including but not limited to
merger and acquisition analysis, due diligence, valuation analysis,
structuring, negotiation, and such other financial advice as the Company may
reasonably request from time to time ("Financial Advisory Services").
b. SMC may also cause its affiliated entities to provide
funds to the Company or arrange for funds to be provided to the Company in the
form of either debt or equity or a combination thereof from time to time (a
"Financing").
<PAGE> 2
Mr. Ronald G. Crane
May 21, 1997
Page 2
2. SCOPE OF SERVICES.
During the term of this Agreement SMC shall provide the
Company with such regular and customary financial advisory services as are
reasonably requested by the Company provided that SMC shall not be required to
undertake duties not reasonably within the scope of the financial advisory
services contemplated by this Agreement. It is understood and acknowledged by
the parties that the value of SMC's advice is not readily quantifiable, and
that SMC shall be obligated to render advice upon the request of the Company,
in good faith, but shall not be obligated to spend any specific amount of time
in so doing. Further, nothing set forth herein shall prohibit SMC from
providing the services that it may provide to the Company hereunder to any
other person or entity.
3. COMPENSATION.
a. With respect to the financing provided on the
date hereof pursuant to the Securities Purchase Agreement among the Company,
Sagaponack Partners L.P. and Sagaponack International Partners L.P. (the
"Securities Purchase Agreement") the Company shall pay to SMC on the date
hereof by certified funds, wire transfer or official bank check, a transaction
fee in the amount of $210,000.00. Transaction fees for any other Financing
shall be mutually agreed upon by SMC and Company.
b. During the term hereof, in consideration for
SMC's Financial Advisory Services, the Company shall pay to SMC a fee of
$100,000 per year in equal quarterly installments of $25,000 each which shall
be due and payable on the first day of each June, September, December and March
during the Term hereof. Upon the execution hereof, the Company shall pay to
SMC $25,000 which shall represent the quarterly payment of the Financial
Advisory Fee due with respect to the period commencing June 1, 1997.
4. TERM OF ENGAGEMENT.
The term of this agreement shall be for the period commencing
on the date first set forth above and ending on May 21, 2002.
5. SUBSEQUENT TRANSACTIONS.
In the event that during the period of the term of this
agreement, the Company determines to undertake a pubic or private sale of debt
or equity securities
<PAGE> 3
Mr. Ronald G. Crane
May 21, 1997
Page 3
other than a Financing (a "Public Offering" or "Private Offering,"
respectively) with respect to which the Company uses the services of a
financial intermediary, the Company shall retain SMC as a co-managing
underwriter or placement agent, as the case may be, in connection with such
transaction, in the event and to the extent SMC is licensed to perform, and is
reasonably capable of performing, such services. The fees in any engagement
for either a Public Offering or Private Offering shall be paid pursuant to an
underwriting or placement agent agreement containing customary representations,
warranties, covenants, conditions and indemnities and providing for customary
fees, the exact amount thereof to be mutually agreed. In addition, should the
Company during the term of this agreement, undertake a Business Transaction
which Business Transaction is of a type or a size (or both) not currently
contemplated or substantially in excess of the level and type of activity
undertaken by the Company, and in connection therewith the Company requires the
services of a financial advisor, the Company shall retain SMC as the financial
advisor to assist the Company in identifying, analyzing, structuring and
negotiating such Business Transaction.
As used herein, the term "Business Transaction" shall include, but not
be limited to, a purchase or sale of stock or assets, assumptions of
liabilities, merger, consolidation, tender offer, joint venture, or other
business combination or similar undertaking by the Company. In the event of
such Business Combination, the services to be provided by SMC shall be outlined
in a separate advisory agreement containing the customary representations,
warranties, covenants, conditions and indemnities and providing for separate
and customary fees, the exact amounts thereof to be mutually agreed upon;
provided, however that in the event that the Business Transaction relates to
sale of all or substantially all of the assets or securities of the Company and
it becomes necessary for the Company to engage another financial advisor in
order to consummate such Business Transaction then in such event SMC agrees
that any fees that are to be paid to all financial advisors with respect to
such Business Transaction shall not, in the aggregate, exceed the amount of
fees that would customarily be paid to one (1) financial advisor for such a
Business Transaction.
6. REIMBURSEMENT OF EXPENSES.
The Company shall reimburse SMC for all reasonable
out-of-pocket expenses including travel and legal expenses incurred in
connection with the performance of its services both prior and subsequent to
the signing of this agreement. Such reimbursement shall be paid on a current
basis upon the request of SMC from time to time and shall be paid regardless of
the consummation of a Financing or the outcome of any Financial Advisory
Services rendered hereunder. SMC shall also be reimbursed for
<PAGE> 4
Mr. Ronald G. Crane
May 21, 1997
Page 4
expenses in connection with any Public Offering or Business Transaction
pursuant to a separate agreement to be entered into with respect to any such
Public Offering, Private Offering or Business Transaction. The Company
expressly acknowledges that SMC may reasonably allocate certain travel, lodging
and similar expenses among it's clients for whom such expenses were incurred,
consistent with SMC's past practices. In addition, the Company agrees to pay
its pro rata share of any multiple-issuer tombstone advertisement (which
advertisement is subject to the prior approval of the Company) that references
the Financing closing on the date hereof that SMC may place in the financial
press, which pro-rata share shall exceed $500.00.
7. INDEMNIFICATION; CONTRIBUTION.
The Company agrees to indemnify, defend and hold harmless SMC
in accordance with the indemnification provisions (the "Indemnification
Provisions") attached to this Letter Agreement, which Indemnification
Provisions are set forth on Schedule A attached hereto and made a part hereof.
8. LEGAL FEES.
In the event of any action brought by SMC to enforce this
Letter Agreement, SMC shall be entitled to all costs of collection, including
reasonable attorney fees and out-of-pocket expenses thereto.
9. MISCELLANEOUS.
This Letter Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York applicable agreements made
and to be performed entirely in such state. This Letter Agreement may not be
amended or otherwise modified except by an instrument signed by all parties.
If any provision hereof shall be determined to be invalid or unenforceable in
any respect, such determination shall not affect such provision in any other
respect or any other provisions of this Letter Agreement, which shall remain in
full force and effect.
<PAGE> 5
Mr. Ronald G. Crane
May 21, 1997
Page 5
10. SURVIVAL.
It is expressly agreed that the provisions contained in
Sections 3, 5, 6, 7 and 8 shall survive any termination or expiration of this
Agreement.
11. COMPANY COOPERATION.
The Company will cooperate with SMC and make available to SMC
all information which SMC reasonably requests in connection with the
performance of its services hereunder, including all information concerning the
business, assets, operations or financial condition of the Company, its
competitors and industry. In addition, the Company shall use its best efforts
to assist SMC in its marketing and arranging of any Financing, including, but
not limited to, participating in meetings with potential investors. The
Company agrees that SMC may rely upon the accuracy and completeness of such
information without independent verification or independent appraisal. In
addition, the Company shall be responsible for the completeness, accuracy and
format of all information prepared by this Company.
SAGAPONACK MANAGEMENT CO. INC.
By: /s/ BARRY S. ROSENSTEIN
---------------------------
Name:
Title:
Accepted and Agreed to as
of the date first written above.
WATSON GENERAL CORPORATION
By: /s/ RONALD G. CRANE
---------------------------
Name: Ronald G. Crane
Title: President
<PAGE> 6
Mr. Ronald G. Crane
May 21, 1997
Page 6
SCHEDULE A
Indemnification Provisions
In connection with the engagement by Watson General Corporation
("Watson General") of Sagaponack Management Co. Inc. ("SMC") as Watson
General's financial advisor, Watson General hereby agrees to indemnify and hold
harmless SMC and its affiliates, and the respective directors, officers,
shareholders, legal counsel, agents and employees of SMC (collectively, the
"Indemnified Person"), from and against any and all claims, actions, suits,
proceedings (including those of shareholders), damages, liabilities and
expenses incurred by any of them (including, without limitation, the reasonable
costs, expenses and disbursements, as and when incurred, of investigating,
preparing and defending any such action, suit, proceedings or investigation
(whether or not in connection with litigation which SMC as a party) which are
(A) directly or indirectly, caused by, related to or arise out of (i) any
actions taken or omitted to be taken (including any untrue statements made or
any statement omitted to be made) by the Company, (ii) any Financing, or (iii)
any actions taken or omitted to be taken by any Indemnified Person in
connection with Watson General's engagement of SMC, or (B) otherwise relate to
or arise out of SMC's activities on Watson General's behalf under SMC's
engagement, and Watson General shall reimburse any Indemnified Person for all
expenses (including the fees and expenses of counsel) as incurred by such
Indemnified Person in connection with investigation, preparing or defending any
such claim, action, suit or proceeding (collectively a "Claim"), whether or not
in connection with pending or threatened litigation in which any Indemnified
Person is a party. Watson General will not, however, be responsible for any
Claim which is finally judicially determined to have resulted form the gross
negligence or willful misconduct of any Indemnified Person. Watson General
further agrees that no Indemnify Person shall have nay liability to Watson
General for or in connection with Watson General's engagement of SMC except for
any Claim incurred by Watson General solely as a direct result of any
Indemnified Person's gross negligence or willful misconduct.
Watson General further agrees that Watson General will not, without
the prior written consent of SMC, settle, comprise or consent to the entry of
any judgment in any pending or threatened Claim in respect of which
indemnification may be sought hereunder (so long as such Claim), unless such
settlement, compromise or consent includes an unconditional, irrevocable
release of each Indemnified Person hereunder from any and all liability arising
out of such Claim.
<PAGE> 7
Mr. Ronald G. Crane
May 21, 1997
Page 7
Promptly upon receipt by an Indemnified Person of notice of any
complaint or the assertion or institution of any Claim with respect to which
indemnification is being sought hereunder, such Indemnified Person shall notify
Watson General in writing of such complaint or of such assertion or institution
but failure to so notify Watson General shall not relieve Watson General from
any liability or obligation Watson General may have hereunder, unless and only
to the extent such failure results in the forfeiture by Watson General of
rights and defenses, and will not in any event relieve Watson General from any
other obligation or liability Watson General may have to any Indemnified person
otherwise than under this Agreement. If Watson General so elects or is
requested by such Indemnified Person, Watson General will assume the defense of
such Claim, including the employment of counsel reasonably satisfactory to such
Indemnified Person and the payment of the fees and expenses of such counsel.
In the event, however, that such Indemnified Person reasonably determines in
its sole judgment that having common counsel would present such counsel with a
conflict of interest or if the defendant in, or target of, any such Claim,
includes an Indemnified Person and Watson General, then such Indemnified Person
may employ its own separate counsel to represent or defend it in any such Claim
and Watson General shall pay the fees and expenses of such counsel.
Notwithstanding anything herein to the contrary, if Watson General fails timely
or diligently to defend, contest, or otherwise protect against any Claim, the
relevant Indemnified Person shall have the right, but not the obligation, to
defend, contest, compromise, settle, assert crossclaims, or counterclaims or
otherwise protect against the same, and shall be fully indemnified by Watson
General therefore, including without limitation, for the fees and expenses of
its counsel and all amounts paid as a result of such Claim or the compromise or
settlement thereof. In any Claim in which Watson General assumes the defense,
the Indemnified Person shall have the right to participate in such claim and to
retain its own counsel therefor at its own expense.
Watson General agrees that if any indemnity sought by an Indemnified
Person hereunder is held by a court to be unavailable for any reason, then
(whether or not SMC is the Indemnified Person), Watson General and SMC shall
contribute to the Claim for which such indemnity is held unavailable in such
proportion as is appropriate to reflect the relative benefits to Watson
General, on the one hand, and SMC on the other, in connection with SMC's
engagement referred to above, subject to the limitation that in no event shall
the amount of SMC's contribution to such Claim exceed the amount of fees
actually received by SMC from Watson General pursuant to SMC's engagement,
Watson General hereby agrees that the relative benefits to Watson General, on
the one hand, and SMC on the other, with respect to SMC's engagement shall be
deemed to be in the same proportion as (a) the total value paid or proposed to
be paid or received by Watson General or PPS's stockholders, as the case may
be, pursuant to the transaction (whether
<PAGE> 8
Mr. Ronald G. Crane
May 21, 1997
Page 8
or not consummated) for which you are engaged to render services bears to (b)
the fee paid or proposed to be paid to SMC in connection with such engagement.
Watson General's indemnity, reimbursement and contribution obligations
under this agreement shall be in addition to, and shall in no way limit or
otherwise adversely affect any rights that nay Indemnified Party may have at
law or at equity.
Should SMC or its personnel be required or requested by Watson General
to provide documentary evidence or testimony in connection with any proceeding
arising from or relating to SMC's engagement, Watson General agrees to pay all
reasonable expenses (including fees incurred for legal counsel) in complying
therewith and $2,500 per day for sworn testimony or preparation therefor,
payable in advance.
It is understood that, in connection with the services to be performed
by SMC, SMC may be engaged to act in one or more additional capacities and that
the terms of the original engagement as set forth in the Financial Advisory
Agreement to which this Schedule A is annexed, or any addition engagements may
be embodied in one or more separate written agreements. The provisions of this
Agreement shall apply to the original engagement, any such additional
engagement and any modification of the original engagement or such additional
engagement and shall remain in full force and effect following the completion
or termination of SMC's engagement(s).
WATSON GENERAL CORPORATION
By: /s/ RONALD G. CRANE
-------------------------
Name: Ronald G. Crane
Title: President
<PAGE> 1
EXHIBIT 10.7
COMPANY AGREEMENT
THIS COMPANY AGREEMENT, dated as of May 22, 1997, is by and between
WATSON GENERAL CORPORATION, a California corporation (the "Company") and
SAGAPONACK PARTNERS, L.P., a California limited partnership and SAGAPONACK
INTERNATIONAL PARTNERS, L.P., a Cayman Islands limited partnership
(individually, an "Investor" and, together, the "Investors").
I. BACKGROUND
1. The Company is authorized to issue 7,304,520 shares of Common
Stock, (the "Shares") and 2,625,432 warrants to purchase Common Stock sold on
or about the date hereof to an Investor (the "Warrants"); and
2. The parties deem it in the best interests of the Company to
provide for the nomination of directors as herein provided and delivery of this
Company Agreement is a condition to the investment to be made by an Investor
concurrently herewith.
II. AGREEMENT
In consideration of the agreements and mutual covenants set forth
herein, the parties agree as follows:
1. BOARD OF DIRECTORS AND CERTIFICATE OF INCORPORATION.
(A) DIRECTORS DESIGNATED BY INVESTORS. The Board of
Directors of the Company shall at all times consist of 5 members. The Company
hereby agrees that the Company and its management will nominate to become
members of the Company's Board of Directors two persons designated in writing
by an Investor (the "Investors Designated Directors") and one person designated
pursuant to clause (b) below. Such nomination shall be made as soon as
possible after designation of such persons by an Investor. The Company and its
management shall not nominate at any one time more than 5 persons to become
members of the Company's Board of Directors.
(B) DIRECTOR SELECTED FROM SCHEDULE 1. Attached hereto as
Schedule 1 is a list of persons from which the members of the Company's Board
of Directors and Investors Designated Directors shall select the person to be
nominated by the Company to one of the five directors. Such nomination shall
be made as soon as possible hereafter.
(C) DAN R. COOK. In addition to the foregoing, the
Company agrees that as soon hereafter as possible it will nominate Dan R. Cook
to become a member of the Company's Board of Directors.
<PAGE> 2
(D) REPLACEMENT DIRECTORS. The Investors may from time to
time designate one or more persons to replace one or more of the directors
designated by it if (i) such director resigns, (ii) such directors becomes
unable to serve as a director or (iii) the Investors determine that they desire
a director to be replaced. The Investors may designate a person or persons to
replace directors pursuant to the immediately preceding sentence by giving
notice to the Company of the person or persons that the Investors have
designated to be nominated to be a director or directors, as the case may be.
Upon each such designation by an Investor, the Company shall be obligated to
nominate such person or persons to become members of the Company's Board of
Directors as soon as possible thereafter.
If a person designated and nominated pursuant to clause (b)
resigns or becomes unable to serve as a director, then the remaining four
directors shall select one person from the person listed on Schedule 1 not
nominated prior thereto. If there are no persons listed on Schedule 1 which
have not been nominated prior thereto, the Investors shall provide a list of
not fewer than three persons from which the remaining directors shall select
the person to be nominated. The Company shall be obligated to nominate such
person or persons to become members of the Company's Board of Directors.
(E) ADDITIONAL DIRECTORS. In the event that the Board of
Directors shall, in accordance with the provisions of the Articles of
Incorporation of the Company, increase the number of members of the Company's
Board of Directors by 2 or more members, the Company and its management shall
nominate the persons designated by an Investor to fill such additional director
positions so that if such designated person is elected to be a member of the
Company's Board of Directors, persons designated by the Investors will equal a
number of members of the Company's Board of Directors equal to the number of
members necessary to constitute a majority of the members of the Company's
Board of Directors minus one member. Such nomination shall be made as soon as
possible after such designation by an Investor.
(F) VOTING UPON EVENT OF DEFAULT. If and whenever an
Event of Default (as such term is defined in the Securities Purchase Agreement,
dated the date hereof, between the Company and an Investor) shall occur, then
in such event and at all times thereafter the Company and its management shall
upon the written request of an Investor nominate to become a member or members
of the Company's Board of Directors each person designated by an Investor in
such written request. Such nomination shall be made as soon as possible after
such designation by an Investor. The obligation of the Company under this
subsection (f) shall apply notwithstanding (i) how many persons designated by
an Investor are or will become members of the Company's Board of Directors and
(ii) that an Investor may designate persons to fill every member position on
the Company's Board of Directors.
2. EQUITABLE RELIEF. The parties hereto agree and declare that
legal remedies may be inadequate to enforce the provisions of this Agreement
and that equitable relief, including specific performance an injunctive relief,
may be used to enforce such provisions.
- 2 -
<PAGE> 3
3. MISCELLANEOUS.
(A) NOTICES. Any and all notices, designations, consents,
offers, acceptances, or any other communication provided for herein shall be
given in writing delivered personally (including delivery by courier or by
facsimile if received during normal working hours) or by registered or
certified mail, addressed, if to the Company, to Watson General Corporation,
32-B Mauchly, Irvine, California 92718, Attn: Mr. Ronald G. Crane. Except as
otherwise provided in this Agreement, each such notice shall be deemed given
when delivered or on a date which is 4 days after it is mailed in any post
office or branch post office regularly maintained by the United States Postal
Service (registered or certified, which postage prepaid and properly
addressed).
(B) AMENDMENT. No change in or modification of this
Agreement shall be valid unless the same shall be in writing and signed by an
Investor and the Company.
(C) WAIVER. No failure or delay on the party of the
parties or any of them in exercising any right, power or privilege hereunder,
nor any course of dealing between the parties or any of them shall operate as a
waiver of any such right, power or privilege nor shall any single or partial
exercise of any such right, power or privilege preclude the simultaneous or
later exercise of any other right, power or privilege. The rights and remedies
herein expressly provided are cumulative and are not exclusive of any rights or
remedies which the parties or any of them would otherwise have. No notice to
or demand on the company in any case shall entitle the Company to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the other parties or any of them to take any other or
further action in any circumstances without notice or demand.
(D) COUNTERPARTS. This Agreement may be executed in two
or more counterparts each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
(E) GOVERNING LAW. This Agreement shall be governed by,
and construed and enforced in accordance with, the laws of the State of
California without regard to principles of conflict of laws.
(F) BENEFIT AND BIDING EFFECT. Except as otherwise
provided in this Agreement, no right under this Agreement shall be assignable
and any attempted assignment in violation of this provision shall be void.
This Agreement shall be binding upon and inure to the benefit of the parties
and their executors, administrators, personal representatives, heirs,
successors and permitted assigns. Except as set forth in this clause (i), this
Agreement does not create and shall not be construed as creating any rights
enforceable by any Person not a party hereto.
- 3 -
<PAGE> 4
(G) TERM. The obligations of the Company hereunder shall
terminate at such time as Investor, nor any successor or assign of any
Investor, owns any shares of Common Stock.
(H) SEVERABILITY. In the event that any potion of this
agreement shall be held to be invalid or unenforceable to any extent, such
portion shall be enforced to the fullest lawful extent and the remaining parts
hereof shall nevertheless continue to be valid and enforceable as though the
invalid portions were not a part hereof. If any time period set forth herein
is held by a court of competent jurisdiction to be unenforceable, a different
time period that is determined by the court to be more reasonable shall replace
the unenforceable time period.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this
Company Agreement as of the date and year first above written.
The Company: WATSON GENERAL CORPORATION
a California corporation
By: /s/ RONALD G. CRANE
--------------------------------------
President & CEO
The Investors: SAGAPONACK PARTNERS, L.P.
By: /s/ BARRY S. ROSENSTEIN
--------------------------------------
Title:
SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: /s/ BARRY S. ROSENSTEIN
--------------------------------------
Title:
- 5 -
<PAGE> 6
Schedules
Schedule 1 Names of Potential Board Members
- 6 -
<PAGE> 1
EXHIBIT 10.8
SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT, dated as of May 22, 1997, is by and among
SAGAPONACK PARTNERS, L.P., a California limited partnership, and SAGAPONACK
INTERNATIONAL PARTNERS, L.P., a Cayman Islands limited partnership
(individually, an "Investor" and, together, the "Investors"), and DAN R. COOK,
RONALD G. CRANE, LEON M. BRONFIN, RON E. AINSWORTH, ANDREW BOYD-JONES, THE
CRANE FAMILY REVOCABLE TRUST DATED 8/19/96, RONALD G. CRANE AND KAREN M. CRANE,
TRUSTEES and THE CHARLES A. & MARY L. WATSON TRUST DATED 7/14/86, MARY L.
WATSON, TRUSTEE (Cook, Crane, Bronfin, Ainsworth, Boyd-Jones, The Crane Family
Revocable Trust and The Charles A. & Mary L. Watson Trust hereinafter referred
to collectively as the "Shareholders" and individually as a "Shareholder").
I. BACKGROUND
1. Watson General Corporation, a California corporation (the
"Company") is authorized to issue 7,304,520 shares (the "Shares") of common
stock of the Company ("Common Stock") and 2,625,432 warrants to purchase Common
Stock sold on or about the date hereof to an Investor (the "Warrant"); and
2. Each Shareholder is the record and beneficial owner of the
number of issued and outstanding Securities appearing opposite his name in
Exhibit A to this Agreement, free and clear of all options, liens, encumbrances
or charges of any kind except as set forth in this Agreement; and
3. The parties deem it in the best interests of the Company to
provide for the election of directors as herein provided and delivery of this
Shareholders Agreement is a condition to the investment to be made by an
Investor concurrently herewith.
II. AGREEMENT
In consideration of the agreements and mutual covenants set forth
herein, the parties agree as follows:
1. BOARD OF DIRECTORS.
(A) SHAREHOLDERS VOTE. The Company may, from time to
time, nominate persons to become members of the Company's Board of Directors
pursuant to the terms of a subsection of Section 1(a), (b), (d), (e) and (f) of
the Company Agreement, dated the date hereof, between the Investors and the
Company (the "Company Agreement"). Such persons so nominated shall be
hereinafter called, individually, a "Nominated Person" and, collectively, the
"Nominated Persons". Each Shareholder hereby agrees that he/it will cause all
shares of
<PAGE> 2
Common Stock registered in the name of such Shareholder to be voted, and will
otherwise take or cause to be taken all such other action as may be necessary,
so that each Nominated Person will be elected as a member of the Company's
Board of Directors so long as the Investors vote their shares of Common Stock
for such Nominated Persons and cause all other shares of Common Stock under
their direct or indirect control to be voted for such Nominated Persons. The
obligations set forth in the immediately preceding sentence shall not apply to
subsequent holders of shares of Common Stock held by a Shareholder if such
shares were sold to such subsequent holder in a bona fide third-party sale.
Notwithstanding the foregoing, the Shareholders will not be obligated to vote
their shares of Common Stock for Nominated Person at any meeting of the
shareholders of the Company if (i) it is conclusively and reasonably determined
that the number of shares of Common Stock owned or controlled by the Investors
represents a majority of the shares of Common Stock present in person or by
proxy and entitled to vote at such meeting, (ii) cumulative voting provisions
in the California Corporation Code shall have not been amended or modified in a
way that requires the Investors to own or control more than a majority of the
Common Stock in order for the Investors to elect a majority of the members of
Company's Board of Directors and (iii) Company's constituent documents shall
not have been amended or modified in a way that requires the Investors to own
or control more than a majority of the common Stock in order for the Investors
to elect a majority of Company's Board of Directors.
2. REPRESENTATIONS. Each Shareholder represents that such
Shareholder is the record and beneficial owner of the number of issued and
outstanding Securities appearing opposite such Holder's name in Exhibit A
attached hereto, free and clear of any option, lien, encumbrance or charge of
any kind whatsoever, except as created by or described in this Agreement and
Shareholders Agreement.
3. EQUITABLE RELIEF. The parties hereto agree and declare that
legal remedies may be inadequate to enforce the provisions of this Agreement
and that equitable relief, including specific performance an injunctive relief,
may be used to enforce such provisions.
4. MISCELLANEOUS.
(A) NOTICES. Any and all notices, designations, consents,
offers, acceptances, or any other communication provided for herein shall be
given in writing delivered personally (including delivery by courier or by
facsimile if received during normal working hours) or by registered or
certified mail, addressed to a Shareholder at the address indicated for such
Shareholder on the Schedule of Shareholders attached hereto, or to such other
address as may be designated in writing by any such party. Except as otherwise
provided in this Agreement, each such notice shall be deemed given when
delivered or on a date which is 4 days after it is mailed in any post office or
branch post office regularly maintained by the United States Postal Service
(registered or certified, which postage prepaid and properly addressed).
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<PAGE> 3
(B) AMENDMENT. No change in or modification of this
Agreement shall be valid unless the same shall be in writing and signed by an
Investor and Shareholders representing more than 50% of the Common Stock held
by the Shareholders in the aggregate.
(C) WAIVER. No failure or delay on the party of the
parties or any of them in exercising any right, power or privilege hereunder,
nor any course of dealing between the parties or any of them shall operate as a
waiver of any such right, power or privilege nor shall any single or partial
exercise of any such right, power or privilege preclude the simultaneous or
later exercise of any other right, power or privilege. The rights and remedies
herein expressly provided are cumulative and are not exclusive of any rights or
remedies which the parties or any of them would otherwise have. No notice to
or demand on the company in any case shall entitle the Company to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the other parties or any of them to take any other or
further action in any circumstances without notice or demand.
(D) COUNTERPARTS. This Agreement may be executed in two
or more counterparts each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
(E) GOVERNING LAW. This Agreement shall be governed by,
and construed and enforced in accordance with, the laws of the State of
California without regard to principles of conflict of laws.
(F) BENEFIT AND BIDING EFFECT. Except as otherwise
provided in this Agreement, no right under this Agreement shall be assignable
and any attempted assignment in violation of this provision shall be void.
This Agreement shall be binding upon and inure to the benefit of the parties
and their executors, administrators, personal representatives, heirs,
successors and permitted assigns. Except as set forth in this clause (i), this
Agreement does not create and shall not be construed as creating any rights
enforceable by any Person not a party hereto.
(G) TERM. The obligations of the Shareholders hereunder
shall not be effective at such time as the aggregate number of shares of Common
Stock owned by an Investor or under the direct or indirect control of an
Investor is less than 10% of the total outstanding number of shares of Common
Stock.
(H) SEVERABILITY. In the event that any potion of this
agreement shall be held to be invalid or unenforceable to any extent, such
portion shall be enforced to the fullest lawful extent and the remaining parts
hereof shall nevertheless continue to be valid and enforceable as though the
invalid portions were not a part hereof. If any time period set forth herein
is held by a court of competent jurisdiction to be unenforceable, a different
time period that is determined by the court to be more reasonable shall replace
the unenforceable time period.
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<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this
Shareholders Agreement as of the date and year first above written.
Shareholders: /s/ DAN R. COOK
--------------------------------------
DAN R. COOK
/s/ RONALD G. CRANE
---------------------------------------
RONALD G. CRANE
/s/ LEON M. BRONFIN
---------------------------------------
LEON M. BRONFIN
/s/ RON E. AINSWORTH
---------------------------------------
RON E. AINSWORTH
/s/ ANDREW BOYD-JONES
---------------------------------------
ANDREW BOYD-JONES
THE CRANE FAMILY REVOCABLE TRUST DATED
8/19/96, RONALD G. CRANE AND KAREN M.
CRANE TRUSTEES
/s/ RONALD G. CRANE
---------------------------------------
RONALD G. CRANE
/s/ KAREN M. CRANE
---------------------------------------
KAREN M. CRANE
THE CHARLES A. and MARY L. WATSON TRUST
DATED 7/14/86, MARY L. WATSON, TRUSTEE
/s/ CHARLES A. WATSON ATTORNEY IN FACT
---------------------------------------
MARY L. WATSON
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<PAGE> 5
The Investors: SAGAPONACK PARTNERS, L.P.
By: /s/ BARRY S. ROSENSTEIN
-----------------------------------
Title:
SAGAPONACK INTERNATIONAL PARTNERS, L.P.
By: /s/ BARRY S. ROSENSTEIN
------------------------------------
Title:
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<PAGE> 6
Exhibits and Schedules
Schedule 1 Names of Potential Board Members
Exhibit A. Shareholders
Exhibit B. Consent and Acknowledgment of Spouse
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