-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UAGUIqEHq2lUgZcE+pkZYEtryyPYCvQGeP+EiiwL6GMlM4jQTSzFmU1dR7VS7dqf SgI7ghKIBJvRntGEqoxyoA== 0000720671-03-000069.txt : 20030912 0000720671-03-000069.hdr.sgml : 20030912 20030912164654 ACCESSION NUMBER: 0000720671-03-000069 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20030912 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20030912 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALIFAX CORP CENTRAL INDEX KEY: 0000720671 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 540829246 STATE OF INCORPORATION: VA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08964 FILM NUMBER: 03894325 BUSINESS ADDRESS: STREET 1: 5250 CHEROKEE AVE CITY: ALEXANDRIA STATE: VA ZIP: 22312 BUSINESS PHONE: 7037502202 MAIL ADDRESS: STREET 1: 5250 CHEROKEE AVENUE CITY: ALEXANDRIA STATE: VA ZIP: 22312 FORMER COMPANY: FORMER CONFORMED NAME: HALIFAX ENGINEERING INC/VA DATE OF NAME CHANGE: 19911204 8-K 1 f8ks12eg.txt FORM 8-K DATED AUGUST 29, 2003 7 UNITED STATES 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): August 29, 2003 HALIFAX CORPORATION (Exact name of registrant as specified in its charter) Virginia 1-08964 54-0829246 (State or other (Commission File (I.R.S. Employer jurisdiction of Number) Identification No.) incorporation) 5250 Cherokee Avenue, Alexandria, Virginia 22312 (Address of principal executive offices/Zip Code) Registrant's telephone number, including area code: (703) 750-2202 Former name, former address, and former fiscal year, if changed since last report: N/A Forward Looking Statements Certain statements in this document constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. While forward-looking statements sometimes are presented with numerical specificity, they are based on various assumptions made by management regarding future circumstances over many of which we have little or no control. Forward-looking statements may be identified by words including "anticipate," "believe," "estimate," "expect" and similar expressions. Halifax Corporation ("Halifax" or the "Company") cautions readers that forward- looking statements, including without limitation, those relating to future business prospects, revenues, working capital, liquidity, and income, are subject to certain risks and uncertainties that would cause actual results to differ materially from those indicated in the forward- looking statements. Factors that could cause actual results to differ from forward-looking statements include the concentration of the Company's revenues, risks involved in contracting with its customers, government contracting risks, absence of dividends, potential conflicts of interest, difficulties in attracting, and retaining management, professional and administrative staff, fluctuation in quarterly results, risks related to acquisitions and risks related to the Company's acquisition strategy, continued favorable banking relationships, the availability of capital to finance operations and planned growth, ramifications of the embezzlement matter referenced herein, risks related to competition and the Company's ability to continue to perform efficiently on contracts, and other risks and factors identified from time to time in the Company's Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Forward-looking statements are intended to apply only at the time they are made. Moreover, whether or not stated in connection with a forward-looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should we later become aware that it is not likely to be achieved. If the Company were to update or correct a forward-looking statement, you should not conclude that the Company will make additional updates or correction thereafter. Item 2. Acquisition or Disposition of Assets On August 29, 2003, Halifax acquired all of the outstanding Common Stock of Microserv, Inc. ("Microserv"), a Washington corporation, from the shareholders of Microserv (the "Microserv Shareholders"), through the merger of Microserv with and into wholly-owned subsidiaries of Halifax as described below and in the Agreement and Plan of Merger dated August 29, 2003 for the acquisition of Microserv (the "Merger Agreement") attached hereto as Exhibit 99.1. All capitalized terms not defined herein shall have the meaning ascribed to them in the Merger Agreement. All summaries of documents filed as exhibits hereto are qualified as reference to the actual documents. Microserv was founded in 1985 and provides high availability hardware maintenance services to a nationwide customer base. The Merger Halifax acquired Microserv in a tax-free reorganization. Prior to the closing of the Merger (the "Closing"), Halifax created a new wholly- owned corporation ("Corporate Sub") and a new limited liability company of which Halifax is the sole member ("LLC Sub"). At the Closing, Corporate Sub merged into Microserv in a statutory merger (with Microserv surviving such merger), and immediately thereafter, Microserv merged into LLC Sub in a statutory merger (with LLC Sub surviving such second merger). The merger consideration received by the Microserv Shareholders is as follows: The amount of the merger consideration was determined through arms- length negotiations among the parties. The cash portion of the merger consideration came from Halifax's cash flow from operations and the common stock, par value $0.24 per share (the "Common Stock"), was issued by Halifax from authorized but unissued shares. Common Stock. The Microserv Shareholders received 442,078 shares of Common Stock on the date of Closing. Cash. The Microserv Shareholders received an aggregate of $360,000 in cash. Notes. The Microserv Shareholders received notes in an aggregate original principal amount of $493,934 (the "Notes"). All principal and any unpaid interest shall be due and payable 18 months after the Closing date, subject to certain set off rights of the Company. Interest shall accrue on principal at a rate of 5% per annum and shall be payable to each Microserv Shareholder quarterly in cash. The Notes are unsecured and in the event of a liquidation shall rank subordinate to Halifax's senior and subordinated debt; provided, however, that Halifax shall have the right and obligation to pay its obligations under the Notes to Microserv Shareholders as and when such obligations become due unless a default is declared under Halifax's senior and subordinated loan documents. The Notes contain covenants, protective provisions, default provisions and remedies. The full text of the form of Note is attached hereto as Exhibit 99.6. Reductions in merger consideration. The merger consideration shall be reduced pursuant to the formula set forth in the Merger Agreement. As required, Halifax paid in full $1,200,000 of the $2,000,000 portion of Halifax's debt to Research Industries Incorporated ("RII") which is convertible into equity securities of Halifax. At least $400,000 of the remaining portion of the debt referenced in the preceding sentence shall be paid within thirty days of receipt by Halifax of certain additional funds to be received in the form of advance payment from a certain large customer of Halifax. Registration Rights and Right of First Offer. Microserv Shareholders who acquired shares of the Common Stock in the Merger will have certain "demand" and "piggyback" registration rights, and will be subject to a twelve month prohibition on any transfers of Common Stock acquired in the Merger, which prohibition period may be extended under certain circumstances. In addition, the Microserv Shareholders are required to provide the Company with a right of first offer to purchase the shares of Common Stock acquired in the Merger under certain circumstances. The full text of the Registration Rights and Right of First Offer Agreement is attached hereto as Exhibit 99.2. Deferred Merger Consideration. Microserv Shareholders may, subject to certain set-off rights of the Company, receive up to $250,000 of additional merger consideration (the "Deferred Merger Consideration") based on certain agreed upon Microserv accounts achieving net revenues (for the twelve month period beginning on September 1, 2003 and ending on August 31, 2004 (the "Earnout Period") of equal to or greater than 105% of an agreed upon revenue target. If the Deferred Merger Consideration is earned as described above, such Deferred Merger Consideration shall be paid in cash or, subject to certain limitations, a combination of cash and Common Stock. Employees of Microserv. Gary Lukowski and Jonathan Scott have entered into severance and restrictive covenant agreements with Halifax. See "Employee Severance and Restrictive Covenant Agreements." Election of Director. To the extent Microserv Shareholders continue to hold greater than 50% of the aggregate number of shares of Common Stock issued in connection with the Merger, Microserv Shareholders shall collectively have the right to nominate one member to Halifax's board of directors. The Microserv Shareholders have designated Gerald F. Ryles (the "Microserv Nominee"). Halifax shall recommend, consistent with the fiduciary duties of its Board of Directors, such nominee to its shareholders and undertake its best efforts to secure the election of such nominee. Certain shareholders of the Company have agreed to vote their shares of the Company in favor of such nominee. The full text of the Voting Agreement is attached hereto as Exhibit 99.5. Representations, Warranties, Covenants and Indemnification. The Merger Agreement contains customary representations, warranties, conditions, covenants, indemnification provisions and other agreements, including, without limitation, a general release of claims against Microserv from certain agreed upon Microserv Shareholders and holders of Microserv's options. Halifax's sole remedy, subject to certain agreed upon exceptions, with respect to indemnification claims made pursuant to the Merger Agreement is to (a) setoff any sums for which Halifax is entitled to indemnification thereunder against (i) first, up to $400,000 due under the Notes and (ii) second, payments of Deferred Merger Consideration and (b) under certain circumstances and subject to certain limitations, to require delivery to Halifax by Microserv Shareholders of shares of Common Stock issued in the transaction. If any indemnification claim(s) for which Halifax is the indemnitee is pending at a time when Halifax is required to pay or deliver any such amounts due under the Notes and/or Deferred Merger Consideration, then Halifax shall have the right, upon notice to the Microserv Shareholders, to withhold from such payment or delivery, until final determination of such pending indemnification claim or claims the total amount for which the applicable Microserv Shareholder or Shareholders, as the case may be, may become liable as a result thereof, as determined by Halifax reasonably and in good faith. Interests of Persons in the Merger. Except as described below, the Board of Directors and Officers of Microserv have no interest in the Merger other than as shareholders of Microserv. The Board of Directors and officers of Microserv collectively owned approximately 90% of the Microserv Common Stock (assuming the exercise of all options issued by Microserv). It is anticipated that following the completion of the Merger, the Halifax Board of Directors will be expanded to include the Microserv Nominee. It is currently intended that Gerald Ryles will be the Microserv nominee. From January, 1994 to January, 2001, Mr. Ryles was Chairman of the Board and Chief Executive Officer of Microserv. From January, 2001 until the date hereof, Mr. Ryles has held the position of Chairman of the Board of Microserv. In addition, each of Gary Lukowski and Jonathan Scott, executive officers of Microserv, will be employed by the Company upon completion of the Merger. There was no other material relationship between Microserv or the Microserv Shareholders and Halifax, its affiliates, directors or officers or any associate of the Halifax directors or officers. Employee Severance and Restrictive Covenant Agreements. Gary Lukowski and Jonathan Scott will be employed by the Company as of the date of the closing of the Mergers and shall have certain responsibility with respect to the continued operation of Microserv's business. In connection with such employment, the Company will agree to pay such individuals severance in the event such employment is terminated (i) by the Company, for other than "Cause" (as such term is defined in applicable severance agreement) or death or disability, or (ii) by the applicable employee, for "Good Reason" (as defined in the applicable agreement). In consideration for such employment and the severance benefits referenced above, such employees will be prohibited from (i) either competing with Microserv and the Company for their respective periods of employment plus a one year period thereafter (and in any event no earlier than two years after Closing) or soliciting the customers or employees of Microserv and the Company for the same period, and (ii) either disclosing confidential or proprietary information about Microserv or the Company or publishing disparaging remarks about them. The full text of the Employee Severance and Restrictive Covenant Agreements are attached hereto as Exhibits 99.3 and 99.4. General Release. Each Microserv Shareholder has released Microserv, and Halifax, as successor in interest to Microserv, from any and all claims that such Microserv Shareholder has against Microserv. The full text of the General Release is attached hereto as Exhibit 99.7. Item 7. Financial Statements and Exhibits (a) Financial Statements of business acquired. Audited financial statements are not required pursuant to Rule 3-05(b)(2) of Regulation S- X as the company acquired does not meet the 20% tests set forth therein. (b) Proforma Financial Information. The following proforma financial information will be filed within 75 days of the due date of this currrent report: (i) Consolidated Pro-Forma Statement of Operations for year ended March 31, 2003. (ii) Consolidated Pro-Forma Statement of Operations for the three months ended June 30, 2003. (iii) Consolidated Pro-Forma Balance Sheet as of June 30, 2003. (c) Exhibits. The following exhibits are filed herewith: S-K Item Number Description 32.1 Section 906 Certification 32.2 Section 906 Cerfification 99.1 Agreement and Plan of Merger, dated August 29, 2003 for the Acquisition of Microserv, Inc. by Halifax Corporation 99.2 Registration Rights and Right of First Offer Agreement dated August 29, 2003 99.3 Employee Severance and Restricted Covenant Agreement with Gary Lukowski dated August 29, 2003 99.4 Employee Severance and Restricted Covenant Agreement with Jonathan Scott dated August 29, 2003 99.5 Voting Agreement dated August 29, 2003 99.6 Form of Note to Microserv Shareholders 99.7 General Release dated August 29, 2003 99.8 Press Release dated August 29, 2003 (Incorporated by reference from the Current Report on Form 8-K dated August 29, 2003) 99.9 Proforma Financial Statements (to be filed by amendment) SIGNATURE 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. HALIFAX CORPORATION Date: 9/12/03 By: /s/Joseph Sciacca Name: Joseph Sciacca Title: Chief Financial Officer: EXHIBIT INDEX S-K Item Number Description 32.1 Section 906 Certification 32.2 Section 906 Cerfification 99.1 Agreement and Plan of Merger, dated August 29, 2003 for the Acquisition of Microserv, Inc. by Halifax Corporation 99.2 Registration Rights and Right of First Offer Agreement dated August 29, 2003 99.3 Employee Severance and Restricted Covenant Agreement with Gary Lukowski dated August 29, 2003 99.4 Employee Severance and Restricted Covenant Agreement with Jonathan Scott dated August 29, 2003 99.5 Voting Agreement dated August 29, 2003 99.6 Form of Note to Microserv Shareholders 99.7 General Release dated August 29, 2003 99.8 Press Release dated August 29, 2003 (Incorporated by reference from the Current Report on Form 8-K dated August 29, 2003) EX-32.1 3 ex321eg.txt SECTION 906 CERTIFICATION Exhibit 32.1 HALIFAX CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ( Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of Halifax Corporation (the "Company"), does hereby certify with respect to the Current Report of the Company on Form 8-K dated August 29, 2003 (the "Report") that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: 9/12/03 /s/ Charles L. McNew Charles L. McNew President and Chief Executive Officer EX-32.2 4 ex322eg.txt SECTION 906 CERTIFICATION Exhibit 32.2 HALIFAX CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ( Section 1350 of Chapter 63 of Title 18 of the United States Code), the undersigned officer of Halifax Corporation (the "Company"), does hereby certify with respect to the Current Report of the Company on Form 8-K dated August 29, 2003 (the "Report") that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: 9/12/03 /s/ Joseph Sciacca Joseph Sciacca Chief Financial Officer EX-99.1 5 ex991eg.txt AGREMENT AND PLAN MERGER Exhibit 99.1 AGREEMENT AND PLAN OF MERGER dated August 29, 2003 FOR THE ACQUISITION OF MICROSERV, INC. BY HALIFAX CORPORATION AGREEMENT AND PLAN OF MERGER Table of Contents Section 1: D efined Terms 1 Section 2: The First Merger 1 2.1 The Merger 1 2.2 First Merger Effective Time 1 2.3 Effect of the First Merger 2 2.4 Articles of Incorporation and Bylaws 2 2.5 Directors and Officers 2 2.6 Merger Consideration; Conversion of Capital Stock 2 2.7 Delivery of Merger Consideration and Surrender of Certificates 3 2.8 Merger Consideration Adjustment. 3 2.9 Computation of Deferred Merger Consideration. 5 2.10 Tax Consequences 7 2.11 Further Action 7 Section 3: The Second Merger 7 3.1 The Second Merger 7 3.2 The Second Merger Effective Time 7 3.3 Effect of the Second Merger 7 3.4 Certificate of Formation and Agreement of Limited Liability Company 8 3.5 Managers and Officers 8 3.6 Effect on Capital Stock and Membership Interests 8 Section 4: Representations of the Company and the Selling Shareholders 8 4.1 Organization 8 4.2 Authority; Non-Contravention. 9 4.3 Capital Stock and Ownership. 10 4.4 Financial and Corporate Records. 11 4.5 Compliance with Law; Permits. 12 4.6 Financial Statements. 12 4.7 Assets. 13 4.8 Obligations. 13 4.9 Operations Since the Latest Balance Sheet Date 13 4.10 Accounts Receivable 14 4.11 Tangible Property 14 4.12 Real Property; Environmental Laws. 14 4.13 Software and Intangibles. 15 4.14 Contracts. 16 4.15 Employees and Independent Contractors. 17 4.16 Employee Benefit Plans. 18 4.17 Customers and Suppliers 20 4.18 Taxes. 20 4.19 Proceedings and Judgments. 21 4.20 Insurance 22 4.21 Questionable Payments 22 4.22 Related Party Transactions 22 4.23 Brokerage Fees 22 4.24 Inapplicability of Anti-takeover Laws 22 4.25 Company's Tax Representations Related to Reorganization. 22 4.26 Investment Matters. 22 4.27 Full Disclosure 25 Section 5: Representations of Buyer, Merger Sub and Newco LLC 25 5.1 Organization 25 5.2 Authority; Non-Contravention 25 5.3 Buyer's Stock 26 5.4 Indebtedness 26 5.5 Consents 26 5.6 SEC Filings 26 5.7 Full Disclosure 27 5.8 Buyer's Tax Representations Relating to Reorganization. 27 Section 6: Obligations of the Company and the Selling Shareholders Pending Closing 27 6.1 Conduct of the Company's Business 27 6.2 Interim Financial Statements 28 6.3 Buyer's Due Diligence Investigation; Confidentiality 29 6.4 Consents 29 6.5 Acquisition Proposals 29 6.6 Advice of Changes 29 6.7 Best Efforts 30 Section 7: Certain Obligations of Buyer, Merger Sub and Newco LLC Pending Closing 30 7.1 Corporate/Limited Liability Company Status 30 7.2 The Company's and Selling Shareholders' Due Diligence Investigation; Confidentiality 30 7.3 Consents 30 7.4 SEC Reports 31 7.5 Advice of Changes 31 7.6 Best Efforts 31 Section 8: Conditions Precedent to the Company's and the Selling Shareholders' Closing Obligations 31 8.1 Buyer's, Merger Sub's and Newco LLC's Representations and Performance 31 8.2 Absence of Proceedings 31 8.3 Approvals 31 8.4 Registration Rights and Right of First Offer Agreement 32 8.5 Key Employee Agreements 32 8.6 Voting Agreement 32 8.7 Research Industries Incorporated Debt 32 8.8 Adverse Changes 32 8.9 Tax-Free Reorganization 32 8.10 Closing Deliveries 32 Section 9: Conditions Precedent to Buyer's, Merger Sub's and Newco LLC's Closing Obligations 32 9.1 The Company's and Selling Shareholders' Representations and Performance 32 9.2 Absence of Proceedings 33 9.3 Adverse Changes 33 9.4 Approvals 33 9.5 Environmental Review 33 9.6 Obligations to Selling Shareholders 33 9.7 General Release 33 9.8 Intentionally Omitted. 33 9.9 Key Employee Agreements 33 9.10 Cancellation of Securities 33 9.11 Registration Rights and Right of First Offer Agreement 33 9.12 Intentionally Omitted. 34 9.13 Purchaser Representative 34 9.14 Questionnaires 34 9.15 Dissenters' Rights 34 9.16 Closing Deliveries 34 Section 10: Closing Deliveries 34 10.1 Company's and Selling Stockholders' Obligations at Closing 34 10.2 Buyer's, Merger Sub's and Newco LLC's Obligations at Closing 35 Section 11: Certain Rights and Obligations of Buyer and the Selling Shareholders after Closing 36 11.1 Restrictions on Dispositions of Buyer Shares 36 11.2 Cooperation with Buyer and the Second Merger Survivor 37 11.3 Member of Buyer's Board of Directors 37 11.4 Payment of RII 37 Section 12: Certain Obligations of the Selling Shareholders, Buyer and/or Newco LLC After Closing 37 12.1 Taxes. 37 12.2 Transfer Taxes 38 12.3 Reportable Transactions. 39 12.4 Audits 39 12.5 Amendment of Tax Returns 39 12.6 Fees and Expenses 39 12.7 Employment Matters 40 12.8 Disposition of Company Employee Benefit Plans 40 12.9 Tax-Free Reorganization. 40 Section 13: Indemnification 40 13.1 The Company's and Selling Shareholders' Indemnification 40 13.2 Indemnification by Buyer 41 13.3 Indemnification Procedures 41 13.4 Limits on Indemnification 42 13.5 Setoff. 43 13.6 Time Limitations 44 13.7 Exclusive Remedy 44 13.8 Merger Consideration Adjustment 44 Section 14: Termination 44 14.1 Right to Terminate 44 14.2 Obligations to Cease 45 Section 15: Other Provisions 45 15.1 Publicity 45 15.2 Fees and Expenses 45 15.3 Notices 46 15.4 Reliance; Interpretation of Representations 46 15.5 Entire Understanding 47 15.6 Parties in Interest; Assignment 47 15.7 Waivers 47 15.8 Severability 47 15.9 Counterparts; Facsimile 47 15.10 Section Headings 47 15.11 References 47 15.12 Controlling Law 47 15.13 Arbitration; Jurisdiction and Process. 47 15.14 No Third-Party Beneficiaries 48 15.15 Neutral Construction 48 15.16 Shareholder Representative. 48 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (this "Agreement") is made and entered into as of August 29, 2003, by and among Halifax Corporation, a Virginia corporation ("Buyer"), Microserv Merger Corp., a Delaware corporation and wholly-owned subsidiary of Buyer ("Merger Sub"), Microserv Merger LLC, a Delaware limited liability company and wholly owned subsidiary of Buyer ("Newco LLC"), Microserv, Inc., a Washington corporation (the "Company"), and the shareholders of the Company identified on the signature page attached hereto (each a "Selling Shareholder" and collectively, the "Selling Shareholders"). BACKGROUND The Company is in the business of providing enterprise maintenance solutions, including without limitation, multi-vendor computer hardware support services that focus on providing customized equipment service and support primarily to the desktop market, such as personal and notebook computers, monitors, terminals, printers and storage devices (the "Business"). The Selling Shareholders own, collectively, 100% of the issued and outstanding shares of capital stock of the Company. At Closing (as defined herein), the parties desire that Merger Sub be merged with and into the Company (with the Company surviving the merger) on the terms and subject to the conditions set forth in this Agreement. The parties desire that immediately after the consummation of the First Merger (as hereinafter defined), the First Merger Surviving Corporation (as hereinafter defined) be merged with and into Newco LLC (with Newco LLC surviving that merger). The Board of Directors of the Company has determined that the mergers referenced above and the other transactions contemplated by this Agreement (such mergers and other transactions to collectively be referred to herein as the "Transactions") are in the best interests of the Company and the shareholders of the Company. The respective Boards of Directors and Managers, as the case may be, of Buyer, Merger Sub and Newco LLC have determined that the Transactions are in the best interests of Buyer, Merger Sub, Newco LLC and their respective stockholders or members, as the case may be. Intending to be legally bound, in consideration of the mutual agreements contained herein and subject to the satisfaction of the terms and conditions set forth herein, the parties hereto agree as follows: Section 1: Defined Terms Certain capitalized or defined terms used in this Agreement and not specifically defined in context shall have their respective meanings contained in Exhibit 1A attached hereto. Section 2: The First Merger 2.1 The Merger. At the First Merger Effective Time, subject to and upon the terms and conditions of this Agreement and the applicable provisions of the Delaware General Corporation Law (the "DGCL") and the Washington Business Corporation Act (the "WBCA"), Merger Sub shall be merged with and into the Company, the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation (the "First Merger"). The Company, as the surviving corporation of the First Merger, is hereinafter sometimes referred to as the "First Merger Surviving Corporation". 2.2 First Merger Effective Time. Subject to the provisions of this Agreement, the parties hereto shall cause the First Merger to be consummated by filing (i) a Certificate of Merger with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the DGCL (the "First Merger Delaware Certificate of Merger") and (ii) Articles of Merger with the Secretary of State of the State of Washington in accordance with the relevant provisions of the WBCA (the "First Merger Washington Articles of Merger") (the time of such filings with the Secretary of State of the State of Delaware and the Secretary of State of the State of Washington (or such later time as may be agreed in writing by the Company and Buyer and specified in the First Merger Delaware Certificate of Merger and the First Merger Washington Articles of Merger) being the "First Merger Effective Time") as soon as practicable on the Closing Date. The closing of the First Merger and the Second Merger (as defined and further described in Section 3 hereof) (the "Closing") shall take place at the offices of Blank Rome, LLP, One Logan Square, Philadelphia, PA 19103, at a time and date to be specified by the parties, which shall be no later than the second business day after the satisfaction or waiver of the conditions set forth in Sections 8 and 9 hereof (other than those conditions which are, by their terms, to be satisfied at Closing, but subject to the satisfaction or waiver thereof), or at such other time, date and location as the parties hereto agree in writing (the "Closing Date"). 2.3 Effect of the First Merger. At the First Merger Effective Time, the effect of the First Merger shall be as provided in this Agreement and the applicable provisions of the DGCL and the WBCA. Subject to the foregoing, from and after the First Merger Effective Time, the First Merger Surviving Corporation shall possess all rights, privileges, immunities, powers and franchises and be subject to all the obligations, restrictions, disabilities, liabilities, debts and duties of the Company and Merger Sub. 2.4 Articles of Incorporation and Bylaws. Subject to Section 3 hereof, at the First Merger Effective Time, the Articles of Incorporation of the Company shall be the articles of incorporation of the First Merger Surviving Corporation, until thereafter amended in accordance with the WBCA and as provided in such Articles of Incorporation. Subject to Section 3 hereof, at the First Merger Effective Time, the Bylaws of the Company shall be the Bylaws of the First Merger Surviving Corporation, until thereafter amended in accordance with the WBCA and as provided in such Bylaws. 2.5 Directors and Officers. Subject to Section 3 hereof, from and after the First Merger Effective Time, (a) the directors of the First Merger Surviving Corporation shall be the directors of Merger Sub immediately prior to the First Merger Effective Time, until their respective successors are duly elected or appointed and qualified, and (b) the officers of the First Merger Surviving Corporation shall be the officers of Merger Sub immediately prior to the First Merger Effective Time, until their respective successors are duly appointed. 2.6 Merger Consideration; Conversion of Capital Stock. The Merger Consideration shall consist of: (a) 442,078 Buyer Common Shares; (b) $360,000 in cash (the "Cash Payment"); (c) promissory notes in an aggregate principal amount of $493,934 (each, a "Note", and collectively, the "Notes") in the form attached hereto as Exhibit 2.6; and (d) the right to receive the Deferred Merger Consideration, computed as set forth in Section 2.9; provided, however; that the Merger Consideration is subject to retroactive adjustment as provided in Section 2.8. The items listed in Sections 2.6 (a) through (c) (without adjustment as provided in Section 2.8) are herein sometimes referred to as the Closing Date Merger Consideration. As of the First Merger Effective Time, by virtue of the First Merger and without any action on the part of the holder of any shares of Company Common Stock or capital stock of Merger Sub: 2.6.1 Company Common Stock. All of the Company Common Stock issued and outstanding immediately prior to the First Merger Effective Time shall be cancelled and extinguished and shall be converted into the right to receive, upon the surrender of certificates formerly representing such shares of Company Common Stock (each a "Certificate" and collectively, the "Certificates"), without interest, the percentage of each of the items that collectively constitute the Merger Consideration computed by multiplying each such item by a fraction the numerator of which is equal to the number of shares of Company Common Stock owned by such Selling Shareholder immediately prior to the First Merger Effective Time and the denominator of which is the total number of issued and outstanding shares of Company Common Stock immediately prior to the First Merger Effective Time (with (a) the fraction for each Seller Shareholder referred to herein as such Selling Shareholder's "Ownership Interest" and (b) it being the agreement of the parties that the Ownership Interests of the Selling Shareholders set forth on Schedule 2.6.1 attached hereto (the Ownership Schedule") be final and binding on the parties for purposes of computing the portion of the Merger Consideration for which each Selling Shareholder is entitled pursuant to this Agreement; 2.6.2 Stock of Merger Sub. Each share of the common stock, $0.01 par value, of Merger Sub then outstanding shall be converted into one validly issued, fully paid, and nonassessable share of common stock of the First Merger Surviving Corporation. Each stock certificate, if any, of Merger Sub evidencing ownership of any such shares shall, from and after the First Merger Effective Time, evidence ownership of such shares of capital stock of the First Merger Surviving Corporation; 2.7 Delivery of Merger Consideration and Surrender of Certificates 2.7.1 On the Closing Date, Buyer shall deliver the Closing Date Merger Consideration to the Selling Shareholders against delivery to Buyer by such Selling Shareholders of Certificates formerly representing the Company Common Stock, free and clear of all liens, encumbrances and third party interests of any nature, which shares of Company Common Stock delivered to Buyer shall constitute 100% of the outstanding capital stock of the Company. In the event any Certificates representing shares of Company Common Stock shall have been lost, stolen or destroyed, the applicable portion of the Closing Date Merger Consideration shall be deliverable against delivery of an affidavit of that fact, in customary form and containing customary indemnities, executed by the holder thereof. The Deferred Merger Consideration, if any, shall be payable to the Selling Shareholders in accordance with Section 2.9 hereof. 2.7.2 Buyer shall be entitled to deduct and withhold from any cash consideration deliverable pursuant to this Agreement to any Selling Shareholder such amounts as may be required to be deducted or withheld therefrom under the Code or under any provision of state, local or foreign Law, but Buyer must notify each such Selling Shareholder as to the amount and timing of the deduction or withholding. To the extent such amounts are so deducted or withheld and have been paid as required to the appropriate taxing authority, the amount of such consideration shall be treated for all purposes under this Agreement as having been delivered to the Person entitled to such consideration hereunder. 2.8 Merger Consideration Adjustment. 2.8.1 (a) At or before Closing, the Company shall prepare and deliver to Buyer (i) a balance sheet of the Company, prepared in accordance with GAAP, as of August 31, 2003 (the "Closing Balance Sheet"), (ii) a schedule (the "Cash Payment Offset Schedule") setting forth (a) the dollar amount of any cash dividend declared or paid by the Company in August, 2003 (the "August Dividend"), (b) the amount by which the dollar value of stay bonuses paid by the Company in connection with the Transactions is in excess of the agreed upon threshold amount specified on the Cash Payment Offset Schedule, and (c) the amount by which the severance payments made to employees in connection with the Transactions is in excess of the agreed upon threshold amount specified in the Cash Payment Offset Schedule (collectively, the aggregate dollar value of such items contemplated by (a), (b) and (c) shall be referred to herein as the "Cash Offset Balance"), which Cash Payment Offset Schedule shall be true, complete and correct in all material respects, (iii) an estimate of the Working Capital (the "Estimated Closing Date Working Capital") of the Company on August 31, 2003, and (iv) an estimate of the Net Assets (the "Estimated Closing Date Net Assets") of the Company on August 31, 2003. (b) The amount of the Cash Offset Balance shall be withheld from the Cash Payment and shall be held in escrow by Buyer subject to the terms of this Section 2.8 (the "Cash Escrow"). (c) The aggregate Merger Consideration shall be reduced, dollar for dollar, to the extent that the aggregate of the following amounts computed in items (i) and (ii) below are greater than $100,000 (such amount by which such aggregate exceeds $100,000 to be referred to herein as the "Excess") (such aggregate of the following amounts computed in (i) and (ii) below to be referred to herein as the "March/Closing Comparison Aggregate"); provided, however, that the reduction shall first come from the Cash Escrow and second from reduction of the aggregate principal amount of the Notes: (i) $263,644 less the Estimated Closing Date Working Capital. (ii) $430,861 less the Estimated Closing Date Net Assets. 2.8.2 Within forty-five (45) days after the Closing Date, Buyer shall cause Buyer Accountant at its sole cost and expense to ( i) review and/or conduct certain procedures upon the components of the Estimated Closing Date Working Capital and Estimated Closing Date Net Assets and prepare detailed statements (the "Working Capital and Net Assets Statements") of its calculation of the actual Working Capital of the Company as of August 31, 2003 ("Actual Closing Working Capital") and the actual Net Assets of the Company as of August 31, 2003 (the "Actual Closing Net Assets"), both of which shall be appropriately adjusted for any audit adjustments for the year ended December 31, 2002 and (ii) deliver the Working Capital and Net Assets Statements to the Selling Shareholders. The Selling Shareholders shall have a thirty (30) day period to review the Working Capital and Net Assets Statements and during such period Buyer shall cause the Buyer Accountant, if requested, to share its work papers with the Selling Shareholders or their professional advisers and to make itself reasonably available to the Selling Shareholders and their professional advisers. 2.8.3 If the Selling Shareholders dispute either the Actual Closing Working Capital or the Actual Closing Net Assets stated in the Working Capital and Net Assets Statements, they shall deliver a notice to Buyer no later than thirty (30) days after their receipt of the Working Capital and Net Assets Statements (the "Calculation Dispute Notice"). The Selling Shareholders shall set forth in detail in the Calculation Dispute Notice the basis for their disagreement with the calculations of either of the Actual Closing Working Capital or the Actual Closing Net Assets. If the Selling Shareholders fail to deliver the Calculation Dispute Notice within the allotted time period, the Selling Shareholders shall be deemed to have agreed to the calculations of the Actual Closing Working Capital and the Actual Closing Net Assets prepared by the Buyer Accountant, which calculations shall be final, conclusive and binding upon the parties. 2.8.4 If the Selling Shareholders dispute either the Actual Closing Working Capital or the Actual Closing Net Assets as determined by the Buyer Accountant within the allotted time period, the parties in good faith will attempt to jointly resolve any dispute during the thirty day period following the delivery of the Calculation Dispute Notice. If Buyer and the Selling Shareholders can resolve their dispute and agree upon the Actual Closing Working Capital and Actual Closing Net Assets balances of the Company, they shall memorialize their agreement in writing and such mutually agreed upon figure(s) shall be final, conclusive and binding upon all of the parties. 2.8.5 If Buyer and the Selling Shareholders cannot resolve the dispute to their mutual satisfaction, Buyer and the Selling Shareholders shall engage the Independent Accountants to determine the Actual Closing Working Capital and Actual Closing Net Assets balances, as the case may be, of the Company as of August 31, 2003. The costs and expenses of the Independent Accountants shall be borne fifty percent by Buyer and fifty percent by the Selling Shareholders (each Selling Shareholder responsible for the amount equal to their Ownership Interest multiplied by fifty percent of such costs and expenses); provided, however, that the aggregate principal amount of the Notes shall be reduced by the dollar value of the Selling Shareholders' portion of such costs and expenses. To the extent that the Independent Accountants desire the parties to this Agreement to meet in person, the parties shall choose a mutually acceptable location for such meeting. Each of Buyer and the Selling Shareholders shall cause their accounting professional advisers to provide the Independent Accountants such of their respective work papers as may be requested by the Independent Accountants. The Independent Accountants shall be requested to complete their engagement within forty five days of being retained by Buyer and the Selling Shareholders. The determination of the Independent Accountants shall be final, conclusive and binding upon the parties. 2.8.6 The final determination of the Actual Closing Working Capital and Actual Closing Net Assets of the Company on the Closing Date pursuant to this Section 2.8 shall be referred to herein as the "Final Closing Working Capital" and "Final Closing Net Assets", respectively. The extent to which the Final Closing Working Capital is less than the Estimated Closing Date Working Capital shall be referred to herein as a "Negative Working Capital Balance". The extent to which the Final Closing Net Assets is less than the Estimated Closing Date Net Assets shall be referred to herein as a "Negative Net Assets Balance". The extent to which the Final Closing Working Capital is greater than the Estimated Closing Date Working Capital shall be referred to herein as a "Positive Working Capital Balance". The extent to which the Final Closing Net Assets is greater than the Estimated Closing Date Net Assets shall be referred to herein as a "Positive Net Assets Balance". 2.8.7 The Merger Consideration shall be reduced, dollar for dollar, to the extent the aggregate of the Negative Working Capital Balance, if any, and the Negative Net Assets Balance, if any, exceeds the aggregate of the Positive Working Capital Balance, if any, and the Positive Net Assets Balance, if any, (a "Negative Adjustment"). The reduction shall come first from the Cash Escrow and second from the reduction of the aggregate principal amount of the Notes; provided, however, that the aggregate reduction of the Cash Escrow and the Notes at Closing and in connection with a Negative Adjustment shall be limited to the amount by which the sum of the March/Closing Comparison Aggregate plus the Negative Adjustment exceeds $100,000. Any amount remaining in the Cash Escrow after giving effect to the Negative Adjustment shall be distributed promptly to the Selling Shareholders within five business days of the final determination of the Negative Adjustment. 2.9 Computation of Deferred Merger Consideration. 2.9.1 The Selling Shareholders shall be entitled to additional merger consideration (the "Deferred Merger Consideration") equal to $250,000, payable in cash or a combination of cash and Buyer Common Shares, as provided below, promptly upon determination thereof in accordance with this Section 2.9, if the aggregate of the Net Revenues earned by the Second Merger Survivor in connection with certain of the Company's accounts listed on Exhibit 2.9 (collectively, the Earnout Accounts") for the twelve (12) month period beginning September 1, 2003 and ending August 31, 2004 (the "Earnout Net Revenues") is equal to or greater than 105% of the Net Revenues figure specified on Exhibit 2.9. In the discretion of the Selling Shareholders, as determined by the Shareholder Representative, the Deferred Merger Consideration, if earned, shall be paid in a mix of cash and Buyer Common Shares (with the aggregate number of such Buyer Common Shares being equal to (i) the dollar value of the portion of Deferred Merger Consideration requested to be paid in Buyer Common Shares, divided by the Deferred Merger Consideration Price), provided, however, that notwithstanding anything to the contrary contained in this Agreement, (a) the aggregate number of Buyer Common Shares issued in connection with the Deferred Merger Consideration shall not exceed 49,120, and (b) the Deferred Merger Consideration shall be paid in cash to the extent necessary to satisfy the intent of the parties contemplated by subsection (a) of this proviso. 2.9.2 By October 25, 2004, Buyer shall (i) calculate the Earnout Net Revenues and the amount of the Deferred Merger Consideration, if any, and prepare detailed statements (the "Earnout Statements") of its calculation of the Earnout Net Revenues and the Deferred Merger Consideration and (ii) deliver the Earnout Statements to the Selling Shareholders. The Selling Shareholders shall have a twenty (20) day period to review the Earnout Statements and during such period Buyer shall, if requested, share its relevant supporting documentation with the Selling Shareholders or their professional adviser. 2.9.3 If the Selling Shareholders dispute either the Earnout Net Revenues or the Deferred Merger Consideration stated in the Earnout Statements, they shall deliver a notice to Buyer no later than twenty (20) days after delivery of the Earnout Statements (the "Earnout Dispute Notice"). The Selling Shareholders shall set forth in detail in the Earnout Dispute Notice the basis for their disagreement with the calculations of the Earnout Net Revenues or Deferred Merger Consideration specified in the Earnout Statements. If the Selling Shareholders fail to deliver the Earnout Dispute Notice within the allotted time period, the Selling Shareholders shall be deemed to have agreed to the calculations of the Earnout Net Revenues and Deferred Merger Consideration specified in the Earnout Statements, which calculations shall be final, conclusive and binding upon the parties. 2.9.4 If the Selling Shareholders dispute the Earnout Net Revenues or Deferred Merger Consideration as specified in the Earnout Statements within the allotted time period, the parties in good faith will attempt to jointly resolve any dispute during the thirty day period following the delivery of the Earnout Dispute Notice. If Buyer and the Selling Shareholders can resolve their dispute and agree upon the Earnout Net Revenues and Deferred Merger Consideration, they shall memorialize their agreement in writing and such mutually agreed upon figure(s) shall be final, conclusive and binding upon all of the parties. 2.9.5 If Buyer and the Selling Shareholders cannot resolve the dispute to their mutual satisfaction, Buyer and the Selling Shareholders shall engage the Independent Accountants to determine the Earnout Net Revenues and Deferred Merger Consideration. The costs and expenses of the Independent Accountants shall be borne fifty percent by Buyer and fifty percent by the Selling Shareholders (each Selling Shareholder responsible for the amount equal to their Ownership Interest multiplied by fifty percent of such costs and expenses); provided, however, that the Deferred Merger Consideration payable hereunder shall be reduced by the Selling Shareholder's portion of such costs and expenses; provided, further, that if the value of the Selling Shareholders' portion of such costs and expenses is in excess of such Deferred Merger Consideration payable hereunder, the aggregate principal amount of the Notes shall be reduced by such excess. To the extent that the Independent Accountants desire the parties to this Agreement to meet in person, the parties shall choose a mutually acceptable location for such meeting. Each of Buyer and the Selling Shareholders shall provide or cause their accounting professional advisers, as the case may be, to provide the Independent Accountants such of their respective work papers or other relevant supporting documentation as may be requested by the Independent Accountants. The Independent Accountants shall be requested to complete their engagement within forty five days of being retained by Buyer and the Selling Shareholders. The determination of the Independent Accountants shall be final, conclusive and binding upon the parties. 2.10 Tax Consequences. The parties intend that the Mergers, taken together, shall constitute a tax free reorganization within the meaning of Section 368(a) of the Code and such parties shall treat the Transactions consistent with that intent on all applicable Tax Returns. 2.11 Further Action. If, at any time after the First Merger Effective Time, any further action is reasonably determined by Buyer to be necessary or desirable to carry out the purposes of this Agreement or to vest the First Merger Surviving Corporation with full right, title and possession of and to all rights and property of Merger Sub and the Company, the officers and directors of the First Merger Surviving Corporation and Buyer shall be fully authorized (in the name of Merger Sub, in the name of the Company and otherwise) to take such action. Section 3: The Second Merger 3.1 The Second Merger. Immediately after the consummation of the First Merger, subject to and upon the terms and conditions of this Agreement and the applicable provisions of the WBCA and the Delaware Limited Liability Company Act (the "DLLCA"), the First Merger Surviving Corporation shall be merged with and into Newco LLC, the separate corporate existence of the First Merger Surviving Corporation shall cease and Newco LLC shall continue as the survivor (the "Second Merger"). Newco LLC, as the survivor of the Second Merger, is hereinafter sometimes referred to as the "Second Merger Survivor". 3.2 The Second Merger Effective Time. Subject to the provisions of this Agreement (including the first sentence of Section 3.1 hereof), the applicable parties hereto shall cause the Second Merger to be consummated by filing (i) a Certificate of Merger with the Secretary of State of the State of Delaware in accordance with the relevant provisions of the DLLCA (the "Second Merger Delaware Certificate of Merger") and (ii) Articles of Merger with the Secretary of State of the State of Washington in accordance with the relevant provisions of the WBCA (the "Second Merger Washington Articles of Merger) (the time of such filing with the Secretary of State of the State of Delaware and the Secretary of State of the State of Washington (or such later time as may be agreed in writing by the parties and specified in the Second Merger Delaware Certificate of Merger and the Second Merger Washington Articles of Merger) being the "Second Merger Effective Time") as soon as practicable on the Closing Date. 3.3 Effect of the Second Merger. At the Second Merger Effective Time, the effect of the Second Merger shall be as provided in this Agreement and the applicable provisions of the WBCA and the DLLCA. Subject to the foregoing, from and after the Second Merger Effective Time, the Second Merger Survivor shall possess all rights, privileges, immunities, powers and franchises and be subject to all the obligations, restrictions, disabilities, liabilities, debts and duties of the First Merger Surviving Corporation and Newco LLC. 3.4 Certificate of Formation and Agreement of Limited Liability Company. At the Second Merger Effective Time, the Certificate of Formation of Newco LLC immediately prior to the Second Merger Effective Time shall be the Certificate of Formation of the Second Merger Survivor until thereafter amended in accordance with the DLLCA and as provided in such Certificate of Formation; provided, however, that as of the Second Merger Effective Time, the Certificate of Formation shall provide that the name of the Second Merger Survivor is "Microserv, LLC". At the Second Merger Effective Time, the agreement of limited liability company of Newco LLC, if any, existing immediately prior to the Second Merger Effective Time, shall be the agreement of limited liability company of the Second Merger Survivor until thereafter amended in accordance with the DLLCA and as provided in such agreement of limited liability company; provided, however, that all references in such agreement of limited liability company to Newco LLC shall be amended to refer to "Microserv, LLC" 3.5 Managers and Officers. The initial managers of the Second Merger Survivor shall be the managers of Newco LLC immediately prior to the Second Merger Effective Time, until their respective successors are duly elected or appointed and qualified. The initial officers of the Second Merger Survivor shall be the officers of Newco LLC immediately prior to the Second Merger Effective Time, until their respective successors are duly appointed. 3.6 Effect on Capital Stock and Membership Interests. Subject to the terms and conditions of this Agreement, at the Second Merger Effective Time, by virtue of the Second Merger and without any action on the part of Buyer, the First Merger Surviving Corporation, Newco LLC or the holders of any securities thereto, the following shall occur: 3.6.1 Each share of capital stock of the First Merger Surviving Corporation issued and outstanding immediately prior to the Second Merger Effective Time shall be automatically cancelled and extinguished without payment of any consideration therefor and without any conversion thereof; and 3.6.2 Each unit of membership interest of Newco LLC issued and outstanding immediately prior to the Second Merger Effective Time shall be converted into one validly issued, fully paid, and nonassessable unit of membership interest of the Second Merger Survivor. Each certificate, if any, of Newco LLC evidencing ownership of any such units of membership interest shall continue to evidence ownership of such units of membership interest of the Second Merger Survivor. Section 4: Representations of the Company and the Selling Shareholders Knowing that Buyer, Merger Sub and Newco LLC are relying thereon, the Company (but only for the period prior to the occurrence of the Closing) and each of the Selling Shareholders severally, but not jointly (however, subject to the limitations specified in Section 13 hereof), represent and warrant to Buyer, Merger Sub and Newco LLC, and covenant with Buyer, Merger Sub and Newco LLC, as follows: 4.1 Organization. The Company is a corporation, duly organized and validly existing under the Laws of the State of Washington. The Company possesses the necessary corporate power and corporate authority to enter into and perform its obligations under this Agreement. The Company possesses the necessary corporate power and authority: (i) to own and use its Assets in the manner in which such Assets are currently owned and used, and (ii) to conduct its business as such business is currently being conducted. The Company is duly qualified or registered to do business in each jurisdiction where such qualification or registration is required by applicable Law, except where the failure to so qualify would not have a Material Adverse Effect. 4.1.1 Except as set forth on Schedule 4.1, the Company does not own any securities of any corporation or any other interest in any Person. The Company has never acquired or succeeded to all or substantially all of the Assets or businesses of any other Person, and there is no other Person that may be deemed to be a predecessor of the Company. 4.1.2 Schedule 4.1 sets forth for the Company: (i) its exact legal name; (ii) its corporate business form and jurisdiction and date of formation; (iii) its federal employer identification number; (iv) its headquarters address; (v) its directors and officers, indicating all current title(s) of each individual; (vi) its registered agent and/or office in its jurisdiction of formation (if applicable); (vii) all foreign jurisdictions in which it is qualified or registered to do business, the date it so qualified or registered, and its registered agent and/or office in each such jurisdiction (if applicable); (viii) all fictitious, assumed or other names of any type that are registered or used by it or under which it has done business at any time since its date of incorporation; and (ix) any name changes, recapitalizations, mergers, reorganizations or similar events since its date of formation. 4.1.3 Accurate and complete copies of the articles of incorporation and bylaws, each as amended to date, and all Contracts related to the formation of the Company and still in force, have been delivered to Buyer. 4.2 Authority; Non-Contravention. 4.2.1 The Company has the necessary corporate power and corporate authority to enter into and to perform its obligations under this Agreement, and the execution, delivery and performance of this Agreement and the consummation of the Transactions by the Company have been duly authorized by all necessary actions by its board of directors and shareholders. Each of the Selling Shareholders has the necessary authority and capacity to enter into, execute, deliver and perform all of his or its obligations under this Agreement and under each other agreement, document or instrument referred to in or contemplated by this Agreement to which such Selling Shareholder is or becomes a party. This Agreement constitutes the legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and subject to applicability of general principles of equity. This Agreement (i) has been duly and validly executed by each Selling Shareholder, and (ii) constitutes a valid and binding obligation of each Selling Shareholder, enforceable against each Selling Shareholder in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and subject to applicability of general principles of equity. 4.2.2 Except as set forth on Schedule 4.2, neither the execution, delivery and performance of this Agreement nor the consummation or performance of the Transactions by the Company and/or any of the Selling Shareholders, will directly or indirectly (with or without notice or lapse of time): (a) result in a breach or a violation of (i) any of the provisions of the articles of incorporation or bylaws of the Company; or (ii) any resolution adopted by the shareholders, board of directors or any committee of the board of directors of the Company; or (iii) result in a breach or violation of, or give any Governmental Body or other Person the right to enjoin or invalidate any of the Transactions or to exercise any remedy or obtain any relief under, any Law or any Judgment to which the Company or any of the Selling Shareholders, or any of the Assets owned or used by the Company, is subject; (b) result in a breach or a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Permit that is held by the Company or that otherwise relates to any of the businesses of the Company or to any of the Assets owned or used by the Company; (c) result in a breach or a violation, or a default under, any provision of, any Specified Contract to which the Company is a party or by which it is bound, except where such breach, violation or default would not have a Material Adverse Effect; or (d) result in the imposition or creation of any Encumbrance upon or with respect to any Asset owned or used by the Company. 4.2.3 Except as set forth on Schedule 4.2 neither the Company nor any of the Selling Shareholders was, is or will be required to make any filing with or give any notice to, or to obtain any Consent from, any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Transactions. 4.3 Capital Stock and Ownership. 4.3.1 Schedule 4.3 sets forth the authorized capital stock of the Company, including the type of shares authorized, the par value per share and the number of each type of shares that are issued and outstanding. Schedule 4.3 contains an accurate and complete list of: (i) the full legal names of all shareholders of the Company; (ii) the addresses of such shareholders' respective current principal residences; and (iii) the numbers of shares and type of shares owned of record by such shareholders and the certificate numbers of the stock certificates representing such shares. For each of the shareholders of the Company, he, she or it is the sole record and beneficial owner of his, her or its shares of capital stock of the Company as set forth on Schedule 4.3, and he, she or it has good and marketable title to such shares, free and clear of any Encumbrance. With respect to each such shareholder: (i) he, she or it is the holder and beneficial owner of the shares of the capital stock of the Company set forth on Schedule 4.3 next to such shareholder's name (the "Shares") and has good and valid title to the Shares, free and clear of any Encumbrances; (ii) the Shares are the only shares of the capital stock of the Company held by such shareholder; (iii) such shareholder has the ability to vote all of the Shares at any meeting of the shareholders of the Company, or by written consent in lieu of any such meeting; and (iv) other than in connection with the Transactions or as set forth on Schedule 4.3, such shareholder has not appointed or granted any proxy or entered into any agreement, contract, commitment or understanding with respect to any of the Shares. Except as set forth on Schedule 4.3, the Company has never authorized, offered, sold or issued any securities other than shares of Company Common Stock. Except for the Selling Shareholders, there are no other record or beneficial owners of any shares of the capital stock of the Company or any other securities of the Company. Except for the Shares listed on Schedule 4.3, there currently are no other issued or outstanding shares of capital stock of the Company. All outstanding shares of capital stock of the Company have been duly authorized and validly issued, and are fully paid and nonassessable. Except as set forth on Schedule 4.3, there exists no right of first refusal or other preemptive right with respect to the Company or the capital stock, business or Assets of the Company. 4.3.2 All offerings, sales and issuances by the Company of any shares of capital stock were conducted in compliance with all applicable federal and state securities Laws and all other applicable Laws. 4.3.3 Except as set forth on Schedule 4.3, there is no: (a) outstanding subscription, option, call, warrant or right (whether or not currently exercisable) to acquire any shares of the capital stock or other securities of the Company; (b) outstanding security, instrument or obligation that is or may become convertible into or exchangeable for any shares of the capital stock or other securities of the Company; (c) Contract under which the Company is or may become obligated to sell or otherwise issue any shares of its capital stock or any other securities; (d) pending or previously asserted or overtly threatened claim by any Person to the effect that such Person is or was entitled to acquire or receive any shares of capital stock or any other securities of the Company; or (e) condition or circumstance that, to the knowledge of the Company and the Selling Shareholders, may directly or indirectly be reasonably expected to give rise to or provide a basis for the assertion of a claim by any Person to the effect that such Person is or may be entitled to acquire or receive any shares of capital stock or other securities of the Company. 4.3.4 All securities repurchased, redeemed or otherwise reacquired by the Company were reacquired in material compliance with the applicable provisions of all applicable Contracts and all applicable Laws. 4.3.5 As of Closing, each outstanding stock option issued pursuant to any stock option plan or other agreements or arrangements of the Company will be canceled and extinguished and the stock option plans of the Company shall have been terminated. All options required to be accelerated under any option plan of the Company shall have been accelerated in accordance with the terms of the plan. 4.3.6 As of Closing, each warrant and every other call, subscription or right to acquire Company Common Stock or other securities of the Company shall have been cancelled and extinguished. 4.4 Financial and Corporate Records. 4.4.1 The books and records of the Company are and have been properly prepared and maintained in form and substance adequate for preparing audited financial statements in accordance with GAAP except as set forth on schedule 4.4, and such books and records fairly and accurately reflect (i) all of the material Assets and material Obligations of the Company and (ii) all of the Contracts and other transactions to which the Company is or was a party or by which the Company or the business or Assets of the Company is or was affected. 4.4.2 Accurate and complete copies of the contents of the minute books and stock books of the Company will be delivered to Buyer at Closing. Such minute books and stock books include (i) minutes of all meetings of the shareholders, board of directors and any committees of the board of directors at which any material action was taken, which minutes accurately record all material actions taken at such meetings, (ii) accurate and complete written consents of all actions taken by the shareholders, board of directors and any committees of the board of directors without a meeting, and (iii) accurate and complete records of the subscription, issuance, transfer and cancellation of all shares of capital stock and all other securities since the date of incorporation. None of the shareholders, board of directors or any committee of the board of directors has taken any material action other than those actions reflected in the records referenced in clauses (i) and (ii) of the preceding sentence. 4.4.3 Schedule 4.4 contains an accurate and complete list of all bank accounts, other accounts, certificates of deposit, marketable securities, other investments, safe deposit boxes, lock boxes and safes of the Company, and the names of all officers, employees or other individuals who have access thereto or are authorized to make withdrawals therefrom or dispositions thereof. 4.5 Compliance with Law; Permits. 4.5.1 Except as set forth on Schedule 4.5, (i) the Company is in full compliance with each Judgment and with each Law that is applicable to it or to the conduct of any of its businesses or the ownership or use of any of its Assets; (ii) no event has occurred, and no condition or circumstance exists, that would reasonably be expected (with or without notice or lapse of time) constitute or result in a violation by the Company of, or a failure on the part of the Company to comply with, any Judgment or Law; and (iii) the Company has not received, at any time, any notice or other communication (in writing) from any Governmental Body or any other Person regarding (i) any actual or alleged violation of, or failure to comply with, any Judgment or Law, or (ii) any actual or alleged obligation on the part of the Company to undertake, or to bear all or any portion of the cost of, any cleanup or any remedial, corrective or response action of any nature. 4.5.2 Except as set forth on Schedule 4.5, the Company has obtained and holds all Permits required for the lawful operation of its business as and where such business is presently conducted. All Permits held by the Company are listed on Schedule 4.5, and accurate and complete copies of such Permits have been delivered to Buyer. 4.6 Financial Statements. 4.6.1 The Company's fiscal year end is December 31. 4.6.2 The Company has delivered to Buyer the following financial statements and related notes (the "Financial Statements"): (i) the unaudited balance sheet of the Company as of December 31, 2002, and the unaudited statements of income and cash flows of the Company for the twelve (12) month period then ended; (ii) the unaudited balance sheet of the Company (the "Latest Balance Sheet") as of March 31, 2003 (the "Latest Balance Sheet Date") and the unaudited statements of income and cash flows of the Company for the three month period then ended; and (iii) the unaudited balance sheet of the Company as of June 30, 2003, and the unaudited statements of income and cash flows of the Company for the six month period then ended. 4.6.3 The Financial Statements present fairly the financial position of the Company as of the respective dates thereof and the results of operations, changes in shareholders' equity and cash flows of the Company in accordance with GAAP for the periods covered thereby. Except as disclosed on Schedule 4.6, the Financial Statements have been prepared in accordance with GAAP. 4.7 Assets. 4.7.1 Schedule 4.7 accurately identifies all Assets that are being leased or licensed to the Company (other than commercially available, off the shelf, software programs). 4.7.2 Except as set forth on Schedule 4.7, the Company owns and has good, valid and marketable title to, all of its respective Assets that are purported to be owned by it and has the right to transfer all rights, title and interest in such Assets, free and clear of any Encumbrance. 4.7.3 Except for the Assets of the Company reflected on the Latest Balance Sheet, no other Assets are necessary to operate, or are material to the operation of, the business of the Company. 4.8 Obligations. 4.8.1 The Company has no Obligations in an amount in excess of $20,000 other than (i) Obligations identified as such in the "liabilities" column on the Latest Balance Sheet, (ii) Obligations set forth on Schedule 4.8, (iii) Obligations under Contracts of the type listed on Schedule 4.14, provided that as of the Latest Balance Sheet Date, no such Obligation consisted of or resulted from a default under or violation of any such Contract, and (iv) Obligations that were incurred since the Latest Balance Sheet Date and which were not incurred in breach of any of the representations and warranties made in Section 4.9. Except as described on Schedule 4.8, none of the Company's Obligations are guaranteed by any Person. 4.9 Operations Since the Latest Balance Sheet Date. Except as set forth on Schedule 4.9, since the Latest Balance Sheet Date: 4.9.1 except in the ordinary course of its business consistent with its past practices or reasonably in furtherance of the Transactions, the Company has not: (i) pledged or hypothecated any of its Assets or otherwise permitted any of its Assets to become subject to any Encumbrance; (ii) incurred any Obligation in an amount in excess of $20,000; (iii) made any loan or advance to any Person in an amount in excess of $20,000; (iv) assumed, guaranteed or otherwise become liable for any Obligation of any Person in an amount in excess of $20,000; (v) committed for any capital expenditure not reflected in the Financial Statements; (vi) purchased, leased, sold, abandoned or otherwise acquired or disposed of any business or Assets greater than $20,000; (vii) waived or released any right or canceled or forgiven any debt or claim in an amount in excess of $20,000; (viii) discharged any Encumbrance or discharged or paid any indebtedness or other Obligation in an amount in excess of $20,000; (ix) assumed or entered into any Contract other than this Agreement that would result in Obligations to the Company over a 12 month period in an amount in excess of $20,000; (x) amended or terminated any Specified Contract; (xi) increased, or authorized an increase in, the compensation or benefits paid or provided to any of their directors, officers, employees, salesmen, agents or representatives; (xii) established, adopted or amended (including any amendment with a future effective date) any Employee Benefit Plan; (xiii) declared, accrued, set aside, or paid any dividend or made any other distribution in respect of any shares of capital stock, other securities, Cash Assets or other Assets, except for the August Dividend referenced in Section 2.8.1 hereof; (xiv) repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities; (xv) sold or otherwise issued any shares of capital stock or any other securities; (xvi) amended articles of incorporation or bylaws; (xvii) been a party to any merger, consolidation, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction; (xviii) accrued any deferred bonuses or compensation due to any shareholder, employee or agent of the Company, or paid any such deferred bonuses or compensation except to the extent such deferred bonuses or compensation was accrued on the Latest Balance Sheet; (xix) changed any of its methods of accounting or accounting practices in any respect; or (xx) made any Tax Election; 4.9.2 even in the ordinary course of its businesses consistent with its past practices, the Company has not incurred any Obligation, made any loan to any Person, acquired or disposed of any business or Assets, entered into any Contract (other than customer contracts) or other transaction, or done any of the other things described in Section 4.9.1 hereof, involving an amount exceeding $20,000 in any single case or $40,000 in the aggregate; and 4.9.3 there has been no Material Adverse Change. 4.10 Accounts Receivable. All Accounts Receivable of the Company arose in the ordinary course of business and are proper and valid Accounts Receivable, and can be collected by the Company in full (without any counterclaim or setoff), subject to any reserves set forth in the Financial Statements. There are no refunds, discounts, rights of setoff or assignments affecting any such Accounts Receivable. Proper amounts of deferred revenues appear on the books and records of the Company, in accordance with GAAP, with respect to all of the Company's (i) billed but unearned Accounts Receivable; (ii) previously billed and collected Accounts Receivable still unearned; and (iii) unearned customer deposits. 4.11 Tangible Property. The Company has good and marketable title to all of the Tangible Property purported to be owned by the Company, free and clear of any Encumbrances, except as set forth in the Latest Balance Sheet or on Schedule 4.11. Except as set forth on Schedule 4.11, all of the Company's Tangible Property is located at the Company's offices or facilities and the Company has the right to require the immediate return of any of its Tangible Property which is not located at its offices or facilities. All Tangible Property of the Company, wherever located, (i) is in good condition, ordinary wear and tear excepted, (ii) complies with, and is being operated and otherwise used in material compliance with, all applicable Laws, and (iii) is sufficient for the operations and business of the Company as presently conducted. 4.12 Real Property; Environmental Laws. 4.12.1 The Company does not own any Real Property. Schedule 4.12 contains an accurate and complete list of all Real Property leased by the Company, showing location, rental cost and landlord. All Real Property under lease to or otherwise used by the Company is in good condition, ordinary wear and tear excepted, and is sufficient for the current operations of the Company. No such Real Property, nor the occupancy, maintenance or use thereof, is in violation of, or breach or default under, any Contract or Law, and no notice or threat from any lessor, Governmental Body or other Person has been received by the Company claiming any violation of, or breach, default or liability under, any Contract or Law, or requiring the Company to perform any work, repairs, construction, alteration, installations or environmental remediation. To the knowledge of the Company and the Selling Shareholders, no Proceedings are pending which would have a Material Adverse Effect on the zoning or use of the Company's Real Property. All of the Company's Real Property has direct access to, abuts, and is served by a public road, which road does provide a means of ingress and egress thereto and therefrom. All utilities, including water, gas, telephone, electricity, sanitary and storm sewers, are currently available to all of the Company's Real Property, and are adequate to serve the Company's Real Property for the Company's current use thereof. 4.12.2 The Company is in compliance with all applicable Environmental Laws, which compliance includes the possession by the Company of all permits and other Governmental Authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof. Except as set forth on schedule 4.12, neither the Company nor any of the Selling Shareholders has placed or caused to be placed, and neither the Company nor any of the Selling Shareholders has any knowledge that there were or are, any Hazardous Substances in, on, under or migrating from any of the Company's Real Property. 4.13 Software and Intangibles. 4.13.1 Set forth on Schedule 4.13 is an accurate and complete list and description of all Company Intangibles (other than commercially available, off the shelf, software programs). No other Software or Intangible is used to operate the Business of the Company. 4.13.2 Except as set forth on Schedule 4.13, the Company has good and marketable title to, and has the right to use, all of the Company Intangibles owned by the Company (the "Company Owned Intangibles"), free and clear of any Encumbrance. 4.13.3 Except as set forth on Schedule 4.13, all of the Company Owned Intangibles were created as a work for hire (as defined under U.S. copyright law) by regular full time employees of the Company. To the extent that any author or developer of any Company Owned Intangible was not a regular full-time salaried employee of the Company at the time such person contributed to such Company Owned Intangible, such author or developer has irrevocably assigned to the Company in writing all copyrights and other proprietary rights in such person's work with respect to such Company Owned Intangibles. 4.13.4 To the Company's knowledge, after due inquiry, none of the Company Intangibles, or their respective past or current uses, including the preparation, distribution, marketing or licensing thereof is violating or infringing upon, any Software, technology, patent, copyright, trade secret or other Intangible of any Person. None of the Company Intangibles is subject to any Judgment to which the Company is a party. No Proceeding is pending or is threatened against the Company, nor has any claim or demand been made against the Company, which challenges the legality, validity, enforceability, use or exclusive ownership by the Company of any of the Company Owned Intangibles. To the knowledge of the Company and the Selling Shareholders, no Person is violating or infringing upon, or has violated or infringed upon at any time, any of the Company Owned Intangibles. 4.13.5 The Company has used reasonable efforts to maintain the confidentiality of all trade secrets with respect to the Company Owned Intangibles. 4.13.6 Any license, sublicense or other Contract covering or relating to any Company Intangible is legal, valid, binding, enforceable and in full force and effect, and upon consummation of the transactions contemplated hereby, will continue to be legal, valid, binding, enforceable and in full force and effect on terms identical to those in effect immediately prior to the consummation of the transactions contemplated hereby. The Company is not in breach of or default under any license, sublicense or other Contract covering or relating to any Company Intangible or has performed any act or omitted to perform any act which, with notice or lapse of time or both, will become or result in a material violation, breach or default thereunder, except where the foregoing could result in a Material Adverse Effect. No Proceeding is pending or is being or has been threatened, nor has any claim or demand been made, which challenges the legality, validity, enforceability or ownership of any license, sublicense or other Contract covering or relating to any Company Intangible. 4.13.7 None of the Company Owned Intangibles is owned by or registered in the name of any current or former owner, shareholder, partner, director, executive, officer, employee, salesman, agent, customer, representative or contractor or any of the shareholders nor does any such Person have any interest therein or right thereto, including the right to royalty payments. 4.13.8 Except with respect to demonstration or trial copies, no portion of any Company Intangible created by the Company contains any "back door," "time bomb," "Trojan horse," "worm," "drop dead device," "virus" or other software routines or hardware components designed to permit unauthorized access or to disable or erase software, hardware, or data without the consent of the user. 4.13.9 Set forth in Schedule 4.13 are all Internet domain names related to the Company's Business ("Domain Names"). The Company is the registrant of all Domain Names and all the registrations of Domain Names are currently in good standing. The Company has not received any notice that any action has been taken or is pending to challenge rights to, suspend, cancel or disable any Domain Name, registration therefor or the right of the Company to use a Domain Name. The Company has all right, title and interest in and to, and rights to use on the Internet and common law rights as a trade-mark and trade name, the Domain Names. 4.13.10 Except as disclosed in Schedule 4.13, the Company is the sole owner of, and has good and marketable title to, and all right, title and interest in and to all databases related to the Company's Business. Except as specified in Schedule 4.13, no Person other than the Company has any right or interest of any kind or nature in or to such databases. To the knowledge of the Company, no person (i) is violating or infringing upon, or has violated or infringed upon at any time, any right of the Company in or to such databases; or (ii) is breaching or has breached at any time any duty or obligation owed to the Company in respect of such databases. All licenses referred to in Schedule 4.13 are in full force and effect and neither the Company nor the other party thereto is in material default of its obligations thereunder. Neither the past nor current use of any such database or the information contained therein in the Company's Business (i) has violated or infringed upon, or is violating or infringing upon, the rights of any Person; or (ii) breaches any duty or obligation owed to any Person; or (iii) violates the privacy or any Law relating to the privacy of any Person. 4.13.11 The Company has not experienced any Year 2000-related problems with respect to such Software or received any notices from any Person relating to any Year 2000-related problems. 4.14 Contracts. 4.14.1 Schedule 4.14 contains an accurate and complete list of the following types of Contracts, to the extent such Contracts involve payments by or to the Company in excess of $20,000 per year (with the Contracts set forth on Schedule 4.14 collectively referred to as the "Specified Contracts"), grouped into the following categories: (a) customer Contracts; (b) Contracts for the purchase or lease of Real Property or otherwise concerning Real Property owned or used by the Company; (c) loan agreements, mortgages, notes, guarantees and other financing Contracts; (d) Contracts for the purchase, lease and/or maintenance of computer equipment and other equipment, Contracts for the purchase, license, lease and/or maintenance of Software under which the Company is the licensor, purchaser, licensee, lessee or user, and other supplier Contracts; (e) employment, consulting and sales representative Contracts (excluding Contracts which constitute Employee Benefit Plans listed on Schedule 4.16 and excluding oral Contracts with employees for "at will" employment); (f) Contracts under which any rights in and/or ownership of any Software product, technology or other Intangible of the Company, or any prior version thereof, or any part of the customer base, business or Assets of the Company was acquired; (g) Contracts containing clauses that prohibit or restrict the Company from soliciting any employee or customer of any other Person or otherwise prohibiting or restricting the Company from engaging in any business; and (h) other Contracts (excluding Contracts which constitute Insurance Policies listed on Schedule 4.20, excluding this Agreement and all other Contracts entered into between the Company and Buyer, or among the Company, Buyer and other parties in connection herewith or therewith). A description of each oral Specified Contract is included on Schedule 4.14 and copies of each written Specified Contract have been delivered or made available to Buyer. 4.14.2 Except as set forth on Schedule 4.14, or except where any of the following would not have a Material Adverse Effect, with respect to each of the Specified Contracts (i) the Company is neither in default thereunder nor, based on currently existing circumstances, would be in default thereunder with the passage of time, the giving of notice or both; (ii) to the knowledge of the Company and the Selling Shareholders, none of the other parties to any Specified Contract is in default thereunder or, based on currently existing circumstances, would be in default thereunder with the passage of time, the giving of notice or both; (iii) the Company has not given or received any notice of default or notice of termination with respect to any Specified Contract; and (iv) each Specified Contract is in full force and effect and is enforceable by the Company in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and subject to applicability of general principles of equity. 4.14.3 The Specified Contracts, together with the other Contracts of the Company, are all the Contracts necessary and sufficient to operate the Company's Business as currently conducted. Except as set forth on Schedule 4.14, there are no currently outstanding proposals or offers submitted by the Company to any customer, prospect, supplier or other Person with respect to Company's Business which, if accepted, would result in a legally binding Contract of the Company involving an amount or commitment exceeding $20,000. 4.14.4 Except as set forth on Schedule 4.14, each of the customers of the Company has signed and is bound by a written Contract that has been provided or made available to Buyer in due diligence materials, and the provisions of each such customer Contract are binding on the customer and enforceable by the Company. 4.15 Employees and Independent Contractors. 4.15.1 Schedule 4.15 contains an accurate and complete list of all of the employees of the Company (including any employee of the Company who is on a leave of absence or on layoff status) and (i) their titles or responsibilities; (ii) their dates of hire; (iii) their current salaries or wages; (iv) any Permit that is held by them and that relates to or is useful in connection with any of the businesses of the Company; and (v) any outstanding loans or advances made to them by the Company. 4.15.2 Schedule 4.15 also contains an accurate and complete list of all sales representatives and independent contractors engaged by the Company where their payment arrangements are other than in accordance with industry standards (if not set forth in a Specified Contract listed or described on Schedule 4.14). 4.15.3 Except as limited by the specific and express terms of any employment Contracts listed on Schedule 4.14 and except for any limitations of general application which may be imposed under applicable employment Laws, the Company has the right to terminate the employment of each of its employees at will and to terminate the engagement of any of its independent contractors without payment to such employee or independent contractor other than for services rendered through termination and without incurring any penalty or liability. 4.15.4 The Company is in compliance with all Laws relating to employment practices, except where such failure to be in compliance would not have a Material Adverse Effect. The Company has delivered to Buyer accurate and complete copies of all employee manuals and handbooks, disclosure materials, policy statements and other materials relating to the employment of the current employees of the Company. 4.15.5 The Company has never been a party to or bound by any union or collective bargaining Contract, nor is any such Contract currently in effect or being negotiated by or on behalf of the Company. 4.15.6 To the knowledge of the Company and the Selling Shareholders, no employee of the Company is a party to or is bound by any confidentiality agreement, noncompetition agreement or other Contract (with any Person) that will have an adverse effect on (A) the performance by such employee of any of his duties or responsibilities as an employee of the Company, or (B) any of the businesses or operations of the Company. 4.15.7 Except as set forth on Schedule 4.15, since the Latest Balance Sheet Date, no employee of the Company having an annual salary of $50,000 or more has indicated an intention to terminate or has terminated his or her employment with the Company 4.16 Employee Benefit Plans. 4.16.1 Schedule 4.16 contains an accurate and complete list and description of all of the Company's Employee Benefit Plans (collectively referred to as the "Company Employee Benefit Plans"), all employees affected or covered by the Company Employee Benefit Plans, and all Obligations thereunder. Accurate and complete copies of all of the Company Employee Benefit Plans have been provided to Buyer. 4.16.2 Except as set forth on Schedule 4.16, the Company has not (i) established, maintained or contributed to (nor does the Company have any obligation to contribute to) any Employee Benefit Plans, (ii) proposed any Employee Benefit Plans which it plans to establish or maintain or to which it plans to contribute, or (iii) proposed any changes to any Employee Benefit Plans now in effect. 4.16.3 If permitted by applicable Law, the Company has properly submitted all of the Company Employee Benefit Plans intended to be qualified under Section 401(a) of the Code to the Internal Revenue Service (the "IRS") for its approval within the time prescribed therefor under applicable federal regulations, except to the extent that such plan is a master and prototype or volume submitter plan entitled to rely on a favorable opinion or advisory letter issued to the sponsor of the plan. Favorable letters of determination of such tax-qualified status from the IRS are attached to Schedule 4.16. 4.16.4 With respect to the Company Employee Benefit Plans, the Company will have made, on or before the Closing Date, all payments required to be made by them on or before the Closing Date and will have accrued (in accordance with GAAP) as of the Closing Date all payments due but not yet payable as of the Closing Date, so there will not have been, nor will there be, any Accumulated Funding Deficiencies (as defined in ERISA or the Code) or waivers of such deficiencies. 4.16.5 The Company has delivered to Buyer an accurate and complete copy of the most current Form 5500 and any other form or filing required to be submitted to any Governmental Body with regard to any of the Company Employee Benefit Plans and the most current actuarial report, if any, with regard to any of the Company Employee Benefit Plans. 4.16.6 All of the Company Employee Benefit Plans are, and have been, operated in material compliance with their provisions and with all applicable Laws including ERISA and the Code and the regulations and rulings thereunder. The Company and all fiduciaries of the Company Employee Benefit Plans have complied with the provisions of the Company Employee Benefit Plans and with all applicable Laws including ERISA and the Code and the regulations and rulings thereunder. There have been no Reportable Events (as defined in ERISA) or events described in Sections 4062, 4063 or 4064 of ERISA with respect to any Company Employee Benefit Plan that is subject to Title IV of ERISA, no remedial filings with the IRS and no termination or partial termination (including any termination or partial termination attributable to this sale) of any of the Company Employee Benefit Plans. There would be no Obligation of the Company under Title IV of ERISA if any of the Company Employee Benefit Plans were terminated as of the Closing Date. The Company has not incurred, and will not incur, any withdrawal liability, and the Company does not have any contingent withdrawal liability, under ERISA to any Multiemployer Plan (as defined in ERISA or the Code). The Company has not incurred, and will not incur, any Obligation to the Pension Benefit Guaranty Corporation (or any successor thereto). 4.16.7 Neither the execution and delivery of this Agreement nor the consummation of the Transactions will (i) result in any payment (including any severance, unemployment compensation or golden parachute payment) becoming due from the Company under any of the Company Employee Benefit Plans, (ii) increase any benefits otherwise payable under any of the Company Employee Benefit Plans, or (iii) result in the acceleration of the time of payment or vesting of any such benefits to any extent other than the acceleration of vesting of options granted under the Company's 1999 Stock Incentive Compensation Plan. 4.16.8 There are no pending Proceedings that have been asserted or instituted against any of the Company Employee Benefit Plans, the Assets of any of the trusts under such plans, the plan sponsor, the plan administrator or any fiduciary of any such plan (other than routine benefit claims), and, to the knowledge of the Company and the Selling Shareholders, there are no facts which would reasonably be expected to form the basis for any such Proceeding. There are no investigations or audits of any of the Company Employee Benefit Plans, any trusts under such plans, the plan sponsor, the plan administrator or any fiduciary of any such plan that have been instituted or, to the knowledge of the Company and the Selling Shareholders, threatened. 4.16.9 Except as described on Schedule 4.16, no event has occurred nor, to the Knowledge of the Company and the Selling Shareholders, would reasonably be expected to occur which will result in the Company having an Obligation in connection with any Employee Benefit Plan established, maintained, contributed to or to which there has been an obligation to contribute (currently or previously) by it or by any other entity which, together with the Company, constitute elements of either (i) a controlled group of corporations (within the meaning of Section 414(b) of the Code), (ii) a group of trades or businesses under common control (within the meaning of Sections 414(c) of the Code or 4001 of ERISA), (iii) an affiliated service group (within the meaning of Section 414(m) of the Code), or (iv) another arrangement covered by Section 414(o) of the Code. 4.16.10 Except as set forth on Schedule 4.16, no Company Employee Benefit Plan of health, hospitalization, medical or dental coverage is maintained on a self-insured basis. 4.17 Customers and Suppliers. Schedule 4.17 contains an accurate and complete list of (i) all customers generating greater than 5% of the Company's revenues for the 18 month period ended June 30, 2003 and (ii) all current suppliers of parts and other significant materials in support of the Company's services to customers. Except as set forth on Schedule 4.17, since January 1, 2002, none of the customers or suppliers of the Company required to be listed in accordance with the previous sentence has given notice or otherwise indicated to the Company that (i) it will or intends to terminate or not renew its Contract with the Company before the scheduled expiration date, (ii) it will otherwise terminate its relationship with the Company, or (iii) it may otherwise reduce the volume of business transacted with the Company below historical levels. The relationship of the Company with its customers is currently on a good and normal basis, and the Company has not experienced any problems with customers or suppliers since January 1, 2002. To the knowledge of the Company and the Selling Shareholders, there are no facts or circumstances currently existing which are, or with the passage of time, would reasonably be expected to be materially adverse to the Company's relationship with its customers or suppliers. The Company has delivered to Buyer an accurate and complete copy of the most recent customer surveys of the Company. 4.18 Taxes. 4.18.1 Schedule 4.18 contains an accurate and complete list of all jurisdictions in which the Company (and each Selling Shareholder with respect to the Company) is required to file Tax Returns in the last thirty six (36) months. "Tax Returns" means all federal, state, local, foreign and other Tax returns and reports, information returns, statements, declarations, estimates, schedules, notices, notifications, forms, elections, certificates or other documents the Company is required to file or submit to any Governmental Body with respect to the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Law relating to any Tax. Accurate and complete copies of all federal, state, local and foreign income, sales and use Tax Returns filed by the Company for 2001 and 2002 have been delivered or made available to Buyer. 4.18.2 Except as set forth on Schedule 4.18: (i) the Company has properly and timely filed all Tax Returns required to be filed by it, all of which were accurately prepared and completed in full compliance with all Laws; (ii) the Company has properly withheld from payments to its employees, agents, representatives, contractors and suppliers all amounts required by Law to be withheld for Taxes; (iii) the Company has paid all Taxes required to be paid by it; (iv) no audit of the Company by any governmental taxing authority has been conducted within the past five (5) years or is currently pending or, to the knowledge of the Company and the Selling Shareholders, is threatened; (v) no notice of any proposed Tax audit, or of any Tax deficiency or adjustment by any governmental taxing authority, has been received by the Company within the past five (5) years; (vi) to the knowledge of the Company and the Selling Shareholders, there are no agreements or waivers currently in effect that provide for an extension of time for the assessment of any Tax against the Company; (vii) the Financial Statements fully accrue all actual and contingent liabilities for Taxes with respect to all periods through the dates thereof in accordance with GAAP; (viii) since the Latest Balance Sheet Date, the Company has not incurred any liabilities for Taxes except in the ordinary course of business consistent with past practices; (ix) no Proceeding is pending or has been threatened, and no claim has been or would reasonably be expected to be asserted, against or with respect to the Company in respect of any Tax; (x) the Company has been a validly electing S-corporation within the meaning of the Code for all tax periods since January 1, 1998; (xi) each Selling Shareholder that is a trust and any former shareholder of the Company since January 1, 1998 that was a trust is or was a trust described in Section 1361(c)(2) of the Code for all Tax periods in which it was a shareholder of the Company since January 1, 1998; and (xii) the Selling Shareholders have filed all Tax Returns and paid all Tax liabilities related to their respective ownership interests in the Company. The Company has disclosed to the Internal Revenue Service on the appropriate Tax Returns any Reportable Transaction in which the Company has participated. The Company has retained all documents and other records pertaining to any Reportable Transaction in which the Company has participated, including documents and other records listed in Treasury Regulation Section 1.6011-4(g) and any other documents or other records which are related to any Reportable Transaction in which the Company has participated but not listed in Treasury Regulation Section 1.6011-4(g). 4.18.3 The Company (a) has not been a member of an affiliated group filing a consolidated federal income tax return and (b) does not have any liability for the Taxes of any Person (other than the Company under Reg. 1.1502-6 (or any similar provision of state, local, or foreign law)), as a transferee or successor, by contract, or otherwise. 4.19 Proceedings and Judgments. 4.19.1 Except as set forth on Schedule 4.19: (i) no Proceeding is currently pending or, to the knowledge of the Company and the Selling Shareholders, threatened in writing, nor has any Proceeding occurred at any time since January 1, 2001, to which the Company is or was a party, or by which the Company or any Assets or business of the Company is or was affected; (ii) no Judgment is currently outstanding, nor has any Judgment been outstanding at any time since January 1, 2001, against the Company, or by which the Company or any Assets or business of the Company is or was affected; and (iii) no breach of contract, breach of warranty, tort, negligence, infringement, product liability, discrimination, wrongful discharge or other claim of any nature has been asserted or, to the knowledge of the Company or the Selling Shareholders, threatened by or against the Company at any time since January 1, 2001, and there is no basis for any such claim. Except as set forth on Schedule 4.19, no event has occurred, and no claim, dispute or other condition or circumstance exists, that, directly or indirectly, would reasonably be expected to give rise to or serve as a basis for the commencement of any Proceeding described in this Section 4.19.1. 4.19.2 As to each matter described on Schedule 4.19, accurate and complete copies of all pertinent pleadings, judgments, orders, correspondence and other legal documents have been delivered to Buyer. 4.19.3 To the knowledge of the Company and the Selling Shareholders, no officer or employee of the Company is subject to any Judgment that prohibits such officer or employee from engaging in or continuing any conduct, activity or practice relating to any of the businesses of the Company. 4.19.4 Without in any way limiting the foregoing contained in this Section 4.19, there is no currently outstanding Judgment or, to the knowledge of the Company and the Selling Shareholders, proposed Judgment, against (i) the Company or, (ii) to the knowledge of the Company and the Selling Shareholders, the Company's officers, directors or employees arising from their respective duties performed for the Company. 4.20 Insurance. Schedule 4.20 contains an accurate and complete list and description of all Insurance Policies (excluding Insurance Policies that constitute the Company Employee Benefit Plans described on Schedule 4.16) currently owned or maintained by the Company. Except as set forth on Schedule 4.20, accurate and complete copies of all Insurance Policies described or required to be described on Schedule 4.20 have been delivered to Buyer. Each such Insurance Policy is in full force and effect; the Company has not received notice of cancellation with respect to any such Insurance Policy; and the Company has no knowledge of any basis for the insurer thereunder to terminate any such Insurance Policy. Except as set forth on Schedule 4.20, there are no claims that are pending under any of the Insurance Policies described on Schedule 4.20. 4.21 Questionable Payments. None of the current or former partners, owners, shareholders, directors, executives, officers, representatives, agents or employees of the Company (when acting in such capacity or otherwise on behalf of the Company or any of its predecessors): (a) has used or is using any corporate funds for any illegal contributions, gifts, entertainment or other unlawful expenses relating to political activity; (b) has used or is using any corporate funds for any direct or indirect unlawful payments to any foreign or domestic government officials or employees; (c) has violated or is violating any provision of the Foreign Corrupt Practices Act of 1977; (d) has established or maintained, or is maintaining, any unlawful or unrecorded fund of corporate monies or other properties; (e) has made at any time since January 1, 2000, any false or fictitious entries on the books and records of the Company; or (f) has made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any nature using corporate funds or otherwise on behalf of the Company. 4.22 Related Party Transactions. Except as described on Schedule 4.22 and except for any employment Contracts listed on Schedule 4.14, there are no real estate leases, personal property leases, loans, guarantees, Contracts, transactions, understandings or other arrangements of any nature between or among the Company and any current or former shareholder, director, employee, officer or controlling Person of the Company (or any of its respective predecessors) or any other Person affiliated with the Company (or any of its respective predecessors). 4.23 Brokerage Fees. Except as set forth on Schedule 4.23, no Person acting on behalf of the Company or any of the Selling Shareholders is or shall be entitled to any brokerage or finder's fee in connection with the Transactions. 4.24 Inapplicability of Anti-takeover Laws. The Company is not subject to any Washington state takeover law that is applicable to the Transactions. 4.25 Company's Tax Representations Related to Reorganization. 4.25.1 In connection with the Transactions, neither the Company nor any person related to the Company (as defined in Treasury Regulation Section 1.368-1(e)(3)) has directly or through any transaction, agreement, or arrangement with any other person (i) acquired stock of the Company, or (ii) redeemed any shares of Company stock. The Company operates at least one significant historic business line, or owns at least a significant portion of its historic business assets, in each case within the meaning of Treasury Regulation Section 1.368-1(d). 4.25.2 At the Closing Date, the Company is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. 4.26 Investment Matters. 4.26.1 Each of the Selling Shareholders (i) has carefully read and understands that certain Confidential Private Placement Memorandum delivered to the Selling Shareholders contemporaneously herewith (the "Memorandum") and (ii) has based a decision to invest in the Buyer Common Shares and the Notes (collectively, the "Buyer Securities") solely on the information contained in the Memorandum. 4.26.2 Each of the Selling Shareholders is acquiring the Buyer Securities for his, her or its own account as principal for investment and not with a view toward resale or distribution thereof in violation of the securities laws. 4.26.3 Each of the Selling Shareholders who is not an accredited investor, together with any purchaser representative, as defined in Rule 501(h) of the Securities Act of 1933 acknowledged by such Selling Shareholder as his, her or its purchaser representative (a "Purchaser Representative"), has such knowledge and experience in financial and business matters and is capable of evaluating the merits and risks of the investment in the Buyer Securities being issued hereunder. 4.26.4 Each of the Selling Shareholders: (i) has no need for liquidity in the investment in the Buyer Securities and (ii) is able to bear the economic risk of losing the entire investment in the Buyer Securities issued hereunder. Each of the Selling Shareholder's investments in and commitments to non-liquid investments are, and after a purchase of the Buyer Securities hereunder will be, reasonable in relation to his, her or its net worth and current needs. 4.26.5 Each of the Selling Shareholders understands that the Buyer Securities to be issued hereunder have not been registered under either the Securities Act of 1933 or the securities laws of any state and, as a result thereof, are subject to substantial restrictions on transfer and shall bear a legend restricting the transfer of such securities. 4.26.6 Each of the Selling Shareholders understands that (i) except as may be provided in the Registration Rights and Right of First Offer Agreement, the Company has no obligation or intention to register the Buyer Securities issued hereunder under any federal or state securities laws, or to take any action which would make available any exemption from the registration requirements of such laws, and (ii) therefore, each of the Selling Shareholders may be precluded from selling or otherwise transferring or disposing of any of such Buyer Securities or any portion thereof and may have to bear the economic risk of his, her or its investment therein for an indefinite period of time. 4.26.7 Each of the Selling Shareholders or his, her or its Purchaser Representative understands that an investment in the Buyer Securities issued hereunder involves certain risks and has taken full cognizance of and understands all of the risk factors relating to the purchase of such Buyer Securities, including those set forth under the caption "Risk Factors" in the Form 10-K and the Memorandum. 4.26.8 Each of the Selling Shareholders understands that the Memorandum and other information furnished by Buyer to the Company and/or the Selling Shareholders does not constitute investment, accounting, legal or tax advice. The Selling Shareholders, in making the investment in the Buyer Securities contemplated hereunder, are relying, if at all, solely upon the advice of each such Selling Shareholder's tax advisers with respect to the federal and/or state tax aspects of an investment in the Buyer Securities and, except as expressly provided otherwise in this Agreement, the transactions contemplated hereunder, and Buyer has not made any representation regarding the tax consequences of such investment in the Buyer Securities. 4.26.9 Each of the Selling Shareholders or his, her or its Purchaser Representative has had an opportunity to ask questions and receive answers from Buyer concerning Buyer, and has been furnished with all information about Buyer that he, she or it has requested. Each Selling Shareholder is an "accredited investor" as defined in Rule 501(a) of the Securities Act of 1933, as amended, or if such shareholder is not an "accredited investor", either such shareholder has utilized the services of a Purchaser Representative or such shareholder alone has such knowledge and experience in financial and business matters and is capable of evaluating the merits and risks of the investment in the Buyer Securities being issued hereunder. 4.26.10 Each of the Selling Shareholders and Purchaser Representatives, if any, understands that the Buyer Securities are being offered and sold in reliance on specific exemptions from the registration requirements of federal and state securities laws and that Buyer and controlling persons thereof are relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings related to the Selling Shareholders set forth herein and in the Questionnaires in order to determine the applicability of such exemptions and the suitability of him, her or it to acquire the Buyer Securities being issued hereunder. 4.26.11 Each of the Selling Shareholders represents and warrants that (i) he, she or it maintains his, her or its domicile (and is not a transient or temporary resident) at the address set forth on the applicable Questionnaire. 4.26.12 Each of the Selling Shareholders represents and warrants that he, she or it is unaware of, is in no way relying on, and did not become aware of the offering of the Buyer Securities through or as a result of, any form of general solicitation or general advertising including, without limitation, any article, notice, advertisement or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, in connection with the offering and sale of the Buyer Securities and is not subscribing for such Buyer Securities and did not become aware of the offering of the Buyer Securities through or as a result of any seminar or meeting to which such Selling Shareholder was invited by, or any solicitation of a subscription by, a person not previously known to the Selling Shareholder in connection with investments in securities generally. 4.26.13 Each of the Selling Shareholders acknowledges that, if the Selling Shareholder has used the services of a Purchaser Representative in connection with an investment in Buyer, such Purchaser Representative has disclosed, by submitting to the Selling Shareholder and Buyer a Purchaser Representative Questionnaire, any material relationship between such Purchaser Representative or such Purchaser Representative's affiliates, on the one hand, and Buyer and its affiliates, on the other hand, which now exists or mutually is understood to be contemplated or which has existed at any time during the previous two (2) years, and further setting forth any compensation received or to be received as a result of such relationship. 4.26.14 Each Selling Shareholder acknowledges that the Memorandum contains confidential information regarding Buyer and agrees not to (and agrees to cause his, her or its Purchaser Representative not to) distribute or disclose such information contained therein to any other party without the prior written consent of Buyer. Each Selling Shareholder further agrees not to (and agrees to cause his, her or its Purchaser Representative not to) engage in any purchase or sale transaction in Buyer's securities following receipt of this non-public information until such time as this non-public information is disclosed to the public generally or advised by Buyer that it is acceptable to do so. 4.26.15 As of the Closing, the Company shall not have greater than thirty five (35) shareholders. 4.27 Full Disclosure. No representation or warranty made by either the Company or any of the Selling Shareholders in this Agreement or pursuant hereto (a) contains any untrue statement of any material fact; or (b) omits to state any material fact that is necessary to make the statements made, in the context in which made, not false or misleading. The copies of documents attached as Schedules to this Agreement or otherwise delivered to Buyer in connection with the transactions contemplated hereby (including information relating to the Company and the Selling Shareholders which is contained in the Memorandum), are accurate and complete, and are not missing any amendments, modifications, correspondence or other related papers which would be material to Buyer's understanding thereof in any respect. To the knowledge of the Company or any of the Selling Shareholders, there is no fact that has not been disclosed to Buyer in the Schedules to this Agreement or otherwise in writing, that was or is or, so far as either the Company or any of the Selling Shareholders can reasonably foresee, will have a Material Adverse Effect. Section 5: Representations of Buyer, Merger Sub and Newco LLC Knowing that the Company and the Selling Shareholders rely thereon, Buyer, Merger Sub and Newco LLC, jointly and severally, represent and warrant to the Company and the Selling Shareholders as of the date of this Agreement, and covenant with the Company and the Selling Shareholders, as follows: 5.1 Organization. Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of Virginia. Merger Sub is a corporation and Newco LLC is a limited liability company, in each case, duly organized, validly existing and in good standing under the Laws of the State of Delaware. Each of Buyer, Merger Sub and Newco LLC possesses the full power and authority to own its Assets, conduct its business as and where such business is presently conducted, and enter into, deliver and perform this Agreement and to consummate the Transactions. All of the issued and outstanding shares of capital stock or membership interests, as the case may be, of Merger Sub and Newco LLC are owned, beneficially and of record, by Buyer. 5.2 Authority; Non-Contravention. Each of Buyer's, Merger Sub's and Newco LLC's execution, delivery and performance of this Agreement, each Note, and each other agreement to which Buyer, Merger Sub or Newco LLC is or becomes a party pursuant to this Agreement, and its consummation of the Transactions (a) have been duly authorized by all necessary actions by their respective boards of directors or managers, as the case may be, and, in the case of Merger Sub and Newco LLC, their respective sole stockholder or sole member, as the case may be; (b) do not require any approval or actions by the stockholders of Buyer; (c) do not constitute a violation of or default under their respective charters, bylaws, certificates of formation or operating agreements, as the case may be; (d) do not constitute a default or breach (immediately or after the giving of notice, passage of time or both) under any Contract to which Buyer, Merger Sub or Newco LLC is a party or by which they are bound; (e) do not constitute a violation of any Law or Judgment that is applicable to it or to their respective businesses or Assets, or to the Transactions; and (f) except as stated on Schedule 5.2, do not require the Consent of any Person. This Agreement, each Note, and each other agreement to which Buyer, Merger Sub or Newco LLC is or becomes a party pursuant to this Agreement constitutes the valid and legally binding agreement of each of Buyer, Merger Sub and Newco LLC, enforceable against each of them in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and subject to applicability of general principles of equity. 5.3 Buyer's Stock. The total authorized shares of capital stock of Buyer is 7,500,000, consisting of 6,000,000 Buyer Common Shares, of which 2,468,333 shares are issued and outstanding as of the date hereof, and 1,500,000 shares of preferred stock, $0.24 par value per share, none of which are issued or outstanding. Buyer has issued warrants granting the holders thereof the right to purchase, on or before July 22, 2008, an aggregate of 58,393 Buyer Common Shares at an exercise price per share of $4.93. Buyer has (i) 500,000 shares of Common Stock authorized for issuance under its stock incentive plans (with (a) 400,000 authorized under Buyer's incentive plan for employees and (b) 100,000 authorized under Buyer's plan for directors), and (ii) outstanding under such plans options to purchase 397,667 shares as of the date hereof (with (a) 326,750 outstanding under Buyer's plan for employees and (b) 70,917 outstanding under Buyer's plan for directors). Except as described above or on Schedule 5.3, Buyer has not issued any securities exercisable to purchase or convertible into capital stock of Buyer or any subsidiary of Buyer nor is Buyer or any subsidiary otherwise bound by any agreement, whether absolute or contingent, to issue any such securities. Each issued and outstanding share of capital stock of the Buyer has been duly authorized and is validly issued and outstanding and their issuance and sale have not violated any preemptive rights. The Buyer Common Shares to be issued in the First Merger, when so issued, shall be duly authorized and validly issued, fully paid and nonassessable and shall not have been issued in violation of any preemptive right. 5.4 Indebtedness. Buyer does not have any secured debt, except as set forth on Schedule 5.4, which describes the name of any lender, the maximum amount Buyer can borrow under the loan facility, and the amount actually borrowed as of a recent date. Buyer has outstanding subordinated promissory notes to Research Industries Incorporated ("RII") in the aggregate principal amount of $2,000,000, and a convertible subordinated debenture to RII with a balance at Closing of $800,000. Except for the foregoing, Buyer does not have any secured debt, any outstanding indebtedness for borrowed money, or any agreement pursuant to which Buyer can borrow money from any Person. Accurate and complete copies of all agreements, notes, amendments or other documents relating to all of the foregoing have been delivered to the Company for the benefit of the Selling Shareholders. Subject to receiving consents from applicable lenders, which consents are listed on Schedule 5.5, Buyer has, or by Closing shall have the right to pay the obligations of Buyer under the Notes to the Selling Shareholders as and when such obligations become due unless a default is declared under Buyer's senior and subordinated loan documents. 5.5 Consents. Except as set forth on Schedule 5.5 attached hereto, no consent, approval, authorization, order, license, permit, filing or registration with any governmental entity or other regulatory body is required of the Buyer, Merger Sub or Newco LLC as a condition of its execution, delivery or performance of this Agreement, the Notes, or any other agreements to which Buyer, Merger Sub or Newco LLC is or becomes a party pursuant to this Agreement or their respective consummation of the Transactions and has not been obtained, other than filings with the Secretary of State of Delaware and the Secretary of State of Washington as specifically contemplated herein. 5.6 SEC Filings. Buyer has timely filed with the SEC all of the reports that it has been required to file pursuant to Section 13 or 14 of the Securities Exchange Act of 1934, as amended (the "1934 Act") in respect of all periods, events or stockholder actions since April 1, 2002 ("Buyer SEC Documents"). As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing): (i) each of the Buyer SEC Documents complied in all material respects with the applicable requirements of the 1934 Act; and (ii) none of the Buyer SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 5.7 Full Disclosure. No representation or warranty made by any of Buyer, Merger Sub or Newco LLC in this Agreement or pursuant hereto (a) contains any untrue statement of any material fact; or (b) omits to state any material fact that is necessary to make the statements made, in the context in which made, not false or misleading. The copies of documents attached as Schedules to this Agreement or otherwise delivered to the Company and/or Selling Shareholders in connection with the transactions contemplated hereby (including information relating to Buyer contained in the Memorandum), are accurate and complete, and are not missing any amendments, modifications, correspondence or other related papers which would be material to their understanding thereof in any respect. To the knowledge of Buyer, Merger Sub and Newco LLC, there is no fact that has not been disclosed to the Company and/or the Selling Shareholders in the Schedules to this Agreement or otherwise in writing, that was or is or, so far as Buyer, Merger Sub or Newco LLC can reasonably foresee, will have a Material Adverse Effect. 5.8 Buyer's Tax Representations Relating to Reorganization. 5.8.1 In connection with the Transactions, neither Buyer nor any person related to Buyer (as defined in Treasury Regulation Section 1.368-1(e)(3)) will have acquired directly or through any transaction, agreement or arrangement with any other person, stock of the Company with any consideration other than common stock of Buyer, except for Merger Consideration pursuant to this Agreement. Other than with respect to the right of first offer described in the Registration Rights and Right of First Offer Agreement, there is no plan or intention by Buyer or any person related to Buyer (as defined in Treasury Regulation Section 1.368-1(e)(3)) to acquire or redeem any of the stock of Buyer issued in the Transactions either directly or through any transaction, agreement, or arrangement with any other person; provided, however, that Buyer may repurchase Buyer's stock issued in the Transactions pursuant to an open market stock repurchase program, as described in Revenue Ruling 99-58, 1999-2 C.B. 701. 5.8.2 At the Closing Date, none of Buyer, Merger Sub or Newco LLC is an investment company as defined Section 368(a)(2)(F)(iii) and (iv) of the Code. Section 6: Obligations of the Company and the Selling Shareholders Pending Closing 6.1 Conduct of the Company's Business. Between the date of this Agreement and the Closing Date, the Company will and the Selling Shareholders, severally, will cause the Company to: 6.1.1 not take or suffer or permit any action which would render untrue any of the representations or warranties of the Company and the Selling Shareholders herein contained, and not omit to take any action within its power, the omission of which would render untrue any such representation or warranty; 6.1.2 conduct its business in the ordinary and usual course; 6.1.3 not enter into any Contract with any party, other than Contracts entered into in the ordinary course of business, and not amend, modify or terminate any Contract other than in the ordinary course of business without the prior written consent of Buyer; 6.1.4 use its reasonable best efforts to preserve the Business intact, to keep available the services of its employees, and to preserve its relationships with employees, customers, suppliers and others with whom it deals; 6.1.5 not reveal, orally or in writing, to any party, other than Buyer and Buyer's authorized agents, any of the business procedures and practices followed by it in the conduct of its business or any technology used in the conduct of its business; 6.1.6 maintain in full force and effect all of the Insurance Policies listed on Schedule 4.20 and make no change in any insurance coverage without the prior written consent of Buyer; 6.1.7 keep the premises occupied by it and all of its equipment and other tangible personal property in good order and repair and perform all necessary repairs and maintenance within normal time frames of scheduled maintenance; 6.1.8 continue to maintain all of its usual business books and records in accordance with its past practices; 6.1.9 not amend its articles of incorporation or bylaws; 6.1.10 Except for the August Dividend, not declare or make any dividend or other payment on or with respect to its securities, redeem or otherwise acquire any securities or issue any securities or any option, warrant or right relating thereto; 6.1.11 not pay any bonuses (i) to any employees who are Selling Shareholders and (ii) with respect to employees other than Selling Shareholders, other than in the ordinary course of business, consistent with past practice; 6.1.12 not waive any right or cancel any claim.; 6.1.13 not increase the compensation or the rate of compensation payable to any of its employees other than in the ordinary course of business consistent with past practices by amounts that do not exceed five percent (5%); 6.1.14 maintain its entity existence and not merge or consolidate with any other entity; 6.1.15 comply with all material provisions of any Contract applicable to it and all applicable Laws; 6.1.16 except with Buyer's consent, not make any capital expenditures outside of the ordinary course of business; and 6.1.17 use its reasonable best efforts to effectuate the Transactions, and to do all things whatsoever necessary and proper to effect the Transactions and agreements contemplated herein. 6.2 Interim Financial Statements. For each calendar month that ends between the date hereof and the Closing Date, the Company shall, and the Selling Shareholders shall cause the Company to, promptly prepare and deliver to Buyer monthly financial statements, which shall be accurate and complete and fairly present, in all material respects, the financial condition of the Company as of the end of such month and of the results of operations of the Company for such month. 6.3 Buyer's Due Diligence Investigation; Confidentiality. Between the date of this Agreement and the Closing Date, the Company and the Selling Shareholders shall (a) permit Buyer and its authorized representatives to have reasonable access to the facilities and offices of the Company during normal business hours, to observe the operations of the Company, to meet with the officers and employees of the Company, to contact the customers, prospects and suppliers of the Company, and to audit, examine and copy the files, books and records and other documents and papers of the Company, and (b) provide to Buyer and its authorized representatives all information concerning the business, Assets and financial condition of the Company that Buyer reasonably requests. Buyer will not reveal any confidential data and/or information supplied by the Company except to its management, counsel, accountants, insurance representatives, investment and commercial bankers and like agents, for purposes relating to the evaluation and consummation of the transactions contemplated by this Agreement, and in the event the transactions contemplated by this Agreement are not consummated, such data and information will be returned to the Company and, regardless of whether the Transactions are consummated, will be held confidential by those to whom it is disclosed. In addition, the parties acknowledge that the information being provided to one another in connection with the Transactions contemplated hereunder is subject to the terms and conditions of that certain undated Confidential Non- Disclosure Agreement (the "Confidentiality Agreement"), the terms of which are incorporated herein by reference. 6.4 Consents. Between the date of this Agreement and the Closing Date, the Company and the Selling Shareholders shall in good faith use their best efforts to obtain all Consents and approvals of all lenders, lessors, vendors, customers and other Persons necessary to permit the mergers and the other Transactions contemplated hereunder to be consummated without violating any loan agreement, lease or other material contract to which the Company is a party or by which the Company is bound, and to give the notices, make the filings and obtain the Consents required to be described or disclosed on Schedule 4.2. 6.5 Acquisition Proposals. Between the date of this Agreement and the Closing Date, none of the Company, the Selling Shareholders, or any officer, employee, representative or agent of the Company or the Selling Shareholders shall, directly or indirectly, solicit, initiate, encourage or respond to any inquiries or proposals from, or participate in any discussions or negotiations with, or provide any non-public information to, any Person or group (other than Buyer and its officers, employees, representatives and agents) concerning any bulk sale of any Assets of the Company, any sale of shares of capital stock or other securities of the Company, or any merger, consolidation or similar transaction involving the Company. The Company and/or the Selling Shareholders shall immediately advise Buyer of, and communicate to Buyer the terms of, any such inquiry or proposal received by the Company or any Selling Shareholder. Any violation of the restrictions by any officer, director, affiliate, employee, agent, investment banker, attorney or other advisor or representative of the Company or the Selling Shareholders shall be deemed to be a breach of this Section 6.5 by the Company and Selling Shareholders. 6.6 Advice of Changes. Between the date of this Agreement and the Closing Date, the Company and each Selling Shareholder shall promptly advise Buyer, in writing, of any fact of which any of them obtains knowledge and that, if existing or known as of the date of this Agreement, would have been required to be set forth or disclosed in or pursuant to this Agreement (it being understood that such advice shall not be deemed to modify the representations, warranties and covenants of the Company and/or of any Selling Shareholder contained in this Agreement). 6.7 Best Efforts. The Company and each Selling Shareholder shall use its or his reasonable best efforts to consummate the mergers and the other Transactions contemplated hereunder as of the earliest practicable date, including but not limited to voting or executing a written shareholder consent in favor of the First Merger. Neither the Company nor any of the Selling Shareholders shall take, or cause to be taken, or to the best of their ability permit to be taken, any action that would impair the prospect of completing the mergers and/or the other Transactions contemplated hereunder. Section 7: Certain Obligations of Buyer, Merger Sub and Newco LLC Pending Closing 7.1 Corporate/Limited Liability Company Status. Between the date of this Agreement and the Closing Date: 7.1.1 Each of Buyer, Merger Sub and Newco LLC shall maintain their corporate and limited liability company existence, as the case may be, and good standing in their respective jurisdictions of formation or incorporation, as the case may be, and shall not amend their respective charters, bylaws, certificates of formation or operating agreements, as the case may be, in any manner that would be inconsistent with their respective obligations under this Agreement. 7.1.2 Buyer, Merger Sub and Newco LLC shall not enter into any Contract that commits them to take any action or omit to take any action that would be inconsistent with any of the provisions of this Section 7.1 or any other provisions of this Agreement. 7.1.3 The Buyer shall not take or suffer or permit any action which would render untrue any of the representations or warranties of the Buyer herein contained, and not omit to take any action within its power, the omission of which would render untrue any such representation or warranty. 7.1.4 Buyer shall conduct its business in the ordinary and usual course other than as necessary to consummate the Transactions. 7.2 The Company's and Selling Shareholders' Due Diligence Investigation; Confidentiality. Between the date of this Agreement and the Closing Date, upon the Company's request, Buyer shall (a) permit the Company, the Selling Shareholders and their authorized representatives to visit Buyer's facilities during normal business hours, to meet with Buyer's key officers, and (b) provide to the Company, the Selling Shareholders and their authorized representatives all information concerning Buyer and its subsidiaries and their businesses, assets and financial condition, that the Company and the Selling Shareholders reasonably request. The Company and Selling Shareholders will not reveal any confidential data and/or information supplied by the Company except to its management, counsel, accountants, insurance representatives, investment and commercial bankers and like agents, for purposes relating to the evaluation and consummation of the transactions contemplated by this Agreement, and in the event the transactions contemplated by this Agreement are not consummated, such data and information will be returned to Buyer and will be held confidential by those to whom it is disclosed. In addition, the parties acknowledge that the information being provided to one another in connection with the Transactions contemplated hereunder is subject to the terms and conditions of the Confidentiality Agreement, the terms of which are incorporated herein by reference. 7.3 Consents. Between the date of this Agreement and the Closing Date, Buyer, Merger Sub and Newco LLC shall in good faith cooperate with the Company and the Selling Shareholders in their efforts to obtain the consents and approvals, and to give the notices and make the filings, described in Section 5.2. 7.4 SEC Reports. Between the date of this Agreement and the Closing Date, Buyer shall file all reports and other filings required to be filed by it under the 1934 Act, and Buyer shall notify the Selling Shareholders, promptly after they become available, of all registration statements, proxy statements, reports and other filings, and all amendments thereto, that Buyer files with the SEC. 7.5 Advice of Changes. Between the date of this Agreement and the Closing Date, Buyer shall promptly advise the Company and the Selling Shareholders, in writing, of any fact of which it obtains knowledge and that, if existing or known as of the date of this Agreement, would have been required to be set forth or disclosed pursuant to a representation or warranty in this Agreement (it being understood that such advice shall not be deemed to modify the representations, warranties and covenants of Buyer, Merger Sub and/or Newco LLC contained in this Agreement). 7.6 Best Efforts. Buyer, Merger Sub and Newco LLC shall use their best efforts to consummate the mergers and the other Transactions contemplated hereunder as of the earliest practicable date, and Buyer, Merger Sub and Newco LLC shall not take, or cause to be taken, or to the best of their ability permit to be taken, any action that would impair the prospect of completing the mergers and the other Transactions contemplated hereunder. Section 8: Conditions Precedent to the Company's and the Selling Shareholders' Closing Obligations Each obligation of the Company and the Selling Shareholders to be performed on the Closing Date shall be subject to the satisfaction of each of the conditions stated in this Section 8, except to the extent that such satisfaction is waived by the Company and/or the Selling Shareholders in writing. 8.1 Buyer's, Merger Sub's and Newco LLC's Representations and Performance. The representations and warranties of Buyer, Merger Sub and Newco LLC contained in this Agreement will be true and correct on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date (or, to the extent such representations and warranties speak as of an earlier date, they shall be true and correct as of such earlier date). Each of Buyer, Merger Sub and Newco LLC will have performed and complied with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. 8.2 Absence of Proceedings. No Proceeding shall have been instituted (excluding any Proceeding instituted by or on behalf of the Company or any Selling Shareholder), no Judgment shall have been issued, and no new Law shall have been enacted, on or before the Closing Date, that seeks to or does prohibit or restrain, or that seeks damages as a result of, the consummation of the mergers or any of the other Transactions contemplated hereunder. 8.3 Approvals. All necessary approvals and/or filings, including those set forth on Schedules 5.4 and 5.5, for the transactions contemplated hereby to be obtained and/or made by Buyer, Merger Sub and Newco LLC will have been obtained and/or made, as the case may be, and shall be in full force and effect. As of Closing, Buyer shall have filed the requisite listing application with the American Stock Exchange with respect to the Buyer Common Shares to be issued as part of the Merger Consideration. Buyer shall use its reasonable best efforts to have such Buyer Common Shares approved for listing as soon as practicable after Closing but in no event later than one year after Closing. 8.4 Registration Rights and Right of First Offer Agreement. The Registration Rights and Right of First Offer Agreement shall have been executed by Buyer. 8.5 Key Employee Agreements. The Key Employee Agreements shall have been executed by Buyer. 8.6 Voting Agreement. The Voting Agreement (the "Voting Agreement") by and among the Selling Shareholders and each of the shareholders of Buyer set forth on Schedule 8.6 attached hereto (collectively, the "Buyer Voting Shareholders") shall have been executed by each of the Buyer Voting Shareholders. 8.7 Research Industries Incorporated Debt. Buyer shall have paid at least $1,200,000 of the $2,000,000 portion of Buyer's debt to Research Industries Incorporated ("RII") which is convertible into equity securities of Buyer. 8.8 Adverse Changes. There shall not have been any Material Adverse Change or material casualty loss affecting the Buyer or its business, assets or financial condition, between the date of this Agreement and the Closing Date, and there shall not have been any Material Adverse Change in the financial performance of the Buyer between the date of this Agreement and the Closing Date. 8.9 Tax-Free Reorganization. The aggregate value of all Buyer Common Shares to be delivered to the Selling Shareholders on the Closing Date hereunder (determined by (i) multiplying the closing sale price of Buyer Common Shares on the American Stock Exchange on the last completed trading day immediately preceding the time of Closing by (ii) the number of Buyer Common Shares to be delivered to Selling Shareholders pursuant to this Agreement, must equal or exceed the sum of the Cash Payment described in Section 2.6(a), the non-adjusted principal amount of the Notes described in Section 2.6(c), the maximum amount of the Deferred Merger Consideration that may be received as described in Section 2.9.1 and any other consideration paid or deemed paid to Selling Shareholders not consisting of Buyer Common Shares. This condition is intended to ensure that the continuity of interest requirements of Treasury Regulation Section 1.368-1(e) are satisfied and shall be interpreted and applied consistently therewith. 8.10 Closing Deliveries. The deliveries contemplated by Section 10.2 hereof shall have been made. Section 9: Conditions Precedent to Buyer's, Merger Sub's and Newco LLC's Closing Obligations Each obligation of Buyer, Merger Sub and Newco LLC to be performed on the Closing Date shall be subject to the satisfaction of each of the conditions stated in this Section 9 except to the extent that such satisfaction is waived by Buyer in writing. 9.1 The Company's and Selling Shareholders' Representations and Performance. The representations and warranties of the Company and the Selling Shareholders contained in this Agreement will be true and correct on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date (or, to the extent such representations and warranties speak as of an earlier date, they shall be true and correct as of such earlier date). Each of the Company and the Selling Shareholders will have performed and complied with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. 9.2 Absence of Proceedings. No Proceeding shall have been instituted (excluding any such Proceeding initiated by or on behalf of Buyer, Merger Sub or Newco LLC), no Judgment shall have been issued, and no new Law shall have been enacted, on or before the Closing Date, that seeks to or does prohibit or restrain, or that seeks damages as a result of, the consummation of the mergers or any of the other Transactions contemplated hereunder. 9.3 Adverse Changes. There shall not have been any material adverse change or material casualty loss affecting the Company or its business, Assets or financial condition, between the date of this Agreement and the Closing Date, and there shall not have been any material adverse change in the financial performance of the Company between the date of this Agreement and the Closing Date. 9.4 Approvals. All necessary approvals and/or filings (including Consents generally and the requisite approval of the Company's shareholders) for the transactions contemplated hereby to be obtained and/or made by the Company and the Selling Shareholders will have been obtained and/or made, as the case may be, and shall be in full force and effect. 9.5 Environmental Review. The delivery to Buyer of environmental database analyses or, if requested by Buyer, a Phase I environmental report with respect to the Company's Real Property (with applicable costs related to such phase I report to be borne 50% by Buyer, on the one hand, and 50% by the Selling Shareholders, on the other hand. 9.6 Obligations to Selling Shareholders. Any and all Obligations of the Company due to the Selling Shareholders shall have been paid off in full satisfaction of such Obligations on or prior to the Closing Date except for such Obligations accrued on the Closing Balance Sheet. 9.7 General Release. Each of the Selling Shareholders, including those Selling Shareholders who formerly held stock options issued by the Company, who are identified on Schedule 9.7 hereto, shall have executed and delivered to Buyer a general release of claims against the Company in the form attached hereto as Exhibit 9.7 (the "General Release"). 9.8 Intentionally Omitted. 9.9 Key Employee Agreements. Buyer and each person listed on Schedule 9.9, including without limitation, Gary Lukowski and Jonathan Scott (each, a "Key Employee" and collectively, the "Key Employees") shall have entered into the employment agreements in the form attached hereto as Exhibit 9.9 (the "Key Employee Employment Agreements"). 9.10 Cancellation of Securities. As contemplated by Sections 2.6.3 and 2.6.4 hereof, each option, warrant, call, subscription or right to acquire Company Common Stock or other securities of the Company shall have been cancelled and extinguished such that only Company Common Stock shall be issued and outstanding at the Closing. 9.11 Registration Rights and Right of First Offer Agreement. The Selling Shareholders and Buyer shall have entered into a Registration Rights and Right of Offer Agreement in the form attached hereto as Exhibit 9.11 (the "Registration Rights and Right of First Offer Agreement"). 9.12 Intentionally Omitted. 9.13 Purchaser Representative. All shareholders of the Company who are not "accredited investors", as defined in Rule 501(a) under the Securities Act of 1933, other than such shareholders who have such knowledge and experience in financial and business matters and are capable of evaluating the merits and risks of the investment in the Buyer Securities being issued hereunder, shall have secured the services of a Purchaser Representative reasonably satisfactory to Buyer. 9.14 Questionnaires. As early as practicable before Closing, (a) each shareholder of the Company (including holders of options of the Company) shall have completed an investor questionnaire in a form reasonably satisfactory to Buyer and delivered such questionnaire to Buyer, and (b) each Purchaser Representative of any unaccredited shareholder of the Company shall have completed the purchaser representative questionnaire in a form reasonably satisfactory to Buyer (the questionnaires to be completed by the shareholders and option holders referenced above as well as applicable purchaser representatives shall collectively be referred to herein as the "Questionnaires") and delivered such Questionnaire to Buyer. 9.15 Dissenters' Rights. There shall not have occurred the exercise of dissenters' rights by any shareholders of the Company on the Closing Date. 9.16 Closing Deliveries. The deliveries contemplated by Section 10.1 hereof shall have been made. Section 10: Closing Deliveries 10.1 Company's and Selling Stockholders' Obligations at Closing. At the Closing, the Company and/or Selling Shareholders shall deliver the following to Buyer: 10.1.1 Certificates representing all issued and outstanding shares of Company Common Stock. 10.1.2 All instruments or documents necessary to change the names of the individuals who have access to or are authorized to make withdrawals from or dispositions of all bank accounts, other accounts, certificates of deposits, marketable securities, other investments, safe deposit boxes, lock boxes and safes of the Company described on Schedule 4.4 and all keys and combinations to all safe deposit boxes, lock boxes and safes of the Company and other depositories described on Schedule 4.4. 10.1.3 Intentionally Deleted. 10.1.4 The First Merger Delaware Certificate of Merger and the First Merger Washington Articles of Merger, in form and substance acceptable to the parties duly executed by the Company. 10.1.5 The original (or facsimile) signed copies of all Consents listed on Schedule 4.2. 10.1.6 The Registration Rights and Right of First Offer Agreement duly executed by each of the Selling Shareholders. 10.1.7 All of the existing original minute books, stock and share books and similar records of the Company and duly executed resignations, dated the Closing Date, of all directors and officers of the Company other than as specified by Buyer. 10.1.8 Good standing certificates or certificates of existence or subsistence, as the case may be, of the Company, dated no earlier than ten (10) days before the Closing Date, from the applicable jurisdiction of formation or organization and from each other jurisdiction in which it is qualified or registered to do business as a foreign corporation. 10.1.9 A certificate of Secretary of the Company as to the incumbency and signatures of the officers of the Company executing this Agreement. 10.1.10 Copies of the resolutions duly adopted by the board of directors and shareholders of the Company authorizing the Company to execute, deliver and perform this Agreement and the other agreements and documents contemplated hereby and to consummate the Transactions contemplated hereby and thereby, certified by an officer of the Company as in full force and effect, without modification or rescission, on and as of the Closing Date. 10.1.11 The General Release duly executed by each of the Selling Shareholders who are identified on Schedule 9.7 attached hereto. 10.1.12 Intentionally Deleted. 10.1.13 Receipts acknowledging payment to the Selling Shareholders of the Closing Date Merger Consideration. 10.1.14 The Key Employee Agreements duly executed by each Key Employee. 10.1.15 Payoff statements or termination statements and any other termination documents terminating all Encumbrances and claims in and to the Assets and the Real Property leased by the Company and the shares of capital stock of the Company, including liens recorded by each of Dell Computers and Silicon Valley Bank, except those Encumbrances which Buyer agrees in writing to assume. 10.1.16 All other agreements, certificates, instruments, financial statement certifications and documents reasonably requested by Buyer in order to fully consummate the Transactions and carry out the purposes and intent of this Agreement. 10.2 Buyer's, Merger Sub's and Newco LLC's Obligations at Closing. At the Closing, Buyer, Merger Sub and Newco, LLC shall deliver the following to the Selling Shareholders: 10.2.1 Certificates representing the Buyer Common Shares issued to the Selling Shareholders as contemplated by the Merger Consideration Schedule. 10.2.2 The Notes duly executed by Buyer, in amounts set forth on the Merger Consideration Schedule. 10.2.3 With respect to the Cash Payment, checks delivered to each Selling Shareholder in an amount consistent with each such Selling Shareholder's Ownership Interest. 10.2.4 If required to be executed by Merger Sub in accordance with applicable Law, the First Merger Delaware Certificate of Merger and the First Merger Washington Articles of Merger, in form and substance acceptable to the parties duly executed by Merger Sub. 10.2.5 The Second Merger Delaware Certificate of Merger and the Second Merger Washington Articles of Merger, in form and substance acceptable to the parties, dated the Closing Date and duly executed by Newco LLC and, if required by applicable Law, the First Merger Surviving Corporation. 10.2.6 The Registration Rights and Right of First Offer Agreement duly executed by Buyer. 10.2.7 The Voting Agreement duly executed by the Buyer Voting Shareholders. 10.2.8 The Key Employee Agreements duly executed by Buyer. 10.2.9 Intentionally Deleted. 10.2.10 Good standing certificates or certificates of existence or subsistence, as the case may be, for each of Buyer, Merger Sub and Newco LLC, dated no earlier than ten (10) days before the Closing Date, from the Commonwealth of Virginia and State of Delaware, as the case may be. 10.2.11 Copies of the resolutions duly adopted by the board of directors of Buyer and by the board of directors and/or managers, as the case may be, and the sole stockholder or member of each of Merger Sub and Newco LLC, authorizing Buyer, Merger Sub and Newco LLC, respectively, to execute, deliver and perform this Agreement and to consummate the Transactions, certified by an officer of Buyer, Merger and Newco LLC, respectively, as in full force and effect, without modification or rescission, on and as of the Closing Date. 10.2.12 A certificate of an appropriate officer of each of Buyer, Merger Sub and Newco LLC as to the incumbency and signatures of the officers of Buyer, Merger Sub and Newco executing this Agreement. 10.2.13 All other agreements, certificates, instruments, opinions of counsel and documents reasonably requested by the Company and/or Selling Shareholders in order to fully consummate the Transactions and carry out the purposes and intent of this Agreement. Section 11: Certain Rights and Obligations of Buyer and the Selling Shareholders after Closing 11.1 Restrictions on Dispositions of Buyer Shares. From and after the Closing Date, none of the Selling Shareholders shall sell, assign, give, pledge or otherwise transfer, dispose of or reduce his or its risk relating to any of his or its Buyer Common Shares until the twelve month anniversary of the Closing Date has expired and, thereafter, only in compliance with applicable federal and state securities Laws. 11.2 Cooperation with Buyer and the Second Merger Survivor. From and after the Closing Date, (a) each of the Selling Shareholders shall fully cooperate to transfer to Buyer and the Second Merger Survivor the full control of the Business and Assets of the Company, (b) none of the Selling Shareholders shall take any action, directly or indirectly, alone or together with others, which obstructs or impairs the assumption by Buyer and the Second Merger Survivor of control of the Business and Assets of the Company; and (c) the Selling Shareholders shall promptly deliver to Buyer and the Second Merger Survivor all correspondence, papers, documents and other items and materials received by them or found to be in their possession which pertain to the Business or the Assets of the Company and (d) the Selling Shareholders shall use their reasonable best efforts to cooperate with Buyer and the Second Merger Survivor in connection with the preparation and audit of any financial statements of the Company, including, without limitation, where appropriate, the signing of such reasonable accurate management representation letters as are required in connection with such audit. Provided, however, that the foregoing will in no way affect the rights of each Selling Shareholder to dispute the calculations of Buyer's Accountant pursuant to Section 2.8.3 and Section 2.9.3. At any time and from time to time after the Closing Date, at Buyer's request and without further consideration, each of the Selling Shareholders shall promptly execute and deliver all such further agreements, certificates, instruments and documents and perform such further actions as Buyer may reasonably request, in order to fully consummate the mergers and the other Transactions contemplated hereunder and to fully carry out the purposes and intent of this Agreement, including, but not limited to, such documents and actions as may be required in connection with the continuation or termination of the employee benefit plans of the Company, the adoption by the Second Merger Survivor of Buyer's employee benefit plans, and the filing of tax returns of the Company for all periods ending on, before or including the Closing Date. 11.3 Member of Buyer's Board of Directors. From and after the Closing Date until such time as the Selling Shareholders fail to own collectively greater than 50% of the aggregate number of shares of Buyer Common Stock issued on the Closing Date (as appropriately adjusted for any combination, division or similar recapitalization affecting such Buyer Common Shares), the Selling Shareholders shall have the right to nominate one member to Buyer's board of directors. Buyer shall recommend, consistent with the fiduciary duties of its Board of Directors, such nominee to its shareholders and undertake its best efforts to secure the election of such nominee. Gerald Ryles shall be the initial nominee of the Selling Shareholders and such nominee will be appointed to the Company's board of directors at the next scheduled meeting of such board of directors expected to be held in October, 2003. 11.4 Payment of RII. Buyer shall (i) pay off at least $400,000 of the $2,000,000 debt referenced in Section 8.7 hereof within thirty (30) days of receipt by Buyer of certain additional funds to be received in the form of advance payment from a certain large customer of Buyer (such date which shall be thirty (30) days after receipt of such advance payment to be referred to herein as the "Post Closing RII Payment Date") and (ii) use its reasonable best efforts to pay off the remaining $400,000 of such debt within thirty (30) days after the Post Closing RII Payment Date, subject to appropriate cash needs of Buyer. Section 12: Certain Obligations of the Selling Shareholders, Buyer and/or Newco LLC After Closing 12.1 Taxes. 12.1.1 Tax Periods Through the Closing Date. Except as provided in Section 12.2, the Selling Shareholders shall prepare or cause to be prepared all Tax Returns required by applicable Law with respect to the Company for taxable periods ending on or before the Closing Date which are filed after the Closing Date ("Short-Period Returns") and shall provide the Short-Period Returns to Buyer at least thirty (30) days before the due date therefor, as extended by any proper extension, which Buyer shall timely file or cause to be filed at the Selling Shareholders' request. With respect to Short-Period Returns for Income Taxes, the Selling Shareholders shall include any income, gain, loss, deduction or other Tax items for such period on their own Tax Returns in a manner consistent with the Schedule K-1s for the Short Period Returns. With respect to Short-Period Returns for other Taxes, the Selling Shareholders shall timely pay the Taxes due as shown on the Short Period Returns that are not accrued on the Closing Balance Sheet. The Company (or Second Merger Survivor, if applicable) shall timely pay all Taxes due as shown on the Short Period Returns that are accrued on the Closing Balance Sheet. Buyer shall review the Short-Period Returns but shall not change their content without the Selling Shareholders' consent (which consent shall not be unreasonably withheld). 12.1.2 Tax Periods Straddling the Closing Date. Except as provided in Section 12.2, with respect to each jurisdiction in which one Tax Return ("Full Year Return") for a period beginning before the Closing Date and ending after the Closing Date ("Full Year Period") will be required, the Selling Shareholders shall prepare or cause to be prepared a Tax Return for the Company for the short period starting at the beginning of the Full Year Period and ending on and including the Closing Date, on a pro forma basis as if a Short-Period Return for such period were required ("Pro Forma Return") and as if there were a closing of the Company's books as of the end of the Closing Date, and the Selling Shareholders shall provide such Pro Forma Return to Buyer at least thirty (30) days before the due date for the corresponding Full Year Return. Pro Forma Returns shall be prepared on the same basis as Short-Period Returns under Section 12.1.1. Pro Forma Returns shall not be filed, but the Selling Shareholders shall timely pay to Buyer an amount equal to Company Taxes due as shown thereon that are not accrued on the Closing Balance Sheet. The Company (or Second Merger Survivor, if applicable) shall timely pay such amount of Taxes shown on the Pro Forma Returns that are accrued on the Closing Balance Sheet. Buyer shall prepare or cause to be prepared the Full Year Returns for the Company and the Second Merger Survivor (or Buyer, if applicable), and shall timely and properly file or cause to be filed the Full Year Returns and pay or cause to be paid the amount of Taxes due shown thereon. 12.1.3 Tax Periods After the Closing Date. Buyer shall timely prepare and file or cause to be timely prepared and filed all Tax Returns for the Buyer and Second Merger Survivor required to be filed for taxable periods beginning after the Closing Date. Buyer shall, subject to Section 12.2 hereof, timely pay or cause to be paid the amount of Taxes due shown on such Tax Returns. 12.2 Transfer Taxes. The Selling Shareholders agree to pay all Transfer Taxes imposed by Law on Selling Shareholders, Merger Sub and Newco LLC solely by reason of the Closing of the First Merger and the Second Merger. Buyer and Second Merger Survivor agree to pay all Transfer Taxes imposed by Law on Buyer or Second Merger Survivor solely by reason of the Closing of the First Merger and the Second Merger. Tax Returns in respect of Transfer Taxes shall be prepared and filed by the party responsible thereof under applicable Law provided that such party shall provide a draft of each such Return to the other parties within a reasonable amount of time prior to the due date thereof and shall make any changes to such draft return as may be reasonably requested by the other parties. 12.3 Reportable Transactions. The Company agrees to retain all documents and other records for the appropriate period of time as set forth in Treasury Regulation Section 1.6011-4(g) which relate to any Reportable Transaction in which the Company has participated. 12.4 Audits. The Selling Shareholders shall have sole control over all audits and other proceedings (at their own expense) that relate to Taxes of the Company or the Selling Shareholders for any period that ends on or before the Closing Date; provided, that (i) the Selling Shareholders shall consult with Buyer regarding any such audit and Buyer shall have the right to review any adjustments related to the same before they are made, (ii) Buyer and counsel of its own choosing shall have the right to participate in, but not direct, the prosecution or defense of such proceedings at Buyer' s sole expense, and (iii) with respect to any proceeding that would reasonably be expected to adversely affect the Company or Buyer, the Selling Shareholders shall consult with Buyer prior to the settlement of any such proceedings and shall obtain the prior written consent of Buyer prior to the settlement of any such proceedings, which consent shall not be unreasonably withheld. Buyer shall have sole control over all audits and other proceedings that relate to Taxes of the Second Merger Survivor or Buyer for any period that begins after the Closing Date; provided, that with respect to any audit or other proceeding that would reasonably be expected to adversely affect Selling Shareholders in any taxable period ending on or before the Closing Date (i) Buyer shall consult with Selling Shareholders regarding any such audit and the Selling Shareholders shall have the right to review any adjustments related to the same before they are made, (ii) Selling Shareholders and counsel of their own choosing shall have the right to participate in, but not direct, the prosecution or defense of such proceedings at Selling Shareholders' sole expense, and (iii) Buyer shall consult with Selling Shareholders prior to the settlement of any such proceedings, and shall obtain the prior written consent of the Selling Shareholders prior to the settlement of any such proceedings, which consent shall not be unreasonably withheld. The Selling Shareholders and Buyer shall cooperate as to any audits or other proceedings that relate to Taxes of the Company and Second Merger Survivor (or Buyer, if applicable) for any period that straddles the Closing Date. Buyer and each of the Selling Shareholders shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this Section 12 and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding. 12.5 Amendment of Tax Returns. Selling Shareholders may file or amend all Tax Returns that relate to Taxes of the Company or the Selling Shareholders for any period that ends on or before the Closing Date, provided that any amended Tax Return of the Company or claim for Tax refund on behalf of the Company for any period for which the Selling Shareholders are responsible under Sections 12.1 and 12.2 hereof shall not be filed without the prior written consent of Buyer (which consent shall not be unreasonably withheld or delayed) to the extent such filing, if accepted, reasonably might change the Tax liability of the Company or Buyer for any period ending on or after the Closing Date. Any other amended Tax Return of the Company or claim for Tax refund on behalf of the Company shall be filed, or caused to be filed, only by Buyer. 12.6 Fees and Expenses. The Company shall pay prior to Closing, or shall accrue on the Closing Balance Sheet, all fees and expenses (not including fees and expenses incurred by Buyer) associated with preparing Income Tax Returns of the Company for periods ending on or before the Closing Date. The Second Merger Survivor shall pay all such fees and expenses accrued on the Closing Balance Sheet but not paid by the Company. The Buyer shall pay all fees and expenses associated with preparing Tax Returns of the Company and Second Merger Survivor for periods ending after the Closing Date, Short-Period Returns of the Company that do not relate to Income Taxes, and the Full Year Returns. 12.7 Employment Matters. During the one year period commencing at the Second Merger Effective Time, Buyer shall provide or cause the Second Merger Survivor to provide employees of the Company who continue to be employed after the Merger benefits that are in the aggregate, substantially comparable to the benefits being provided to such employees as of the date of this Agreement. 12.8 Disposition of Company Employee Benefit Plans. As soon as is practicable after the Second Merger Effective Time, Buyer shall review the Company Employee Benefit Plans to determine which such plans should remain in effect as plans of the Second Merger Survivor and which should be replaced with Buyer's Employee Benefit Plans, with a view toward replacing all of the Company Employee Benefit Plans with Buyer's Employee Benefit Plans except where cost factors or unusual circumstances dictate otherwise. If such termination of the Company Employee Benefit Plans causes any timing gap in comparable Buyer coverage, then the Company's relevant benefit plan will be continued until such timing gap does not exist. 12.9 Tax-Free Reorganization. 12.9.1 Buyer and the Company shall each use its best efforts to cause the Transactions to be treated as a reorganization within the meaning of Section 368(a) of the Code, subject to the rights and obligations of the parties specified in Section 13.5 hereof and Section 7 of the Registration Rights and Right of First Offer Agreement. 12.9.2 The Company, Buyer, Merger Sub and Newco LLC shall each report the Transactions as a reorganization within the meaning of Section 368(a) of the Code in all federal, state, and local Tax Returns. 12.9.3 Buyer intends for Newco LLC to continue a significant historic business line of the Company or to use a significant portion of the Company's historic business assets in a business after the Transactions, in each case within the meaning of Treasury Regulation Section 1.368-1(d). 12.9.4 Buyer will own 100% of the equity of Newco LLC after the Transactions and has no plan or intention to cause Newco LLC to take any action that would result in Buyer owning less than 100% of the equity of Newco LLC. 12.9.5 Following the Transactions, Buyer has no plan or intention to merge Newco LLC with or into another corporation (other than Buyer), sell or dispose of any Newco LLC equity, or cause Newco LLC to sell or dispose of any of its assets or the assets acquired from the Company and Merger Sub, except for dispositions in the ordinary course of business. 12.9.6 Buyer, Merger Sub, Newco LLC, the Company and the Selling Shareholders will pay their respective expenses, if any, incurred in connection with the Transactions. 12.9.7 No indebtedness between Buyer and the Company, between Merger Sub and the Company or between Newco LLC and the Company was issued, acquired or will be settled at a discount. Section 13: Indemnification 13.1 The Company's and Selling Shareholders' Indemnification. Subject to the conditions and limitations expressed in this Section 13, the Selling Shareholders and the Company (prior to the First Merger Effective Time) and the Selling Shareholders (after the First Merger Effective Time), with such indemnifying parties being collectively referred to for purposes of this Section 13 as the "Microserv Group"), severally (but subject to the limitations set forth in Section 13.4.2 hereof) shall indemnify, defend and hold harmless Buyer, Merger Sub, Newco LLC and the Company (post closing), their respective officers, directors, employees, agents, representatives and their successors and assigns (each a "Buyer Indemnified Party" or, collectively, "Buyer Indemnified Parties") from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including reasonable attorney's fees and court costs ("Loss", or "Losses"), arising out of or caused by, directly or indirectly, any of the following: 13.1.1 Any breach of any warranty or representation made by the Microserv Group in or pursuant to this Agreement. 13.1.2 Any failure or refusal by any of the Microserv Group to satisfy or perform any covenant in this Agreement or any agreement or document contemplated hereby required to be satisfied or performed by any or all of them. 13.1.3 Any deficiency, adjustment or assessment for Taxes made against or imposed upon the Company (or any of its predecessors or successors) with respect to any period ending on or before the Closing Date that is not accrued on the Closing Balance Sheet. The right of the Buyer Indemnified Parties to indemnification under this Section 13.1.3 shall not be affected by the fact that such deficiency, adjustment or assessment is made against or imposed upon the Buyer Indemnified Parties as a result of the fact that, after the Closing Date, the Company/Second Merger Survivor shall be included in the consolidated federal income tax returns filed by Buyer. 13.2 Indemnification by Buyer. Subject to the conditions and limitations expressed in this Section 13, Buyer shall indemnify, defend and hold harmless the Selling Shareholders and the Company (but the indemnification obligation benefiting the Company under this Section 13.2 shall expire upon the occurrence of the Closing) and their respective officers, managers, employees, agents, representatives and successors and assigns (each a "Microserv Indemnified Party" or, collectively, the "Microserv Indemnified Parties"), from and against any and all Losses, arising out of or caused by, directly or indirectly, any or all of the following: 13.2.1 Any breach of any warranty or representation made by Buyer, Merger Sub or Newco LLC in or pursuant to this Agreement. 13.2.2 Any failure or refusal by Buyer, Merger Sub or Newco LLC to satisfy or perform any covenant in this Agreement or any agreement to be executed and delivered pursuant to this Agreement that is required to be satisfied or performed by them. 13.3 Indemnification Procedures. With respect to each event, occurrence or matter (an "Indemnification Matter") as to which any member of the Buyer Indemnified Parties or the Microserv Indemnified Parties, as the case may be (the "Indemnitee") is entitled to indemnification from Buyer or the Microserv Group, as the case may be (the "Indemnitor") under Section 13.1 or 13.2: 13.3.1 Within ten (10) days after the Indemnitee receives written documents underlying the Indemnification Matter or, if the Indemnification Matter does not involve a third party action, suit, claim or demand, promptly after the Indemnitee first has actual knowledge of the Indemnification Matter, the Indemnitee shall give notice to the Indemnitor ("Indemnification Notice") of the nature of the Indemnification Matter and the amount demanded or claimed in connection therewith, together with copies of any such written documents; provided, however, that failure to timely provide such notice shall not be a defense to the underlying indemnity claim except to the extent that delay in providing such notice has damaged the Indemnitor. 13.3.2 If a third party action, suit, claim or demand is involved, then, upon receipt of the Indemnification Notice, the Indemnitor shall, at its expense and through counsel of its choice, promptly assume and have sole control over the litigation, defense or settlement (the "Defense") of the Indemnification Matter, except that (i) the Indemnitee may, at its option and expense and through counsel of its choice, participate in (but not control) the Defense; (ii) if the Indemnitee reasonably believes that the handling of the Defense by the Indemnitor may have a material adverse effect on the Indemnitee, its business or financial condition, or its relationship with any customer, prospect, supplier, employee, salesman, consultant, agent or representative, then the Indemnitee may, at its option and expense and through counsel of its choice, assume control of the Defense, provided that the Indemnitor shall be entitled to participate in the Defense at its expense and through counsel of its choice; (iii) the Indemnitor shall not consent to any Judgment, or agree to any settlement, without the Indemnitee's prior written consent (which consent shall not be unreasonably withheld) unless the result of such settlement is the complete and final release of Indemnitee with respect to the matter in dispute; and (iv) if the Indemnitor does not promptly assume control over the Defense or, after doing so, does not continue to prosecute the Defense in good faith, the Indemnitee may, at its option and through counsel of its choice, but at the Indemnitor's expense, assume control over the Defense. In any event, the Indemnitor and the Indemnitee shall fully cooperate with each other in connection with the Defense, including by furnishing all available documentary or other evidence as is reasonably requested by the other. 13.3.3 All amounts owed by the Indemnitor to the Indemnitee (if any) shall be paid in full within ten (10) business days after a final Judgment (without further right of appeal) determining the amount owed is rendered, or after a final settlement or agreement as to the amount owed is executed (the "Indemnification Amount"). If the Indemnification Amount owed by the Indemnitor to the Indemnitee is not paid when due, interest shall accrue on such amount at the rate of ten percent (10%) per annum compounded until paid in full. 13.4 Limits on Indemnification. Indemnitor's liability under this Section 13 shall be limited as follows: 13.4.1 Except with respect to Carve-Outs (as defined below), the Buyer Indemnified Parties, on the one hand, and the Microserv Indemnified Parties, on the other hand, shall not be entitled to be indemnified for Losses under this Section 13 unless the aggregate of such Losses arising hereunder for which indemnification liability would, but for this proviso, exist equals or exceeds $70,000; provided, however, that at such time as the aggregate of such Losses equals or exceeds $70,000, the Buyer Indemnified Parties or Microserv Indemnified Parties, as the case may be, shall be entitled to be indemnified against the full amount of such Losses that have been incurred or suffered by such parties (and not merely the portion in excess of $70,000). For purposes of this Agreement, a "Carve-Out shall mean (i) an Indemnification Matter (where a Buyer Indemnified Party is the Indemnitee) involving (a) intentional misrepresentation or fraud, (b) failure of the Selling Shareholders to deliver to Buyer at Closing shares of Company Common Stock representing 100% of the issued and outstanding capital stock of the Company (exclusive of claims related to title which are addressed in Section 13.4.2(b) hereof), or (c) Taxes, and (ii) an Indemnification Matter (where a member of the Microserv Group is an Indemnitee) involving intentional misrepresentation or fraud. 13.4.2 (a) Subject to Section 13.4.2(b), each Selling Shareholder shall be responsible for a portion of each indemnification claim made by a Buyer Indemnified Party equal to his or its Ownership Interest multiplied by the dollar amount of the applicable claim. (b) Notwithstanding anything contained in this Section 13 to the contrary, with respect to a claim that certain shares of Company Common Stock were delivered to Buyer without good and marketable title, free and clear of any Encumbrance, the applicable Selling Shareholder(s) whose shares of Company Common Stock are the subject of the claim shall be solely liable as an indemnitor and no other Selling Shareholder shall have any obligation as an indemnitor in respect thereof. 13.4.3 The amount of indemnification to be paid by an Indemnitor shall be reduced by the receipt by the Indemnitee, with respect to any Losses for which indemnification is sought, of (i) any tax benefit and (ii) any insurance proceeds received in respect of such Losses. 13.5 Setoff. 13.5.1 Buyer's rights to indemnification pursuant to this Section 13 shall be satisfied solely by (i) first, its right to setoff any sums for which a Buyer Indemnified Party is entitled to indemnification under this Section 13 against (a) first, up to $400,000 due under the Notes, and (b) next, payments of Deferred Merger Consideration contemplated by Section 2.9 hereof, and (ii) second, in connection with claims made by a Buyer Indemnified Party for which an Indemnification Notice is delivered on or before the first annual anniversary of the Closing Date and to the extent the setoff right contemplated by Section (i) above is not sufficient to satisfy one or more claims, the delivery by the Selling Shareholders to Buyer of a number of Closing Shares equal to the dollar value of the unsatisfied claim(s) or portion thereof divided by the Indemnification Price (it being the agreement of the parties that each Selling Shareholder deliver Closing Shares on a pro-rata basis with the other Selling Shareholders in accordance with his or its Ownership Interest); provided, however, that the aggregate number of Buyer Common Shares that may be delivered to Buyer pursuant to this Section (ii) in connection with Indemnification Matters other than Carve-Outs shall be 221,039 (as appropriately adjusted for any combination, division or similar recapitalization occurring after the date hereof and affecting such Buyer Common Stock). 13.5.2 If any Indemnification Matters for which a Buyer Indemnified Party is the Indemnitee are pending at a time when Buyer is required to pay or deliver any such amounts due under the Notes and/or Deferred Merger Consideration to the Indemnitor, then Buyer shall have the right, upon notice to the Indemnitor, to withhold from such payment or delivery, until final determination of such pending Indemnification Matters, the total amount for which the Indemnitor may become liable as a result thereof, as determined by Buyer reasonably and in good faith. 13.5.3 The twelve (12) month prohibition on transfer of the Closing Shares as contained in the Registration Rights and Right of First Offer Agreement is incorporated herein by reference and shall be deemed extended hereunder if any Indemnification Matters for which a Buyer Indemnified Party is the Indemnittee are pending at the end of such twelve month period until final determination of such pending Indemnification Matters, and if applicable, satisfaction thereof; provided, however, that the extension of the prohibition on transfer shall only apply to that number of Closing Shares which the Indemnitor may become liable to deliver as a result of such Indemnification Matters, as determined by Buyer reasonably and in good faith. Any transfer, sale, assignment, pledge, encumbrance or other disposition of Closing Shares in violation of the restriction contemplated in this Section 13.5.3 or in the Registration Rights and Right of First Offer Agreement shall be null and void. 13.5.4 If it is necessary for the Selling Shareholders to deliver Closing Shares to Buyer pursuant to Section 13.5.1, each Selling Shareholder shall, within ten days of receiving the applicable Indemnification Notice, return to Buyer any certificate(s) representing such Closing Shares for cancellation and Buyer, in exchange, will issue or cause to be issued to each Selling Shareholder a new certificate reflecting the appropriate number of Closing Shares held by each such Selling Shareholder after the reduction contemplated in Section 13.5.1 herein. If a Selling Shareholder does not deliver to Buyer its certificate(s) as contemplated in the preceding sentence, (i) such certificate(s) shall immediately be deemed cancelled and Buyer shall mark its records to indicate that such certificate(s) have been cancelled and (ii) Buyer shall issue a new certificate to such Selling Shareholder in accordance with the previous sentence. Each Selling Shareholder hereby gives the Secretary of Buyer an irrevocable power of attorney to make such cancellations on Buyer's books on behalf of each such Selling Shareholder in accordance with the foregoing. 13.6 Time Limitations. No claim for indemnity under this Section 13 shall be valid if not made before the expiration of eighteen months from the Closing Date; provided, however, that claims with respect to Carve Outs may be made until the relevant statute of limitations has expired, or would have expired but for an action or omission of the party entitled to such indemnity that has tolled or otherwise extended such statute of limitations. 13.7 Exclusive Remedy. Except with respect to disputes concerning the Merger Consideration Adjustment and Deferred Merger Consideration contemplated by Sections 2.8 and 2.9 hereof, from and after the Closing Date, the provisions and limitations of this Section 13 shall provide the exclusive remedy with respect any claim arising out of or relating in any way to this Agreement, and no such claim shall be brought other than pursuant to this Section 13; provided, however, that each party shall retain the right to pursue claims for specific performance, injunctive or other equitable relief for any breach of any obligation required to be performed hereunder. 13.8 Merger Consideration Adjustment. The parties agree to treat any payment made under this Section 13 as an adjustment to the Merger Consideration pursuant to Section 2.6. Section 14: Termination 14.1 Right to Terminate. Notwithstanding anything to the contrary set forth in this Agreement, this Agreement may be terminated and the Transactions abandoned at any time prior to the Closing: 14.1.1 by mutual consent of Buyer, Merger Sub and Newco LLC, on the one hand, and the Selling Shareholders and the Company, on the other; 14.1.2 by Buyer, Merger Sub and Newco LLC, on the one hand, or the Selling Shareholders and the Company, on the other hand, if the Closing shall not have occurred by August 29, 2003, provided, however, that the right to terminate this Agreement under this Section 14.1.2 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 Closing to occur on or before such date; 14.1.3 by Buyer, Merger Sub and Newco LLC, on the one hand, or the Selling Shareholders and the Company, on the other hand, if a court of competent jurisdiction shall have issued an order, decree or ruling permanently restraining, enjoining or otherwise prohibiting the Transactions, and such order, decree, ruling or other action shall have become final and nonappealable; 14.1.4 by the Selling Shareholders and the Company if Buyer and/or Merger Sub and/or Newco LLC (x) breach their material representations and warranties in any material respect, or (y) fail to comply in any material respect with any of their material covenants or agreements contained herein; or 14.1.5 by Buyer, Merger Sub and Newco LLC if the Selling Shareholders and/or the Company (x) breach their material representations and warranties in any material respect, or (y) fail to comply in any material respect with any of their material covenants or agreements contained herein. 14.2 Obligations to Cease. Subject to the next succeeding sentence, in the event that this Agreement shall be terminated pursuant to Section 14.1 hereof, all obligations of the parties hereto under this Agreement shall terminate and there shall be no liability of any party hereto to any other party except for (i) the obligations with respect to publicity contained in Section 15.1 hereof and (ii) the obligations with respect to costs contained in Section 15.2 hereof, provided, however, that in the event of a termination of this Agreement by reason of either Section 14.1.4 or 14.1.5 hereof, the non-terminating party(ies) shall reimburse the terminating party(ies) for its (their) reasonable out-of-pocket expenses (which shall include legal and accounting fees, etc.), incurred relative to this Agreement and the Transactions. Section 15: Other Provisions 15.1 Publicity. At all times before the Closing Date, without the prior written consent (which consent shall not be unreasonably withheld) of the other parties hereto, none of the parties hereto shall issue any announcement, press release, public statement or other information to the press or any third party with respect to this Agreement or the transactions contemplated hereby; provided, however, that nothing contained herein shall prevent any party hereto, at any time, from furnishing any required information to any Government Body or from issuing any announcement, press release, public statement or other information to the press or any third party with respect to the Agreement or the transaction contemplated hereby if required by Law or any stock exchange or inter-dealer quotation system on which the securities of a party are traded. If a party is required by Law or stock exchange requirements to make any such disclosure, it must first provide to the other party the content of the proposed disclosure, with a reasonable opportunity to comment thereon, the reasons that such disclosure is required by law, and the time and place that the disclosure will be made. Notwithstanding anything to the contrary in this Agreement or any other agreement relating to the transaction described in this Agreement, the parties hereto shall be permitted to disclose the U.S. federal income tax treatment and tax structure of the transaction described in this Agreement (including any materials, opinions or analyses relating to such tax treatment or tax structure, but without disclosure of information if disclosure of such information is subject to restrictions reasonably necessary to comply with securities laws) on and after the date of the earlier of the date of the public announcement of discussions relating to the Transactions, the date of the public announcement of the Transactions, or the date of the execution of this Agreement. Moreover, notwithstanding any other provision of this agreement, there shall be no limitation on either party's ability to consult any tax advisor, whether or not independent from the parties, regarding the U.S. federal income tax treatment or tax structure of the transaction described in this Agreement. 15.2 Fees and Expenses. Except with respect to indemnification claims which shall be governed by Section 13, Buyer, Merger Sub and Newco LLC shall pay all of the fees and expenses incurred by them, and the Selling Shareholders and the Company (pre-closing) shall pay all of the fees and expenses incurred by the them, in negotiating and preparing this Agreement (and all other Contracts and documents executed in connection herewith or therewith) and in consummating the transactions contemplated hereby; provided, however, that Buyer shall pay the expense of any financial statement audit related to the transactions contemplated hereby (other than audits of taxes contemplated by Section 12.4 hereof), which shall be paid as provided therein. 15.3 Notices. Any notices, requests, demands or other communications required or permitted to be sent hereunder shall be delivered personally or by facsimile, sent by overnight or international courier or mailed by registered or certified mail, return receipt requested, to the following addresses, and shall be deemed to have been received on the day of personal delivery or delivery by facsimile, one business day after deposit with an overnight domestic courier or three business days after deposit in the mail: If to Buyer, Merger Sub or Newco LLC : c/o Halifax Corporation 5250 Cherokee Avenue Alexandria, Virginia 22312 Attn: Joseph Sciacca, Chief Financial Officer Telefax: (703) 658-2426 With a copy to: Blank Rome LLP One Logan Square Philadelphia, PA 19103 Attn: Barry H. Genkin, Esq. Telefax: (215) 832-5514 If to Company or any Selling Shareholder: To each Selling Shareholder at his or its address set forth on the signature page hereof and to the Company at: Microserv, Inc. 11321 NE 120th St. Kirkland, WA 98034 Attn: Chief Executive Officer Telefax: (425) 820-5665 With a copy to: Stoel Rives LLP 600 University Street, Suite 3600 Seattle, Washington 98101 Attn: L. John Stevenson, Jr., Esq. Telefax: (206) 386-7500 15.4 Reliance; Interpretation of Representations. Notwithstanding any right of Buyer to fully investigate the affairs of the Company (and vice versa) and notwithstanding any knowledge of facts determined or determinable by Buyer pursuant to such investigation or right of investigation (and vice versa), Buyer, Merger Sub and Newco LLC, on the one hand, and the Company and the Selling Shareholders, on the other hand, have the right to rely fully upon the representations, warranties, covenants and agreements contained in this Agreement or in any document delivered to them or any representatives in connection with the transactions contemplated by this Agreement. Each warranty, representation and covenant contained in this Agreement is independent of all other warranties, representations and covenants contained herein (whether or not covering identical or related subject matter) and must be independently and separately complied with and satisfied. 15.5 Entire Understanding. This Agreement, together with the Exhibits and Schedules hereto, state the entire understanding among the parties with respect to the subject matter hereof, and supersede all prior oral and written communications and agreements, and all contemporaneous oral communications and agreements, with respect to the subject matter hereof, including all confidentiality letter agreements and letters of intent (including but not limited to that certain Letter of Intent dated July 21, 2003) previously entered into among some or all of the parties hereto. No amendment or modification of this Agreement shall be effective unless in writing and signed by the party against whom enforcement is sought. 15.6 Parties in Interest; Assignment. This Agreement shall bind, benefit, and be enforceable by and against the Company, Buyer, Merger Sub, Newco LLC and their respective successors and assigns, and the Selling Shareholders and their respective heirs, estates and personal representatives. No party shall in any manner assign any of its or his rights or obligations under this Agreement without the express prior written consent of the other parties. 15.7 Waivers. Except as otherwise expressly provided herein, no waiver with respect to this Agreement shall be enforceable unless in writing and signed by the party against whom enforcement is sought. Except as otherwise expressly provided herein, no failure to exercise, delay in exercising, or single or partial exercise of any right, power or remedy by any party, and no course of dealing between or among any of the parties, shall constitute a waiver of, or shall preclude any other or further exercise of, any right, power or remedy. 15.8 Severability. If any provision of this Agreement is construed to be invalid, illegal or unenforceable, then the remaining provisions hereof shall not be affected thereby and shall be enforceable without regard thereto. 15.9 Counterparts; Facsimile. This Agreement may be executed in any number of counterparts, including by facsimile, each of which when so executed and delivered shall be an original hereof, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. 15.10 Section Headings. Section and subsection headings in this Agreement are for convenience of reference only, do not constitute a part of this Agreement, and shall not affect its interpretation. 15.11 References. All words used in this Agreement shall be construed to be of such number and gender as the context requires or permits. 15.12 Controlling Law. THIS AGREEMENT IS MADE UNDER, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. 15.13 Arbitration; Jurisdiction and Process. 15.13.1 The parties shall use their best efforts to amicably resolve any disputes, controversies or misunderstandings concerning the terms and provisions contained in this Agreement prior to seeking arbitration pursuant to this Section 15.13. Should the parties be unable to amicably resolve disputes, controversies and misunderstandings concerning this Agreement, other than claims for equitable remedies and except as otherwise provided herein (including disputes concerning the purchase price adjustment and Deferred Merger Consideration contemplated by Sections 2.8 and 2.9 hereof, respectively), all claims, demands, disputes, controversies, differences or misunderstandings between the parties arising out of, or by virtue of, this Agreement shall be submitted to and determined by arbitration in accordance with this Section 15.13. With respect to any matter being arbitrated hereunder, an arbitrator shall be mutually agreed upon by Buyer and Seller. If Buyer and Seller are unable to agree upon such arbitrator, such arbitrator shall be selected by the Independent Accountants. The matter shall be arbitrated in Chicago, Illinois, in accordance with the rules of the American Arbitration Association applying the laws of Delaware. At any time before a decision of the arbitrator has been rendered, the parties may resolve the dispute by settlement. If the arbitrator resolves all disputes presented to it in the manner proposed by one of the parties, the fees and expenses of the arbitrator shall be paid for by the other party. In all other events, the fees and expenses of the arbitrator relating to the dispute shall be shared in the same proportion that a given party's position, on the one hand, and the other disputing party's position, on the other hand, initially presented to the arbitrator bears to the arbitrator's award. The decision of the arbitrator shall (a) be binding and conclusive on all parties and (b) not be appealable and shall include a finding for payment of the costs of such arbitration. Judgment of a court of competent jurisdiction may be entered upon the award and may be enforced as such in accordance with the provisions of the award. The parties may obtain discovery in aid of the arbitration to the fullest extent permitted under law. All discovery disputes shall be resolved by the arbitrator. This agreement to arbitrate is specifically enforceable by the parties to this Agreement. 15.13.2 Subject to Section 15.13.1 hereof and except as provided otherwise herein (including disputes concerning the purchase price adjustment and Deferred Merger Consideration contemplated by Sections 2.8 and 2.9 hereof, respectively), in any action between or among any of the parties, whether arising out of this Agreement or otherwise, (a) each of the parties irrevocably consents to the exclusive jurisdiction and venue of the federal and state courts located in the state of Delaware, (b) if any such action is commenced in a state court, then, subject to applicable law, no party shall object to the removal of such action to any federal court located in the State of Delaware, (c) each of the parties irrevocably waives the right to trial by jury, (d) each of the parties irrevocably consents to service of process by first class certified mail, return receipt requested, postage prepaid, to the address at which such party is to receive notice in accordance with Section 15.3, and (e) the prevailing parties shall be entitled to recover their reasonable attorneys' fees and court costs from the other parties. 15.14 No Third-Party Beneficiaries. No provision of this Agreement is intended to or shall be construed to grant or confer any right to enforce this Agreement, or any remedy for breach of this Agreement, to or upon any Person other than the parties hereto, including any customer, prospect, supplier, employee, contractor, salesman, agent or representative of the Company. 15.15 Neutral Construction. In view of the fact that each of the parties hereto have been represented by their own counsel and this Agreement has been fully negotiated by all parties, the legal principle that ambiguities in a documents are construed against the draftsperson of that document shall not apply to this Agreement. 15.16 Shareholder Representative. 15.16.1 Each Selling Shareholder hereby irrevocably authorizes and appoints Scott Koznek as the Shareholder Representative, with full power of substitution and resubstitution, as his or its representative in connection with the Transactions. 15.16.2 Each Selling Shareholder agrees that the Shareholder Representative shall have the full power, authority and right to perform, do and take any and all actions he deems necessary or advisable to carry out the purposes of this Agreement and the Transactions all without liability to such Selling Shareholder, so long as same are carried out by the Shareholder Representative in good faith. Such actions include the power to amend, modify or waive any agreement in the name of each Selling Shareholder as if such Selling Shareholder had himself amended, modified or waived such agreement; provided that the Shareholder Representative shall have no power to alter any term of this Agreement which would reduce the amount or change the type of Merger Consideration to be received by any Selling Shareholder unless a majority of the Selling Shareholders shall so agree. In particular, but not by way of limitation, the Shareholder Representative shall have the power to make and carry out decisions under this Agreement or in furtherance of the Transactions on behalf of each Selling Shareholder and to sign documents and make filings on behalf of each Selling Shareholder as if such Selling Shareholder had himself or itself signed or filed such document. 15.16.3 Each Selling Shareholder understands and agrees that this appointment is irrevocable. 15.16.4 The Shareholder Representative may resign at any time. Upon such resignation, each Selling Shareholder hereby authorizes the Shareholder Representative to appoint a new Shareholder Representative to replace such resigning Shareholder Representative with the same powers and duties as such resigning Shareholder Representative, provided that such newly appointed Shareholder Representative shall have been a Selling Shareholder immediately prior to the First Merger Effective Time. 15.16.5 If the Shareholder Representative or any successor shall die, or become unable to act as the Shareholder Representative, a replacement shall promptly be appointed by a writing signed by Selling Shareholders who received a majority of the Merger Consideration, provided that such newly appointed Shareholder Representative shall have been a Selling Shareholder immediately prior to the First Merger Effective Time. [Signature page follows] IN WITNESS WHEREOF, the parties have executed or caused to be executed this Agreement effective as of the day and year first above written. HALIFAX CORPORATION By: /s/ Charles McNew Name: Charles McNew Title: President & CEO MICROSERV MERGER CORP. By: /s/ Charles McNew Name: Charles McNew Title: President MICROSERV MERGER LLC By: /s/ Charles McNew Name: Charles McNew Title: President MICROSERV, INC. By: /s/ Jonathan Scott Name: Title: THE SELLING SHAREHOLDERS: /s/ Gary M. Lukowski Gary M. Lukowski [Signature page to Agreement and Plan of Merger] The Dempsey 1996 Revocable Trust dated November 13, 1996 By: /s/ Neal Dempsey III Name: Neal Dempsey III Title: Trustee G. and A. Ryles Living Trust dated October 29, 1968 By: /s/ Gerald F. Ryles Name: Gerald F. Ryles Title: Trustee /s/ Robert S. Johanson Robert S. Johanson /s/ Charles W. Lewis Charles W. Lewis /s/ Kris Hansen Kris Hansen /s/ Jonathan L. Scott Jonathan L. Scott NEW VENTURE ASSOCIATES, LLC PROFIT SHARING PLAN By: /s/ Patrick E. Green Name: Title: [Signature page to Agreement and Plan of Merger] /s/ Richard M. Brooks Richard M. Brooks /s/ Mark Working Mark Working /s/ T.J. Leffingwell T.J. Leffingwell /s/ Leo C. Manson Leo C. Manson [Signature page to Agreement and Plan of Merger] EXHIBIT "1A" Defined Terms "Accounts Receivable" means (a) any right to payment for goods sold, leased or licensed or for services rendered, whether or not it has been earned by performance, whether billed or unbilled, and whether or not it is evidenced by any Contract; (b) any note receivable; or (c) any other receivable or right to payment of any nature. "Actual Closing Net Assets" shall have the meaning specified in Section 2.8.2 of the Agreement. "Actual Closing Working Capital" shall have the meaning specified in Section 2.8.2 of the Agreement. "Asset" means any real, personal, mixed, tangible or intangible property of any nature, including Cash Assets, prepayments, deposits, escrows, Accounts Receivable, Tangible Property, Real Property, Software, Contract Rights, Intangibles and goodwill, and claims, causes of action and other legal rights and remedies. "Buyer Accountant" means Deloitte & Touche LLP, or such other independent accounting firm of internationally recognized standing selected by Buyer for purposes of Section 2.8.2 of the Agreement. "Buyer Common Shares" means shares of common stock, $.24 par value, of Buyer. "Buyer SEC Documents" shall have the meaning specified in Section 5.6 of the Agreement. "Buyer Securities" shall have the meaning specified in Section 4.26.1 of the Agreement. "Buyer Shareholders" shall have the meaning specified in Section 11.3 of the Agreement. "Calculation Dispute Notice" shall have the meaning specified in Section 2.8.3 of the Agreement. "Cash Asset" means any cash on hand, cash in bank or other accounts, readily marketable securities, and other cash-equivalent liquid assets of any nature. "Certificate" shall have the meaning specified in Section 2.6.1 of the Agreement. "Closing" shall have the meaning specified in Section 2.2 of the Agreement. "Closing Balance Sheet" shall have the meaning specified in Section 2.8.1 of the Agreement. "Closing Date" shall have the meaning specified in Section 2.2 of the Agreement. "Closing Date Merger Consideration" shall have the meaning specified in Section 2.6 of the Agreement. "Closing Shares" means the Buyer Common Shares delivered to the Selling Shareholders as part of the Closing Date Merger Consideration. "Code" means the Internal Revenue Code of 1986, as amended. "Company Common Stock" means shares of the common stock, $0.01 par value, of the Company. "Company Employee Benefit Plans" shall have the meaning specified in Section 4.16.1 of the Agreement. "Company Intangible" means all Software and other Intangibles owned, marketed, licensed, supported, maintained, used or under development by the Company. "Confidentiality Agreement" shall have the meaning specified in Section 6.3 of the Agreement. "Consent" means any consent, approval, order or authorization of, or any declaration, filing or registration with, or any application, notice or report to, or any waiver by, or any other action (whether similar or dissimilar to any of the foregoing) of, by or with, any Person, which is necessary in order to take a specified action or actions in a specified manner and/or to achieve a specified result. "Contract" means any written or oral contract, agreement, instrument, order, arrangement, commitment or understanding of any nature, including sales orders, purchase orders, leases, subleases, data processing agreements, maintenance agreements, license agreements, sublicense agreements, loan agreements, promissory notes, security agreements, pledge agreements, deeds, mortgages, guaranties, indemnities, warranties, employment agreements, consulting agreements, sales representative agreements, joint venture agreements, buy-sell agreements, options or warrants. "Contract Right" means any right, power or remedy of any nature under any Contract, including rights to receive property or services or otherwise derive benefits from the payment, satisfaction or performance of another party's Obligations, rights to demand that another party accept property or services or take any other actions, and rights to pursue or exercise remedies or options. "Deferred Merger Consideration Price" means the greater of (i) the market price of the Buyer Common Shares on the date of payment of the Deferred Merger Consideration, or (ii) the average market price of the Buyer Common Shares over the five trading days immediately prior to such date of payment. "DGCL" shall have the meaning specified in Section 2.1 of the Agreement. "DLLCA" shall have the meaning specified in Section 3.1 of the Agreement. "Earnout Accounts" shall have the meaning specified in Section 2.9.1 of the Agreement. "Earnout Dispute Notice" shall have the meaning specified in Section 2.9.3 of the Agreement. "Earnout Net Revenues" shall have the meaning specified in Section 2.9.1 of the Agreement. "Earnout Statements" shall have the meaning specified in Section 2.9.2 of the Agreement. "Employee Benefit Plan" means any employee benefit plan as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any other plan, program, policy or arrangement for or regarding bonuses, commissions, incentive compensation, severance, vacation, deferred compensation, pensions, profit sharing, retirement, payroll savings, stock options, stock purchases, stock awards, stock ownership, phantom stock, stock appreciation rights, medical/dental expense payment or reimbursement, disability income or protection, sick pay, group insurance, self insurance, death benefits, employee welfare or fringe benefits of any nature; but not including employment Contracts with individual employees. "Encumbrance" means any lien, superlien, security interest, pledge, right of first refusal, mortgage, easement, covenant, restriction, reservation, conditional sale, prior assignment, or other encumbrance, claim, burden or charge of any nature. "Entity" means any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any company limited by shares, limited liability company or joint stock company), firm, society or other enterprise, association, organization or entity. "Environmental Laws" means all applicable Laws (including consent decrees and administrative orders) relating to the public health and safety and protection of the environment, including those governing the use, generation, handling, storage and disposal or cleanup of Hazardous Substances, all as amended. "Estimated Closing Date Net Assets" shall have the meaning specified in Section 2.8.1 of the Agreement. "Estimated Closing Date Working Capital" shall have the meaning specified in Section 2.8.1 of the Agreement. "Final Closing Net Assets" shall have the meaning specified in Section 2.8.6 of the Agreement. "Final Closing Working Capital" shall have the meaning specified in Section 2.8.6 of the Agreement. "Financial Statements" shall have the meaning specified in Section 4.6.2 of the Agreement. "First Merger" shall have the meaning specified in Section 2.1 of the Agreement. "First Merger Delaware Certificate of Merger" shall have the meaning specified in Section 2.2 of the Agreement. "First Merger Effective Time" shall have the meaning specified in Section 2.2 of the Agreement. "First Merger Surviving Corporation" shall have the meaning specified in Section 2.1 of the Agreement. "First Merger Washington Articles of Merger" shall have the meaning specified in Section 2.2 of the Agreement. "Form 10-K" shall have the meaning specified in Section 5.4 of the Agreement. "GAAP" means generally accepted accounting principles under current United States accounting rules and regulations, consistently applied. "General Release" shall have the meaning specified in Section 9.7 of the Agreement. "Governmental Body" means any (a) nation, principality, republic, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or Entity and any court or other tribunal); (d) multi-national organization or body; or (e) individual, Entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature. "Hazardous Substances" means any substance, waste, contaminant, pollutant or material that has been determined by any United States federal government authority, or any state or local government authority having jurisdiction over any Real Property, to be capable of posing a risk of injury or damage to health, safety, property or the environment, including (a) all substances, wastes, contaminants, pollutants and materials defined, designated or regulated as hazardous, dangerous or toxic pursuant to any Law of any state in which any Real Property is located or any United States Law, and (b) asbestos, polychlorinated biphenyls ("PCB's"), petroleum, petroleum products and urea formaldehyde. "including" means including but not limited to. "Independent Accountants" means a Neutral Accounting Firm other than the Buyer Accountant. "Indemnification Price" means the greater of (i) the market price of the Buyer Common Shares on the date of payment of the applicable indemnification claim, or (ii) the average market price of the Buyer Common Shares over the five trading days immediately preceding such date of payment. "Insurance Policy" means any public liability, product liability, general liability, comprehensive, property damage, vehicle, life, hospital, medical, dental, disability, worker's compensation, key man, fidelity bond, theft, forgery, errors and omissions, directors' and officers' liability, or other insurance policy of any nature. "Intangible" means any name, corporate name, fictitious name, trademark, trademark application, service mark, service mark application, trade name, brand name, product name, slogan, trade secret, know-how, patent, patent application, copyright, copyright application, design, logo, formula, invention, product right, technology or other intangible asset of any nature, whether in use, under development or design, or inactive. "Judgment" means any order, writ, injunction, citation, award, decree or other judgment of any nature of any foreign, federal, state or local court, governmental body, administrative agency, regulatory authority or arbitration tribunal. "Key Employee" shall have the meaning specified in Section 9.9 of the Agreement. "Key Employee Agreements" shall have the meaning specified in Section 9.9 of the Agreement. "to the knowledge of the Company and the Selling Shareholders'" and similar phrases means that none of the Selling Shareholders, nor any of the directors or officers of the Company have any actual knowledge or belief, in each case after due inquiry, that the statement made is incorrect. "Latest Balance Sheet" shall have the meaning specified in Section 4.6.2 of the Agreement. "Latest Balance Sheet Date" shall have the meaning specified in Section 4.6.2 of the Agreement. "Law" means any provision of any foreign, federal, state or local law, statute, ordinance, charter, constitution, treaty, code, rule, regulation or guidelines, including common law (including those of self- regulatory organizations such as the American Stock Exchange). "Loss" or "Losses" shall have the meanings specified in Section 13.1 of the Agreement. "March/Closing Comparison Aggregate" shall have the meaning specified in Section 2.9.1 of the Agreement. "Material Adverse Change" means a change which has or can be reasonably expected to have a Material Adverse Effect. "Material Adverse Effect" means a material adverse effect on the financial condition, results of operations or business of the Company (when used in Section 4) or Buyer (when used in Section 5) or on the ability of the Company and the Selling Shareholders (when used in Section 4) or the Buyer Parties (when used in Section 5) to consummate the Transactions. "Merger Consideration" shall have the meaning specified in Section 2.6 of the Agreement. "Memorandum" shall have the meaning specified in Section 4.26.1 of the Agreement. "Merger Consideration Schedule" shall have the meaning specified in Section 2.6 of the Agreement. "Microserv Group" shall have the meaning specified in Section 13.1 of the Agreement. "Negative Adjustment" shall have the meaning specified in Section 2.8.6 of the Agreement. "Negative Net Assets Balance" shall have the meaning specified in Section 2.8.6 of the Agreement. "Negative Working Capital Balance" shall have the meaning specified in Section 2.8.6 of the Agreement. "Net Assets" means (a) the value of all assets on the Company's balance sheet excluding (i) any assets included in the definition of Working Capital hereunder and (ii) inventory, less (b) the value of all liabilities on the Company's balance sheet which are not included in the definition of Working Capital, with such values in (a) and (b) to be determined in accordance with GAAP; provided, however, that severance and retention obligations equal to the threshold amount specified in the Cash Payment Offset Schedule shall not be included as a liability for purposes of determining Net Assets; provided, further, that any debt of an employee owed to the Company shall not be taken into consideration for purposes of Net Assets. "Net Revenues" shall mean revenues net of the following offsets: sales returns and allowances, as determined in accordance with GAAP. "Neutral Accounting Firm" means Grant Thornton, LLP, or if Grant Thornton, LLP is unwilling to perform as the Neutral Accounting Firm, or at the relevant time does not qualify as an independent accounting firm of nationally recognized standing that has not rendered services to the Company or Buyer or any affiliate thereof, within 12 months prior to the date of the Agreement, then the Neutral Accounting firm shall be an accounting firm meeting the foregoing qualifications selected by an arbitrator selected in accordance with the rules of the American Arbitration Association. "Note" shall have the meaning specified in Section 2.6 of the Agreement. "Obligation" means any debt, liability or obligation of any nature, whether secured, unsecured, recourse, nonrecourse, liquidated, unliquidated, accrued, absolute, fixed, contingent, ascertained, unascertained, known, unknown or otherwise. "Permit" means any license, permit, approval, waiver, order, authorization, right or privilege of any nature, granted, issued, approved or allowed by any foreign, federal, state or local governmental body, administrative agency or regulatory authority. "Person" means any individual, Entity or Governmental Body. "Positive Net Assets Balance" shall have the meaning specified in Section 2.9.6 of the Agreement. "Positive Working Capital Balance" shall have the meaning specified in Section 2.9.6 of the Agreement. "Proceeding" means any demand, claim, suit, action, litigation, investigation, arbitration, administrative hearing or other proceeding of any nature. "Purchaser Representative" shall have the meaning specified in Section 4.26.3 of the Agreement. "Questionnaires" shall have the meaning specified in Section 9.14 of the Agreement. "Real Property" means any real estate, land, building, condominium, town house, structure or other real property of any nature, all shares of stock or other ownership interests in cooperative or condominium associations or other forms of ownership interest through which interests in real estate may be held, all leasehold estates with respect to any of the foregoing, and all appurtenant and ancillary rights thereto, including easements, covenants, water rights, sewer rights and utility rights. "Registration Rights and Right of First Offer Agreement" shall have the meaning specified in Section 9.11 of the Agreement. "Reportable Transaction" shall mean any transaction listed in Treasury Regulation Section 1.6011-4(b). "RII" shall have the meaning specified in Section 5.4 of the Agreement. "SEC" means the United States Securities and Exchange Commission. "Second Merger" shall have the meaning specified in Section 3.1 of the Agreement. "Second Merger Delaware Certificate of Merger" shall have the meaning specified in Section 3.2 of the Agreement. "Second Merger Effective Time" shall have the meaning specified in Section 3.2 of the Agreement. "Second Merger Survivor" shall have the meaning specified in Section 3.1 of the Agreement. "Second Merger Washington Articles of Merger" shall have the meaning specified in Section 3.2 of the Agreement. "Selling Shareholders' Restrictive Covenant Agreement" shall have the meaning specified in Section 9.8 of the Agreement. "Software" means any computer program, operating system, applications system, firmware or software of any nature, whether operational, under development or inactive including all object code, source code, comment code, algorithms, menu structures or arrangements, icons, operational instructions, scripts, commands, syntax, screen designs, reports, designs, concepts, technical manuals, test scripts, user manuals and other documentation therefore, whether in machine-readable form, programming language or any other language or symbols, and whether stored, encoded, recorded or written on disk, tape, film, memory device, paper or other media of any nature and all data bases necessary or appropriate to operate any such computer program, operating system, applications system, firmware or software. "Specified Contract" shall have the meaning specified in Section 4.14 of the Agreement. "Tangible Property" means any furniture, fixtures, leasehold improvements, vehicles, office equipment, computer equipment, other equipment, machinery, tools, forms, supplies or other tangible personal property of any nature. "Tax" means (a) any foreign, federal, state or local income, earnings, profits, gross receipts, franchise, capital stock, net worth, sales, use, value added, bank, bank shares, mutual thrift, occupancy, general property, real property, personal property, intangible property, transfer, fuel, excise, payroll, withholding, unemployment compensation, social security, retirement or other tax of any nature; (b) any foreign, federal, state or local organization fee, qualification fee, annual report fee, filing fee, occupation fee, assessment, sewer rent or other fee or charge of any nature by a Governmental Body; or (c) any deficiency, interest or penalty imposed with respect to any of the foregoing. "Tax Returns" shall have the meaning specified in Section 4.18.1 of the Agreement. "Transfer Tax Returns" means Tax Returns filed with respect to Transfer Taxes. "Transfer Taxes" means any transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest). "WBCA" shall have the meaning specified in Section 2.1 of the Agreement. "Working Capital" mean (i) current assets (excluding inventory), including but not limited to Cash Assets, Accounts Receivable and prepaid expenses, minus (ii) current liabilities, including but not limited to, accounts payable, accrued expenses and unearned revenue, with such values to be determined in accordance with GAAP; provided, however, that severance and retention obligations equal to the threshold amount specified in the Cash Payment Offset Schedule shall not be included as a liability for purposes of determining Working Capital; provided, further that any debt owed by an employee to the Company shall not be taken into consideration for purposes of the definition of Working Capital. "Working Capital and Net Assets Statements" shall have the meaning specified in Section 2.8.2 of the Agreement. EX-99.2 6 ex992eg.txt REGISTRATION RIGHTS AND RIGHT OF FIRST OFFER AGREEMENT Exhibit 99.2 REGISTRATION RIGHTS AND RIGHT OF FIRST OFFER AGREEMENT THIS REGISTRATION RIGHTS AND RIGHT OF FIRST OFFER AGREEMENT (the "Agreement") is made as of August 29, 2003 by and among Halifax Corporation, a Virginia corporation (the "Company"), and the other parties identified on the signature page attached hereto (collectively, the "Purchasers"). RECITALS A. Pursuant to a certain Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Microserv Merger Corp., a Delaware corporation and wholly owned subsidiary of the Company, Microserv Merger LLC, a Delaware limited liability company and wholly owned subsidiary of the Company, Microserv, Inc., a Washington corporation ("Microserv"), and the shareholders of Microserv parties thereto, the Company has agreed to acquire Microserv through the consummation of merger transactions (the "Merger") and other related transactions, more fully described in the Merger Agreement (the Merger and such related transactions collectively referred to as the "Transactions"). B. Pursuant to the Merger Agreement, the Purchasers will receive from the Company and the Company will issue to the Purchasers a number of shares of the Company's common stock, $.24 par value ("Common Stock"), as specified in a schedule attached to the Merger Agreement. Such issuance of shares of Common Stock pursuant to the Merger Agreement is referred to herein as the "Offering". C. To induce the Purchasers to accept Common Stock in the Offering and to otherwise close the Transactions, the Company is willing, under certain circumstances, to register under the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively, the "Securities Act"), the Common Stock issued to the Purchasers. D. The parties desire to impose certain rights and restrictions on the transfer of the Common Stock issued pursuant to the Offering. NOW THEREFORE, intending to be legally bound, the parties hereto agree as follows: 1. Required Registration. (a) At any time after the twelve month anniversary of the closing of the Merger and/or such later date in accordance with Section 13.5.3 of the Merger Agreement, and assuming the Company is eligible to register its securities on Form S-3 (or a successor form), holders of at least one-half of the then outstanding shares of the Registrable Securities may request, in writing, that the Company effect the registration of Registrable Securities (as defined in Section 8 hereof) owned by such holders on a form that may be used for the registration of Registrable Securities. If the holders initiating the registration intend to distribute the Registrable Securities by means of an underwriting, they shall so advise the Company in their request. In the event such registration is underwritten, the right of other holders to participate shall be conditioned on such holders' participation in such underwriting. Upon receipt of any such request, the Company shall promptly give written notice of such proposed registration to all holders of the Registrable Securities and holders of Common Stock who have been granted registration rights. Such holders shall have the right, by giving written notice to the Company within 30 days after the Company provides its notice, to elect to have included in such registration a number of their securities, including the Registrable Securities, as such holders may request in such notice of election; provided that if the underwriter (if any) managing the offering determines that, because of marketing factors, all of the securities, including the Registrable Securities, requested to be registered by all holders may not be included in the offering, then the number of shares to be included in such offering shall be reduced, and shares shall be excluded from such offering in a number deemed necessary by such managing underwriter. In the event an exclusion of shares is necessary, the Company shall include shares in such registration in the following order: (i) first, (a) the securities of the Purchasers or their successors or assigns where such entities hold Registrable Securities, and (b) the securities of purchasers referenced in that certain Registration Rights Agreement dated July 23, 2003 executed by the Company (the "July 23 Agreement"), in the case of (a) and (b), pro rata among the holders of such securities on the basis of the number of shares requested for registration by each such holder; and (ii) second, the other securities requested to be included therein by the other holders of the Company securities requested to be included in such registration. To the extent that all of the Registrable Securities requested to be included in the underwritten offering cannot be included, holders of Registrable Securities shall participate in such offering pro rata among such Purchasers, based on the number of shares of Registrable Securities each holder proposed to include. Thereupon, the Company shall, as expeditiously as possible, use its best efforts to effect the registration (on a form that may be used for the registration of the Registrable Securities) of all the Registrable Securities which the Company has been requested to so register. (b) The Company shall not be required to effect more than one registration pursuant to the first sentence of paragraph (a) above; provided, however, in the event of a proration pursuant to the foregoing paragraph (a) which results in Purchasers holding Registrable Securities having less than all of the requested securities being included in a current registration, then, to the extent of such unincluded Registrable Securities, the Purchasers shall receive an additional demand registration right upon the expiration of any blackout period, upon the request of the holders of 50% of the remaining Registrable Securities, and the Company shall be obligated to file an additional registration statement (which registration statement shall contain a current prospectus) relating to the Registrable Securities; and (ii) the Company shall use its best efforts to effect the registration of such Registrable Securities as promptly as practicable thereafter. (c) The Registration Expenses (as defined in Section 4) shall be paid by the Company with respect to all registrations effected pursuant to this Section. (d) The Company may delay the filing or effectiveness of any registration statement for a period of up to 120 days after the date of a request pursuant to this Section 1 if at the time of such request to register Registrable Securities: (i) the Company is engaged or has fixed plans to engage within 30 days of the time of the request in a firm commitment underwritten public offering, or (ii) the Company furnishes to the Purchaser or Purchasers requesting registration a certificate signed by a senior executive officer of the Company stating that the Company is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, is a material non-public event which would be adversely affected by the requested registration to the material detriment of the Company. In such case, the Company may at its option direct that such request be delayed for a period not in excess of 120 days from the effective date of such offering or the date of commencement of such other material activity, as the case may be, provided, however, the Company may not utilize the right set forth in this clause (ii) more than once in any 12-month period. 2. Piggyback Registration. (a) Each time that the Company proposes to register a public offering solely of its authorized but unissued Common Stock or shares held in Treasury ("Primary Shares") or other securities, other than pursuant to a Registration Statement on Form S-4 or Form S-8 or similar or successor forms (collectively, "Excluded Forms"), the Company shall promptly give written notice of such proposed registration to all holders of the Registrable Securities, which shall offer such holders the right to request inclusion of any Registrable Securities in the proposed registration statement. (b) Each holder of the Registrable Securities shall have twenty (20) days or such longer period as shall be set forth in the notice from the receipt of such notice to deliver to the Company a written request specifying the number of shares of Common Stock such holder intends to sell and the holder's intended plan of disposition. (c) In the event that the proposed registration by the Company is, in whole or in part, an underwritten public offering of securities of the Company, any request under Section 2(b) may specify that the Registrable Securities be included in the underwriting on the same terms and conditions as the shares of Common Stock, if any, otherwise being sold through underwriters under such registration. (d) Upon receipt of a written request pursuant to Section 2(b), the Company shall promptly use its best efforts to cause all such Registrable Securities to be registered, to the extent required to permit sale or disposition as set forth in the written request. (e) Notwithstanding the foregoing, if the managing underwriter of an underwritten public offering determines and advises in writing that the inclusion of all Registrable Securities proposed to be included in the underwritten public offering, together with any other issued and outstanding shares of Common Stock proposed to be included therein by holders other than the holders of Registrable Securities (such other shares hereinafter collectively referred to as the "Other Shares"), would interfere with the successful marketing of the securities proposed to be included in the underwritten public offering, then the number of such shares to be included in such underwritten public offering shall be reduced, and shares shall be excluded from such underwritten public offering in a number deemed necessary by such managing underwriter. In the event an exclusion of shares is necessary, shares shall be included in the following order: (i) first, the Primary Shares; (ii) second, (a) the securities held by the Purchasers or their successors or assigns requesting registration, and (b) the securities of purchasers referenced in the July 23 Agreement, in the case of (a) and (b), pro rata among the holders of such securities on the basis of the number of shares requested for registration by each such holder; and (iii) third, other shares. To the extent all of the Registrable Securities requested to be included in the underwritten public offering can not be included, holders of Registrable Securities shall participate in such offering pro rata based on the number of shares of Registrable Securities each holder proposes to include. (f) All shares of Common Stock that are not included in the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 180 days following an initial public offering and 90 days for any offering thereafter, that the managing underwriter reasonably determines as necessary in order to effect the underwritten public offering. The holders of such shares shall execute such documentation as the managing underwriter reasonably requests to evidence this lock-up. 3. Procedures. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company shall use its reasonable best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof; and pursuant thereto the Company shall as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission (the "Commission") a registration statement on the appropriate form under the Securities Act, which form shall be available for the sale of such Registrable Securities in accordance with the intended method or methods of distribution thereof, and use its commercially reasonable efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to the counsel selected by the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review and comment of such counsel); (b) notify each holder of Registrable Securities of the effectiveness of each registration statement filed hereunder and prepare and file with the Commission, such amendments, post-effective amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary or appropriate to keep such registration statement effective for the period required for sale of the Registrable Securities, (provided that in no event shall the Company be obligated to keep such registration statement effective (i) if the Company is eligible to use the Form S-3, at such time as there are no longer any Registrable Securities outstanding, and (ii) if the Company is not eligible to register on Form S-3, until such time as the Purchasers are eligible to sell all of the Registrable Securities pursuant to Rule 144 (k)), cause such prospectus as so supplemented to be filed as required under the Securities Act, and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement or supplement to the prospectus; (c) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, immediately incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority in interest of the Registrable Securities being sold reasonably agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the principal amount of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering, and make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post- effective amendment; (d) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (e) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions where such registration or qualification is required as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction); (f) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which the prospectus included in such registration statement as then in effect, contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and, at the request of any such seller, the Company shall promptly prepare a supplement or amendment to such prospectus so that, thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact required to be stated therein or omit to state any fact necessary to make the statements therein not misleading; (g) cause all such Registrable Securities to be listed on the securities exchange on which similar securities issued by the Company are then listed or traded, and, if not so listed or traded, to be listed on the NASDAQ Stock Market; (h) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; enable such Registrable Securities to be in such denominations and registered in such names as the selling holders or the managing underwriters, if any, may request at least ten Business Days prior to any sale of Registrable Securities; and provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (i) enter into such customary agreements (including, if there is an underwriter, underwriting agreements in customary form including, without limitation, the requirement to obtain an opinion of counsel to the Company and a "comfort letter" from the independent public accountants to the Company in the usual and customary form for such an underwritten offering); (j) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company that are customary, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (k) cooperate, and cause the Company's officers, directors, employees and independent accountants to cooperate, with the selling holders of Registrable Securities and the managing underwriters, if any, in the sale of the Registrable Securities and take any actions necessary to promote, facilitate or effectuate such sale; (l) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission and make available to its security holders, as soon as reasonably practicable, an earning statement covering the period of at least twelve months, beginning with the first fiscal quarter beginning after the effective date of the registration statement, which earning statement shall satisfy the provisions of Section 11(a) of the Securities Act; (m) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any common stock included in such registration statement for sale in any jurisdiction, the Company shall use its best efforts promptly to obtain the withdrawal of such order; and (n) otherwise use its best effects to take all other steps necessary to effect the registration of the Registrable Securities. 4. Registration Expenses. (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees (including, if applicable, the fees and expenses of any "qualified independent underwriter" and its counsel as may be required under the rules and regulations of the NASD), fees and expenses of compliance with securities or blue sky laws (including fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications and determination of their eligibility for investment under applicable laws), printing expenses, messenger, telephone and delivery expenses, fees and disbursements of custodians, and fees and disbursements of counsel for the Company and all independent certified public accountants (including the expenses of any special audit and "cold comfort" letters required by or incident to such performance), underwriters (excluding underwriters' discounts and commissions) and other Persons retained by the Company (all such expenses being herein called "Registration Expenses"), shall be borne by the Company and the Company shall, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance if such insurance coverage is obtained by the Company and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the American Stock Exchange. (b) Each holder of securities included in any registration hereunder shall pay those expenses which are not Registration Expenses which are allocable to the registration of such holder's securities so included (such as the fees and disbursements of any counsel engaged by any holder of the Registrable Securities), and any such expenses not so allocable, such as the underwriting discount and any selling commissions shall be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered. 5. Indemnification and Contribution (a) The Company agrees to indemnify and hold harmless each holder of Registrable Securities which is included in a registration statement pursuant to the terms of this Agreement, its officers and directors and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses, including without limitation attorneys' fees, except as limited by Paragraph 5(c), which arise out of or are based upon: (i) any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, or with respect to a prospectus, necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same; and (ii) any violation by the Company of the Securities Act, the Exchange Act (as defined below), any applicable state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law. In connection with an underwritten offering, the Company shall indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. (b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder shall furnish to the Company in writing such information and affidavits as the Company and any underwriter reasonably requests for use in connection with any such registration statement or prospectus and shall indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses, including without limitation attorneys' fees, except as limited by Paragraph 5(c), resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder. (c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give prompt notice shall not impair any Person's right to indemnification hereunder to the extent such failure has not materially prejudiced the indemnifying party) and (ii) unless in such indemnified party's reasonable judgment (based upon a written opinion of counsel) a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim. (d) If the indemnification provided for in this Section 5 is unavailable to an indemnified party under paragraphs (a) or (b) hereof in respect to any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Company and the holder of Registrable Securities in connection with the statements or omissions that resulted in such losses, claim, damages, liabilities or expenses. The relative fault of the Company and the holder of Registrable Securities in connection with the statements that resulted in such losses, claims, liabilities or expenses shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material facts or the omission or alleged omission to state a material fact relates to information supplied by the Company or the holder of the Registrable Securities and the parties relative intent, knowledge, access to information and opportunity to correct such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 5(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or, except as provided in Section 5(c), defending any such action or claim. (e) Notwithstanding any other provision of this Section, the liability of any holder of Registrable Securities for indemnification or contribution under this Section shall be individual to each holder and shall not exceed an amount equal to the number of shares sold by such holder of Registrable Securities multiplied by the net amount per share which he receives in such underwritten offering. (f) The indemnification and contribution provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities. 6. Participation in Underwritten Registrations. No Person may participate in any registration hereunder which is underwritten unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements; provided that no holder of Registrable Securities included in any underwritten registration shall be required to make any representations or warranties to the Company or the underwriters other than representations and warranties directly regarding such holder and such holder's intended method of distribution. 7. Restrictions on Transfer of Common Stock. Prior to the twelve month anniversary of the Closing Date (as defined in the Merger Agreement) and/or such later date in accordance with Section 13.5.3 of the Merger Agreement, the Purchasers shall not transfer, sell, assign, pledge, encumber or otherwise dispose of (collectively, "Transfer") their respective shares of Common Stock issued pursuant to the Offering without the prior written consent of the Company. Thereafter, Transfers, if any, of the Common Stock issued pursuant to the Offering shall be in accordance with all securities laws applicable thereto and, other than Transfers pursuant to (i) an effective registration statement or (ii) the Resale Rules (as defined below), which items (i) and (ii) shall also be in accordance with all securities laws applicable thereto, subject to the terms of this Section 7. (a) Offer. If a Purchaser or one or more Purchasers acting together (collectively the "Selling Shareholder") has a bona fide intent to sell, in a single transaction or a series of related transactions, greater than 10,000 shares of Common Stock issued pursuant to the Offering (as appropriately adjusted for any combination, division or similar recapitalization affecting such Common Stock), such Selling Shareholder must first give the Company the opportunity to offer to purchase such shares of Common Stock in accordance with subsection 7(b) herein, by giving written notice of the Selling Shareholder's intent to sell ("Selling Shareholder Sale Notice") to the Company. (b) Option to the Company. Subject to Section 7(c) hereof, the Company (or its nominee as set forth in Section 7(d) hereof) shall have the option to offer to purchase, insofar as it may be permitted by law, the Common Stock subject to the Selling Shareholder's Sale Notice ("Subject Stock") , or such reduced number of shares as described in Section 7(c) hereof, and may exercise the option by giving written notice (the "Offer Notice") of its offer to the Selling Shareholder within five business days after the date of delivery of the Selling Shareholder Sale Notice. Notwithstanding the foregoing, the Company may not deliver an Offer Notice or purchase such Subject Stock if such purchase would cause the Transactions to fail to comply with the 50% continuity of interest standard set forth in Section 3.02 of Revenue Procedure 77-37, applied as set forth in Section 8.9 of the Merger Agreement, and this condition is intended to ensure that the continuity of interest requirements of Treasury Regulation Section 1.368-1(e) are satisfied and shall be interpreted and applied consistently therewith. The Company's Offer Notice must state the price per share on which it is it offering to purchase the Subject Stock (the "Offered Price"). (c) Purchase of All Stock. Unless otherwise agreed to by the Selling Shareholder and except for any reduction so as to satisfy the requirements of Section 7(b) hereof, all and not less than all of the Subject Stock must be purchased pursuant to subsection 7(b) by the Company. (d) Company's Nominee. Should the Company be unable to purchase all the Subject Stock in order to comply with Section 7(b) hereof, the Company may designate one or more nominees who shall each have the same rights as the Company hereunder, provided that any such nominee shall not be a person "related" (as defined in Treasury Regulation Section 1.368-1(e)(3)) to the Company, or an agent of the Company under applicable law. The purpose of such designation of a nominee is to satisfy the requirements of Section 7(b) hereof. (e) Acceptance of Offer; Delivery. The Selling Shareholder shall have five business days following its receipt of the Offer Notice to accept, by delivery of written notice (the "Acceptance Notice") to the Company, the Company's offer to purchase the Subject Stock. If the Selling Shareholder accepts the offer, within three business days of the Company's receipt of the Acceptance Notice, the Company shall deliver to the Selling Shareholder the purchase price for the Subject Stock, in immediately available funds, against delivery to the Company of all certificates for the Subject Stock (or, if the Subject Stock is subject to pledge, hypothecation or other encumbrance, evidence of the Selling Shareholder's rights therein) duly endorsed for transfer, at the then principal office of the Company. (f) Right to Transfer. If (i) the Company does not give the Selling Shareholder an Offer Notice within the time period required by Section 7(b), or (ii) the Selling Shareholder does not deliver to the Company the Acceptance Notice in accordance with Section 7(e), the Selling Shareholder may, for a period of one month following the final date for acceptance under Section 7(e) herein, sell the Subject Stock to any Person or Persons; provided, however, that if the Company has timely given the Selling Shareholder an Offer Notice, such shares may be sold only at a price per share not less than the Offered Price in such Offer Notice. If the Selling Shareholder wishes to sell some or all of the Subject Stock for a price per share less than the Offered Price or if the Selling Shareholder has not sold the Subject Stock within that one-month period, the Selling Shareholder shall be obliged to make a new Sale Notice to the Company, in accordance with this Section 7, before the Selling Shareholder shall be permitted to transfer such Subject Stock, or any part thereof, to any Person. (g) Covenant Not To Circumvent. The Purchasers and the Company agree that at no time will any of them take any action, directly or indirectly, with the intent to circumvent their respective obligations under, or to deprive the Purchasers or the Company of any benefit intended by, any provision of Section 7 of this Agreement. 8. Definitions. "AMEX" means the American Stock Exchange. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "NASD" means the National Association of Securities Dealers. "Person" means any individual, corporation, partnership, limited liability company, trust, estate, association, cooperative, government or governmental entity (or any branch, subdivision or agency thereof) or any other entity. "Registrable Securities" means (i) any of the shares of Common Stock issued in the Offering and (ii) any other securities that subsequently may be issued or issuable with respect to such shares of Common Stock as a result of a stock split or dividend or any sale, transfer, assignment or other transaction involving such shares of the Company and any securities into which such shares of Common Stock may thereafter be changed as a result of merger, consolidation, recapitalization or other similar transaction. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when they have been distributed to the public pursuant to an offering registered under the Securities Act or eligible to be sold to the public pursuant to Rule 144(k) under the Securities Act (or any such rule then in force) or, if held by an affiliate of the Company, when all such securities of such person are eligible for resale pursuant to Rule 144 and could be sold in one transaction in accordance with the volume limitations contained in Rule 144(e)(1)(i). For purposes of this Agreement, a Person shall be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected. "Securities Act" means the Securities Act of 1933, as amended. 9. Form S-3. The Company represents and warrants that the Company is currently eligible to register for resale on Form S-3 the Registrable Securities issued to the Purchasers, and the Company covenants that it will use its reasonable best efforts to remain so eligible until it has filed a Form S-3 (or a successor form) covering the Registrable Securities pursuant to this Agreement and the Commission has declared such registration statement effective, or until the Company has no further obligation hereunder to register any Registrable Securities. 10. Rule 144. In order to permit each Purchaser to sell the securities of the Company it holds from time to time pursuant to Rule 144 promulgated by the Commission or any successor to such rule or any other rule or regulation of the Commission that may at any time permit each Purchaser to sell its securities to the public without registration ("Resale Rules"), the Company will: (a) comply with all rules and regulations of the Commission applicable in connection with use of the Resale Rules; (b) make and keep adequate and current public information available, as those terms are understood and defined in the Resale Rules, at all times; (c) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; (d) furnish annually to the Purchasers material containing the information required by Rule 14a-3(b) under the Exchange Act; (e) furnish to each Purchaser promptly upon request (i) a written statement by the Company that it has complied with the reporting requirements of the Resale Rules, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and any other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing the Purchasers of any rule or regulation of the Commission which permits the selling of any shares of Common Stock holding the Purchasers without registration; and (f) take any action (including cooperating with the Purchasers to cause the transfer agent to remove any restrictive legend on certificates evidencing the shares of Common Stock held by the Purchasers) as shall be reasonably requested by the Purchasers or which shall otherwise facilitate the sale of shares of Common Stock held by the Purchasers from time to time by the Purchasers pursuant to the Resale Rules. 11. Miscellaneous. (a) No Inconsistent Agreements. The Company shall not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the holders of Registrable Securities in this Agreement, or grant to any person any registration rights, ("New Registration Rights") with respect to securities of the Company if such New Registration Rights are, in the reasonable opinion of the Purchasers, superior in any fashion to the registration rights granted to the Purchasers pursuant to this Agreement, unless the holders of a majority of the Registrable Securities then outstanding consent in writing to such Registration Rights or such other inconsistent agreement, provided however this limitation shall not apply to any registration rights currently outstanding or which the Company is legally obligated to grant as of the date hereof. (b) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only upon the prior written consent of the Company and holders of a majority of the Registrable Securities. (c) Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of purchasers or holders of the Registrable Securities are also for the benefit of, and enforceable by, any subsequent holder of the Registrable Securities. A person is deemed to be a holder of the Registrable Securities whenever such person is the registered holder of the Registrable Securities. Upon the transfer of any Registrable Securities, the transferring holder of the Registrable Securities shall cause the transferee to execute and deliver to the Company a counterpart of this Agreement. (d) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. (e) Counterparts. This Agreement may be executed simultaneously in two or more counterparts, including by facsimile, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. (f) Descriptive Heading. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. (g) Governing Law. The corporate law of Virginia shall govern all issues and questions concerning the relative rights of the Company and its shareholders. All issues and questions concerning the construction, validity, interpretation and enforcement of this Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Virginia, without giving effect to any choice of law or conflict of law rules or provisions (whether of Virginia or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than Virginia. (h) Neutral Construction. In view of the fact that each of the parties hereto has been represented by its own counsel (or has had the opportunity to consult with counsel of its choice) and this Agreement has been fully negotiated by all parties, the legal principle that ambiguities in a document are construed against the draftsperson of that document shall not apply to this Agreement. (i) Notices. Notices required or permitted to be given hereunder shall be in writing and shall be deemed to be received when personally delivered or sent by overnight courier or registered mail, return receipt requested, addressed (i) if to the Company, at Halifax Corporation, 5250 Cherokee Avenue, Alexandria, VA 22312, Attention: President and to Blank Rome LLP, 1 Logan Square, Philadelphia, Pennsylvania 19103, Attn: Barry H. Genkin, Esquire; and (ii) if to any holder of the Registrable Securities, to the address set forth on Schedule I attached hereto (or at such other address as each party furnishes by notice given in accordance with this Section 10(i)). (j) Use of Pronouns. All pronouns and any variations thereof used herein shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or entities referred to may require. Without in any way limiting the generality of the foregoing, use of the pronoun "he" or "his" herein with respect to the Purchasers shall be deemed to refer to any Purchaser that the context requires, regardless of whether such Purchaser is male, female or an entity. [Signature page follows] IN WITNESS WHEREOF, the parties have executed or caused to be executed this Agreement effective as of the day and year first above written. HALIFAX CORPORATION By: /s/ Charles McNew Name: Charles McNew Title: President & CEO /s/ Gary M. Lukowski Gary M. Lukowski The Dempsey 1996 Revocable Trust dated November 13, 1996 By: /s/ Neal Dempsey III Name: Neal Dempsey III Title: Trustee G. and A. Ryles Living Trust dated October 29, 1968 By: /s/ Gerald F. Ryles Name: Gerald F. Ryles Title: Trustee /s/ Robert S. Johanson Robert S. Johanson [Signature page to Registration Rights And Right Of First Offer Agreement] /s/ Charles W. Lewis Charles W. Lewis /s/ Kris Hansen Kris Hansen /s/ Jonathan L. Scott Jonathan L. Scott NEW VENTURE ASSOCIATES, LLC PROFIT SHARING PLAN By: /s/ Patrick E. Green Name: Title: /s/ Richard M. Brooks Richard M. Brooks /s/ Mark Working Mark Working /s/ T.J. Leffingwell T.J. Leffingwell /s/ Leo C. Manson Leo C. Manson [Signature page to Registration Rights And Right Of First Offer Agreement] EX-99.3 7 ex993eg.txt EMPLOYEE SEVERANCE AND RESTRICTIVE COVENANT AGREEMENT Exhibit 99.3 EMPLOYEE SEVERANCE AND RESTRICTIVE COVENANT AGREEMENT THIS EMPLOYEE SEVERANCE AND RESTRICTIVE COVENANT AGREEMENT ("Agreement") is made as of this 29th day of August, 2003, by and between Halifax Corporation, a Virginia corporation ("Company"), and Gary M. Lukowski ("Employee"). BACKGROUND A. Pursuant to that certain Agreement and Plan of Merger (the "Merger Agreement") dated August 29, 2003 by and among Company, Employee, Microserv Merger Corp., a Delaware corporation, Microserv Merger LLC, a Delaware limited liability company, Microserv, Inc., a Washington corporation and certain shareholders of Microserv parties thereto, Company has agreed to acquire Microserv through the consummation of merger transactions more fully described in the Merger Agreement (the "Transactions"). B. Company and Employee desire to set forth certain arrangements in the event of Employee's separation from the Company. C. It is a condition precedent to the respective obligations of the parties to the Merger Agreement to consummate the Transactions that Company and Employee enter into this Agreement. NOW, THEREFORE, in consideration of the facts, mutual promises, and covenants contained herein and intending to be legally bound hereby, the parties hereto agree as follows: 1. Severance. (a) In the event Employee's employment with Company is terminated for other than "Cause" or "Good Reason" (as defined below) or as permitted in Section 1(c) during the period beginning on the date hereof and ending on the third annual anniversary of the date hereof, Employee's base salary shall continue as severance payments until, and terminate upon, the 12 month anniversary of the date of such termination. Upon termination of Employee's employment with Company, whether for Cause or otherwise, Employee shall be entitled to any earned and unpaid benefits (other than base salary) up to the date of termination, provided, however, that Company may set off any amounts owed by Employee to Company or its affiliates (including but not limited to any unearned salary advances or outstanding loans) against any payments due Employee hereunder (whether for severance or otherwise). The severance payments referenced above shall be payable during the applicable severance period specified above in accordance with Company's regular payroll practices in effect and shall be subject to such withholding as may be required by applicable law. (b) For purposes of this Agreement, the term "Cause" shall mean the following: (i) if Employee is in material violation or breach of the terms of this Agreement or neglects or refuses to perform his employment duties reasonably assigned to him or violates any express direction of any lawful rule or regulation established by the Company or its Board of Directors which is consistent with the scope of Employee's employment duties and such neglect, refusal, violation or breach continues uncured for ten (10) days following receipt by Employee of written notice of such breach; provided, however, that Employee shall have this cure right only twice during each twelve (12) consecutive month period; provided, further, that the cure provision contained in this Section 1(b)(i) shall not apply to any breaches of the covenants contained in Section 2 hereof; (ii) if Employee engages in misconduct which is injurious to Company and/or its subsidiaries or affiliates; or (iii) if Employee commits fraud or theft against Company and/or its subsidiaries or affiliates or is convicted of a felony offense or any crime involving moral turpitude. For purposes of this Agreement, termination by Employee of employment with Company for "Good Reason" shall mean termination based on any of the following: (i) a reduction by Company in Employee's salary, compensation or benefits (as in effect on the date of this Agreement or as increased at any time during the term of this Agreement); (ii) material breach by Company of the terms of this Agreement; or (iii) Company's requiring Employee to be based more than 25 miles from the greater Seattle, Washington area (c) The Company shall have the right to terminate Employee's employment without the payment of severance (i) in the event of Employee's death or (ii) if, due to any physical or mental illness, disability or incapacity, Employee is prevented from performing the essential functions of his employment duties for a period of not less than ninety (90) consecutive days or for an aggregate of one hundred fifty days during any period of twelve consecutive months, even with reasonable accommodations. (d) Recognition. Employee recognizes and accepts that (i) Employee is employed by Company on an "at will" basis, (ii) this Agreement does not guarantee or otherwise provide for employment and that, at any time and for any reason, Employee may resign or Company may terminate Employee's employment with Company, and (iii) Company shall not, in any case, be responsible for any additional amount, severance pay, termination pay, severance obligation or other damages whatsoever arising from the termination of his employment, above and beyond those specifically provided for in this Agreement. 2. Restrictive Covenants. (a) Employee will not, during the term of his employment with Company and for one year thereafter and in any event no earlier than two years from the date hereof (the "Restricted Period"), in any capacity (including, but not limited to, owner, member, partner, shareholder, consultant, advisor, financier, agent, employee, officer, director, manager or otherwise), whether directly, indirectly or through affiliates, within the States of Washington and Oregon, for his own account or for the benefit of any person or entity, establish, engage in or be connected with (i) the Business (as defined herein) or (ii) any business which is similar to or in competition with the business conducted by Company (or any subsidiaries or affiliates thereof) during the Restricted Period. (b) Employee will not, during the Restricted Period, in any capacity (including, but not limited to, owner, member, partner, shareholder, consultant, advisor, financier, agent, employee, officer, director, manager or otherwise), whether directly, indirectly or through affiliates, for their own account or for the benefit of any other person or entity, including without limitation, a person or entity in (i) the Business or (ii) any business in competition with Company (or any subsidiaries or affiliates thereof) during the Restricted Period: (i) Solicit, hire, contract, engage, retain, divert, induce or accept business from or otherwise take away or interfere with any customer of Company (or any subsidiaries or affiliates thereof) or any prospective customer of Company (or any subsidiaries or affiliates thereof) with which Company (or any subsidiaries or affiliates thereof) has had a substantial business contact during the Restricted Period for the purpose of providing the same or similar services or goods as that of Company (or any subsidiaries or affiliates thereof); and/or (ii) Solicit, divert or induce any of the employees or consultants of Company (or any subsidiaries or affiliates thereof) to leave or to work for Employee or any person or entity with which Employee is connected. (c) Employee will not, at any time after the date hereof, whether directly, indirectly or through affiliates, disclose, communicate or divulge to any person or entity, or use for the benefit of any person or entity, any secret, confidential or proprietary knowledge or information with respect to the conduct or details of the business (including, without limitation, the Business) conducted by Company (or any subsidiaries or affiliates thereof) including, but not limited to, know-how, processes, customers, prospects, costs, pricing information, trade secrets, products, employees, agents, representatives, policies, marketing methods and strategies, finances, financial condition and suppliers. (d) Neither party will, at any time after the date hereof, whether directly, indirectly or through affiliates, publish or communicate disparaging or derogatory statements or opinions about the other party, including but not limited to, disparaging or derogatory statements or opinions about Company's and/or its subsidiaries' or affiliates' management, products or services, to any third party. It shall not be a breach of this Section for either party to testify truthfully in any judicial or administrative proceeding or to make statements or allegations in legal filings that are based on his reasonable belief and are not made in bad faith. (e) Employee agrees that at no time will it take any action, directly or indirectly, to circumvent its respective obligations under, or to deprive Company (or its subsidiaries or affiliates) of any benefit intended by, any provision of this Agreement. Without limiting the generality of the foregoing, Employee shall not in any way assist or enable any person or entity to take any action that Employee is prohibited from taking himself pursuant to this Agreement. (f) The parties hereto agree that any breach by either party of the covenants and agreements contained in this Section 2 will result in irreparable injury to the other party (and its subsidiaries and affiliates) for which money damages could not adequately compensate them and, therefore, in the event of any such breach, either party shall be entitled (in addition to any other rights and remedies which it or they may have at law or in equity) to have an injunction issued by any competent court of equity enjoining and restraining the other party and any other person or entity involved therein from continuing such breach. (g) The parties hereto acknowledge that a breach of any other agreement, whether written or oral, between or among, Employee, on the one hand, and Company (or its subsidiaries or affiliates), on the other hand, or any other actionable conduct by Company (or its subsidiaries or affiliates), or any defense, set-off or counterclaim by Employee or any other related rights of Employee, against Company (or its subsidiaries or affiliates), will have no effect on any or all of the terms and provisions of this Section 2 and its enforceability and validity. (h) If any portion of the covenants and agreements contained in this Section 2, or the application thereof, is construed to be invalid or unenforceable, then the other portions of such covenant(s) or agreement(s) or the application thereof shall not be affected and shall be given full force and effect without regard to the invalid or unenforceable portions. If any covenant or agreement in this Section 2 is held to be unenforceable because of the area covered, the duration thereof, or the scope thereof, then the court making such determination shall have the power to reduce the area and/or duration and/or limit the scope thereof, and the covenant or agreement shall then be enforceable in its reduced form. (i) The term, "Business", as used herein, means providing enterprise maintenance solutions, including without limitation, multi-vendor computer hardware support services that focus on providing customized equipment service and support primarily to the desktop market, such as personal and notebook computers, monitors, terminals, printers and storage devices. 3. Miscellaneous. (a) Waivers and Amendments. This Agreement may be amended or modified only by a written instrument signed by all the parties. Neither the failure, nor any delay, on the part of any party to exercise any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, remedy, power or privilege hereunder, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, remedy,power or privilege hereunder. (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the State of Delaware (notwithstanding any conflict-of-laws doctrines of such state or other jurisdiction to the contrary), and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing andshall be deemed to have been duly given, made and received only when delivered (personally, by courier service such as Federal Express, or by other messenger) or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Employee: Gary M. Lukowski 24107 NE 180th Street Woodinville, WA 98077-6779 (ii) If to Company: Halifax Corporation 5250 Cherokee Avenue Alexandria, Virginia 22312 Attn: Joseph Sciacca, Chief Financial Officer Telefax: (703) 658-2426 with a copy, given in the manner prescribed above, to Blank Rome LLP One Logan Square Philadelphia, PA 19103 Attn: Barry H. Genkin, Esq. Telefax: (215) 832-5514 In addition, notice by mail shall be by air mail if posted outside of the continental United States. Any party may alter the addresses to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section for the giving of notice. (d) Binding Nature of Agreement. The rights and obligations of both parties under this Agreement shall inure to the benefit of and shal l be binding upon their heirs, successors and assigns. (e) Assignment. This Agreement may not be assigned by Employee. Company, without the consent of Employee, may assign its rights and obligations hereunder to an affiliate thereof or in connection with a sale of substantially all of its assets. (f) Execution in Counterparts. This Agreement may be executed in any number of counterparts, including by facsimile, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. (g) Provisions Severable. If any provision of this Agreement is construed to be invalid or unenforceable, such determination shall not affect the remaining provisions of this Agreement, all of which shall remain in full force and effect. (h) Entire Agreement. This Agreement contains the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. (i) Section Headings. The Section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. (j) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. [Signature page follows] IN WITNESS WHEREOF, the parties have executed and delivered this Agreement, intending to be legally bound hereby, as of the date first above written. HALIFAX CORPORATION By: /s/ Charles McNew Name: Charles McNew Title: President & CEO EMPLOYEE: /s/ Gary M. Lukowski GARY M. LUKOWSKI [Signature Page to Employee Severance and Restrictive Covenant Agreement] EX-99.4 8 ex994eg.txt EMPLOYEE SEVERANCE AND RESTRICTIVE COVENANT AGREEMENT Exhibit 99.4 EMPLOYEE SEVERANCE AND RESTRICTIVE COVENANT AGREEMENT THIS EMPLOYEE SEVERANCE AND RESTRICTIVE COVENANT AGREEMENT ("Agreement") is made as of this 29th day of August, 2003, by and between Halifax Corporation, a Virginia corporation ("Company"), and Jonathan L. Scott ("Employee"). BACKGROUND A. Pursuant to that certain Agreement and Plan of Merger (the "Merger Agreement") dated August 29, 2003 by and among Company, Employee, Microserv Merger Corp., a Delaware corporation, Microserv Merger LLC, a Delaware limited liability company, Microserv, Inc., a Washington corporation and certain shareholders of Microserv parties thereto, Company has agreed to acquire Microserv through the consummation of merger transactions more fully described in the Merger Agreement (the "Transactions"). B. Company and Employee desire to set forth certain arrangements in the event of Employee's separation from the Company. C. It is a condition precedent to the respective obligations of the parties to the Merger Agreement to consummate the Transactions that Company and Employee enter into this Agreement. NOW, THEREFORE, in consideration of the facts, mutual promises, and covenants contained herein and intending to be legally bound hereby, the parties hereto agree as follows: 1. Severance. (a) In the event Employee's employment with Company is terminated for other than "Cause" or "Good Reason" (as defined below) or as permitted in Section 1(c) during the period beginning on the date hereof and ending on the third annual anniversary of the date hereof, Employee's base salary shall continue as severance payments until, and terminate upon, the 12 month anniversary of the date of such termination. Upon termination of Employee's employment with Company, whether for Cause or otherwise, Employee shall be entitled to any earned and unpaid benefits (other than base salary) up to the date of termination, provided, however, that Company may set off any amounts owed by Employee to Company or its affiliates (including but not limited to any unearned salary advances or outstanding loans) against any payments due Employee hereunder (whether for severance or otherwise). The severance payments referenced above shall be payable during the applicable severance period specified above in accordance with Company's regular payroll practices in effect and shall be subject to such withholding as may be required by applicable law. (b) For purposes of this Agreement, the term "Cause" shall mean the following: (i) if Employee is in material violation or breach of the terms of this Agreement or neglects or refuses to perform his employment duties reasonably assigned to him or violates any express direction of any lawful rule or regulation established by the Company or its Board of Directors which is consistent with the scope of Employee's employment duties and such neglect, refusal, violation or breach continues uncured for ten (10) days following receipt by Employee of written notice of such breach; provided, however, that Employee shall have this cure right only twice during each twelve (12) consecutive month period; provided, further, that the cure provision contained in this Section 1(b)(i) shall not apply to any breaches of the covenants contained in Section 2 hereof; (ii) if Employee engages in misconduct which is injurious to Company and/or its subsidiaries or affiliates; or (iii) if Employee commits fraud or theft against Company and/or its subsidiaries or affiliates or is convicted of a felony offense or any crime involving moral turpitude. For purposes of this Agreement, termination by Employee of employment with Company for "Good Reason" shall mean termination based on any of the following: (i) a reduction by Company in Employee's salary, compensation or benefits (as in effect on the date of this Agreement or as increased at any time during the term of this Agreement); (ii) material breach by Company of the terms of this Agreement; or (iii) Company's requiring Employee to be based more than 25 miles from the greater Seattle, Washington area. (c) The Company shall have the right to terminate Employee's employment without the payment of severance (i) in the event of Employee's death or (ii) if, due to any physical or mental illness, disability or incapacity, Employee is prevented from performing the essential functions of his employment duties for a period of not less than ninety (90) consecutive days or for an aggregate of one hundred fifty days during any period of twelve consecutive months, even with reasonable accommodations. (d) Recognition. Employee recognizes and accepts that (i) Employee is employed by Company on an "at will" basis, (ii) this Agreement does not guarantee or otherwise provide for employment and that, at any time and for any reason, Employee may resign or Company may terminate Employee's employment with Company, and (iii) Company shall not, in any case, be responsible for any additional amount, severance pay, termination pay, severance obligation or other damages whatsoever arising from the termination of his employment, above and beyond those specifically provided for in this Agreement. 2. Restrictive Covenants. (a) Employee will not, during the term of his employment with Company and for one year thereafter and in any event no earlier than two years from the date hereof (the "Restricted Period"), in any capacity (including, but not limited to, owner, member, partner, shareholder, consultant, advisor, financier, agent, employee, officer, director, manager or otherwise), whether directly, indirectly or through affiliates, within the States of Washington and Oregon, for his own account or for the benefit of any person or entity, establish, engage in or be connected with (i) the Business (as defined herein) or (ii) any business which is similar to or in competition with the business conducted by Company (or any subsidiaries or affiliates thereof) during the Restricted Period. (b) Employee will not, during the Restricted Period, in any capacity (including, but not limited to, owner, member, partner, shareholder, consultant, advisor, financier, agent, employee, officer, director, manager or otherwise), whether directly, indirectly or through affiliates, for their own account or for the benefit of any other person or entity, including without limitation, a person or entity in (i) the Business or (ii) any business in competition with Company (or any subsidiaries or affiliates thereof) during the Restricted Period: (i) Solicit, hire, contract, engage, retain, divert, induce or accept business from or otherwise take away or interfere with any customer of Company (or any subsidiaries or affiliates thereof) or any prospective customer of Company (or any subsidiaries or affiliates thereof) with which Company (or any subsidiaries or affiliates thereof) has had a substantial business contact during the Restricted Period for the purpose of providing the same or similar services or goods as that of Company (or any subsidiaries or affiliates thereof); and/or (ii) Solicit, divert or induce any of the employees or consultants of Company (or any subsidiaries or affiliates thereof) to leave or to work for Employee or any person or entity with which Employee is connected. (c) Employee will not, at any time after the date hereof, whether directly, indirectly or through affiliates, disclose, communicate or divulge to any person or entity, or use for the benefit of any person or entity, any secret, confidential or proprietary knowledge or information with respect to the conduct or details of the business (including, without limitation, the Business) conducted by Company (or any subsidiaries or affiliates thereof) including, but not limited to, know-how, processes, customers, prospects, costs, pricing information, trade secrets, products, employees, agents, representatives, policies, marketing methods and strategies, finances, financial condition and suppliers. (d) Neither party will, at any time after the date hereof, whether directly, indirectly or through affiliates, publish or communicate disparaging or derogatory statements or opinions about the other party, including but not limited to, disparaging or derogatory statements or opinions about Company's and/or its subsidiaries' or affiliates' management, products or services, to any third party. It shall not be a breach of this Section for either party to testify truthfully in any judicial or administrative proceeding or to make statements or allegations in legal filings that are based on his reasonable belief and are not made in bad faith. (e) Employee agrees that at no time will it take any action, directly or indirectly, to circumvent its respective obligations under, or to deprive Company (or its subsidiaries or affiliates) of any benefit intended by, any provision of this Agreement. Without limiting the generality of the foregoing, Employee shall not in any way assist or enable any person or entity to take any action that Employee is prohibited from taking himself pursuant to this Agreement. (f) The parties hereto agree that any breach by either party of the covenants and agreements contained in this Section 2 will result in irreparable injury to the other party (and its subsidiaries and affiliates) for which money damages could not adequately compensate them and, therefore, in the event of any such breach, either party shall be entitled (in addition to any other rights and remedies which it or they may have at law or in equity) to have an injunction issued by any competent court of equity enjoining and restraining the other party and any other person or entity involved therein from continuing such breach. (g) The parties hereto acknowledge that a breach of any other agreement, whether written or oral, between or among, Employee, on the one hand, and Company (or its subsidiaries or affiliates), on the other hand, or any other actionable conduct by Company (or its ubsidiaries or affiliates), or any defense, set-off or counterclaim by Employee or any other related rights of Employee, against Company (or its subsidiaries or affiliates), will have no effect on any or all of the terms and provisions of this Section 2 and its enforceability and validity. (h) If any portion of the covenants and agreements contained in this Section 2, or the application thereof, is construed to be invalid or unenforceable, then the other portions of such covenant(s) or agreement(s) or the application thereof shall not be affected and shall be given full force and effect without regard to the invalid or unenforceable portions. If any covenant or agreement in this Section 2 is held to be unenforceable because of the area covered, the duration thereof, or the scope thereof, then the court making such determination shall have the power to reduce the area and/or duration and/or limit the scope thereof, and the covenant or agreement shall then be enforceable in its reduced form. (i) The term, "Business", as used herein, means providing enterprise maintenance solutions, including without limitation, multi-vendor computer hardware support services that focus on providing customized equipment service and support primarily to the desktop market, such as personal and notebook computers, monitors, terminals, printers and storage devices. 3. Miscellaneous. (a) Waivers and Amendments. This Agreement may be amended or modified only by a written instrument signed by all the parties. Neither the failure, nor any delay, on the part of any party to exercise any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, remedy, power or privilege hereunder, nor shall any single or partial exercise of any right, remedy, power or privilege hereunder, preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege hereunder. (b) Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the State of Delaware (notwithstanding any conflict-of-laws doctrines of such state or other jurisdiction to the contrary), and without the aid of any canon, custom or rule of law requiring construction against the draftsman. (c) Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received only when delivered (personally, by courier service such as Federal Express, or by other messenger) by fax or when deposited in the United States mails, registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: (i) If to Employee: Jonathan L. Scott 8623 SE 78th Street Mercer Island, WA 98040-5712 (ii) If to Company: Halifax Corporation 5250 Cherokee Avenue Alexandria, Virginia 22312 Attn: Joseph Sciacca, Chief Financial Officer Telefax: (703) 658-2426 with a copy, given in the manner prescribed above, to Blank Rome LLP One Logan Square Philadelphia, PA 19103 Attn: Barry H. Genkin, Esq. Telefax: (215) 832-5514 In addition, notice by mail shall be by air mail if posted outside of the continental United States. Any party may alter the addresses to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section for the giving of notice. (d) Binding Nature of Agreement. The rights and obligations of both parties under this Agreement shall inure to the benefit of and shall be binding upon their heirs, successors and assigns. (e) Assignment. This Agreement may not be assigned by Employee. Company, without the consent of Employee, may assign its rights and obligations hereunder to an affiliate thereof or in connection with a sale of substantially all of its assets. (f) Execution in Counterparts. This Agreement may be executed in any number of counterparts, including by facsimile, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. (g) Provisions Severable. If any provision of this Agreement is construed to be invalid or unenforceable, such determination shall not affect the remaining provisions of this Agreement, all of which shall remain in full force and effect. (h) Entire Agreement. This Agreement contains the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. (i) Section Headings. The Section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. (j) Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context indicates is appropriate. [Signature page follows] IN WITNESS WHEREOF, the parties have executed and delivered this Agreement, intending to be legally bound hereby, as of the date first above written. HALIFAX CORPORATION By: /s/ Charles McNew Name: Charles McNew Title: President & CEO EMPLOYEE: /s/ Jonathan L. Scott JONATHAN L. SCOTT [Signature Page to Employee Severance and Restrictive Covenant Agreement] EX-99.5 9 ex995eg.txt VOTING AGREEMENT Exhibit 99.5 VOTING AGREEMENT THIS VOTING AGREEMENT (the "Agreement") is made and entered into as of August 29, 2003 by and among Microserv, Inc., a Washington corporation ("Microserv"), and the undersigned shareholders of Halifax Corporation (collectively, the "Shareholders"). RECITALS A. Pursuant to that certain Agreement and Plan of Merger (the "Merger Agreement") by and among Halifax Corporation, a Delaware corporation ("Halifax"), Microserv, the shareholders of Microserv who are parties thereto (the "Selling Shareholders") and certain other parties, Halifax has agreed to acquire Microserv through the consummation of certain merger transactions (the "Merger") and other related transactions, as more fully described in the Merger Agreement (the Merger and such related transactions collectively referred to as the "Transactions"). B. It is a condition to closing of the Transactions, pursuant to the Merger Agreement, that the Shareholders enter into, execute and deliver this Agreement. C. The Shareholders are willing to enter into this Agreement to induce the Selling Shareholders and Microserv to close the Transactions, and the Shareholders acknowledge that the Selling Shareholders are entitled to rely and will rely on this Agreement in completing such closing. NOW THEREFORE, intending to be legally bound, the parties hereto agree as follows: 1. Defined Terms. Capitalized terms used and not defined herein shall have the meanings set forth in the Merger Agreement. As to each of the Shareholders, the term "Shares" shall mean at any relevant time all shares of voting capital stock of Halifax which such Shareholder at that time has the power to vote for the election of directors (including any such shares acquired by such Shareholder after the date hereof or issued to such Shareholder with respect to, upon conversion of, or in exchange or substitution therefor). 2. Election of Directors. Subject to Section 3 hereof, in any election of directors of Halifax, each Shareholder shall vote at any regular or special meeting of shareholders all of his, her or its Shares to elect one director nominated by the Selling Shareholders and recommended by the board of directors of Halifax pursuant to the Merger Agreement. Any vote taken to remove any director elected pursuant to this Section 2, or to fill any vacancy created by the resignation, removal or death of a director elected pursuant to this Agreement, shall also be subject to the provisions of this Section 2. The voting of the Shares pursuant to this Agreement may be effected in person, by proxy, or in any other manner permitted by applicable law. 3. Qualification of Nominee. The Selling Shareholders shall not nominate any person if: (i) such individual is employed by, or has investment interests, directly or indirectly, in, any material competitor of Halifax (unless such investment constitutes less than two percent (2%) of the equity ownership in a public company and at the time of purchase has a fair market value of less than $50,000); (ii) such individual is not reasonably experienced in business and financial matters; (iii) such individual has been convicted of, or has pled nolo contendere to, a felony; (iv) the election of such individual would violate any law; or (v) any event required to be disclosed pursuant to Item 401(f) of Regulation S-K of the Exchange Act has occurred with respect to such individual. 4. Term. The obligations of the Shareholders hereunder shall continue until such time as the Selling Shareholders fail to own collectively greater than 50% of the aggregate number of Buyer Common Shares issued on the Closing Date (as appropriately adjusted for any combination, division or similar recapitalization affecting such Buyer Common Shares). 5. Further Assurances; Intended Beneficiaries. The Shareholders will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be performed hereunder, but will at all times in good faith assist in the carrying out of all of the provisions of this Agreement and in the taking of all such actions as may be necessary, appropriate or reasonably requested by the Selling Shareholders through the Shareholder Representative in order to protect the rights of the Selling Shareholders hereunder against impairment. The Shareholders acknowledge and agree that the Selling Shareholders are intended beneficiaries of this Agreement, and that the Selling Shareholders shall have all rights to enforce the obligations of the Shareholders hereunder. 6. Miscellaneous. (a) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only upon the written agreement or consent of the holders of a majority of the Shares, and the Selling Shareholders, through their Shareholder Representative. (b) Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors, assigns, heirs and executors of the parties hereto. (c) Notices. Notices required or permitted to be given hereunder shall be in writing and shall be deemed to be received when personally delivered or sent by overnight courier or registered mail, return receipt requested, addressed to the address set forth adjacent to each Shareholder's signature hereto (or at such other address as each party furnishes by notice given in accordance with this Section 5(c)). (d) Governing Law. The corporate law of Virginia shall govern all issues and questions concerning the relative rights of Halifax and its shareholders. All issues and questions concerning the construction, validity, interpretation and enforcement of this Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Virginia, without giving effect to any choice of law or conflict of law rules or provisions (whether of Virginia or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than Virginia. (e) Specific Enforcement. It is agreed and understood that monetary damages would not adequately compensate an injured Selling Shareholder for the breach of this Agreement by any Shareholder, that this Agreement shall be specifically enforceable, and that any breach or threatened breach of this Agreement shall be the proper subject of a temporary or permanent injunction or restraining order. Further, each Shareholder hereto waives any claim or defense that there is an adequate remedy at law for such breach or threatened breach. (f) Attorneys Fees. In the event that any suit or action is instituted under or in relation to this Agreement, including without limitation to enforce any provision in this Agreement, the prevailing party or parties in such dispute shall be entitled to recover from the losing party or parties all reasonable fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation reasonable fees and expenses of attorneys and accountants, and including on any appeal. (g) Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. (h) Counterparts. This Agreement may be executed simultaneously in two or more counterparts, including by facsimile, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. [Signature page follows] SIGNATURE PAGE TO HALIFAX CORPORATION VOTING AGREEMENT IN WITNESS WHEREOF, the undersigned have executed this Voting Agreement effective as of the day and year first above written. /s/ Hugh M. Foley Hugh M. Foley Address: 5250 Cherokee Avenue Alexandria, VA 22312 /s/ Thomas J. Basile Thomas J. Basile Address: 5250 Cherokee Avenue Alexandria, VA 22312 MICROSERV, INC. By: /s/ Jonathan Scott Name: Title EX-99.6 10 ex996eg.txt FORM OF NOTE TO MICROSERV SHAREHOLDERS Exhibit 99.6 THE PAYMENT OF PRINCIPAL AND INTEREST ON THIS NOTE IS SUBJECT TO CERTAIN SUBORDINATION PROVISIONS SET FORTH IN PARAGRAPH 5 HEREIN. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW. THE TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN PARAGRAPH 4 HEREIN. PROMISSORY NOTE U.S. $__________ August 29, 2003 Alexandria, Virginia FOR VALUE RECEIVED, Halifax Corporation, a Virginia corporation ("Maker"), promises to pay to the order of __________________________ ("Payee"), at the address or addresses specified in Section 11 herein, the principal sum of _________________________ ($__________) (the "Principal Sum"), together with interest, on the following terms and conditions: 1. Purpose of Note; Right of Setoff. This Note is one of a series of notes (collectively, the "Notes") being delivered by Maker pursuant to the terms of that certain Agreement and Plan of Merger ("Merger Agreement") dated August 29, 2003 by and among Maker, Microserv, Inc., a Washington Corporation ("Microserv"), Microserv Merger Corp., a Delaware corporation, Microserv Merger LLC, a Delaware limited liability company, Payee and the other shareholders of Microserv parties to the Merger Agreement. All capitalized terms used herein but not defined shall have their respective meanings assigned to them pursuant to the Merger Agreement. This Note is subject to and governed by the terms and conditions of the Merger Agreement, including without limitation, the setoff provisions contained in Section 13.5 of the Merger Agreement. 2. Payment of Principal Sum and Interest. (a) Subject to the last sentence of Section 1 hereof, the Principal Sum shall be paid in full in one lump sum payment due eighteen (18) months from the date hereof (the "Due Date"). Notwithstanding anything in this Note to the contrary, the original Principal Sum under this Note is subject to adjustment, (i) effective as of the date hereof, pursuant to Section 2.8.1 of the Merger Agreement and (ii) as of the date of incurrence of costs and expenses related to the Independent Accountants, pursuant to Sections 2.8.5 and 2.9.5 of such Merger Agreement. If the Principal Sum of this Note is reduced pursuant to the previous sentence after Maker has made a payment or payments of interest based on the incorrect balance of Principal Sum prior to such adjustment, the Maker shall be deemed to have made a prepayment of Principal Sum to the extent such payment or payments of interest exceeded the amount that would have been payable had the Principal Sum reflected the appropriate adjustment contemplated by the previous sentence. (b) Subject to the last sentence of Section 1 hereof, on each October 1, January 1, April 1 and July 1 until this Note has been paid in full, Maker shall pay all accrued but unpaid interest on the unpaid Principal Sum. Interest shall accrue from the date of this Note on the unpaid Principal Sum at a rate per annum equal to five percent (5%); provided, however, that after any Event of Default hereunder, interest shall accrue on the unpaid Principal Sum at a rate per annum equal to ten percent (10%). (c) If a specified payment date hereunder is a Saturday, Sunday or a bank holiday, such payment of Principal Sum or interest, as the case may be, shall be payable on the first business day following such date. 3. Prepayment. Maker may at any time or from time to time, without notice, premium or penalty, prepay the entire unpaid Principal Sum or any part thereof, together with the accrued and unpaid interest on the amount prepaid; provided, however, that the aggregate amount of any prepayment must be distributed pro rata to the holders of the Notes based on the then outstanding principal balance of the Notes. 4. Transfer Restrictions. This Note has not been registered under the Securities Act of 1933, as amended, or any applicable state securities law. Neither this Note, nor any interest herein, may be sold, assigned, transferred, given, pledged or otherwise disposed without the prior written consent of Maker. 5. Subordination: Restrictions on Payment. (a) Unless and until Maker is notified in writing that an event of default (a "Senior Default") has been declared under the Senior Indebtedness (as defined below), Maker may pay, and Payee may receive, scheduled payments of principal, interest, fees and costs hereunder. (b) This Note is unsecured and, in the event of liquidation of Maker, shall rank subordinate to Maker's Senior Indebtedness. Upon written notice to Maker that any Senior Default has been declared, which notice shall describe the nature of the Senior Default, and during the continuance thereof, the holders of such Senior Indebtedness shall be entitled to receive payment in full of all such Senior Indebtedness before Payee is entitled to receive any payment on account of Principal Sum or other amounts due (or past due) upon this Note. Any payments received by Payee in contravention of the subordination provisions set forth herein shall forthwith be paid over to the Senior Indebtedness holders for application first to the Senior Debt (as defined below) and then to Subordinated Debt (as defined below) and until so turned over shall be held "in trust" for the benefit of the Senior Indebtedness. For purposes of this Note, "Senior Debt" shall mean any principal, premium, interest, fees and charges owed to Southern Financial Bank pursuant to that certain Revolving Credit Agreement dated March 6, 2002. For purposes of this Section 5, "Subordinated Debt" shall have the meaning set forth in Section 5(f) below. "Senior Indebtedness" shall mean collectively the Senior Debt and the Subordinated Debt and shall include all interest, fees and charges accruing thereon before and after maturity and/or after the filing of any petition in bankruptcy or the commencement of any insolvency, reorganization or like proceeding relating to the Maker, whether or not a claim for such amounts are allowed in such proceeding. (c) The subordination provisions of this Note shall be enforceable by all persons who hold, become holders of, or continue to hold, Senior Indebtedness and such holders shall be third party beneficiaries of the provisions of this Section 5. Upon written request of the Company, Payee, by its acceptance hereof, agrees to execute and deliver such agreements and documents as may reasonably be required by the holder or holders of the Senior Indebtedness to confirm the subordination provisions set forth in this Note. (d) The provisions as to subordination are solely for the purpose of defining the relative rights of the holders of the Senior Indebtedness, on the one hand, and Payee, on the other hand, and none of such provisions shall impair, as between Maker and Payee, the obligation of Maker, subject to the provisions herein, to pay to Payee the Principal Sum and interest in accordance with the terms of this Note, nor shall any such provisions prevent Payee from exercising all remedies otherwise permitted by applicable law or under the terms of this Note upon default hereunder, subject to the rights, if any, under the subordination provisions herein, of the holders of Senior Indebtedness to receive cash, property or securities, as the case may be, prior to payment to Payee under this Note. (e) The subordination of this Note to the Senior Indebtedness and the rights of the holders of Senior Indebtedness shall continue in full force and effect until the payment in full of the Senior Indebtedness notwithstanding any action which any holder of Senior Indebtedness, with or without notice to, or consent of Payee, shall take or refrain from taking with respect to the Senior Indebtedness, including, but not limited to, (a) any amendment, extension or renewal of the Senior Indebtedness, or (b) any forbearance, release, indulgence or other dealing with respect to the Senior Indebtedness or any guaranty thereof or any security therefore. (f) Notwithstanding any other provision of this Note, the term "Subordinated Debt" shall mean any principal, premium, interest, fees and charges owed to Research Industries, Incorporated ("RII") pursuant to only the following: (i) the 7% Convertible Subordinated Debenture payable by Maker to RII, which has an outstanding balance of not more than $800,000 as of the date hereof; and (ii) the subordinated debentures dated October 8, 1998, October 13, 1998, November 2, 1998 and November 5, 1998, payable by Maker to RII (the "Subordinated Debentures"), which have a combined total principal amount of $2,400,000, and the term "Subordinated Debt" shall not include any amounts borrowed by Maker from RII after the date hereof or any amendments to any of the foregoing Debentures that increase the principal amount thereof. 6. Events of Default. Upon the occurrence of an Event of Default (as defined below), at the option of Payee, the whole unpaid Principal Sum together with all accrued and unpaid interest thereon, and all other sums payable under this Note, shall become due and payable immediately. In addition to, and not in limitation of, the foregoing, before or after acceleration of this Note, upon the occurrence of an Event of Default, Payee may exercise any other remedies as are available at law, in equity or otherwise. Each of the following events shall constitute an Event of Default hereunder: (a) any failure by Maker to pay any amount due under any of the Notes as and when the same becomes due and payable; provided, however, that such failure to pay shall not be an Event of Default to the extent that Maker is exercising its rights pursuant to Section 13.5 of the Merger Agreement; or (b) The breach by Maker of any of the material terms or material provisions contained in any of the Notes other than the failure specified in (a) above, and such breach shall continue uncured for ten (10) days after notice of such breach has been delivered to the Maker; or (c) The occurrence and continuance of a default or event of default under the Senior Indebtedness for such period of time as would permit (assuming the giving of appropriate notice if required) any of the holders of Senior Indebtedness to accelerate the maturity thereof; provided, however, that no payment shall be made hereunder until the Senior Indebtedness is satisfied in full; or (d) There shall remain in force, undischarged, unsatisfied and unstayed, for more than thirty (30) days, whether or not consecutive, any final judgment against Maker that with other such outstanding final judgments against Maker exceeds in the aggregate $100,000; or (e) The occurrence of any of the following: (i) the consolidation or merger of Maker with or into another entity where (A) the shareholders of Maker immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction or (B) the common stock of such surviving corporation is not listed for trading on the Nasdaq National Market System, the New York Stock Exchange or the American Stock Exchange immediately after the completion of such transaction, (ii) the sale of all or substantially all of the assets of Maker in one or a series of related transactions, (iii) the acquisition by any person, entity or group of at least 51% of the outstanding voting securities of Maker, or (iv) the execution by Maker of an agreement to which Maker is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii); or (f) the dissolution, liquidation or termination of existence of Maker, or Maker's and its affiliates cessation to conduct the Business (as defined in the Merger Agreement); or (g) Maker's application for or consent to the appointment of a receiver, trustee or liquidator for itself or any of its properties or assets; Maker's admitting in writing its inability to pay its debts as they come due in the ordinary course; Maker's making a general assignment for the benefit of its creditors; Maker's commencement of a voluntary case for relief as a debtor under the United States Bankruptcy Code or filing of a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage of any applicable law respecting bankruptcy, reorganization, insolvency, readjustment of debts, dissolution or liquidation ("Bankruptcy Law"); Maker's filing any answer admitting the material allegations of a petition filed against it in any proceeding under any such Bankruptcy Law; or (h) any involuntary case under the United States Bankruptcy Code being commenced against Maker or a petition being filed against Maker seeking similar relief under any Bankruptcy Law and such case or petition remaining undismissed for sixty (60) days after the commencement or filing thereof, as applicable; or (i) an order, judgment or decree being entered, without the application, approval or consent of Maker, by any competent jurisdiction approving a petition seeking reorganization of Maker or of all or a substantial part of its properties or assets, if applicable, or appointing a receiver, trustee or liquidator of Maker and such order, judgment or decree continuing unstayed and in effect for any period of sixty (60) days; or (j) if, by the order or decree of a court of competent jurisdiction, any material portion of the property or assets of Maker shall be sequestered and such order or decree shall have been undischarged and unstayed for sixty (60) days after the entry thereof; or (k) any attachment or execution process being issued against all or any substantial part of the assets of Maker; or any Governmental Body's seizing or appropriating custody or control, condemning or occupying any substantial portion of Maker's assets. 7. Remedies Cumulative; Waiver of Presentment. Subject to Section 5 hereof, all rights and remedies hereby granted or otherwise available to Payee at law or in equity shall be cumulative and concurrent and may be pursued singly, successively or together at Payee's sole option, and may be exercised from time to time and as often as occasion therefor shall occur until all obligations hereunder are paid or otherwise satisfied in full. The failure to exercise any such right or remedy shall in no event be construed as a waiver or release of same by Payee. Demands, presentment for payment, protest, notice of dishonor or nonpayment and notice of the exercise of any option hereunder, are hereby waived by Maker. 8. Expenses. The Maker shall pay the Payee, on demand, for all reasonable costs and expenses, including, but not limited to, reasonable attorneys' fees and costs, incurred by Payee upon the occurrence of an Event of Default hereunder in connection with collection of principal and interest due under this Note. 9. Loss, Theft, Destruction or Mutilation of Note. Upon receipt of evidence reasonably satisfactory to Maker of the loss, theft, destruction or mutilation of this Note, and, in the case of any such loss, theft or destruction, upon receipt of an affidavit of loss from Payee and such bond/indemnity as may be reasonably required by Maker, or in the case of any such mutilation, upon surrender and cancellation of this Note, Maker will make and deliver, in lieu of this Note, a new Note of like tenor and unpaid Principal Sum and dated as of the date to which interest has been paid on this Note. 10. Cancellation. After the Principal Sum and interest on this Note has been paid in full, this Note shall be surrendered to Maker for cancellation and shall not be reissued. 11. Notices. All notices that are required or permitted hereunder shall be in writing and shall be sufficient if personally delivered or sent by mail, facsimile message or by a nationally recognized overnight delivery courier. Any notices shall be deemed given upon the earlier of the date when received at, or the third (3rd) day after the date when sent by registered or certified mail or the day after the date when sent by overnight delivery courier to, the address or fax number set forth below, unless such address or fax number is changed by notice to the other parties hereto: If to Payee at: [Insert Address] with a copy to: Stoel Rives LLP 600 University Street, Suite 3600 Seattle, Washington 98101 Attn: L. John Stevenson, Jr., Esq. Telefax: (206) 386-7500 If to Maker Halifax Corporation 5250 Cherokee Avenue Alexandria, Virginia 22312 Attn: Joseph Sciacca, Chief Financial Officer Telefax: (703) 658-2426 with a copy to: Blank Rome LLP One Logan Square Philadelphia, PA 19103 Attn: Barry H. Genkin, Esq. Telefax: (215) 832-5514 12. Captions. The descriptive headings of the various sections or parts of this Promissory Note are for convenience only and shall not affect the meanings or construction of any of the provisions hereof. 13. Successors and Assigns. This Note is and shall be binding upon Maker and Maker's successors and assigns and does and shall inure to the benefit of Payee and Payee's consented to successors and assigns. 14. Governing Law. This Note shall be governed by the laws of the State of Delaware applicable to contracts executed and to be performed in Delaware. IN WITNESS WHEREOF, and intending to be legally bound hereby, Maker has caused this Promissory Note to be executed on the date first set forth above. HALIFAX CORPORATION By: Name: Charles McNew Title: President [Signature page to Promissory Note issued to__________] EX-99.7 11 ex997eg.txt GENERAL RELEASE Exhibit 99.7 GENERAL RELEASE As an inducement for Halifax Corporation, a Virginia corporation ("Buyer"), to deliver the Merger Consideration and to otherwise complete the transactions contemplated by that certain Agreement and Plan of Merger (the "Merger Agreement") dated August 29, 2003, by and among Buyer, Microserv Merger Corp., a Delaware corporation and wholly-owned subsidiary of Buyer ("Merger Sub"), Microserv Merger LLC, a Delaware limited liability company and wholly-owned subsidiary of Buyer ("Newco LLC"), Microserv, Inc., a Washington corporation (the "Company"), and the shareholders of Microserv who are parties to the Merger Agreement, and for other good and valuable consideration, including, in the case of certain employees of the Company, severance benefits and stay bonuses to which such employees were not otherwise entitled, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, the undersigned hereby release, remise and forever discharge (i) Microserv, its subsidiaries and affiliates and their respective predecessors and each and every one of their past and present directors, officers, employees, agents, servants and shareholders of each and every one of them (collectively referred to herein as the "Microserv Released Parties") and (ii) each of Buyer, Merger Sub and Newco LLC, their subsidiaries and affiliates and their respective predecessors and each and every one of their past and present parents, subsidiaries, affiliates, divisions and partnerships in which any of the foregoing has, had or may have any interest, and the past and present directors, officers, employees, agents, servants, shareholders, members, managers and partners of each and every one of them (collectively, the "Buyer Released Parties" and together with the Microserv Released Parties, the "Released Parties"), from any and all actions, causes of action, claims, demands, rights, suits, accountings, debts, dues, accounts, bonds, options, warrants, covenants, contracts, agreements, duties or obligations of whatever kind or nature, whether at law or equity, or otherwise known or unknown, by reason of any matter or thing whatsoever which the undersigned have, had or may have against the Released Parties, including without limitation, the release and discharge of any option or other right to acquire any capital stock of the Company which is unexercised at the time of Closing; provided, however, that notwithstanding the foregoing (a) the Buyer Released Parties shall only be released hereunder with respect to claims of the undersigned against the Microserv Released Parties that are released hereunder for which the Buyer Released Parties may be held responsible as a successor in interest to such Microserv Released Parties, and (b) the undersigned shall not release the Buyer Released Parties hereunder for obligations of such Buyer Released Parties pursuant to (i) the Merger Agreement or (ii) any other document or agreement by and among any of the Buyer Released Parties, on the one hand, and one or more of the undersigned, on the other hand, delivered pursuant to, and as expressly contemplated by, the Merger Agreement at the time of Closing thereunder. Each of the undersigned will severally, but not jointly, hold the Released Parties harmless from and will indemnify the same for all reasonable expenses and costs (including, without limitation, reasonable attorney's fees) which such Released Parties may suffer or incur by reason of a breach of any of the provisions hereof by such breaching party, which provisions shall be construed in accordance with the laws of the State of Delaware. All capitalized terms utilized herein, and not otherwise defined, shall have their respective meanings contained in the Merger Agreement. This General Release may be executed in one or more counterparts, including by facsimile, each of which shall be deemed an original and all of which together shall constitute one and the same instrument, and, when signed by all of the parties hereto, shall become legally binding on such parties effective as of the date hereof. The undersigned acknowledge that each of them has read this General Release and has had the opportunity to obtain the advice of counsel with respect thereto. [Signature page follows] IN WITNESS WHEREOF, the undersigned have hereunto signed this General Release on this 29th day of August, 2003. /s/ Gary M. Lukowski Gary M. Lukowski The Dempsey 1996 Revocable Trust Dated November 13, 1996 /s/ Neal Dempsey III By: Neal Dempsey III G. and A. Ryles Living Trust dated October 29, 1968 /s/ Gerald F. Ryles By: Gerald F. Ryles /s/ Robert S. Johanson Robert S. Johanson /s/ Charles W. Lewis Charles W. Lewis NEW VENTURE ASSOCIATES, LLC PROFIT SHARING PLAN By: /s/ Patrick E. Green Name: Title: /s/ Kris Hansen Kris Hansen [Signature page to General Release] /s/ Jonathan Scott Jonathan Scott /s/ Richard M. Brooks Richard M. Brooks /s/ Mark Working Mark Working /s/ T.J. Leffingwell T.J. Leffingwell /s/ Leo Manson Leo Manson /s/ John Bender John Bender /s/ Scott Kosnek Scott Kosnek [Signature page to General Release] -----END PRIVACY-ENHANCED MESSAGE-----