5.09 Diligence Compendium
In reviewing and utilizing this form, the Diligence Attorney should keep in mind
that in most instances (but not all), the client will have little interest in
reviewing the Diligence Compendium. The principal purpose of the compendium is
to document "for the record" the scope, character, findings and recommendations
of the entire diligence effort.
ATTORNEY/CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
PRIVILEGED AND CONFIDENTIAL PROPOSED ACQUISITION BY
ABC CORP. OF XYZ INC.
DILIGENCE COMPENDIUM
January 5, 1999
MEMORANDUM
TO: [Responsible Attorney]
FROM: [Diligence Attorney]
RE: ABC Corp.-Acquisition of XYZ Inc. ("XYZ")
DATE: January 5, 1999
I. INTRODUCTION.The following sets forth the results of the due diligence review of XYZ
Inc., a Delaware corporation ("XYZ"), conducted by Attorney, L.L.P. (Dallas) in
connection with the contemplated acquisition by ABC Corp. ("ABC") of XYZ,
through the acquisition of the stock and warrants thereof. This report contains
the results of our due diligence review and sets out material issues which arose
in the course thereof. Unless otherwise indicated, all such issues were resolved
prior to closing.
General Comments
Our due diligence investigation with respect to XYZ was based entirely
upon documentation provided to us by XYZ, certain documents which were available
in the public domain and information supplied to us by the officers or employees
of XYZ and its subsidiaries. The information was provided pursuant to our
request delivered on November 5, 1998, a copy of which is attached hereto as
Exhibit A, and follow-up requests, copies of which are in our chronfiles. As
discussed with, and as requested by, our client, we did not independently
investigate the authenticity of the materials provided to us by XYZ, its
officers, employees or legal counsel.
Additionally, our due diligence investigation was limited in its scope
insofar as Accounting Co. and ABC conducted concurrent due diligence
examinations of XYZ and its subsidiaries covering the financial, operational and
tax aspects of such entities. While our due diligence review may be deemed to
have overlapped in some respects with that conducted by Accounting Co. and ABC,
we did not undertake our due diligence review with the financial, operational or
tax aspects of XYZ as objectives of our due diligence investigation. For
information related to these topics, please see the separate reports prepared by
Accounting Co. and ABC, respectively.
II. ORGANIZATIONAL STRUCTURE AND CORPORATE DOCUMENTS.
Listed below are brief summaries of basic corporate information relating
to XYZ and its subsidiaries. Attached as Exhibit B is a more thorough summary of
our findings resulting from the due diligence investigation of the corporate
records of XYZ and its subsidiaries. Attached as Exhibit C is an organization
chart of XYZ which was constructed based upon such investigation.A. XYZ Inc.
State of Incorporation: Delaware (Original Charter filed 5/5/80 in name of
"123 Inc.")
States Qualified to do Business: Arizona
Fiscal Year: Calendar year
Officers: Mike Michaels - President and CEO; Dan Daniels - Group V.P.; Rod
Rodgers - Group V.P.; Joe Joseph - Sr. V.P.; Rich Richards -V.P. Operations; Max
Maxwell -Controller. (5/5/92 BOD meeting)
Directors: Mike Michaels, Oliver Owens and Sam SilverNo. of BOD Members Authorized: Three (restated Charter)
Shares authorized: 555,555 shares (500,000 shares of Class A, par
value $1.00 per share, and 55,555 shares of Class B, par value $1.00 per share)
Shares issued: 40,000 shares of Class A Stock issued to Investment Co.
40,000 shares of Class B Stock issued to the persons shown on Exhibit D.
Limitation of Liability/Indemnification for and Directors:Restated Charter. Directors are not liable to XYZ or its
stockholders for breach of fiduciary duty except for: (i) breach of duty of
loyalty; (ii) acts not in good faith or involving intentional misconduct or a
knowing violation of the law; (iii) under Section 174 of Title 8 of the Delaware
Code (unlawful payment of dividends, unlawful stock purchase or redemption), or (iv) for any transaction for which the director derived improper personal benefit.
Bylaws. Indemnify officers and directors to the fullest extent
authorized by the Delaware General Corporation Law, but will only indemnify an
officer or director who initiates an action if the action was authorized by the
Board. Indemnification of employees and agents is permitted to the same extent
as for officers and directors. These rights are not exclusive of rights granted
outside the Bylaws. The company is permitted to provide O&D insurance.
Michaels Employment Agreement. See Section VI.D.1. for a description
of XYZ's indemnity obligations to Mike Michaels under his employment contract.
B. XYZ Sub Inc.
State of Incorporation: Delaware (5/5/80)
States Qualified to do Business: Arizona (since 5/5/81; name change
2/5/88)
Fiscal Year: Calendar year (BOD Consent 5/5/80)
Officers: Mike Michaels - Chairman and CEO; Dan Daniels - President,
Secretary and Treasurer; Rich Richards - V.P. Operations; Max Maxwell - V.P.
Land. (5/5/93 Board Consent)
Directors: Mike Michaels, Dan Daniels and Rich Richards. (5/5/93 SH
Consent)
No. of BOD Members Authorized: Three (5/5/93 BOD Resolution)
Shares authorized: 50,000 shares common stock
Shares issued: 50,000 shares to XYZ (BOD Consent 5/5/80 allowed issuance
of up to 50,000 shares, $10.00 par value per share, to XYZ from time to time for
par value. If so issued, would be fully paid, validly issued and nonassessable)
Limitation of Liability/Indemnification for Officers and Directors:Bylaws. Indemnify officers and directors to the fullest extent
authorized by the Delaware General Corporation Law, but will only indemnify an
officer or director who initiates an action if the action was authorized by the
Board. Indemnification of employees and agents is permitted to the same extent
as for officers and directors. These rights are not exclusive of rights granted
outside the Bylaws. The company is permitted to provide O&D insurance.
C. XYZ Canada, Ltd.
State of Incorporation: Ontario, Canada (5/5/87)
Jurisdicti on to do Business: Jurisdictions Qualified Ontario, Quebec,
Nova Scotia
Fiscal Year: Calendar year
Officers: Mike Michaels - Chairman of the Board; Rod Rodgers - President;
Will Williams - Vice President, Finance & Administration, Secretary and
Treasurer; and Vice President, Land - Pat Patterson
Directors: Mike Michaels, Rod Rodgers and Will Williams
No. of BOD Members Authorized: Minimum of 1; maximum of 9.
Shares authorized: Unlimited number of common shares. Unlimited number of
preferred shares. No transfers without the consent of directors.
Shares issued: 5,555,555 Common Shares issued to XYZ
Indemnification for Officers and Directors:Directors not liable for acts other than failure to act in good
faith with a view to the best interests of the Corporation and failure to
exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. Indemnified to the fullest extent by law.
III. MATERIAL AGREEMENTS
A. Credit Facilities/Financial Arrangements. Attached as Exhibit E are
summaries produced by XYZ which set forth the material terms of XYZ's major debt
facilities.
1. Note Purchase Agreement dated as of 5/5/95 among 123 Inc.,
Subsidiary Inc. ("Subsidiary"), Affiliate Inc. ("Affiliate") and The Insurance
Co. ("Insure Co"). 123 agreed to sell to Insure Co $5,000,00 face amount of
10.00% Senior Notes due 12/31/98). Subsidiary and Affiliate agreed to sell to
Insure Co principal amount of $500,000 of their Senior Notes, due on the 5th
anniversary of the fifth interest payment date after the date of issue thereof.
Prepayments. $50,000 on each December 31 until the Notes have been paid in
full. The Notes can be paid or can be prepaid at any time at the option of XYZ
in integral multiples of $50,000.
Covenant to Secure Company Notes. If the Company allows any of its assets
to be encumbered, it must enter into an arrangement whereby the Notes are
concurrently secured by such a lien equally and ratably with any and all other
Debt secured thereby.
Negative Covenants. Current ratio cannot be lower than 1.05 to 1.
Consolidated Net Working Capital cannot be less than $500,000. Consolidated
Tangible Net Worth may not be less than $5,000,000. The Company cannot encumber
any of its assets (excludes tax liens, liens incurred in the ordinary course of
business that do not materially impair the use of its assets in the operation of
its business, liens securing inter-affiliate payables, judgment liens, and
certain preexisting liens on acquired assets). The Company cannot become liable
under any new debt (excluding intercompany or interaffiliate payables,
Subordinated Debt of $500,000 or less, debt incurred as contemplated by the
documents related to the Note Purchase Agreement or Current Debt incurred in the
ordinary course of business). The Company cannot declare dividends on its stock
or redeem shares of any class of its stock other than as contemplated in the
Stockholders' Agreement. The Company cannot invest more than $50,000 in
investments other than investments in certain affiliates, obligations of the
United States of America, certain high grade investment securities, investments
in joint ventures or partnerships to develop properties of the Company which
arrangements are consistent with those prevailing in the industry, and loans to
employees and others which are not material in aggregate amount and are made in
the ordinary course of business of the Company.
Merger or Consolidation. The Company covenants that it will not be a party
to any merger or consolidate with any other corporation.
Issue or Sale of Additional Stock. The Company cannot issue or sell any
shares of its own capital stock or securities convertible into any shares of its
capital stock, except as contemplated in this Agreement and certain related
agreements.
Guaranty. The Notes issued by XYZ were guaranteed by Subsidiary and
Affiliate. XYZ unconditionally guaranteed the payment of the notes issued by
Affiliate and Subsidiary.
Events of Default. Failure to make principal or interest payments; failure
to meet obligations under other debt, capitalized lease obligations, conditional
sales agreements, etc.; cross defaults with certain agreements related to the
Note Purchase Agreement; bankruptcy, reorganization, arrangements with
creditors, etc.
Amendment No. 1 to Note Purchase Agreement, dated as of 5/5/93. The effect
of this amendment was to prohibit the Consolidated Subsidiaries of XYZ from
guarantying XYZ's contractual obligations (other than the payment of debt).Amendment No. 2 to Note Purchase Agreement, dated 5/5/94. Among other
things, this Amendment increases the amount of permitted indebtedness to
$5,000,000 in unpaid principal amount of debt of the Company and its
consolidated subsidiaries. The Amendment increases the amount of permitted
capital expenditures to $1.5 million per year.
Amendment No. 4 to Note Purchase Agreement dated 5/5/97. This Amendment
decreases the amount of principal prepayment to $500,000 per year. The Amendment
also changes the working capital requirements to maintain a Current Ratio of 1:1
prior to 12/31/98 and 1.25:1 thereafter.
2. Corporate Loan Agreement dated 5/5/94 between XYZ Inc. and Trust
Company Inc. Trust Co agrees to make loans to the Company in multiples of $5,000
up to a total outstanding principal amount of $500,000. The Termination Date is
the later of 5/5/96, or any later date to which an extension is made. XYZ must
repay the principal amount of all loans on Trust Co's first business day
following the Termination Date. XYZ can repay the principal amount of any loan
in advance, or in part, at any time without penalty. The interest rate on any
loan is 1% above Trust Co's Prime Rate before maturity and 5% above Trust Co's
Prime Rate after maturity. Commitment Fee: 1% of the unused portion of the
credit facility limit, paid annually.
Extension of Termination Date. The Termination Date extends by one year
automatically unless Trust Co notifies XYZ prior to the immediately preceding
October 5th. The proceeds of this credit facility are only to be used for
working capital requirements.
Covenants. The Company agrees to comply with certain covenants found in
the Note Purchase Agreement. All amounts due under this Agreement are guaranteed
by XYZ Sub Inc. The guarantees are unconditional and absolute. Assignment of
XYZ's rights under this agreement without the prior written consent of the Bank
are void. Events of default include cross default under Company Notes issued
pursuant to the Note Purchase Agreement. There are various other cross default
provisions with Note Purchase Agreement.
a. Amendment No. 1 to Corporate Loan Agreement dated 8/8/95 Allowed
XYZ to loan to XYZ Sub $500,000 for general corporate purposes and for the
purpose of permitting XYZ Sub to redeem outstanding preferred stock of XYZ Sub
and to refinance existing indebtedness owed by XYZ Sub to XYZ.
b. Waiver Letter dated 5/5/97. Waiving certain provisions of the
Corporate Loan Agreement to allow XYZ to dispose of certain of its assets.
B. Acquisition/Disposition/Merger Agreements1. Sale and Purchase Agreement by and between 123 Inc. and Other
Corp. dated 4/1/94. The terms of this agreement governed the sale by Other of
the product manufacturing system owned by Other and located in Erie County,
Pennsylvania, including all plants, equipment, inventory and permits necessary
for the conduct of the system. XYZ agreed to assume certain liabilities of Other
existing as of or accruing after the Closing Date. The purchase price for the
system was to be the net depreciated book value of the system plus $50,000.
C. License Agreements
1. Canada
Software Licensing Agreement dated 5/5/97 between Computer Company
Ltd. and XYZ Canada, Ltd. XYZ Canada leases certain software technology. The
technology cannot be assigned or leased by XYZ Canada. The term of the license
is perpetual unless terminated by either party. The license may be terminated by
Computer Company Ltd. only if XYZ Canada fails to comply with any provision of
the license.
License Agreement dated 5/5/94 between Info Ltd. and XYZ Canada. The
term of this license is one year, renewable by the licensee upon the same terms
and conditions, with an adjustment of the license fee to be agreed upon by both
parties. The license agreement is governed by the laws of the Province of
Ontario. No evidence of renewal of this agreement was produced for review.
2. United States
Agreement for the sale of computer software dated 5/5/92 between
Systems, Inc. and XYZ.
Agreement for the sale of System Support dated 5/5/92 between
Systems, Inc. and XYZ. The agreement automatically renews for subsequent one-
year terms unless 90 days written notice is given by either party prior to
January 1st of any calendar year. Total monthly service charge of $500.
Software License Agreement dated 5/5/92 between Data Inc. and XYZ
Software.
D. Computer, Vehicle and Equipment Leases1. Canada
Vehicle Lease Agreement dated 5/5/98 between XYZ Canada and Leasing
Co. This schedule references Lease Agreement dated 5/5/98 (not produced).
Vehicle lease for a white 1992 pickup. Term of the lease is 24 months from
5/5/98. Monthly charges of $500.00. XYZ Canada agrees to insure. The lease
provides the payment of an administration fee if XYZ Canada terminates the lease
before its scheduled expiration date.
Support Services Agreement between XYZ Canada and Computer Company
Ltd. Note: The copy of this agreement produced for review was not executed by
Computer Co. Customer can terminate the agreement upon 60 days notice. Computer
Co. may terminate the agreement at any time after the first 12 months upon 90
days notice to the customer unless customer fails to perform under the contract,
in which case Computer Co. can terminate without notice. The contract is
governed by the laws of the Province of Quebec.
Maintenance Agreement dated 5/5/98 between XYZ Canada and Info
Systems Ltd. Term of one year. The agreement is a maintenance agreement for a
laser printer. The agreement is governed by the laws of the Province of Quebec.
2. United States
Equipment Lease dated 5/5/98 between Copier Co. and XYZ. $500 per
month payment for copier. Term of 24 months. Automatically renews for a term of
12 months unless notice of termination is given 60 days prior to the end of the
term or renewal term.
Full Maintenance Agreement dated 5/5/98 between Copier Co. and XYZ.
Discount Supply Agreement dated 5/5/98 between Copier Co. and XYZ.
Lease dated 5/5/97 between Paper Co. and XYZ. Term of 24 months.
$500.00 per month for copy equipment.
Postal Meter Rental Agreement dated 5/5/94 between XYZ and Paper Co.
Attached as Exhibit F is a schedule produced by XYZ listing the Data
Processing Maintenance Agreements by which XYZ is bound, office equipment,
leasing information, computer equipment maintenance information and the Vehicles
owned by XYZ as of 5/5/98.
E. Stockholder Agreements [None]
F. Maintenance Agreements
1. Service Agreement dated 5/5/96. Total contract price $500.
Maintenance for an air conditioning unit. Term of one year.
2. Maintenance Agreement dated 5/5/98 between Software Company and
XYZ Canada, Ltd. Annual maintenance charge of $500 (Canadian). Terminates upon
60 days written notice of a breach which remains uncured. The licensee may not
assign any rights under this agreement.
G. Other Material Agreements.1. Settlement Agreement. Settlement Co. and XYZ Sub entered into a
Settlement Agreement dated March 5, 1998 to avoid the expense associated with
litigation and to compromise their disputes concerning product purchase
contracts. Pursuant to the Settlement Agreement, Settlement Co. paid a lump sum
settlement to XYZ Sub by wire transfer to XYZ Sub's account in Trust Company,
Pennsylvania.
2. Venture Agreement dated November 5, 1996 between Venture Co. and
XYZ Sub.
Expired on December 5, 1997 unless further extended pursuant to its
terms.
Two-phase agreement to jointly develop product.
Phase I involves setting up initial product design. The parties are
also subject to a further agreement: Agreement dated November 5, 1996 regarding
use of product.
Restrictions: XYZ Sub cannot use the product for the benefit of any
other party, including any affiliate of XYZ Sub. Restrictions against assignment
(not triggered by proposed purchase transaction).
IV. REAL PROPERTY
A. Domestic Lease: [Location].
Lease Agreement dated ______ between ________ ("Lessor") Leasing Co. and
________ ("Lessee"). This lease covers net rentable square feet located at
________, ________. Term. The lease is in its ________ [original/renewed number] term. The
current term expires on ________ and [is/is not] subject to extension. [Describe
extension.]
Use. The lease requires that the premises must be used as ________.
Rent. Monthly base rentals through ___________ are $_____. Base rental
contains a component applicable to Basic Costs of $____ per square foot, which
can be adjusted each year, by the Lessor, whereupon the Base Rental thereafter
due shall include Lessee's proportionate share of any such increase in estimated
Basic Costs.
Assignment. If Lessee desires to assign or sublet any part of the leased
premises, or to the extent that any entity attempts to succeed to any of the
interests of the Lessee created by the Lease, Lessee must give Lessor notice
sixty (60) days in advance. Lessor may then, within fifteen (15) days, (i)
terminate the Lease as to the space affected, (ii) permit the proposed
assignment or sublet, or (iii) refuse to consent to the assignment or
subleasing, which consent shall not be unreasonably withheld, and continue the
Lease in full force and effect.
Subordination to Mortgage. The Lease is subject and subordinate to any
liens which encumber the Project (defined as the building and adjacent grounds).
The Lessee agrees to execute nondisturbance and attornment agreements as any
mortgagee shall request. Unless any mortgagee specifically subordinates a
mortgage to the Lease, the mortgagee upon foreclosure will terminate the Lease
and the rights of Lessee. Holdover rent is ___% of rent.
Default. Defaults by Lessee include any action taken to reorganize or
modify Lessee's capital structure if Lessee is a corporation or other entity.
Remedies upon default include termination of the lease and acceleration of all
amounts due to Lessor from Lessee, including the balance of the rent for the
remainder of the term less the fair market value for comparable office space in
the area. Lessor may also terminate Lessee's right of possession, repossess the
leased premises and relet for the account of Lessee on such terms and for such
amounts as are satisfactory to Lessor. Lessee would be liable to Lessor for the
amount of the excess of the rent due under the Lease over the rents received by
Lessor under any such reletting of the premises.
Insurance. Lessee must maintain liability insurance in an amount of
$________ for personal injury or death in respect of any one occurrence and not
less than $_______ for property damage in any one occurrence.
Renewal. Lessee has an option of renewing the Lease for approximately
_____ square feet of the premises for a period of _____ (__) years commencing on
______ at the prevailing rental rate. Lessee has the option to renew the Lease
for approximately _____ square feet of the premises for a period of _____ (__)
years commencing on ______ at the prevailing rental rate. Notice of renewal must
have been delivered on or before ________. The prevailing rental rates shall be
the rate charged for space in other comparable first class office buildings in
the area. Lessee has a preferential right to lease space that becomes available
on the ___ floor of the Building.
B. Foreign Office [Location]. The review of this lease of ________ was
conducted by ________. Attached as Exhibit G is a summary of their findings.
V. LITIGATIONA. Domestic Legal Matters1. Auditor Response Letter from ________ (law firm) to
________(accounting firm) dated ________.
The Company's subsidiary and a large number of product producers
entered into long-term supply contracts with third party purchasers to receive
prices for product in excess of the initial contract price through escalation
terms. Certain protesters challenged the increased prices paid by the purchasers
before Regulators. Regulators issued an order holding that the escalation terms
were valid. The protesters appealed to U.S. Court of Appeals for the D.C.
Circuit, which upheld the Regulators ruling. In ________, the protesters asked
the U.S. Supreme Court for writ of certiorari, which request was denied in
________. This determination is now final.
As of ________, the Company and its subsidiaries had an outstanding
payable to (this law firm) for legal services rendered in the amount of $_____.
B. Foreign Legal Matters
Our diligence effort has not identified any non-U.S. pending or threatened legal matters.
C. Interview of General Counsel
On ________, we interviewed ________, General Counsel of the Company and
its subsidiaries. In particular, we inquired as to all litigation matters that
may be pending or threatened, any administrative proceedings, inquiries or
investigations, and any consent decrees, judgments, injunctions or other
orders, decrees, settlement agreements, or arbitration findings with respect to
any litigation matter for the above Companies. Other than what is described
above in A & B, the General Counsel has indicated that there were no such
pending or threatened matters.
VI. EMPLOYEE AND LABOR MATTERS.
Attached as Exhibit H are personnel organizational charts for United
States and foreign operations. These charts were prepared by the Company and
reviewed by our firm.
A. Employee Pension Benefit Plans (performed by _____)1. 401(k) Plan. Effective ______. See Exhibit I attached hereto for
a description of the 401(k) plan.
B. Employee Welfare Benefit Plans1. Domestic. Provides major medical, dental plan, vision care, basic
life insurance, coverage four times annual
base compensation to a maximum of $_______, dependent life insurance, accidental
death and dismemberment, travel accident insurance, long-term disability (total
disability), 401(k) salary deferral plan, paid vacation and parking.
2. Foreign. Provides basic medical coverage, dental coverage, vision
care, basic life insurance at four times annual salary up to a maximum of
$_______ in Canadian dollars, accidental death and dismemberment insurance,
travel accident insurance, long-term disability insurance, short-term
disability, group registered retirement savings plan, paid vacation and parking.C. Collective Bargaining Agreements. None, either domestic or foreign.
D. Employment Agreements, Consulting and Similar Agreements1. Chairman and CEO. The agreement calls for Employee to serve as
Chairman of the Board, President, Chief Executive Officer and Director. Employee
must devote efforts and normal business time as reasonably required for his
duties. Employee can be actively engaged in other business activities provided
that prior written consent of the Board of Directors must be received if the
business activities directly compete with the Company. Employee is allowed to
maintain his residence in Philadelphia, PA.
Compensation/Benefits. The Salary shall be determined by the Board
but shall in no event be less than $______ per year during the Employment
Period, payable in equal semi-monthly installments. Employee is entitled to a
bonus of $______ following the end of each calendar year, subject to performance
adjustment by the Board of Directors to a minimum of $______ and a maximum of
$______. The Company will reimburse Employee for expenses incurred in connection
with the performance of his duties, including travel expenses from his residence
in ________. Membership in a dining or country club in the ________ area. Four
weeks paid vacation each year.
Employee Offices. The Company will pay Employee's expenses,
excluding rent, furnishings and secretarial expenses, for the offices he
maintains in his residence in Philadelphia. The Company must provide Employee
with an office space in Philadelphia, and the Company shall pay all expenses
associated with the maintenance of such office including rent, furnishings,
secretarial expenses and other costs.
Benefits. Major medical and hospitalization insurance, life and
accidental death and dismemberment insurance, long-term disability insurance,
pension plan, savings plan and other benefits to the same extent as Employee was
entitled to receive on the date of the Agreement.
Option. Covenant to grant to Employee an option to purchase 500
shares of Class B Common Stock, exercisable at an option price of $50.00 per share.
Term. Initial term expires ______. The term extends automatically
for additional one-year periods unless written notice of either party's intent
not to extend has been given at least two months prior to the expiration of the
term. If employer terminates employment for any reason, if Employee terminates
employment for Cause or if employment is terminated because of death or
disability, Employer must pay a lump sum payment in cash equal to the base
salary and bonuses which would be payable to Employee for a period of two years.
The amount payable for bonus for such two-year period will be the highest bonus
paid prior to the effective date of the termination. "Cause" means: material
breach by Employer of the Agreement; decision by the Board or the stockholders
for Employee to be removed as Chairman, President and Chief Executive Officer;
decision by the stockholders to not elect Employee as Director or to remove him;
merger, consolidation, liquidation, dissolution, winding up, exchange or sale of
all or substantially all of the properties and assets of Employer; the sale of
shares by one or more stockholders and/or the issuance or sale by Employer of
shares constituting 20% or more of the outstanding stock of Employer or any
other transaction resulting in a change of control; policy changes by Employer
which, in the reasonable judgment of Employee, make the performance of
Employee's duties under the Agreement unduly burdensome or result in any adverse
change in Employee's status, duties, responsibilities or authority; any
reduction in Employee's aggregate compensation or benefits without Employee's
consent; or action by Employer requiring the relocation of Employee's residence.
For a period of two (2) years after the Agreement is terminated as described
above, the Employer shall continue to provide major medical and hospitalization
insurance, life and accidental death and dismemberment insurance, and long-term
disability insurance comparable in amounts and in coverage to the highest level
of insurance coverage provided to Employee during the Employment Period.Indemnification. Broad indemnification for Employee to the fullest
extent permitted by Delaware law for acts committed while serving as an officer,
director or employee of any entity at the request of Employer. Employer must
maintain directors and officers liability insurance policy throughout the
employment period. We are still in process of confirming that the Company is in
compliance with this provision, and if so, what the specific terms of the
director and officer insurance policy are.
General. Employee is under no duty to mitigate or offset. At the
request of Employee, Employer shall require any successor or assign of the
Employer to specifically assume performance of the Agreement.
2. Consulting Contracts. Pursuant to the Agreement, Consultant will
provide Company with consulting services for at least ___ days per year for
compensation of $___ per month. Any services exceeding __ days per year will be
paid at the rate of $___ per day. This Agreement is terminable by the Company
upon 30 days prior written notice or by Consultant's written notice to the
Company at any time.
3. Incentive Plans1. Stock Value Incentive Plan. (Note: A copy of the Plan and a
form of agreement granting units under the plan is attached as Exhibit J.)
Eligibility. All employees are eligible to participate in the
Plan. The Board of Directors is given absolute authority in determining who may
participate in the Plan and the number of units to be granted to each
participant.
Units. The term "unit" is used to refer to a measure of value
of one share of common stock of the Company. No holders of units are entitled to
receive shares of Common Stock because of their rights in units issued. The
value of a unit is set at the "Fair Market Value" of one share of Common Stock
of the Company on the date in question. The Fair Market Value of one share of
Common Stock is determined by dividing the value of the Company, as determined
by an independent appraiser, by the total number of shares of Class A Stock and
Class B Stock combined. The appraisal shall be conducted as of the end of each
fiscal year, at the Company's expense, within 120 days after the end of such
fiscal year. If the Common Stock is traded on a national exchange, the "Fair
Market Value" shall be equal to the mean of the reported high and low sales
price of the Common Stock on such exchange on the date in question, or if no
prices are reported on that day, on the last preceding date on which such prices
of the Common Stock were so reported. If the Common Stock is publicly traded but
is not traded on a national stock exchange at the time the determination of its
Fair Market Value is required to be made, its Fair Market Value shall be
determined to be equal to the average of the closing bid and ask prices of the
Common Stock on the most recent date the Common Stock was publicly traded. The
"grant value" of the unit is the Fair Market Value of one share of Common Stock
on the date of grant. The value of the unit and the number of units held by any
person shall be appropriately adjusted to reflect any stock split, stock
dividend or other corporate event which shall affect the Common Stock. Maximum. The number of units which may be granted under the
Plan shall not exceed 1,000.
Award. The Board may grant units under the Plan prior to the
expiration of 10 years from the date on which the Plan is adopted.
Terms and Conditions. Units awarded pursuant to the Plan must
be evidenced by agreements, which agreements must contain the following terms:
(i) number of units granted; (ii) the effective date of the grant; (iii) the
grant value of the units; (iv) vesting is determined as follows: if the employee
is continuously employed from the date of grant until the fourth anniversary
after the grant, the employee's vested interest is 100%. If the employee
voluntarily terminates employment prior to the fourth anniversary of grant, the
employee's vested interest is 0%. If the employee is involuntarily terminated
(other than for cause), the employee's vested interest shall be determined based
upon the number of full years of employment as follows: 1 year-20%, 2 years-40%;
3 years-70%; 4 years-100%. If the employee is terminated for cause, the
employee's vested interest shall be 0%. "Cause" is defined as the employee's
gross negligence or willful misconduct or final conviction of a felony or a
misdemeanor involving moral turpitude. If the employment of the employee is
terminated as a result of his death, the vested interest is 100%.
Time and Amount of Payment. Upon termination of the employee's
employment, the holder of units is entitled to receive cash equal to (i) the
excess of the payment value of the units over the grant value of the units;
multiplied by (ii) the employee's vested interest in the units. Payments will be
made as soon as administratively feasible after the event which allows
determination of the amount to be received.
Cash Dividends. In the event of cash dividends on the Common
Stock, each unit holder shall receive an equivalent cash payment. In the event
of any dissolution or liquidation of the Company, or any merger, consolidation
or sale of substantially all of the stock or assets of the company, payment must
be made to the owners of units immediately prior to the effective date of such
event as if the event were an involuntary termination of employment without
cause except that the holders of the unit shall have a 100% vested interest in
the units.
Assignability. None.
2. Option Plan. (A copy of the plan is attached as Exhibit K).
The options granted under this plan are options to purchase shares of the Class B Stock.
Administration. The Board of Directors is given complete and
final discretion in selecting the individuals to whom options should be granted
and establishing the number of shares which may be issued under each option.
Option Agreements. Any Option Agreement may provide for the
surrender of the right to purchase shares under the Option in return for a
payment in cash or shares of Stock, or combination of cash and shares of Stock,
equal in value to the excess of the Fair Market Value of the shares with respect
to which the right to purchase is surrendered over the option price therefor
("Stock Appreciation Price"), on such terms and conditions as the Board in its
sole discretion may prescribe. Each Option Agreement may also provide for the
payment of the option price in any combination of cash or shares of Stock having
a fair market value equal to such option price. Eligibility of Optionee. Options may be granted only to key
employees of the Company or any parent or subsidiary corporation of the Company
at the time the Option is granted.
Shares Subject to the Plan. The aggregate number of shares
which may be issued under the Options granted under the Plan shall not exceed
5,000. Until the termination of the Plan, the Company shall at all times make
available a sufficient number of shares to meet the requirements of the Plan,
whether such shares consist of authorized but unissued shares or previously
issued shares of Stock reacquired by the Company. Any of the shares which are
unissued and which are not subject to outstanding options at the termination of
the Plan shall cease to be subject to the plan. Should any Option expire prior
to its exercise, the shares theretofore subject to such Option may again be
subject to an option granted under the Plan. The aggregate number of shares
which may be issued under the Plan shall be subject to adjustment to account for
changes caused by stock options, stock dividends, stock splits, etc. Once an
Option is exercised, the number of shares of Stock which may thereafter be
available for the purposes of the Plan and for sale to any one individual shall
be decreased by the number of shares as to which the option is exercised.
Separate stock certificates are to be issued for shares acquired pursuant to the
exercise of an Incentive Stock Option and for those shares acquired pursuant to
the exercise of any Option not constituting an Incentive Stock Option.
Option Price. To be determined by the Board, but such purchase
price shall not be less than the fair market value of Stock subject to an
Incentive Stock Option on the date the Option is granted.
Term. The plan became effective on ______. Except with respect
to Options outstanding, the Plan shall terminate upon, and no further options
shall be granted after, the expiration of 10 years from the date of its adoption
by the Board.
Recapitalization or Reorganization. When the Company effects a
subdivision or consolidation of shares of Stock or the payment of a stock
dividend without receipt of consideration, prior to the expiration of an Option
theretofore granted, the number of shares of Stock with respect to which such
Option may thereafter be exercised shall be adjusted proportionately, and the
purchase price per share also shall be adjusted proportionately. If the Company
recapitalizes, upon any exercise of an Option theretofore granted, the optionee
shall be entitled to purchase the number of shares to which he would be entitled
had the optionee been the holder of record of the number of shares of Stock as
to which such option is then exercisable immediately prior to such
recapitalization. If (i) the Company is party to any merger or consolidation to
which it is not the surviving entity (or survives as a subsidiary of an entity
other than a previously wholly owned subsidiary of the Company), (ii) the
Company sells substantially all of its assets to any other person or entity
(other than a wholly owned subsidiary of the Company), or (iii) the company is
to be liquidated, the board shall require the mandatory surrender of all
outstanding Options and shall thereupon cancel all Options and pay to each
optionee an amount of cash per share under option equal to the highest per share
price offered to the shareholders of the Company in any such merger,
consolidation, sale of assets or dissolution. If the consideration offered to
the shareholders of the company in any of these transactions is other than cash,
the Board shall retain an independent appraisal firm to determine the fair cash
equivalent value of the consideration which is other than cash. Note: If (i) any
person or entity acquires or gains ownership of more than 30% of the outstanding
shares of Stock, or (ii) as a result of the contested election of directors, the
persons who were directors of the Company before such election shall cease to
constitute a majority of the Board, then within 10 days after such corporate
change, the Board shall accelerate the time at which Options then outstanding
may be exercised so that all such Options may be exercised in full. Each holder
of an Option shall be entitled to participate in any repurchase or redemption of
Stock from the Company's Shareholders by exercising such Option and
simultaneously tendering the Stock purchase pursuant to such exercise to the
Company as a part of such repurchase or redemption. Each holder of an Option
shall receive a payment from the Company equal to any dividend or other
distribution such optionee would have received had such optionee owned the
shares of Stock subject to the Option. Registration Rights. If the Company proposes to file a
registration statement with the SEC, the Company shall give notice thereof to
each optionee (including optionees who have previously exercised all of their
outstanding Options) at least 10 days prior to the initial filing. Each optionee
shall have the right, within 10 days after delivery of the Notice, to request in
writing that the Company include all or a portion of the Stock purchased by such
optionee pursuant to the exercise of an Option and then held by such optionee in
the registration statement relating to such Public Offering. The Company shall
include in such Public Offering all of the stock that such optionee has
requested to be included. "Public Offering" is defined as a registration
statement filed with the SEC under the Securities Act of 1933, as amended,
respecting an offering, whether primary or secondary, of Stock, which is
underwritten on a firmly committed basis, is declared effective and the
securities so registered are issued and sold. The underwriting agreement for the
Public Offering must give each optionee the right to sell his shares to the
underwriters, and the underwriters must purchase such shares at the price paid
by the underwriters for the Stock sold by the Company. The company shall
withdraw from registration any shares of an optionee on request of such optionee
at the Company's expense. The Board may terminate the Plan at any time with
respect to any shares for which Options have not been granted. The Board may
amend the plan at any time; provided that no change in any Option theretofore
granted may be made which would impair the rights of the optionee without the
consent of such optionee and provided further that any amendment adopted by the
Board shall be subject to the approval of shareholders of the Company to the
extent the amendment increases the aggregate number of shares that may be issued
under Options granted pursuant to the Plan. Shareholder approval is also
required for amendments that change the designation of the employees eligible to
receive options, or to the extent otherwise required to satisfy the conditions
for exemptive relief contained in the Rule 16(b)-3 promulgated pursuant to
Section 16 of the 1934 Act.
Securities Laws. The Company shall not be required to issue
any shares of Stock unless a registration statement covering such shares has
been filed under the Securities Act of 1933, or, in the opinion of the Company's
legal counsel, no exemption from the registration requirements exist.
H. Employee Benefits1. Vacation. No vacation time granted during the first three (3)
months of employment. During the first ten (10) consecutive years of employment,
employees earn two (2) weeks of paid vacation each year. After ten (10)
consecutive years, full-time employees earn three (3) weeks of paid vacation
each year.
Vacation Accrual. Employees hired pursuant to written agreement
providing for vacation exceeding these levels are entitled to the levels so
provided.
Use of Vacation. Subject to workload. Vacation can be carried
forward past an employee's anniversary date only in special circumstances with
written permission. The company will make no cash settlement for vacation
accrued but not taken.
2. Severance Policy
Severance Payments. The employee manual provides that severance
payments will be made to employees who are terminated (for reasons other than
cause) and employees that do not accept permanent full-time positions with the
acquirer. Severance payments will be based on one month's salary per year of
service, with a minimum payment of three month's salary and a maximum payment of
12 month's salary. For purposes of this computation, employee service is rounded
to the nearest one-half year. Managers will receive a minimum of six month's
salary upon termination and officers will receive a minimum of one year's salary
at termination. No one who resigns prior to the closing of any purchase
transaction will be entitled to any severance payments, nor will any employee
who accepts a permanent full-time position with the acquirer be entitled to any
severance payments.
Employee Benefits. All coverage under all medical insurance and
other benefit programs will cease, effective on the date of the employee's
termination or the effective date of any purchase transaction. Each employee
will be entitled to continue his medical insurance coverage at his own expense
for a period of up to 12 months if he so chooses.
Vacation. Each employee is entitled to compensation for accrued
vacation that has not been taken in accordance with existing policy and
applicable law.
Release. As a condition to receiving the severance and retention
payments each employee will be required to execute a legal document releasing
the Company from any liabilities to the employee.
VII. ENVIRONMENTAL MATTERS
The due diligence review of environmental matters was conducted by
_______________. Attached as Exhibit L are memoranda summarizing their findings.
Accountants of ________ also conducted a review of environmental issues relating
to foreign operations. Their findings are summarized in Exhibit M.
VIII. AFFILIATED PARTY TRANSACTIONS
A. Corporate Loan Agreement dated ______ between the Company and Trust
Company Inc. See discussion in Section III.A.2 above. Mike Michaels is a member
of the Board of Directors of Bank Corporation, the bank holding company parent
of Trust Co.B. Management Services Agreement. The Company and its Canadian subsidiary
are parties to a Management Services Agreement dated ________ (the "Management
Services Agreement"). Pursuant to the Management Services Agreement, the Company
provides certain services relating to the business of developing and producing
products in Canada. The Company receives payment for (i) all reasonable travel
expenses, (ii) wages, overhead and other indirect costs incurred , (iii) an
amount of $______ per year (escalates by not less than 8% per year on each
January 1 commencing ______), and (iv) an amount representing a proportionate
share of all insurance costs paid by the Company. This agreement can be
terminated by either party upon written notice to the other on or before June 5
of any year. The type of services provided include the following: legal
services, general management and supervisory consulting services including
general administrative matters, assisting management on financial matters,
evaluating corporate acquisitions, organizing and implementing training seminars
for management and personnel, supervising employee benefit packages, designing
and maintaining accounting control systems, advising on operating activities
including land acquisitions, development strategies, and budget and long-term
planning including budget planning and preparation.
IX. INTELLECTUAL PROPERTY
The Company's general counsel ahs confirmed in writing that neither the
Company nor any of its subsidiaries possesses any registered patents, trademarks
or trade names. Other than the names under which the Company and its
subsidiaries operate, and certain information acquired in the ordinary course of
business, neither the Company nor any of its subsidiaries possesses any
intellectual property or proprietary information.
X. DESCRIPTION OF LIEN SEARCHES PERFORMED
The following searches were conducted in the names of the entities
indicated.
A. Delaware Secretary of State. UCC searches and searches for
federal tax liens were run by Filing System in the name of the Company and its
subsidiaries through ______. No records were found.
B. New Castle County (DE) Recorder of Deeds and New Castle County
(DE) Prothonotary. Searches were run by the Filing System for UCC filings (from
____), federal tax liens (____________), state tax liens and judgment liens
(____________). No records were found.
Attached as Exhibit N are the results of the various searches that were
found as described above.
XI. SCHEDULE OF EXHIBITS
A. Document Request Letter
B. Due Diligence Memo-Corporate Records
C. Organizational Chart
D. Shareholders-Class B
E. Major Debt Facilities-Terms
F. Data Processing Maintenance Agreements
G. Foreign Office Leases-Memo of Attorneys of Canada Ltd.
H. Personnel Organizational Charts
I. 401(k) Plan Description
J. ____ Stock Value Incentive Plan
K. ____ Stock Option Plan
L. Environmental Review-Domestic
M. Environmental Review-Foreign
N. Lien Searches
O. Warrant R-1
P. Review of Corporate Documents (Foreign)
SAMPLE FORM OF EXHIBIT EXHIBIT B
Corporate Documents
A. Company. 1. Restated Certificate of Incorporation. Filed in the Office of the
Secretary of State of Delaware on ______. Name. 123, Inc.
Purpose. Broad.
Authorized Shares. 555,555 total shares of all classes of capital stock,
consisting of 500,000 Shares of Class A Non-Voting Common Stock ("Class A
Stock"), par value $1.00 per share, and 55,555 shares of Class B Voting Common
Stock ("Class B Stock"), par value $1.00 per share. All shares of previously
outstanding Common Stock were reclassified as Class B stock on the effective
date of the Restated Charter and are automatically converted into shares of
Class B Stock.
Reserved Shares. 1,000 shares of Class B Stock solely for the purpose of
effecting the conversion of any or all shares of Class A Stock. 10,000 shares of
Class B Stock solely for the purpose of effecting the exercise of all or any
Options issued pursuant to the Stock Option Plan. 50 shares of Class B Stock for
issuance to employees and/or directors of the Company as the Board of Directors
may direct.
CLASS A STOCK
Voting Rights. As long as 5,000 or more shares of Class A Stock are
outstanding, the holders of such shares shall have the right to vote as a class
(a) to amend the charter or bylaws of the Corporation and (b) to vote on (i)
consolidation or merger of the Corporation, (ii) the dissolution of the
Corporation, and (iii) the sale of all or a substantial part of the assets of
the Corporation. These matters must be approved by the holders of a majority of
the outstanding shares of Class A Stock. "Substantial Part of its Assets" means
assets representing 15% or more of the total consolidated assets of the
Corporation and its subsidiaries.
Conversion Rights. At the option of the original holder thereof into one
share of Class B Stock, but only in connection with the sale of such share of
Class A Stock. Each share of Class A Stock is convertible at the option of any
subsequent holder at any time.
CLASS B STOCK
Voting Rights. One vote per share. The holders of shares of Class B Stock
have full voting power for the election of directors and for all other purposes.
Stockholder approval requires the affirmative vote of the holders of a majority
of the outstanding shares of Class B Stock. Other than as set forth above, the
preferences, limitations and relative rights of the shares of Class A Stock and
the shares of Class B Stock shall be the same.Directors. The number of directors shall be three, and election need not
be by written ballot.
Amendment of Bylaws and Charter. Exclusively within the power of the
stockholders.
Liability of Directors to the Corporation and Stockholders. None except
for: (i) breach of the duty of loyalty, (ii) acts not in good faith or involving
intentional misconduct or a knowing violation of the law, (iii) under Delaware
Code, or (iv) for any transaction for which the director derived improper
personal benefit.
a. Certificate of Amendment to the Restated Certificate of
Incorporation of 123 Inc. Filed with the Delaware Secretary of State on ______.
Changed the name of the Corporation to "__________."
b. Certificate of Amendment to the Restated Certificate of
Incorporation of XYZ Inc. Filed with the Delaware Secretary of State on ______.
The Amendment increased the number of authorized shares of all classes of
capital stock to 555,555 consisting of 500,000 shares of Class A Stock, par
value $1.00 per share and 55,555 shares of Class B Stock, par value $1.00 per share.
2. Original Certificate of Incorporation. Filed in the Office of the
Secretary of State of the State of Delaware on ______.
Name. The name of the Company was originally "123 Inc."
Purpose. The original Certificate of Incorporation had a broad purpose
clause.
Authorized Shares. 500,000 shares of Common Stock, par value $1.00 per
share, and 50,000 shares of Preferred Stock, par value $5.00 per share.
Dividends. Preferred Stock is given, as declared, noncumulative dividends
in cash at the rate of 5% of par value, payable annually on December 31. No
dividends can be paid on the Common Stock, nor can any Common Stock be redeemed
by the Corporation, unless and until all declared and unpaid dividends accrued
on the Preferred Stock shall have been paid, or an amount for payment set aside.
Subject to the previous limitations, dividends may be declared on the Common
Stock and the Common Stock may be redeemed by the Corporation.
Redemption. Any portion of the Preferred Stock may be redeemed by the
Corporation, without premium, by paying $5.00 per share in cash, together with
any declared and unpaid dividends accrued on the shares of Preferred Stock to be
redeemed. In the event that less than all shares of Preferred Stock are
redeemed, the Board of Directors shall give notice to the Stockholders of the
redemption, which shall occur pro rata or by such other equitable method as the
Board may determine. When notice of redemption is given to the Stockholders, and
funds necessary for the redemption are set aside by the corporation, the shares
to be redeemed shall no longer be deemed outstanding, regardless of whether the
certificates representing the Preferred Stock have been produced for redemption.
Any holder of the Preferred Stock may, by written notice to the Corporation,
require the Corporation to redeem all or any portion of the Preferred Stock
owned by such holder by paying $5.00 per share, together with any declared and
unpaid dividends accrued on the shares of Preferred Stock. The Corporation can
redeem shares only in the event that there are funds legally available therefore
under the General Corporation Law of Delaware. Liquidation. The holders of Preferred Stock are entitled to a liquidation
preference of $5.00 per share, plus any declared but unpaid dividends on the
Preferred Stock. The Holders of the Preferred Stock are not entitled to
participate further in the distribution of assets upon liquidation or winding up
of the Corporation's business, and the remaining assets must be divided among
the holders of the Common Stock. If the assets of the Corporation are
insufficient to permit the payment of the entire amount of liquidation
preference on the Preferred Stock, assets of the Company shall be distributed to
the holders of the Preferred Stock. A consolidation or merger of the
Corporation, a sale or transfer of substantially all of its assets, or a
purchase or redemption of stock of the Corporation of any class shall not be
regarded as a liquidation, dissolution or winding up of the affairs of the
Corporation.
Voting. Each share of Common Stock and the Preferred Stock is entitled to
one vote per share. The Common Stock and the Preferred Stock are to vote as a
single class except on matters on which a separate class vote is required by law
or the Certificate of the Corporation. Holders of two-thirds of the Preferred
Stock must consent to or vote at a meeting to (i) create any new class of stock
or increase the authorized amount of any class of stock ranking prior to or on a
parity with the Preferred Stock with respect to dividends or assets, or any
class of stock convertible into or evidencing the right to purchase any class of
stock ranking prior to or on a parity with the Preferred Stock, or (ii) amend,
alter, adopt or repeal any provisions of the Certificate of the Corporation so
as to effect adversely the rights and preferences of the Preferred Stock.
Initial Directors. Initial Directors were Jane Doe, Lew Lewis, and Harry
Harris.
Amendment of Bylaws. The Board may amend the bylaws of the Corporation.
3. Restated Bylaws (adopted February 5, 1993) (Note: no resolutions have
been produced which show that these bylaws were properly adopted).
STOCKHOLDERS.
Quorum. The holders of a majority of the stock issued, outstanding and
entitled to vote at any meeting constitute a quorum, and the act of a majority
of the stock so represented shall constitute the act of the meeting of the
Stockholders.
Special Meetings. Special meetings of the Stockholders may be called at
any time by the President, and shall be called by the President or the Secretary
upon the written request therefor, stating the purpose of the meeting, signed by
the holders of a majority or more of the issued and outstanding stock entitled
to vote at the meeting.
Voting. Voting by proxy is allowed. Each proxy expires within two years
from its date unless it expressly provides for a longer period, and is revocable
unless it expressly states that it is irrevocable and is coupled with an
interest. The Corporation cannot vote any shares of treasury stock at any
meeting of the Stockholders. Action Without Meeting. Stockholders can act by written consent so long as
the consent is signed by the holders of outstanding stock having no less than
the minimum number of votes necessary to authorize or take such action at a
meeting. Prompt notice must be given to all shareholders who do not sign the consent.
DIRECTORS.
Number. The number of Directors shall be set forth in the Certificate of
Corporation.
Quorum. The majority of the total number of directors shall constitute a
quorum at any meeting, and an act of the majority of Directors present at such
meeting shall be the act of the Board.
Meetings. Regular meetings of the Board of Directors shall be held semi-
annually each year at such time and place as shall be designated from time to
time by resolution of the Board. Special meetings may be called by the
President, or, upon the written request of any two directors, by the Secretary,
in each case on at least 48 hours notice personally delivered to the Directors,
or where such notice is by mail, on at least 15 days notice to each Director.
Unless otherwise required by law, notice is not required to state the purpose of
the meeting.
Removal. Directors may be removed by Holders of a majority of the Shares
entitled to vote at an election of the Directors. However, unless the
Certificate of Incorporation provides otherwise, if the Board is classified,
then the Stockholders may effect such removal only for cause.
Vacancies. Vacancies and newly created directorships resulting from an
increase in the authorized number of directors may be filled by a majority of
the Directors then in office, although less than a quorum, or a sole remaining
Director.
Action Without Meeting. The Board may act without a meeting if a written
consent is signed by each Director.
OFFICERS. Any Officer may be removed with or without cause by the vote of
the majority of the whole Board at a special meeting called for that purpose,
but such removal shall be without prejudice to the contract rights, if any, of
the persons so removed. Officers and Directors of the Corporation are given very
broad indemnification rights.
AMENDMENT OF BYLAWS. Only the Stockholders shall have the power to vote to
adopt, amend, and repeal from time to time the Bylaws of the Corporation.
4. Board and Stockholder Minutes (selected).
5/5/99 Board Meeting. Elected officers. Repayment of Subordinated
Convertible Note. The board discussed and authorized the repayment of the
Subordinated Convertible Note made by the Company to 123 Limited in the amount
of $500,000 bearing interest at 5% with a stated maturity of 5/5/2000. The
minutes referenced that the $500,000 was to be paid into escrow on 5/5/2000.
6/6/99 Board Meeting. Stock Value Incentive Plan. The directors reviewed
the terms on which the Company implemented the 1988 Stock Value Incentive Plan
and granted 500 of the 1,000 units to non-stockholder management at a grant
price of $50 per unit. The board then authorized an amendment to the Stock Value
Incentive Plan to provide that the grant value of units granted prior to 5/5/95
be $50 per unit, and authorized the officers of the company to amend the
applicable agreement granting units under the plan to reflect such amendment.
7/7/99. Board Meeting. Bank Financing Plans. The board authorized the
company to enter into a Loan Agreement with Trust Company Inc. with the intent
of establishing a $500,000 credit facility. Mr. Michaels advised the board that
he was a member of the Board of Directors of Bank Corporation, the bank holding
company parent of Trust Co. Mr. Michaels abstained from voting on this matter.
8/8/99 Board Consent. Approved an amendment to the nonqualified stock
option agreements issued or entered into pursuant to the XYZ Inc. 1987 Stock
Option Plan. Authorized that this matter be put before the stockholders for a
vote and recommended that they adopt the proposed amendment to the stock option
agreements. Authorized the Company to enter into an amendment to the Employment
Agreement dated 5/5/87 between XYZ and Mr. Michaels.
5/5/00 Board Meeting. Reelected the officers of XYZ Inc. for 1997.
7/7/00 Board Meeting. Authorized the amendment to the nonqualified stock
option agreements of XYZ; authorized the amendment to the employment agreement
entered into with Mike Michaels on November 5, 1988; reviewed the valuation of
the fair market value of XYZ stock prepared by Partners & Co., Inc.; letter
dated February 5, 1997 from Partners & Co., Inc. states that the XYZ has a Stock
Value Incentive Plan ("SVIP") providing for cash payment to key employees upon
termination of employment in an amount equal to the excess of the fair market
value of one share of Class B common stock at termination over the fair market
value as of the date of the grant. As of September 5, 1996, 500 SVIP units were
outstanding at a grant value per unit of $50. Partners went further in the
letter to state that in their opinion as of September 5, 1996, the XYZ Class B
common stock had a fair market value of $100 per share.
Letter dated May 5, 2000 from Larry Lawrence, Vice President of Corporate
Finance at Insurance Company Inc., granting Insure Co's consent to the amendment
of 1994 Stock Option Plan. Additionally, unanimous consent of the stockholders
of XYZ Inc. was signed by all shareholders approving said amendment.
8/8/00 Board Meeting. Approved the first amendment to XYZ Inc. profit
sharing plan.
10/10/00 Board Meeting. The Board determined that it would be appropriate
to grant additional units under the XYZ Inc. 1995 Stock Value Incentive Plan.
Mr. Michaels stated that he would propose grants of units to several of the
Company's employees and seek approval of the Board of Directors for the granting
of these units in the very near future; authorized the increase of funds
available for discretionary bonuses for the employees (excluding Mr. Michaels)
selected by Mr. Michaels in amounts designated by him from $50,000 to $75,000
for the fiscal year end at September 5, 1997.
11/11/00 Board Meeting. Authorized the grant of units to certain employees
pursuant to the XYZ Inc. 1995 Stock Value Incentive Plan.
12/12/00 Board Meeting. Reelected officers for 1998. Authorized the sale
of Property to Buyers for $500,000.
2/2/01 Board Meeting. Approved the compensation of the officers (with Mr.
Michaels abstaining with respect to his compensation); approved the proposal to
restructure the intercompany financing of XYZ Canada, Ltd.
9/9/01 Stockholder Consent. The stockholders of XYZ consented to the
execution by XYZ of a purchase and settlement agreement pursuant to which XYZ
will purchase 10 shares of stock owned by Rich Richards and one-half of the
options to purchase stock owned by Rich Richards. The stockholders waived their
right to participate in said disposition on a prorated basis in accordance with
their respective ownership.
5/5/02
