SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
Date of Report (Date of earliest event reported) September 15, 1999
-------------------------------------------------------------------
AMCON DISTRIBUTING COMPANY
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-24708 47-0702918
- ------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
10228 "L" Street, Omaha, NE 68127
---------------------------------
(Address of principal executive offices) (Zip Code)
(402) 331-3727
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Food For Health Company, Inc. ("FFH"), an Arizona corporation and a wholly
owned subsidiary of AMCON Distributing Company ("AMCON"), a Delaware
corporation, entered into a Stock Purchase Agreement, dated August 30, 1999
(the "Stock Purchase Agreement") with Health Food Associates ("HFA") and each
of its shareholders.
On September 15, 1999, upon terms set forth in the Stock Purchase Agreement,
FFH completed its purchase of all of the outstanding stock of HFA for a
purchase price of $13.4 million. There are no material relationships between
FFH and HFA or any of its shareholders and the purchase price was determined
by arm's-length negotiations. Funding for the acquisition was provided as
follows: $4 million through borrowings under AMCON's revolving credit
facility; $2.0 million through borrowings under an 8% Convertible Subordinated
Note (the "Convertible Note") from FFH to the sellers; and $7.4 million
through borrowings under a Secured Promissory Note (the "Secured Note") from
FFH to the sellers. Costs and expenses incurred by FFH in connection with the
acquisition were paid from cash flow from operations.
Both the Convertible Note and the Secured Note have five-year terms and bear
interest at 8% per annum. Principal on the Convertible Note is due in a
single payment at maturity. Principal on the Secured Note is payable in
installments of $800,000 per year with the balance due at maturity. The
Secured Note is secured by a pledge of the stock of HFA. The principal
balance of the Convertible Note may be converted into stock of FFH under
circumstances set forth in the Convertible Note.
On September 16, 1999, AMCON and FFH issued a press release announcing that
the acquisition of HFA pursuant to the Stock Purchase Agreement had been
completed. The press release is filed herewith as an exhibit and incorporated
herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORM FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired
Health Food Associates, Inc.
dba AKiN Natural Foods Market
Financial Statements
For the years ended December 31, 1998 and 1997
Report of Independent Accountants
To Board of Directors and Shareholders of
Health Food Associates, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Health Food Associates, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Phoenix, Arizona
October 15, 1999
Health Food Associates, Inc.
Balance Sheets
December 31, 1998 and 1997
1998 1997
---- ----
Assets
Current assets:
Cash $ 1,837,939 $ 1,392,175
Accounts receivable 68,309 96,280
Inventories 2,418,251 1,864,827
Prepaid Expenses 84,171 48,185
Investments in equity securities 48,473 39,673
----------- -----------
Total current assets 4,457,143 3,441,140
Equipment and leasehold improvements, less
accumulated depreciation and amortization 964,713 874,568
Other assets 193,637 219,213
----------- -----------
$ 5,615,493 $ 4,534,921
=========== ===========
Liabilities ans Shareholders' Equity
Current liabilities:
Accounts payable $ 299,903 $ 181,605
Accrued expenses 247,908 226,834
Distributions payable 451,904 560,000
Payable to related party 60,000 60,000
----------- -----------
Total current liabilities 1,059,715 1,028,439
Shareholders' equity (Note 8):
Voting common stock, $1 par value;
1,250,000 shares authorized; 250,000
shares issued and outstanding 250,000 250,000
Non-voting common stock, $1 par value;
1,000,000 shares authorized; 750,000
shares issued and outstanding 750,000 750,000
Retained earnings 3,587,854 2,508,311
Accumulated other comprehensive income (32,076) (1,829)
----------- -----------
Total shareholders' equity 4,555,778 3,506,482
----------- -----------
$ 5,615,493 $ 4,534,921
=========== ===========
See accompanying notes to the financial statements
Health Food Associates, Inc.
Statements of Operations
For the years ended December 31, 1998 and 1997
1998 1997
---- ----
Net sales $ 20,020,821 $ 18,082,223
Cost of sales 11,152,126 10,594,536
------------ ------------
Gross profit 8,868,695 7,487,687
------------ ------------
Operating expenses:
Store expenses 4,872,001 3,967,811
Advertising/promotions 541,392 389,198
General and administrative 137,110 103,190
Depreciation and amortization 292,717 260,961
Rent 454,610 397,593
------------ ------------
6,297,830 5,118,753
------------ ------------
Income from operations 2,570,865 2,368,934
------------ ------------
Other income, net 44,078 64,941
------------ ------------
Net income $ 2,614,943 $ 2,433,875
============ ============
See accompanying notes to the financial statements
Health Food Associates, Inc.
Statement of Shareholders' Equity
For the years ended December 31, 1998 and 1997
Common Stock Additional
------------------------ Paid-in
Shares Amount Capital
---------- ----------- ----------
Balance, December 31, 1996 330 $ 330 $ 220
Comprehensive income:
Net income
Unrealized gain (loss) on
securities available for sale
---------- ----------- ----------
Total comprehensive income
Distributions to Shareholders
Common stock issued 999,670 $ 999,670 (220)
---------- ----------- ----------
Balance, December 31, 1997 1,000,000 $ 1,000,000 $ -
---------- ----------- ----------
Comprehensive income:
Net income
Unrealized gain (loss) on
securities available for sale
---------- ----------- ----------
Total comprehensive income
Distributions to Shareholders
---------- ----------- ----------
Balance, December 31, 1998 1,000,000 $ 1,000,000 $ -
========== =========== ==========
(Continued on following page)
See accompanying notes to the financial statements
Health Food Associates, Inc.
Statement of Shareholders' Equity
For the years ended December 31, 1998 and 1997
(continued)
Accumulated
Other
Retained Comprehensive Total
Earnings Income Equity
----------- ------------- -----------
Balance, December 31, 1996 $ 3,338,886 $ 3,339,436
Comprehensive income:
Net income 2,433,875 2,433,875
Unrealized gain (loss) on
securities available for sale $ (1,829) (1,829)
----------- ------------- -----------
Total comprehensive income 2,432,046
Distributions to Shareholders (2,265,000) (2,265,000)
Common stock issued (999,450) -
----------- ------------- -----------
Balance, December 31, 1997 2,508,311 (1,829) 3,506,482
----------- ------------- -----------
Comprehensive income:
Net income 2,614,943 2,614,943
Unrealized gain (loss) on
securities available for sale (30,247) (30,247)
----------- ------------- -----------
Total comprehensive income 2,584,696
Distributions to Shareholders (1,535,400) (1,535,400)
----------- ------------- -----------
Balance, December 31, 1998 $ 3,587,854 $ (32,076) $ 4,555,778
=========== ============= ===========
See accompanying notes to the financial statements
Health Food Associates, Inc.
Statements of Cash Flows
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,614,943 $ 2,433,875
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 292,717 260,961
Loss (gain) on sale of investments 1,426 (12,470)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 27,971 (45,568)
(Increase) decrease in prepaid expenses (35,986) 17,622
(Increase) decrease in inventory (553,424) (10,604)
(Decrease) increase in accounts payable 118,298 (110,809)
(Decrease) increase in accrued expenses 21,074 55,847
----------- -----------
Net cash provided by operating activities 2,487,019 2,588,854
----------- -----------
Cash flows from investing activities:
Purchases of investments (97,979) (59,829)
Proceeds from sales of investments 57,506 54,797
Capital expenditures (357,286) (365,791)
----------- -----------
Net cash used in investing activities (397,759) (370,823)
----------- -----------
Cash flows from financing activities:
Payments of distributions payable (220,000) -
Distribution paid to shareholders (1,423,496) (1,705,000)
Payment of bank loan - (262,682)
----------- -----------
Net cash used in financing activities (1,643,496) (1,967,682)
----------- -----------
Net increase (decrease) in cash 445,764 250,349
Cash at beginning of period 1,392,175 1,141,826
----------- -----------
Cash at end of period $ 1,837,939 $ 1,392,175
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest 43,819 20,841
Non-cash investing and financing activities:
Distribution to shareholders as notes payable 111,904 560,000
Restructuring of Equity (Note 8) - 1,000,000
See accompanying notes to the financial statements
</TABLE>
Health Food Associates, Inc.
Notes to Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Health Food Associates, Inc (the "Company") d.b.a. AKiN Natural Foods Market
is an Oklahoma Corporation which operates six Natural Foods Supermarkets in
the Midwestern United States.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories consist of merchandise for resale and are stated at lower of cost
or market. Cost is determined using the retail inventory method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
provided over the estimated useful lives of the assets ranging from 5 to 10
years using the straight-line method. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful life of the related
asset.
INCOME TAXES
The Company qualifies as an S-Corporation for federal income tax reporting
purposes. Accordingly, taxable income of the Company is reported in the
income tax returns of the shareholders and no provision has been made in the
accompanying financial statements for income taxes.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results may differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash. The Company maintains its cash
accounts primarily with banks located in the Midwestern United States. The
total cash balances are insured by the F.D.I.C. up to $100,000 per bank. The
Company had cash balances or deposits at December 31, 1998 that exceeded the
balance insured by the F.D.I.C. in the amount of $1,818,432.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
2. INVESTMENTS
The Company's investments are categorized as available for sale securities, as
defined by the Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a
separate component of Shareholders' equity until realized. For the purpose of
computing realized gains and losses cost is identified on a specific
identification basis.
The cost and estimated market values of equity securities at December 31 are
as follows:
1998 1997
---- ----
Gross cost $ 80,549 $ 41,502
Unrealized gains 11 6,046
Unrealized losses (32,087) (7,875)
-------- --------
Market Value $ 48,473 $ 39,673
======== ========
Proceeds from sales of investments were $57,506 and $54,797 during 1998 and
1997. Gross gains of $9,843 and $12,470 and gross losses of $11,269 and $0
were realized on those sales during 1998 and 1997.
3. OTHER ASSETS
Other assets consist of a non-compete agreement and goodwill, which are
amortized using the straight-line method. The non-compete agreement is
amortized over 10 years. Goodwill is amortized over 15 years.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements is comprised of the following at December
31:
1998 1997
---- ----
Furniture, fixtures and equipment $ 1,215,042 $ 1,095,941
Systems and network 658,447 574,067
Leasehold improvements 503,939 394,315
----------- -----------
Total fixed assets 2,377,428 2,064,323
Less accumulated depreciation and
amortization 1,412,715 1,189,755
----------- -----------
Net fixed assets $ 964,713 $ 874,568
=========== ===========
5. LEASES
The Company has entered into various non-cancelable operating leases for
store, warehouse, and office space which expire within the next six years.
Certain of these leases contain the option for renewal at rates that have
already been negotiated.
Future minimum lease payments under cancelable operating leases (with initial
or remaining lease terms in excess of one year) as of December 31, 1998 are:
Year ending December 31,
1999 $ 452,285
2000 404,693
2001 339,032
2002 209,779
2003 147,375
-----------
$ 1,553,164
===========
6. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution 401(k) tax deferred savings plan
covering all eligible employees. Company contributions to the Plan for the
years ended December 31, 1998 and 1997 totaled $19,342 and $17,480,
respectively, which represents a match of 50% of a participant's contribution
up to a maximum of 4% of participant's contribution eligible compensation.
7. RELATED PARTY TRANSACTIONS
The Company purchases inventory from Elk River Distributing Company ("Elk
River"), a distributing company owned by a shareholder. The cost of inventory
purchased from this distribution company during 1998 and 1997 was $1,769,408
and $1,711,878, respectively. In September 1999 the Company purchased all the
inventory of Elk River at a cost of $274,000.
At December 31, 1998 and 1997, the Company had a note payable of $60,000 to
the spouse of a shareholder. This note payable bears interest of 10% per
annum and is payable within 60 days of demand. This note was paid in full in
September 1999.
8. SHAREHOLDERS' EQUITY
On September 15, 1997, the Company filed an Amended Certificate of
Incorporation (the "Amendment"). The Amendment increased the number of common
shares authorized from 50,000 shares to 1,250,000 shares, with par values of
$1. The shares are divided into 250,000 shares of class A voting common stock
and 1,000,000 shares of class B non-voting common stock.
9. STOCK
Subsequent to the Amendment, in a restructuring of the Company's equity, the
shareholders of the Company exchanged 330 shares of old common stock for
250,000 shares of class A voting and 750,000 shares of class B non-voting
common stock. The restructuring was recorded as a reduction in additional
paid in capital and retained earnings.
10. SUBSEQUENT EVENTS
Distributions payable due to shareholders totaling $451,904 at December 31,
1998, was paid in full in September 1999.
Effective September 14, 1999, all of the outstanding common stock of the
Company was acquired by Food for Health, Inc. for $14,000,000. Food for
Health, Inc. is a wholesale distributor of health food and related products
throughout the United States.
(b) Pro Forma Financial Information
AMCON Distributing Company
Pro Forma Condensed
Combined Balance Sheet
June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
AMCON HFA Pro Forma Pro Forma
Historical Historical Adjustments Combined
----------- ---------- ------------ -----------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash $ 348,207 $ 1,911,691 $ - $ 2,259,898
Accounts receivable 17,289,406 94,685 - 17,384,091
Inventories 18,197,533 3,072,910 368,498 (1) 21,638,941
Deferred income taxes 702,780 - - 702,780
Other 477,553 48,185 - 525,738
----------- ----------- ----------- -----------
Total current assets 37,015,479 5,127,471 368,498 42,511,448
Fixed assets, net 6,775,333 648,812 377,878 (2) 7,802,023
Investments 622,500 80,797 - 703,297
Other assets 5,997,868 220,139 7,495,882 (3) 13,713,889
----------- ----------- ----------- -----------
$50,411,180 $ 6,077,219 $ 8,242,258 $64,730,657
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $11,099,091 $ 275,434 $ - $11,374,525
Accrued expenses 2,023,606 153,643 38,818 (4) 2,216,067
Accrued wages, salaries
and bonuses 636,211 - - 636,211
Distributions payable - 441,904 - 441,904
Payable to related party - 60,000 - 60,000
Income taxes payable 1,335,549 - - 1,335,549
Dividends payable 49,600 - - 49,600
Current portion of
long-term debt 6,381,132 - 149,678 (5) 6,530,810
----------- ----------- ----------- -----------
Total current liabilities 21,525,189 930,981 188,496 22,644,666
----------- ----------- ----------- -----------
Deferred income taxes 15,600 - - 15,600
Other liabilities 428,697 - - 428,697
Long-term debt, less
current portion 15,761,290 - 13,200,000 (5) 28,961,290
Shareholders' equity:
Preferred stock - - - -
Common stock 24,800 1,000,000 (1,000,000)(6) 24,800
Additional paid-in capital 2,271,278 - 2,271,278
Unrealized gain on investments
available-for-sale 287,761 - - 287,761
Retained earnings 10,096,880 4,146,238 (4,146,238)(6) 10,096,880
----------- ----------- ----------- -----------
12,680,719 5,146,238 (5,146,238) 12,680,719
Less treasury stock (315) - - (315)
----------- ----------- ----------- -----------
Total shareholders' equity 12,680,404 5,146,238 (5,146,238) 12,680,404
----------- ----------- ----------- -----------
$50,411,180 $ 6,077,219 $ 8,242,258 $64,730,657
=========== =========== =========== ===========
See accompanying notes to the Pro Forma Condensed Financial Statements.
</TABLE>
AMCON Distributing Company
Pro Forma Condensed
Combined Statement of Income
for the year ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
AMCON HFA Pro Forma Pro Forma
Historical Historical Adjustments Combined
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Sales $294,281,323 $ 19,722,719 $ - $314,004,042
Cost of sales 262,632,767 11,344,043 - 273,976,810
------------ ------------ ------------ ------------
Gross profit 31,648,556 8,378,676 - 40,027,232
Selling, general and administrative
expenses 25,088,767 5,702,542 - 30,791,309
Depreciation and amortization 1,120,482 290,502 324,855 (7) 1,735,839
------------ ------------ ------------ ------------
Income from operations 5,439,307 2,385,632 (324,855) 7,500,084
------------ ------------ ------------ ------------
Other expense (income):
Interest expense 1,814,555 - 1,038,000 (8) 2,852,555
Other (income) expense, net (276,287) 9,761 - (266,526)
------------ ------------ ------------ ------------
Income before income taxes 3,901,039 2,375,871 (1,362,855) 4,914,055
Income tax expense 1,542,853 - 400,141 (9) 1,942,994
------------ ------------ ------------ ------------
Net income $ 2,358,186 $ 2,375,871 $ (1,762,996) $ 2,971,061
============ ============ ============ ============
Earnings per common and common
equivalent share attributable
to common shareholders:
Basic $0.96 $1.21
============ ============
Diluted $0.93 $1.17
============ ============
Weighted average shares outstanding:
Basic 2,458,062 2,458,062
============ ============
Diluted 2,535,451 2,535,451
============ ============
See accompanying notes to the Pro Forma Financial Statements.
</TABLE>
AMCON Distributing Company
Pro Forma Condensed
Combined Statement of Income
for the nine months ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
AMCON HFA Pro Forma Pro Forma
Historical Historical Adjustments Combined
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Sales $275,998,896 $ 15,505,675 $ - $291,504,571
Cost of sales 245,334,725 8,436,475 - 253,771,200
------------ ------------ ------------ ------------
Gross profit 30,664,171 7,069,200 - 37,733,371
Selling, general and administrative
expenses 23,347,446 4,834,551 - 28,181,997
Depreciation and amortization 1,053,122 238,627 243,641 (7) 1,535,390
------------ ------------ ------------ ------------
Income from operations 6,263,603 1,996,022 (243,641) 8,015,984
------------ ------------ ------------ ------------
Other expense (income):
Interest expense 1,234,745 - 778,500 (8) 2,013,245
Other income, net (151,666) (20,001) - (171,667)
------------ ------------ ------------ ------------
Income before income taxes 5,180,524 2,016,023 (1,022,141) 6,174,406
Income tax expense 2,025,633 - 387,614 (9) 2,413,247
------------ ------------ ------------ ------------
Net income $ 3,154,891 $ 2,016,023 $ (1,409,755) $ 3,761,159
============ ============ ============ ============
Earnings per common and common
equivalent share attributable
to common shareholders:
Basic $1.27 $1.52
============ ============
Diluted $1.23 $1.46
============ ============
Weighted average shares outstanding:
Basic 2,479,903 2,479,903
============ ============
Diluted 2,571,997 2,571,997
============ ============
See accompanying notes to the Pro Forma Financial Statements.
</TABLE>
AMCON Distributing Company
Notes to Pro Forma Financial Information
Basis of Presentation:
The accompanying unaudited pro forma balance sheet and income statements give
effect to the purchase of all of the outstanding common stock of Health Food
Associates, Inc. ("HFA")as of June 30, 1999 and October 1, 1997, respectively.
The pro forma financial information are not necessarily indicative of future
results or the results that would have occurred had these transactions
actually occurred on October 1, 1997. It is suggested that this financial
information be read in conjunction with AMCON's annual report for the year
ended September 30, 1998y and AMCON's quarterly report on Form 10-Q for the
nine months ended June 30, 1999. The historical financial information for HFA
is as of June 30, 1999, the twelve months ended September 30, 1998 and the
nine months ended June 30, 1999.
The acquisition of HFA will be accounted for under the purchase method of
accounting. Under this method of accounting, the purchase price will be
allocated to the assets acquired and liabilities assumed based on their
estimated fair values.
Pro Forma Adjustments:
Pro forma adjustments to the historical financial information reflect
adjustments associated with recording inventories, fixed assets and other
intangible assets at their fair values and to include all expenses associated
with the acquisition of HFA. Pro forma adjustments related to the income
statements have been provided assuming the acquisition was consummated on
October 1, 1997. Pro forma adjustments are as follows:
(1) To record inventories at their approximate fair values.
(2) To record fixed assets at their approximate fair values.
(3) To record intangible assets which include, trade name, trademarks and
favorable leases, and goodwill and acquisition costs associated with the
purchase of HFA. The following is a summary of the adjustment to goodwill
and other intangibles:
Purchase price $13,349,678
Acquisition and debt financing costs 38,818
Increase in fair value of inventories (368,498)
Increase in fair value of fixed assets (377,878)
Net assets acquired (5,146,238)
-----------
Goodwill and other intangibles $ 7,495,882
============
(4) To record a liability for acquisition costs associated with the
acquisition of HFA.
(5) To record subordinated notes and bank debt associated with the acquisition
of HFA.
(6) To eliminate the equity of HFA.
(7) To record depreciation expense on fixed assets and amortization expense
for intangible assets and goodwill related to the HFA acquisition.
Intangibles will be amortized over 3 to 40 years. Goodwill of
approximately $336,000 will be amortized over 20 years.
(8) To record additional interest expense associated with the debt incurred to
finance the purchase of HFA. The interest expense was calculated based on
AMCON's current borrowing rate of approximately 7.25% on $4,000,000 of the
debt and 8.0% fixed rate interest on the subordinated notes. A change of
1/8% in AMCON's variable interest rate would affect interest income by
$5,000 and $3,750 for the year ended September 30, 1998 and the nine
months ended June 30, 1999, respectively.
(9) To record the tax effect of the pro forma adjustments at the marginal
effective rate of 39.5% and 39.0% for the year ended September 30, 1998
and the nine months ended June 30, 1999, respectively. Since the seller
agreed to make an election under I.R.C. section 338(h)(10) to treat the
acquisition as a sale of assets for tax purposes, all goodwill is tax
deductible.
(c) Exhibits
The following items are filed as exhibits to this report:
EXHIBIT NO. DESCRIPTION
2.1 Stock Purchase Agreement, dated August 30, 1999,
by and among Food For Health Company, Inc., a
wholly-owned subsidiary of AMCON Distributing
Company and Health Food Associates
10.1 8% Convertible Subordinated Note, dated September
15, 1999 by and between AMCON Distributing Company
and Health Food Associates
10.2 Secured Promissory Note, dated September 15, 1999
by and between AMCON Distributing Company and
Health Food Associates
10.3 Pledge Agreement, dated September 15, 1999, by and
between AMCON Distributing Company and Health Food
Associates
99.1 Press release, dated September 16, 1999, issued
by AMCON Distributing Company and Food For Health
Company, Inc.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMCON DISTRIBUTING COMPANY
(Registrant)
Date: November 30, 1999 By : Michael D. James
-------------------------
Name: Michael D. James
Title: Treasurer & Chief Financial
Officer
EXHIBIT INDEX
-------------
Exhibit Description
2.1 Stock Purchase Agreement, dated August 30, 1999,
by and among Food For Health Company, Inc., a
wholly-owned subsidiary of AMCON Distributing
Company and Health Food Associates.
10.1 8% Convertible Subordinated Note, dated September
15, 1999 by and between AMCON Distributing Company
and Health Food Associates
10.2 Secured Promissory Note, dated September 15, 1999
by and between AMCON Distributing Company and
Health Food Associates
10.3 Pledge Agreement, dated September 15, 1999, by and
between AMCON Distributing Company and Health Food
Associates
99.1 Press release, dated September 16, 1999, issued by AMCON
Distributing Company and Food For Health Company, Inc.
STOCK PURCHASE AGREEMENT
BETWEEN
Health Food Associates, Inc.,
an Oklahoma corporation
James C. Hinkefent, individually and as trustee of the
James C. Hinkefent Health Food Associates Stock Trust
dated January 30, 1998, James C. Hinkefent
and Marilyn M. Hinkefent, as trustees of the
James C. Hinkefent Trust dated July 11, 1994, as amended,
Eric Hinkefent, Mary Ann O'Dell,
Sally Sobol, and Amy Laminsky
AND
Food for Health Co., Inc.,
an Arizona corporation
Dated: August 30, 1999
TABLE OF CONTENTS
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1. Purchase and Sale of Stock...........................................1
2. Purchase Price.......................................................1
2.1 Allocation of Closing Payment Among Shareholders.............2
2.2 Allocation of Payments under the Secured Note Among
Shareholders.................................................2
2.3 Allocation of Payments under the Convertible Note Among
Shareholders.................................................3
2.4 338(h)(10) Election..........................................3
3. Closing..............................................................3
4. Shareholders' Obligations at Closing; Further Assurances.............4
5. Representations and Warranties by Shareholders.......................4
6. Representations and Warranties by Hinkefent..........................5
6.1 Organization, Standing and Qualification.....................5
6.2 Subsidiaries.................................................5
6.3 Transactions with Certain Persons............................6
6.4 Capitalization...............................................6
6.5 Financial Statements.........................................7
6.6 Absence of Undisclosed Liabilities...........................8
6.7 Taxes........................................................8
6.8 Absence of Changes or Events.................................8
6.9 Litigation..................................................10
6.10 Compliance with Laws and Other Instruments..................10
6.11 Title to Properties.........................................11
6.12 Schedules...................................................11
6.13 Proprietary Rights..........................................13
6.14 No Guaranties...............................................13
6.5 Filing and Records..........................................13
6.16 Broker's Fees...............................................14
6.17 Environmental, Health, and Safety Matters...................14
6.18 Intellectual Property.......................................15
6.18.6 Year 2000 Representation and Warranty............18
6.19 Employment Matters..........................................18
6.19.1 Compliance with Employment Laws..................18
6.19.2 Plan Compliance..................................19
6.20 Inventory Returns...........................................20
6.21 Utilities...................................................20
6.22 Accuracy and Completeness of Representations and
Warranties................................................20
7. Representations and Warranties by Purchaser..........................20
7.1 Organization.................................................20
7.2 Authorization and Approval of Agreement......................20
7.3 Execution, Delivery and Performance of Agreement.............20
7.4 Litigation...................................................21
7.5 Broker's Fees................................................21
7.6 Issuance of Convertible Note.................................21
8. Conduct of Business Prior to Closing.................................21
8.1 Consents and Approvals.......................................21
9. Investigation, Confidentiality and Exclusivity.......................23
9.1 Investigations...............................................23
9.2 Confidentiality..............................................23
9.3 Press Releases...............................................24
9.4 Disposition of Property Upon Termination.....................24
9.5 Exclusivity..................................................24
10. Director and Shareholders Authorizations.............................24
11. Conditions Precedent to Purchaser's Obligations......................24
11.1 Approval of Agreement........................................25
11.2 Additional Documents.........................................25
11.3 Representations..............................................25
11.4 Covenants....................................................25
11.5 Diligence....................................................25
11.6 Closing Financial Statements.................................25
11.7 Certificate..................................................26
11.8 Good Standing................................................26
11.9 Opinion......................................................26
11.10 Environmental Report.........................................26
11.11 Acquisition of Assets of Elk River Trading Company...........26
11.12 Election.....................................................27
12. Conditions Precedent to Company's and Shareholders' Obligations......27
12.1 Representations..............................................27
12.2 Covenants....................................................27
12.3 Certificate..................................................27
12.4 Opinion......................................................27
12.5 Purchase Price...............................................27
12.6 Election.....................................................28
13. Indemnification......................................................28
13.1 By Shareholders.............................................28
13.2 By Purchaser................................................28
13.3 Procedure...................................................28
13.4 Contribution................................................29
13.5 Limitation on Indemnification...............................29
14. Offset...............................................................29
15. Survival of Representations and Warranties...........................29
16. Notices..............................................................30
17. Legal and Other Costs................................................30
18. Miscellaneous........................................................30
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") dated as of August 30, 1999
(the "Effective Date"), by and among Health Food Associates, Inc., an Oklahoma
corporation doing business in some locations as Akin's Natural Foods Market,
having its principal office at 7807 East 51st Street, Tulsa, Oklahoma 74145
("HFA"), Food for Health Co., Inc., an Arizona corporation, having its
principal office at 3655 West Washington Street, Phoenix, Arizona 85009
("Purchaser"), and James C. Hinkefent, individually, ("Hinkefent"), James C.
Hinkefent as trustees of the James C. Hinkefent Health Food Associates Stock
Trust, dated January 30, 1998 (the "Stock Trust"), James C. Hinkefent and
Marilyn M. Hinkefent, as Trustee of the James Hinkefent Trust dated July 11,
1994, as amended (the "Hinkefent Trust"), Eric Hinkefent, Mary Ann O'Dell,
Sally Sobol, and Amy Laminsky, as sole shareholders of HFA (collectively, the
"Shareholders"). HFA is sometimes referred to as the "Company."
RECITALS:
A. HFA is in the business of operating retail stores for the purpose
of selling natural foods, supplements, and health and beauty care products to
the consuming public.
B. With the exception of Hinkefent, who owns his shares beneficially
through the Stock Trust and the Hinkefent Trust, Shareholders own all the
issued and outstanding shares of capital stock in HFA.
C. Purchaser wishes to acquire the ongoing business of HFA and has
agreed to purchase the issued and outstanding capital stock of HFA.
AGREEMENT:
In consideration of the mutual covenants and agreements hereinafter set
forth, the parties hereby agree as follows:
1. Purchase and Sale of Stock. Subject to and upon the terms and
conditions set forth in this Agreement, the Shareholders will sell, transfer,
convey, assign and deliver to Purchaser, and Purchaser will purchase, at the
Closing hereunder, all of the outstanding stock of the Company (the "Shares"),
free and clear of all liabilities, obligations, liens and encumbrances.
2. Purchase Price. In consideration of the transfer and delivery of
the Shares by Shareholders to Purchaser, and in reliance upon the
representations and warranties made in this Agreement by Company and
Shareholders, Purchaser will pay to Shareholders a total purchase price of:
o $14,000,000;
o less the amount, if any, by which the total liabilities
of Company as of the close of business on the last day of the month preceding
the Closing (excluding liabilities represented by any permitted payment set
forth on Schedule 2 that has not been made prior to that day) exceed $500,000
(the "Purchase Price").
The Purchase Price shall be payable as follows: (a) the difference between
$4,000,000 and the amount, if any, by which the total liabilities of Company
as of the close of business on the last day of the month preceding the Closing
exceed $500,000, shall be paid at the Closing by check or wire (the "Closing
Payment"); (b) $2,000,000 shall be payable by promissory note in the form
attached as Exhibit A (the "Convertible Note"); and (c) $8,000,000 shall be
payable by promissory note in the form attached as Exhibit B (the "Secured
Note") secured by a pledge of certain Shares in the form of Exhibit E. The
Convertible Note and the Secured Note are collectively referred to as the
"Notes."
2.1 Allocation of Closing Payment Among Shareholders. The Closing
Payment shall be paid and allocated among the Shareholders as follows:
PERCENTAGE OF INITIAL
SHAREHOLDER INSTALLMENT
----------- -----------
Stock Trust 38.5%
Hinkefent Trust 61.5%
Eric Hinkefent 0.0%
Mary Ann O'Dell 0.0%
Sally Sobol 0.0%
Amy Laminsky 0.0%
-----
TOTAL SHARES 100.0%
=====
2.2 Allocation of Payments under the Secured Note Among
Shareholders. The amounts payable under the Secured Note shall be paid and
allocated among the Shareholders as follows:
PERCENTAGE OF PAYMENTS
SHAREHOLDER UNDER SECURED NOTE
------------- ------------------
Stock Trust 0.00%
Hinkefent Trust 27.00%
Eric Hinkefent 18.25%
Mary Ann O'Dell 18.25%
Sally Sobol 18.25%
Amy Laminsky 18.25%
------
TOTAL SHARES 100.00%
======
2.3 Allocation of Payments under the Convertible Note Among
Shareholders. The amounts payable under the Convertible Note shall be paid
and allocated among the Shareholders as follows:
PERCENTAGE OF PAYMENTS
SHAREHOLDER UNDER CONVERTIBLE NOTE
----------- ----------------------
Stock Trust 0.0%
Hinkefent Trust 0.0%
Eric Hinkefent 25.0%
Mary Ann O'Dell 25.0%
Sally Sobol 25.0%
Amy Laminsky 25.0%
-----
TOTAL SHARES 100.0%
=====
2.4 338(h)(10) Election. Shareholders agree to timely execute
and file Form 8023-A and otherwise cooperate with Purchaser in Purchaser's and
Shareholders' joint election to treat this transaction as a sale of assets
under I.R.C. Section 338(h)(10). Shareholders and Purchaser agree that the
Purchase Price shall be allocated among the purchased assets as set forth on
Schedule 2.4, which the parties agree may be attached hereto at any time prior
to Closing if initialed by Purchaser and Eric Hinkefent.
3. Closing. The Closing shall take place on the date when each of the
conditions precedent hereunder have been either satisfied or waived by the
party for whose benefit the condition exists, provided that the Closing must
occur within 120 days after the Effective Date of this Agreement. The parties
will endeavor to close the agreement on September 13, 1999 or such other date
as Purchaser and Company may agree, subject to the 120 day limit. The Closing
shall take place at 9:00 a.m. local time at the offices of Company or such
other time and place as Purchaser and Company may agree upon. The day on
which the Closing actually takes place is sometimes referred to as the Closing
Date.
4. SHAREHOLDERS' OBLIGATIONS AT CLOSING; FURTHER ASSURANCE.
4.1 At the Closing, Company and Shareholders will deliver to
Purchaser:
4.1.1 stock certificates representing the Shares, together
with assignments separate from certificates duly executed by the Shareholders;
and
4.1.2 all documents required to be delivered to Purchaser
under the provisions of this Agreement.
4.2 At any time and from time to time after the Closing, at
Purchaser's request and without further consideration, the Company and
Shareholders will execute and deliver such other instruments of sale,
transfer, assignment and confirmation and take such action as Purchaser may
reasonably deem necessary or desirable (subject to the consent of the Company
and the Shareholders, which shall not be unreasonably withheld) in order to
more effectively convey to Purchaser, and to confirm Purchaser's title to, the
Shares, to put Purchaser in actual possession and operating control thereof
and to assist Purchaser in exercising all rights with respect thereto.
5. Representations and Warranties by Shareholders. Each Shareholder as
to itself (and Hinkefent as to the Stock Trust and the Hinkefent Trust)
represents and warrants that: (a) it is the lawful record and beneficial
owner of all of the Shares of the Company's capital stock set forth on
Schedule 6.4, with absolute right to sell them and with full title thereto,
free and clear of any liens, claims, encumbrances or restrictions of any kind;
(b) as to such Shares so owned by it, all are validly issued and outstanding,
fully paid and nonassessable, there are no undisclosed interests, present or
future, in the Shares or the ownership of the Company, nor do any of them know
of any assertion of such an interest, or of any facts or circumstances which
would give any person any such present or future interest or entitle any
person to assert such an interest; (c) there are no provisions of any
contract, indenture, agreement or other instrument to which the Shareholder is
a party or to which the Shares it owns are subject which would prevent, limit,
or condition the sale or transfer of the Shares it owns or the operation of
the Company to the Purchaser; (d) neither the execution, delivery nor
performance of this Agreement by Company, or the Shareholder will, with or
without the giving of notice or the passage of time, or both, conflict with,
result in a default, right to accelerate or loss of rights under, or result in
the creation of any lien, charge or encumbrance pursuant to, any provision of
any law, rule or regulation or any order, judgment or decree to which the
Shareholder is a party or by which it may be bound or affected; (e) the
Shareholder has the full power and authority to enter into this Agreement, to
make the representations, warranties and covenants contained herein and to
carry out the transactions contemplated hereby, and all proceedings required
to be taken by the Shareholder to authorize the execution, delivery and
performance of this Agreement and the agreements relating hereto have been
properly taken, and this Agreement constitutes the valid and binding agreement
of the Shareholder; and (f) except as provided in Schedule 5, neither the
execution and the delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (A) to the best of the Shareholder's
knowledge, violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Shareholder is subject
or, any provision of its charter, bylaws or trust documents if it is not an
individual or (B) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
the Shareholder is a party or by which it is bound or to which any of his or
its assets is subject.
6. Representations and Warranties by Hinkefent. Hinkefent and Eric
Hinkefent jointly and severally represent and warrant to Purchaser as follows:
6.1 Organization, Standing and Qualification. Company is a
corporation duly organized, validly existing and in good standing under the
laws of Oklahoma and is qualified to do business and is in good standing in
each other jurisdictions in which the failure to be so qualified would have a
material adverse effect on Company's financial condition. Company has full
corporate power and authority to enter into this Agreement and the related
agreements referred to herein and to carry out the transactions contemplated
by this Agreement. Company is entitled to carry on its business as now being
conducted and to own, lease or operate its properties as and in the places
where such business is now conducted and such properties are now owned, leased
or operated. For purposes of this Agreement, the "business" of the Company
shall be deemed to include all web sites owned and controlled by Company and
all other assets of the Company, which are related to the operations of the
Company and all future business leads and prospects relating thereto.
Hinkefent has delivered to Purchaser true and complete copies of Company's
Articles of Incorporation and all amendments thereto and the Bylaws of Company
as presently in effect, certified as true and correct by Company's Secretary.
This Agreement constitutes the valid and legally binding obligation of
Company, Hinkefent and the Shareholders, enforceable in accordance with its
terms and conditions. To the best of knowledge of Hinkefent and Eric
Hinkefent, except as set forth in Schedule 6.12.11, neither Company,
Hinkefent, nor Shareholders need give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency or any other person or entity in order to consummate the
transactions contemplated by this Agreement.
6.2 Subsidiaries. The Company has no subsidiaries and no
interest, direct or indirect, in any other corporation or in any partnership,
joint venture or other business enterprise or entity other than as disclosed
in this SECTION 6.2. The business carried on by the Company has not been
conducted through any other direct or indirect subsidiary or affiliate of any
shareholders. Hinkefent, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and
Amy Laminsky (collectively, the "Hinkefents") and each Shareholder within the
last three years has been involved as owner, management, employee or
consultant in no business other than Company, except as referenced on SCHEDULE
6.2.
6.3 Transactions with Certain Persons. Except as set forth on
Schedule 6.3 and except for transactions not material to Company or its
financial condition, during the past three years Company has not, directly or
indirectly, (a) purchased, leased or otherwise acquired any property or
obtained any services from, or (b) sold, leased or otherwise disposed of any
property or furnished any services to, or (c) otherwise dealt with (except
with respect to remuneration for services rendered as a director, officer or
employee of Company), in the ordinary course of business or otherwise, (i) any
shareholders of Company or (ii) any person, firm or corporation which,
directly or indirectly, alone or together with others, controls, is controlled
by or is under common control with Company or any shareholders of Company.
Except as set forth in SCHEDULE 6.3, Company does not owe any material amount
to, or have any contract or commitment to pay any material amount or to incur
any material liability on behalf of, any of its shareholders, directors,
officers, employees or consultants ("Insider") (other than compensation for
current services not yet due and payable and reimbursement of expenses arising
in the ordinary course of business), and none of such persons owes any amount
to Company. Except as set forth on SCHEDULE 6.3, no part of the property or
assets of Company or any direct or indirect subsidiary or affiliate of Company
is used by the Hinkefents or any Shareholder, except in connection with the
business of the Company. For purposes of this Agreement, the "ordinary course
of business" shall mean the ordinary course of business consistent with past
custom and practice (including with respect to quantity and frequency).
Amounts or liabilities owed to or to be incurred on behalf of Insiders
required to be disclosed on Schedule 6.3 are referred to collectively as the
"Insider Obligations."
6.4 Capitalization. All of the presently authorized, issued and
outstanding shares of capital stock of Company and the names and addresses of
the record and beneficial owners thereof are as set forth on SCHEDULE 6.4.
Except as set forth on Schedule 6.4 there are no outstanding subscriptions,
options, warrants, calls, conversion rights, exchange rights, purchase rights,
contracts, demands, commitments, convertible securities or other agreements or
arrangements of any character or nature whatsoever under which Company or any
Shareholder is or may become obligated to issue, assign, sell or otherwise
cause to become outstanding or transfer any shares of the capital stock of
Company. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Company,
other than the Company's 401(k) program, which does not invest any funds in
securities of the Company. There are no voting trusts, proxies, or other
agreements or understandings with respect to the voting of the capital stock
of the Company. Except as set forth on Schedule 2, all dividends and other
distributions declared prior to the Effective Date with respect to the issued
and outstanding shares of the capital stock of the Company have been paid or
distributed.
6.5 Financial Statements. Company has delivered to Purchaser
copies of the following financial statements prepared by management of the
Company (collectively called the "Management Financial Statements"), all of
which are complete and correct in all material respects, have been prepared
from the books and records of Company consistently applied and maintained
throughout the periods indicated and fairly and reasonably present the
financial condition of Company as at their respective dates and the results of
its operations for the periods covered thereby:
6.5.1 an unaudited balance sheet of Company as at December
31, 1998 (the "Balance Sheet"), and unaudited balance sheets of Company as at
December 31, 1997 and December 31, 1996; and
6.5.2 unaudited statements of earnings and sources and uses
of cash for the periods ended December 31, 1998, 1997 and 1996.
The statements of earnings referenced in subsection 6.5.2 above do not
contain any items of special or non-recurring income or any other income not
earned in the ordinary course of business except as expressly specified
therein, and such financial statements include all adjustments, which consist
only of normal recurring accruals, necessary for such fair presentation.
Company agrees to deliver to Purchaser prior to Closing copies of the
following financial statements audited by PricewaterhouseCoopers LLP (the
"Audited Financial Statements"), all of which shall be deemed to have been
warranted and represented to be, at the time of delivery, complete and correct
in all material respects, prepared from the books and records of Company in
accordance with generally accepted accounting principles consistently applied
and maintained throughout the periods indicated and fairly and reasonably
present the financial condition of Company as at their respective dates and
the results of its operations for the periods covered thereby:
6.5.3 audited balance sheets of Company as at December 31,
1998, and December 31, 1997; and
6.5.4 unaudited statements of earnings for the periods ended
December 31, 1998, and December 31, 1997 and 1996.
The statements of earnings referenced in subsection 6.5.4 above, when
delivered, shall be deemed to have been warranted and represented, at the time
of delivery, not to contain any items of special or non-recurring income or
any other income not earned in the ordinary course of business except as
expressly specified therein, and the Audited Financial Statements, when
delivered, shall be deemed to have been warranted and represented, at the time
of delivery, to include all adjustments, which consist only of normal
recurring accruals, necessary for such fair presentation.
The Management Financial Statements and the Audited Financial Statements are
referred to, collectively, as the "Financial Statements."
6.6 Absence of Undisclosed Liabilities. Except as and to the
extent reflected or reserved against on (a) either (i) the face of the Balance
Sheet or (ii) Schedule 6.6, and (b) depicted in the Financial Statements
(excluding the notes thereto), as of December 31, 1998 (the "Balance Sheet
Date"), Company has no debts, liabilities or obligations (whether absolute,
accrued, contingent or otherwise) of any nature whatsoever, including, without
limitation, any foreign or domestic tax liabilities or deferred tax
liabilities incurred in respect of or measured by Company's income, for the
period prior to the close of business on the Balance Sheet Date or any other
debts, liabilities or obligations relating to or arising out of any act,
omission, transaction, circumstance, sale of goods or services, state of facts
or other condition which occurred or existed on or before the Balance Sheet
Date, whether or not then known, due or payable. On the Balance Sheet and in
the Financial Statements as of the Balance Sheet Date, the inventory of the
Company (net of reserve for shrinkage or spoilage) identified thereon shall be
and is good and saleable inventory in the ordinary course of business and all
accounts receivable are either good and collectible or adequately and
reasonably reserved against. None of the Company's employees is now, or will
by the passage of time hereafter become, entitled to receive any vacation
time, vacation pay or severance pay attributable to services rendered prior to
the Balance Sheet Date except as disclosed on the face of the Balance Sheet
(excluding the notes thereto).
6.7 Taxes. All tax returns required to be filed in connection
with all taxes imposed by any taxing authority, and all taxes which are due or
payable by Company, have been accurately prepared and duly and timely filed
and, if applicable, paid and all deposits required by law to be made by
Company with respect to employees' withholding taxes have been duly made.
Company has no tax deficiency or claim outstanding, proposed or assessed
against it.
6.8 Absence of Changes or Events. Except as set forth in SCHEDULE
6.8 (or Schedules denominated according to the subsections of this SECTION
6.8), since the Balance Sheet Date Company has conducted its business only in
the ordinary course and has not:
6.8.1 incurred any obligation or liability, absolute,
accrued, contingent or otherwise, whether due or to become due, except current
liabilities for trade or business obligations incurred in connection with the
purchase of goods or services in the ordinary course of business and
consistent with its prior practice, none of which liabilities, in any case or
in the aggregate, materially and adversely affects the business, liabilities
or financial condition of Company;
6.8.2 discharged or satisfied any material lien, charge or
encumbrance other than those then required to be discharged or satisfied, or
paid any obligation or liability, absolute, accrued, contingent or otherwise,
whether due or to become due, other than current liabilities shown on the
Balance Sheet and current liabilities incurred since the Balance Sheet Date in
the ordinary course of business and consistent with its prior practice;
6.8.3 declared or made any payment of dividends or other
distribution to its shareholders or upon or in respect of any shares of its
capital stock, or purchased, retired or redeemed, or obligated itself to
purchase, retire or redeem, any of its shares or capital stock or other
securities;
6.8.4 mortgaged, pledged or subjected to lien, charge,
security interest or any other encumbrance or restriction any of its property,
business or assets, tangible or intangible, other than pledges of leased
office equipment;
6.8.5 sold, transferred, leased to others or otherwise
disposed of any of its assets, except for inventory sold in the ordinary
course of business, or canceled or compromised any debt or claim, or waived or
released any right of material value;
6.8.6 received any notice of termination of any contract,
lease or other agreement prior to its expiration date or suffered any damage,
destruction or loss (whether or not covered by insurance) which, in any case
or in the aggregate, has had or would have a materially adverse effect on the
assets, operations or prospects of Company;
6.8.7 encountered any labor union organizing activity, had
any actual or, threatened employee strikes, work stoppages, slow-downs or
lock-outs, or had any material change in its relations with its employees,
agents, customers or suppliers;
6.8.8 made any change in the rate of compensation,
commission, bonus or other direct or indirect remuneration payable, or paid or
agreed or orally promised to pay, conditionally or otherwise, any bonus, extra
compensation, pension or severance or vacation pay, to any shareholder,
director, officer, employee, salesman, distributor or agent of Company;
6.8.9 issued or sold any shares of its capital stock or
other securities, or issued, granted or sold any options, rights or warrants
with respect thereto, or acquired any capital stock or other securities of any
corporation or any interest in any business enterprise, or otherwise made any
loan or advance to or investment in any person, firm or corporation;
6.8.10 made any capital expenditures or capital additions in
excess of an aggregate of $20,000;
6.8.11 changed its banking or safe deposit arrangements;
6.8.12 instituted, settled or agreed to settle any
litigation, action or proceeding before any court or governmental body
relating to the Company or its property;
6.8.13 failed to replenish its inventories and supplies in a
normal and customary manner consistent with its prior practice and ordinary
business practices prevailing in the industry, or made any purchase commitment
in excess of the normal, ordinary and usual requirements of its business or at
any price materially in excess of the then current market price or upon terms
and conditions materially more onerous than those usual and customary in the
industry, or made any change in its selling, pricing, advertising or personnel
practices inconsistent with its prior practice and ordinary business practices
prevailing in the industry;
6.8.14 suffered any change, event or condition which in any
case or in the aggregate, has had or may have a materially adverse affect on
Company's condition (financial or otherwise), properties, assets, liabilities,
operations or prospects, including, without limitation, any change in
Company's revenues, costs, backlog or relations with its employees, agents,
customers or suppliers;
6.8.15 entered into any transaction, contract or commitment
other than in the ordinary course of business or paid or agreed to pay any
legal, accounting, brokerage, finder's fee, taxes or other expenses in
connection with, or incurred any severance pay obligations by reason of, this
Agreement or the transactions contemplated hereby; or
6.8.16 entered into any agreement or made any commitment to
take any of the types of action described in Sections 6.8.1 through 6.8.15
above.
6.9 Litigation. Except as set forth in Schedule 6.9, there is no
claim, legal action, suit, arbitration, governmental investigation or other
legal or administrative proceeding, nor any order, decree or judgment in
progress, pending or in effect, or to the knowledge of Hinkefent or Eric
Hinkefent threatened, nor to the knowledge of Hinkefent or Eric Hinkefent does
there exist the basis for any such claim, action, or other proceeding against
or relating to Company, its officers, directors or employees, its properties,
assets or business or the transactions contemplated by this Agreement.
6.10 Compliance with Laws and Other Instruments. Except as set
forth in Schedule 6.10.
6.10.1 Except as disclosed on Schedule 6.10.1, to the best
of knowledge of Hinkefent and Eric Hinkefent, Company has conducted its
business in compliance with all existing laws, rules, regulations, ordinances,
orders, judgments and decrees ("Laws") now or hereafter applicable to its
business, properties or operations and, when the Business is owned by
Purchaser as of the Closing Date, the Business will remain in compliance in
all material respect with such Laws;
6.10.2 Company has secured and is in compliance with all,
and there are no proceedings to revoke or challenge any, material permits
required for its Properties, and Business as presently conducted. All material
Permits required to be secured by Company relating to the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been taken and secured or will, before the Closing,
be taken or secured.
6.10.3 Company has not offered, paid, or agreed to pay money
or anything of value for the purpose of or with the intent of obtaining or
maintaining business for Company, or otherwise benefitting Company, in
violation of any Law; and
6.10.4 Neither the ownership nor use of Company's properties
nor the conduct of its business conflicts with the rights of any other person,
firm or corporation or violates, or with or without the giving of notice or
the passage of time, or both, will violate, conflict with or result in a
default, right to accelerate or loss of rights under, any terms or provisions
of its Articles of Incorporation or Bylaws as presently in effect, or any
lien, encumbrance, mortgage, lease, license, agreement, understanding, law,
ordinance, rule or regulation, or any order, judgment or decree to which
Company is a party or by which it may be bound or affected. Hinkefent is not
aware of any proposed regulations, judgments, decrees, governmental takings,
condemnations or other proceedings which would be applicable to its business,
operations or properties and which might adversely affect its properties,
assets, liabilities, operations or prospects, either before or after the
Closing.
6.11 Title to Properties. Except as set forth on Schedule 6.11,
Company has good and marketable title to all the properties and assets of
every kind or nature, including but not limited to intellectual property, it
owns in its business or purports to own, including, without limitation, those
reflected in its books and records and in the Balance Sheet (except inventory
shown on the Balance Sheet as consignment inventory and except inventory sold
after the Balance Sheet Date in the ordinary course of business). None of
such properties and assets are subject to any mortgage, pledge, lien, charge,
security interest, encumbrance, restriction, lease, license, liability or
adverse claim of any nature whatsoever, direct or indirect, whether accrued,
absolute, contingent or otherwise, except as expressly set forth in the
Balance Sheet as securing specific liabilities or as otherwise expressly
permitted by the terms hereof. All of the properties and assets owned, leased
or used by Company are in good operating condition and repair, have been
maintained in a commercially reasonable manner, and are suitable for the
purposes used. Neither Hinkefent, Eric Hinkefent nor Company knows of any
pending or threatened condemnation affecting the Properties.
6.12 Schedules. Attached as Schedule 6.12 is a separate schedule
containing an accurate and complete list and description of:
6.12.1 All real property owned by Company or in which
Company has a leasehold or other interest or which is used by Company in
connection with the operation of its business, or any other instrument under
which Company claims or holds such leasehold or other interest or right to the
use thereof or pursuant to which Company has assigned, sublet or granted any
rights therein, identifying the parties thereto, the rental or other payment
terms, expiration date and cancellation and renewal terms thereof.
6.12.2 All tangible personal property (other than inventory
and supplies), owned, leased or used by Company except for items having a
value of less than $2,500 which do not, in the aggregate, have a total value
of more than $20,000, setting forth with respect to all such listed property a
summary description of all leases, liens, claims, encumbrances, charges,
restrictions, covenants and conditions relating thereto, identifying the
parties thereto, the rental or other payment terms, expiration date and
cancellation and renewal terms.
6.12.3 All fire, theft, casualty, liability and other
insurance policies insuring Company, specifying with respect to each such
policy the name of the insurer, the risk insured against, the limits of
coverage, the deductible amount (if any), the premium rate and the date
through which coverage will continue by virtue of premiums already paid.
6.12.4 All sales agency agreements, distributorship
agreements, or agreements providing for the services of an independent
contractor to which Company is a party or by which it is bound.
6.12.5 All contracts, agreements and commitments, whether
or not fully performed, in respect of the issuance, sale or transfer of the
capital stock, bonds or other securities of Company or pursuant to which
Company has acquired any substantial portion of its business or assets.
6.12.6 All contracts, agreements, commitments or other
understandings or arrangements to which Company is a party or by which it or
any of its property is bound or affected but excluding (A) purchase and sales
orders and commitments made in the ordinary course of business involving
payments or receipts by Company of less than $5,000 in any single case but not
more than $10,000 in the aggregate (exclusive of purchase orders for
replacement inventory), and (B) contracts entered into in the ordinary course
of business and involving payments or receipts by Company of less than $5,000
in the case of any single contract but not more than $10,000 in the aggregate
(exclusive of purchase orders for replacement inventory).
6.12.7 All collective bargaining agreements, employment and
consulting agreements, executive compensation plans, bonus plans, deferred
compensation agreements, employee pension plans or retirement plans, employee
stock options or stock purchase plans and group life, health and accident
insurance and other employee benefit plans, agreements, arrangements or
commitments, including, without limitation, holiday, vacation, Christmas and
other bonus practices, to which Company is a party or is bound or which relate
to the operation of Company's business.
6.12.8 The names and current annual salary rates of all
persons (including independent commission agents) whose annual compensation
(direct or indirect) from Company is currently at the rate of more than
$25,000 per annum and showing separately for each such person the amounts paid
or payable as salary, bonus payments and any indirect compensation for the
year ended December 31, 1998; and
6.12.9 The names of all of Company's directors and
officers; the name of each bank in which Company has an account or safe
deposit box and the names of all persons authorized to draw thereon or have
access thereto; and the names of all persons, if any, holding tax or other
powers of attorney from Company and a summary of the terms thereof.
6.12.10 Each loan, conditional sales, or security agreement
of Company relating to the Business with an unpaid balance of more than
$25,000 and which will not be released on or before the Closing.
To the best of knowledge of Hinkefent and Eric Hinkefent, (a) all of the
contracts, agreements, leases, licenses and commitments required to be listed
on Schedule 6.12 (other than those which have been fully performed) are valid
and binding, enforceable in accordance with their respective terms, and in
full force and effect, and (b) except as specified in Schedule 6.12.11, no
consent or waiver needs to be obtained prior to the Closing in connection with
the purchase of the Shares in order to prevent a breach thereof, and (c) after
the Closing, Company will be entitled to the full benefits of such agreements,
leases, licenses and commitments. Hinkefent, Eric Hinkefent and the Company
shall obtain, prior to Closing, all consents and waivers needed to prevent
such breach ("Third Party Consents"), and shall furnish written evidence
thereof in form reasonably acceptable to Purchaser. Except as disclosed in
Schedule 6.12, there is not thereunder any existing default or event which,
after notice or lapse of time, or both, would constitute a default or result
in a right to accelerate or loss of rights. True and complete copies of all
such contracts, agreements, leases, licenses and other documents listed on
Schedule 6.12 (together with any and all amendments thereto) have been
delivered or made available to Purchaser. Each of the documents and materials
previously delivered to Purchaser or its representatives and the Information,
as such term is defined below, whether or not attached to or described in this
Agreement as a schedule, are true and correct copies of such items and
truthfully, accurately and completely describe or depict the information
contained therein. Company and Hinkefent have caused the same to be provided
to Purchaser with the intent that Purchaser rely on the same with regard to
the transactions contemplated by this Agreement.
6.13 Proprietary Rights. Company is the owner of its proprietary
rights and property including the Intellectual Property, as defined herein,
all of which is set forth on Schedule 6.13.
6.14 No Guaranties. Company has not guaranteed the obligations or
liabilities of any other person, firm or corporation.
6.15 Filing and Records. The Company has made all material
required government filings applicable to the Business, and the books of
account, minute books, stock certificate books and stock transfer ledgers of
Company are complete and correct in all material respects and are prepared on
a basis consistent with prior years, and there have been no transactions
involving the business of Company which properly should have been set forth
therein and which have not been accurately so set forth.
6.16 Broker's Fees. Company is not obligated to pay any broker's
or other finder's fees to any third party in connection with the transactions
contemplated by this Agreement except as disclosed on Schedule 2.
6.17 Environmental, Health, and Safety Matters. For purposes of
this Agreement, "Environmental, Health, and Safety Requirements" shall mean
all federal, state, local and foreign statutes, regulations, ordinances and
other provisions having the force or effect of law, all judicial and
administrative orders and determinations, all contractual obligations and all
common law concerning public health and safety, worker health and safety, and
pollution or protection of the environment, including without limitation all
those relating to the presence, use, production, generation, handling,
transportation, treatment, storage, disposal, distribution, labeling, testing,
processing, discharge, release, threatened release, control, or cleanup of any
hazardous materials, substances or wastes, chemical substances or mixtures,
pesticides, pollutants, contaminants, toxic chemicals, petroleum products or
byproducts, asbestos, polychlorinated biphenyls, noise or radiation, each as
amended and as now or hereafter in effect.
6.17.1 To the best of knowledge of Hinkefent and Eric
Hinkefent, Company has complied and is in compliance with all Environmental,
Health, and Safety Requirements.
6.17.2 To the best of knowledge of Hinkefent and Eric
Hinkefent, without limiting the generality of the foregoing, Company has
obtained and complied with, and is in compliance with, all permits, licenses
and other authorizations that are required pursuant to Environmental, Health,
and Safety Requirements for the occupation of its facilities and the operation
of its business.
6.17.3 Neither Company nor Hinkefent nor their respective
predecessors or affiliates has received any written or oral notice, report or
other information regarding any actual or alleged violation of Environmental,
Health, and Safety Requirements, or any liabilities or potential liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise), including
any investigatory, remedial or corrective obligations, relating to any of them
or its facilities arising under Environmental, Health, and Safety
Requirements.
6.17.4 To the best of knowledge of Hinkefent and Eric
Hinkefent, none of the following exists at any property or facility owned or
operated by the Company: (1) underground storage tanks, (2) asbestos-
containing material in any form or condition, (3) materials or equipment
containing polychlorinated biphenyls, or (4) landfills, surface impoundments,
or disposal areas.
6.17.5 To the best of knowledge of Hinkefent and Eric
Hinkefent, neither Company nor its predecessors or affiliates has treated,
stored, disposed of, arranged for or permitted the disposal of, transported,
handled, or released any substance, including without limitation any hazardous
substance, or owned or operated any property or facility (and no such property
or facility is contaminated by any such substance) in a manner that has given
or would give rise to liabilities, including any liability for response costs,
corrective action costs, personal injury, property damage, natural resources
damages or attorney fees, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the
Solid Waste Disposal Act, as amended ("SWDA") or any other Environmental,
Health, and Safety Requirements.
6.17.6 To the best of knowledge of Hinkefent and Eric
Hinkefent, neither this Agreement nor the consummation of the transaction that
is the subject of this Agreement will result in any obligations for site
investigation or cleanup, or notification to or consent of government agencies
or third parties, pursuant to any of the so-called "transaction-triggered" or
"responsible property transfer" Environmental, Health, and Safety
Requirements.
6.17.7 Company has not, either expressly or by operation of
law, assumed or undertaken any liability, including without limitation any
obligation for corrective or remedial action, of any other person relating to
Environmental, Health, and Safety Requirements.
6.17.8 To the best of knowledge of Hinkefent and Eric
Hinkefent, no facts, events or conditions relating to the past or present
facilities, properties or operations of the Company will prevent, hinder or
limit continued compliance with Environmental, Health, and Safety
Requirements, give rise to any investigatory, remedial or corrective
obligations pursuant to Environmental, Health, and Safety Requirements, or
give rise to any other liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise) pursuant to Environmental, Health, and Safety
Requirements, including without limitation any relating to onsite or offsite
releases or threatened releases of hazardous materials, substances or wastes,
personal injury, property damage or natural resources damage.
6.17.9 Hinkefent has received a copy of those Phase 1
environmental reports referred to in Section 11.10 and has no reason to
believe that any statement contained is incorrect or misleading.
6.18 Intellectual Property. For purposes of this Agreement,
"Intellectual Property" means (a) any inventions and new technologies (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations, continuations-in-
part, revisions, extensions, and reexaminations thereof, (b) all trademarks,
service marks, trade dress, logos, trade names, and corporate names, together
with all translations, adaptations, derivations, and combinations thereof and
including all goodwill associated therewith, and all applications,
registrations, and renewals in connection therewith, (c) all copyrightable
works, all copyrights, and all applications, registrations, and renewals in
connection therewith, (d) all mask works and all applications, registrations,
and renewals in connection therewith, (e) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, customer and supplier
lists, pricing and cost information, and business and marketing plans and
proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
6.18.1 To the best of the Company's and Hinkefent's and
Eric Hinkefent's knowledge, the Company owns or has the right to use pursuant
to license, sublicense, agreement, or permission all Intellectual Property
necessary or desirable for the operation of the businesses of the Company as
presently conducted and as presently proposed to be conducted. Each item of
Intellectual Property owned or used by Company immediately prior to the
Closing hereunder will be owned or available for use by Company on identical
terms and conditions immediately subsequent to the Closing hereunder. Except
as provided in Schedule 6.18.1, to the best of the Company's and Hinkefent's
and Eric Hinkefent's knowledge, the Company has taken all reasonably prudent
action to maintain and protect each item of Intellectual Property that it owns
or uses listed in subpart (b) of Section 6.18.
6.18.2 To the best of the Company's and Hinkefent's and
Eric Hinkefent's knowledge, neither the Company nor the Hinkefents nor any
Shareholder has interfered with, infringed upon, misappropriated, or otherwise
come into conflict with any Intellectual Property rights of third parties, and
neither the Company nor the Hinkefents nor any Shareholder, director, officer
(nor any employees with responsibility for Intellectual Property matters) of
the Company has ever received any charge, complaint, claim, demand, or notice
alleging any such interference, infringement, misappropriation, or violation
(including any claim that the Company must license or refrain from using any
Intellectual Property rights of any third party). To the knowledge of any of
the directors and officers (and employees with responsibility for Intellectual
Property matters) of Company and Hinkefent and Eric Hinkefent, no third party
has interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Company.
6.18.3 Schedule 6.18.3 identifies each license, trademark,
patent or registration which has been issued to the Company with respect to
any of its Intellectual Property, identifies each pending patent application
or application for registration which Company has made with respect to any of
its Intellectual Property, and identifies each license, agreement, or other
permission which Company has granted to any third party with respect to any of
its Intellectual Property (together with any exceptions). Company has
delivered to Purchaser correct and complete copies of all such patents,
registrations, applications, licenses, agreements, and permissions (as amended
to date) and has made available to Purchaser correct and complete copies of
all other written documentation evidencing ownership and prosecution (if
applicable) of each such item. Schedule 6.18.3 also identifies each trade name
or unregistered trademark used by Company in connection with of its business.
With respect to each item of Intellectual Property required to be identified
in Schedule 6.18.3:
(A) To the best of knowledge of Hinkefent and Eric Hinkefent,
Company possesses all right, title, and interest in and to the item, free and
clear of any Security Interest, license, or other restriction;
(B) the item is not subject to any outstanding injunction, judgment,
order, decree, ruling, or charge;
(C) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or, to the knowledge of Company,
Hinkefent, Eric Hinkefent and Shareholders and the directors and officers of
Company, is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
(D) Company has not ever agreed to indemnify any Person for or
against any interference, infringement, misappropriation, or other conflict
with respect to the item.
6.18.4 Schedule 6.18.4 identifies each item of Intellectual
Property that any third party owns and that Company uses pursuant to license,
sublicense, agreement, or permission. The Company has delivered to Purchaser
correct and complete copies of all such licenses, sublicenses, agreements, and
permissions (as amended to date). With respect to each item of Intellectual
Property required to be identified in Schedule 6.18.4, to the best of
knowledge of Hinkefent and Eric Hinkefent,:
(A) the license, sublicense, agreement, or permission covering the
item is legal, valid, binding, enforceable, and in full force and effect;
(B) the license, sublicense, agreement, or permission will continue
to be legal, valid, binding, enforceable, and in full force and effect on
identical terms following the consummation of the transactions contemplated
hereby (including the assignments and assumptions referred to above);
(C) no party to the license, sublicense, agreement, or permission is
in breach or default, and no event has occurred which with notice or lapse of
time would constitute a breach or default or permit termination, modification,
or acceleration thereunder;
(D) no party to the license, sublicense, agreement, or permission
has repudiated any provision thereof;
(E) with respect to each sublicense, the representations and
warranties set forth in subsections (A) through (D) above are true and correct
with respect to the underlying license;
(F) the underlying item of Intellectual Property is not subject to
any outstanding injunction, judgment, order, decree, ruling, or charge that
affects Company's right to the use of such Intellectual Property;
(G) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or, is threatened which challenges the
legality, validity, or enforceability of the underlying item of Intellectual
Property; and
(H) neither the Company nor Hinkefent nor any Shareholder has
granted any sublicense or similar right with respect to the license,
sublicense, agreement, or permission.
6.18.5 To the knowledge of Company and Hinkefent and Eric
Hinkefent, the Company will not interfere with, infringe upon, misappropriate,
or otherwise come into conflict with, any Intellectual Property rights of
third parties as a result of the continued operation of its businesses as
presently conducted and as presently proposed to be conducted.
6.18.6 Year 2000 Representation and Warranty. The Systems
of Company are not Year 2000 Compliant. Company has delivered to Purchaser
complete and accurate lists of its vendors and automated Systems materials to
its operations, including, software, firmware, hardware, embedded chips and
other processing devices and all reports, files and information in its
possession relating to the extent to which the Systems of the Company and its
suppliers and vendors are or are not Year 2000 Compliant. For purposes of
this section:
6.18.6.1 "Systems" means any of the following: (i)
computer software; (ii) computer hardware; (iii) other products in which one
or more computer chips are embedded; or (iv) computer, communication or other
information systems that include hardware and software.
6.18.6.2 "Year 2000 Compliant" means the ability
of one or more Systems to properly run using date data from any century,
including dates after December 31, 1999. Such ability includes: (a) yielding
correct results in arithmetic operations, comparisons and sorting of date
data into and between the twentieth and twenty-first centuries, including
correct Leap Year calculations, and (ii) not ceasing to execute, not returning
an error message and not otherwise failing due to date-related processing or
due to the then current date or any other date being a date in the twentieth
or twenty-first centuries. "Leap Year" means the year during which an extra
day is added in February (February 29th).
6.19 Employment Matters.
6.19.1 Compliance with Employment Laws. Except as otherwise
disclosed under this Agreement, Company (1) To the best of knowledge of
Hinkefent and Eric Hinkefent, is in material compliance with all Laws
regulating employment practices, terms and conditions of employment and wages
and hours, (2) is not subject to any unfair labor practice complaint or other
petition before the National Labor Relations Board, (3) is not subject to any
material labor strike, dispute, slow-down, or stoppage, (4) is not subject to
any material Proceeding arising out of or under a collective bargaining
agreement, and (5) has not experienced any primary work stoppage or other
labor difficulty involving its employees during the past three years;
6.19.2 Plan Compliance. Company has administered and
maintained its executive compensation plans, salary continuation plans, bonus
plans, holiday and other bonus practices, deferred compensation agreements,
pension or retirement plans, employee stock option or stock purchase plans,
employee life, health, and accident insurance, and other employee benefit
plans, agreements, arrangements or commitments relating to employees of
Company in the Business in material compliance with all applicable Laws.
Except as set forth on SCHEDULE 6.19 attached hereto, which also includes
copies of the Company's current employee handbook and employment application,
there are no employee pension benefit plans, as defined in Section 3(2) of
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
(including, without limitation, any defined benefit plan, defined contribution
plan, simplified employee pension plan, annuity plan, multiple employer plan,
or multi-employer plan, as defined in ERISA and the Code), currently
maintained by or on behalf of the Company, or with respect to which the
Company is required to contribute, or may have any liability or obligation, or
are otherwise bound (the "ERISA Pension Plans"). Each ERISA Pension Plan that
is intended to be tax qualified has received one or more United States
Internal Revenue Service determination letters to such effect covering such
plan from inception to date, and nothing has occurred that would adversely
affect or otherwise jeopardize such plan's tax qualification. Neither
Company, Hinkefent nor Eric Hinkefent knows or has reason to know, of any
prohibited transaction (as defined in ERISA) relating to any Employment Plan.
Each employee benefit plan within the meaning of Section 3(3) of ERISA
("Employee Benefit Plan") complies, and has from its inception complied, in
all material respects with all applicable requirements of ERISA, including
reporting requirements and all qualification requirements of the Code. No
Employee Benefit Plan has any amount of unfunded benefit liabilities (within
the meaning of Section 4001(a)(18) of ERISA). Each Employee Benefit Plan (i)
has complied with all notification and continuation coverage requirements of
COBRA, Section 4980B of the Code and all regulations thereunder; (ii) has not
experienced any reportable event as defined in ERISA; and (iii) has not
terminated. Except as set forth on Schedule 6.19, Seller has no nonqualified
deferred compensation, severance pay, or other employee pension plans. The
Company has delivered to Purchaser correct and complete copies of each
Employee Benefit Plan, including all amendments to such plan, and all summary
plan descriptions and other summaries of such plan, each trust agreement,
annuity or insurance contract, or other funding instrument pertaining to each
Employee Benefit Plan, the most recent annual report (IRS Form 5500 Series),
including all schedules to such report, if applicable, filed with respect to
each Employee Benefit Plan for which such a report is required to be filed,
the most recent IRS determination letter, plan audit, financial statement, and
accountant's opinion (with footnotes), if applicable, for each Employee
Benefit Plan for which same is required to be prepared, and the most recent of
all relevant schedules and reports concerning the administrative costs,
benefit payments, employee and employer contributions, claims experience,
financial information, and insurance premiums for each Employee Benefit Plan,
to the extent any of same have been prepared by, or are in the possession of,
the Company.
6.20 Inventory Returns. After the Closing, to the best of
Company's, Hinkefent's and Eric Hinkefent's knowledge, the Business will not
be required pursuant to its regular return policy or otherwise to accept the
return of any material portion of Inventory sold by Company to others prior to
the Closing Date;
6.21 Utilities. To the best of Company's, Hinkefent's and Eric
Hinkefent's knowledge, all water, sewer, gas, electric, telephone, and
drainage facilities required by applicable law or by the normal use and
operation of the Properties are adequate to service each of the Properties
under its current use;
6.22 Accuracy and Completeness of Representations and Warranties.
No representation or warranty made by Company or Hinkefent or Eric Hinkefent
in this Agreement and no statement contained in any schedule delivered or to
be delivered to Purchaser pursuant to this Agreement contains or will contain
any untrue statement of a material fact or omits to state a material fact,
necessary to make the statements contained herein or therein, not misleading.
7. Representations and Warranties by Purchaser. Purchaser represents
and warrants to the Shareholders as follows:
7.1 Organization. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Arizona
and has full power and authority to enter into this Agreement and the related
agreements referred to herein and to carry out the transactions contemplated
by this Agreement and to carry on its business as now being conducted and to
own, lease or operate its properties.
7.2 Authorization and Approval of Agreement. All proceedings or
actions required to be taken by Purchaser relating to the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby shall have been taken at or prior to the Closing.
7.3 Execution, Delivery and Performance of Agreement. Neither the
execution, delivery nor performance of this Agreement by Purchaser will, with
or without the giving of notice or the passage of time, or both, conflict
with, result in a default, right to accelerate or loss of rights under, or
result in the creation of any lien, charge or encumbrance pursuant to, any
provision of Purchaser's Articles of Incorporation or Bylaws or any franchise,
mortgage, deed of trust, lease, license, agreement, understanding, law,
ordinance, rule or regulation or any order, judgment or decree to which
Purchaser is a party or by which it may be bound or affected. Purchaser has
full power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby, and all proceedings required to be taken by
Purchaser to authorize the execution, delivery and performance of this
Agreement and the agreements relating hereto have been properly taken and this
Agreement constitutes a valid and binding obligation of Purchaser.
7.4 Litigation. There is no legal action, suit, arbitration,
governmental investigation or other legal or administrative proceeding, nor
any order, decree or judgment in progress, pending or in effect, or to the
knowledge of Purchaser threatened, against or relating to Purchaser in
connection with or relating to the transactions contemplated by this
Agreement, and Purchaser does not know or have any reason to be aware of any
basis for the same.
7.5 Broker's Fees. Purchaser is not obligated to pay any broker's
or other finder's fees to any third party in connection with the transactions
contemplated by this Agreement.
7.6 Issuance of Convertible Note. The issuance of the Convertible
Note will qualify for an exemption from registration under the Securities Act
of 1933 based upon representations of the Shareholders of their
qualifications.
8. Conduct of Business Prior to Closing.
8.1 Consents and Approvals. After the execution of this Agreement
and prior to the Closing, Purchaser, Hinkefent, Eric Hinkefent and Company
shall undertake to use their best efforts to obtain as quickly as reasonably
possible all approvals necessary for the transactions contemplated by this
Agreement from all necessary regulatory authorities (the "Regulatory
Authorities"), Shareholders and other parties, including without limitation
Third Party Consents (as defined in Section 6.12), and to comply with all
applicable laws which may be applicable to the transactions contemplated by
this Agreement.
8.2 Prior to the Closing, Company shall conduct its business and
affairs only in the ordinary course and consistent with its prior practice and
shall maintain, keep and preserve its assets and properties in good condition
and repair and maintain insurance thereon in accordance with present
practices, and Company and each Shareholder will use their best efforts (i)to
preserve the business and organization of Company intact, (ii)to keep
available to Purchaser the services of Company's present officers, employees,
agents and independent contractors, (iii)to preserve for the benefit of
Purchaser the goodwill of the Company as relates to its favorable relations
with suppliers, customers, landlords and others having business relations with
it, and (iv) to use reasonable efforts in obtaining the consent of any party
whose consent may be required by reason of the transactions contemplated
hereby. Without limiting the generality of the foregoing, prior to the
Closing Company will not, without Purchaser's prior written approval:
8.2.1 change its Articles of Incorporation or Bylaws or
merge or consolidate or obligate itself to do so with or into any other
entity;
8.2.2 enter into any contract, agreement, commitment or
other understanding or arrangement except for those of the type which would
not have to be listed and described under Section 6.12.6; or
8.2.3 perform, take any action or incur or permit to exist
any of the acts, transactions, events or occurrences of the type (1) described
in Sections 6.8.1, .2, .3, .4, .5, .8, .9, .10, .11, .12, .13, .15, or .16 of
this Agreement (excluding any exceptions permitted under those sections) which
would have been inconsistent with the representations and warranties set forth
therein had the same occurred after the Balance Sheet Date and prior to the
date hereof or (2) described in Section 6.3 of this Agreement (excluding any
exceptions permitted under that section) which would be required to be set
forth on Schedule 6.3 if it had taken place during the past three years.
8.3 Company shall give Purchaser prompt written notice of any
material change in any of the information contained in the representations and
warranties made in Section 6 or elsewhere in this Agreement or the Schedules
referred to herein which occurs prior to the Closing.
8.4 Company shall not cause or permit its total liabilities to
increase or decrease other than in the ordinary, reasonable and prudent course
of business. Company shall, and Hinkefent and Eric Hinkefent will cause
Company to, consult with Purchaser with respect to material changes in the
conduct of the business of the Company; provided, however, that nothing
contained in this Section 8.4 shall require Company to take or fail to take
any action that, in Company's reasonable judgment, is likely to give rise to a
substantial penalty or a claim for damages by any third party against Company,
or is likely to result in losses to Company, or is otherwise likely to
prejudice in any material respect or interfere with the conduct of Company's
business and operations in the ordinary course consistent with prior practice,
or is likely to result in a breach by Company of any of its representations,
warranties or covenants contained in this Agreement (unless any such breach is
first waived in writing by Purchaser).
8.5 From the date of this Agreement, Company and the Shareholders
shall not:
8.5.1 take any action that would encumber or restrict the
Shares or their sale or transfer, except any action by Company to enforce its
rights hereunder.
8.5.2 take any action which would breach any of their
representations and warranties in this Agreement;
8.5.3 sell or otherwise dispose of any of the assets of the
Company except in the ordinary course of business;
8.5.4 subject any properties to an encumbrance, other than
in the ordinary course of business;
8.5.5 enter into or terminate any material contract relating
to the Business except in the ordinary course of business and except for those
of the type which would not have to be listed and described in Schedule 6.10
or any other schedule to this Agreement;
8.5.6 grant any options or other rights or interests in the
Shares.
Company will consult with Purchaser about material changes in the conduct of
the Business. Company is not required to take or fail to take any action
that, in Company's reasonable judgment, is likely to result in (a) a
substantial penalty, (b) a claim for damages by any third party against
Company, (c) losses to Company, (d) prejudice to or interference with the
Company's business and operations, or (e) a breach by Company of any of the
representations and warranties made by it in this Agreement.
9. Investigation, Confidentiality and Exclusivity.
9.1 Investigations. Subject to the restrictions of Section 9.2,
Company consents to Purchaser commencing a due diligence investigation of the
operations and financial status of Company at Purchaser's expense. Upon
reasonable notice and during regular business hours, Company will give
Purchaser and Purchaser's attorneys, accountants and other representatives
full access to Company's officers, directors, employees, independent
contractors, counsel, and independent accountants and all properties,
documents, contracts, books and records of Company and will furnish Purchaser
with copies of such documents (certified by Company's officers if so
requested) and with such information with respect to the affairs of Company
(all of which are collectively referred to as "Information") as Purchaser may
reasonably request from time to time, including without limitation all books
and records, references and customer contracts. Purchaser does not assume
responsibility for its accuracy or completeness of the Information, whether or
not Purchaser independently verifies the Information. Any such furnishing of
such Information to Purchaser or any investigation by Purchaser shall not
affect Purchaser's right to rely on any representations and warranties made in
this Agreement or in connection herewith or pursuant hereto. Subject to the
restrictions of Section 9.2, Purchaser shall provide to Company all
information reasonably necessary to permit Company to evaluate Purchaser's
ability to perform under this Agreement.
9.2 Confidentiality. Shareholders, Company and Purchaser agree to
keep the existence and terms of this Agreement confidential and to keep
confidential all information and communications concerning this Agreement,
including the fact that any meetings or discussions between Purchaser and
Company took place or were scheduled to take place, except to the extent
necessary or appropriate in connection with any applicable regulations. The
parties contemplate that by virtue of this Agreement, each may come into
possession of the other's confidential financial and other business
information, and each party agrees that it shall keep such information
confidential and shall not engage in any activities which would or could
violate the Confidentiality and Non-Disclosure Agreement, a copy of which is
attached to this Agreement as Exhibit 9.2, and an original of which has been
signed by each party prior to or contemporaneously with its execution and
delivery of this Agreement. Shareholders and Company agrees that Purchaser
may disclose to potential investors all information provided by Company, as
long as such information is disclosed pursuant to a written nondisclosure
agreement and on the condition that such information may be used for the sole
purpose of determining whether to make an investment in Purchaser, in which
case Shareholders and Company agree that such potential investors may contact
Company directly. Except as provided by the foregoing sentences, no party
shall make any disclosure regarding any other party to this Agreement to any
person or entity unless it shall have first obtained and delivered to such
other party, as applicable, such person's or entity's signature on an original
of the attached Confidentiality and Non-Disclosure Agreement and also obtained
such other party's written approval for such disclosure.
9.3 Press Releases. Any public announcement of the pendency of
the transactions embodied in this Agreement shall be made only upon receiving
the prior written consent from Purchaser and Hinkefent as to the necessity for
the announcement and the text to be used.
9.4 Disposition of Property Upon Termination. Upon expiration or
earlier termination of this Agreement for any reason, each party shall deliver
to the other all tangible forms of confidential information, trade secrets and
other proprietary property of the other parties which is in its possession or
control, and shall certify to the other parties in writing that it has no
other such property in its possession or control, and that it has no knowledge
of the possession by others of any such property of the other parties
previously in its possession or control.
9.5 Exclusivity. As long as the parties are proceeding in
accordance with this Agreement, neither party shall have any discussions with
any third party concerning any acquisition of control of Company or any
investment in or merger with Company.
10. Director and Shareholders Authorizations.
10.1 At or prior to the Closing, Company will deliver to Purchaser
a copy of the resolutions of the Board of Directors and the resolutions or
consents of the Shareholders of Company, together with any and all required
resolutions or consents of Shareholders, approving the execution and delivery
of this Agreement and the consummation of all of the transactions contemplated
hereby, duly certified by an officer of Company.
10.2 At or prior to Closing, Purchaser will deliver of
Shareholders a copy of the resolutions or consents of the Board of Directors
of Purchaser, together with any and all resolutions or consents of
shareholders of Purchaser, approving the execution and delivery of this
Agreement and the consummation of all of the transactions contemplated hereby,
duly certified by an officer of Purchaser.
11. Conditions Precedent to Purchaser's Obligations. All obligations of
Purchaser hereunder are subject, at the option of Purchaser, to the
fulfillment of each of the following conditions at or prior to the Closing,
and Company and Shareholders shall exert their best efforts to cause each such
condition to be so fulfilled on or prior to September 10, 1999, or such other
date as Purchaser and Company may agree.
11.1 Approval of Agreement. The Board of Directors and
shareholders of Company shall have approved of this Agreement and related
documents.
11.2 Additional Documents. Eric Hinkefent and Purchaser shall
have entered into an employment and non-competition agreement in the form
attached as Exhibit C, and Hinkefent and Purchaser shall have entered into a
non-competition agreement in the form attached as Exhibit D.
11.3 Representations. All representations and warranties of
Company, Hinkefent, Eric Hinkefent and the Shareholders contained herein or in
any document delivered pursuant hereto shall be true and correct in all
material respects when made and shall be deemed to have been made again at and
as of the date of the Closing, and shall then be true and correct in all
material respects except for changes in the ordinary course of business after
the date hereof in conformity with the covenants and agreements contained
herein, provided that (a) Company, Hinkefent, and the Shareholders shall have
provided to Purchaser written updates to any disclosures and schedules under
this Agreement ("Updates") necessary to make all representations and
warranties of Company, Hinkefent and the Shareholders contained herein or in
any documents delivered pursuant hereto true and correct in all material
respects as of the Closing, (b) the Purchaser approves in writing of such
Updates in its sole discretion, and (c) representations and warranties
regarding Elk River Trading Company that are contained in an asset purchase
agreement which, together with all amendments and schedules and exhibits, has
been approved in form and content by Purchaser, shall be in full force and
effect, and Hinkefent and Eric Hinkefent shall guarantee the truth and
accuracy of such representations and warranties to Purchaser as if they had
been fully set forth in this Agreement.
11.4 Covenants. All covenants, agreements and obligations
required by the terms of this Agreement to be performed by Company, Hinkefent,
Eric Hinkefent or by Shareholders at or before the Closing shall have been
duly and properly performed in all material respects, and all documents
required to be delivered to Purchaser at or prior to the Closing shall have
been so delivered.
11.5 Diligence. Purchaser shall have completed its due diligence
within 30 days after the Effective Date with results satisfactory to
Purchaser, provided that Purchaser shall also be satisfied with the results of
due diligence with respect to any material events or developments arising
subsequent to the 30th day after the Effective Date and prior to Closing.
11.6 Closing Financial Statements. Purchaser shall be provided by
Company with an unaudited balance sheet as at June 30, 1999 and unaudited
statements of earnings and sources and uses of cash for the period ended June
30, 1999 (collectively, "Interim Financial Statements") and an unaudited
balance sheet of Company as at the last day of the month prior to Closing for
the period then ended ("Closing Balance Sheet"), all representations,
warranties, indemnities and covenants made by Company and/or the Shareholders
in this Agreement which relate to the Financial Statements shall similarly be
deemed to relate to the Interim Financial Statements, as though each of such
representations, warranties, indemnities and covenants were fully set forth
herein as additional representations, warranties, indemnities and covenants
containing the words "Interim Financial Statements" in lieu of the words
"Financial Statements," and all representations, warranties, indemnities and
covenants made by Company and/or the Shareholders in this Agreement which
relate to the Balance Sheet or the Balance Sheet Date shall similarly be
deemed to relate to the Closing Balance Sheet, and the Closing Balance Sheet
Date, as the case may be as though each of such representations, warranties,
indemnities and covenants were fully set forth herein as additional
representations, warranties, indemnities and covenants containing the words
"Closing Balance Sheet" in lieu of the words "Balance Sheet" and the date
thereof in lieu of the words "the Balance Sheet Date."
11.7 Certificate. There shall be delivered to Purchaser a
certificate executed by the President and Secretary of Company and by
Hinkefent and each Shareholders, individually, dated the date of the Closing,
certifying that the conditions set forth in this Section 11 have been
fulfilled.
11.8 Good Standing. There shall be delivered to Purchaser a
certificate issued by the agency regulating corporations in each of the states
in which the Company is doing business, attesting to the corporate existence
and good standing of Company in such state.
11.9 Opinion. Purchaser shall have received an opinion of
Company's counsel, dated the date of the Closing, in form and substance
satisfactory to counsel for Purchaser, to the effect that the Company is duly
formed, validly existing, and in good standing, this Agreement has been duly
authorized on behalf of the Company, Hinkefent and the Shareholders, and the
Agreement has been validly executed and is enforceable against the Company,
Hinkefent and the Shareholders in accordance with its terms, subject to
qualifications relating to insolvency laws, equitable principles, and the
like.
11.10 Environmental Report. Purchaser, Eric Hinkefent and
Hinkefent shall have received and Purchaser shall have approved, in its sole
discretion, a Phase 1 environmental report, or a report deemed by Purchaser in
its sole discretion to be equivalent to a Phase 1 environmental report,
relating to conditions on or under all locations at or adjacent to premises
used or owned or controlled by Company, except that the portion of the report
relating to premises leased by Company as to which the owner refuses consent
to access after request by Company may omit information regarding such
premises that is impossible to obtain without such access.
11.11 Acquisition of Assets of Elk River Trading Company. Company
shall have acquired all of the assets (excluding cash and cash equivalents)
of, including without limitation all rights to the name of, and shall have
assumed none of the liabilities of Elk River Trading Company (except
assumption of the lessee's rights and liabilities under the lease of Elk River
Trading Company), in a transaction in form and substance acceptable to
Purchaser, and Purchaser shall have received a legal opinion of counsel to the
Company in form and substance satisfactory to counsel for Purchaser, to the
effect that the Company's acquisition did not violate, or cause any
acceleration or default under, any lien, any provision of law or any contract
or lease to which Elk River Trading Company or its assets are subject, and
that there is no basis for any claim against Company arising from such
acquisition. All representations, warranties, covenants and conditions in
favor of the Company contained in the acquisition agreement shall be deemed to
be representations, warranties, covenants and conditions in favor of Purchaser
which are the obligations of Hinkefent and Eric Hinkefent to warrant,
represent, perform or fulfill, as if fully set forth in this Agreement.
11.12 Election. Company, Shareholders and Purchaser shall have
executed the Election to Allocate Income Under Normal Accounting Rules Under
Section 1362(e)(3) in the form set forth on Exhibit 11.
12. Conditions Precedent to Company's and Shareholders' Obligations.
All obligations of Company and Shareholders at the Closing are subject, at the
option of Company and each Shareholder, to the fulfillment of each of the
following conditions at or prior to the Closing, and Purchaser shall exert its
best efforts in the exercise of reasonable business judgment to cause each
such condition to be so fulfilled:
12.1 Representations. All representations and warranties of
Purchaser contained herein or in any document delivered pursuant hereto shall
be true and correct in all material respects when made and as of the Closing.
12.2 Covenants. All obligations required by the terms of this
Agreement to be performed by Purchaser at or before the Closing shall have
been duly and properly performed in all material respects.
12.3 Certificate. There shall be delivered to Shareholders a
certificate executed by an officer of the Purchaser, dated the date of the
Closing, certifying that the conditions set forth in this Section 12 have been
fulfilled.
12.4 Opinion. Company shall have received an opinion of
Purchaser's counsel, dated the date of the Closing in form and substance
satisfactory to counsel for Company, to the effect that the Purchaser is duly
formed, validly existing, and in good standing, this Agreement has been duly
authorized on behalf of the Purchaser, and the Agreement has been validly
executed and is enforceable against the Purchaser in accordance with its
terms, subject to qualifications relating to insolvency laws, equitable
principles, and the like.
12.5 Purchase Price. Shareholders shall have received at Closing
payment of the first installment of the Purchase Price in accordance with
Section 2 and shall have delivered the Notes to the Shareholders.
12.6 Election. Company, Shareholders and Purchaser shall have
executed the Election to Allocate Income Under Normal Accounting Rules Under
Section 1362(e)(3) in the form set forth on Exhibit 11.
13. Indemnification. Purchaser agrees to indemnify Company and the
Shareholders and Company agree to indemnify Purchaser, in connection with this
transaction, against all expenses, losses, claims, damages and liabilities,
including without limitation expenses of investigating the foregoing, expenses
of appearing in any action or legal proceeding to which any indemnitee may
become subject in order to defend against the foregoing, expenses of preparing
for any such action or proceeding, and reasonable counsel fees and
disbursements (collectively, "Liabilities") which result from or arise from or
are based upon, the matters as set forth below. The indemnification
provisions of this Agreement shall apply equally to Purchaser, Purchaser's
members, officers, directors, agents, employees and affiliates and each
person, if any, who controls Purchaser or any of Purchaser's affiliates
(collectively, the "Purchaser Indemnitees") and to Shareholders, Company and
its officers, directors, agents, employees and affiliates, the beneficiaries
of Shareholders, and each person, if any, who controls Company, Shareholders,
beneficiaries of the Shareholders or any of their affiliates (collectively,
the "Company Indemnitees").
13.1 By Shareholders. Hinkefent, Eric Hinkefent, and each
Shareholder hereby agrees to indemnify and agree to hold Purchaser harmless
from, against and in respect of (and shall on demand reimburse Purchaser for)
any and all Liabilities suffered or incurred by Purchaser by reason of any
untrue representation, breach of warranty or non-fulfillment of any covenant
by Hinkefent, Eric Hinkefent, or such Shareholder, respectively.
13.2 By Purchaser. Purchaser hereby agrees to indemnify and hold
Shareholders harmless from, against and in respect of (and shall on demand
reimburse Shareholders for) any and all Liabilities resulting from any untrue
representation, breach of warranty or non-fulfillment of any covenant or
agreement by Purchaser contained herein.
13.3 Procedure. Promptly after any person entitled to
indemnification hereunder receives notice of the commencement of any
proceeding, such person will give notice in writing to the indemnifying party,
which must be given within three years after the Closing. The indemnifying
party will without being deemed to have admitted any liability assume the
defense, including the employment of and payment of such counsel's fees and
disbursements. Should the person entitled to indemnification reasonably
determine that separate counsel is necessary (whether due to the existence of
different defenses, potential conflicts of interest or otherwise), or if the
indemnifying party has not assumed the defense, then the person entitled to
indemnification may, employ separate counsel, and the indemnifying party shall
pay such counsel's reasonable fees and disbursements as incurred. In the
event of any proceedings in connection with this Agreement, each party agrees
that, if requested, it or its representatives will testify or otherwise assist
each other party in preparing for testimony.
13.4 Contribution. If any indemnification or reimbursement sought
pursuant to this Agreement is held by a court to be unenforceable for any
reason other than the express terms of this Agreement (for example, but not by
way of limitation, enforcement is against public policy), then Purchaser,
Hinkefent, Shareholders and Company agree, to contribute to the Liabilities
for which such indemnification or reimbursement is held unavailable in such
proportion as is appropriate to reflect the relative benefits to Purchaser and
Company in connection with the transaction or transactions contemplated by
this Agreement.
13.5 Limitation on Indemnification. Notwithstanding any other
provision of this Agreement, no person or entity shall be obligated to
indemnify or hold harmless any other person or entity, and no representation,
warranty or covenant made by any person or entity pursuant to this Agreement
shall be deemed to be breached or condition unfulfilled, unless and until the
Liabilities suffered or incurred (or reasonably likely to be suffered or
incurred) by the party otherwise entitled to indemnification, which result
from or arise from or are based upon such untrue representation, breach of
warranty or non-fulfillment of covenant or condition, together with the
Liabilities suffered or incurred (or reasonably likely to be suffered or
incurred) by the same party resulting from or arising from or based upon all
untrue representations, breaches of warranties and non-fulfillment of
covenants made by all other parties to this Agreement in favor of such person
and all unfulfilled conditions in favor of such person, exceed, in the
aggregate: the difference between $500,000 and the amount of actual total
liabilities of Company as of the close of business on the last day of the
month preceding the Closing (excluding liabilities represented by any
permitted payment set forth on Schedule 2 that has not been made prior to that
day).
14. Offset. In addition to any other remedy and subject to the
limitations referenced in Section 13.5, Purchaser shall be entitled, upon any
breach of this Agreement by Company or Shareholders, to offset against
Purchaser's obligations to Company, Hinkefent, any Shareholder, or any
Affiliate of the foregoing, including without limitation obligations under the
Notes, the amount of damages, losses or expenses estimated by Purchaser to
arise from such breach. Without limiting the foregoing, Purchaser may
exercise this right of offset for any amount by which the actual liabilities
of Company as of the close of business on the last day of the month preceding
the Closing exceed the liabilities on such date as certified by Company.
15. Survival of Representations and Warranties. All statements,
representations, warranties, indemnities, covenants and agreements made by
each of the parties hereto shall survive after the Closing for a period of two
years after the Closing. Nothing herein shall be deemed to constitute a
representation or warranty with respect to any matter as of any time after the
Closing, including without limitation any warranty or representation relating
to any claims threatened or asserted after Closing with respect to product
labeling, product function, product advertising, or other product liability
claims that were unknown at time of Closing.
16. Notices. Any and all notices, offers, demands or other
communications required or permitted to be given under any of the provisions
of this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or on the tenth business day after mailed by
first class registered or certified United States mail, return receipt
requested, addressed to the parties at the addresses set forth herein (or at
such other address as any party may specify by notice to all other parties
given as aforesaid). Copies of any notice sent to Purchaser must be sent to:
Scott DeWald, Esq., Lewis and Roca LLP, 40 North Central Avenue, Phoenix,
Arizona 85004. Copies of any notice sent to Company, Hinkefent, Eric
Hinkefent or Shareholders must be sent to: James C. Hinkefent, 7807 East 51st
Street, Tulsa, Oklahoma 74145 and R. Blake Atkins, Atkins and Atkins, P.C.,
427 South Boston Avenue, Suite 815, Tulsa, Oklahoma 74103-4154.
17. Legal and Other Costs.
17.1 In the event that any party defaults (the "Defaulting Party")
in his, her or its obligations under this Agreement and, as a result thereof,
the other party (the "Non-Defaulting Party") seeks to legally enforce his, her
or its rights hereunder against the Defaulting Party, then, in addition to all
damages and other remedies to which the Non-Defaulting Party is entitled by
reason of such default, the Defaulting Party shall promptly pay to the Non-
Defaulting Party an amount equal to all costs and expenses (including
reasonable attorneys' fees and costs) paid or incurred by the Non-Defaulting
Party in connection with such enforcement.
17.2 Each party shall be solely responsible for its respective
expenses incurred in regard to the negotiation and drafting of this Agreement
as well as the obligations to be undertaken by the respective parties in
accordance with this Agreement and the proposed transactions described herein,
provided that the Company shall be permitted to make expenditures set forth in
Schedule 2.
18. Miscellaneous.
18.1 This writing constitutes the entire agreement of the parties
with respect to the subject matter hereof and may not be modified, amended or
terminated except by a written agreement specifically referring to this
Agreement signed by all of the parties hereto.
18.2 No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or
default of the same or similar nature.
18.3 This Agreement shall be binding upon and inure to the benefit
of each party hereto, its, his or her successors, assigns, heirs and personal
representatives.
18.4 The paragraph headings contained herein are for the purposes
of convenience only and are not intended to define or limit the contents of
said paragraphs.
18.5 Without further consideration each party hereto shall
cooperate, shall take such further action and shall execute and deliver such
further documents as may be reasonably requested by any other party in order
to carry out the provisions and purposes of this Agreement.
18.6 Shareholders will pay all sales, transfer and documentary
taxes, if any, payable in connection with the sale, conveyances, assignments,
transfers and deliveries to be made to Purchaser hereunder.
18.7 This Agreement may be executed in one or more counterparts,
all of which taken together shall be deemed one original.
18.8 This Agreement and all amendments thereof shall be governed
by and construed in accordance with the laws in force in the State of Arizona.
Venue for any litigation arising thereunder shall lie in the state and federal
courts situated in either Maricopa County, Arizona or Tulsa County, Oklahoma.
18.9 For purposes of this Agreement, an individual will be deemed to have
"knowledge" of a particular fact or other matter if: (a) such individual is
actually aware of such fact or other matter; or, (b) a prudent individual
could be expected to discover or otherwise become aware of such fact or other
matter in the course of conducting a reasonably comprehensive investigation
concerning the existence of such fact or other matter. A person (other than
an individual) will be deemed to have "knowledge" of a particular fact or
other matter if any individual who is serving, or who has at any time served,
as a director, officer, partner, executor, or trustee of such person (or in
any similar capacity) has, or at any time had, knowledge of such fact or other
matter.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
FOOD FOR HEALTH CO., INC.,
an Arizona corporation
Jerry Fleming
-----------------------------------
Jerry Fleming, President
Grant Anderson
-----------------------------------
Grant Anderson, Secretary
HEALTH FOOD ASSOCIATES, INC.,
an Oklahoma corporation
Eric Hinkefent
-----------------------------------
Eric Hinkefent, President
SHAREHOLDERS:
James C. Hinkefent
-----------------------------------
James C. Hinkefent
8965 South Sandusky
Tulsa, Oklahoma 74137
James C. Hinkefent
-----------------------------------
James C. Hinkefent, as trustee of the
James C. Hinkefent Health Food
Associate Stock Trust dated January 30,
1998
James c. Hinkefent
-----------------------------------
James C. Hinkefent, as trustee of the
James C. Hinkefent Trust dated July 11,
1994, as amended
Marilyn M. Hinkefent
-----------------------------------
Marilyn M. Hinkefent, as trustee of the
James C. Hinkefent Trust dated July 11,
1994, as amended
Eric Hinkefent
-----------------------------------
Eric Hinkefent
6384 South 86th East Avenue
Tulsa, Oklahoma 74133
Mary Ann O'Dell
-----------------------------------
Mary Ann O'Dell
4104 West Elgin
Broken Arrow, Oklahoma 74012
Sally Sobol
-----------------------------------
Sally Sobol
11533 East 7th
Tulsa, Oklahoma 74128
Amy Laminsky
-----------------------------------
Amy Laminsky
5611 South 95th East Avenue
Tulsa, Oklahoma 74145
FOOD FOR HEALTH CO., INC.
8% CONVERTIBLE SUBORDINATED NOTE
DUE SEPTEMBER 15, 2004
$2,000,000.00 September 15, 1999
THIS CONVERTIBLE SUBORDINATED NOTE evidences debt of, and a potential
right to convert such debt into equity of, Food for Health Co., Inc., an
Arizona Corporation (the "Corporation"). The Corporation is currently a
wholly owned subsidiary of AMCON Distributing Company (the "Parent"), a
Delaware corporation. At the time of the execution of this Note, the parties
acknowledge that the Parent may (but is not required to) distribute its
interest in the Corporation to the Parent's shareholders, at which time the
Corporation would become a publicly held corporation (this transaction is
referred to as the "Spin-Off").
The Corporation, for value received, promises to pay to Eric Hinkefent,
Mary Ann O'Dell, Sally Sobol, and Amy Laminsky, or any transferee permitted
under this Note, (each of which is a "Payee" and all of which are
collectively, the "Holder") the principal amount of Two Million Dollars
($2,000,000.00) and to pay interest thereon at the rate of eight percent (8%)
per annum. Interest shall accrue from the date hereof and shall be paid in
quarterly installments on the 15th day of March, June, September and December,
commencing on December 15, 1999. Interest shall be paid on the basis of a
360-day year of twelve 30-day months. Principal and all unpaid accrued
interest shall be paid on September 15, 2004 ("Maturity"). Both principal and
interest are payable in lawful money of the United States of America at Health
Food Associates, Inc., d.b.a. Akin's, 7807 East 51st Street, Tulsa, Oklahoma
74145, to the attention of Eric Hinkefent. Exhibit A sets forth, for each
Payee, the amount of the initial principal balance of this Note to which that
Payee is entitled, and the percentage obtained from dividing such amount by
the initial principal balance of this Note ("Payee Percentage"). Each time
the Corporation makes a payment under this Note, such payment will deemed
properly made to all Payees if the Corporation delivers to Eric Hinkefent
separate checks, one payable to each of the Payees, with the amount of each
respective separate check equal to the total payment made by the Corporation
multiplied by the Payee Percentage for the respective Payee. Eric Hinkefent
assumes all responsibility for distributing the separate checks to the Payees,
and the Corporation shall be entitled to assert as a complete defense to any
claim of nonpayment by any Payee that the relevant payment was delivered to
Eric Hinkefent.
Any and every right and action that may be taken by the Holder under this
Note, including without limitation the exercise of any conversion right, is
valid only if such right or action has been authorized in advance by unanimous
written consent of all of the Payees, and if such written consent is delivered
to the Corporation upon request.
The securities represented hereby have not been registered under the
Securities Act of 1933 (the "Act") or any state securities laws and may not be
resold, transferred, pledged, hypothecated or otherwise assigned until (a) the
Corporation has received from the Holder's counsel an opinion satisfactory to
the Corporation that such transfer can be made without compliance with the
registration provisions of the Act, or (b) a registration statement filed by
the Corporation is declared effective.
ARTICLE 1
CONVERSION AND PURCHASE RIGHTS
1.1 Conversion Price. If, prior to Maturity, the Spin-Off takes place,
all or any portion of the principal amount of this Note is convertible, at the
option of the Holder, into shares of the Corporation's Common Stock
("Conversion Shares"), at any time within 60 days after notice from the
Corporation that the Spin-Off will occur. In addition, if prior to Maturity,
there is a sale of substantially all of the assets or stock of the Corporation
or an acquisition of the Corporation by merger (a "Sale" of the Corporation),
all or any portion of the principal amount of this Note is convertible, at the
option of the Holder, into Conversion Shares, at any time within 60 days after
notice from the Corporation that the Sale will occur (and, in such event, the
term, "Spin-off," shall be deemed to refer to the "Sale" for purposes of this
Article 1). The conversion price per share ("Conversion Price") shall be
equal to the total outstanding principal balance of this Note at the time of
conversion, divided by the total number of shares into which this Note may be
converted (the total number of "Conversion Shares"). The total number of
Conversion Shares shall be equal to a quotient, obtained by dividing (1) the
product of (a) the unpaid principal balance of this Note, multiplied by (b)
the number of shares of common stock outstanding immediately prior to the
closing of the Spin-Off, on a fully-diluted basis assuming the exercise of all
options and conversion rights other than conversion rights pursuant to this
Note, by (2) the difference between (i) seventy-five percent (75%) of the
Corporation's gross sales (on a consolidated basis including Health Food
Associates, Inc. and all other subsidiaries) for the twelve-month period
ending on the month preceding the Spin-Off, and (ii) the unpaid principal
balance of this Note. For example, if 28,500 shares of common stock are
outstanding before conversion, $2,000,000 is the unpaid principal balance, and
annual gross sales are $150,000,000, 75% of gross sales are $112,500,000, and
the number of shares into which the Note may be converted will be the
quotient, obtained by dividing (1) the product of (a) $2,000,000, multiplied
by (b) 28,500 (which is 57,000,000,000), by (2) the difference between (i)
$112,500,000, and (ii) $2,000,000 (which is $110,500,000), or 57,000,000,000
divided by 110,500,000, or 515.8371 shares. The Conversion Price is subject
to adjustment as provided in Section 1.2 of this Note. Sales of any
subsidiary that has not been owned by the Corporation during any month of the
twelve months preceding the closing of the Spin-Off, shall be calculated as if
it had been a subsidiary of the Corporation during such month. The foregoing
provision for determining the number of Conversion Shares is expressed for
convenience of reference in the following formula and is subject to the more
detailed definitions above:
Number of Conversion Shares = [(shares before conversion)x(loan balance)]
-------------------------------------------
[(75% of annual sales) loan balance]
1.2 Anti-Dilution Adjustment of Conversion Terms. The Conversion Price
and number of shares to be issued upon conversion or purchase determined
pursuant to this Article 1 shall be subject to adjustment, as follows:
1.2.1 Merger, Sale of Assets, etc. If the Corporation at any
time shall consolidate with or merge (other than pursuant to a merger in which
the Corporation is the surviving entity and which does not result in any
reclassification of or change in the outstanding Common Stock of the
Corporation) into or sell or convey all or substantially all its assets to any
person or entity, this Note shall thereafter evidence the right to purchase
such number and kind of securities and property as would have been issuable or
distributable on account of such consolidation, merger, sale or conveyance,
upon or with respect to the securities subject to the conveyance, upon or with
respect to the securities subject to the conversion or purchase right
immediately prior to such consolidation, merger, sale or conveyance. The
foregoing provision shall apply to successive transactions of a similar nature
by any such successor or purchaser. It is the intent of this subsection to
treat the Holder of the Note, for purposes of adjusting the number of shares
to be issued upon conversion and adjusting the Conversion Price, as if he had
exercised his right to conversion immediately prior to the event triggering
the adjustments described herein, but this sentence does not require Holder to
convert the Note upon any of the events that are the subject of this
subsection 1.2.1.
1.2.2 Reclassification, etc. If the Corporation at any time
shall, by subdivision, combination or reclassification of securities or
otherwise, change any of the securities then purchasable upon the exercise of
the conversion right or purchase right contained in this Article 1 into the
same or a different number of securities of any class or classes, this Note
shall thereafter evidence the right to purchase such number and kind of
securities as would have been issuable as the result of such change with
respect to the securities which were subject to the conversion or purchase
right immediately prior to such subdivision, combination, reclassification or
other change. If shares of Common Stock are subdivided or combined into a
greater or smaller number of shares of Common Stock, the Conversion Price
shall be proportionately reduced in case of subdivision of shares or
proportionately increased in the case of combination of shares, both cases by
the ratio which the total number of shares of Common Stock to be outstanding
immediately after such event bears to the total number of shares of Common
Stock outstanding immediately prior to such event. It is the intent of this
subsection to treat the Holder of the Note, for purposes of adjusting the
number of shares to be issued upon conversion and adjusting the Conversion
Price, as if he had exercised his right to conversion immediately prior to the
event triggering the adjustments described herein, but this sentence does not
require Holder to convert the Note upon any of the events that are the subject
of this subsection 1.2.2.
1.3 Notice of Adjustment. Whenever events occur requiring the
Conversion Price to be adjusted, the Corporation shall promptly file with its
secretary or an assistant secretary at its principal office and with its stock
transfer agent, if any, a certificate of its chief financial officer showing
the adjusted Conversion Price, setting forth in reasonable detail the facts
requiring such adjustment, and stating such other facts as shall be necessary
to show the manner and figures used to compute such adjustment. Such chief
financial officer's certificate shall be made available at all reasonable
times for inspection by the Holder. Promptly after each such adjustment, the
Corporation shall mail a copy of such certificate by certified mail to the
Holder. The Corporation shall endorse on any Note executed and delivered by
the Corporation a description of each adjustment, if any, under this Section
as the result of events occurring before the execution and delivery of the
Note. If, within 45 days of the mailing of such certificate, the Holder
notifies the Corporation in writing of its disagreement with the adjustment to
the Conversion Price contained in the certificate, then the Corporation will
promptly obtain and mail to the Holder a certificate of a firm of independent
certified public accountants selected by the Corporation's board of directors
(who may be the regular auditors of the Corporation) covering the same items
required by the chief financial officer's certificate. The certificate of the
firm of independent public accountants will be conclusive evidence of the
correctness of the computations with respect to any adjustment of the
Conversion Price.
1.4 Authorized Shares. The Corporation covenants that during the
period the conversion or purchase rights under this Article 1 exist, the
Corporation will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of Common Stock upon
the conversion of this Note. The Corporation agrees that its issuance of this
Note shall constitute full authority to its officers who are charged with the
duty of executing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the conversion of this Note or
purchase of shares pursuant hereto. All shares of the Corporation's Common
Stock (or other securities in the event of an adjustment of the Conversion
Price) which may be issued upon the conversion of this Note shall, upon
issuance, be deemed to be fully paid and nonassessable.
1.5 Exercise of Conversion Privilege. If the Spin-Off is consummated,
the Holder shall receive a Conversion Privilege. The Conversion Privilege
shall be exercisable by the Holder within 60 days after delivery, upon written
notice to the Corporation or its successor and the surrender of this Note in
exchange for the number of shares of Common Stock (or other securities and
property, including cash, in the event of an adjustment of the Conversion
Price) into which this Note is convertible based upon the Conversion Price.
1.6 Issuance of Stock Certificate. Upon the conversion of this Note,
the Corporation shall forthwith issue to the Holder a certificate or
certificates representing the number of shares of its Common Stock (or other
securities in the event of an adjustment of the Conversion Price) to which the
conversion relates. The Corporation shall not be required to issue fractional
shares of Common Stock upon conversion of this Note and, in lieu thereof,
shall pay a cash adjustment based upon the then current fair market value of
the Common Stock as determined by the Board of Directors on the last business
day prior to the date of conversion. If the entire principal amount of this
Note is converted upon the surrender hereof, the Corporation shall pay within
20 days all interest accrued hereon to the date of conversion and issue and
deliver to the Holder certificates evidencing the number of shares of Common
Stock required herein. If a portion of the principal amount of this Note is
converted, upon surrender hereof the Corporation shall pay within 20 days all
interest accrued on the portion converted hereon to the date of conversion,
issue and deliver to the Holder a certificate for the proper number of shares
of Common Stock required for the portion converted, and deliver a new Note in
the form hereof for the balance of the principal amount hereof.
ARTICLE 2
REGISTRATION RIGHTS
2.1 Investment Representation. The Holder hereby represents and
warrants that it has acquired this Note for purpose of investment and with no
present intent to sell or distribute the same. Should it exercise the
conversion or purchase rights under Article 1, any securities of the
Corporation so acquired will be with the same investment intent.
2.2 Definitions. The following constitute definitions of certain of
the terms used in this Article Eight:
2.2.1 "Act" means the Securities Act of 1933 as amended.
2.2.2 "Commission" means the Securities and Exchange Commission.
2.2.3 "Conversion Shares" means the common Stock issuable upon
conversion of the Note.
2.2.4 "Securities" shall mean the Note, and any of the Conversion
Shares.
2.3 Piggyback Registration Rights. Subject to the consent of the
Corporation's underwriter in connection with such offering, if the Corporation
proposes to register any of its securities under the Securities Act pursuant
to an underwritten offering in an amount of not less than $10,000,000.00,
(other than a registration effected solely to implement an employee benefit
plan or a transaction to which Rule 145 under the Securities Act is applicable
or a registration using any form that does not permit secondary sales of
securities), it will give written notice to the Holder of its intention to do
so and the intended method of disposition. Upon written request of the Holder
delivered to the Corporation within 30 days after receipt of such written
notice (which request shall state the number of shares of Conversion Shares to
be registered), the Corporation will use its best efforts in connection with
such registrations of securities to be sold for the Corporation's account, at
its own expense, to register under the Securities Act all shares of Conversion
Shares requested to be registered by holder and outstanding as of the date of
the written notice or to be outstanding upon conversion pursuant to any notice
of conversion which is effective on or prior to the date of notice of the
request for registration, all to the extent required to permit disposition in
accordance with the intended method.
2.4 Registration Obligations. As a condition to the satisfaction of
its obligations to file each of the registration statements required pursuant
to Section 2.3, ("Registration Statement"), the Corporation shall:
2.4.1 Effect Registration. Deliver to Holder a copy of such
Registration Statement and, as expeditiously as possible, use its best efforts
to effect registration under the Act of the Securities to which such
Registration Statement relates.
2.4.2 Declaration of Effectiveness. Promptly notify the Holder
of the time when such Registration Statement has become effective or any
supplement to any prospectus forming a part of such Registration Statement has
been filed.
2.4.3 Notices of Effectiveness. Promptly notify the Holder of
the time when such Registration Statement has become effective or any
supplement to any prospectus forming a part of such Registration Statement has
been filed.
2.4.4 Notices of Requests for Amendment. Promptly notify the
Holder of any requests by the Commission for the amending or supplementing of
such Registration Statement or prospectus or for additional information.
2.4.5 Amend Upon Request. Prepare and file with the Commission
promptly upon the Holder's request any amendment or supplements to such
Registration Statement or prospectus which, in the option of counsel for the
Holder, may be necessary or advisable in connection with the distribution of
the Securities by the Holder.
2.4.6 Amend to Correct. Promptly prepare and file with the
Commission and promptly notify the Holder of the filing of such amendment or
supplement to such Registration Statement or prospectus as may be necessary to
correct any statements or omission, if at any time when a prospectus relating
to the securities is required to be delivered under the Act, any event shall
have occurred as a result of which such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not
misleading.
2.4.7 Amend for Prospectus Delivery. In case the Holder or any
underwriter for the Holder is required to deliver a prospectus, at a time when
the prospectus then in effect may no longer be used under the Act, prepare
promptly upon request such amendment or amendments to such Registration
Statement and such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10 of the Act.
2.4.8 Prior Notice of Amendment. Furnish to the Holder as soon
as available copies of any amendment or supplement to the Registration
Statement and each preliminary or final prospectus or supplement a reasonable
time prior to the filing thereof, all in such quantities as the Holder may
from time to time reasonably request, and not file any such amendment or
supplement to which the Holder shall reasonably object after having been
furnished a copy.
2.4.9 Stop Orders. Advise promptly after the Corporation shall
receive notice or obtain knowledge of the issuance of any stop order by the
Commission suspending the effectiveness of any such Registration Statement or
the initiation or threatening of any proceeding for that purpose and promptly
use its best efforts to prevent the issuance of any stop order or to obtain
its withdrawal if such stop order shall be issued.
2.4.10 Blue Sky Compliance. Use its best efforts to qualify or
register the Securities for transfer under the securities laws of such states
as the Holder may designate.
2.4.11 Comfort Letter. Obtain a cold comfort letter from the
independent public accountants of the Corporation in customary form and
covering such matters of the type customarily covered by cold comfort letters
as the Holder or the underwriter reasonably requests.
2.4.12 Opinion. Cause to be issued in favor of the Holder an
opinion of counsel in customary form and covering such matters of the type
customarily covered by opinions in connection with registered offerings as the
Holder reasonably requests.
2.4.13 Compliance. Otherwise use its best efforts to comply with
all applicable rules and regulations of the Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least 12 months, but no more than 18 months,
beginning with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Act.
2.4.14 Costs and Expenses. Holder shall pay for all fees and
expenses of its legal, tax, accounting and other advisors in connection with
the Registration Statement. Corporation shall pay all other expenses in
connection with the Registration Statement.
2.4.15 Indemnification. Indemnify and hold harmless the Holder
and each person, if any, who controls the Holder within the meaning of the Act
against any losses, claims, damages or liabilities (or actions in respect
thereof), joint or several, to which the Holder or such controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) are cause by any untrue
statement or alleged untrue statement or any material fact contained, on the
effective date thereof, in any Registration Statement under which the
Securities were registered under the Act, any prospectus contained therein, or
any amendment or supplement thereto, or arise out of or are based upon the
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
reimburse the Holder and each controlling person for any legal or other
expenses reasonably incurred by the Holder or such controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Corporation will not be
liable in any such case to the extent that any such loss, claim, damage,
expense or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in conformity
with written information furnished by the Holder in writing specifically for
use in the preparation thereof.
2.5 Limitations. Notwithstanding any other provision of this Article
2, (a) the Corporation shall not be obliged to file on behalf of the Holder of
the Note more than one registration statement pursuant to the terms of this
Article 2 in any twelve-month period, not including for this purpose any
registration statement or notification described in Section 2.3 and (b) the
Corporation shall have the privilege of postponing action under this paragraph
for a reasonable period of time (not exceeding 120 days) in the event the
filing would, in the opinion of the Corporation's Board of Directors,
adversely affect a material financing project, or a proposed or pending
acquisition, merger, or other corporate reorganization for which the
Corporation is or is expected to be a party.
2.6 Indemnification by the Holder. In the event of any registration of
any Securities pursuant to this Article 2, the Holder will indemnify and hold
harmless the Corporation, each of its directors, each of its officers who has
signed any such registration statement, and such person, if any, who controls
the Corporation within the meaning of the Act, against any losses, claims,
damages or liabilities to which the Corporation or any such director, officer,
or controlling person may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in such registration statement, prospectus, or
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in such
registration statement, prospectus, amendment or supplement, in reliance upon
and in conformity with written information furnished by the Holder for use in
the preparation thereof; and will reimburse any legal or other expenses
reasonably incurred by the Corporation or any such director, officer or
controlling person in connection with investigating or defending any such
loss, claim, damage, liability or action.
2.7 Indemnification Procedures. Promptly after receipt by an
indemnified party under this Article 2 of notice of the commencement of any
action, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party under this Article 2 notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may
have to any indemnified party otherwise than under this Article 2. In case
any such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party. In the event
the indemnifying party gives notice to the indemnified party of its election
so to assume the defense thereof, the indemnifying party will not be liable to
such indemnified party under this Article 2 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof subsequent to the date of such notice other than reasonable costs of
investigation.
2.8 Legend. Any certificate representing Securities shall be stamped
with a suitable endorsement to the effect that said Securities are subject to
the terms and conditions of this Article 2, a copy of which is on file and
available for the inspection at the main office of the Corporation.
2.9 Lockup Agreement. In consideration for the Corporation agreeing to
its obligations under this Article 2, the Holder agrees in connection with any
registration of the Corporation's securities that, upon the request of the
underwriter(s) managing any underwritten offering of the Corporation's
securities, such holders shall execute an agreement not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise
dispose of any Conversion Shares, other than shares included in the
registration, without the prior written consent of the underwriter(s) for the
period of time (not to exceed 180 days) from the effective date of the
registration as the underwriter(s) may specify unless a longer period is
requested by any state securities administrator exercising jurisdiction over
the offer or sale of securities in its state.
ARTICLE 3
PREPAYMENT RIGHTS
3.1 Prepayment. Corporation shall not, without the prior written
consent of the Holder, be entitled to make any prepayment(s) of any portion of
principal or interest of this Note, in whole or in part, provided that the
Corporation may, in its sole discretion, prepay all or any portion of
principal or interest of this Note in the event of a Sale of the Corporation
(as defined in Section 1.1). If the principal amount of this Note is prepaid
in whole or in part, the prepayment shall be applied first to any interest
accrued hereon to the date of prepayment. From the date of prepayment
forward, interest shall accrue on a principal amount equal to the principal
amount immediately prior to prepayment less the prepayment amount.
ARTICLE 4
SUBORDINATION
4.1 Subordination and Priority. The indebtedness evidences by this
Note, including the principal and accrued interest, is expressly subordinate
and subject in right of payment to the prior payment in full of all "Senior
Indebtedness," whether now outstanding or hereafter created, incurred, assumed
or guaranteed. Upon any terminating liquidation of assets of the Corporation,
or upon the occurrence of any dissolution, winding up, liquidation, whether or
not in bankruptcy, insolvency or receivership proceedings, the Corporation
shall not pay thereafter, and the Holder of this Note shall not be entitled to
receive thereafter, any amount in respect of the principal and interest of
this Note unless and until the Senior Indebtedness shall have been paid or
otherwise discharged.
4.2 Senior Indebtedness. The term "Senior Indebtedness" shall mean the
principal of, premium, if any, and interest on (a) indebtedness (other than
this Note or any previously issued subordinated Note) of the Corporation
evidenced by notes or similar obligations for money borrowed for trade
purposes from or guaranteed to persons, firms or corporations which engage in
lending money, including, but without limitation, individuals, banks, trust
companies, insurance companies and other financing institutions and charitable
trusts, pension trusts and other investing entities or organizations, (b)
indebtedness of the Corporation for trade purposes evidenced by notes or Notes
issued under the provisions of an indenture or similar instrument between the
Corporation and a bank or trust Corporation and (c) indebtedness incurred,
assumed or guaranteed by the Corporation in connection with the acquisition by
it of any property or asset for trade purposes; provided that Senior
Indebtedness shall exclude indebtedness which, by the terms of the instrument
creating or evidencing such indebtedness, expressly provides that such
indebtedness is not superior in right of payment to this Note. Senior
Indebtedness shall exclude, and the indebtedness evidenced by this Note is
expressly senior and entitled to priority in payment and upon liquidation with
respect to, (i) all capital stock of the Corporation, and (ii) any
indebtedness issued after the date of this Note and convertible into shares of
the Corporation's Common Stock. Upon request by the Corporation, Holder shall
promptly sign any subordination agreement or other acknowledgment consistent
with the foregoing provisions.
4.3 Rights Against the Corporation and Others. It is understood that
the provisions of this Article 4 are solely for the purpose of defining the
relative rights of the Holder of this Note and the holder of the Senior
Indebtedness of the Corporation. Nothing contained in this Article 4 or
elsewhere in this Note shall or is intended to impair, as between the
Corporation, its creditors other than the holder of Senior Indebtedness, and
the Holder of this Note, the unconditional and absolute obligation of the
Corporation to pay the Holder of this Note the principal of and interest on
this Note as and when the same shall become due and payable in accordance with
its terms or affect the relative rights of the Holder of this Note and the
creditors of the Corporation, other than the holder of such Senior
Indebtedness; nor shall anything herein prevent the Holder of this Note from
exercising all remedies otherwise permitted by applicable law upon default
under this Note, subject to the rights, if any, of the holders of Senior
Indebtedness in respect to cash, property or securities of the Corporation
received upon the exercise of any such remedy.
ARTICLE 5
CORPORATION'S COVENANTS
5.1 Affirmative Covenants. The Corporation agrees that until this Note
is paid in full, the Corporation will:
5.1.1 Records and Reports. Maintain a standard system of
accounting in substantial conformity with generally accepted accounting
principles and on a consistent basis; permit representatives of the Holder, as
long as it holds this Note, or any securities acquired upon conversion of this
Note, to have access to and to examine its properties, books and records at
all reasonable times.
5.1.2 Maintain Corporate Rights and Facilities. Maintain and
preserve its corporate existence and all rights, franchises and other
authority adequate for the conduct of its business; maintain its properties,
equipment and facilities in good order and repair and conduct its business in
an orderly manner without voluntary interruption.
5.1.3 Maintain Insurance. Maintain public liability, property
damage and workmen's compensation insurance and insurance on all its insurable
property against fire and other hazards with responsible insurance carriers to
the extent usually maintained by companies of similar size engaged in the same
business.
5.1.4 Pay Taxes and Other Liabilities. Pay and discharge, before
the same become delinquent and before penalties accrue thereon, all taxes,
assessments and governmental charges upon or against it or any of its
properties, and all its other material liabilities at any time existing,
except to the extent and so long as: (i) the same are being contested in good
faith and by appropriate proceedings in such manner as not to cause any
materially adverse effect upon its financial condition or the loss of any
right of redemption from any sale thereunder; and (ii) it shall have set aside
on its books reserves (segregated to the extent required by sound accounting
practice) deemed by it adequate with respect thereto.
5.1.5 Notice of Default. Promptly notify the Holder of this Note
in writing of the occurrence of any Event of Default hereunder or of any event
which would become an Event of Default hereunder upon the lapse of time
specified in this Note.
5.1.6 Conduct of Business. Conduct the business of the
Corporation in accordance with all applicable provisions of law.
5.1.7 Related Party Transactions. Conduct any transactions or
dealings with its affiliates on an arm's-length basis.
ARTICLE 6
EVENTS OF DEFAULT
The occurrence of any of the following events of default shall, at the
option of the Holder hereof, cause interest to accrue on the unpaid principal
balance of the Note at the default rate of 12% per year:
6.1 Failure to Pay Principal or Interest. Failure to pay any
installment of principal or interest hereon when due and continuance thereof
for a period of five days after written notice to the Corporation from the
Holder.
6.2 Breach of Covenant. The breach of any covenant or other term or
condition of this Note or the Secured Promissory Note dated as of the date of
this Note, payable by the Corporation to James C. Hinkefent and Marilyn M.
Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as
amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky and
continuance thereof for a period of thirty days after written notice to the
Corporation from the Holder.
6.3 Breach of Representations and Warranties. Any of the Corporation's
representations or warranties made herein or any statement or certificate at
time given in writing pursuant hereto or in connection herewith shall be false
or misleading in any material respect.
6.4 Insolvency; Receiver or Trustee. The Corporation shall become
insolvent or admit in writing its inability to pay its debts as they mature;
or make an assignment for the benefit of creditors; or apply for or consent to
the appointment of a receiver or trustee for it or for a substantial part of
its property or business; or such a receiver or trustee otherwise shall be
appointed.
6.5 Judgments. Any material money judgment, writ or similar process
shall be entered or filed against the Corporation or any of its property or
other assets and shall remain unvacated, unbonded or unstayed for a period of
60 days or in any event later than five days prior to the date of any proposed
sale thereunder.
6.6 Attachments. If any material writ of attachment shall be levied
against any property or other assets of the Corporation and the Corporation
shall not post a bond for the release of such attachment.
ARTICLE 7
TRANSFER
7.1 Restriction on Transfer. This Note may not be partially
transferred but may be transferred, before or after any conversion. The
Holder may not transfer any Conversion Shares until he has first given written
notice to the Corporation describing briefly the manner of any such proposed
transfer and until (i) the Corporation has received from the Holder's counsel
an opinion satisfactory to the Corporation and its counsel that such transfer
can be made without compliance with the registration provisions of the Act, or
(ii) a registration statement filed by the Corporation is declared effective
by the Commission; upon satisfaction of such conditions, the transfer by the
Holder of any Conversion Shares shall cause the automatic termination of all
rights of the Holder.
7.2 Rights Upon Permitted Transfer. Upon any transfer of this Note
permitted under this Article 8, the then unexercised conversion right set
forth in Article 1 shall inure to the transferee(s) in proportion to their
respective interests in remaining principal, or as the Holder shall allocate
such conversion right or purchase right.
7.3 Register. The Corporation shall maintain a register for the
recordation of transfers of this Note, which shall be transferable in whole or
in part. Upon presentation by the Holder and surrender of this Note, the
Corporation shall register such transfer and issue a new Note or Notes of like
aggregate principal amount and bearing the same date.
ARTICLE 8
MISCELLANEOUS
8.1 Status of the Holder of Note. This Note shall not entitle the
Holder to any voting rights or other rights as a shareholder of the
Corporation, and no dividends shall be payable or accrue in respect of this
Note or the securities issuable upon conversion, unless and until this Note is
converted. Upon the conversion of this Note, the Holder shall, to the extent
permitted by law, be deemed to be the holder of record of the shares of Common
Stock issuable upon such conversion, notwithstanding that the stock transfer
books of the Corporation are then closed or that the certificates representing
such shares of Common Stock are not then actually delivered.
8.2 Loss or Destruction of Note. The Corporation shall execute and
deliver a new Note of like tenor and date upon receipt by the Corporation of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Note and, in the case of loss, theft or destruction, of an indemnity by
the original Holder hereof or in case of any transfer upon such terms as may
be satisfactory to the Corporation, or, in the case of mutilation, upon
surrender and cancellation of this Note.
8.3 Survival of Warranties. All agreements, representations and
warranties made herein shall survive the execution and delivery hereof.
8.4 Purchase Agreement. This Note and the terms of the indebtedness
evidenced hereby are issued and incurred subject to the terms of a certain
Stock Purchase Agreement of even date herewith by and between the Corporation
and the original Holder hereof, among others, the terms and conditions of
which shall become binding upon any subsequent Holder or transferee of this
Note.
8.5 Failure or Indulgence Not Waiver. No failure or delay on the part
of the Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any
rights or remedies otherwise available.
8.6 Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received when delivered or five days
after they are deposited in the United States mails, first class postage
prepaid, addressed as set forth below:
(a) If to the Corporation:
Food For Health Co. Inc.
3655 W. Washington Street
Phoenix, AZ 85009
Attention: Jerry Fleming, President
with a copy to:
Lewis and Roca LLP
40 North Central Avenue
Phoenix, Arizona 85004
Attention: Scott DeWald, Esq.
(b) If to the Holder:
Health Food Associates, Inc.
d.b.a. Akin's, 7807 East 51st Street
Tulsa, Oklahoma 74145
Attention: Eric Hinkefent
with a copy to:
Atkins and Atkins, P.C.
427 South Boston Avenue, Suite 815
Tulsa, Oklahoma 74103-4154
Attention: R. Blake Atkins
Either party may alter the person, office or address to which
communications or copies are to be sent by giving notice.
8.7 Binding Nature of Note. This Note shall be binding upon any
successors and assigns of the Corporation and shall inure to the benefit of
the Holder and its successors and assigns, except that the Holder may not
assign or transfer its rights under this Note as expressly permitted by this
Note.
8.8 Cost of Collection. If default is made in the payment of this
Note, the Corporation shall pay the Holder hereof costs of collection,
including attorneys' fees.
8.9 Governing Law. This Note has been executed in and shall be
governed by the laws of the State of Arizona.
8.10 Maximum Interest Rate. Notwithstanding the foregoing, the maximum
total compensation that the Holder shall be entitled to receive hereunder
shall not exceed the maximum rate permitted under applicable law.
FOOD FOR HEALTH CO., INC.,
an Arizona corporation
Jerry Fleming
-----------------------------------
Jerry Fleming, President
EXHIBIT A
NAME PRINCIPAL AMOUNT PAYEE PERCENTAGE
---------------- ---------------- ----------------
Eric Hinkefent $500,000.00 25
Mary Ann O'Dell $500,000.00 25
Sally Sobol $500,000.00 25
Amy Laminsky $500,000.00 25
------------- ---
TOTAL $2,000,000.00 100%
============= ===
FOOD FOR HEALTH CO., INC.
SECURED PROMISSORY NOTE
$8,000,000.00 Phoenix, Arizona
September 15, 1999
FOR VALUE RECEIVED, the undersigned, FOOD FOR HEALTH CO., INC., an Arizona
Corporation (the "Corporation"), promises to pay to James C. Hinkefent and
Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July
11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy
Laminsky, or any transferee permitted under this Note (each of which is a
"Payee" and all of which are, collectively, the "Holder"), the principal sum
of $8,000,000.00, with interest at eight percent (8%) per annum, on the
following terms and conditions:
1. Payments. Interest shall accrue from the date hereof and shall be
paid in quarterly installments on the 15th day of March, June, September and
December, commencing December 15, 1999. Interest shall be paid on the basis
of a 360-day year of twelve 30-day months. Principal payments in the amount
of Eight Hundred Thousand Dollars ($800,000) shall be paid annually, on each
anniversary of the Closing, commencing with the first anniversary of the
Closing. All unpaid principal and unpaid accrued interest shall be paid on
September 15, 2004 ("Maturity"). Both principal and interest are payable in
lawful money of the United States of America at Health Food Associates, Inc.,
d.b.a. Akin's, 7807 East 51st Street, Tulsa, Oklahoma 74145, to the attention
of Eric Hinkefent. Exhibit A sets forth, for each Payee, the amount of the
initial principal balance of this Note to which that Payee is entitled, and
the percentage obtained from dividing such amount by the initial principal
balance of this Note ("Payee Percentage"). Each time the Corporation makes a
payment under this Note, such payment will deemed properly made to all Payees
if the Corporation delivers to Eric Hinkefent separate checks, one payable to
each of the Payees, with the amount of each respective separate check equal to
the total payment made by the Corporation multiplied by the Payee Percentage
for the respective Payee. Eric Hinkefent assumes all responsibility for
distributing the separate checks to the Payees, and the Corporation shall be
entitled to assert as a complete defense to any claim of nonpayment by any
Payee that the relevant payment was delivered to Eric Hinkefent.
2. Security. This Note is secured by a pledge of stock pursuant to the
terms of the Pledge Agreement between Corporation and Holder. Any and every
right and action that may be taken by the Holder under this Note is valid only
if such right or action has been authorized in advance by unanimous written
consent of all of the Payees, and if such written consent is delivered to the
Corporation upon request.
3. Covenant. As long as any amount remains unpaid under this Note, the
Corporation will take such actions as may be necessary to cause the year-end
net worth of HFA Associates, Inc. ("HFA"), or any successor or division whose
business is a successor thereto, to be not less than the net worth of HFA as
of the end of the month preceding the date of this Note. Compliance with this
covenant shall be determined exclusively by certification of the net worth of
HFA as of its fiscal year-end delivered to Holder not later than April 1 of
each year.
4. Prepayment. At any time during the term of this Note, Corporation
may prepay all or any portion of the principal and accrued interest on the
indebtedness under this Note without penalty of any kind.
4.1 Subordination and Priority. The indebtedness evidences by
this Note, including the principal and accrued interest, is expressly
subordinate and subject in right of payment to the prior payment in full of
all "Senior Indebtedness," whether now outstanding or hereafter created,
incurred, assumed or guaranteed. Upon any terminating liquidation of assets
of the Corporation, or upon the occurrence of any dissolution, winding up,
liquidation, whether or not in bankruptcy, insolvency or receivership
proceedings, the Corporation shall not pay thereafter, and the Holder of this
Note shall not be entitled to receive thereafter, any amount in respect of the
principal and interest of this Note unless and until the Senior Indebtedness
shall have been paid or otherwise discharged.
4.2 Senior Indebtedness. The term "Senior Indebtedness" shall
mean the principal of, premium, if any, and interest on (a) indebtedness
(other than this Note or any previously issued subordinated Note) of the
Corporation evidenced by notes or similar obligations for money borrowed for
trade purposes from or guaranteed to persons, firms or corporations which
engage in lending money, including, but without limitation, individuals,
banks, trust companies, insurance companies and other financing institutions
and charitable trusts, pension trusts and other investing entities or
organizations, (b) indebtedness of the Corporation for trade purposes
evidenced by notes or Notes issued under the provisions of an indenture or
similar instrument between the Corporation and a bank or trust Corporation and
(c) indebtedness incurred, assumed or guaranteed by the Corporation in
connection with the acquisition by it of any property or asset for trade
purposes; provided that Senior Indebtedness shall exclude indebtedness which,
by the terms of the instrument creating or evidencing such indebtedness,
expressly provides that such indebtedness is not superior in right of payment
to this Note. Senior Indebtedness shall exclude, and the indebtedness
evidenced by this Note is expressly senior and entitled to priority in payment
and upon liquidation with respect to, (i) all capital stock of the
Corporation, and (ii) any indebtedness issued after the date of this Note and
convertible into shares of the Corporation's Common Stock. Upon request by
the Corporation, Holder shall promptly sign any subordination agreement or
other acknowledgment consistent with the foregoing provisions.
4.3 Rights Against the Corporation and Others. It is understood
that the provisions of this Section 4 are solely for the purpose of defining
the relative rights of the Holder of this Note and the holder of the Senior
Indebtedness of the Corporation. Nothing contained in this Section 4 or
elsewhere in this Note shall or is intended to impair, as between the
Corporation, its creditors other than the holder of Senior Indebtedness, and
the Holder of this Note, the unconditional and absolute obligation of the
Corporation to pay the Holder of this Note the principal of and interest on
this Note as and when the same shall become due and payable in accordance with
its terms or affect the relative rights of the Holder of this Note and the
creditors of the Corporation, other than the holder of such Senior
Indebtedness; nor shall anything herein prevent the Holder of this Note from
exercising all remedies otherwise permitted by applicable law upon default
under this Note, subject to the rights, if any, of the holders of Senior
Indebtedness in respect to cash, property or securities of the Corporation
received upon the exercise of any such remedy.
5. Default. In the event of default in payment of any amount when due,
at the option of the Holder, interest may be charged on the amount delinquent
at a rate of twelve percent (12%) per annum (the "Default Rate"), effective
from the date that such amount shall become delinquent and in default pursuant
to Section 6 below. Interest shall continue until such delinquent amount,
with interest thereon at the Default Rate, shall have been paid.
6. Notice and Cure. Notwithstanding any other provision of this Note
to the contrary, Corporation shall be entitled to cure any failure to observe
or perform any condition or obligation under this Note or under any instrument
securing it within 20 days after written notice there of by Holder, and no
default hereunder shall be deemed to exist until the expiration of such 20-day
period without such failure having been cured.
7. Waivers. Failure of the Holder to exercise any option hereunder
shall not constitute a waiver of the right to exercise the same in the event
of any subsequent default or in the event of continuance of any existing
default after demand for strict performance hereof. Corporation hereby waives
demand, diligence, presentment for payment, notice of dishonor or nonpayment,
protest, and notice of protest in collection of this Note or in enforcing the
pledge of stock which is security for this Note. Corporation also agrees that
the granting without notice of any renewal or extension or extensions of time
for payment of any sum due hereunder of for the performance of any covenant,
condition or agreement of this Note shall in no way release or discharge the
liability of the Corporation.
8. Notices. All notices, requests, demands and other communications
under this Note must be in writing. Notices are deemed given (a) when
personally delivered, (b) on the date of receipt when given by facsimile or by
overnight courier service, or (c) on the fifth business day after mailing by
first class mail. Notices must be sent to the following addresses (or any
other address designated in writing by a party to change its address):
To Corporation: Food for Health Co., Inc.
3655 W. Washington Street
Phoenix, AZ 85009
Attention: Jerry Fleming, President
Copy to: Lewis and Roca LLP
40 North Central Avenue
Phoenix, Arizona 85004
Attention: Scott DeWald, Esq.
To Holder: Health Food Associates, Inc.
d.b.a. Akin's, 7807 East 51st Street
Tulsa, Oklahoma 74145
Attention: Eric Hinkefent
with a copy to:
Atkins and Atkins, P.C.
427 South Boston Avenue, Suite 815
Tulsa, Oklahoma 74103-4154
Attention: R. Blake Atkins
9. Law Governing. This Note is to be governed by and construed in
accordance with the laws of the State of Arizona.
10. Negotiability and Assignability. This note is not negotiable by
the Holder, and the Holder's interest shall not be assignable without prior
written consent of the Corporation, such consent shall not be unreasonably
withheld. This Note is binding upon the heirs, legal representatives,
successors and assigns of Corporation, and inures to the benefit of Holder,
its legal representatives, successors and permitted assigns.
11. No Conflict. This Note provides for payment of amounts owed to
Holder in connection with the Stock Purchase Agreement. To the extent the
amount and terms of payment of this Note vary from those specified in the
Stock Purchase Agreement, the terms of this Note control.
12. Attorney's Fees. In the event of any dispute regarding this Note,
the prevailing party shall be entitled to receive, in addition to any other
award, reasonable attorneys' fees and costs, determined by the court or
arbitrator and not a jury.
13. Legal Limits on Interest. In no event shall interest on this Note
(including prepaid interest, additional interest, or any charge, fee, cost or
expense) exceed the amount Holder may lawfully collect. If the effective rate
of interest for any monthly installment period exceeds the amount Holder may
lawfully collect, all excess sums will be applied to reduce the principal
balance of this Note immediately upon receipt of such sums by Holder or, if in
excess of the amount due under the Note, waived or refunded to Corporation.
14. Severability. If any of the provisions of this Note shall be held
by a court of competent jurisdiction to be invalid, illegal or unenforceable
in any respect, the validity of the remaining provisions of this Note shall in
no way be affected, prejudiced or disturbed thereby.
CORPORATION:
FOOD FOR HEALTH CO., INC.,
an Arizona Corporation
Jerry Fleming
-----------------------------------
Jerry Fleming, President
EXHIBIT A
TO SECURED NOTE
AGGREGATE
PRINCIPAL PAYEE
NAME AMOUNT PERCENTAGE
- -------------------------------------- ------------- ----------
James C. Hinkefent and Marilyn M. $2,160,000.00 27.00%
Hinkefent, as trustees of the James C.
Hinkefent Trust dated July 11, 1994,
as amended
Eric Hinkefent $1,460,000.00 18.25%
Mary Ann O'Dell $1,460,000.00 18.25%
Sally Sobol $1,460,000.00 18.25%
Amy Laminsky $1,460,000.00 18.25%
------------- ------
TOTAL $8,000,000.00 100.00%
============= ======
PLEDGE AGREEMENT
This PLEDGE AGREEMENT ("Agreement") is dated as of September 15, 1999,
between James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James
C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann
O'Dell, Sally Sobol, and Amy Laminsky (each of which is a "Shareholder" and
all of which are, collectively, "Pledgee"), and Food for Health Co., Inc., an
Arizona corporation ("Pledgor").
RECITALS:
A. Pledgor and Pledgee are parties to a Stock Purchase Agreement dated
August 30, 1999, under which Pledgor has agreed to purchase all outstanding
shares of the common stock of HFA Associates, Inc., an Oklahoma corporation
(the "Corporation"), including 140,000 shares of Class A common stock and
750,000 shares of Class B common stock (the "Shares") from Pledgee for a
purchase price payable in part by a Secured Promissory Note in the principal
amount of $8,000,000, signed by Pledgor (the "Secured Note").
B. Under the terms of the Stock Purchase Agreement, Pledgor has agreed
to pledge the Shares to Pledgee as security for the performance of its
obligations under the Secured Note and this Agreement.
AGREEMENTS:
In consideration of the recitals and the mutual agreements set forth in
this Agreement, the parties agree as follows:
1. Delivery of Certificates to Pledgee. Pledgor pledges to Pledgee and
grants to Pledgee a security interest in the Shares (together with all
proceeds or distributions arising from ownership of the Shares, which shall be
included in the definition of "Shares" for purposes of this Agreement) to
secure the payment of the amounts due and the performance of Pledgor's
obligations under the Secured Note, and this Agreement (collectively,
"Obligations"). Pledgor hereby delivers to Pledgee the certificates (the
"Certificates") evidencing the Shares.
2. Shares Held as Security. Pledgee shall hold the Shares as security
for the Obligations subject to the terms of this Agreement. If permitted by
law, Pledgor authorizes Pledgee to file a financing statement with respect to
the Shares signed only by Pledgee, and to file a copy of this Agreement with
such financing statement.
3. Release of Shares. Unless the parties agree otherwise, Pledgee
shall deliver to Pledgor the Certificates within 10 days after the earliest to
occur of the following conditions:
3.1 Pledgee receives payment or prepayment (as defined in the
Secured Note) of the entire amount due under the Secured Note, including all
principal, interest, and any other amounts due under the Secured Note; or
3.2 Any event by which Pledgor's liability under the Secured Note
is completely discharged.
4. Actions By Pledgee. Any and every right and action that may be
taken by the Pledgee under this Agreement is valid only if such right or
action has been authorized in advance by unanimous written consent of all of
the Shareholders and if such written consent is delivered to Pledgor upon
request.
5. Remedies Upon Default. If Pledgor defaults in its Obligations and
such default is not cured within 30 days after notice as permitted under the
Secured Note, Pledgee has at its option all of the rights and remedies of a
secured party accorded by Arizona law. Pledgee's rights under this section
will be cumulative with respect to any other rights and remedies it may have
under this Agreement.
5.1 Expenses of Disposition. Pledgee is entitled to reimbursement
for any expenses (including reasonable attorneys' fees and legal expenses)
involved in the retaking, holding, preparing for sale, selling or similar
charges, incurred in connection with the disposition of the Shares if Pledgor
defaults, including any amounts paid to discharge prior security interests or
liens or in settlement of prior security interests or liens.
6. Voting and Dividend Rights. If Pledgor has not breached the Secured
Note, and the Shares have not been deemed transferred to Pledgee because of a
default by Pledgor:
6.1 Pledgor has the right to vote the Shares without any notice to
or consent by Pledgee; and
6.2 Pledgor has the right to receive all dividends declared with
respect to the Shares so long as:
6.2.1 any dividend in connection with a partial or total
liquidation, dissolution, or reduction in capital, capital surplus, or paid in
surplus, any redemption or exchange for the Shares, or any dividend that
results from the sale of the Corporation or its assets, is paid to Pledgee and
applied to amounts due under the Secured Note, with the remainder, if any,
returned to Pledgor; and
6.2.2 any dividend in shares or property is delivered to
Pledgee and held as security for the Obligations, to be returned to Pledgor
upon release of the Shares under Section 3.
7. Other Liens. Pledgor agrees it will not sell or otherwise dispose
of the Shares and agrees to keep the Shares free and clear of all liens and
encumbrances for as long as they are pledged to Pledgee under this Agreement.
8. Reasonable Care. Pledgee is deemed to have exercised reasonable
care in the custody and preservation of the Shares in its possession if it
accords the Shares treatment substantially equal to that which Pledgee accords
its own property. Pledgee will have no responsibility for (a) ascertaining or
taking action with respect to calls, conversions, exchanges, tenders or other
matters relative to the Shares, whether or not Pledgee has or is deemed to
have knowledge of such matters, or (b) taking any necessary steps to preserve
rights against any parties with respect to the Shares.
9. Cooperation. In order to carry out this Agreement, each party will
cooperate, will take further action, and will execute, acknowledge and deliver
any further instruments reasonably requested by either party.
10. Amendment. The parties may amend this Agreement only by a written
agreement signed by both parties or their respective successors or assigns.
11. Governing Law. This Agreement is governed by and construed and
enforced in accordance with the laws of the State of Arizona.
12. Headings. The descriptive section headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
13. Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together are one original.
14. Notices. All notices, requests, demands and other communications
under this Agreement must be in writing. Notices are deemed given (a) when
personally delivered (b) on the date of receipt when given by facsimile or by
overnight courier service, or (c) on the fifth business day after mailing by
first class mail. Notices must be sent to the parties at the following
addresses:
To Corporation: Food for Health Co., Inc.
3655 W. Washington Street
Phoenix, AZ 85009
Attention: Jerry Fleming, President
Copy to: Lewis and Roca LLP
40 North Central Avenue
Phoenix, Arizona 85004
Attention: Scott DeWald, Esq.
To Holder: Health Food Associates, Inc.
7807 East 51st Street
Tulsa, Oklahoma 74145
Attention: Eric Hinkefent
with a copy to:
Atkins and Atkins, P.C.
427 South Boston Avenue, Suite 815
Tulsa, Oklahoma 74103-4154
Attention: R. Blake Atkins
15. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Pledgor, Pledgee and their respective personal representatives,
successors and assigns and shall be binding upon any person or entity to whom
any of the Shares is transferred and the legal representatives of any such
person or persons, entity or entities.
16. Attorneys' Fees. If any dispute regarding this Agreement arises,
the prevailing party is entitled to receive, in addition to any other award,
reasonable attorneys' fees and costs, determined by the court or arbitrator
and not a jury.
"PLEDGEE"
September 15, 1999 James C. Hinkefent
Date of Signing:------------------ --------------------------------------
James C. Hinkefent, as trustee of the
James C. Hinkefent Trust dated July 11,
1994, as amended
September 15, 1999 Marilyn M. Hinkefent
Date of Signing:------------------ --------------------------------------
Marilyn M. Hinkefent, as trustee of the
James C. Hinkefent Trust dated July 11,
1994, as amended
September 15, 1999 Eric Hinkefent
Date of Signing:------------------ --------------------------------------
Eric Hinkefent
6384 South 86th East Avenue
Tulsa, Oklahoma 74133
September 15, 1999 Mary Ann O'Dell
Date of Signing:------------------ --------------------------------------
Mary Ann O'Dell
4104 West Elgin
Broken Arrow, Oklahoma 74012
September 15, 1999 Sally Sobol
Date of Signing:------------------ --------------------------------------
Sally Sobol
11533 East 7th
Tulsa, Oklahoma 74128
September 15, 1999 Amy Laminsky
Date of Signing:------------------ --------------------------------------
Amy Laminsky
5611 South 95th East Avenue
Tulsa, Oklahoma 74145
"PLEDGOR"
FOOD FOR HEALTH CO., INC.,
an Arizona corporation
September 15, 1999 Jerry Fleming
Date of Signing:------------------ --------------------------------------
Jerry Fleming, President
September 15, 1999 Grant Anderson
Date of Signing:------------------ --------------------------------------
Grant Anderson, Secretary
NEWS RELEASE
FOR FURTHER INFORMATION CONTACT: FOR IMMEDIATE RELEASE
Jerry Fleming, President
Food For Health Co., Inc.
Telephone: (602) 269-2371
Facsimile: (602) 278-1630
Food For Health Acquires Akin's Natural Foods Market
----------------------------------------------------
Phoenix, AZ, September 16, 1999 Food For Health Company, Inc., a wholly-
owned subsidiary of AMCON Distributing Company (NASDAQ: DIST), announced today
that it has completed the acquisition of all of the outstanding stock of
Health Food Associates, Inc. (dba Akin's Natural Foods Market) for an
undisclosed price.
Akin's Natural Foods Market, first established in 1935 and headquartered in
Tulsa, is a highly acclaimed chain of six health and natural product retail
stores, all offering an extensive selection of natural supplements and herbs,
dairy products, delicatessen items and organic produce. Akin's has locations
in Tulsa (2 stores) and Oklahoma City, Oklahoma; Lincoln, Nebraska;
Springfield, Missouri; and Topeka, Kansas.
Earlier this year, Food For Health announced its acquisition of Chamberlin's
Market and Cafe, an award winning chain of natural food stores headquartered
in Orlando, Florida. Prior to that, Food For Health announced its acquisition
of U.S. Health, a health food distribution company headquartered in Melbourne,
Florida.
Food For Health Co., Inc., which primarily serves the western and southern
United States, is a leading wholesale distributor of health and beauty care
products, dairy and frozen foods, and organic produce. Food For Health has
three facilities located in Texas, Arizona and Florida. Chamberlin Natural
Foods, Inc., a wholly-owned subsidiary of Food For Health, operates six health
and natural product retail stores in central Florida. Chamberlin's was
designated last year by a trade publication as the number one health food
retail chain in America. AMCON is a leading wholesale distributor of consumer
products, with seven distribution centers in Kansas, Missouri (2), Nebraska,
North Dakota, South Dakota and Wyoming.
-end-
