<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Date of Report (Date of earliest event reported): January 13, 1999
THERMATRIX INC.
(Exact name of Registrant as specified in its charter)
Commission File Number 0-20819
Delaware 94-2958515
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
2025 Gateway Place, Suite 132 95110-1005
San Jose, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 453-0490
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) Thermatrix Inc., a Delaware corporation (the "Company"), TMX
Acquisition Sub I, Inc., a Delaware corporation and a wholly-owned subsidiary of
Thermatrix ("Merger Sub"), and Wahlco Environmental Systems, Inc., a Delaware
corporation ("Wahlco") entered into an Agreement and Plan of Merger, dated
November 9, 1998 (the "Merger Agreement"). On January 13, 1999, in accordance
with the terms of the Merger Agreement, Merger Sub merged into Wahlco, Wahlco
became a wholly-owned subsidiary of the Company, and each outstanding share of
the common stock of Wahlco, converted into the right to receive a pro-rata share
of an initial payment equal to $1,581,768.50, subject to certain adjustments for
expenses, and a pro-rata share of one or more contingent payments in an amount
that will depend on the resolution of claims and other contingencies, not
expected to exceed $2,000,000 in the aggregate (the "Contingent Payments"). The
Contingent Payments, if any, would primarily be funded from collection of
certain payables owed to Wahlco.
In connection with the acquisition of Wahlco, the Company executed (i) a
Guaranty, dated as of January 13, 1999 (the "Guaranty"), to guaranty certain
obligations (the "Obligations") of Wahlco under (A) a certain Amended and
Restated Credit Agreement, dated as of January 30, 1998 (the "Credit
Agreement"), among Wahlco, the lenders party thereto (collectively, the
"Lenders") and Wexford Management LLC, as agent on behalf of the Lenders (the
"Agent") and (B) certain Notes issued by Wahlco to the Chase Manhattan Bank
pursuant to a non-committed line of credit, dated respectively, March 2, 1998,
September 22, 1998, October 8, 1998 and October 19, 1998 and (ii) a Security
Agreement, dated as of January 13, 1999, to secure the Obligations under the
Guaranty, by granting a security interest in all of the Company's assets for the
benefit of the Lenders and the Agent. The outstanding aggregate principal
amount of the Obligations is approximately five million dollars ($5,000,000) and
such Obligations mature on February 2, 1999. The Company is in the process of
extending the maturity date of the Obligations for an additional six months.
(b) Wahlco designs, manufactures and sells combined cycle gas turbine
products, metallic bellows, air pollution control equipment, and related
products and services to electric utilities, independent power producers, co-
generation plants, and industrial manufacturers worldwide. Wahlco also provides
mechanical plant installation services and rents associated equipment to users
in the United Kingdom. Wahlco operates through several subsidiaries which focus
on specific geographical regions or products. The Company intends to continue
to devote the property, plant and equipment acquired from Wahlco to these uses.
<PAGE>
ITEM 7 FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements and exhibits are filed as part of this
Report, where indicated.
(a) Financial statements of business acquired, prepared pursuant to Rule
3-05 of Regulation S-X:
Financial statements were previously reported in Wahlco's Annual Report on
Form 10-K for the year ended December 31, 1997 and Quarterly Reports on Form 10-
Q for the fiscal quarters ended March 31, 1998, June 30, 1998, and September 30,
1998, respectively, are incorporated by reference herein.
(b) Pro forma financial information required pursuant to Article 11 of
Regulation S-X:
The pro forma financial information is unavailable as of the date of this
filing. Such information will be filed on or before the sixtieth day following
the filing date of this Current Report on Form 8-K.
(c) Exhibits in accordance with Item 601 of Regulation S-K:
Exhibit
Number Description
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2.1 Agreement and Plan of Merger dated November 9, 1998 by and among
Thermatrix Inc., TMX Acquisition Sub I, Inc. and Wahlco Environmental
Systems, Inc.
2.2 Security Agreement dated January 13, 1999 by and among Thermatrix,
Inc., Wexford Capital Partners II, L.P., Wexford Overseas Partners
I, L.P., Wexford Special Situations 1996, L.P., Wexford Special
Situations 1996 Institutional, L.P., Wexford Special Situations 1996
Limited, Wexford-Euris Special Situations 1996, L.P. and Wexford
Management LLC.
2.3 Guaranty dated January 13, 1999 by and among Thermatrix Inc.,
Wexford Capital Partners II, L.P., Wexford Overseas Partners I, L.P.,
Wexford Special Situations 1996, L.P., Wexford Special Situations 1996
Institutional, L.P., Wexford Special Situations 1996 Limited, Wexford-
Euris Special Situations 1996, L.P. and Wexford Management LLC.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THERMATRIX INC.
Date: January 27, 1999 By: /s/ DANIEL S. TEDONE
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Daniel S. Tedone
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
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2.1 Agreement and Plan of Merger dated November 9, 1998 by and among
Thermatrix Inc., TMX Acquisition Sub I, Inc. and Wahlco Environmental
Systems, Inc.
2.2 Security Agreement dated January 13, 1999 by and among Thermatrix,
Inc., Wexford Capital Partners II, L.P., Wexford Overseas Partners
I, L.P., Wexford Special Situations 1996, L.P., Wexford Special
Situations 1996 Institutional, L.P., Wexford Special Situations 1996
Limited, Wexford-Euris Special Situations 1996, L.P. and Wexford
Management LLC.
2.3 Guaranty dated January 13, 1999 by and among Thermatrix Inc.,
Wexford Capital Partners II, L.P., Wexford Overseas Partners I, L.P.,
Wexford Special Situations 1996, L.P., Wexford Special Situations 1996
Institutional, L.P., Wexford Special Situations 1996 Limited, Wexford-
Euris Special Situations 1996, L.P. and Wexford Management LLC.
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
by and among
THERMATRIX INC.,
TMX ACQUISITION SUB I, INC.
and
WAHLCO ENVIRONMENTAL SYSTEMS, INC.
dated as of November 9, 1998
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TABLE OF CONTENTS
Page
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DEFINITIONS.................................................................1
ARTICLE 1. THE MERGER.......................................................7
1.1 Effective Time of The Merger...................................7
1.2 Closing........................................................7
1.3 Effects of the Merger..........................................8
1.4 Directors and Officers.........................................8
ARTICLE 2. CONVERSION OF SECURITIES.........................................8
2.1 Conversion of Capital Stock....................................8
2.2 Exchange of Certificates.......................................9
2.3 Appraisal Rights..............................................11
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF TARGET........................11
3.1 Organization..................................................12
3.2 TARGET Capital Structure......................................12
3.3 Subsidiaries..................................................13
3.4 Authority and Status..........................................13
3.5 No Conflict; Required Filings and Consents....................13
3.6 SEC Filings; Financial Statements.............................14
3.7 No Undisclosed Liabilities....................................15
3.8 Absence of Certain Changes or Events..........................15
3.9 Taxes.........................................................16
3.10 Restrictions on Business Activities...........................17
3.11 Title to Properties; Absence of Liens and Encumbrances........17
3.12 Intellectual Property.........................................17
3.13 Agreements, Contracts and Commitments.........................18
3.14 Employees; Employment Matters.................................20
3.15 Employee Benefit Plans........................................21
3.16 Litigation....................................................21
3.17 Licenses and Permits; Compliance with Law.....................21
3.18 Insurance.....................................................22
3.19 Related Parties...............................................22
3.20 Clients.......................................................22
3.21 Warranty; Unbillable Work.....................................23
3.22 Environmental Liability.......................................23
3.23 Brokers or Finders............................................23
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TABLE OF CONTENTS
(continued)
Page
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ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB................24
4.1 Organization.................................................24
4.2 Authority; No Conflict; Required Filings and Consents........24
4.3 Financing....................................................25
4.4 Sophisticated Purchaser; Access to Information; No Oral
Representations.............................................25
ARTICLE 5. CONDUCT OF BUSINESS............................................25
5.1 Covenants of TARGET..........................................25
5.2 SEC Filings; Financial Statements............................27
5.3 Cooperation..................................................27
5.4 Board of Directors...........................................28
ARTICLE 6. ADDITIONAL AGREEMENTS..........................................28
6.1 No Solicitation..............................................28
6.2 Proxy Statement..............................................29
6.3 Stockholders' Meeting........................................30
6.4 Consents.....................................................30
6.5 Access to Information........................................30
6.6 Legal Conditions to Merger...................................30
6.7 Update Disclosure; Breaches; Opportunity to Cure.............31
6.8 Trading Prohibitions.........................................31
6.9 Voting Agreement.............................................31
6.10 Additional Agreements; Reasonable Efforts....................31
6.11 Security Interest............................................32
6.12 Collection and Payment of the Net Proceeds...................32
6.13 Payment of Wexford Debts and Replacement of Wexford
Guarantees..................................................33
6.14 Working Capital..............................................33
6.15 Subsidiaries.................................................33
6.16 Fees and Expenses............................................33
ARTICLE 7. CONDITIONS TO MERGER..........................................34
7.1 Conditions to Each Party's Obligation to Effect the Merger...34
7.2 Additional Conditions to Obligations of BUYER................34
7.3 Additional Conditions to Obligations of TARGET...............35
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TABLE OF CONTENTS
(continued)
Page
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ARTICLE 8. TERMINATION AND AMENDMENT......................................35
8.1 Termination..................................................35
8.2 Effect of Termination........................................37
8.3 Fees and Expenses............................................37
8.4 Amendment....................................................38
8.5 Extension; Waiver............................................38
ARTICLE 9. MISCELLANEOUS.................................................38
9.1 Nonsurvival of Representations, Warranties and Agreements....38
9.2 Notices......................................................38
9.3 Interpretation...............................................40
9.4 Counterparts.................................................40
9.5 Governing Law................................................40
9.6 Arbitration..................................................40
9.7 Assignment...................................................41
9.8 Entire Agreement; No Third Party Beneficiaries...............41
9.9 Severability.................................................41
9.10 Exhibits and Schedules Incorporated..........................41
EXHIBITS AND SCHEDULES
Exhibit A Voting and Option Agreement
Schedule I Wexford Debts
Schedule II Wexford Guarantees
Schedule 3 TARGET Disclosure Schedule
Schedule 4 BUYER Disclosure Schedule
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 9, 1998 (this
"Agreement") by and among Thermatrix Inc., a Delaware Corporation ("BUYER"), TMX
Acquisition Sub I, Inc., a Delaware corporation and a wholly-owned subsidiary of
BUYER ("SUB"), and Wahlco Environmental Systems, Inc., a Delaware corporation
("TARGET").
RECITALS
A. The Boards of Directors of BUYER, SUB and TARGET deem it advisable and
in the best interests of each corporation and its respective stockholders that
BUYER and TARGET combine in order to advance the long-term business strategies,
goals and interests of BUYER and TARGET;
B. The combination of BUYER and TARGET shall be effected by the terms of
this Agreement through a transaction in which SUB will merge with and into
TARGET, TARGET will be the surviving corporation and will become a wholly-owned
subsidiary of BUYER.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
DEFINITIONS
"Alternative Transaction" shall have the meaning set forth in Section 8.1.
"Approval" shall have the meaning set forth in Section 6.6.
"Business day" means a Monday through Friday on which banks are generally
open for business in California.
"BUYER Disclosure Schedule" shall have the meaning set forth in Article 4.
"BUYER Expenses" shall have the meaning set forth in Section 8.3(a).
"Certificate of Merger" shall have the meaning set forth in Section 1.1.
"Certificate(s)" shall have the meaning set forth in Section 2.2(b).
"Closing" shall have the meaning set forth in Section 1.2.
"Closing Date" shall have the meaning set forth in Section 1.2.
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"COBRA" shall have the meaning set forth in Section 3.14(d).
"Competing Offer" shall have the meaning set forth in Section 6.1(a).
"Confidentiality Agreement" shall have the meaning set forth in Section
6.1(a).
"Constituent Corporations" shall have the meaning set forth in Section
1.3(a).
"Contingent Payments" shall have the meaning set forth in Section
2.1(c)(ii).
"Credit Agreement" shall have the meaning set forth in the definition of
"Wexford Debts."
"Designated Amounts" shall mean (i) (Pounds)637,310 due from Mannesmann
Demag together with any fees or interest on such amount that may be recovered
(the "Mannesmann Receivable"), and (ii) (x) (Pounds)688,310 on deposit with
London International and Mercantile, a company organized under the laws of the
United Kingdom ("LIM"), to secure WEP's obligation to indemnify LIM against any
payments LIM may be required to make to customers of WEP holding guarantees
issued by LIM to secure WEP's obligations to such customers under WEP
warranties, (y) the rate of return due to WEP on such amount and (z) any and all
other payments due and owing to WEP from LIM in respect of such amounts without
giving effect to any set off against such funds by LIM in respect of fees owed
to LIM by WEP in respect of the LIM guarantees ((x), (y) and (z) collectively,
the "LIM Funds").
"DGCL" shall have the meaning set forth in Section 1.1.
"Dissenting Shares" shall have the meaning set forth in Section 2.3.
"Dissenting Stockholder" shall have the meaning set forth in Section 2.3.
"Effective Time" shall have the meaning set forth in Section 1.1.
"Environmental Claim" shall mean any notice, claim, act, cause of action or
investigation by any person alleging potential liability (including potential
liability for investigatory costs, cleanup costs, governmental response costs,
natural resources damages, property damages, personal injuries or penalties)
arising out of, based on or resulting from (i) the presence, or release into the
environment, of any Hazardous Materials or (ii) any violation, or alleged
violation, of any Environmental Laws.
"Environmental Laws" shall mean all federal, state, local and foreign laws
and regulations relating to pollution or the environment (including ambient air,
surface water, ground water, land surface or subsurface strata) or the
protection of human health and worker safety, including, without limitation,
laws and regulations relating to emissions, discharges, releases or threatened
releases of Hazardous Materials, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials.
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<PAGE>
"ERISA Affiliate" shall mean any corporation or other business entity that
is included in a controlled group of corporations within which TARGET is also
included, as provided in Section 414(b) of the Code; or which is a trade or
business under common control with TARGET, as provided in Section 414(c) of the
Code; or which constitutes a member of an affiliated service group within which
TARGET is also included, as provided in Section 414(m) of the Code; or which is
required to be aggregated with TARGET pursuant to regulations issued under
Section 414(o) of the Code. All ERISA Affiliates are listed in the TARGET
Disclosure Schedule.
"Event" shall have the meaning set forth in Section 6.7.
"Exchange Act" shall have the meaning set forth in Section 3.5(b).
"Exchange Agent" shall have the meaning set forth in Section 2.2(a).
"Exchange Fund" shall have the meaning set forth in Section 2.2(a).
"GAAP" means generally accepted accounting principles as in effect from
time to time, applied consistently with the principles used in preparing
financial statements of the respective party.
"Governmental Entity" shall have the meaning set forth in Section 3.5(b).
"Hazardous Materials" means chemicals, pollutants, contaminants, wastes,
toxic substances, radioactive and biological materials, asbestos-containing
materials (ACM), hazardous substances, petroleum and petroleum products or any
fraction thereof.
"Include" shall have the meaning set forth in Section 9.3.
"Include without limitation" shall have the meaning set forth in Section
9.3.
"Indebtedness" of any Person means all obligations of such Person which in
accordance with GAAP should be classified upon a balance sheet of such Person as
liabilities of such Person, and in any event, regardless of how classified in
accordance with GAAP, shall include: (i) all obligations of such Person for
borrowed money or which have been incurred in connection with the purchase of
property or assets; (ii) obligations secured by any Security Interest upon
property or assets owned by such Person, even though such Person has not assumed
or become liable for the payment of such obligations; (iii) obligations created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person, notwithstanding the fact that the
rights and remedies of the seller, lender or lessor under such agreement in the
event of default are limited to repossession or sale of the property; and (iv)
that portion of capitalized lease obligations properly classified as a liability
on a balance sheet in accordance with GAAP.
"Initial Payment" shall have the meaning set forth in Section 2.1(c)(i).
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"Interim Funding Cap" shall mean any amounts advanced to TARGET by Wexford
with the approval of the Executive Committee, up to a total equal to the product
of $200,000 and the number of months from the date hereof to the Closing Date
(prorated for partial months), and a maximum of $500,000 in the aggregate.
"Latest Financial Statements" shall have the meaning set forth in Section
3.6(c).
"Liability" means any liability (whether known or unknown, whether absolute
or contingent, whether liquidated or unliquidated, and whether due or to become
due), obligation or Indebtedness.
"LIM" shall have the meaning set forth in the definition of "Designated
Amounts."
"LIM Funds" shall have the meaning set forth in the definition of
"Designated Amounts."
"Mannesmann Receivable" shall have the meaning set forth in the definition
of "Designated Amounts."
"Material Contracts" shall have the meaning set forth in Section 3.13.
"Merger" shall have the meaning set forth in Section 1.3(a).
"Merger Consideration" shall have the meaning set forth in Section
2.1(c)(ii).
"Net Proceeds" shall mean (i) the Designated Amounts collected on or before
the third anniversary of the Closing Date (ii) plus the amount by which the
Puerto Rico Tax Liability is less than $1.5 million (the "PR Surplus") or minus
the amount by which the Puerto Rico Tax Liability exceeds $1.8 million (the "PR
Deficit"), in each case as such amount shall be finally determined on or before
the third anniversary of the Closing Date, (iii) minus the reasonable costs of
collection, defense or settlement actually incurred on or before the third
anniversary of the Closing Date in collecting or seeking to collect the
Designated Amounts or in respect of counterclaims, and (iv) minus collection
fees owing to BUYER pursuant to Section 6.12 hereof; provided, however, that if
a final determination of the Puerto Rico Tax Liability shall not have been
reached on or before the third anniversary of the Closing Date, there shall be
no PR Surplus and no PR Liability.
"Ordinary Course of Business" means the ordinary course of business of
TARGET and its Subsidiaries, consistent with past custom and practice of TARGET
and its Subsidiaries (including with respect to quantity and frequency).
"Person" means any individual, trust, corporation, partnership, limited
partnership, limited liability company or other business association or entity,
court, governmental body or governmental agency.
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"Pentney" shall mean Pentney Engineering, Ltd., a limited liability company
organized under the laws of the United Kingdom, and an indirectly wholly-owned
subsidiary of TARGET.
"Plans" means: (i) all employee benefit plans as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA");
(ii) all other severance pay, deferred compensation, excess benefit, vacation,
stock, stock option, fringe benefit and incentive plans, contracts, schemes,
programs, funds, commitments, or arrangements of any kind; and (iii) all other
plans, contracts, schemes, programs, funds, commitments, or arrangements
providing money, services, property, or other benefits, whether written or oral,
formal or informal, qualified or nonqualified, funded or unfunded, and including
any that have been frozen or terminated, which pertain to any employee, former
employee, director, officer, stockholder, consultant, or independent contractor
of TARGET or any ERISA Affiliate of TARGET and (i) to which TARGET or any ERISA
Affiliate of TARGET is or has been a party or by which any of them is or has
been bound or (ii) with respect to which TARGET or any ERISA Affiliate of TARGET
has made any payments or contributions since December 31, 1987 or (iii) to which
TARGET or any ERISA Affiliate of TARGET may otherwise have any Liability
(including any such plan or arrangement formerly maintained by TARGET or any
ERISA Affiliate of TARGET).
"PR Deficit" shall have the meaning set forth in the definition of "Net
Proceeds."
"Preferred Proposal" shall have the meaning set forth in Section 6.1(a).
"PR Surplus" shall have the meaning set forth in the definition of "Net
Proceeds."
"Proxy Statement" shall have the meaning set forth in Section 6.2(a).
"Puerto Rico Tax Liability" means all taxes, including penalties and
interest, paid to or claimed by the Commonwealth of Puerto Rico on or after the
date of this Agreement with respect to operations conducted by TARGET and its
Subsidiaries in Puerto Rico prior to the date of this Agreement, and all legal,
accounting and other expenses incurred on or after the date of this Agreement in
connection with the investigation, defense and settlement of such tax
liabilities.
"Reserve" shall have the meaning set forth in Section 2.2(d).
"SEC" shall have the meaning set forth in Section 3.5(b).
"Securities Act" shall have the meaning set forth in Section 3.2(b).
"Security Interest" means any mortgage, pledge, security interest, charge,
lien or other encumbrance or right of any third party.
"Security Agreement" shall have the meaning set forth in Section 6.11.
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<PAGE>
"Shareholders" shall mean the beneficial owners of the TARGET Common Stock
issued and outstanding immediately prior to the Effective Time.
"Shareholder Representative" shall mean Wexford Management LLC as
representative of the Shareholders.
"Subsidiary" means, with respect to any Person, any corporation or other
entity, whether incorporated or unincorporated, of which (i) such Person or any
other Subsidiary of such Person is a general partner (excluding partnerships,
the general partnership interests of which held by such Person or any Subsidiary
of such Person do not have a majority of the voting interest in such
partnership) or (ii) at least a majority of the securities or other interests
having by their terms ordinary voting power to elect a majority of the Board of
Directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such Person or by any one or more of its Subsidiaries, or by such Person and
one or more of its Subsidiaries.
"Surviving Corporation" shall have the meaning set forth in Section 1.3(a).
"TARGET Balance Sheet" shall have the meaning set forth in Section 3.6(b).
"TARGET Common Stock" shall have the meaning set forth in Section 3.2(a).
"TARGET Disclosure Schedule" shall have the meaning set forth in Article 3.
"TARGET Expenses" shall have the meaning set forth in Section 8.3(b).
"TARGET Intellectual Property Rights" shall have the meaning set forth in
3.12(a).
"TARGET Material Adverse Effect" means a material adverse effect on the
business, operations, employee or client relations, properties, assets
(including intangible assets), liabilities (contingent or otherwise), financial
condition or results of operations of TARGET and its Subsidiaries taken as a
whole.
"TARGET Preferred Stock" shall have the meaning set forth in Section
3.2(a).
"TARGET SEC Reports" shall have the meaning set forth in Section 3.6(a).
"TARGET Stockholders Meeting" shall have the meaning set forth in Section
6.2(a).
"Tax" or "Taxes" means any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and liabilities,
including taxes based upon or measured by gross receipts, income, profits,
sales, use and occupation, and value added, ad valorem, transfer, franchise,
withholding, payroll, recapture, employment, excise and property taxes, together
with all interest, penalties and additions imposed with respect to such amounts
and any obligations
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<PAGE>
under any agreements or arrangements with any other person with respect to
such amounts, including any obligations with respect to taxes of a predecessor
entity.
"Tax return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third Party" shall have the meaning set forth in Section 8.1.
"Voting Agreement" shall have the meaning set forth in Section 6.9.
"WEP" shall mean Wahlco Engineered Products, Ltd., a limited liability
company formed under the laws of the United Kingdom, and an indirectly wholly-
owned subsidiary of TARGET.
"Wexford" shall have the meaning set forth in Section 6.9.
"Wexford Debts" shall mean all Indebtedness of TARGET and its Subsidiaries
which is owed to or guaranteed by Wexford (i) as set forth on Schedule I hereto,
----------
and (ii) any amounts approved by the Executive Committee and advanced by Wexford
to TARGET from the date hereof to the Closing Date, and (iii) in each case,
accrued and unpaid interest on such amounts from the date hereof to the Closing
Date in accordance with the terms of the Amended and Restated Credit Agreement
dated as of January 30, 1998 (the "Credit Agreement").
"Wexford Guarantees" shall mean all guarantees by Wexford of any
outstanding obligations of TARGET and its Subsidiaries (other than the Wexford
Debts) as of the Effective Time. Schedule II hereto sets forth the Wexford
-----------
Guarantees.
ARTICLE 1.
THE MERGER
1.1 Effective Time of The Merger. Subject to the provisions of this
----------------------------
Agreement, a certificate of merger prepared in accordance with Section 252 of
the Delaware General Corporation Law ("DGCL") (the "Certificate of Merger")
shall be duly prepared, executed and acknowledged by TARGET, SUB and such other
parties as may be appropriate, and thereafter the Certificate of Merger shall be
delivered to the Delaware Secretary of State for filing as soon as practicable
on or after the date on which the Closing occurs. The Merger shall become
effective on the date and at the time of the acceptance of the Certificate of
Merger by the Delaware Secretary of State or at such time thereafter as is
provided in the Certificate of Merger (the "Effective Time").
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1.2 Closing. The closing of the Merger (the "Closing") will take place at
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10:00 a.m., Pacific Time, on a date to be specified by BUYER and TARGET, which
shall be no later than two (2) business days following the satisfaction of the
conditions hereto (the "Closing Date"), at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304-1050, unless another
date or place is agreed to in writing by BUYER and TARGET.
1.3 Effects of the Merger.
---------------------
(a) At the Effective Time, (i) the separate existence of SUB shall
cease and SUB shall be merged (the "Merger") with and into TARGET (SUB and
TARGET are sometimes referred to herein as the "Constituent Corporations" and
TARGET is sometimes referred to herein as the "Surviving Corporation"), (ii) the
Certificate of Incorporation of TARGET as in effect immediately prior to the
Effective Time shall become the Certificate of Incorporation of the Surviving
Corporation, and (iii) the Bylaws of TARGET as in effect immediately prior to
the Effective Time shall become the Bylaws of the Surviving Corporation.
(b) At and after the Effective Time, the effects of the Merger shall
be as provided in the applicable provisions of the DGCL. Without limiting the
generality of the foregoing, and subject thereto, the Surviving Corporation
shall possess all the rights, privileges, powers and franchises of a public as
well as of a private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations; and all and
singular rights, privileges, powers and franchises of each of the Constituent
Corporations, and all property, real, personal and mixed, and all debts due to
either of the Constituent Corporations on whatever account, as well as for stock
subscriptions and all other things in action or belonging to each of the
Constituent Corporations, shall be vested in the Surviving Corporation, and all
property, rights, privileges, powers and franchises, and all and every other
interest shall be thereafter as effectually the property of the Surviving
Corporation as they were of the Constituent Corporations, and the title to any
real estate vested by deed or otherwise, in either of the Constituent
Corporations, shall not revert or be in any way impaired; but all rights of
creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the Constituent Corporations shall thereafter attach to the Surviving
Corporation, and may be enforced against it to the same extent as if such debts
and liabilities had been incurred by it.
1.4 Directors and Officers. The directors of SUB immediately prior to the
----------------------
Effective Time shall be the initial directors of the Surviving Corporation, and
the officers of SUB immediately prior to the Effective Time shall be the
officers of the Surviving Corporation.
ARTICLE 2.
CONVERSION OF SECURITIES
2.1 Conversion of Capital Stock. As of the Effective Time, by virtue of
---------------------------
the Merger and without any action on the part of the holders of any shares of
TARGET Common Stock or capital stock of Sub:
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<PAGE>
(a) Capital Stock of Sub. Each issued and outstanding share of the
--------------------
capital stock of SUB shall be converted into and become one fully paid and
nonassessable share of common stock, $.01 per share, of the Surviving
Corporation.
(b) Cancellation of Treasury Stock and BUYER-Owned Stock. Any shares
----------------------------------------------------
of TARGET Common Stock that are owned by BUYER, SUB or any other wholly-owned
Subsidiary of BUYER shall be canceled and retired and shall cease to exist and
no stock of BUYER or other consideration shall be delivered in exchange
therefor.
(c) Conversion of TARGET Common Stock. Subject to Section 2.3, each
---------------------------------
issued and outstanding share of TARGET Common Stock (other than shares to be
canceled in accordance with Section 2.1(b)) shall be converted into the right to
receive an amount per share equal to the sum of the following:
(i) An initial payment of $1,581,768.50 minus any amounts
advanced by Wexford to TARGET from the date hereof to the Closing Date in
excess of the Interim Funding Cap, divided by the number of shares of TARGET
Common Stock outstanding as of the Effective Time (the "Initial Payment"). The
Initial Payment will be payable upon surrender of Certificates for TARGET
Common Stock in accordance with Section 2.2. The Initial Payment is subject to
reduction as set forth in Section 6.16.
(ii) Contingent payments equal to (A) the Net Proceeds divided
by (B) the number of shares of TARGET Common Stock outstanding as of the
Effective Time (the "Contingent Payments" and together with the Initial
Payment, the "Merger Consideration"). The Contingent Payments will be
deposited with the Exchange Agent in accordance with Section 2.2 hereof.
All shares of TARGET Common Stock, when converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a Certificate representing any such shares shall cease
to have any rights with respect thereto, except the right to receive the Initial
Payment and Contingent Payment in consideration therefor upon the surrender of
such Certificate in accordance with Section 2.2, without interest.
(d) TARGET Stock Plans, Options and Rights. All outstanding options
--------------------------------------
and rights to purchase TARGET Common Stock issued under the TARGET 1996 Employee
Stock Option Plan shall be terminated as of the Effective Time.
(e) TARGET Warrants. The Surviving Entity will not assume any
---------------
outstanding warrants to purchase TARGET Common Stock. TARGET will obtain
agreements to terminate all warrants held by Wexford and Wexford affiliates.
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<PAGE>
2.2 Exchange of Certificates. The procedures for exchanging outstanding
------------------------
shares of TARGET Common Stock for cash pursuant to the Merger shall be as
follows:
(a) Exchange Agent. As of the Effective Time, BUYER shall deposit
--------------
with Boston Equiserve or another agent approved by BUYER and the Shareholder
Representative (the "Exchange Agent"), for the benefit of the Shareholders, the
aggregate amount of the Initial Payment payable pursuant to Section 2.1 in
exchange for outstanding shares of TARGET Common Stock. BUYER shall deposit, or
cause the Surviving Corporation to deposit, with the Exchange Agent any amounts
constituting all or part of the Net Proceeds promptly as such Net Proceeds are
received by the Surviving Corporation. The cash deposited for the Initial
Payment and Contingent Payments as it shall be constituted from time to time is
referred to as the "Exchange Fund."
(b) Exchange Procedures. As soon as reasonably practicable after the
-------------------
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of TARGET Common Stock (each a "Certificate" and,
collectively, the "Certificates") whose shares were converted pursuant to
Section 2.1 into the right to receive the Merger Consideration (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as BUYER and TARGET may reasonably specify), (ii) instructions for
use in effecting the surrender of the Certificates in exchange for the Merger
Consideration; and (iii) the notice of approval of the Merger and accompanying
statutory materials, information and instruction as required by Section 262 of
the DGCL. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by BUYER, together
with such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive, in exchange for the Certificate, the Merger
Consideration, and the Certificate so surrendered shall immediately be canceled.
In the event of a transfer of ownership of TARGET Common Stock which is not
registered in the transfer records of TARGET, the Merger Consideration may be
paid to a transferee if the Certificate representing such TARGET Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this
Section 2.2, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the Merger
Consideration. The instructions for effecting the surrender of the Certificates
shall set forth procedures that must be taken by the holder of any Certificate
that has been lost, destroyed or stolen. It shall be a condition to the right
of such holder to receive the Merger Consideration that the Exchange Agent shall
have received, along with the letter of transmittal, a duly executed lost
certificate affidavit, including an agreement to indemnify BUYER, signed exactly
as the name or names of the registered holder or holders appeared on the books
of TARGET immediately prior to the Effective Time, together with a customary
bond and such other documents as BUYER or the Exchange Agent may reasonably
require in connection therewith.
(c) No Further Ownership Rights in TARGET Common Stock. Merger
--------------------------------------------------
Consideration paid pursuant to this Section 2.2 shall be deemed when paid in
full to have been paid
-10-
<PAGE>
in full satisfaction of all rights pertaining to such shares of TARGET Common
Stock. There shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of TARGET Common
Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged as provided in this Section
2.2.
(d) Distribution from Exchange Fund. No amounts other than the
-------------------------------
Initial Payment shall be distributed from the Exchange Fund prior to the earlier
of the first anniversary of the Closing Date or the date on which the Puerto
Rico Tax Liability is finally determined. From such date until the expiration
of the Exchange Fund, amounts may be distributed from the Exchange Fund as and
when determined by the Shareholder Representative; provided, however, that until
the earlier of the final determination of the Puerto Rico Tax Liability and the
third anniversary of the Closing Date, an amount equal to 125% of the excess of
the estimated Puerto Rico Tax Liability (as estimated in good faith by BUYER)
over $1,800,000 (the "Reserve") shall not be distributed from the Exchange Fund;
and provided further that unless the Shareholder Representative shall have
instructed BUYER not to proceed with litigation to recover any funds that may
constitute Net Proceeds, then for each unresolved item in the Designated
Amounts, the Reserve shall be increased by $50,000.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund
----------------------------
which remains undistributed to the stockholders of TARGET within one month after
the third anniversary of the Closing Date shall be delivered to BUYER, and any
stockholders of TARGET who have not previously complied with this Section 2.2
shall thereafter look only to BUYER for payment of their claim for any Merger
Consideration and any dividends or distributions with respect to TARGET Common
Stock.
(f) No Liability. Neither BUYER nor TARGET shall be liable to any
------------
holder of shares of TARGET Common Stock, as the case may be, in respect of any
Merger Consideration delivered to a public official as required by any
applicable abandoned property, escheat or similar law.
2.3 Appraisal Rights. The shares of TARGET Common Stock ("Dissenting
----------------
Shares") held by any stockholder of TARGET who has demanded an appraisal
pursuant to the DGCL (a "Dissenting Stockholder") shall not be converted
pursuant to the Merger unless and until the holder thereof shall have failed to
perfect or shall have effectively withdrawn or lost such holder's rights to
demand an appraisal under the DGCL, and shall be entitled to receive only the
payment provided for by the DGCL. If any such holder shall fail to perfect or
shall have effectively withdrawn or lost the right to demand an appraisal, the
Dissenting Shares held by such Dissenting Stockholder shall thereupon be treated
as though such shares had been converted into the right to receive the Merger
Consideration pursuant to the terms hereof.
-11-
<PAGE>
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF TARGET
TARGET represents and warrants to BUYER and SUB that the statements
contained in this Article 3 are true and correct, except as set forth in the
disclosure schedule delivered by TARGET to BUYER (the "TARGET Disclosure
Schedule"). The TARGET Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
3, and the disclosure in any paragraph shall qualify only the corresponding
paragraph in this Article 3.
3.1 Organization. The TARGET Disclosure Schedule lists each of TARGET's
------------
Subsidiaries. Each of TARGET and its active Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
respective jurisdiction of its incorporation, has all requisite corporate power
to own, lease and operate its property and to carry on its business as now being
conducted and as proposed to be conducted, and is duly qualified and/or licensed
to do business and is in good standing as a foreign corporation in each
jurisdiction in which the failure to be so qualified would have a TARGET
Material Adverse Effect. Except as set forth on the TARGET Disclosure Schedule,
neither TARGET nor any of its Subsidiaries directly or indirectly owns any
equity or similar interest in, or any interest convertible into or exchangeable
or exercisable for, any corporation, partnership, joint venture or other
business association or entity, excluding securities in any publicly traded
company held for investment by TARGET and comprising less than one percent (1%)
of the outstanding stock of such company.
3.2 TARGET Capital Structure.
------------------------
(a) The authorized capital stock of TARGET consists of 50,000,000
shares of common stock, par value $0.01 per share ("TARGET Common Stock"), and
10,000,000 shares of Preferred Stock, par value $0.01 per share ("TARGET
Preferred Stock"). As of October 31, (i) 16,323,074 shares of TARGET Common
Stock were issued and outstanding, all of which are duly authorized, validly
issued, fully paid and nonassessable, (ii) there were options and rights
outstanding under the TARGET Stock Option Plans, entitling the optionees
thereunder upon valid exercise to acquire in the aggregate 1,342,556 shares of
TARGET Common Stock, (iii) there were warrants outstanding entitling the holders
thereof upon valid exercise to acquire in the aggregate 1,306,133 shares of
TARGET Common Stock at the exercise prices set forth on the TARGET Disclosure
Schedule, and (iv) no shares of TARGET Common Stock were held by any Subsidiary
of TARGET. No change in such capitalization has occurred since such date other
than the exercise and termination of stock options outstanding. No shares of
TARGET Preferred Stock were issued and outstanding. All shares of TARGET Common
Stock subject to issuance as specified above, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
shall be duly authorized, validly issued, fully paid and nonassessable. There
are no obligations, contingent or otherwise, of TARGET or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of TARGET
Common Stock or the capital stock of any TARGET Subsidiary or make any
investment (in the form of a loan, capital contribution or otherwise) in any
such Subsidiary or any other entity.
-12-
<PAGE>
(b) Except as set forth in this Section 3.2, there are no equity
securities of any class of TARGET or any of its Subsidiaries, or any security
exchangeable into or exercisable for such equity securities, issued, reserved
for issuance or outstanding. Except as set forth in this Section 3.2, there are
no options, warrants, equity securities, calls, rights, commitments or
agreements of any character to which TARGET or any of its Subsidiaries is a
party or by which any of them are bound obligating TARGET or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of TARGET or any of its Subsidiaries or
obligating TARGET or any of its Subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, call, right,
commitment or agreement. To the knowledge of TARGET, there are no voting
trusts, proxies or other agreements or understandings with respect to the shares
of capital stock of TARGET other than the Voting Agreement attached hereto as
Exhibit A. All of the outstanding TARGET Common Stock, options or warrants were
either registered under the Securities Act of 1933, as amended (the "Securities
Act") or were issued pursuant to valid exemptions from registration. TARGET has
taken all actions necessary such that after the Effective Time there will not
exist any rights of any nature granting any Person a right to acquire the
securities of TARGET and/or its Subsidiaries.
3.3 Subsidiaries. TARGET directly or indirectly owns all of the
------------
outstanding stock of each of its Subsidiaries free and clear of all Security
Interests, agreements, preemptive rights, and/or limitations on TARGET's voting
rights, charges or other restrictions of any nature, and all such shares are
duly authorized, validly issued, fully paid and nonassessable.
3.4 Authority and Status.
--------------------
(a) The execution, delivery and performance by TARGET of this
Agreement and each and every other agreement, document and instrument provided
for herein have been duly authorized and approved by a unanimous vote of the
TARGET Board of Directors except that Mark L. Plaumann, a representative of
Wexford on the Board, may abstain from voting subject only to the approval of
the Merger by TARGET's stockholders under applicable provisions of TARGET's
Certificate of Incorporation and the DGCL. The Board of Directors of TARGET has
(i) determined that the Merger is fair to and in the best interests of the
stockholders of TARGET and (ii) resolved to submit the Merger to and recommend
approval of the Merger by the stockholders of TARGET.
(b) TARGET has the corporate power and authority to execute and
deliver this Agreement, to perform hereunder and, upon approval of the
transactions provided for herein by the stockholders of TARGET, to consummate
the transactions contemplated hereby without any other corporate or stockholder
approval. Assuming this Agreement and each and every agreement, document or
instrument to be executed, delivered and performed by TARGET in connection
herewith are valid and legally binding obligations of BUYER and Sub, this
Agreement and each and every agreement, document and instrument to be executed,
delivered and performed by TARGET in connection herewith constitute or will,
when executed and delivered, constitute the valid and legally binding obligation
of TARGET enforceable against it in accordance with their respective terms,
except as enforceability may be limited by applicable equitable principles or by
bankruptcy,
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<PAGE>
insolvency, reorganization, moratorium, or similar laws from time to
time in effect affecting the enforcement of creditors' rights generally.
3.5 No Conflict; Required Filings and Consents.
------------------------------------------
(a) The execution and delivery of this Agreement by TARGET does not,
and the consummation of the transactions contemplated by this Agreement will
not, (i) conflict with, or result in any violation or breach of, any provision
of the Certificate of Incorporation or Bylaws of TARGET; (ii) result in any
violation or breach of, require any consent or approval under, or constitute
(with or without notice or lapse of time, or both) a default (or give rise to a
right of termination, cancellation or acceleration of any obligation or loss of
any material benefit) under any of the terms, conditions or provisions of any
material note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or obligation to which TARGET or any of its Subsidiaries is a party
or by which any of them or any of their properties or assets may be bound; or
(iii) subject to the consents, approvals, orders, authorizations, filings and
registrations specified in Section 3.5(b), conflict with or violate any permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to TARGET or any of its Subsidiaries or
any of their properties or assets; other than, in the case of clause (ii) or
(iii) above, any such conflicts, violations, defaults, or rights that
individually or in the aggregate could not reasonably be expected to (x) have a
TARGET Material Adverse Effect, (y) materially impair the ability of TARGET to
perform its obligations under this Agreement or (z) prevent or materially delay
the consummation of any of the transactions contemplated by this Agreement.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to TARGET or any of its Subsidiaries in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) the filing of the applicable
Certificate of Merger with the Delaware Secretary of State; (ii) the filing of
the Proxy Statement with the Securities and Exchange Commission (the "SEC") in
accordance with the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); (iii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws; and (iv) such other consents, approvals, orders,
authorizations, registrations, declarations and filings as to which the failure
to obtain or make could not reasonably be expected to (x) have a TARGET Material
Adverse Effect, (y) materially impair the ability of TARGET to perform its
obligations under this Agreement or (z) prevent or materially delay the
consummation of any of the transactions contemplated by this Agreement.
3.6 SEC Filings; Financial Statements.
---------------------------------
(a) TARGET has filed all forms, each registration statement, schedule,
report, proxy statement and document required to be filed by TARGET with the SEC
since the date of its initial public offering (collectively, the "TARGET SEC
Reports"). The TARGET SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities
-14-
<PAGE>
Act and the Exchange Act, as the case may be, and (ii) did not at the time
they were filed (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated in
the TARGET SEC Reports or necessary in order to make the statements in the
TARGET SEC Reports, in the light of the circumstances under which they were
made, not misleading. None of TARGET's Subsidiaries is required to file any
forms, reports or other documents with the SEC. TARGET has made all filings
with the SEC in a timely manner as required by law and no event has occurred
that requires an additional filing or any amendment to a prior filing.
(b) Each of the consolidated financial statements (including, in each
case, any related notes) contained in the TARGET SEC Reports complied as to form
in all material respects with the applicable published rules and regulations of
the SEC with respect thereto, was prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes to such financial statements or, in the case of unaudited statements,
as permitted for presentation in Quarterly Reports on Form 10-Q), and fairly
presented the consolidated financial position of TARGET and its Subsidiaries as
at the respective dates and the consolidated results of their operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were subject to normal and recurring year-end adjustments
which were not or are not material in amount. The audited balance sheet of
TARGET as of December 31, 1997 is referred to herein as the "TARGET Balance
Sheet."
(c) TARGET has provided BUYER with a consolidated balance sheet and
related statements of income, changes in stockholder's equity and cash flows for
TARGET and each of its Subsidiaries as of and for the three month period ended
September 30, 1998 ("Latest Financial Statements"). The Latest Financial
Statements are consistent with the accounting policies used in preparing the
consolidated financial statements attached to the TARGET SEC Reports and fairly
present the results for the interim period presented thereby, except that such
financial statements are subject to normal and recurring year-end adjustments
which are not material in amount.
3.7 No Undisclosed Liabilities. Except as set forth in the TARGET
--------------------------
Disclosure Schedule, the Company does not have any Liability in excess of fifty
thousand dollars ($50,000) that (i) has not been reflected in the Latest
Financial Statements or (ii) has not arisen in the Ordinary Course of Business
since September 30, 1998. Except as reflected on the Latest Financial
Statements, or disclosed in the TARGET Disclosure Schedule, no customer has
asserted a right of refund or set off from TARGET.
3.8 Absence of Certain Changes or Events. Since the date of the Latest
------------------------------------
Financial Statements, TARGET and its Subsidiaries have conducted their
businesses only in the Ordinary Course of Business and, since such date, there
has not been (i) any material damage, destruction or loss (whether or not
covered by insurance) with respect to TARGET or any of its Subsidiaries; (ii)
any material change by TARGET in its accounting methods, principles or
practices; (iii) any increase in dividends or employee compensation or benefits
payable by TARGET, except for increases in the Ordinary Course of Business; (iv)
any revaluation by TARGET of any of its assets, including, without limitation,
writing down the value of capitalized software or inventory or writing off notes
or
-15-
<PAGE>
accounts receivable other than in the Ordinary Course of Business; (v) any
change in any material respect in which the business of TARGET and its
Subsidiaries has been conducted, including, without limitation, billing of
clients or collection of accounts receivable, purchases of goods and services or
payment of accounts payable; (vi) any agreement and/or understanding entered
into which materially alters or amends any licensing or contractual arrangements
with respect to any TARGET Intellectual Property Rights, other than in the
Ordinary Course of Business; (vii) any loss or change in the relationships with
any client, contractor or supplier that would constitute a TARGET Material
Adverse Effect; (viii) any declaration, setting aside or payment of a dividend
or other distribution with respect to the capital stock of TARGET, or any direct
or indirect redemption, purchase or other acquisition by TARGET of any of its
capital stock other than pursuant to the exercise of repurchase rights under
stock option agreements; (ix) any increase in the salary or other compensation
payable or to become payable by TARGET to any of its officers, directors, or
advisors, or the declaration, payment or commitment or obligation of any kind
for the payment, by TARGET, of a bonus or other additional salary or
compensation to any such person; (x) except as reflected on the Latest Financial
Statements, any loan by TARGET to any person or entity, incurring by TARGET of
any indebtedness, guaranteeing by TARGET of any indebtedness, issuance or sale
of any debt securities of TARGET or guaranteeing of any debt securities of
others except for advances to employees for travel and business expenses in the
Ordinary Course of Business; or (xi) any other transaction, commitment, dispute,
or any other action or event or condition that would be reasonably likely to
have a TARGET Material Adverse Effect. BUYER acknowledges and agrees that
recent and/or ongoing operating losses of TARGET do not make untrue the
representations made in this Section 3.8.
3.9 Taxes.
-----
(a) TARGET and its Subsidiaries have, as of the date hereof, and will
prior to the Effective Time have, timely and accurately filed all federal,
state, foreign and local income, franchise, sales, real and personal property,
payroll and other tax returns and reports required to be filed by them prior to
such dates and have timely paid, or will prior to the Effective Time timely pay,
all taxes shown on such returns as owed for the periods of such returns,
including all withholding or other payroll related taxes shown on such returns.
The tax basis of all assets of TARGET and the Subsidiaries as reflected on their
books and records is correct and accurate in all material aspects. Except as
described on the TARGET Disclosure Schedule, neither TARGET nor any Subsidiary
is, nor is either TARGET or any Subsidiary expected to become, subject to any
additional taxes, interest, penalties or other similar charges with respect to
the tax returns and reports referred to in the first sentence of this Section
3.9(a) that would individually or in the aggregate have a TARGET Material
Adverse Effect. No assessments or notices of deficiency or other written
communications have been received by TARGET, with respect to any tax return that
has not been paid, discharged or fully reserved on the TARGET Balance Sheet, and
no amendments or applications for refund have been filed or are planned with
respect to any such return. TARGET does not have any material liabilities for
Taxes that have not been accrued for or reserved on the TARGET Balance Sheet,
contingent or otherwise. There are no agreements between TARGET or any
Subsidiary and any taxing authority, including, without limitation, the IRS,
waiving or extending any statute of limitations with respect to any tax return,
and neither TARGET nor any of its Subsidiaries has filed
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<PAGE>
any consent or election under the Code, including, without limitation, any
election under Section 341(f) of the Code.
(b) Neither TARGET nor any of its Subsidiaries has made any payments,
or is obligated to make any payments, or is a party to any agreement that under
certain circumstances could obligate it, or any successor in interest, to make
any payments, that will not be deductible under Section 280G of the Code.
(c) TARGET and its Subsidiaries (i) have withheld the proper amounts
necessary to comply with the tax withholding provisions of all applicable laws
for all compensation paid to the officers and employees of TARGET and its
Subsidiaries, (ii) have correctly prepared and duly and timely filed all returns
and reports relating to those amounts withheld from their officers and employees
and to their employer liability for employment taxes under the Tax Code and
applicable state and local laws and (iii) have duly and timely paid and remitted
to the appropriate taxing authorities the amounts withheld from their officers
and employees and any additional amounts that represent their employer liability
under applicable law for employment taxes.
(d) No assessments or notices of deficiency or other written
communications have been submitted to TARGET by the IRS, any foreign, state or
local taxing authority, or any other investigation or audit, that will have, or
can be expected to have, a TARGET Material Adverse Effect.
(e) Neither TARGET nor any of its Subsidiaries is a "United States
real property holding corporation" as defined in Section 897(c)(2) of the Code.
3.10 Restrictions on Business Activities. There is no agreement, judgment,
-----------------------------------
injunction, order or decree binding upon TARGET or any of its Subsidiaries which
has the effect of prohibiting or materially impairing any current or future
business practice of TARGET or any of its Subsidiaries, any acquisition of
property by TARGET or any of its Subsidiaries or the conduct of business by
TARGET or any of its Subsidiaries as currently conducted or as proposed to be
conducted by TARGET or any of its Subsidiaries.
3.11 Title to Properties; Absence of Liens and Encumbrances.
------------------------------------------------------
(a) Section 3.11 of the TARGET Disclosure Schedule sets forth a list
of all real property owned by TARGET or any of its Subsidiaries.
(b) TARGET, including its Subsidiaries, has good and valid title to,
or, in the case of leased properties and assets, valid leasehold interests in,
all of its properties and assets, free and clear of any Liens, except for
defects in title, easements, restrictive covenants and similar encumbrances or
impediments that, in the aggregate, do not and will not materially interfere
with the use of the properties or assets subject thereto or affected thereby or
otherwise materially impair business operations at such properties.
-17-
<PAGE>
(c) All material assets owned or leased by TARGET and its are in good
operating condition and reasonable state of repair, subject only to ordinary
wear and tear.
3.12 Intellectual Property.
---------------------
(a) TARGET and its Subsidiaries own, or have a valid license to use,
the rights to all patents, trademarks, trade names, service marks, copyrights
and any applications therefor, technology, trade secrets, know-how and any other
intellectual property rights (the "TARGET Intellectual Property Rights") that
are material to the conduct of the business of TARGET and its Subsidiaries taken
as a whole. No claims are pending or, to the knowledge of TARGET, threatened
that TARGET or any of its Subsidiaries is infringing or otherwise adversely
affecting the rights of any person with regard to any material TARGET
Intellectual Property Right. To TARGET's knowledge, no person is infringing the
rights of TARGET or any of its Subsidiaries with respect to any material TARGET
Intellectual Property Right.
(b) TARGET and its Subsidiaries use fully integrated operational and
accounting software packages which are commercially available. Additionally,
TARGET and its Subsidiaries have developed various proprietary software packages
which are integrated into several of its final products to monitor and control
the processes at customer locations. All of the commercially available products
and the proprietary software could potentially be affected by the date change in
the year 2000. TARGET and its Subsidiaries continue to assess the impact of the
year 2000 issue on business operations, and have received assurances from the
vendors of such licensed software that all date-sensitive issues related to the
year 2000 conversion have been resolved. TARGET and its Subsidiaries are aware
of programming changes which are required to configure its proprietary software
and are in the process of implementing a corrective program. To TARGET's
knowledge, the costs associated with such corrective program will not be
material.
3.13 Agreements, Contracts and Commitments. The TARGET Disclosure Schedule
-------------------------------------
contains a true and complete list of all material contracts, agreements,
commitments and other instruments (identified by title, date and parties)
(whether oral or written), to which TARGET or its Subsidiaries is a party,
including all:
(a) material leases, rental agreements or other contracts or
commitments affecting the ownership or leasing of, title to or use of any
interest in real or personal property and all maintenance or service agreements
relating to any real or personal property requiring payments in excess of
$100,000 per annum;
(b) contracts or commitments providing for payments by TARGET or its
Subsidiaries in excess of $50,000 per annum based in any manner upon the sales,
purchases, receipts, income or profits of TARGET or its Subsidiaries;
(c) any fidelity or surety or completion bond;
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<PAGE>
(d) any agreement of indemnification or guaranty issued other than in
the Ordinary Course of Business;
(e) license agreements;
(f) employment contracts or commitments regarding employees or
independent contractors requiring annual payments by TARGET or any of its
Subsidiaries of an amount in excess of $50,000; and any other material
contracts, plans or commitments providing for any continuing payment of any type
or nature, including, without limitation, any severance, termination, parachute,
or other payments (whether due to a change in control, termination or otherwise)
and bonuses and vested commissions, in each case, requiring payments by TARGET
or any of its Subsidiaries of an amount in excess of $50,000 in any 12-month
period;
(g) any collective bargaining agreements;
(h) instruments or arrangements evidencing or related to Indebtedness
for money borrowed or to be borrowed, whether directly or indirectly, by way of
purchase-money obligation, guaranty, subordination, conditional sale, lease-
purchase or otherwise;
(i) any agreement relating to the disposition or acquisition of assets
or any interest in any business enterprise outside the Ordinary Course of the
Business;
(j) joint product development agreements with any party other than
BUYER;
(k) except as provided in agreements disclosed elsewhere on the TARGET
Disclosure Schedule, any written arrangement concerning non-competition;
(l) agreements with any employee, or Plans, the benefits of which are
contingent on, or the terms of which are materially altered upon, the occurrence
of a transaction of the nature contemplated by this Agreement involving TARGET
or its Subsidiaries; and
(m) agreements or Plans the benefits of which will be increased or
accelerated by the occurrence of the transactions contemplated by this
Agreement.
(n) written arrangements not disclosed on the TARGET Disclosure
Schedule pursuant to any other provision in this Section 3.13 under which the
consequences of a default or termination could have a TARGET Material Adverse
Effect;
The contracts, agreements, commitments and other instruments listed or
required to be listed on the TARGET Disclosure Schedule are herein referred to
as the "Material Contracts."
To TARGET's knowledge, all the Material Contracts are valid and
binding upon TARGET or the applicable Subsidiary and upon the other parties
thereto and are in full force and effect and enforceable in accordance with
their terms, except as enforceability may be affected by
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<PAGE>
bankruptcy, insolvency, moratorium or similar laws affecting creditors rights
generally and general principles of equity relating to the availability of
equitable remedies. Neither TARGET nor any of its Subsidiaries is in violation
of or in default under (nor does there exist any condition which upon the
passage of time or the giving of notice would cause such a violation of or
default under) any Material Contract to which it is a party or by which it or
any of its properties or assets is bound, except for violations or defaults
that could not, individually or in the aggregate, reasonably be expected to
result in a TARGET Material Adverse Effect. Except as set forth on the TARGET
Disclosure Schedule, there are no material contracts or commitments that
require the performance of services or provision of products by TARGET at a
direct cost for each such contract or commitment reasonably expected to be in
excess of the revenue to be derived pursuant to the terms of such contract or
commitment. Except for terms specifically described on the TARGET Disclosure
Schedule, neither TARGET nor any Subsidiary has received any payment from any
contracting party in connection with or as an inducement for entering into any
contract, agreement, policy or instrument except for payment for actual
services rendered or to be rendered by TARGET or its Subsidiaries consistent
with amounts historically charged for such services. The TARGET Disclosure
Schedule also sets forth the amount of client payments to TARGET or its
Subsidiaries through the date hereof with respect to services not yet
performed by TARGET or its Subsidiaries, which payments individually exceed
$1,000,000. All such payments through the date of the Latest Financial
Statements are reflected in the Latest Financial Statements.
3.14 Employees; Employment Matters.
-----------------------------
(a) Except as disclosed on the TARGET Disclosure Schedule, neither
TARGET nor its Subsidiaries have any unsatisfied Liability to any previously
terminated employee or independent contractor. TARGET and its Subsidiaries have
disclosed all written employee handbooks, policies, programs and arrangements to
BUYER.
(b) No key employee or group of employees has informed either TARGET
or its Subsidiaries of any plans to terminate their employment with TARGET or
its Subsidiaries as a result of the transactions contemplated hereby or
otherwise. Neither TARGET nor its Subsidiaries have experienced any strikes,
grievances, other collective bargaining disputes or claims of unfair labor
practices. Neither TARGET nor its Subsidiaries have any knowledge of any
organizational effort presently being made or threatened by or on behalf of any
labor union with respect to employees of TARGET and its Subsidiaries.
(c) Except as set forth on Section 3.13(f) of the TARGET Disclosure
Schedule or as provided by applicable law, all persons employed by TARGET and
its Subsidiaries are employees at will or otherwise employed such that TARGET
and its Subsidiaries may terminate their employment at any time, with or without
cause, without creating any material cause of action against TARGET and its
Subsidiaries or otherwise giving rise to any material liability of TARGET and
its Subsidiaries for wrongful discharge, breach of contract or tort.
(d) Except as disclosed on the TARGET Disclosure Schedule, TARGET and
its Subsidiaries have complied in all material respects with all applicable laws
relating to labor in each
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jurisdiction wherein TARGET and its Subsidiaries conduct business, including,
without limitation, any requirements of the Immigration and Nationalization
Act of 1952, as amended by the Immigration Reform and Control Act of 1986 and
the regulations promulgated thereunder, any provisions thereof relating to
wages, termination pay, vacation pay, fringe benefits, collective bargaining
and the payment and/or accrual of the same and all insurance and all other
costs and expenses applicable thereto, and neither TARGET nor its Subsidiaries
are liable for any arrearage, or any costs or penalties for failure to comply
with any of the foregoing. Without limiting the generality of the foregoing,
neither TARGET nor its Subsidiaries have incurred a violation of Part 6 of
Subtitle B of Title I of ERISA ("COBRA") or any other applicable state or
foreign insurance continuation law. No COBRA or other state or foreign
insurance continuation law violation exists or will exist with respect to any
employees of either TARGET or its Subsidiaries prior to and including the
Effective Time, nor will any such violation occur as a result of the
transactions contemplated hereby.
(e) Each Person whom TARGET or its Subsidiaries has retained as an
independent contractor during the past three years qualifies as an independent
contractor and not as an employee of TARGET or its Subsidiaries under the Code
and all applicable state laws. Neither the execution of this Agreement nor the
consummation of the transactions contemplated hereby shall cause TARGET or its
Subsidiaries to be in breach of any agreement with any employment, contractor or
consultant or cause TARGET or its Subsidiaries to be liable to pay any severance
or other amount to any employee, contractor or consultant of TARGET or its
Subsidiaries.
3.15 Employee Benefit Plans. TARGET and each of its Plans have at all times
----------------------
complied in all material respects with all applicable laws relating to labor and
employee benefits in each jurisdiction wherein TARGET and its Subsidiaries
conduct business, including without limitation, all applicable provisions of
ERISA and the Code, and any applicable federal, state and foreign laws relating
to wages, termination pay, vacation pay, fringe benefits, collective bargaining
and the payment and/or accrual of the same and all taxes, insurance and all
other costs and expenses applicable thereto.
3.16 Litigation. The TARGET Disclosure Schedule sets forth each instance
----------
in which TARGET or any of its Subsidiaries (i) is subject to any unsatisfied
judgment, order, decree, stipulation, injunction or charge or (ii) is a party to
or, to the knowledge of TARGET, is threatened to be made a party to, any charge,
complaint, action, suit, proceeding, hearing, or investigation of or in any
court or quasi- judicial or administrative agency of any Federal, state, local,
or foreign jurisdiction or before any arbitrator, in each case that could
reasonably be expected to result in any TARGET Material Adverse Effect. TARGET
has no knowledge of any basis on which such charge, complaint, action, suit,
proceeding, hearing, or investigation may be brought or threatened against
TARGET or its Subsidiaries.
3.17 Licenses and Permits; Compliance with Law. TARGET and its
-----------------------------------------
Subsidiaries hold all licenses, certificates, permits, franchises and rights
from all appropriate federal, state or other public authorities necessary for
the conduct of their respective businesses and the use of their respective
assets, except for such licenses, certificates, permits, franchises and rights
the absence of which
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<PAGE>
would not individually or in the aggregate have a TARGET Material Adverse
Effect. Except for any matters which will not have a TARGET Material Adverse
Effect, TARGET and its Subsidiaries presently are conducting their respective
businesses so as to comply with all applicable statutes, ordinances, rules,
regulations and orders of any governmental authority. Further, TARGET and its
Subsidiaries are not presently charged with, or, to the knowledge of TARGET,
under governmental investigation with respect to, any actual or alleged
violation of any statute, ordinance, rule or regulation, or presently the
subject of any pending or, to the knowledge of TARGET, threatened adverse
proceeding by any regulatory authority having jurisdiction over their
respective businesses, properties or operations. Neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will result in the termination of any license,
certificate, permit, franchise or right held by TARGET or any of its
Subsidiaries, and all such licenses, certificates, permits, franchises and
rights will inure to the benefit of the Surviving Corporation after the
consummation of the transactions contemplated by this Agreement.
3.18 Insurance. TARGET has provided to BUYER a list and description of
---------
each insurance policy currently in effect where TARGET is the beneficiary,
including the name of each insurer, policy coverage, coverage amounts and
premiums payable. With respect to the insurance policies and fidelity bonds
covering the assets, business, equipment, properties, operations, employees,
officers and directors of TARGET and its Subsidiary, to the knowledge of TARGET,
there is no claim by TARGET and its Subsidiaries pending under any of such
policies or bonds as to which coverage has been questioned, denied, or disputed
by the underwriters of such policies or bonds. All premiums due and payable
under all such policies and bonds have been paid and TARGET and its Subsidiaries
are otherwise in material compliance with the terms of such policies and bonds
(or other policies and bonds providing substantially similar insurance
coverage). TARGET has no knowledge of any threatened termination of, or premium
increase with respect to, any of such policies. TARGET does not have any key-man
life insurance policies or any other policies under which TARGET's Stockholders
are beneficiaries, other than any policies under which TARGET's Stockholders may
be beneficiaries in their capacities as employees of the Company.
3.19 Related Parties. Except for the Wexford Debts and the Wexford
---------------
Guarantees and except as set forth on the TARGET Disclosure Schedule or in the
TARGET SEC Reports, to the knowledge of TARGET, no stockholder owning greater
than a five-percent (5%) interest in TARGET, no Affiliate or member of the
immediate family of any such stockholder, and no officer or director or member
of the immediate family of such officer or director of TARGET or any Subsidiary
possesses, directly or indirectly, any beneficial interest in, or is a director,
officer or employee of, or member of the immediate family of a director, officer
or employee of, any corporation, partnership, firm, association or business
organization that is a client, supplier, customer, lessor, lessee, lender,
creditor, borrower, debtor or contracting party with or of TARGET or any
Subsidiary, in each case, such that would be required to be disclosed by TARGET
in its public filings (except as a stockholder holding less than a one-percent
(1%) interest in a corporation whose shares are traded on a national or regional
securities exchange or in the over-the-counter market), other than arrangements
with TARGET principals and experts in the Ordinary Course of Business.
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<PAGE>
3.20 Clients. TARGET shall provide BUYER with a true and accurate list of
-------
all of the clients that generated at least $1,000,000 in revenues to TARGET in
1997 or are expected to generate $1,000,000 in billings in 1998. Since the date
of the Latest Financial Statements, no client of TARGET and its Subsidiaries
accounting for more than 5% of revenues of TARGET and its Subsidiaries, taken as
a whole; in fiscal 1997, has canceled, materially reduced the scope of, or
otherwise adversely modified its relationship with TARGET or its Subsidiaries
and, to the knowledge of TARGET, no such Person has any intention to do so, and
there are no disputes or problems or notices of dissatisfaction with or from any
such client of TARGET or its Subsidiaries and the consummation of the
transactions contemplated hereby will not, to the knowledge of TARGET, adversely
affect any relationships with such clients.
3.21 Warranty; Unbillable Work. All services rendered by TARGET and its
-------------------------
Subsidiaries have been in material conformity with all applicable contractual
commitments and all warranties, and TARGET and its Subsidiaries have no
Liability for damages in connection therewith, in excess of the warranty
reserves for client claims set forth on the TARGET Balance Sheet. TARGET and
its Subsidiaries have provided Buyer with accurate reports of Buyer's historical
warranty experience.
3.22 Environmental Liability.
-----------------------
(a) TARGET and its Subsidiaries have been and are in compliance in
all material respects (which compliance includes, but is not limited to, the
possession of all permits and other governmental authorizations required under
applicable Environmental Laws and compliance with the terms and conditions
thereof obtain could reasonably be expected to (x) have a TARGET Material
Adverse Effect, (y) materially impair ability of the TARGET to perform its
obligations under this Agreement or (z) prevent or materially delay the
consummation of any of the transactions contemplated by this Agreement) with
all Environmental Laws and the Company has not received any notice of any
alleged claim, violation of or liability under any Environmental Laws which
has not heretofore been cured or for which there is any remaining liability;
(b) Neither TARGET nor any of its Subsidiaries have received notice
of any Environmental Claim filed or threatened against it, or against any person
or entity whose liability for any Environmental Claim the Company has retained
or assumed either contractually or by operation of law and there are no past or
present actions, activities, circumstances, conditions, events or incidents,
that to the knowledge of TARGET could reasonably be expected to form the basis
of any Environmental Claim against the Company, the business thereof, or against
any person or entity whose liability for any Environmental Claim the Company has
retained or assumed either contractually or by operation of law;
(c) Neither TARGET nor any of its Subsidiaries have disposed of,
emitted, discharged, handled, stored, transported, used or released any
Hazardous Materials, arranged for the disposal, discharge, storage or release of
any Hazardous Materials, or exposed any employee or other individual to any
Hazardous Materials or condition so as to give rise to any material liability or
corrective or remedial obligation under any Environmental Laws; and
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<PAGE>
(d) To the knowledge of TARGET no Hazardous Materials are present in,
on, or under any properties owned, leased or used at any time (including both
land and improvements thereon) by TARGET or its Subsidiaries or for its
business, and, to the knowledge of TARGET, no reasonable likelihood exists that
any Hazardous Materials will come to be present in, on, or under any properties
owned, leased or used (including both land and improvements thereon) by the
Company for its business, so as to give rise to any material liability or
corrective or remedial obligation under any Environmental Laws.
3.23 Brokers or Finders. Other than the fees and expenses of Hera, LLC,
------------------
which amount will be paid by TARGET, TARGET has not incurred, nor will it incur,
any liability for brokerage or finders' fee or agents' commissions or similar
fee in connection with any of the transactions contemplated by this Agreement.
The Initial Payment shall be reduced to the extent such fees and expenses
incurred in connection with this transaction exceed $50,000.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF BUYER AND SUB
BUYER and SUB represent and warrant to TARGET that the statements contained
in this Article 4 are true and correct, except as set forth in the disclosure
schedule delivered by BUYER to TARGET (the "BUYER Disclosure Schedule"). The
BUYER Disclosure Schedule shall be arranged in paragraphs corresponding to the
numbered and lettered paragraphs contained in this Article 4, and the disclosure
in any paragraph shall qualify only the corresponding paragraph in this Article
4.
4.1 Organization. BUYER and SUB are corporations duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware.
4.2 Authority; No Conflict; Required Filings and Consents.
-----------------------------------------------------
(a) BUYER and SUB have all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated by
this Agreement. The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of BUYER and Sub. This
Agreement has been duly executed and delivered by BUYER and SUB and constitutes
the valid and binding obligation of BUYER and Sub, enforceable in accordance
with its terms, except as such enforceability may be limited by (i) bankruptcy
laws and other similar laws affecting creditors' rights generally and (ii)
general principles of equity, regardless of whether asserted in a proceeding in
equity or at law.
(b) The execution and delivery of this Agreement by BUYER and SUB does
not, and the consummation of the transactions contemplated by this Agreement
will not, (i) conflict with, or result in any violation or breach of any
provision of the Certificate of Incorporation or Bylaws of BUYER or of Sub, or
(ii) subject to the consents, approvals, orders, authorizations, filings and
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registrations specified in Section 4.2(c), conflict with or violate any permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to BUYER or Sub, except for such
violations which would not be reasonably likely to have a material adverse
effect on the parties' ability to consummate the transactions contemplated by
this Agreement.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to BUYER or SUB in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby, except
for (i) the filing of the Certificate of Merger with the Delaware Secretary of
State, and (ii) such other consents, authorizations, filings, approvals and
registrations which in the aggregate, if not obtained or made, would not be
reasonably likely to have a material adverse effect on the parties' ability to
consummate the transactions contemplated by this Agreement.
4.3 Financing. BUYER has internal resources and will secure financing
---------
commitments from responsible financial institutions in connection with the
Merger that are in an aggregate amount sufficient to consummate the transactions
contemplated hereby.
4.4 Sophisticated Purchaser; Access to Information; No Oral
-------------------------------------------------------
Representations. BUYER represents and acknowledges that it is a sophisticated
- ---------------
purchaser; that it is aware of TARGET's business affairs and financial
condition; that BUYER, together with its representatives, has had the
opportunity to conduct an independent due diligence review of TARGET, and in
connection therewith BUYER has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to enter into this Agreement;
that it is familiar with the industry in which TARGET conducts its business;
that it is relying only on its due diligence review of TARGET and the
representations and warranties contained herein; and that BUYER has formed its
own opinions with respect to TARGET's future results and has not relied on any
projections provided by TARGET.
ARTICLE 5.
CONDUCT OF BUSINESS
5.1 Covenants of TARGET. During the period from the date of this
-------------------
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, TARGET agrees as to itself and its Subsidiaries (except
to the extent that noncompliance with these covenants occurs because BUYER has
declined to advance funds to TARGET or because Wexford has declined to advance
funds to TARGET in excess of the Interim Funding Cap and only to the extent that
such actions are in the control of TARGET), to carry on its business in the
Ordinary Course of Business, to pay its debts and taxes when due, subject to
good faith disputes over such debts or taxes, to pay or perform its other
obligations when due, and, to the extent consistent with such business, to use
all reasonable efforts consistent with past practices and policies to (i)
preserve intact its present business organization, (ii) keep available the
services of its present officers and key employees, (iii) maintain its
properties, (iv) keep its insurance in force, (v) preserve its relationships
with clients, suppliers, distributors, licensors, licensees, and others having
business dealings with it, and (vi) pay its accounts payable in the Ordinary
Course of Business without material increase in average days
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<PAGE>
outstanding. TARGET shall promptly notify BUYER of any event or occurrence not
in the Ordinary Course of Business of TARGET or its Subsidiaries, where such
event or occurrence would result in a breach of any covenant of TARGET or its
Subsidiaries, set forth in this Agreement or cause any representation or
warranty of TARGET, set forth in this Agreement to be untrue as of the date
of, or giving effect to, such event or occurrence. Except as expressly
contemplated by this Agreement, TARGET shall not, without the prior written
consent of BUYER which shall not be unreasonably withheld:
(a) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any of its capital stock, or
split, combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise acquire, directly or
indirectly, any shares of its capital stock;
(b) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any equity interest in or assets of, or by any other manner, any
business or any corporation, partnership or other business organization or
division, or otherwise acquire or agree to acquire any assets;
(c) Sell, lease, license or otherwise dispose of any of its properties
or assets which are material, individually or in the aggregate, to its business
and that of its Subsidiaries, taken as a whole, except for transactions entered
into in the Ordinary Course of Business;
(d) Transfer or license to any Person or otherwise extend, amend or
modify any material rights to the TARGET Intellectual Property Rights, other
than the grant of non-exclusive licenses in the Ordinary Course of Business
substantially consistent with past practices; issue any shares of TARGET capital
stock or capital stock of any Subsidiary, or any securities which may be
exchanged or exercised for or converted into TARGET capital stock or the capital
stock of any Subsidiary (including, without limitation, any options or warrants)
other than shares of TARGET Common Stock issuable upon exercise of existing
options;
(e) (i) Increase or agree to increase the compensation payable or to
become payable to its officers or employees, except for increases in salary or
wages of employees in the Ordinary Course of Business, (ii) grant any additional
severance or termination pay to, or enter into any employment or severance
agreements with, officers, (iii) grant any severance or termination pay to, or
enter into any employment or severance agreement with, any employee, except in
settlement of dispute with terminated employees, (iv) enter into any collective
bargaining agreement, or (v) establish, adopt, enter into or amend in any
material respect any bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, trust, fund, policy or arrangement for the
benefit of any directors, officers or employees;
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<PAGE>
(f) Revalue any material amount of its assets, including writing down
the value of inventory or discounting or writing off notes or accounts
receivable other than the Mannesmann Receivable, the LIM Funds, and other than
in the Ordinary Course of Business;
(g) Except with the approval of the Executive Committee, incur any
Indebtedness for borrowed money or guarantee any such Indebtedness or issue or
sell any debt securities or warrants or rights to acquire any debt securities or
guarantee any debt securities of others, other than Indebtedness incurred under
outstanding lines of credit in the Ordinary Course of Business;
(h) Change any policy or take any action with respect to the payment
of accounts payable, and other than in the Ordinary Course of Business;
(i) Incur or commit to incur capital expenditures other than in the
Ordinary Course of Business;
(j) Make any material change or take any material action with respect
to the amortization, capitalization or other accounting policies or procedures,
other than actions in the Ordinary Course of Business;
(k) Other than with respect to the Designated Amounts and the Puerto
Rico Tax Liability, waive, release, assign, settle or compromise any material
claims or litigation;
(l) Except as described on the TARGET Disclosure Schedule, make any
tax election or settle or compromise any material federal, state, local or
foreign tax liability; or
(m) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (l) above, or any action that individually or
in the aggregate could reasonably be expected to (x) have a TARGET Material
Adverse Effect, (y) materially impair the ability of TARGET to perform its
obligations under this Agreement or (z) prevent or materially delay the
consummation of the transactions contemplated by this Agreement.
5.2 SEC Filings; Financial Statements.
---------------------------------
(a) Between the date hereof and the Effective Time, TARGET will make
all filings and amendments thereto with the SEC in a timely manner as required
by law. All such TARGET SEC Reports shall comply as to form in all material
respects with the applicable published rules and regulations of the SEC with
respect thereto.
(b) Each of the consolidated financial statements (including, in each
case, any related notes) contained in any TARGET SEC Reports filed between the
date hereof and the Effective Time, shall comply as to form in all material
respects with the applicable published rules and regulations of the SEC with
respect thereto, shall be prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes to such financial statements or, in the case of unaudited statements,
as permitted for presentation in
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Quarterly Reports on Form 10-Q), and shall fairly present the consolidated
financial position of TARGET and its Subsidiaries as of the respective dates
and the consolidated results of their operations and cash flows for the
periods indicated.
5.3 Cooperation. Subject to compliance with applicable law, from the date
-----------
hereof until the Effective Time, each of BUYER and TARGET shall confer on a
regular and frequent basis with one or more representatives of the other party
to report operational matters of materiality and the general status of ongoing
operations and shall promptly provide the other party or its counsel with copies
of all filings made by such party with any Governmental Entity in connection
with this Agreement, the Merger and the transactions contemplated hereby.
5.4 Board of Directors. On the date hereof, the TARGET Board of Directors
------------------
shall by resolution, (i) fix the number of directors at five, (ii) appoint John
T. Schofield to fill the existing vacancy on the TARGET Board of Directors,
(iii) designate an Executive Committee of the TARGET Board of Directors
consisting of John T. Schofield, Mark Plaumann and C. Stephen Beal and (iv)
delegate to such committee the authority to oversee the day to day operations of
TARGET to the fullest extent permitted by the DGCL. The Chief Executive Officer
of TARGET shall report directly to the Executive Committee with respect to such
matters.
ARTICLE 6.
ADDITIONAL AGREEMENTS
6.1 No Solicitation.
---------------
(a) TARGET shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, through any officer, director, employee, representative,
agent or affiliate, (i) solicit, initiate, or encourage (including by way of
furnishing information) any inquiries or proposals that constitute, or could
reasonably be expected to lead to, a proposal or offer for a merger,
consolidation, business combination, sale of substantial assets, sale of shares
of capital stock (including without limitation by way of a tender offer) or
similar transactions involving TARGET, other than the transactions contemplated
or permitted by this Agreement (any of the foregoing inquiries or proposals
being referred to in this Agreement as a "Competing Offer"), (ii) engage in
negotiations or discussions concerning, or provide any non-public information to
any Person relating to, any Competing Offer; provided, that TARGET may contact
parties with whom it had been having discussions to terminate such discussions,
or (iii) agree to, approve or recommend any Competing Offer. Neither the Board
of Directors of TARGET, nor any committee thereof, shall (a) withdraw or modify,
or propose to withdraw or modify, in any manner adverse to BUYER, the approval
or recommendation of the Board of Directors of TARGET of the Merger or this
Agreement, or (b) approve or recommend, or propose to approve or recommend, any
Competing Offer or any other acquisition of outstanding shares of TARGET, other
than pursuant to the Merger or this Agreement. Notwithstanding the foregoing,
nothing contained in this Agreement shall prevent TARGET or its Board of
Directors from (A) furnishing non-public information to, or entering into
discussions or
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<PAGE>
negotiations with, any Person in connection with an unsolicited bona fide
written Competing Offer by such Person (including a new and unsolicited
Competing Offer received by TARGET after the execution of this Agreement from
a Person whose initial contact with TARGET may have been solicited by such
party prior to the execution of this Agreement) or recommending such an
unsolicited bona fide written Competing Offer to its stockholders, if and only
to the extent that (1) (x) the TARGET Board of Directors determines in good
faith that such Competing Offer would, if consummated, result in a transaction
more favorable to TARGET's stockholders than the transaction contemplated by
this Agreement and that the Person making such Preferred Proposal has the
financial means, or the ability to obtain the necessary financing, to conclude
such transaction, and (y) the Board of Directors of TARGET determines in good
faith that the failure to take such action would be inconsistent with the
fiduciary duties of the Board of Directors to its stockholders under
applicable law (any such more favorable Competing Offer being referred to in
this Agreement as a "Preferred Proposal"); and (2) prior to furnishing such
non-public information to, or entering into discussions or negotiations with,
such Person, the Board of Directors receives from such Person an executed
confidentiality agreement with confidentiality provisions not materially less
favorable to such Person than those contained in the Confidentiality Agreement
dated as of June 30, 1998 between BUYER and TARGET (the "Confidentiality
Agreement") or (B) complying with Rule 14e-2 promulgated under the Exchange
Act with regard to a Competing Offer. TARGET shall take no action with respect
to the Competing Offer until 48 hours after notice is received by BUYER as
required under Section 6.1(b) below.
(b) TARGET shall notify BUYER orally and in writing no later than 24
hours after receipt by TARGET (or its advisors) of any Competing Offer or any
request for nonpublic information in connection with a Competing Offer or for
access to the properties, books or records of such party by any Person that
informs such party that it is considering making, or has made, a Competing
Offer. Such notice to BUYER shall be made orally and in writing and shall
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact.
6.2 Proxy Statement.
---------------
(a) As promptly as practicable after the execution of this Agreement,
TARGET shall prepare and file with the SEC a proxy statement (the "Proxy
Statement") to be sent to the stockholders of TARGET in connection with the
meeting of its stockholders to consider this Agreement and the Merger (the
"TARGET Stockholders Meeting"). The Proxy Statement (i) shall comply in form
and content with the DGCL and all applicable published rules and regulations of
the SEC with respect thereto, (ii) shall not, on the date the Proxy Statement is
first mailed to stockholders of TARGET, at the time of the TARGET Stockholders
Meeting, or at the Effective Time, contain any statement which, at such time and
in light of the circumstances under which it was made, is false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements made in the Proxy Statement not false or
misleading, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the TARGET Stockholders Meeting which has become false or
misleading, and (iii) shall contain the unanimous recommendations of Directors
of TARGET in
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favor of the Merger and this Agreement except Mark L. Plaumann, a
representative of Wexford on the Board, who shall have abstained from voting.
(b) BUYER and BUYER's counsel shall be given three (3) days to review
and comment on the preliminary Proxy Statement prior to filing with the SEC and
shall be given a reasonable period to review and comment on any subsequent
changes to the Proxy Statement. TARGET will notify BUYER promptly of any
comments received from the SEC or its staff and will provide BUYER with copies
of all correspondence with the SEC pertaining to the Proxy Statement or the
Merger. The final Proxy Statement shall be subject to BUYER's reasonable
approval which shall not be unreasonably withheld and shall be given within two
days after the date on which such document is provided to BUYER.
(c) If at any time prior to the Effective Time any event relating to
TARGET or any of its Affiliates, officers or directors should be discovered by
TARGET which should be set forth in a supplement to the Proxy Statement, TARGET
shall promptly inform BUYER.
6.3 Stockholders' Meeting. TARGET shall call a meeting of its
---------------------
stockholders to be held as promptly as practicable for the purpose of voting
upon this Agreement and the Merger. Subject to Sections 6.1 and 6.2, TARGET
will, through its Board of Directors, recommend to its stockholders approval of
such matters.
6.4 Consents. Each of BUYER and TARGET shall use all reasonable efforts
--------
to obtain all necessary consents, waivers and approvals under their respective
material agreements, contracts, licenses or leases as may be necessary or
advisable to consummate the Merger and the other transactions contemplated by
this Agreement.
6.5 Access to Information. Upon reasonable notice and subject to
---------------------
applicable law and other legal obligations, TARGET shall in good faith afford to
the officers, employees, accountants, counsel and other representatives of
BUYER, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments, personnel
and records and, during such period, TARGET shall furnish promptly to BUYER (a)
a copy of each report, schedule, registration statement and other document filed
or received by it during such period pursuant to the requirements of federal
securities laws and (b) all other information concerning its business,
properties and personnel as BUYER may reasonably request. Unless otherwise
required by law, the parties will hold any such information which is nonpublic
in confidence in accordance with the Confidentiality Agreement. No information
or knowledge obtained in any investigation pursuant to this Section 6.5 shall
affect or be deemed to modify any representation or warranty contained in this
Agreement or the conditions to the obligations of the parties to consummate the
Merger.
6.6 Legal Conditions to Merger. Each of BUYER and TARGET will take all
--------------------------
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on itself with respect to the Merger (which actions shall
include, without limitation, furnishing all information required in connection
with approvals of or filings with any Governmental Entity) and will promptly
cooperate with and will use their best efforts to furnish information to each
other in connection with
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any such requirements imposed upon any of them in connection with the Merger.
Each of BUYER and TARGET will: (i) take all reasonable actions necessary to
obtain (and will cooperate with each other in obtaining) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity or other third party, required to be obtained or made by TARGET or
BUYER in connection with the Merger (any of the foregoing an "Approval") or
the taking of any action contemplated thereby or by this Agreement; (ii)
diligently oppose or pursue any rehearing, appeal or other challenge which may
be available to it of any refusal to issue any Approval or of any order or
ruling of any Governmental Entity which may adversely affect the ability of
the parties hereto to consummate the Merger or to take any action contemplated
by any Approval or by this Agreement until such time as such refusal to issue
any Approval or any order or ruling has become final and non-appealable; and
(iii) diligently oppose any objections to, appeals from or petitions to
reconsider or reopen any Approval or the taking of any action contemplated
thereby or by this Agreement.
6.7 Update Disclosure; Breaches; Opportunity to Cure. From and after the
------------------------------------------------
date of this Agreement until the Effective Time, each party hereto shall
promptly notify the other party in writing, by written update to its respective
Disclosure Schedule or otherwise, as appropriate, of (i) the occurrence or non-
occurrence of any event which would be likely to cause any condition to the
obligations of any party to effect the Merger and the other transactions
contemplated by this Agreement not to be satisfied, or (ii) the failure of BUYER
or TARGET to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it pursuant to this Agreement which would be
likely to result in any condition to the obligations of any party to effect the
Merger and the other transactions contemplated by this Agreement not to be
satisfied. Upon such written notification pursuant to this Section 6.7, the
party responsible for such occurrence, non-occurrence, non-compliance or non-
satisfaction (each, an "Event") shall have the opportunity, for a period of 20
calendar days from the date of such written notice, to cure such Event. If any
Event is so cured, such Event shall not be a breach, notwithstanding anything to
the contrary set forth herein.
6.8 Trading Prohibitions. Each of BUYER, SUB and TARGET hereby
--------------------
acknowledges that as a result of disclosures by BUYER, SUB and TARGET
contemplated under this Agreement, BUYER, Sub, TARGET and its Subsidiaries and
their respective affiliates may, from time to time, have material, non-public
information concerning each other. Each of BUYER, SUB and TARGET confirms that
it and its respective Affiliates are aware, and that it has advised such persons
that, (i) the United States securities laws may prohibit a person who has
material, non-public information from purchasing or selling securities of any
company to which such information relates, and (ii) material non-public
information shall not be communicated to any other Person except as permitted
herein.
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6.9 Voting Agreement. Contemporaneously with the execution of this
----------------
Agreement, each of Wexford Management LLC on behalf of Wexford Special
Situations 1996, L.P., Wexford Special Situations 1996 Institutional, L.P.,
Wexford Special Situations 1996, Limited, Wexford-Euris Special Situations 1996,
L.P., Wexford Overseas Partners I, L.P., Wexford Capital Partners I, L.P., and
Wexford Capital Partners II, L.P. (collectively, "Wexford"), and C. Stephen Beal
shall have executed a voting agreement in the form attached hereto as Exhibit A
---------
(the "Voting Agreement") whereby each party to such agreement has agreed to vote
in favor of the Merger. TARGET shall use all commercially reasonable efforts to
obtain the signature of Henry Huta to the Voting Agreement.
6.10 Additional Agreements; Reasonable Efforts. Subject to the terms and
-----------------------------------------
conditions of this Agreement, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the appropriate vote of the stockholders of TARGET
described in Section 7.1(a), including cooperating fully with the other party.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement or to vest the Surviving
Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of either of the Constituent Corporations, the proper
officers and directors of each party to this Agreement shall take all such
necessary action.
6.11 Security Interest. TARGET, Pentney, WEP, Wexford, in its capacity as
-----------------
principal stockholder of TARGET and in its capacity as the Shareholder
Representative, and BUYER, shall execute on or before the Closing Date, a
Security Agreement creating a valid and enforceable security interest, or
comparable interest under the laws of the relevant jurisdiction, in each of the
Mannesmann Receivable and all of WEP's right, title and interest in the LIM
Funds in favor of the Shareholders (the "Security Agreement"). Prior to the
Effective Time, TARGET and BUYER shall cooperate with the Shareholder
Representative to take all actions necessary to allow the Shareholder
Representative, on behalf of the Shareholders, to perfect the Security Interest,
or take such other actions under the laws of the relevant jurisdiction as are
necessary to give the Shareholders the same protections they would receive from
the perfection of the Security Interest in the United States. From and after
the Effective Time, BUYER shall, and shall cause the Surviving Corporation to,
take any action which may be necessary to allow the Shareholders to maintain
such perfection of the Security Interest.
6.12 Collection and Payment of the Net Proceeds.
------------------------------------------
(a) The LIM Funds.
(i) BUYER shall cause the Surviving Corporation and WEP to use
commercially reasonable efforts to maximize the recovery of the LIM Funds as
quickly as possible.
(ii) Unless the LIM Funds have been repaid in full, BUYER shall
not, and shall cause the Surviving Corporation and WEP not to, use LIM as the
guarantor of any additional warrantee obligations of WEP, the Surviving
Corporation or any other affiliate of BUYER, and shall
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<PAGE>
not amend the terms of any LIM guarantee of WEP's warrantee obligations
without the prior written approval of the Shareholder Representative.
(iii) In the event that the LIM Funds are reduced because any
portion of such funds have been paid by LIM from and after the Effective Time to
the holder of a LIM guarantee of an obligation of the Surviving Corporation or
WEP in satisfaction of a claim by such holder, BUYER shall, or shall cause the
Surviving Corporation or WEP to, deposit an amount equal to the amount by which
the LIM Funds were reduced as a result of such payment, with the Exchange Agent
in accordance with Section 2.2 hereof, as if such amount were a portion of the
Net Proceeds recovered from the LIM Funds.
(b) The Mannesmann Receivable. BUYER shall cause the Surviving
Corporation and Pentney to use commercially reasonable efforts to maximize
recovery of the Mannesmann Receivable and to recover the Mannesmann Receivable
as quickly as possible.
(c) The Puerto Rico Tax Liability. BUYER shall cause the Surviving
Corporation and any of its Subsidiaries, as appropriate, to use commercially
reasonable efforts to maximize the PR Surplus and to determine the final amount
of the Puerto Rico Tax Liability as quickly as possible.
(d) Collection Fee. BUYER shall be entitled to payment of a
collection fee equal to (i) 20% of the funds collected in respect of the
Mannesmann Receivable plus (ii) 20% of the amount by which the Puerto Rico Tax
Liability is less than $1.5 million; and (iii) 10% of the funds collected in
respect of the LIM Funds; provided, however, that such collection fee shall be
calculated after the deduction from such collected amounts of the costs and
expenses associated with such collection.
(e) Approval with Respect to Litigation. BUYER shall not undertake
any litigation, or incur any material collection costs related thereto, in
connection the Net Proceeds without the prior written consent of the Shareholder
Representative.
(f) Assumption of Responsibility. At anytime, the Shareholder
Representative may elect to assume responsibility, at its cost subject to
reimbursement out of Designated Amounts collected, for collection of the
Designated Amounts.
(g) Notwithstanding anything to the contrary, the Initial Payment
shall be increased by the amount of any Net Proceeds collected by BUYER from the
date hereof to the Closing Date.
(h) On the third anniversary of the Closing Date, BUYER and the
Shareholder Representative shall reasonably determine whether LIM is current on
payments on the principal amount the LIM Funds no longer required to be held as
collateral by LIM as of such date. If BUYER and the Shareholder Representative
determine that LIM is current on such payments, BUYER shall deposit in the
Exchange Fund an amount equal to the remaining LIM Funds then held by LIM. If
BUYER and the Shareholder Representative shall determine that LIM is not current
on such
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payments, then, notwithstanding anything to the contrary in Section 2.2(d)
hereof, the Exchange Fund shall not terminate and BUYER shall continue to be
bound by its post closing covenants regarding recovery and deposit of any Net
Proceeds recovered from the LIM Funds.
6.13 Payment of Wexford Debts and Replacement of Wexford Guarantees. From
--------------------------------------------------------------
the date hereof through the Closing Date, BUYER shall use its best efforts to
take all actions necessary to enable BUYER, on the Closing Date to comply with
its obligations under Sections 7.3(b) and 7.3(c) hereof.
6.14 Working Capital. From the date hereof to the Closing Date, upon the
---------------
determination of the Executive Committee that TARGET is in need of working
capital, BUYER shall have the option to advance such funds to TARGET, and if
BUYER shall elect not to advance such funds, Wexford shall have the option to
advance such funds.
6.15 Subsidiaries. As promptly as possible, TARGET shall either provide to
------------
BUYER's counsel true, correct and complete copies of the current Certificate of
Incorporation and By-laws (or other constitutive documents) of each of TARGET
and its Subsidiaries or shall have made applications to the relevant
governmental authorities to obtain such documents.
6.16 Fees and Expenses. On or before the Closing Date, TARGET shall submit
-----------------
to BUYER, or cause its service providers to submit to BUYER, a detailed listing
of reasonable expenses actually incurred by TARGET in connection with this
transaction including, without limitation, reasonable fees and expenses of
counsel, reasonable fees and expenses of accountants, the cost of directors and
officers liability insurance, funding of a reserve account for payment of the
expected fees and expenses of the Exchange Agent, and mailing and photocopying
costs incurred in connection with the Proxy Statement. At the Closing, BUYER
shall pay all such expenses of TARGET; provided however, that if such expenses
exceed $100,000, exclusive of the fee owing to Hera, LLC, which shall not exceed
$50,000, the Initial Payment shall be reduced by the amount of such excess.
ARTICLE 7.
CONDITIONS TO MERGER
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been approved by
--------------------
the affirmative vote of the holders of a majority of the outstanding shares of
TARGET Common Stock entitled to vote thereon, present at a meeting at which a
quorum is present in person or by proxy.
(b) Approvals. Other than the filing provided for by Section 1.1, all
---------
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of
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waiting periods imposed by, any Governmental Entity the absence or
nonoccurrence of which would be reasonably likely to have a TARGET Material
Adverse Effect shall have been filed, occurred or been obtained.
(c) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger or limiting or restricting
the conduct or operation by BUYER of the business of BUYER or the Surviving
Corporation after the Merger shall have been issued, except for any such order,
injunction restraint or prohibition which would not be reasonably likely to have
a material adverse effect on BUYER; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger by any Governmental Entity which makes the consummation
of the Merger illegal.
7.2 Additional Conditions to Obligations of BUYER. The obligations of
---------------------------------------------
BUYER to effect the Merger are subject to the satisfaction of each of the
following conditions, any of which may be waived in writing exclusively by
BUYER:
(a) Performance of Obligations of TARGET. TARGET shall have performed
------------------------------------
in all material respects all material obligations required to be performed by it
under this Agreement at or prior to the Closing Date; provided, however; that
-------- -------
TARGET's performance of the obligations set forth in Sections 6.5, 6.6, 6.7,
6.10, 6.11, and 6.15 hereof, shall not be a condition to the obligation of BUYER
to effect the Merger; provided, however, that if any party having knowledge of
an Event shall have failed to provide written notice of such Event to the party
responsible therefor, then such Event shall not prevent such party from being
deemed to have performed its obligations in all material respects in accordance
with this Section 7.2(a). BUYER shall have received a certificate signed on
behalf of TARGET by the chief executive officer and the chief financial officer
of TARGET to such effect.
(b) Opinion of TARGET's Counsel. BUYER and SUB shall have received an
---------------------------
opinion of counsel for TARGET covering such matters as is customary in a
transaction of this type and in form and substance reasonably satisfactory to
BUYER.
7.3 Additional Conditions to Obligations of TARGET. The obligation of
----------------------------------------------
TARGET to effect the Merger is subject to the satisfaction of each of the
following conditions, any of which may be waived, in writing, exclusively by
TARGET:
(a) Performance of Obligations of BUYER. BUYER shall have performed
-----------------------------------
in all material respects all material obligations required to be performed by
them under this Agreement at or prior to the Closing Date; and TARGET shall have
received a certificate signed on behalf of BUYER by the chief executive officer
and the chief financial officer of BUYER to such effect.
(b) Refinancing of Wexford Debts. At the Effective Time, the Wexford
----------------------------
Debts shall be paid in full.
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(c) Replacement of the Wexford Guarantees. On or prior to the Closing
-------------------------------------
Date, BUYER shall have replaced, or shall have arranged for a third party to
replace, Wexford as guarantor on the Wexford Guarantees.
(d) Security Agreement. TARGET, Pentney, WEP and BUYER shall have
------------------
executed and delivered the Security Agreement.
(e) Opinion of BUYER's Counsel. TARGET shall have received an opinion
--------------------------
of counsel for BUYER and SUB covering such matters as is customary in a
transaction of this type and in form and substance reasonably satisfactory to
TARGET.
ARTICLE 8.
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated at any time prior to the
-----------
Effective Time (with respect to Sections 8.1(b) through 8.1(g), by written
notice by the terminating party to the other party), whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of BUYER or the stockholders of TARGET, as follows:
(a) by mutual written consent of BUYER and TARGET; or
(b) by either BUYER or TARGET if the Merger shall not have been
consummated within the later of (x) ninety (90) days of the date of this
Agreement and (y) the expiration of and any additional period pursuant to
Section 6.7 hereof, provided, however, that the right to terminate this
Agreement under this Section 8.1(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date; and
provided further that if such delay is caused by the SEC, then the Agreement
shall terminate not later than one hundred twenty (120) days after the date of
this Agreement; or
(c) by either BUYER or TARGET if a court of competent jurisdiction or
other Governmental Entity shall have issued a final order, decree or ruling, or
taken any other action, having the effect of permanently restraining, enjoining
or otherwise prohibiting the Merger, and all appeals with respect to such order
or action have been exhausted or the time for appeal of such order, decree,
ruling or action shall have expired; or
(d) by BUYER if, at the TARGET Stockholders' Meeting (including any
adjournment or postponement thereof), the requisite vote of stockholders of
TARGET in favor of this Agreement shall not have been obtained (provided, that
the right to terminate this Agreement under this Section 8.1(d) shall not be
available to any party which has not complied with its obligations hereunder in
all material respects); or
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<PAGE>
(e) by BUYER if (i) the Board of Directors of TARGET shall have
withdrawn its recommendation of this Agreement or the Merger; (ii) an
Alternative Transaction (as defined below) involving TARGET shall have taken
place or the Board of Directors of TARGET shall have recommended such an
Alternative Transaction to the stockholders of TARGET or shall have resolved to
engage in such an Alternative Transaction; or (iii) a tender offer or exchange
offer for forty percent (40%) or more of the outstanding shares of TARGET Common
Stock shall have been commenced or a registration statement with respect thereto
shall have been filed (other than by BUYER or an affiliate thereof), and the
Board of Directors of TARGET shall have recommended that the stockholders of
TARGET tender their shares in such tender or exchange offer; or
(f) by BUYER if a breach of any covenant or agreement on the part of
TARGET set forth in this Agreement shall have occurred which would cause the
conditions set forth in Section 7.2(a) not to be satisfied, and, that with
respect to any breach of a covenant or agreement hereunder, such covenant or
agreement is incapable of being cured or, if capable of being cured, shall not
have been cured within twenty (20) Business Days following receipt by BUYER of
written notice of such breach from TARGET; or
(g) by TARGET, if a breach of any covenant or agreement on the part of
BUYER set forth in this Agreement shall have occurred which would cause the
conditions set forth in Section 7.3(a) not to be satisfied, and, with respect to
any breach of a covenant or agreement hereunder, such covenant or agreement is
incapable of being cured or, if capable of being cured, shall not have been
cured within twenty (20) Business Days following receipt by TARGET of written
notice of such breach from BUYER.
For purposes of this Section 8.1, an "Alternative Transaction" involving a
specified party to this Agreement means: (i) a transaction or series of
transactions pursuant to which any person or group (as such term is defined
under the Exchange Act) other than BUYER, TARGET or Sub, or any affiliate
thereof, (a "Third Party") acquires or would acquire (upon completion of such
transaction or series of transactions) shares (or securities exercisable for or
convertible into shares) representing more than forty percent (40%) of the
outstanding shares of TARGET's common stock, pursuant to a tender offer or
exchange offer or otherwise; (ii) a merger, consolidation, share exchange or
other business combination involving TARGET or any of its material Subsidiaries
if, upon consummation of such merger, consolidation, share exchange or other
business combination such Third Party owns or would own more than forty percent
(40%) of the outstanding equity securities of TARGET or any of its material
Subsidiaries or the entity surviving such merger or business combination or
resulting from such consolidation; (iii) any other transaction or series of
transactions pursuant to which any Third Party acquires or would acquire (upon
completion of such transaction or series of transactions) control of assets of
TARGET or any of its material Subsidiaries (including, for this purpose,
outstanding equity securities of Subsidiaries of such party) having a fair
market value equal to more than forty percent (40%) of the fair market value of
all the consolidated assets of such party immediately prior to such transaction
or series of transactions; or (iv) any transaction or series of transactions
pursuant to which any Third Party acquires or would acquire (upon completion of
such transaction or series of transactions) control of the Board of Directors of
TARGET or by which
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nominees of any Third Party are (or would be) elected or appointed to a
majority of the seats on the Board of Directors of TARGET.
8.2 Effect of Termination. In the event of termination of this Agreement
---------------------
pursuant to Section 8.1, there shall be no Liability or obligation on the part
of BUYER, TARGET, or their respective officers, directors, stockholders or
Affiliates, except as set forth in Section 8.3 and further except to the extent
that such termination results from the willful breach by a party of any of its
representations, warranties, covenants or agreements in this Agreement; and
provided, that the provisions of Section 8.3 of this Agreement and the
Confidentiality Agreement shall remain in full force and effect and survive any
termination of this Agreement.
8.3 Fees and Expenses.
-----------------
(a) If this Agreement is terminated (i) by BUYER pursuant to Section
8.1(d), 8.1(e), or Section 8.1(f), TARGET shall pay to BUYER all fees and
expenses incurred by BUYER relating to this Agreement and the transactions
contemplated hereby ("BUYER Expenses") within five business days after receipt
of such request which shall not exceed $300,000.
(b) If this Agreement is terminated by TARGET pursuant to Section
8.1(g) hereunder, BUYER shall pay to TARGET all fees and expenses incurred by
TARGET relating to this Agreement and the transactions contemplated hereby
("TARGET Expenses") within five business days after receipt of such request not
to exceed $100,000, exclusive of the fee paid to Hera, LLC.
8.4 Amendment. This Agreement may be amended by the parties hereto, by
---------
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the shareholders of TARGET, but, after any such approval, no amendment shall
be made which by law requires further approval by such stockholders, as
applicable, without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
8.5 Extension; Waiver. At any time prior to the Effective Time, the
-----------------
parties hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
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ARTICLE 9.
MISCELLANEOUS
9.1 Nonsurvival of Representations, Warranties and Agreements. None of the
---------------------------------------------------------
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Closing and
the Effective Time, except for covenants and agreements which, by their terms,
are to be performed after the Effective Time. The Confidentiality Agreement
shall survive the execution and delivery of this Agreement. However, neither
the Closing, nor this Section, nor anything in this Agreement shall limit in any
manner any legal or equitable rights and reconciliations of BUYER with respect
to claims of actual fraud.
9.2 Notices. All notices, requests and demands, and other communications
-------
hereunder shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested), or sent by Federal Express or similar overnight
delivery service, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to BUYER or SUB, to:
Thermatrix Inc.
308 N. Peters Road, Suite 100
Knoxville, Tennessee 37922
Attention: Edward E. Greene
Telephone: (423) 539-9603
Facsimile: (423) 670-4091
with a copy to
Wilson Sonsini Goodrich & Rosati,
650 Page Mill Road
Palo Alto, CA 94304
Attention: Michael J. Danaher, Esq.
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
and
(b) if to TARGET to:
Wahlco Environmental Systems, Inc.
3600 West Segerstrom Avenue
Santa Ana, CA 92704-6495
Attention: C. Stephen Beal
Telephone: (714) 979-7300
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<PAGE>
Facsimile: (714) 979-0130
with a copy to
Howard, Smith & Levin
1330 Avenue of the Americas
New York, New York 10019
Attention: Leonard Chazen, Esq.
Telephone: (212) 841-1000
Facsimile: (212) 841-1010
(c) and in each case, with a copy to:
Wexford Management LLC
411 West Putnam Avenue
Greenwich, Connecticut 06830
Attention: Joseph Jacobs
Telephone: (203) 862-7020
Facsimile: (203) 862-7320
If delivered personally, the date on which a notice, request, instruction or
document is delivered shall be the date on which such delivery is made and, if
delivered by mail or by overnight delivery service, the date on which such
notice, request, instruction or document is received shall be the date of
delivery. In the event any such notice, request, instruction or document is
mailed or shipped by overnight delivery service to a party in accordance with
this Section 9.2 and is returned to the sender as nondeliverable, then such
notice, request, instruction or document shall be deemed to have been delivered
or received on the fifth day following the deposit of such notice, request,
instruction or document in the United States mails or the delivery to the
overnight delivery service. Any party hereto may change its address specified
for notices herein by designating a new address by notice in accordance with
this Section 9.2.
9.3 Interpretation. The parties have jointly participated in the
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negotiation and drafting of this Agreement. In the event of an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumptions or burdens of proof
shall arise favoring any party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any Federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. Each
defined term used in this Agreement has a comparable meaning when used in its
plural or singular form. Each gender-specific term used herein has a comparable
meaning whether used in a masculine, feminine or gender-neutral form. The term
"include" and its derivatives shall have the same construction as the phrase
"include, without limitation," and its derivatives. The Section headings
contained in this Agreement are inserted for convenience or reference only and
shall not affect in any way the meaning or interpretation of this Agreement.
When a reference is made in this Agreement to a section, such reference shall be
to a Section of this Agreement unless
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<PAGE>
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.4 Counterparts. This Agreement may be executed in two or more
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counterparts, all of which shall be considered one and the same agreement.
9.5 Governing Law. This Agreement shall be governed and construed in
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accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law rules.
9.6 Arbitration. The parties agree that any and all disputes, claims or
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controversies arising out of or relating to this Agreement that are not resolved
by their mutual agreement shall be submitted to final and binding arbitration
before J.A.M.S/Endispute, or its successor, pursuant to the United States
Arbitration Act, 9 U.S.C. Sec. 1 et seq. Either party may commence the
arbitration process called for in this Agreement by filing a written demand for
arbitration with J.A.M.S/Endispute, with a copy to the other party. The
arbitration will be conducted in accordance with the provisions of
J.A.M.S/Endispute's Comprehensive Arbitration Rules and Procedures in effect at
the time of filing of the demand for arbitration. The parties will cooperate
with J.A.M.S/Endispute and with one another in selecting an arbitrator from
J.A.M.S/Endispute's panel of neutral arbitrators, and in scheduling the
arbitration proceeding. The parties covenant that they will participate in the
arbitration in good faith. Costs with respect to the arbitration shall be
awarded by the arbitrator. The provisions of this Section 9.6 may be enforced
by any court of competent jurisdiction, and the party seeking enforcement shall
be entitled to an award of all costs, fees and expenses, including attorneys'
fees, to be paid by the party against whom enforcement is ordered.
9.7 Assignment. Neither this Agreement nor any of the rights, interests or
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obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties, and any attempted assignment thereof without such consent shall be null
and void. Subject to the preceding sentence, this Agreement will be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
9.8 Entire Agreement; No Third Party Beneficiaries. This Agreement and all
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agreements referenced specifically in this Agreement and executed as required by
this Agreement constitute the entire agreement among the parties hereto and
supersede and cancel any prior agreements, representations, warranties, or
communications, whether oral or written, among the parties hereto relating to
the transactions contemplated hereby or the subject matter herein. Neither this
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, but only by an agreement in writing signed by the party
against whom or which the enforcement of such change, waiver, discharge or
termination is sought. This Agreement is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder, provided,
however, that the Shareholders are beneficiaries of the obligations of BUYER
with respect to the Net Proceeds and the Shareholder Representative shall be
entitled to enforce such obligations of BUYER.
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<PAGE>
9.9 Severability. In the event that any court or any governmental
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authority or agency declares all or any part of any Section of this Agreement to
be unlawful, invalid or unenforceable, (i) such part or Section of this
Agreement shall be modified rather than voided, if possible, in order to achieve
the intent of the parties to the extent possible, (ii) such unlawfulness,
invalidity or unenforceability shall not serve to invalidate any other Section
of this Agreement, and (iii) in the event that only a portion of any Section is
so declared to be unlawful, invalid or unenforceable, such unlawfulness,
invalidity or unenforceability shall not serve to invalidate the balance of such
Section.
9.10 Exhibits and Schedules Incorporated. All Exhibits and Schedules
-----------------------------------
attached hereto are incorporated by reference herein and are an integral part of
this Agreement.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered on the day and year first written above.
BUYER: THERMATRIX INC.
a Delaware Corporation
By: /s/ John T. Schofield
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Name: John T. Schofield
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Its: President and Chief Executive Officer
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SUB: TMX ACQUISITION SUB I, INC.
a Delaware Corporation
By: /s/ John T. Schofield
--------------------------------------
Name: John T. Schofield
------------------------------------
Its: President and Chief Financial Officer
-------------------------------------
TARGET: WAHLCO ENVIRONMENTAL SYSTEMS, INC.
a Delaware Corporation
By: /s/ C. Stephen Beal
-------------------------------------
Name: C. Stephen Beal
-----------------------------------
Its: President and Chief Executive Officer
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[Signature Page to Agreement and Plan of Merger]
<PAGE>
Exhibit 2.2
EXECUTION COPY
SECURITY AGREEMENT, dated as of January 13, 1999, made by THERMATRIX
INC., a Delaware corporation ("Grantor") and Wexford Capital Partners II, L.P.,
a Delaware limited partnership, Wexford Overseas Partners I, L.P., a Cayman
Islands exempted limited partnership, Wexford Special Situations 1996, L.P., a
Delaware limited partnership, Wexford Special Situations 1996 Institutional,
L.P., a Delaware limited partnership, Wexford Special Situations 1996 Limited, a
Cayman Islands exempted company, and Wexford-Euris Special Situations 1996,
L.P., a Delaware limited partnership (collectively, the "Lenders") and WEXFORD
MANAGEMENT LLC, a Connecticut limited liability company, as Agent (the "Agent").
W I T N E S S E T H :
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WHEREAS, Wahlco Environmental Systems Inc. ("Wahlco"), Agent and
lenders are parties to an Amended and Restated Credit Agreement dated January
30, 1998 (the "1998 Credit Agreement"), under which Wahlco has borrowed funds
from time to time, and Wahlco has also borrowed funds through a non-committed
line of credit established, guaranteed and collateralized at the Chase Manhattan
Bank in February 1997 (the "Chase Facility"), and Wahlco is obligated to repay
such borrowings and amounts otherwise due under the 1998 Credit Agreement and
the Chase Facility.
WHEREAS, pursuant to an Agreement and Plan of Merger, dated November
9, 1998 (the "Merger Agreement"), among Wahlco, Thermatrix and TMX Acquisition
Sub I, Inc., a wholly owned subsidiary of Thermatrix ("Merger Sub"), Merger Sub
will merge with and into Wahlco and Wahlco will become a wholly owned subsidiary
of Thermatrix at the effective time of the Merger;
WHEREAS, in connection with the Merger, Grantor has agreed to guaranty
the obligations of Wahlco to the Lenders and to Chase and has executed the
Guarantee, dated the date hereof, in favor of the Lenders and the Agent;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. DEFINITIONS.
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The following terms, as used herein, have the following respective meanings:
"Accounts" means all "accounts" (as defined in the UCC) now owned or
hereafter acquired by Grantor, and shall also mean and include all accounts
receivable, contract rights, book debts, notes, drafts and other obligations or
indebtedness owing to Grantor arising from the sale, lease or exchange of goods
or other property by it and/or the performance of services by it (including,
without limitation, any such obligation which might be characterized as an
account, contract right or general intangible under the UCC in effect in any
jurisdiction) and all of
<PAGE>
Grantor's rights in, to and under all purchase orders for goods, services or
other property, and all of Grantor's rights to any goods, services or other
property represented by any of the foregoing (including returned or
repossessed goods and unpaid sellers' rights of rescission, replevin,
reclamation and rights to stoppage in transit) and all monies due to or to
become due to Grantor under all contracts for the sale, lease or exchange of
goods or other property and/or the performance of services by it (whether or
not yet earned by performance on the part of Grantor), in each case whether
now in existence or hereafter arising or acquired including, without
limitation, the right to receive the proceeds of said purchase orders and
contracts and all collateral security and guarantees of any kind given by any
Person with respect to any of the foregoing.
"Collateral" has the meaning set forth in Section 3.
"Copyright Office" means the United States Copyright Office.
"Copyrights" means all of the following now or hereafter acquired by
Grantor: (i) all copyrights, registrations and applications therefor, (ii) all
renewals and extensions thereof, (iii) all income, royalties, damages and
payments now and hereafter due or payable or both with respect thereto,
including, without limitation, damages and payments for past or future
infringements or misappropriations thereof, (iv) all rights to sue for past,
present and future infringements or misappropriations thereof, and (v) all other
rights corresponding thereto throughout the world.
"Documents" means all "documents" (as defined in the UCC) or other
receipts covering, evidencing or representing goods, now owned or hereafter
acquired by Grantor.
"Equipment" means all "equipment" (as defined in the UCC) now owned or
hereafter acquired by Grantor, including without limitation all motor vehicles,
trucks, trailers, railcars and barges.
"Federal Intellectual Property Laws" means the Copyright Act and the
Patent and Trademark Act.
"General Intangibles" means all "general intangibles" (as defined in
the UCC) now owned or hereafter acquired by Grantor, including, without
limitation, (i) all obligations or indebtedness owing to Grantor (other than
Accounts) from whatever source arising, (ii) all patents, patent licenses,
trademarks, trademark licenses, rights in intellectual property, goodwill, trade
names, service marks, trade secrets, copyrights, permits and licenses, (iii) all
rights or claims in respect of refunds for taxes paid and (iv) all rights in
respect of any pension plan or similar arrangement maintained for employees of
Grantor.
"Instruments" means all "instruments", "chattel paper" or "letters of
credit" (each as defined in the UCC) evidencing, representing, arising from or
existing in respect of, relating to, securing or otherwise supporting the
payment of, any of the Accounts, including (but not limited to) promissory
notes, drafts, bills of exchange and trade acceptances, now owned or hereafter
acquired by Grantor.
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"Intellectual Property Collateral" means all of the Copyrights,
Licenses, Patents, Trademarks and Trade Secrets as to which the Lenders and the
Agent have been granted a security interest hereunder.
"Inventory" means all "inventory" (as defined in the UCC) now owned or
hereafter acquired by Grantor, wherever located, and shall also mean and
include, without limitation, all raw materials and other materials and supplies,
work-in-process and finished goods and any products made or processed therefrom
and all substances, if any, commingled therewith or added thereto.
"License" means any Patent License, Trademark License or other license
as to which the Lenders and the Agent have been granted a security interest
hereunder.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any lease or title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
perfecting a security interest under the UCC).
"Material Adverse Effect" shall mean material adverse effect on (i)
the condition (financial or otherwise), operations, performance, properties,
assets, business or prospects of the Grantor taken as a whole, (ii) Grantor's
ability to pay or perform the Secured Obligations, (iii) the Lenders' Liens on
the Collateral or the priority of any such Lien.
"Patent License" means any written agreement granting any right to
practice any invention on which a Patent is in existence now owned or hereafter
acquired by Grantor.
"Patents" means all of the following now or hereafter acquired by
Grantor: (i) all patents and patent applications, (ii) all inventions and
improvements described and claimed therein, (iii) all releases, divisions,
continuations, renewals, extensions and continuations-in-part thereof, (iv) all
income, royalties, damages and payments now and hereafter due and/or payable to
Grantor with respect thereto, including, without limitation, damages and
payments for past, present or future infringements or misappropriations thereof,
(v) all rights to sue for past, present and future infringements or
misappropriations thereof, and (vi) all other rights corresponding thereto
throughout the world.
"Perfection Certificate" means a certificate substantially in the form
of Exhibit A, completed and supplemented with the schedules and attachments
contemplated thereby to the satisfaction of the Agent, and duly executed by the
chief executive officer and the chief legal officer of Grantor.
"Permitted Liens" means the Security Interests and the following
encumbrances: (i) Liens for taxes or assessments or other governmental charges
or levies, not yet due and payable; (ii) pledges or deposits securing
obligations under workmen's compensation,
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<PAGE>
unemployment insurance, social security or public liability laws or similar
legislation; (iii) pledges or deposits securing bids, tenders, contracts
(other than contracts for the payment of money) or equipment or leases to
which Grantor is a party as lessee made in the ordinary course of business;
(iv) deposits securing public or statutory obligations of Grantor; and (v)
deposits securing or in lieu of surety, appeal or customs bonds in proceedings
to which Grantor is a party; (vi) any Liens securing Grantor's obligations to
Venture Lending Group, a division of Cupertino National Bank ("Venture")
existing on the Closing Date; (vii) Liens (1) upon or in any equipment
acquired or held by Grantor to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment, or (2) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired, accessions thereto, replacements thereof, substitutions therefor and
improvements thereon, and the proceeds of such equipment; (xiii) leases or
subleases and license and sublicenses granted to others in the ordinary course
of business not interfering in any material respect with the business of
Grantor, and any interest or title of a lessor, licensor or under any lease or
license; (xi) Liens on assets (including the proceeds thereof and accessions
thereto) that existed at the time such assets were acquired by Grantor;
provided such Liens are not granted in contemplation of or in connection with
the acquisition of such asset by Grantor; (x) easements, reservations, rights-
of-way, restrictions, minor defects or irregularities in title and other
similar charges or encumbrances affecting real property not constituting a
Material Adverse Effect; (xi) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payments of customs duties in
connection with the importation of goods; (xii) Liens which constitute rights
of set-off of a customary nature or banker's Liens with respect to amounts on
deposit, whether arising by operation of law or by contract, in connection
with arrangements entered into with banks in the ordinary course of business;
(xiii) Liens on insurance proceeds in favor of insurance companies granted
solely as security for financed premiums; and (xiv) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the types described above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.
"Proceeds" means all proceeds of, and all other profits, products,
rents or receipts, in whatever form, arising from the collection, sale, lease,
exchange, assignment, licensing or other disposition of, or other realization
upon, collateral, including without limitation all claims of Grantor against
third parties for loss of, damage to or destruction of, or for proceeds payable
under, or unearned premiums with respect to, policies of insurance in respect
of, any collateral, and any condemnation or requisition payments with respect to
any collateral, in each case whether now existing or hereafter arising.
"PTO" means United States Patent and Trademark Office.
"Secured Obligations" means the obligations of Grantor under the
Guaranty secured under this Agreement.
"Security Interests" means the security interests in the Collateral
granted hereunder securing the Secured Obligations.
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<PAGE>
"Trade Secrets" means trade secrets, along with any and all (i)
income, royalties, damages and payments now and hereafter due and/or payable to
Grantor with respect thereto, including, without limitation, damages and
payments thereof, (ii) rights to sue for past, present and future infringements
or misappropriations thereof, and (iii) all other rights corresponding thereto
throughout the world.
"Trademark License" means any written agreement granting any right to
use any Trademark or Trademark registration now owned or hereafter acquired by
Grantor.
"Trademarks" means all of the following now owned or hereafter
acquired by Grantor: (i) all trademarks (including service marks and trade
names, whether registered or at common law), registrations and applications
therefor, and the entire product lines and goodwill of Grantor's business
connected therewith and symbolized thereby, (ii) all renewals thereof, (iii) all
income, royalties, damages and payments now and hereafter due or payable or both
with respect thereto, including, without limitation, damages and payments for
past, present or future infringements or misappropriations thereof, (iv) all
rights to sue for past, present and future infringements or misappropriations
thereof, and (v) all other rights corresponding thereto throughout the world.
"UCC" means the Uniform Commercial Code as in effect on the date
hereof in the State of New York; provided that if by reason of mandatory
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provisions of law, the perfection or the effect of perfection or non-perfection
of the Security Interest in any Collateral is governed by the Uniform Commercial
Code as in effect in a jurisdiction other than New York, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or non-
perfection.
2. REPRESENTATIONS AND WARRANTIES.
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Grantor represents and warrants as follows:
(A) Grantor has good and marketable title to all of the Collateral in
which Grantor purports to grant a Security Interest hereunder, free and clear of
any Liens other than the Permitted Liens. [Grantor has taken all actions
necessary under the UCC to perfect its interest in any Accounts purchased or
otherwise acquired by it, as against its assignors and creditors of its
assignors.]
(B) Grantor has not performed any acts which might prevent the Agent
from enforcing any of the terms of this Agreement or which would limit the Agent
in any such enforcement. Other than financing statements or other similar or
equivalent documents or instruments with respect to the Security Interests and
Permitted Liens, and other than the other the LIM/Mannesman Security Agreement
entered into in connection with the Merger Agreement, no financing statement,
mortgage, security agreement, filings with the Copyright Office and the PTO or
similar or equivalent document or instrument covering all or any part of the
Collateral in which Grantor purports to grant a Security Interest hereunder is
on file or of record in any jurisdiction in which such filing or recording would
be effective to perfect a Lien on such Collateral. No such Collateral is in the
possession of any Person (other than Grantor) asserting
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<PAGE>
any claim thereto or security interest therein, except that the Agent or its
designee may have possession of Collateral as contemplated hereby.
(C) On or before Friday, January 22, 1999, Grantor shall deliver the
Perfection Certificate to the Agent. The information set forth therein shall be
correct and complete. As promptly as practicable, but in no event later than 30
days after the date hereof, Grantor shall furnish to the Agent file search
reports from each UCC filing office set forth in Schedule 7 to the Perfection
Certificate confirming the filing information set forth in such Schedule.
(D) The Security Interests constitute valid security interests under
the UCC securing the Secured Obligations. When UCC financing statements in the
form specified in Exhibit A shall have been filed in the offices specified in
the Perfection Certificate and the requisite filings have been made in the
Copyright Office and the PTO, the Security Interests shall constitute perfected
security interests in the Collateral (except Inventory in transit) in which
Grantor purports to grant a Security Interest hereunder to the extent that a
security interest therein may be perfected by filing pursuant to the UCC and the
Federal Intellectual Property Laws, prior to all other Liens and rights of
others therein except for the Permitted Liens.
(E) All Inventory in which Grantor purports to grant a Security
Interest hereunder has or will have been produced in compliance with the
applicable requirements of the Fair Labor Standards Act, as amended.
3. THE SECURITY INTERESTS.
----------------------
(A) In order to secure the full and punctual payment of the Secured
Obligations in accordance with the terms thereof, and to secure the performance
of all of the obligations of Grantor hereunder and under the Guaranty, Grantor
hereby grants to the Agent for the ratable benefit of the Lenders a continuing
security interest in and to all of the following property of Grantor, whether
now owned or existing or hereafter acquired or arising and regardless of where
located (all being collectively referred to as the "Collateral"):
(1) Accounts;
(2) Inventory;
(3) General Intangibles;
(4) Documents;
(5) Instruments;
(6) Equipment;
(7) Copyrights;
(8) Patents;
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(9) Patent Licenses;
(10) Trademarks;
(11) Trademark Licenses;
(12) Trade Secrets;
(13) All books and records (including, without limitation, customer
lists, credit files, computer programs, printouts and other computer materials
and records) of Grantor pertaining to any of the Collateral; and
(14) All Proceeds of all or any of the Collateral described in Clauses
1 through 13 hereof.
(B) The Security Interests are granted as security only and shall not
subject the Agent or any Lender to, or transfer or in any way affect or modify,
any obligation or liability of Grantor with respect to any of the Collateral or
any transaction in connection therewith. Notwithstanding the foregoing, the
security interest granted herein shall not extend to and the term "Collateral"
shall not include any property, rights or licenses to the extent the granting of
a security interest therein (i) would be contrary to applicable law or (ii) is
prohibited by or would constitute a default under any agreement or document
governing such property rights or licenses (but only to the extent such
prohibition is enforceable under applicable law).
4. FURTHER ASSURANCES; COVENANTS.
-----------------------------
(A) Grantor will not change its name in any manner unless it shall
have given the Agent prior written notice thereof Grantor will not change the
location of (i) its chief executive office or chief place of business or (ii)
the locations where it keeps or holds any Collateral or any records relating
thereto from the applicable location described in the Perfection Certificate
unless it shall have given the Agent prior written notice thereof. Grantor
shall not in any event change the location of any Collateral if such change
would cause the Security Interests in such Collateral to lapse or cease to be
perfected.
(B) Grantor will, from time to time, at its expense, execute, deliver,
file and record any statement, assignment, instrument, notification, document,
agreement or other paper and take any other action, (including, without
limitation, any filings of financing or continuation statements under the UCC or
filings under the Federal Intellectual Property Laws) that from time to time may
be reasonably necessary or desirable, or that the Agent may reasonably request,
in order to create, preserve, perfect, confirm or validate the Security
Interests or to enable the Agent and the Lenders to obtain the full benefits of
this Agreement, or to enable the Agent to exercise and enforce any of its
rights, powers and remedies hereunder with respect to any of the Collateral. To
the extent permitted by applicable law, Grantor hereby authorizes the Agent to
execute and file financing statements or continuation statements without
Grantor's signature appearing thereon. Grantor agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. Grantor shall
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<PAGE>
pay the costs of, or incidental to, any recording or filing of any financing
or continuation statements concerning the Collateral in which Grantor purports
to grant a Security Interest hereunder.
(C) If any Collateral is at any time in the possession or control of
any warehouseman, bailee or any of Grantor's agents or processors, Grantor shall
notify such warehouseman, bailee, agent or processor of the Security Interests
created hereby and to hold all such Collateral for the Agent's account subject
to the Agent's instructions.
(D) Grantor shall keep full and accurate books and records relating to
the Collateral in which Grantor purports to grant a Security Interest hereunder,
and stamp or otherwise mark such books and records in such manner as the Lenders
or the Agent may reasonably require in order to reflect the Security Interests.
(E) Grantor will immediately deliver and pledge each Instrument to the
Agent, appropriately endorsed to the Agent, provided that so long as a default
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of Grantor on its obligations under the Guaranty has occurred and is continuing.
Grantor may retain for collection in the ordinary course any Instruments
received by it in the ordinary course of business and the Agent shall, promptly
upon request of Grantor, make appropriate arrangements for making any other
Instrument pledged by Grantor available to it for purposes of presentation,
collection or renewal (any such arrangement to be effected, to the extent deemed
appropriate to the Agent, against trust receipt or like document).
(F) Grantor shall use its best efforts to cause to be collected from
its account debtors, as and when due, any and all amounts owing under or on
account of each Account (including, without limitation, Accounts which are
delinquent, such Accounts to be collected in accordance with lawful collection
procedures) and shall apply forthwith upon receipt thereof all such amounts as
are so collected to the outstanding balance of such Account. Subject to the
rights of the Agent and the Lenders hereunder if a default of Grantor on it's
obligations under the Guaranty has occurred and is continuing, Grantor may allow
in the ordinary course of business as adjustments to amounts owing under its
Accounts (i) an extension or renewal of the time or times of payment, or
settlement for less than the total unpaid balance, which Grantor finds
appropriate in accordance with sound business judgment and (ii) a refund or
credit due as a result of returned or damaged merchandise, all in accordance
with Grantor's ordinary course of business consistent with its historical
collection practices. The costs and expenses (including, without limitation,
attorney's fees) of collection, whether incurred by Grantor or the Agent, shall
be borne by Grantor.
(G) Upon the occurrence and during the continuance of any default
under the Guaranty, Grantor will promptly notify (and Grantor hereby authorizes
the Agent so to notify) each account debtor in respect of any Account or
Instrument that such Collateral has been assigned to the Agent hereunder, and
that any payments due or to become due in respect of such Collateral are to be
made directly to the Agent or its designee.
(H) Without the prior written consent of the Lenders and the Agent,
Grantor will not sell, lease, exchange, assign or otherwise dispose of, or grant
any option with respect to,
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any Collateral except that, subject to the rights of the Agent and the Lenders
hereunder if a default of Grantor on it's obligations under the Guaranty has
occurred and is continuing, Grantor may sell, lease or exchange Inventory and
surplus or worn-out Equipment in the ordinary course of business, whereupon,
in the case of such a sale or exchange, the Security Interests created hereby
in such item (but not in any Proceeds arising from such sale or exchange)
shall cease immediately without any further action on the part of the Agent.
(I) No later than January 22, 1999, Grantor will cause the Agent to be
named as loss payee on each insurance policy covering risks relating to any of
its Inventory and Equipment. Grantor will deliver to the Agent, upon request of
the Agent, the insurance policies for such insurance.
(J) From time to time upon request by the Agent, Grantor shall, at its
cost and expense, cause to be delivered to the Lenders an opinion of counsel
satisfactory to the Agent as to such matters relating to the transactions
contemplated hereby as the Lenders may reasonably request.]
(K) Collateral Covenants Regarding Intellectual Property:
(1) Grantor shall notify the Agent immediately if it knows or has
reason to know that any application or registration relating to any
Trademark, Copyright or Patent which is material to the conduct of
Grantor's business may become abandoned or dedicated, or of any adverse
determination or development (including, without limitation, the
institution of, or any such determination or development in, any proceeding
in the PTO, the Copyright Office or any court) regarding Grantor's
ownership of any intellectual property which is material to the conduct of
Grantor s business, its right to register the same, or to keep and maintain
the same.
(2) In no event shall a Grantor, either itself or through any agent,
employee, licensee or designee, file an application for the registration of
any Trademark, Copyright or Patent with the PTO or any similar office or
agency in any other country or any political subdivision thereof, unless it
promptly informs the Agent, and, upon request of the Agent, executes and
delivers any and all agreements, instruments, filings, notifications,
documents, and papers as the Agent may request to evidence the Agent's
security interest in such intellectual property and the General
Intangibles, including, without limitation, the goodwill of Grantor,
relating thereto or represented thereby.
(3) Grantor will take all necessary and appropriate actions,
including, without limitation, in any proceeding before PTO, to maintain
and pursue each application (and to obtain the relevant registration) and
to maintain each registration of the Trademarks, Copyrights and Patents
which are material to the conduct of Grantor's business, including, without
limitation, filing of applications for renewal, affidavits of use,
affidavits of incontestability and opposition cancellation proceedings.
(4) In the event that any of the Intellectual Property Collateral is
infringed, misappropriated or diluted by a third party, Grantor shall
notify the Agent promptly after it learns thereof and shall, if requested
by the Agent, promptly sue for infringement,
9
<PAGE>
misappropriation or dilution and to recover any and all damages for such
infringement, misappropriation or dilution, and take such other actions
as Grantor shall reasonably deem appropriate under the circumstances to
protect such Intellectual Property Collateral.
5. GENERAL AUTHORITY.
-----------------
Grantor hereby irrevocably appoints the Agent its true and lawful
attorney, with full power of substitution, in the name of Grantor, the Agent,
the Lenders or otherwise, for the sole use and benefit of the Agent and the
Lenders, but at Grantor's expense, to the extent permitted by law to exercise,
at any time and from time to time if a default of Grantor on it's obligations
under the Guaranty has occurred or is continuing, all or any of the following
powers with respect to all or any of the Collateral:
(i) to demand, sue for, collect, receive and give acquittance for
any and all monies due or to become due thereon or by virtue thereof,
(ii) to settle, compromise, compound, prosecute or defend any action
or proceeding with respect thereto,
(iii) to sell, transfer, assign or otherwise deal in or with the same
or the proceeds or avails thereof, as fully and effectually as if the Agent
were the absolute owner thereof, and
(iv) to extend the time of payment of any or all thereof and to make
any allowance and other adjustments with reference thereto;
provided that the Agent shall give Grantor not less than ten days' prior written
- --------
notice of the time and place of any sale or other intended disposition of any of
the Collateral, except any Collateral which is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market. Grantor agrees that such notice constitutes "reasonable notification"
within the meaning of Section 9-504(3) of the UCC.
6. REMEDIES UPON GRANTOR'S DEFAULT UNDER THE GUARANTEE.
---------------------------------------------------
(A) If a default of Grantor on its obligations under the Guaranty has
occurred or is continuing, the Agent may exercise on behalf of the Lenders all
rights of a secured party under the UCC (whether or not in effect in the
jurisdiction where such rights are exercised) and, in addition, the Agent may,
without being required to give any notice, except as herein provided or as may
be required by mandatory provisions of law, (i) apply cash, if any, then held by
it as Collateral as specified in Section 8 and (ii) if there shall be no such
cash or if such cash shall be insufficient to pay all the Secured Obligations in
full, sell the Collateral or any part thereof at public or private sale, for
cash, upon credit or for future delivery, and at such price or prices as the
Agent may deem satisfactory. The Agent or any Lender may be the purchaser of
any or all of the Collateral so sold at any public sale (or, if the Collateral
is of a type customarily sold in a recognized market or is of a type which is
the subject of widely distributed standard price quotations, at any private
sale). Grantor will execute and deliver such documents and take such
10
<PAGE>
other action as the Agent deems necessary or advisable in order that any such
sale may be made in compliance with law. Upon any such sale the Agent shall
have the right to deliver, assign and transfer to the purchaser thereof the
Collateral so sold. Each purchaser at any such sale shall hold the Collateral
so sold to it absolutely and free from any claim or right of whatsoever kind,
including any equity or right of redemption of Grantor which may be waived,
and Grantor, to the extent permitted by law, hereby specifically waives all
rights of redemption, stay or appraisal which it has or may have under any law
now existing or hereafter adopted. The notice (if any) of such sale required
by Section 5 shall (1) in case of a public sale, state the time and place
fixed for such sale, and (2) in the case of a private sale, state the day
after which such sale may be consummated. Any such public sale shall be held
at such time or times within ordinary business hours and at such place or
places as the Agent may fix in the notice of such sale. At any such sale the
Collateral may be sold in one lot as an entirety or in separate parcels, as
the Agent may determine. The Agent shall not be obligated to make any such
sale pursuant to any such notice. The Agent may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for
the sale, and such sale may be made at any time or place to which the same may
be so adjourned. In case of any sale of all or any part of the Collateral on
credit or for future delivery, the Collateral so sold may be retained by the
Agent until the selling price is paid by the purchaser thereof, but the Agent
shall not incur any liability in case of the failure of such purchaser to take
up and pay for the Collateral so sold and, in case of any such failure, such
Collateral may again be sold upon like notice. The Agent, instead of
exercising the power of sale herein conferred upon it, may proceed by a suit
or suits at law or in equity to foreclose the Security Interests and sell the
Collateral, or any portion thereof, under a judgment or decree of a court or
courts of competent jurisdiction.
(B) For the purpose of enforcing any and all rights and remedies under
this Agreement the Agent may (i) require Grantor to, and Grantor agrees that it
will, at its expense and upon the request of the Agent, forthwith assemble all
or any part of the Collateral as directed by the Agent and make it available at
a place designated by the Agent which is, in its opinion, reasonably convenient
to the Agent and Grantor, whether at the premises of Grantor or otherwise, (ii)
to the extent permitted by applicable law, enter, with or without process of law
and without breach of the peace, any premise where any of the Collateral is or
may be located, and without charge or liability to it seize and remove such
Collateral from such premises, (iii) have access to and use Grantor's books and
records relating to the Collateral and (iv) prior to the disposition of the
Collateral, store or transfer it without charge in or by means of any storage or
transportation facility owned or leased by Grantor, process, repair or
recondition it or otherwise prepare it for disposition in any manner and to the
extent the Agent deems appropriate and, in connection with such preparation and
disposition, use without charge any trademark, trade name, copyright, patent or
technical process used by Grantor.
7. LIMITATION ON DUTY OF THE AGENT IN RESPECT OF COLLATERAL.
--------------------------------------------------------
Beyond the exercise of reasonable care in the custody thereof, the
Agent shall have no duty as to any Collateral in its possession or control or in
the possession or control of any agent or bailee or any income thereon or as to
the preservation of rights against prior parties or any other rights pertaining
thereto. The Agent shall be deemed to have exercised reasonable
11
<PAGE>
care in the custody of the Collateral in its possession if the Collateral is
accorded treatment substantially equal to that which it accords its own
property, and shall not be liable or responsible for any loss or damage to any
of the Collateral, or for any diminution in the value thereof, by reason of
the act or omission of any warehouseman, carrier, forwarding agency, consignee
or other agent or bailee selected by the Agent in good faith.
8. APPLICATION OF PROCEEDS.
-----------------------
Upon the occurrence and continuance of a default under the Guaranty,
the proceeds of any sale of, or other realization upon, all or any part of the
Collateral shall be applied by the Agent in the following order of priorities:
first, to payment of the expenses of such sale or other realization,
-----
including reasonable compensation to agents and counsel for the Agent, and
all expenses, liabilities and advances incurred or made by the Agent in
connection therewith, and any other unreimbursed expenses for which the
Agent or any Lender is to be reimbursed pursuant to Section 11;
second, to the ratable payment of accrued but unpaid interest on the
------
Secured Obligations in accordance with the terms thereof;
third, to the ratable payment of unpaid principal of the Secured
-----
Obligations;
fourth, to the ratable payment of all other Secured Obligations, until
------
all Secured Obligations shall have been paid in full; and
finally, to payment to Grantor of any surplus then remaining from such
-------
proceeds.
The Agent may make distributions hereunder in cash or in kind or, on a
ratable basis, in any combination thereof.
9. CONCERNING THE AGENT.
--------------------
(A) The Agent is authorized to take all such action as is provided to
be taken by it as the Agent hereunder and all other action reasonably incidental
thereto. As to any matters not expressly provided for herein (including,
without limitation, the timing and methods of realization upon the Collateral)
the Agent shall act or refrain from acting in accordance with written
instructions from the Lenders or, in the absence of such instructions, in
accordance with its discretion.
(B) The Agent shall not be responsible for the existence, genuineness
or value of any of the Collateral or for the validity, perfection, priority or
enforceability of the Security Interests in any of the Collateral, whether
impaired by operation of law or by reason of any action or omission to act on
its part hereunder. The Agent shall have no duty to ascertain or inquire as to
the performance or observance of any of the terms of this Agreement by Grantor.
12
<PAGE>
10. APPOINTMENT OF CO-AGENTS.
------------------------
At any time or times, in order to comply with any legal requirement in
any jurisdiction, the Agent may appoint one or more other Persons, either to act
as co-agent or co-agents, jointly with the Agent, or to act as separate agent or
agents on behalf of the Lenders with such power and authority as may be
necessary for the effectual operation of the provisions hereof and may be
specified in the instrument of appointment (which may, in the discretion of the
Agent, include provisions for the protection of such co-agent or separate agent
similar to the provisions of Section 9).
11. EXPENSES.
--------
In the event that Grantor fails to comply with the provisions of the
Guaranty or this Agreement, such that the value of any Collateral or the
validity, perfection, rank or value of any Security Interest is thereby
diminished or potentially diminished or put at risk, the Agent if requested by
the Lenders may, but shall not be required to, effect such compliance on behalf
of Grantor, and Grantor shall reimburse the Agent for the costs thereof on
demand. All insurance expenses and all expenses of protecting, storing,
warehousing, appraising, insuring, handling, maintaining, and shipping the
Collateral, any and all excise, property, sales, and use taxes imposed by any
state, federal, or local authority on any of the Collateral, or in respect of
periodic appraisals and inspections of the Collateral to the extent the same may
be requested by the Lenders from time to time, or in respect of the sale or
other disposition thereof shall be borne and paid by Grantor; and if Grantor
fails to promptly pay any portion thereof when due, the Agent or any Lender may,
at its option, but shall not be required to, pay the same and charge Grantor's
account therefor, and Grantor agrees to reimburse the Agent or such Lender
therefor on demand. All sums so paid or incurred by the Agent or any Lender for
any of the foregoing and any and all other sums for which Grantor may become
liable hereunder and all costs and expenses (including attorneys' fees, legal
expenses and court costs) reasonably incurred by the Agent or any Lender in
enforcing or protecting the Security Interests or any of their rights or
remedies under this Agreement, shall be additional Secured Obligations
hereunder.
12. TERMINATION OF SECURITY INTERESTS; RELEASE OF COLLATERAL.
--------------------------------------------------------
Upon the repayment in full of all Secured Obligations under the
Guaranty, the Security Interests shall terminate and all rights to the
Collateral shall revert to Grantor. At any time and from time to time prior to
such termination of the Security Interests, the Agent may release any of the
Collateral. Upon any such termination of the Security Interests or release of
Collateral, the Agent will, at the expense of Grantor, execute and deliver to
Grantor such documents as the Grantor shall reasonably request to evidence the
termination of the Security Interests or the release of such Collateral, as the
case may be.
13. NOTICES.
-------
All notices, communications and distributions hereunder shall be given
in accordance with Section 3.1 of the Guaranty.
13
<PAGE>
14. WAIVERS, NON-EXCLUSIVE REMEDIES.
-------------------------------
No failure on the part of the Agent to exercise, and no delay in
exercising and no course of dealing with respect to, any right under this
Agreement shall operate as a waiver thereof; nor shall any single or partial
exercise by the Agent of any right under the Guaranty, the Guaranty or this
Agreement preclude any other or further exercise thereof or the exercise of any
other right. The rights in this Agreement and the Guaranty are cumulative and
are not exclusive of any other remedies provided by law.
15. SUCCESSORS AND ASSIGNS.
----------------------
This Agreement is for the benefit of the Agent and the Lenders and
their successors and assigns, and in the event of an assignment of all or any of
the Secured Obligations, the rights hereunder, to the extent applicable to the
indebtedness so assigned, may be transferred with such indebtedness. This
Agreement shall be binding on Grantor and its successors and assigns.
16. CHANGES IN WRITING.
------------------
Neither this Agreement nor any provision hereof may be changed,
waived, discharged or terminated orally, but only in writing signed by the
Grantor and the Agent with the consent of the Lenders.
17. GOVERNING LAW.
-------------
ALL MATTERS RELATING TO THE INTERPRETATION, CONSTRUCTION, VALIDITY AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE WITHOUT GIVING EFFECT TO ANY
CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR
ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF NEW YORK.
18. CONSENT TO JURISDICTION.
-----------------------
GRANTOR, EACH OF THE LENDERS AND THE AGENT IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF (i) THE SUPREME COURT OF THE STATE OF NEW YORK, NEW
YORK COUNTY AND (ii) THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT
OF NEW YORK, FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING
OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. GRANTOR, EACH OF
THE LENDERS AND THE AGENT FURTHER AGREES THAT SERVICE OF ANY PROCESS, SUMMONS,
NOTICE OR DOCUMENTS BY UNITED STATES REGISTERED MAIL TO SUCH PARTY'S RESPECTIVE
ADDRESS FOR NOTICES SET FORTH IN
14
<PAGE>
SECTION 13 SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY ACTION, SUIT OR
PROCEEDING IN NEW YORK WITH RESPECT TO ANY MATTERS TO WHICH IT HAS SUBMITTED
TO JURISDICTION IN THIS SECTION 18. GRANTOR, EACH OF THE LENDERS AND THE AGENT
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF
ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY IN (a) THE SUPREME COURT OF THE STATE OF NEW
YORK, NEW YORK COUNTY AND (b) THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK, AND HEREBY FURTHER IRREVOCABLY AND
UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT
ANY SUCH ACTION, SUIT OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.
19. SEVERABILITY.
------------
If any provision hereof is invalid or unenforceable in any
jurisdiction, then, to the fullest extent permitted by law, (i) the other
provisions hereof shall remain in full force and effect in such jurisdiction and
shall be liberally construed in favor of the Agent and the Lenders in order to
carry out the intentions of the parties hereto as nearly as may be possible; and
(ii) the invalidity or unenforceability of any provision hereof in any
jurisdiction shall not affect the validity or enforceability of such provision
in any other jurisdiction.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
THERMATRIX, INC.
By: /s/ DANIEL S. TEDONE
-------------------------
Name: Daniel S. Tedone
Title: Chief Financial Officer
WEXFORD CAPITAL PARTNERS II, L.P.
By: Wexford Capital II, L.P., As General Partner
By: Wexford Capital Corp., As General Partner
By: /s/ ARTHUR AMRON
-------------------------
Name: Arthur Amron
Title: Vice President
WEXFORD OVERSEAS PARTNERS I, L.P.
By: Wexford Capital Overseas II, L.P., As
General Partner
By: Wexford Capital Limited, As General Partner
By: /s/ ARTHUR AMRON
-------------------------
Name: Arthur Amron
Title: Vice President
WEXFORD SPECIAL SITUATIONS 1996, L.P.
By: Wexford Advisors LLC, As General Partner
By: /s/ ARTHUR AMRON
--------------------------
Name: Arthur Amron
Title: Vice President
16
<PAGE>
WEXFORD SPECIAL SITUATIONS 1996, INSTITUTIONAL,
L.P.
By: Wexford Advisors LLC, As General Partner
By: /s/ ARTHUR AMRON
--------------------------
Name: Arthur Amron
Title: Vice President
WEXFORD SPECIAL SITUATIONS 1996 LIMITED
By: Wexford Advisors LLC, As Investment Manager
By: /s/ ARTHUR AMRON
--------------------------
Name: Arthur Amron
Title: Vice President
WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P.
By: Wexford Euris Advisors LLC, As General
Partner
By: /s/ ARTHUR AMRON
--------------------------
Name: Arthur Amron
Title: Vice President
WEXFORD MANAGEMENT LLC, As Agent
By: /s/ ARTHUR AMRON
--------------------------
Name: Arthur Amron
Title: Executive Vice President and General
Counsel
17
<PAGE>
Exhibit 2.3
EXECUTION COPY
GUARANTY
GUARANTY, dated as of January 13, 1999 (the "Guaranty"), by Thermatrix
Inc., a Delaware corporation ("Thermatrix"), for and in favor of and Wexford
Capital Partners II, L.P., a Delaware limited partnership, Wexford Overseas
Partners I, L.P., a Cayman Islands exempted limited partnership, Wexford Special
Situations 1996, L.P., a Delaware limited partnership, Wexford Special
Situations 1996 Institutional, L.P., a Delaware limited partnership, Wexford
Special Situations 1996 Limited, a Cayman Islands exempted company, and Wexford-
Euris Special Situations 1996, L.P., a Delaware limited partnership
(collectively, the "Lenders") and WEXFORD MANAGEMENT LLC, a Connecticut limited
liability company, as Agent (the "Agent").
Introduction
WHEREAS, Wahlco Environmental Systems Inc. ("Wahlco"), the Agent and
the Lenders are party to an Amended and Restated Credit Agreement, dated January
30, 1998 (the "Credit Agreement"), under which Wahlco has borrowed funds from
time to time;
WHEREAS, Wahlco has also borrowed funds through a non-committed line
of credit established, guaranteed and collateralized at The Chase Manhattan Bank
("Chase") in February 1997 (the "Chase Facility");
WHEREAS, pursuant to an Agreement and Plan of Merger, dated November
9, 1998 (the "Merger Agreement"), among Wahlco, Thermatrix and TMX Acquisition
Sub I, Inc., a wholly owned subsidiary of Thermatrix ("Merger Sub"), Merger Sub
has merged with and into Wahlco and Wahlco and became a wholly owned subsidiary
of Thermatrix at the effective time of the Merger;
WHEREAS Wahlco has entered into agreements dated the date hereof
(copies of which are attached as Annexes 1 and 2 hereto), regarding the
Liabilities; and
WHEREAS, in connection with the Merger, Thermatrix has agreed to
guaranty to the Lenders and the Agent the obligations of Wahlco to the Lenders
and to Chase under the Credit Agreement and the Chase Facility;
NOW THEREFORE, the parties agree as follows:
Thermatrix hereby unconditionally guarantees the full and punctual
payment (whether at stated maturity, by acceleration or otherwise) of any and
all amounts payable by (i) Wahlco to the Agent or the Lenders pursuant to the
Credit Agreement and (ii) Wahlco to Chase pursuant to the Chase Facility (all
such amounts described in clauses (i) and (ii) collectively, the "Liabilities").
Upon failure by Wahlco to pay any such amount when due, Thermatrix shall,
following its receipt of written notice of such failure from the Agent, pay the
amount not paid.
<PAGE>
This Guaranty shall in all respects be a continuing, absolute and
unconditional guaranty, and shall remain in full force and effect,
notwithstanding, without limitation, the dissolution or insolvency of Wahlco or
that at any time or from time to time all of the Liabilities may have been paid
in full, or any and all extensions or renewals of any of the Liabilities, any
and all interest on any of the foregoing, and any and all expenses paid or
incurred by the Agent in endeavoring to collect any of the foregoing and in
enforcing this Guaranty (including attorneys' and paralegals' fees and
expenses); and all of the agreements and obligations of Thermatrix under this
Guaranty shall remain fully in effect until all of the Liabilities (including
any extensions or renewals of any thereof) and all such interest and expenses
shall have been paid in full.
Thermatrix further agrees that, if at any time all or any part of any
payment theretofore applied by the Agent to any of the Liabilities is or must be
rescinded or returned by the Agent for any reason whatsoever (including, without
limitation, the insolvency, bankruptcy or reorganization of Wahlco), the
Liabilities shall, for the purposes such payment is of this Guaranty, to the
extent that is or must be rescinded or returned, be deemed to have continued in
existence, notwithstanding such application by the Agent, and this Guaranty
shall continue to be effective or be reinstated, as the case may be, as to the
Liabilities, all as though such application by the Agent had not been made.
The Agent may, from time to time, whether before or after any
discontinuance of this Guaranty, in its sole discretion and without notice to
Thermatrix, take any or all of the following actions: (a) retain or obtain a
security interest in any property to secure any of the Liabilities or any
obligation hereunder; (b) retain or obtain the primary or secondary obligation
of any obligor or obligors, in addition to Thermatrix, with respect to any of
the Liabilities; (c) extend or renew for one or more periods (whether or not
longer than the original period), alter or exchange any of the Liabilities; (d)
release, waive or compromise any obligation of Thermatrix hereunder or any
obligation of any nature of any other obligor primarily or secondarily obligated
with respect to any of the Liabilities; (e) release its security interest in, or
surrender, release or permit any substitution or exchange for, all or any part
of any property now or hereafter securing any of the Liabilities or any
obligation hereunder, or extend or renew for one or more periods (whether or not
longer than the original period) or release, waive, compromise, alter or
exchange any obligations of any nature of any obligor with respect to any such
property; and (f) resort to Thermatrix for payment of any of the Liabilities,
whether or not the Agent shall have resorted to any property securing any of the
Liabilities or any obligation hereunder or shall have proceeded against any
other obligor primarily or secondarily obligated with respect to any of the
Liabilities.
Any amounts received by the Agent from whatever source on account of the
Liabilities may be applied by the Agent toward the payment of such of the
Liabilities, and in such order of application, as the Agent may from time to
time elect; and, notwithstanding any payments made by or for the account of
Thermatrix pursuant to this Guaranty, Thermatrix shall not be subrogated to any
rights of the Agent until such
-2-
<PAGE>
time as the Agent shall have received payment of the full amount of all of the
Liabilities and of all of the obligations of Thermatrix hereunder. Thermatrix
further agrees that nothing contained herein or otherwise shall prevent the
Agent from pursuing concurrently or successively all rights and remedies
available to it at law and/or in equity or under any of the documents
evidencing the Liabilities and the exercise of any of its rights or remedies
shall not constitute a discharge of Thermatrix's obligations hereunder, it
being the purpose and intent of Thermatrix that its obligations hereunder
shall be absolute, independent and unconditional under any and all
circumstances whatsoever.
Thermatrix hereby expressly waives: (a) notice of the acceptance by
the Agent and the Lenders of this Guaranty; (b) notice of the existence or
creation or non-payment of all or any of the Liabilities; (c) presentment,
demand, notice of dishonor, protest, notice of protest and all other notices
whatsoever; (d) any defense, right of set-off or other claim which Thermatrix
may have against Wahlco or which Thermatrix, Wahlco or any subsidiary or
affiliate may have against the Agent or the Lenders; (e) all diligence in
collection or protection of or realization upon the Liabilities or any
thereof, any obligation hereunder, or any security for or guaranty of any of
the foregoing; and (f) any failure by the Agent or any Lender to inform
Thermatrix of any facts the Agent or such Lender may now or hereafter know
about Wahlco or any subsidiary or affiliate and the Liabilities, it being
understood and agreed that the Agent and the Lenders have no duty so to inform
and that Thermatrix is fully responsible for being and remaining informed by
Wahlco and any subsidiary or affiliate of all circumstances bearing on the
existence or creation, or the risk of nonpayment or nonperformance of the
Liabilities.
Notwithstanding the immediately preceding paragraph, but without
limiting or affecting any of the Agent's or the Lenders' rights or remedies of
any kind whatsoever, the Agent shall endeavor to notify Thermatrix of
significant events of default under the Credit Agreement which are or have
become, in the Agent's determination, the basis upon which to exercise the
rights or remedies provided therein. The requirement of notification set forth
in this paragraph represents a non-binding statement of principle only, and is
not intended to impose any affirmative duty upon the Agent, nor shall the
requirement of notification be construed to create or support any claim, right
of action, counterclaim, crossclaim or defense of any kind whatsoever, nor
shall the requirement of notification impair or in any way affect any of the
Agent's rights, benefits or remedies.
The Agent and each Lender may, from time to time, without notice to
Thermatrix, assign or transfer any or all of the Liabilities or any interest
therein and, notwithstanding any such assignment or transfer or any subsequent
assignment or transfer thereof, the Liabilities shall be and remain the
Liabilities for the purposes of this Guaranty, and each and every immediate and
successive assignee or transferee of any of the Liabilities or of any interest
therein shall, to the extent of the interest of such assignee or transferee in
the Liabilities, be entitled to the benefits of this Guaranty to the same extent
as if such assignee or transferee were the Agent or such Lender; provided,
however, that, unless the Agent shall otherwise consent in writing, the Agent
-3-
<PAGE>
shall have an unimpaired right, prior and superior to that of any such assignee
or transferee, to enforce this Guaranty, for the benefit of the Agent and the
Lenders, as to those of the Liabilities which the Agent have not been assigned
or transferred.
No delay in the exercise of any right or remedy shall operate as a
waiver thereof, and no single or partial exercise by the Agent or any Lender
of any right or remedy shall preclude other or further exercise thereof or the
exercise of any other right or remedy; nor shall any modification or waiver of
any of the provisions of this Guaranty be binding upon the Agent or any
Lender, except as expressly set forth in a writing duly signed and delivered
by the Agent or such Lender. No action of the Agent or any Lender permitted
hereunder shall in any way affect or impair the rights of the Agent or such
Lender and the obligations of Thermatrix under this Guaranty.
This Guaranty shall be continuing and shall not be discharged,
impaired or affected by (a) the power or authority or lack thereof of Wahlco
or any subsidiary or affiliate to incur the Liabilities; (b) the validity or
invalidity of the documents evidencing the Liabilities or securing the same;
(c) any claims or defenses whatsoever that Wahlco, any subsidiary or affiliate
or anyone else may or might have to the payment or performance of the
Liabilities; (d) the existence or non-existence of Wahlco or any subsidiary or
affiliate as a legal entity; (e) the transfer by Wahlco or any subsidiary or
affiliate of all or any part of the collateral described in the documents
securing the Liabilities; or (f) any right of offset, counterclaim or defense
(other than payment in full and performance in full of all of the Liabilities
in accordance with the terms of the documents evidencing and securing the
Liabilities) that Thermatrix may or might have to its undertakings,
liabilities and obligations hereunder, each and every such defense being
hereby waived by Thermatrix to the extent permitted by law.
This Guaranty shall be binding upon Thermatrix and upon Thermatrix's
successors and assigns and shall inure to the benefit of the Agent and the
Lenders and its successors and assigns. All references herein to Wahlco,
Thermatrix and any subsidiary or affiliate, respectively, shall be deemed to
include their respective successors and assigns, whether immediate or remote.
If more than one party shall execute this Guaranty, the term "undersigned" as
used herein shall mean all parties executing this Guaranty and each of them, and
all such parties shall be jointly and severally obligated hereunder. In
addition and notwithstanding anything to the contrary contained in this
Guaranty, the obligations of Thermatrix with respect to the Liabilities shall be
joint and several with any other party that shall now or hereafter execute a
guaranty of any of the Liabilities pursuant to a guaranty separate from this
Guaranty.
All notices required or permitted to be given hereunder shall be in
writing and shall be either personally delivered or sent by United States
certified or registered mail, return receipt requested, addressed, if to
Thermatrix at its address stated below or at such other address as Thermatrix
hereafter notifies the Agent and the Lenders as herein provided and, if to the
Agent or the Lenders at their address for notices under the Credit Agreement
or at such other address as the Agent or such Lender hereafter notifies
Thermatrix as herein provided. Notices shall be deemed received on the earlier
of (i) the date noted on the return receipt as delivered if mail delivery of
the notice is
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<PAGE>
successful; (ii) the last date of attempted delivery, as noted by the United
States Postal Service on the envelope containing the notice, if mail delivery
is unsuccessful; or (iii) the date of actual delivery if personally delivered.
This Guaranty has been delivered for acceptance by the Agent and the
Lenders in New York County and shall be governed by and construed in accordance
with the internal laws (as opposed to the conflicts of law provisions) of the
State of New York. Thermatrix hereby (i) waives any right to a trial by jury in
any action to enforce or defend any matter arising from or related to this
Guaranty; (ii) irrevocable submits to the jurisdiction of any state or federal
court located in S.D.N.Y. over any action or proceeding to enforce or defend any
matter arising from or related to this Guaranty; (iii) irrevocably waives, to
the fullest extent Thermatrix may effectively do so, the defense of an
inconvenient forum to the maintenance of any such action or proceeding; (iv)
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in any other jurisdictions by suit on the
judgment or in any other manner provided by law; and (v) agrees not to institute
any legal action or proceeding against the Agent or the Lenders or any of their
directors, officers, members, shareholders, employees, agents or property,
concerning any matter arising out of or relating to this Guaranty in any court
other than one located in S.D.N.Y. Nothing in this paragraph shall affect or
impair the Agent's or the Lenders' right to serve legal process in any manner
permitted by law or the Agent's or the Lender's right to bring any action or
proceeding against Thermatrix or its property in the courts of any other
jurisdiction. Wherever possible each provision of this Guaranty shall be
interpreted as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
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<PAGE>
IN WITNESS WHEREOF, this Guaranty has been duly executed by its authorized
officer as of the day and year first above written.
THERMATRIX INC.
By /s/ DANIEL S. TEDONE
-------------------------------
Name: Daniel S. Tedone
Title: Chief Financial Officer
Accepted and agreed.
WEXFORD MANAGEMENT LLC
By:/s/ ARTHUR AMRON
-------------------------------
Name: Arthur Amron
Title: Senior Vice President and General Counsel
WEXFORD CAPITAL PARTNERS II, L.P.
By: Wexford Capital II, L.P., As General Partner
By: Wexford Capital Corp., As General Partner
By:/s/ ARTHUR AMRON
-------------------------------
Name: Arthur Amron
Title: Vice President
WEXFORD OVERSEAS PARTNERS I, L.P.
By: Wexford Capital Overseas II, L.P., As General Partner
By: Wexford Capital Limited, As General Partner
By:/s/ ARTHUR AMRON
-------------------------------
Name: Arthur Amron
Title: Vice President
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<PAGE>
WEXFORD SPECIAL SITUATIONS 1996, L.P.
By: Wexford Advisors LLC, As General Partner
By:/s/ ARTHUR AMRON
-------------------------------
Name: Arthur Amron
Title: Vice President
WEXFORD SPECIAL SITUATIONS 1996, INSTITUTIONAL, L.P.
By: Wexford Advisors LLC, As General Partner
By:/s/ ARTHUR AMRON
-------------------------------
Name: Arthur Amron
Title: Vice President
WEXFORD SPECIAL SITUATIONS 1996 LIMITED
By: Wexford Advisors LLC, As Investment Manager
By:/s/ ARTHUR AMRON
-------------------------------
Name: Arthur Amron
Title: Vice President
WEXFORD-EURIS SPECIAL SITUATIONS 1996, L.P.
By: Wexford Euris Advisors LLC, As General Partner
By:/s/ ARTHUR AMRON
-------------------------------
Name: Arthur Amron
Title: Vice President
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