-----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, C0WMW7BucgcsKpy5ggmyc6mIQY2XagGaf+kxlepk7heG31Ji/39pcrnckwzrLmlf 71sdK3rsZZXo4ZeRgGxTeQ== 0000928465-99-000037.txt : 19991201 0000928465-99-000037.hdr.sgml : 19991201 ACCESSION NUMBER: 0000928465-99-000037 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990915 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMCON DISTRIBUTING CO CENTRAL INDEX KEY: 0000928465 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 470702918 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-24708 FILM NUMBER: 99766390 BUSINESS ADDRESS: STREET 1: 10228 L ST STREET 2: POST OFFICE BOX 241230 CITY: OMAHA STATE: NE ZIP: 68127 BUSINESS PHONE: 4023313727 MAIL ADDRESS: STREET 1: 10228 L STREET STREET 2: POST OFFICE 241230 CITY: OMAHA STATE: NE ZIP: 68127 8-K/A 1 AMCON DISTRIBUTING COMPANY FORM 8-K/A, 09/15/99 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 Date of Report (Date of earliest event reported) September 15, 1999 ------------------------------------------------------------------- AMCON DISTRIBUTING COMPANY -------------------------- (Exact name of registrant as specified in its charter) DELAWARE 0-24708 47-0702918 - ------------------------------------------------------------------------------ (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 10228 "L" Street, Omaha, NE 68127 --------------------------------- (Address of principal executive offices) (Zip Code) (402) 331-3727 -------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name or former address, if changed since last report) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS Food For Health Company, Inc. ("FFH"), an Arizona corporation and a wholly owned subsidiary of AMCON Distributing Company ("AMCON"), a Delaware corporation, entered into a Stock Purchase Agreement, dated August 30, 1999 (the "Stock Purchase Agreement") with Health Food Associates ("HFA") and each of its shareholders. On September 15, 1999, upon terms set forth in the Stock Purchase Agreement, FFH completed its purchase of all of the outstanding stock of HFA for a purchase price of $13.4 million. There are no material relationships between FFH and HFA or any of its shareholders and the purchase price was determined by arm's-length negotiations. Funding for the acquisition was provided as follows: $4 million through borrowings under AMCON's revolving credit facility; $2.0 million through borrowings under an 8% Convertible Subordinated Note (the "Convertible Note") from FFH to the sellers; and $7.4 million through borrowings under a Secured Promissory Note (the "Secured Note") from FFH to the sellers. Costs and expenses incurred by FFH in connection with the acquisition were paid from cash flow from operations. Both the Convertible Note and the Secured Note have five-year terms and bear interest at 8% per annum. Principal on the Convertible Note is due in a single payment at maturity. Principal on the Secured Note is payable in installments of $800,000 per year with the balance due at maturity. The Secured Note is secured by a pledge of the stock of HFA. The principal balance of the Convertible Note may be converted into stock of FFH under circumstances set forth in the Convertible Note. On September 16, 1999, AMCON and FFH issued a press release announcing that the acquisition of HFA pursuant to the Stock Purchase Agreement had been completed. The press release is filed herewith as an exhibit and incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PRO FORM FINANCIAL INFORMATION AND EXHIBITS (a) Financial Statements of Business Acquired Health Food Associates, Inc. dba AKiN Natural Foods Market Financial Statements For the years ended December 31, 1998 and 1997 Report of Independent Accountants To Board of Directors and Shareholders of Health Food Associates, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Health Food Associates, Inc. at December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Phoenix, Arizona October 15, 1999 Health Food Associates, Inc. Balance Sheets December 31, 1998 and 1997 1998 1997 ---- ---- Assets Current assets: Cash $ 1,837,939 $ 1,392,175 Accounts receivable 68,309 96,280 Inventories 2,418,251 1,864,827 Prepaid Expenses 84,171 48,185 Investments in equity securities 48,473 39,673 ----------- ----------- Total current assets 4,457,143 3,441,140 Equipment and leasehold improvements, less accumulated depreciation and amortization 964,713 874,568 Other assets 193,637 219,213 ----------- ----------- $ 5,615,493 $ 4,534,921 =========== =========== Liabilities ans Shareholders' Equity Current liabilities: Accounts payable $ 299,903 $ 181,605 Accrued expenses 247,908 226,834 Distributions payable 451,904 560,000 Payable to related party 60,000 60,000 ----------- ----------- Total current liabilities 1,059,715 1,028,439 Shareholders' equity (Note 8): Voting common stock, $1 par value; 1,250,000 shares authorized; 250,000 shares issued and outstanding 250,000 250,000 Non-voting common stock, $1 par value; 1,000,000 shares authorized; 750,000 shares issued and outstanding 750,000 750,000 Retained earnings 3,587,854 2,508,311 Accumulated other comprehensive income (32,076) (1,829) ----------- ----------- Total shareholders' equity 4,555,778 3,506,482 ----------- ----------- $ 5,615,493 $ 4,534,921 =========== =========== See accompanying notes to the financial statements Health Food Associates, Inc. Statements of Operations For the years ended December 31, 1998 and 1997 1998 1997 ---- ---- Net sales $ 20,020,821 $ 18,082,223 Cost of sales 11,152,126 10,594,536 ------------ ------------ Gross profit 8,868,695 7,487,687 ------------ ------------ Operating expenses: Store expenses 4,872,001 3,967,811 Advertising/promotions 541,392 389,198 General and administrative 137,110 103,190 Depreciation and amortization 292,717 260,961 Rent 454,610 397,593 ------------ ------------ 6,297,830 5,118,753 ------------ ------------ Income from operations 2,570,865 2,368,934 ------------ ------------ Other income, net 44,078 64,941 ------------ ------------ Net income $ 2,614,943 $ 2,433,875 ============ ============ See accompanying notes to the financial statements Health Food Associates, Inc. Statement of Shareholders' Equity For the years ended December 31, 1998 and 1997 Common Stock Additional ------------------------ Paid-in Shares Amount Capital ---------- ----------- ---------- Balance, December 31, 1996 330 $ 330 $ 220 Comprehensive income: Net income Unrealized gain (loss) on securities available for sale ---------- ----------- ---------- Total comprehensive income Distributions to Shareholders Common stock issued 999,670 $ 999,670 (220) ---------- ----------- ---------- Balance, December 31, 1997 1,000,000 $ 1,000,000 $ - ---------- ----------- ---------- Comprehensive income: Net income Unrealized gain (loss) on securities available for sale ---------- ----------- ---------- Total comprehensive income Distributions to Shareholders ---------- ----------- ---------- Balance, December 31, 1998 1,000,000 $ 1,000,000 $ - ========== =========== ========== (Continued on following page) See accompanying notes to the financial statements Health Food Associates, Inc. Statement of Shareholders' Equity For the years ended December 31, 1998 and 1997 (continued) Accumulated Other Retained Comprehensive Total Earnings Income Equity ----------- ------------- ----------- Balance, December 31, 1996 $ 3,338,886 $ 3,339,436 Comprehensive income: Net income 2,433,875 2,433,875 Unrealized gain (loss) on securities available for sale $ (1,829) (1,829) ----------- ------------- ----------- Total comprehensive income 2,432,046 Distributions to Shareholders (2,265,000) (2,265,000) Common stock issued (999,450) - ----------- ------------- ----------- Balance, December 31, 1997 2,508,311 (1,829) 3,506,482 ----------- ------------- ----------- Comprehensive income: Net income 2,614,943 2,614,943 Unrealized gain (loss) on securities available for sale (30,247) (30,247) ----------- ------------- ----------- Total comprehensive income 2,584,696 Distributions to Shareholders (1,535,400) (1,535,400) ----------- ------------- ----------- Balance, December 31, 1998 $ 3,587,854 $ (32,076) $ 4,555,778 =========== ============= =========== See accompanying notes to the financial statements Health Food Associates, Inc. Statements of Cash Flows For the years ended December 31, 1998 and 1997
1998 1997 ---- ---- Cash flows from operating activities: Net income $ 2,614,943 $ 2,433,875 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 292,717 260,961 Loss (gain) on sale of investments 1,426 (12,470) Changes in assets and liabilities: (Increase) decrease in accounts receivable 27,971 (45,568) (Increase) decrease in prepaid expenses (35,986) 17,622 (Increase) decrease in inventory (553,424) (10,604) (Decrease) increase in accounts payable 118,298 (110,809) (Decrease) increase in accrued expenses 21,074 55,847 ----------- ----------- Net cash provided by operating activities 2,487,019 2,588,854 ----------- ----------- Cash flows from investing activities: Purchases of investments (97,979) (59,829) Proceeds from sales of investments 57,506 54,797 Capital expenditures (357,286) (365,791) ----------- ----------- Net cash used in investing activities (397,759) (370,823) ----------- ----------- Cash flows from financing activities: Payments of distributions payable (220,000) - Distribution paid to shareholders (1,423,496) (1,705,000) Payment of bank loan - (262,682) ----------- ----------- Net cash used in financing activities (1,643,496) (1,967,682) ----------- ----------- Net increase (decrease) in cash 445,764 250,349 Cash at beginning of period 1,392,175 1,141,826 ----------- ----------- Cash at end of period $ 1,837,939 $ 1,392,175 =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest 43,819 20,841 Non-cash investing and financing activities: Distribution to shareholders as notes payable 111,904 560,000 Restructuring of Equity (Note 8) - 1,000,000 See accompanying notes to the financial statements
Health Food Associates, Inc. Notes to Financial Statements 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Health Food Associates, Inc (the "Company") d.b.a. AKiN Natural Foods Market is an Oklahoma Corporation which operates six Natural Foods Supermarkets in the Midwestern United States. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVENTORIES Inventories consist of merchandise for resale and are stated at lower of cost or market. Cost is determined using the retail inventory method. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Depreciation is provided over the estimated useful lives of the assets ranging from 5 to 10 years using the straight-line method. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. INCOME TAXES The Company qualifies as an S-Corporation for federal income tax reporting purposes. Accordingly, taxable income of the Company is reported in the income tax returns of the shareholders and no provision has been made in the accompanying financial statements for income taxes. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. CONCENTRATIONS OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash. The Company maintains its cash accounts primarily with banks located in the Midwestern United States. The total cash balances are insured by the F.D.I.C. up to $100,000 per bank. The Company had cash balances or deposits at December 31, 1998 that exceeded the balance insured by the F.D.I.C. in the amount of $1,818,432. ADVERTISING COSTS Advertising costs are expensed as incurred. 2. INVESTMENTS The Company's investments are categorized as available for sale securities, as defined by the Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses are reflected as a net amount in a separate component of Shareholders' equity until realized. For the purpose of computing realized gains and losses cost is identified on a specific identification basis. The cost and estimated market values of equity securities at December 31 are as follows: 1998 1997 ---- ---- Gross cost $ 80,549 $ 41,502 Unrealized gains 11 6,046 Unrealized losses (32,087) (7,875) -------- -------- Market Value $ 48,473 $ 39,673 ======== ======== Proceeds from sales of investments were $57,506 and $54,797 during 1998 and 1997. Gross gains of $9,843 and $12,470 and gross losses of $11,269 and $0 were realized on those sales during 1998 and 1997. 3. OTHER ASSETS Other assets consist of a non-compete agreement and goodwill, which are amortized using the straight-line method. The non-compete agreement is amortized over 10 years. Goodwill is amortized over 15 years. 4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements is comprised of the following at December 31: 1998 1997 ---- ---- Furniture, fixtures and equipment $ 1,215,042 $ 1,095,941 Systems and network 658,447 574,067 Leasehold improvements 503,939 394,315 ----------- ----------- Total fixed assets 2,377,428 2,064,323 Less accumulated depreciation and amortization 1,412,715 1,189,755 ----------- ----------- Net fixed assets $ 964,713 $ 874,568 =========== =========== 5. LEASES The Company has entered into various non-cancelable operating leases for store, warehouse, and office space which expire within the next six years. Certain of these leases contain the option for renewal at rates that have already been negotiated. Future minimum lease payments under cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 1998 are: Year ending December 31, 1999 $ 452,285 2000 404,693 2001 339,032 2002 209,779 2003 147,375 ----------- $ 1,553,164 =========== 6. DEFINED CONTRIBUTION PLAN The Company has a defined contribution 401(k) tax deferred savings plan covering all eligible employees. Company contributions to the Plan for the years ended December 31, 1998 and 1997 totaled $19,342 and $17,480, respectively, which represents a match of 50% of a participant's contribution up to a maximum of 4% of participant's contribution eligible compensation. 7. RELATED PARTY TRANSACTIONS The Company purchases inventory from Elk River Distributing Company ("Elk River"), a distributing company owned by a shareholder. The cost of inventory purchased from this distribution company during 1998 and 1997 was $1,769,408 and $1,711,878, respectively. In September 1999 the Company purchased all the inventory of Elk River at a cost of $274,000. At December 31, 1998 and 1997, the Company had a note payable of $60,000 to the spouse of a shareholder. This note payable bears interest of 10% per annum and is payable within 60 days of demand. This note was paid in full in September 1999. 8. SHAREHOLDERS' EQUITY On September 15, 1997, the Company filed an Amended Certificate of Incorporation (the "Amendment"). The Amendment increased the number of common shares authorized from 50,000 shares to 1,250,000 shares, with par values of $1. The shares are divided into 250,000 shares of class A voting common stock and 1,000,000 shares of class B non-voting common stock. 9. STOCK Subsequent to the Amendment, in a restructuring of the Company's equity, the shareholders of the Company exchanged 330 shares of old common stock for 250,000 shares of class A voting and 750,000 shares of class B non-voting common stock. The restructuring was recorded as a reduction in additional paid in capital and retained earnings. 10. SUBSEQUENT EVENTS Distributions payable due to shareholders totaling $451,904 at December 31, 1998, was paid in full in September 1999. Effective September 14, 1999, all of the outstanding common stock of the Company was acquired by Food for Health, Inc. for $14,000,000. Food for Health, Inc. is a wholesale distributor of health food and related products throughout the United States. (b) Pro Forma Financial Information AMCON Distributing Company Pro Forma Condensed Combined Balance Sheet June 30, 1999 (Unaudited)
AMCON HFA Pro Forma Pro Forma Historical Historical Adjustments Combined ----------- ---------- ------------ ----------- ASSETS Current assets: Cash $ 348,207 $ 1,911,691 $ - $ 2,259,898 Accounts receivable 17,289,406 94,685 - 17,384,091 Inventories 18,197,533 3,072,910 368,498 (1) 21,638,941 Deferred income taxes 702,780 - - 702,780 Other 477,553 48,185 - 525,738 ----------- ----------- ----------- ----------- Total current assets 37,015,479 5,127,471 368,498 42,511,448 Fixed assets, net 6,775,333 648,812 377,878 (2) 7,802,023 Investments 622,500 80,797 - 703,297 Other assets 5,997,868 220,139 7,495,882 (3) 13,713,889 ----------- ----------- ----------- ----------- $50,411,180 $ 6,077,219 $ 8,242,258 $64,730,657 =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $11,099,091 $ 275,434 $ - $11,374,525 Accrued expenses 2,023,606 153,643 38,818 (4) 2,216,067 Accrued wages, salaries and bonuses 636,211 - - 636,211 Distributions payable - 441,904 - 441,904 Payable to related party - 60,000 - 60,000 Income taxes payable 1,335,549 - - 1,335,549 Dividends payable 49,600 - - 49,600 Current portion of long-term debt 6,381,132 - 149,678 (5) 6,530,810 ----------- ----------- ----------- ----------- Total current liabilities 21,525,189 930,981 188,496 22,644,666 ----------- ----------- ----------- ----------- Deferred income taxes 15,600 - - 15,600 Other liabilities 428,697 - - 428,697 Long-term debt, less current portion 15,761,290 - 13,200,000 (5) 28,961,290 Shareholders' equity: Preferred stock - - - - Common stock 24,800 1,000,000 (1,000,000)(6) 24,800 Additional paid-in capital 2,271,278 - 2,271,278 Unrealized gain on investments available-for-sale 287,761 - - 287,761 Retained earnings 10,096,880 4,146,238 (4,146,238)(6) 10,096,880 ----------- ----------- ----------- ----------- 12,680,719 5,146,238 (5,146,238) 12,680,719 Less treasury stock (315) - - (315) ----------- ----------- ----------- ----------- Total shareholders' equity 12,680,404 5,146,238 (5,146,238) 12,680,404 ----------- ----------- ----------- ----------- $50,411,180 $ 6,077,219 $ 8,242,258 $64,730,657 =========== =========== =========== =========== See accompanying notes to the Pro Forma Condensed Financial Statements.
AMCON Distributing Company Pro Forma Condensed Combined Statement of Income for the year ended September 30, 1998 (Unaudited)
AMCON HFA Pro Forma Pro Forma Historical Historical Adjustments Combined ------------- ------------ ------------- ------------ Sales $294,281,323 $ 19,722,719 $ - $314,004,042 Cost of sales 262,632,767 11,344,043 - 273,976,810 ------------ ------------ ------------ ------------ Gross profit 31,648,556 8,378,676 - 40,027,232 Selling, general and administrative expenses 25,088,767 5,702,542 - 30,791,309 Depreciation and amortization 1,120,482 290,502 324,855 (7) 1,735,839 ------------ ------------ ------------ ------------ Income from operations 5,439,307 2,385,632 (324,855) 7,500,084 ------------ ------------ ------------ ------------ Other expense (income): Interest expense 1,814,555 - 1,038,000 (8) 2,852,555 Other (income) expense, net (276,287) 9,761 - (266,526) ------------ ------------ ------------ ------------ Income before income taxes 3,901,039 2,375,871 (1,362,855) 4,914,055 Income tax expense 1,542,853 - 400,141 (9) 1,942,994 ------------ ------------ ------------ ------------ Net income $ 2,358,186 $ 2,375,871 $ (1,762,996) $ 2,971,061 ============ ============ ============ ============ Earnings per common and common equivalent share attributable to common shareholders: Basic $0.96 $1.21 ============ ============ Diluted $0.93 $1.17 ============ ============ Weighted average shares outstanding: Basic 2,458,062 2,458,062 ============ ============ Diluted 2,535,451 2,535,451 ============ ============ See accompanying notes to the Pro Forma Financial Statements.
AMCON Distributing Company Pro Forma Condensed Combined Statement of Income for the nine months ended June 30, 1999 (Unaudited)
AMCON HFA Pro Forma Pro Forma Historical Historical Adjustments Combined ------------- ------------ ------------- ------------ Sales $275,998,896 $ 15,505,675 $ - $291,504,571 Cost of sales 245,334,725 8,436,475 - 253,771,200 ------------ ------------ ------------ ------------ Gross profit 30,664,171 7,069,200 - 37,733,371 Selling, general and administrative expenses 23,347,446 4,834,551 - 28,181,997 Depreciation and amortization 1,053,122 238,627 243,641 (7) 1,535,390 ------------ ------------ ------------ ------------ Income from operations 6,263,603 1,996,022 (243,641) 8,015,984 ------------ ------------ ------------ ------------ Other expense (income): Interest expense 1,234,745 - 778,500 (8) 2,013,245 Other income, net (151,666) (20,001) - (171,667) ------------ ------------ ------------ ------------ Income before income taxes 5,180,524 2,016,023 (1,022,141) 6,174,406 Income tax expense 2,025,633 - 387,614 (9) 2,413,247 ------------ ------------ ------------ ------------ Net income $ 3,154,891 $ 2,016,023 $ (1,409,755) $ 3,761,159 ============ ============ ============ ============ Earnings per common and common equivalent share attributable to common shareholders: Basic $1.27 $1.52 ============ ============ Diluted $1.23 $1.46 ============ ============ Weighted average shares outstanding: Basic 2,479,903 2,479,903 ============ ============ Diluted 2,571,997 2,571,997 ============ ============ See accompanying notes to the Pro Forma Financial Statements.
AMCON Distributing Company Notes to Pro Forma Financial Information Basis of Presentation: The accompanying unaudited pro forma balance sheet and income statements give effect to the purchase of all of the outstanding common stock of Health Food Associates, Inc. ("HFA")as of June 30, 1999 and October 1, 1997, respectively. The pro forma financial information are not necessarily indicative of future results or the results that would have occurred had these transactions actually occurred on October 1, 1997. It is suggested that this financial information be read in conjunction with AMCON's annual report for the year ended September 30, 1998y and AMCON's quarterly report on Form 10-Q for the nine months ended June 30, 1999. The historical financial information for HFA is as of June 30, 1999, the twelve months ended September 30, 1998 and the nine months ended June 30, 1999. The acquisition of HFA will be accounted for under the purchase method of accounting. Under this method of accounting, the purchase price will be allocated to the assets acquired and liabilities assumed based on their estimated fair values. Pro Forma Adjustments: Pro forma adjustments to the historical financial information reflect adjustments associated with recording inventories, fixed assets and other intangible assets at their fair values and to include all expenses associated with the acquisition of HFA. Pro forma adjustments related to the income statements have been provided assuming the acquisition was consummated on October 1, 1997. Pro forma adjustments are as follows: (1) To record inventories at their approximate fair values. (2) To record fixed assets at their approximate fair values. (3) To record intangible assets which include, trade name, trademarks and favorable leases, and goodwill and acquisition costs associated with the purchase of HFA. The following is a summary of the adjustment to goodwill and other intangibles: Purchase price $13,349,678 Acquisition and debt financing costs 38,818 Increase in fair value of inventories (368,498) Increase in fair value of fixed assets (377,878) Net assets acquired (5,146,238) ----------- Goodwill and other intangibles $ 7,495,882 ============ (4) To record a liability for acquisition costs associated with the acquisition of HFA. (5) To record subordinated notes and bank debt associated with the acquisition of HFA. (6) To eliminate the equity of HFA. (7) To record depreciation expense on fixed assets and amortization expense for intangible assets and goodwill related to the HFA acquisition. Intangibles will be amortized over 3 to 40 years. Goodwill of approximately $336,000 will be amortized over 20 years. (8) To record additional interest expense associated with the debt incurred to finance the purchase of HFA. The interest expense was calculated based on AMCON's current borrowing rate of approximately 7.25% on $4,000,000 of the debt and 8.0% fixed rate interest on the subordinated notes. A change of 1/8% in AMCON's variable interest rate would affect interest income by $5,000 and $3,750 for the year ended September 30, 1998 and the nine months ended June 30, 1999, respectively. (9) To record the tax effect of the pro forma adjustments at the marginal effective rate of 39.5% and 39.0% for the year ended September 30, 1998 and the nine months ended June 30, 1999, respectively. Since the seller agreed to make an election under I.R.C. section 338(h)(10) to treat the acquisition as a sale of assets for tax purposes, all goodwill is tax deductible. (c) Exhibits The following items are filed as exhibits to this report: EXHIBIT NO. DESCRIPTION 2.1 Stock Purchase Agreement, dated August 30, 1999, by and among Food For Health Company, Inc., a wholly-owned subsidiary of AMCON Distributing Company and Health Food Associates 10.1 8% Convertible Subordinated Note, dated September 15, 1999 by and between AMCON Distributing Company and Health Food Associates 10.2 Secured Promissory Note, dated September 15, 1999 by and between AMCON Distributing Company and Health Food Associates 10.3 Pledge Agreement, dated September 15, 1999, by and between AMCON Distributing Company and Health Food Associates 99.1 Press release, dated September 16, 1999, issued by AMCON Distributing Company and Food For Health Company, Inc. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMCON DISTRIBUTING COMPANY (Registrant) Date: November 30, 1999 By : Michael D. James ------------------------- Name: Michael D. James Title: Treasurer & Chief Financial Officer EXHIBIT INDEX ------------- Exhibit Description 2.1 Stock Purchase Agreement, dated August 30, 1999, by and among Food For Health Company, Inc., a wholly-owned subsidiary of AMCON Distributing Company and Health Food Associates. 10.1 8% Convertible Subordinated Note, dated September 15, 1999 by and between AMCON Distributing Company and Health Food Associates 10.2 Secured Promissory Note, dated September 15, 1999 by and between AMCON Distributing Company and Health Food Associates 10.3 Pledge Agreement, dated September 15, 1999, by and between AMCON Distributing Company and Health Food Associates 99.1 Press release, dated September 16, 1999, issued by AMCON Distributing Company and Food For Health Company, Inc. EX-2.1 2 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT BETWEEN Health Food Associates, Inc., an Oklahoma corporation James C. Hinkefent, individually and as trustee of the James C. Hinkefent Health Food Associates Stock Trust dated January 30, 1998, James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky AND Food for Health Co., Inc., an Arizona corporation Dated: August 30, 1999 TABLE OF CONTENTS ----------------- 1. Purchase and Sale of Stock...........................................1 2. Purchase Price.......................................................1 2.1 Allocation of Closing Payment Among Shareholders.............2 2.2 Allocation of Payments under the Secured Note Among Shareholders.................................................2 2.3 Allocation of Payments under the Convertible Note Among Shareholders.................................................3 2.4 338(h)(10) Election..........................................3 3. Closing..............................................................3 4. Shareholders' Obligations at Closing; Further Assurances.............4 5. Representations and Warranties by Shareholders.......................4 6. Representations and Warranties by Hinkefent..........................5 6.1 Organization, Standing and Qualification.....................5 6.2 Subsidiaries.................................................5 6.3 Transactions with Certain Persons............................6 6.4 Capitalization...............................................6 6.5 Financial Statements.........................................7 6.6 Absence of Undisclosed Liabilities...........................8 6.7 Taxes........................................................8 6.8 Absence of Changes or Events.................................8 6.9 Litigation..................................................10 6.10 Compliance with Laws and Other Instruments..................10 6.11 Title to Properties.........................................11 6.12 Schedules...................................................11 6.13 Proprietary Rights..........................................13 6.14 No Guaranties...............................................13 6.5 Filing and Records..........................................13 6.16 Broker's Fees...............................................14 6.17 Environmental, Health, and Safety Matters...................14 6.18 Intellectual Property.......................................15 6.18.6 Year 2000 Representation and Warranty............18 6.19 Employment Matters..........................................18 6.19.1 Compliance with Employment Laws..................18 6.19.2 Plan Compliance..................................19 6.20 Inventory Returns...........................................20 6.21 Utilities...................................................20 6.22 Accuracy and Completeness of Representations and Warranties................................................20 7. Representations and Warranties by Purchaser..........................20 7.1 Organization.................................................20 7.2 Authorization and Approval of Agreement......................20 7.3 Execution, Delivery and Performance of Agreement.............20 7.4 Litigation...................................................21 7.5 Broker's Fees................................................21 7.6 Issuance of Convertible Note.................................21 8. Conduct of Business Prior to Closing.................................21 8.1 Consents and Approvals.......................................21 9. Investigation, Confidentiality and Exclusivity.......................23 9.1 Investigations...............................................23 9.2 Confidentiality..............................................23 9.3 Press Releases...............................................24 9.4 Disposition of Property Upon Termination.....................24 9.5 Exclusivity..................................................24 10. Director and Shareholders Authorizations.............................24 11. Conditions Precedent to Purchaser's Obligations......................24 11.1 Approval of Agreement........................................25 11.2 Additional Documents.........................................25 11.3 Representations..............................................25 11.4 Covenants....................................................25 11.5 Diligence....................................................25 11.6 Closing Financial Statements.................................25 11.7 Certificate..................................................26 11.8 Good Standing................................................26 11.9 Opinion......................................................26 11.10 Environmental Report.........................................26 11.11 Acquisition of Assets of Elk River Trading Company...........26 11.12 Election.....................................................27 12. Conditions Precedent to Company's and Shareholders' Obligations......27 12.1 Representations..............................................27 12.2 Covenants....................................................27 12.3 Certificate..................................................27 12.4 Opinion......................................................27 12.5 Purchase Price...............................................27 12.6 Election.....................................................28 13. Indemnification......................................................28 13.1 By Shareholders.............................................28 13.2 By Purchaser................................................28 13.3 Procedure...................................................28 13.4 Contribution................................................29 13.5 Limitation on Indemnification...............................29 14. Offset...............................................................29 15. Survival of Representations and Warranties...........................29 16. Notices..............................................................30 17. Legal and Other Costs................................................30 18. Miscellaneous........................................................30 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("Agreement") dated as of August 30, 1999 (the "Effective Date"), by and among Health Food Associates, Inc., an Oklahoma corporation doing business in some locations as Akin's Natural Foods Market, having its principal office at 7807 East 51st Street, Tulsa, Oklahoma 74145 ("HFA"), Food for Health Co., Inc., an Arizona corporation, having its principal office at 3655 West Washington Street, Phoenix, Arizona 85009 ("Purchaser"), and James C. Hinkefent, individually, ("Hinkefent"), James C. Hinkefent as trustees of the James C. Hinkefent Health Food Associates Stock Trust, dated January 30, 1998 (the "Stock Trust"), James C. Hinkefent and Marilyn M. Hinkefent, as Trustee of the James Hinkefent Trust dated July 11, 1994, as amended (the "Hinkefent Trust"), Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky, as sole shareholders of HFA (collectively, the "Shareholders"). HFA is sometimes referred to as the "Company." RECITALS: A. HFA is in the business of operating retail stores for the purpose of selling natural foods, supplements, and health and beauty care products to the consuming public. B. With the exception of Hinkefent, who owns his shares beneficially through the Stock Trust and the Hinkefent Trust, Shareholders own all the issued and outstanding shares of capital stock in HFA. C. Purchaser wishes to acquire the ongoing business of HFA and has agreed to purchase the issued and outstanding capital stock of HFA. AGREEMENT: In consideration of the mutual covenants and agreements hereinafter set forth, the parties hereby agree as follows: 1. Purchase and Sale of Stock. Subject to and upon the terms and conditions set forth in this Agreement, the Shareholders will sell, transfer, convey, assign and deliver to Purchaser, and Purchaser will purchase, at the Closing hereunder, all of the outstanding stock of the Company (the "Shares"), free and clear of all liabilities, obligations, liens and encumbrances. 2. Purchase Price. In consideration of the transfer and delivery of the Shares by Shareholders to Purchaser, and in reliance upon the representations and warranties made in this Agreement by Company and Shareholders, Purchaser will pay to Shareholders a total purchase price of: o $14,000,000; o less the amount, if any, by which the total liabilities of Company as of the close of business on the last day of the month preceding the Closing (excluding liabilities represented by any permitted payment set forth on Schedule 2 that has not been made prior to that day) exceed $500,000 (the "Purchase Price"). The Purchase Price shall be payable as follows: (a) the difference between $4,000,000 and the amount, if any, by which the total liabilities of Company as of the close of business on the last day of the month preceding the Closing exceed $500,000, shall be paid at the Closing by check or wire (the "Closing Payment"); (b) $2,000,000 shall be payable by promissory note in the form attached as Exhibit A (the "Convertible Note"); and (c) $8,000,000 shall be payable by promissory note in the form attached as Exhibit B (the "Secured Note") secured by a pledge of certain Shares in the form of Exhibit E. The Convertible Note and the Secured Note are collectively referred to as the "Notes." 2.1 Allocation of Closing Payment Among Shareholders. The Closing Payment shall be paid and allocated among the Shareholders as follows: PERCENTAGE OF INITIAL SHAREHOLDER INSTALLMENT ----------- ----------- Stock Trust 38.5% Hinkefent Trust 61.5% Eric Hinkefent 0.0% Mary Ann O'Dell 0.0% Sally Sobol 0.0% Amy Laminsky 0.0% ----- TOTAL SHARES 100.0% ===== 2.2 Allocation of Payments under the Secured Note Among Shareholders. The amounts payable under the Secured Note shall be paid and allocated among the Shareholders as follows: PERCENTAGE OF PAYMENTS SHAREHOLDER UNDER SECURED NOTE ------------- ------------------ Stock Trust 0.00% Hinkefent Trust 27.00% Eric Hinkefent 18.25% Mary Ann O'Dell 18.25% Sally Sobol 18.25% Amy Laminsky 18.25% ------ TOTAL SHARES 100.00% ====== 2.3 Allocation of Payments under the Convertible Note Among Shareholders. The amounts payable under the Convertible Note shall be paid and allocated among the Shareholders as follows: PERCENTAGE OF PAYMENTS SHAREHOLDER UNDER CONVERTIBLE NOTE ----------- ---------------------- Stock Trust 0.0% Hinkefent Trust 0.0% Eric Hinkefent 25.0% Mary Ann O'Dell 25.0% Sally Sobol 25.0% Amy Laminsky 25.0% ----- TOTAL SHARES 100.0% ===== 2.4 338(h)(10) Election. Shareholders agree to timely execute and file Form 8023-A and otherwise cooperate with Purchaser in Purchaser's and Shareholders' joint election to treat this transaction as a sale of assets under I.R.C. Section 338(h)(10). Shareholders and Purchaser agree that the Purchase Price shall be allocated among the purchased assets as set forth on Schedule 2.4, which the parties agree may be attached hereto at any time prior to Closing if initialed by Purchaser and Eric Hinkefent. 3. Closing. The Closing shall take place on the date when each of the conditions precedent hereunder have been either satisfied or waived by the party for whose benefit the condition exists, provided that the Closing must occur within 120 days after the Effective Date of this Agreement. The parties will endeavor to close the agreement on September 13, 1999 or such other date as Purchaser and Company may agree, subject to the 120 day limit. The Closing shall take place at 9:00 a.m. local time at the offices of Company or such other time and place as Purchaser and Company may agree upon. The day on which the Closing actually takes place is sometimes referred to as the Closing Date. 4. SHAREHOLDERS' OBLIGATIONS AT CLOSING; FURTHER ASSURANCE. 4.1 At the Closing, Company and Shareholders will deliver to Purchaser: 4.1.1 stock certificates representing the Shares, together with assignments separate from certificates duly executed by the Shareholders; and 4.1.2 all documents required to be delivered to Purchaser under the provisions of this Agreement. 4.2 At any time and from time to time after the Closing, at Purchaser's request and without further consideration, the Company and Shareholders will execute and deliver such other instruments of sale, transfer, assignment and confirmation and take such action as Purchaser may reasonably deem necessary or desirable (subject to the consent of the Company and the Shareholders, which shall not be unreasonably withheld) in order to more effectively convey to Purchaser, and to confirm Purchaser's title to, the Shares, to put Purchaser in actual possession and operating control thereof and to assist Purchaser in exercising all rights with respect thereto. 5. Representations and Warranties by Shareholders. Each Shareholder as to itself (and Hinkefent as to the Stock Trust and the Hinkefent Trust) represents and warrants that: (a) it is the lawful record and beneficial owner of all of the Shares of the Company's capital stock set forth on Schedule 6.4, with absolute right to sell them and with full title thereto, free and clear of any liens, claims, encumbrances or restrictions of any kind; (b) as to such Shares so owned by it, all are validly issued and outstanding, fully paid and nonassessable, there are no undisclosed interests, present or future, in the Shares or the ownership of the Company, nor do any of them know of any assertion of such an interest, or of any facts or circumstances which would give any person any such present or future interest or entitle any person to assert such an interest; (c) there are no provisions of any contract, indenture, agreement or other instrument to which the Shareholder is a party or to which the Shares it owns are subject which would prevent, limit, or condition the sale or transfer of the Shares it owns or the operation of the Company to the Purchaser; (d) neither the execution, delivery nor performance of this Agreement by Company, or the Shareholder will, with or without the giving of notice or the passage of time, or both, conflict with, result in a default, right to accelerate or loss of rights under, or result in the creation of any lien, charge or encumbrance pursuant to, any provision of any law, rule or regulation or any order, judgment or decree to which the Shareholder is a party or by which it may be bound or affected; (e) the Shareholder has the full power and authority to enter into this Agreement, to make the representations, warranties and covenants contained herein and to carry out the transactions contemplated hereby, and all proceedings required to be taken by the Shareholder to authorize the execution, delivery and performance of this Agreement and the agreements relating hereto have been properly taken, and this Agreement constitutes the valid and binding agreement of the Shareholder; and (f) except as provided in Schedule 5, neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (A) to the best of the Shareholder's knowledge, violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which the Shareholder is subject or, any provision of its charter, bylaws or trust documents if it is not an individual or (B) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Shareholder is a party or by which it is bound or to which any of his or its assets is subject. 6. Representations and Warranties by Hinkefent. Hinkefent and Eric Hinkefent jointly and severally represent and warrant to Purchaser as follows: 6.1 Organization, Standing and Qualification. Company is a corporation duly organized, validly existing and in good standing under the laws of Oklahoma and is qualified to do business and is in good standing in each other jurisdictions in which the failure to be so qualified would have a material adverse effect on Company's financial condition. Company has full corporate power and authority to enter into this Agreement and the related agreements referred to herein and to carry out the transactions contemplated by this Agreement. Company is entitled to carry on its business as now being conducted and to own, lease or operate its properties as and in the places where such business is now conducted and such properties are now owned, leased or operated. For purposes of this Agreement, the "business" of the Company shall be deemed to include all web sites owned and controlled by Company and all other assets of the Company, which are related to the operations of the Company and all future business leads and prospects relating thereto. Hinkefent has delivered to Purchaser true and complete copies of Company's Articles of Incorporation and all amendments thereto and the Bylaws of Company as presently in effect, certified as true and correct by Company's Secretary. This Agreement constitutes the valid and legally binding obligation of Company, Hinkefent and the Shareholders, enforceable in accordance with its terms and conditions. To the best of knowledge of Hinkefent and Eric Hinkefent, except as set forth in Schedule 6.12.11, neither Company, Hinkefent, nor Shareholders need give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency or any other person or entity in order to consummate the transactions contemplated by this Agreement. 6.2 Subsidiaries. The Company has no subsidiaries and no interest, direct or indirect, in any other corporation or in any partnership, joint venture or other business enterprise or entity other than as disclosed in this SECTION 6.2. The business carried on by the Company has not been conducted through any other direct or indirect subsidiary or affiliate of any shareholders. Hinkefent, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (collectively, the "Hinkefents") and each Shareholder within the last three years has been involved as owner, management, employee or consultant in no business other than Company, except as referenced on SCHEDULE 6.2. 6.3 Transactions with Certain Persons. Except as set forth on Schedule 6.3 and except for transactions not material to Company or its financial condition, during the past three years Company has not, directly or indirectly, (a) purchased, leased or otherwise acquired any property or obtained any services from, or (b) sold, leased or otherwise disposed of any property or furnished any services to, or (c) otherwise dealt with (except with respect to remuneration for services rendered as a director, officer or employee of Company), in the ordinary course of business or otherwise, (i) any shareholders of Company or (ii) any person, firm or corporation which, directly or indirectly, alone or together with others, controls, is controlled by or is under common control with Company or any shareholders of Company. Except as set forth in SCHEDULE 6.3, Company does not owe any material amount to, or have any contract or commitment to pay any material amount or to incur any material liability on behalf of, any of its shareholders, directors, officers, employees or consultants ("Insider") (other than compensation for current services not yet due and payable and reimbursement of expenses arising in the ordinary course of business), and none of such persons owes any amount to Company. Except as set forth on SCHEDULE 6.3, no part of the property or assets of Company or any direct or indirect subsidiary or affiliate of Company is used by the Hinkefents or any Shareholder, except in connection with the business of the Company. For purposes of this Agreement, the "ordinary course of business" shall mean the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). Amounts or liabilities owed to or to be incurred on behalf of Insiders required to be disclosed on Schedule 6.3 are referred to collectively as the "Insider Obligations." 6.4 Capitalization. All of the presently authorized, issued and outstanding shares of capital stock of Company and the names and addresses of the record and beneficial owners thereof are as set forth on SCHEDULE 6.4. Except as set forth on Schedule 6.4 there are no outstanding subscriptions, options, warrants, calls, conversion rights, exchange rights, purchase rights, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatsoever under which Company or any Shareholder is or may become obligated to issue, assign, sell or otherwise cause to become outstanding or transfer any shares of the capital stock of Company. There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to the Company, other than the Company's 401(k) program, which does not invest any funds in securities of the Company. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting of the capital stock of the Company. Except as set forth on Schedule 2, all dividends and other distributions declared prior to the Effective Date with respect to the issued and outstanding shares of the capital stock of the Company have been paid or distributed. 6.5 Financial Statements. Company has delivered to Purchaser copies of the following financial statements prepared by management of the Company (collectively called the "Management Financial Statements"), all of which are complete and correct in all material respects, have been prepared from the books and records of Company consistently applied and maintained throughout the periods indicated and fairly and reasonably present the financial condition of Company as at their respective dates and the results of its operations for the periods covered thereby: 6.5.1 an unaudited balance sheet of Company as at December 31, 1998 (the "Balance Sheet"), and unaudited balance sheets of Company as at December 31, 1997 and December 31, 1996; and 6.5.2 unaudited statements of earnings and sources and uses of cash for the periods ended December 31, 1998, 1997 and 1996. The statements of earnings referenced in subsection 6.5.2 above do not contain any items of special or non-recurring income or any other income not earned in the ordinary course of business except as expressly specified therein, and such financial statements include all adjustments, which consist only of normal recurring accruals, necessary for such fair presentation. Company agrees to deliver to Purchaser prior to Closing copies of the following financial statements audited by PricewaterhouseCoopers LLP (the "Audited Financial Statements"), all of which shall be deemed to have been warranted and represented to be, at the time of delivery, complete and correct in all material respects, prepared from the books and records of Company in accordance with generally accepted accounting principles consistently applied and maintained throughout the periods indicated and fairly and reasonably present the financial condition of Company as at their respective dates and the results of its operations for the periods covered thereby: 6.5.3 audited balance sheets of Company as at December 31, 1998, and December 31, 1997; and 6.5.4 unaudited statements of earnings for the periods ended December 31, 1998, and December 31, 1997 and 1996. The statements of earnings referenced in subsection 6.5.4 above, when delivered, shall be deemed to have been warranted and represented, at the time of delivery, not to contain any items of special or non-recurring income or any other income not earned in the ordinary course of business except as expressly specified therein, and the Audited Financial Statements, when delivered, shall be deemed to have been warranted and represented, at the time of delivery, to include all adjustments, which consist only of normal recurring accruals, necessary for such fair presentation. The Management Financial Statements and the Audited Financial Statements are referred to, collectively, as the "Financial Statements." 6.6 Absence of Undisclosed Liabilities. Except as and to the extent reflected or reserved against on (a) either (i) the face of the Balance Sheet or (ii) Schedule 6.6, and (b) depicted in the Financial Statements (excluding the notes thereto), as of December 31, 1998 (the "Balance Sheet Date"), Company has no debts, liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature whatsoever, including, without limitation, any foreign or domestic tax liabilities or deferred tax liabilities incurred in respect of or measured by Company's income, for the period prior to the close of business on the Balance Sheet Date or any other debts, liabilities or obligations relating to or arising out of any act, omission, transaction, circumstance, sale of goods or services, state of facts or other condition which occurred or existed on or before the Balance Sheet Date, whether or not then known, due or payable. On the Balance Sheet and in the Financial Statements as of the Balance Sheet Date, the inventory of the Company (net of reserve for shrinkage or spoilage) identified thereon shall be and is good and saleable inventory in the ordinary course of business and all accounts receivable are either good and collectible or adequately and reasonably reserved against. None of the Company's employees is now, or will by the passage of time hereafter become, entitled to receive any vacation time, vacation pay or severance pay attributable to services rendered prior to the Balance Sheet Date except as disclosed on the face of the Balance Sheet (excluding the notes thereto). 6.7 Taxes. All tax returns required to be filed in connection with all taxes imposed by any taxing authority, and all taxes which are due or payable by Company, have been accurately prepared and duly and timely filed and, if applicable, paid and all deposits required by law to be made by Company with respect to employees' withholding taxes have been duly made. Company has no tax deficiency or claim outstanding, proposed or assessed against it. 6.8 Absence of Changes or Events. Except as set forth in SCHEDULE 6.8 (or Schedules denominated according to the subsections of this SECTION 6.8), since the Balance Sheet Date Company has conducted its business only in the ordinary course and has not: 6.8.1 incurred any obligation or liability, absolute, accrued, contingent or otherwise, whether due or to become due, except current liabilities for trade or business obligations incurred in connection with the purchase of goods or services in the ordinary course of business and consistent with its prior practice, none of which liabilities, in any case or in the aggregate, materially and adversely affects the business, liabilities or financial condition of Company; 6.8.2 discharged or satisfied any material lien, charge or encumbrance other than those then required to be discharged or satisfied, or paid any obligation or liability, absolute, accrued, contingent or otherwise, whether due or to become due, other than current liabilities shown on the Balance Sheet and current liabilities incurred since the Balance Sheet Date in the ordinary course of business and consistent with its prior practice; 6.8.3 declared or made any payment of dividends or other distribution to its shareholders or upon or in respect of any shares of its capital stock, or purchased, retired or redeemed, or obligated itself to purchase, retire or redeem, any of its shares or capital stock or other securities; 6.8.4 mortgaged, pledged or subjected to lien, charge, security interest or any other encumbrance or restriction any of its property, business or assets, tangible or intangible, other than pledges of leased office equipment; 6.8.5 sold, transferred, leased to others or otherwise disposed of any of its assets, except for inventory sold in the ordinary course of business, or canceled or compromised any debt or claim, or waived or released any right of material value; 6.8.6 received any notice of termination of any contract, lease or other agreement prior to its expiration date or suffered any damage, destruction or loss (whether or not covered by insurance) which, in any case or in the aggregate, has had or would have a materially adverse effect on the assets, operations or prospects of Company; 6.8.7 encountered any labor union organizing activity, had any actual or, threatened employee strikes, work stoppages, slow-downs or lock-outs, or had any material change in its relations with its employees, agents, customers or suppliers; 6.8.8 made any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, or paid or agreed or orally promised to pay, conditionally or otherwise, any bonus, extra compensation, pension or severance or vacation pay, to any shareholder, director, officer, employee, salesman, distributor or agent of Company; 6.8.9 issued or sold any shares of its capital stock or other securities, or issued, granted or sold any options, rights or warrants with respect thereto, or acquired any capital stock or other securities of any corporation or any interest in any business enterprise, or otherwise made any loan or advance to or investment in any person, firm or corporation; 6.8.10 made any capital expenditures or capital additions in excess of an aggregate of $20,000; 6.8.11 changed its banking or safe deposit arrangements; 6.8.12 instituted, settled or agreed to settle any litigation, action or proceeding before any court or governmental body relating to the Company or its property; 6.8.13 failed to replenish its inventories and supplies in a normal and customary manner consistent with its prior practice and ordinary business practices prevailing in the industry, or made any purchase commitment in excess of the normal, ordinary and usual requirements of its business or at any price materially in excess of the then current market price or upon terms and conditions materially more onerous than those usual and customary in the industry, or made any change in its selling, pricing, advertising or personnel practices inconsistent with its prior practice and ordinary business practices prevailing in the industry; 6.8.14 suffered any change, event or condition which in any case or in the aggregate, has had or may have a materially adverse affect on Company's condition (financial or otherwise), properties, assets, liabilities, operations or prospects, including, without limitation, any change in Company's revenues, costs, backlog or relations with its employees, agents, customers or suppliers; 6.8.15 entered into any transaction, contract or commitment other than in the ordinary course of business or paid or agreed to pay any legal, accounting, brokerage, finder's fee, taxes or other expenses in connection with, or incurred any severance pay obligations by reason of, this Agreement or the transactions contemplated hereby; or 6.8.16 entered into any agreement or made any commitment to take any of the types of action described in Sections 6.8.1 through 6.8.15 above. 6.9 Litigation. Except as set forth in Schedule 6.9, there is no claim, legal action, suit, arbitration, governmental investigation or other legal or administrative proceeding, nor any order, decree or judgment in progress, pending or in effect, or to the knowledge of Hinkefent or Eric Hinkefent threatened, nor to the knowledge of Hinkefent or Eric Hinkefent does there exist the basis for any such claim, action, or other proceeding against or relating to Company, its officers, directors or employees, its properties, assets or business or the transactions contemplated by this Agreement. 6.10 Compliance with Laws and Other Instruments. Except as set forth in Schedule 6.10. 6.10.1 Except as disclosed on Schedule 6.10.1, to the best of knowledge of Hinkefent and Eric Hinkefent, Company has conducted its business in compliance with all existing laws, rules, regulations, ordinances, orders, judgments and decrees ("Laws") now or hereafter applicable to its business, properties or operations and, when the Business is owned by Purchaser as of the Closing Date, the Business will remain in compliance in all material respect with such Laws; 6.10.2 Company has secured and is in compliance with all, and there are no proceedings to revoke or challenge any, material permits required for its Properties, and Business as presently conducted. All material Permits required to be secured by Company relating to the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been taken and secured or will, before the Closing, be taken or secured. 6.10.3 Company has not offered, paid, or agreed to pay money or anything of value for the purpose of or with the intent of obtaining or maintaining business for Company, or otherwise benefitting Company, in violation of any Law; and 6.10.4 Neither the ownership nor use of Company's properties nor the conduct of its business conflicts with the rights of any other person, firm or corporation or violates, or with or without the giving of notice or the passage of time, or both, will violate, conflict with or result in a default, right to accelerate or loss of rights under, any terms or provisions of its Articles of Incorporation or Bylaws as presently in effect, or any lien, encumbrance, mortgage, lease, license, agreement, understanding, law, ordinance, rule or regulation, or any order, judgment or decree to which Company is a party or by which it may be bound or affected. Hinkefent is not aware of any proposed regulations, judgments, decrees, governmental takings, condemnations or other proceedings which would be applicable to its business, operations or properties and which might adversely affect its properties, assets, liabilities, operations or prospects, either before or after the Closing. 6.11 Title to Properties. Except as set forth on Schedule 6.11, Company has good and marketable title to all the properties and assets of every kind or nature, including but not limited to intellectual property, it owns in its business or purports to own, including, without limitation, those reflected in its books and records and in the Balance Sheet (except inventory shown on the Balance Sheet as consignment inventory and except inventory sold after the Balance Sheet Date in the ordinary course of business). None of such properties and assets are subject to any mortgage, pledge, lien, charge, security interest, encumbrance, restriction, lease, license, liability or adverse claim of any nature whatsoever, direct or indirect, whether accrued, absolute, contingent or otherwise, except as expressly set forth in the Balance Sheet as securing specific liabilities or as otherwise expressly permitted by the terms hereof. All of the properties and assets owned, leased or used by Company are in good operating condition and repair, have been maintained in a commercially reasonable manner, and are suitable for the purposes used. Neither Hinkefent, Eric Hinkefent nor Company knows of any pending or threatened condemnation affecting the Properties. 6.12 Schedules. Attached as Schedule 6.12 is a separate schedule containing an accurate and complete list and description of: 6.12.1 All real property owned by Company or in which Company has a leasehold or other interest or which is used by Company in connection with the operation of its business, or any other instrument under which Company claims or holds such leasehold or other interest or right to the use thereof or pursuant to which Company has assigned, sublet or granted any rights therein, identifying the parties thereto, the rental or other payment terms, expiration date and cancellation and renewal terms thereof. 6.12.2 All tangible personal property (other than inventory and supplies), owned, leased or used by Company except for items having a value of less than $2,500 which do not, in the aggregate, have a total value of more than $20,000, setting forth with respect to all such listed property a summary description of all leases, liens, claims, encumbrances, charges, restrictions, covenants and conditions relating thereto, identifying the parties thereto, the rental or other payment terms, expiration date and cancellation and renewal terms. 6.12.3 All fire, theft, casualty, liability and other insurance policies insuring Company, specifying with respect to each such policy the name of the insurer, the risk insured against, the limits of coverage, the deductible amount (if any), the premium rate and the date through which coverage will continue by virtue of premiums already paid. 6.12.4 All sales agency agreements, distributorship agreements, or agreements providing for the services of an independent contractor to which Company is a party or by which it is bound. 6.12.5 All contracts, agreements and commitments, whether or not fully performed, in respect of the issuance, sale or transfer of the capital stock, bonds or other securities of Company or pursuant to which Company has acquired any substantial portion of its business or assets. 6.12.6 All contracts, agreements, commitments or other understandings or arrangements to which Company is a party or by which it or any of its property is bound or affected but excluding (A) purchase and sales orders and commitments made in the ordinary course of business involving payments or receipts by Company of less than $5,000 in any single case but not more than $10,000 in the aggregate (exclusive of purchase orders for replacement inventory), and (B) contracts entered into in the ordinary course of business and involving payments or receipts by Company of less than $5,000 in the case of any single contract but not more than $10,000 in the aggregate (exclusive of purchase orders for replacement inventory). 6.12.7 All collective bargaining agreements, employment and consulting agreements, executive compensation plans, bonus plans, deferred compensation agreements, employee pension plans or retirement plans, employee stock options or stock purchase plans and group life, health and accident insurance and other employee benefit plans, agreements, arrangements or commitments, including, without limitation, holiday, vacation, Christmas and other bonus practices, to which Company is a party or is bound or which relate to the operation of Company's business. 6.12.8 The names and current annual salary rates of all persons (including independent commission agents) whose annual compensation (direct or indirect) from Company is currently at the rate of more than $25,000 per annum and showing separately for each such person the amounts paid or payable as salary, bonus payments and any indirect compensation for the year ended December 31, 1998; and 6.12.9 The names of all of Company's directors and officers; the name of each bank in which Company has an account or safe deposit box and the names of all persons authorized to draw thereon or have access thereto; and the names of all persons, if any, holding tax or other powers of attorney from Company and a summary of the terms thereof. 6.12.10 Each loan, conditional sales, or security agreement of Company relating to the Business with an unpaid balance of more than $25,000 and which will not be released on or before the Closing. To the best of knowledge of Hinkefent and Eric Hinkefent, (a) all of the contracts, agreements, leases, licenses and commitments required to be listed on Schedule 6.12 (other than those which have been fully performed) are valid and binding, enforceable in accordance with their respective terms, and in full force and effect, and (b) except as specified in Schedule 6.12.11, no consent or waiver needs to be obtained prior to the Closing in connection with the purchase of the Shares in order to prevent a breach thereof, and (c) after the Closing, Company will be entitled to the full benefits of such agreements, leases, licenses and commitments. Hinkefent, Eric Hinkefent and the Company shall obtain, prior to Closing, all consents and waivers needed to prevent such breach ("Third Party Consents"), and shall furnish written evidence thereof in form reasonably acceptable to Purchaser. Except as disclosed in Schedule 6.12, there is not thereunder any existing default or event which, after notice or lapse of time, or both, would constitute a default or result in a right to accelerate or loss of rights. True and complete copies of all such contracts, agreements, leases, licenses and other documents listed on Schedule 6.12 (together with any and all amendments thereto) have been delivered or made available to Purchaser. Each of the documents and materials previously delivered to Purchaser or its representatives and the Information, as such term is defined below, whether or not attached to or described in this Agreement as a schedule, are true and correct copies of such items and truthfully, accurately and completely describe or depict the information contained therein. Company and Hinkefent have caused the same to be provided to Purchaser with the intent that Purchaser rely on the same with regard to the transactions contemplated by this Agreement. 6.13 Proprietary Rights. Company is the owner of its proprietary rights and property including the Intellectual Property, as defined herein, all of which is set forth on Schedule 6.13. 6.14 No Guaranties. Company has not guaranteed the obligations or liabilities of any other person, firm or corporation. 6.15 Filing and Records. The Company has made all material required government filings applicable to the Business, and the books of account, minute books, stock certificate books and stock transfer ledgers of Company are complete and correct in all material respects and are prepared on a basis consistent with prior years, and there have been no transactions involving the business of Company which properly should have been set forth therein and which have not been accurately so set forth. 6.16 Broker's Fees. Company is not obligated to pay any broker's or other finder's fees to any third party in connection with the transactions contemplated by this Agreement except as disclosed on Schedule 2. 6.17 Environmental, Health, and Safety Matters. For purposes of this Agreement, "Environmental, Health, and Safety Requirements" shall mean all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as now or hereafter in effect. 6.17.1 To the best of knowledge of Hinkefent and Eric Hinkefent, Company has complied and is in compliance with all Environmental, Health, and Safety Requirements. 6.17.2 To the best of knowledge of Hinkefent and Eric Hinkefent, without limiting the generality of the foregoing, Company has obtained and complied with, and is in compliance with, all permits, licenses and other authorizations that are required pursuant to Environmental, Health, and Safety Requirements for the occupation of its facilities and the operation of its business. 6.17.3 Neither Company nor Hinkefent nor their respective predecessors or affiliates has received any written or oral notice, report or other information regarding any actual or alleged violation of Environmental, Health, and Safety Requirements, or any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial or corrective obligations, relating to any of them or its facilities arising under Environmental, Health, and Safety Requirements. 6.17.4 To the best of knowledge of Hinkefent and Eric Hinkefent, none of the following exists at any property or facility owned or operated by the Company: (1) underground storage tanks, (2) asbestos- containing material in any form or condition, (3) materials or equipment containing polychlorinated biphenyls, or (4) landfills, surface impoundments, or disposal areas. 6.17.5 To the best of knowledge of Hinkefent and Eric Hinkefent, neither Company nor its predecessors or affiliates has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or released any substance, including without limitation any hazardous substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) in a manner that has given or would give rise to liabilities, including any liability for response costs, corrective action costs, personal injury, property damage, natural resources damages or attorney fees, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the Solid Waste Disposal Act, as amended ("SWDA") or any other Environmental, Health, and Safety Requirements. 6.17.6 To the best of knowledge of Hinkefent and Eric Hinkefent, neither this Agreement nor the consummation of the transaction that is the subject of this Agreement will result in any obligations for site investigation or cleanup, or notification to or consent of government agencies or third parties, pursuant to any of the so-called "transaction-triggered" or "responsible property transfer" Environmental, Health, and Safety Requirements. 6.17.7 Company has not, either expressly or by operation of law, assumed or undertaken any liability, including without limitation any obligation for corrective or remedial action, of any other person relating to Environmental, Health, and Safety Requirements. 6.17.8 To the best of knowledge of Hinkefent and Eric Hinkefent, no facts, events or conditions relating to the past or present facilities, properties or operations of the Company will prevent, hinder or limit continued compliance with Environmental, Health, and Safety Requirements, give rise to any investigatory, remedial or corrective obligations pursuant to Environmental, Health, and Safety Requirements, or give rise to any other liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental, Health, and Safety Requirements, including without limitation any relating to onsite or offsite releases or threatened releases of hazardous materials, substances or wastes, personal injury, property damage or natural resources damage. 6.17.9 Hinkefent has received a copy of those Phase 1 environmental reports referred to in Section 11.10 and has no reason to believe that any statement contained is incorrect or misleading. 6.18 Intellectual Property. For purposes of this Agreement, "Intellectual Property" means (a) any inventions and new technologies (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in- part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including data and related documentation), (g) all other proprietary rights, and (h) all copies and tangible embodiments thereof (in whatever form or medium). 6.18.1 To the best of the Company's and Hinkefent's and Eric Hinkefent's knowledge, the Company owns or has the right to use pursuant to license, sublicense, agreement, or permission all Intellectual Property necessary or desirable for the operation of the businesses of the Company as presently conducted and as presently proposed to be conducted. Each item of Intellectual Property owned or used by Company immediately prior to the Closing hereunder will be owned or available for use by Company on identical terms and conditions immediately subsequent to the Closing hereunder. Except as provided in Schedule 6.18.1, to the best of the Company's and Hinkefent's and Eric Hinkefent's knowledge, the Company has taken all reasonably prudent action to maintain and protect each item of Intellectual Property that it owns or uses listed in subpart (b) of Section 6.18. 6.18.2 To the best of the Company's and Hinkefent's and Eric Hinkefent's knowledge, neither the Company nor the Hinkefents nor any Shareholder has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of third parties, and neither the Company nor the Hinkefents nor any Shareholder, director, officer (nor any employees with responsibility for Intellectual Property matters) of the Company has ever received any charge, complaint, claim, demand, or notice alleging any such interference, infringement, misappropriation, or violation (including any claim that the Company must license or refrain from using any Intellectual Property rights of any third party). To the knowledge of any of the directors and officers (and employees with responsibility for Intellectual Property matters) of Company and Hinkefent and Eric Hinkefent, no third party has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of the Company. 6.18.3 Schedule 6.18.3 identifies each license, trademark, patent or registration which has been issued to the Company with respect to any of its Intellectual Property, identifies each pending patent application or application for registration which Company has made with respect to any of its Intellectual Property, and identifies each license, agreement, or other permission which Company has granted to any third party with respect to any of its Intellectual Property (together with any exceptions). Company has delivered to Purchaser correct and complete copies of all such patents, registrations, applications, licenses, agreements, and permissions (as amended to date) and has made available to Purchaser correct and complete copies of all other written documentation evidencing ownership and prosecution (if applicable) of each such item. Schedule 6.18.3 also identifies each trade name or unregistered trademark used by Company in connection with of its business. With respect to each item of Intellectual Property required to be identified in Schedule 6.18.3: (A) To the best of knowledge of Hinkefent and Eric Hinkefent, Company possesses all right, title, and interest in and to the item, free and clear of any Security Interest, license, or other restriction; (B) the item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; (C) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to the knowledge of Company, Hinkefent, Eric Hinkefent and Shareholders and the directors and officers of Company, is threatened which challenges the legality, validity, enforceability, use, or ownership of the item; and (D) Company has not ever agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the item. 6.18.4 Schedule 6.18.4 identifies each item of Intellectual Property that any third party owns and that Company uses pursuant to license, sublicense, agreement, or permission. The Company has delivered to Purchaser correct and complete copies of all such licenses, sublicenses, agreements, and permissions (as amended to date). With respect to each item of Intellectual Property required to be identified in Schedule 6.18.4, to the best of knowledge of Hinkefent and Eric Hinkefent,: (A) the license, sublicense, agreement, or permission covering the item is legal, valid, binding, enforceable, and in full force and effect; (B) the license, sublicense, agreement, or permission will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby (including the assignments and assumptions referred to above); (C) no party to the license, sublicense, agreement, or permission is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder; (D) no party to the license, sublicense, agreement, or permission has repudiated any provision thereof; (E) with respect to each sublicense, the representations and warranties set forth in subsections (A) through (D) above are true and correct with respect to the underlying license; (F) the underlying item of Intellectual Property is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge that affects Company's right to the use of such Intellectual Property; (G) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, is threatened which challenges the legality, validity, or enforceability of the underlying item of Intellectual Property; and (H) neither the Company nor Hinkefent nor any Shareholder has granted any sublicense or similar right with respect to the license, sublicense, agreement, or permission. 6.18.5 To the knowledge of Company and Hinkefent and Eric Hinkefent, the Company will not interfere with, infringe upon, misappropriate, or otherwise come into conflict with, any Intellectual Property rights of third parties as a result of the continued operation of its businesses as presently conducted and as presently proposed to be conducted. 6.18.6 Year 2000 Representation and Warranty. The Systems of Company are not Year 2000 Compliant. Company has delivered to Purchaser complete and accurate lists of its vendors and automated Systems materials to its operations, including, software, firmware, hardware, embedded chips and other processing devices and all reports, files and information in its possession relating to the extent to which the Systems of the Company and its suppliers and vendors are or are not Year 2000 Compliant. For purposes of this section: 6.18.6.1 "Systems" means any of the following: (i) computer software; (ii) computer hardware; (iii) other products in which one or more computer chips are embedded; or (iv) computer, communication or other information systems that include hardware and software. 6.18.6.2 "Year 2000 Compliant" means the ability of one or more Systems to properly run using date data from any century, including dates after December 31, 1999. Such ability includes: (a) yielding correct results in arithmetic operations, comparisons and sorting of date data into and between the twentieth and twenty-first centuries, including correct Leap Year calculations, and (ii) not ceasing to execute, not returning an error message and not otherwise failing due to date-related processing or due to the then current date or any other date being a date in the twentieth or twenty-first centuries. "Leap Year" means the year during which an extra day is added in February (February 29th). 6.19 Employment Matters. 6.19.1 Compliance with Employment Laws. Except as otherwise disclosed under this Agreement, Company (1) To the best of knowledge of Hinkefent and Eric Hinkefent, is in material compliance with all Laws regulating employment practices, terms and conditions of employment and wages and hours, (2) is not subject to any unfair labor practice complaint or other petition before the National Labor Relations Board, (3) is not subject to any material labor strike, dispute, slow-down, or stoppage, (4) is not subject to any material Proceeding arising out of or under a collective bargaining agreement, and (5) has not experienced any primary work stoppage or other labor difficulty involving its employees during the past three years; 6.19.2 Plan Compliance. Company has administered and maintained its executive compensation plans, salary continuation plans, bonus plans, holiday and other bonus practices, deferred compensation agreements, pension or retirement plans, employee stock option or stock purchase plans, employee life, health, and accident insurance, and other employee benefit plans, agreements, arrangements or commitments relating to employees of Company in the Business in material compliance with all applicable Laws. Except as set forth on SCHEDULE 6.19 attached hereto, which also includes copies of the Company's current employee handbook and employment application, there are no employee pension benefit plans, as defined in Section 3(2) of Employee Retirement Income Security Act of 1974, as amended ("ERISA") (including, without limitation, any defined benefit plan, defined contribution plan, simplified employee pension plan, annuity plan, multiple employer plan, or multi-employer plan, as defined in ERISA and the Code), currently maintained by or on behalf of the Company, or with respect to which the Company is required to contribute, or may have any liability or obligation, or are otherwise bound (the "ERISA Pension Plans"). Each ERISA Pension Plan that is intended to be tax qualified has received one or more United States Internal Revenue Service determination letters to such effect covering such plan from inception to date, and nothing has occurred that would adversely affect or otherwise jeopardize such plan's tax qualification. Neither Company, Hinkefent nor Eric Hinkefent knows or has reason to know, of any prohibited transaction (as defined in ERISA) relating to any Employment Plan. Each employee benefit plan within the meaning of Section 3(3) of ERISA ("Employee Benefit Plan") complies, and has from its inception complied, in all material respects with all applicable requirements of ERISA, including reporting requirements and all qualification requirements of the Code. No Employee Benefit Plan has any amount of unfunded benefit liabilities (within the meaning of Section 4001(a)(18) of ERISA). Each Employee Benefit Plan (i) has complied with all notification and continuation coverage requirements of COBRA, Section 4980B of the Code and all regulations thereunder; (ii) has not experienced any reportable event as defined in ERISA; and (iii) has not terminated. Except as set forth on Schedule 6.19, Seller has no nonqualified deferred compensation, severance pay, or other employee pension plans. The Company has delivered to Purchaser correct and complete copies of each Employee Benefit Plan, including all amendments to such plan, and all summary plan descriptions and other summaries of such plan, each trust agreement, annuity or insurance contract, or other funding instrument pertaining to each Employee Benefit Plan, the most recent annual report (IRS Form 5500 Series), including all schedules to such report, if applicable, filed with respect to each Employee Benefit Plan for which such a report is required to be filed, the most recent IRS determination letter, plan audit, financial statement, and accountant's opinion (with footnotes), if applicable, for each Employee Benefit Plan for which same is required to be prepared, and the most recent of all relevant schedules and reports concerning the administrative costs, benefit payments, employee and employer contributions, claims experience, financial information, and insurance premiums for each Employee Benefit Plan, to the extent any of same have been prepared by, or are in the possession of, the Company. 6.20 Inventory Returns. After the Closing, to the best of Company's, Hinkefent's and Eric Hinkefent's knowledge, the Business will not be required pursuant to its regular return policy or otherwise to accept the return of any material portion of Inventory sold by Company to others prior to the Closing Date; 6.21 Utilities. To the best of Company's, Hinkefent's and Eric Hinkefent's knowledge, all water, sewer, gas, electric, telephone, and drainage facilities required by applicable law or by the normal use and operation of the Properties are adequate to service each of the Properties under its current use; 6.22 Accuracy and Completeness of Representations and Warranties. No representation or warranty made by Company or Hinkefent or Eric Hinkefent in this Agreement and no statement contained in any schedule delivered or to be delivered to Purchaser pursuant to this Agreement contains or will contain any untrue statement of a material fact or omits to state a material fact, necessary to make the statements contained herein or therein, not misleading. 7. Representations and Warranties by Purchaser. Purchaser represents and warrants to the Shareholders as follows: 7.1 Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Arizona and has full power and authority to enter into this Agreement and the related agreements referred to herein and to carry out the transactions contemplated by this Agreement and to carry on its business as now being conducted and to own, lease or operate its properties. 7.2 Authorization and Approval of Agreement. All proceedings or actions required to be taken by Purchaser relating to the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been taken at or prior to the Closing. 7.3 Execution, Delivery and Performance of Agreement. Neither the execution, delivery nor performance of this Agreement by Purchaser will, with or without the giving of notice or the passage of time, or both, conflict with, result in a default, right to accelerate or loss of rights under, or result in the creation of any lien, charge or encumbrance pursuant to, any provision of Purchaser's Articles of Incorporation or Bylaws or any franchise, mortgage, deed of trust, lease, license, agreement, understanding, law, ordinance, rule or regulation or any order, judgment or decree to which Purchaser is a party or by which it may be bound or affected. Purchaser has full power and authority to enter into this Agreement and to carry out the transactions contemplated hereby, and all proceedings required to be taken by Purchaser to authorize the execution, delivery and performance of this Agreement and the agreements relating hereto have been properly taken and this Agreement constitutes a valid and binding obligation of Purchaser. 7.4 Litigation. There is no legal action, suit, arbitration, governmental investigation or other legal or administrative proceeding, nor any order, decree or judgment in progress, pending or in effect, or to the knowledge of Purchaser threatened, against or relating to Purchaser in connection with or relating to the transactions contemplated by this Agreement, and Purchaser does not know or have any reason to be aware of any basis for the same. 7.5 Broker's Fees. Purchaser is not obligated to pay any broker's or other finder's fees to any third party in connection with the transactions contemplated by this Agreement. 7.6 Issuance of Convertible Note. The issuance of the Convertible Note will qualify for an exemption from registration under the Securities Act of 1933 based upon representations of the Shareholders of their qualifications. 8. Conduct of Business Prior to Closing. 8.1 Consents and Approvals. After the execution of this Agreement and prior to the Closing, Purchaser, Hinkefent, Eric Hinkefent and Company shall undertake to use their best efforts to obtain as quickly as reasonably possible all approvals necessary for the transactions contemplated by this Agreement from all necessary regulatory authorities (the "Regulatory Authorities"), Shareholders and other parties, including without limitation Third Party Consents (as defined in Section 6.12), and to comply with all applicable laws which may be applicable to the transactions contemplated by this Agreement. 8.2 Prior to the Closing, Company shall conduct its business and affairs only in the ordinary course and consistent with its prior practice and shall maintain, keep and preserve its assets and properties in good condition and repair and maintain insurance thereon in accordance with present practices, and Company and each Shareholder will use their best efforts (i)to preserve the business and organization of Company intact, (ii)to keep available to Purchaser the services of Company's present officers, employees, agents and independent contractors, (iii)to preserve for the benefit of Purchaser the goodwill of the Company as relates to its favorable relations with suppliers, customers, landlords and others having business relations with it, and (iv) to use reasonable efforts in obtaining the consent of any party whose consent may be required by reason of the transactions contemplated hereby. Without limiting the generality of the foregoing, prior to the Closing Company will not, without Purchaser's prior written approval: 8.2.1 change its Articles of Incorporation or Bylaws or merge or consolidate or obligate itself to do so with or into any other entity; 8.2.2 enter into any contract, agreement, commitment or other understanding or arrangement except for those of the type which would not have to be listed and described under Section 6.12.6; or 8.2.3 perform, take any action or incur or permit to exist any of the acts, transactions, events or occurrences of the type (1) described in Sections 6.8.1, .2, .3, .4, .5, .8, .9, .10, .11, .12, .13, .15, or .16 of this Agreement (excluding any exceptions permitted under those sections) which would have been inconsistent with the representations and warranties set forth therein had the same occurred after the Balance Sheet Date and prior to the date hereof or (2) described in Section 6.3 of this Agreement (excluding any exceptions permitted under that section) which would be required to be set forth on Schedule 6.3 if it had taken place during the past three years. 8.3 Company shall give Purchaser prompt written notice of any material change in any of the information contained in the representations and warranties made in Section 6 or elsewhere in this Agreement or the Schedules referred to herein which occurs prior to the Closing. 8.4 Company shall not cause or permit its total liabilities to increase or decrease other than in the ordinary, reasonable and prudent course of business. Company shall, and Hinkefent and Eric Hinkefent will cause Company to, consult with Purchaser with respect to material changes in the conduct of the business of the Company; provided, however, that nothing contained in this Section 8.4 shall require Company to take or fail to take any action that, in Company's reasonable judgment, is likely to give rise to a substantial penalty or a claim for damages by any third party against Company, or is likely to result in losses to Company, or is otherwise likely to prejudice in any material respect or interfere with the conduct of Company's business and operations in the ordinary course consistent with prior practice, or is likely to result in a breach by Company of any of its representations, warranties or covenants contained in this Agreement (unless any such breach is first waived in writing by Purchaser). 8.5 From the date of this Agreement, Company and the Shareholders shall not: 8.5.1 take any action that would encumber or restrict the Shares or their sale or transfer, except any action by Company to enforce its rights hereunder. 8.5.2 take any action which would breach any of their representations and warranties in this Agreement; 8.5.3 sell or otherwise dispose of any of the assets of the Company except in the ordinary course of business; 8.5.4 subject any properties to an encumbrance, other than in the ordinary course of business; 8.5.5 enter into or terminate any material contract relating to the Business except in the ordinary course of business and except for those of the type which would not have to be listed and described in Schedule 6.10 or any other schedule to this Agreement; 8.5.6 grant any options or other rights or interests in the Shares. Company will consult with Purchaser about material changes in the conduct of the Business. Company is not required to take or fail to take any action that, in Company's reasonable judgment, is likely to result in (a) a substantial penalty, (b) a claim for damages by any third party against Company, (c) losses to Company, (d) prejudice to or interference with the Company's business and operations, or (e) a breach by Company of any of the representations and warranties made by it in this Agreement. 9. Investigation, Confidentiality and Exclusivity. 9.1 Investigations. Subject to the restrictions of Section 9.2, Company consents to Purchaser commencing a due diligence investigation of the operations and financial status of Company at Purchaser's expense. Upon reasonable notice and during regular business hours, Company will give Purchaser and Purchaser's attorneys, accountants and other representatives full access to Company's officers, directors, employees, independent contractors, counsel, and independent accountants and all properties, documents, contracts, books and records of Company and will furnish Purchaser with copies of such documents (certified by Company's officers if so requested) and with such information with respect to the affairs of Company (all of which are collectively referred to as "Information") as Purchaser may reasonably request from time to time, including without limitation all books and records, references and customer contracts. Purchaser does not assume responsibility for its accuracy or completeness of the Information, whether or not Purchaser independently verifies the Information. Any such furnishing of such Information to Purchaser or any investigation by Purchaser shall not affect Purchaser's right to rely on any representations and warranties made in this Agreement or in connection herewith or pursuant hereto. Subject to the restrictions of Section 9.2, Purchaser shall provide to Company all information reasonably necessary to permit Company to evaluate Purchaser's ability to perform under this Agreement. 9.2 Confidentiality. Shareholders, Company and Purchaser agree to keep the existence and terms of this Agreement confidential and to keep confidential all information and communications concerning this Agreement, including the fact that any meetings or discussions between Purchaser and Company took place or were scheduled to take place, except to the extent necessary or appropriate in connection with any applicable regulations. The parties contemplate that by virtue of this Agreement, each may come into possession of the other's confidential financial and other business information, and each party agrees that it shall keep such information confidential and shall not engage in any activities which would or could violate the Confidentiality and Non-Disclosure Agreement, a copy of which is attached to this Agreement as Exhibit 9.2, and an original of which has been signed by each party prior to or contemporaneously with its execution and delivery of this Agreement. Shareholders and Company agrees that Purchaser may disclose to potential investors all information provided by Company, as long as such information is disclosed pursuant to a written nondisclosure agreement and on the condition that such information may be used for the sole purpose of determining whether to make an investment in Purchaser, in which case Shareholders and Company agree that such potential investors may contact Company directly. Except as provided by the foregoing sentences, no party shall make any disclosure regarding any other party to this Agreement to any person or entity unless it shall have first obtained and delivered to such other party, as applicable, such person's or entity's signature on an original of the attached Confidentiality and Non-Disclosure Agreement and also obtained such other party's written approval for such disclosure. 9.3 Press Releases. Any public announcement of the pendency of the transactions embodied in this Agreement shall be made only upon receiving the prior written consent from Purchaser and Hinkefent as to the necessity for the announcement and the text to be used. 9.4 Disposition of Property Upon Termination. Upon expiration or earlier termination of this Agreement for any reason, each party shall deliver to the other all tangible forms of confidential information, trade secrets and other proprietary property of the other parties which is in its possession or control, and shall certify to the other parties in writing that it has no other such property in its possession or control, and that it has no knowledge of the possession by others of any such property of the other parties previously in its possession or control. 9.5 Exclusivity. As long as the parties are proceeding in accordance with this Agreement, neither party shall have any discussions with any third party concerning any acquisition of control of Company or any investment in or merger with Company. 10. Director and Shareholders Authorizations. 10.1 At or prior to the Closing, Company will deliver to Purchaser a copy of the resolutions of the Board of Directors and the resolutions or consents of the Shareholders of Company, together with any and all required resolutions or consents of Shareholders, approving the execution and delivery of this Agreement and the consummation of all of the transactions contemplated hereby, duly certified by an officer of Company. 10.2 At or prior to Closing, Purchaser will deliver of Shareholders a copy of the resolutions or consents of the Board of Directors of Purchaser, together with any and all resolutions or consents of shareholders of Purchaser, approving the execution and delivery of this Agreement and the consummation of all of the transactions contemplated hereby, duly certified by an officer of Purchaser. 11. Conditions Precedent to Purchaser's Obligations. All obligations of Purchaser hereunder are subject, at the option of Purchaser, to the fulfillment of each of the following conditions at or prior to the Closing, and Company and Shareholders shall exert their best efforts to cause each such condition to be so fulfilled on or prior to September 10, 1999, or such other date as Purchaser and Company may agree. 11.1 Approval of Agreement. The Board of Directors and shareholders of Company shall have approved of this Agreement and related documents. 11.2 Additional Documents. Eric Hinkefent and Purchaser shall have entered into an employment and non-competition agreement in the form attached as Exhibit C, and Hinkefent and Purchaser shall have entered into a non-competition agreement in the form attached as Exhibit D. 11.3 Representations. All representations and warranties of Company, Hinkefent, Eric Hinkefent and the Shareholders contained herein or in any document delivered pursuant hereto shall be true and correct in all material respects when made and shall be deemed to have been made again at and as of the date of the Closing, and shall then be true and correct in all material respects except for changes in the ordinary course of business after the date hereof in conformity with the covenants and agreements contained herein, provided that (a) Company, Hinkefent, and the Shareholders shall have provided to Purchaser written updates to any disclosures and schedules under this Agreement ("Updates") necessary to make all representations and warranties of Company, Hinkefent and the Shareholders contained herein or in any documents delivered pursuant hereto true and correct in all material respects as of the Closing, (b) the Purchaser approves in writing of such Updates in its sole discretion, and (c) representations and warranties regarding Elk River Trading Company that are contained in an asset purchase agreement which, together with all amendments and schedules and exhibits, has been approved in form and content by Purchaser, shall be in full force and effect, and Hinkefent and Eric Hinkefent shall guarantee the truth and accuracy of such representations and warranties to Purchaser as if they had been fully set forth in this Agreement. 11.4 Covenants. All covenants, agreements and obligations required by the terms of this Agreement to be performed by Company, Hinkefent, Eric Hinkefent or by Shareholders at or before the Closing shall have been duly and properly performed in all material respects, and all documents required to be delivered to Purchaser at or prior to the Closing shall have been so delivered. 11.5 Diligence. Purchaser shall have completed its due diligence within 30 days after the Effective Date with results satisfactory to Purchaser, provided that Purchaser shall also be satisfied with the results of due diligence with respect to any material events or developments arising subsequent to the 30th day after the Effective Date and prior to Closing. 11.6 Closing Financial Statements. Purchaser shall be provided by Company with an unaudited balance sheet as at June 30, 1999 and unaudited statements of earnings and sources and uses of cash for the period ended June 30, 1999 (collectively, "Interim Financial Statements") and an unaudited balance sheet of Company as at the last day of the month prior to Closing for the period then ended ("Closing Balance Sheet"), all representations, warranties, indemnities and covenants made by Company and/or the Shareholders in this Agreement which relate to the Financial Statements shall similarly be deemed to relate to the Interim Financial Statements, as though each of such representations, warranties, indemnities and covenants were fully set forth herein as additional representations, warranties, indemnities and covenants containing the words "Interim Financial Statements" in lieu of the words "Financial Statements," and all representations, warranties, indemnities and covenants made by Company and/or the Shareholders in this Agreement which relate to the Balance Sheet or the Balance Sheet Date shall similarly be deemed to relate to the Closing Balance Sheet, and the Closing Balance Sheet Date, as the case may be as though each of such representations, warranties, indemnities and covenants were fully set forth herein as additional representations, warranties, indemnities and covenants containing the words "Closing Balance Sheet" in lieu of the words "Balance Sheet" and the date thereof in lieu of the words "the Balance Sheet Date." 11.7 Certificate. There shall be delivered to Purchaser a certificate executed by the President and Secretary of Company and by Hinkefent and each Shareholders, individually, dated the date of the Closing, certifying that the conditions set forth in this Section 11 have been fulfilled. 11.8 Good Standing. There shall be delivered to Purchaser a certificate issued by the agency regulating corporations in each of the states in which the Company is doing business, attesting to the corporate existence and good standing of Company in such state. 11.9 Opinion. Purchaser shall have received an opinion of Company's counsel, dated the date of the Closing, in form and substance satisfactory to counsel for Purchaser, to the effect that the Company is duly formed, validly existing, and in good standing, this Agreement has been duly authorized on behalf of the Company, Hinkefent and the Shareholders, and the Agreement has been validly executed and is enforceable against the Company, Hinkefent and the Shareholders in accordance with its terms, subject to qualifications relating to insolvency laws, equitable principles, and the like. 11.10 Environmental Report. Purchaser, Eric Hinkefent and Hinkefent shall have received and Purchaser shall have approved, in its sole discretion, a Phase 1 environmental report, or a report deemed by Purchaser in its sole discretion to be equivalent to a Phase 1 environmental report, relating to conditions on or under all locations at or adjacent to premises used or owned or controlled by Company, except that the portion of the report relating to premises leased by Company as to which the owner refuses consent to access after request by Company may omit information regarding such premises that is impossible to obtain without such access. 11.11 Acquisition of Assets of Elk River Trading Company. Company shall have acquired all of the assets (excluding cash and cash equivalents) of, including without limitation all rights to the name of, and shall have assumed none of the liabilities of Elk River Trading Company (except assumption of the lessee's rights and liabilities under the lease of Elk River Trading Company), in a transaction in form and substance acceptable to Purchaser, and Purchaser shall have received a legal opinion of counsel to the Company in form and substance satisfactory to counsel for Purchaser, to the effect that the Company's acquisition did not violate, or cause any acceleration or default under, any lien, any provision of law or any contract or lease to which Elk River Trading Company or its assets are subject, and that there is no basis for any claim against Company arising from such acquisition. All representations, warranties, covenants and conditions in favor of the Company contained in the acquisition agreement shall be deemed to be representations, warranties, covenants and conditions in favor of Purchaser which are the obligations of Hinkefent and Eric Hinkefent to warrant, represent, perform or fulfill, as if fully set forth in this Agreement. 11.12 Election. Company, Shareholders and Purchaser shall have executed the Election to Allocate Income Under Normal Accounting Rules Under Section 1362(e)(3) in the form set forth on Exhibit 11. 12. Conditions Precedent to Company's and Shareholders' Obligations. All obligations of Company and Shareholders at the Closing are subject, at the option of Company and each Shareholder, to the fulfillment of each of the following conditions at or prior to the Closing, and Purchaser shall exert its best efforts in the exercise of reasonable business judgment to cause each such condition to be so fulfilled: 12.1 Representations. All representations and warranties of Purchaser contained herein or in any document delivered pursuant hereto shall be true and correct in all material respects when made and as of the Closing. 12.2 Covenants. All obligations required by the terms of this Agreement to be performed by Purchaser at or before the Closing shall have been duly and properly performed in all material respects. 12.3 Certificate. There shall be delivered to Shareholders a certificate executed by an officer of the Purchaser, dated the date of the Closing, certifying that the conditions set forth in this Section 12 have been fulfilled. 12.4 Opinion. Company shall have received an opinion of Purchaser's counsel, dated the date of the Closing in form and substance satisfactory to counsel for Company, to the effect that the Purchaser is duly formed, validly existing, and in good standing, this Agreement has been duly authorized on behalf of the Purchaser, and the Agreement has been validly executed and is enforceable against the Purchaser in accordance with its terms, subject to qualifications relating to insolvency laws, equitable principles, and the like. 12.5 Purchase Price. Shareholders shall have received at Closing payment of the first installment of the Purchase Price in accordance with Section 2 and shall have delivered the Notes to the Shareholders. 12.6 Election. Company, Shareholders and Purchaser shall have executed the Election to Allocate Income Under Normal Accounting Rules Under Section 1362(e)(3) in the form set forth on Exhibit 11. 13. Indemnification. Purchaser agrees to indemnify Company and the Shareholders and Company agree to indemnify Purchaser, in connection with this transaction, against all expenses, losses, claims, damages and liabilities, including without limitation expenses of investigating the foregoing, expenses of appearing in any action or legal proceeding to which any indemnitee may become subject in order to defend against the foregoing, expenses of preparing for any such action or proceeding, and reasonable counsel fees and disbursements (collectively, "Liabilities") which result from or arise from or are based upon, the matters as set forth below. The indemnification provisions of this Agreement shall apply equally to Purchaser, Purchaser's members, officers, directors, agents, employees and affiliates and each person, if any, who controls Purchaser or any of Purchaser's affiliates (collectively, the "Purchaser Indemnitees") and to Shareholders, Company and its officers, directors, agents, employees and affiliates, the beneficiaries of Shareholders, and each person, if any, who controls Company, Shareholders, beneficiaries of the Shareholders or any of their affiliates (collectively, the "Company Indemnitees"). 13.1 By Shareholders. Hinkefent, Eric Hinkefent, and each Shareholder hereby agrees to indemnify and agree to hold Purchaser harmless from, against and in respect of (and shall on demand reimburse Purchaser for) any and all Liabilities suffered or incurred by Purchaser by reason of any untrue representation, breach of warranty or non-fulfillment of any covenant by Hinkefent, Eric Hinkefent, or such Shareholder, respectively. 13.2 By Purchaser. Purchaser hereby agrees to indemnify and hold Shareholders harmless from, against and in respect of (and shall on demand reimburse Shareholders for) any and all Liabilities resulting from any untrue representation, breach of warranty or non-fulfillment of any covenant or agreement by Purchaser contained herein. 13.3 Procedure. Promptly after any person entitled to indemnification hereunder receives notice of the commencement of any proceeding, such person will give notice in writing to the indemnifying party, which must be given within three years after the Closing. The indemnifying party will without being deemed to have admitted any liability assume the defense, including the employment of and payment of such counsel's fees and disbursements. Should the person entitled to indemnification reasonably determine that separate counsel is necessary (whether due to the existence of different defenses, potential conflicts of interest or otherwise), or if the indemnifying party has not assumed the defense, then the person entitled to indemnification may, employ separate counsel, and the indemnifying party shall pay such counsel's reasonable fees and disbursements as incurred. In the event of any proceedings in connection with this Agreement, each party agrees that, if requested, it or its representatives will testify or otherwise assist each other party in preparing for testimony. 13.4 Contribution. If any indemnification or reimbursement sought pursuant to this Agreement is held by a court to be unenforceable for any reason other than the express terms of this Agreement (for example, but not by way of limitation, enforcement is against public policy), then Purchaser, Hinkefent, Shareholders and Company agree, to contribute to the Liabilities for which such indemnification or reimbursement is held unavailable in such proportion as is appropriate to reflect the relative benefits to Purchaser and Company in connection with the transaction or transactions contemplated by this Agreement. 13.5 Limitation on Indemnification. Notwithstanding any other provision of this Agreement, no person or entity shall be obligated to indemnify or hold harmless any other person or entity, and no representation, warranty or covenant made by any person or entity pursuant to this Agreement shall be deemed to be breached or condition unfulfilled, unless and until the Liabilities suffered or incurred (or reasonably likely to be suffered or incurred) by the party otherwise entitled to indemnification, which result from or arise from or are based upon such untrue representation, breach of warranty or non-fulfillment of covenant or condition, together with the Liabilities suffered or incurred (or reasonably likely to be suffered or incurred) by the same party resulting from or arising from or based upon all untrue representations, breaches of warranties and non-fulfillment of covenants made by all other parties to this Agreement in favor of such person and all unfulfilled conditions in favor of such person, exceed, in the aggregate: the difference between $500,000 and the amount of actual total liabilities of Company as of the close of business on the last day of the month preceding the Closing (excluding liabilities represented by any permitted payment set forth on Schedule 2 that has not been made prior to that day). 14. Offset. In addition to any other remedy and subject to the limitations referenced in Section 13.5, Purchaser shall be entitled, upon any breach of this Agreement by Company or Shareholders, to offset against Purchaser's obligations to Company, Hinkefent, any Shareholder, or any Affiliate of the foregoing, including without limitation obligations under the Notes, the amount of damages, losses or expenses estimated by Purchaser to arise from such breach. Without limiting the foregoing, Purchaser may exercise this right of offset for any amount by which the actual liabilities of Company as of the close of business on the last day of the month preceding the Closing exceed the liabilities on such date as certified by Company. 15. Survival of Representations and Warranties. All statements, representations, warranties, indemnities, covenants and agreements made by each of the parties hereto shall survive after the Closing for a period of two years after the Closing. Nothing herein shall be deemed to constitute a representation or warranty with respect to any matter as of any time after the Closing, including without limitation any warranty or representation relating to any claims threatened or asserted after Closing with respect to product labeling, product function, product advertising, or other product liability claims that were unknown at time of Closing. 16. Notices. Any and all notices, offers, demands or other communications required or permitted to be given under any of the provisions of this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or on the tenth business day after mailed by first class registered or certified United States mail, return receipt requested, addressed to the parties at the addresses set forth herein (or at such other address as any party may specify by notice to all other parties given as aforesaid). Copies of any notice sent to Purchaser must be sent to: Scott DeWald, Esq., Lewis and Roca LLP, 40 North Central Avenue, Phoenix, Arizona 85004. Copies of any notice sent to Company, Hinkefent, Eric Hinkefent or Shareholders must be sent to: James C. Hinkefent, 7807 East 51st Street, Tulsa, Oklahoma 74145 and R. Blake Atkins, Atkins and Atkins, P.C., 427 South Boston Avenue, Suite 815, Tulsa, Oklahoma 74103-4154. 17. Legal and Other Costs. 17.1 In the event that any party defaults (the "Defaulting Party") in his, her or its obligations under this Agreement and, as a result thereof, the other party (the "Non-Defaulting Party") seeks to legally enforce his, her or its rights hereunder against the Defaulting Party, then, in addition to all damages and other remedies to which the Non-Defaulting Party is entitled by reason of such default, the Defaulting Party shall promptly pay to the Non- Defaulting Party an amount equal to all costs and expenses (including reasonable attorneys' fees and costs) paid or incurred by the Non-Defaulting Party in connection with such enforcement. 17.2 Each party shall be solely responsible for its respective expenses incurred in regard to the negotiation and drafting of this Agreement as well as the obligations to be undertaken by the respective parties in accordance with this Agreement and the proposed transactions described herein, provided that the Company shall be permitted to make expenditures set forth in Schedule 2. 18. Miscellaneous. 18.1 This writing constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified, amended or terminated except by a written agreement specifically referring to this Agreement signed by all of the parties hereto. 18.2 No waiver of any breach or default hereunder shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature. 18.3 This Agreement shall be binding upon and inure to the benefit of each party hereto, its, his or her successors, assigns, heirs and personal representatives. 18.4 The paragraph headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of said paragraphs. 18.5 Without further consideration each party hereto shall cooperate, shall take such further action and shall execute and deliver such further documents as may be reasonably requested by any other party in order to carry out the provisions and purposes of this Agreement. 18.6 Shareholders will pay all sales, transfer and documentary taxes, if any, payable in connection with the sale, conveyances, assignments, transfers and deliveries to be made to Purchaser hereunder. 18.7 This Agreement may be executed in one or more counterparts, all of which taken together shall be deemed one original. 18.8 This Agreement and all amendments thereof shall be governed by and construed in accordance with the laws in force in the State of Arizona. Venue for any litigation arising thereunder shall lie in the state and federal courts situated in either Maricopa County, Arizona or Tulsa County, Oklahoma. 18.9 For purposes of this Agreement, an individual will be deemed to have "knowledge" of a particular fact or other matter if: (a) such individual is actually aware of such fact or other matter; or, (b) a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonably comprehensive investigation concerning the existence of such fact or other matter. A person (other than an individual) will be deemed to have "knowledge" of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, partner, executor, or trustee of such person (or in any similar capacity) has, or at any time had, knowledge of such fact or other matter. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. FOOD FOR HEALTH CO., INC., an Arizona corporation Jerry Fleming ----------------------------------- Jerry Fleming, President Grant Anderson ----------------------------------- Grant Anderson, Secretary HEALTH FOOD ASSOCIATES, INC., an Oklahoma corporation Eric Hinkefent ----------------------------------- Eric Hinkefent, President SHAREHOLDERS: James C. Hinkefent ----------------------------------- James C. Hinkefent 8965 South Sandusky Tulsa, Oklahoma 74137 James C. Hinkefent ----------------------------------- James C. Hinkefent, as trustee of the James C. Hinkefent Health Food Associate Stock Trust dated January 30, 1998 James c. Hinkefent ----------------------------------- James C. Hinkefent, as trustee of the James C. Hinkefent Trust dated July 11, 1994, as amended Marilyn M. Hinkefent ----------------------------------- Marilyn M. Hinkefent, as trustee of the James C. Hinkefent Trust dated July 11, 1994, as amended Eric Hinkefent ----------------------------------- Eric Hinkefent 6384 South 86th East Avenue Tulsa, Oklahoma 74133 Mary Ann O'Dell ----------------------------------- Mary Ann O'Dell 4104 West Elgin Broken Arrow, Oklahoma 74012 Sally Sobol ----------------------------------- Sally Sobol 11533 East 7th Tulsa, Oklahoma 74128 Amy Laminsky ----------------------------------- Amy Laminsky 5611 South 95th East Avenue Tulsa, Oklahoma 74145 EX-10.1 3 8% CONVERTIBLE SUBORDINATED NOTE FOOD FOR HEALTH CO., INC. 8% CONVERTIBLE SUBORDINATED NOTE DUE SEPTEMBER 15, 2004 $2,000,000.00 September 15, 1999 THIS CONVERTIBLE SUBORDINATED NOTE evidences debt of, and a potential right to convert such debt into equity of, Food for Health Co., Inc., an Arizona Corporation (the "Corporation"). The Corporation is currently a wholly owned subsidiary of AMCON Distributing Company (the "Parent"), a Delaware corporation. At the time of the execution of this Note, the parties acknowledge that the Parent may (but is not required to) distribute its interest in the Corporation to the Parent's shareholders, at which time the Corporation would become a publicly held corporation (this transaction is referred to as the "Spin-Off"). The Corporation, for value received, promises to pay to Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky, or any transferee permitted under this Note, (each of which is a "Payee" and all of which are collectively, the "Holder") the principal amount of Two Million Dollars ($2,000,000.00) and to pay interest thereon at the rate of eight percent (8%) per annum. Interest shall accrue from the date hereof and shall be paid in quarterly installments on the 15th day of March, June, September and December, commencing on December 15, 1999. Interest shall be paid on the basis of a 360-day year of twelve 30-day months. Principal and all unpaid accrued interest shall be paid on September 15, 2004 ("Maturity"). Both principal and interest are payable in lawful money of the United States of America at Health Food Associates, Inc., d.b.a. Akin's, 7807 East 51st Street, Tulsa, Oklahoma 74145, to the attention of Eric Hinkefent. Exhibit A sets forth, for each Payee, the amount of the initial principal balance of this Note to which that Payee is entitled, and the percentage obtained from dividing such amount by the initial principal balance of this Note ("Payee Percentage"). Each time the Corporation makes a payment under this Note, such payment will deemed properly made to all Payees if the Corporation delivers to Eric Hinkefent separate checks, one payable to each of the Payees, with the amount of each respective separate check equal to the total payment made by the Corporation multiplied by the Payee Percentage for the respective Payee. Eric Hinkefent assumes all responsibility for distributing the separate checks to the Payees, and the Corporation shall be entitled to assert as a complete defense to any claim of nonpayment by any Payee that the relevant payment was delivered to Eric Hinkefent. Any and every right and action that may be taken by the Holder under this Note, including without limitation the exercise of any conversion right, is valid only if such right or action has been authorized in advance by unanimous written consent of all of the Payees, and if such written consent is delivered to the Corporation upon request. The securities represented hereby have not been registered under the Securities Act of 1933 (the "Act") or any state securities laws and may not be resold, transferred, pledged, hypothecated or otherwise assigned until (a) the Corporation has received from the Holder's counsel an opinion satisfactory to the Corporation that such transfer can be made without compliance with the registration provisions of the Act, or (b) a registration statement filed by the Corporation is declared effective. ARTICLE 1 CONVERSION AND PURCHASE RIGHTS 1.1 Conversion Price. If, prior to Maturity, the Spin-Off takes place, all or any portion of the principal amount of this Note is convertible, at the option of the Holder, into shares of the Corporation's Common Stock ("Conversion Shares"), at any time within 60 days after notice from the Corporation that the Spin-Off will occur. In addition, if prior to Maturity, there is a sale of substantially all of the assets or stock of the Corporation or an acquisition of the Corporation by merger (a "Sale" of the Corporation), all or any portion of the principal amount of this Note is convertible, at the option of the Holder, into Conversion Shares, at any time within 60 days after notice from the Corporation that the Sale will occur (and, in such event, the term, "Spin-off," shall be deemed to refer to the "Sale" for purposes of this Article 1). The conversion price per share ("Conversion Price") shall be equal to the total outstanding principal balance of this Note at the time of conversion, divided by the total number of shares into which this Note may be converted (the total number of "Conversion Shares"). The total number of Conversion Shares shall be equal to a quotient, obtained by dividing (1) the product of (a) the unpaid principal balance of this Note, multiplied by (b) the number of shares of common stock outstanding immediately prior to the closing of the Spin-Off, on a fully-diluted basis assuming the exercise of all options and conversion rights other than conversion rights pursuant to this Note, by (2) the difference between (i) seventy-five percent (75%) of the Corporation's gross sales (on a consolidated basis including Health Food Associates, Inc. and all other subsidiaries) for the twelve-month period ending on the month preceding the Spin-Off, and (ii) the unpaid principal balance of this Note. For example, if 28,500 shares of common stock are outstanding before conversion, $2,000,000 is the unpaid principal balance, and annual gross sales are $150,000,000, 75% of gross sales are $112,500,000, and the number of shares into which the Note may be converted will be the quotient, obtained by dividing (1) the product of (a) $2,000,000, multiplied by (b) 28,500 (which is 57,000,000,000), by (2) the difference between (i) $112,500,000, and (ii) $2,000,000 (which is $110,500,000), or 57,000,000,000 divided by 110,500,000, or 515.8371 shares. The Conversion Price is subject to adjustment as provided in Section 1.2 of this Note. Sales of any subsidiary that has not been owned by the Corporation during any month of the twelve months preceding the closing of the Spin-Off, shall be calculated as if it had been a subsidiary of the Corporation during such month. The foregoing provision for determining the number of Conversion Shares is expressed for convenience of reference in the following formula and is subject to the more detailed definitions above: Number of Conversion Shares = [(shares before conversion)x(loan balance)] ------------------------------------------- [(75% of annual sales) loan balance] 1.2 Anti-Dilution Adjustment of Conversion Terms. The Conversion Price and number of shares to be issued upon conversion or purchase determined pursuant to this Article 1 shall be subject to adjustment, as follows: 1.2.1 Merger, Sale of Assets, etc. If the Corporation at any time shall consolidate with or merge (other than pursuant to a merger in which the Corporation is the surviving entity and which does not result in any reclassification of or change in the outstanding Common Stock of the Corporation) into or sell or convey all or substantially all its assets to any person or entity, this Note shall thereafter evidence the right to purchase such number and kind of securities and property as would have been issuable or distributable on account of such consolidation, merger, sale or conveyance, upon or with respect to the securities subject to the conveyance, upon or with respect to the securities subject to the conversion or purchase right immediately prior to such consolidation, merger, sale or conveyance. The foregoing provision shall apply to successive transactions of a similar nature by any such successor or purchaser. It is the intent of this subsection to treat the Holder of the Note, for purposes of adjusting the number of shares to be issued upon conversion and adjusting the Conversion Price, as if he had exercised his right to conversion immediately prior to the event triggering the adjustments described herein, but this sentence does not require Holder to convert the Note upon any of the events that are the subject of this subsection 1.2.1. 1.2.2 Reclassification, etc. If the Corporation at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any of the securities then purchasable upon the exercise of the conversion right or purchase right contained in this Article 1 into the same or a different number of securities of any class or classes, this Note shall thereafter evidence the right to purchase such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the conversion or purchase right immediately prior to such subdivision, combination, reclassification or other change. If shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, the Conversion Price shall be proportionately reduced in case of subdivision of shares or proportionately increased in the case of combination of shares, both cases by the ratio which the total number of shares of Common Stock to be outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. It is the intent of this subsection to treat the Holder of the Note, for purposes of adjusting the number of shares to be issued upon conversion and adjusting the Conversion Price, as if he had exercised his right to conversion immediately prior to the event triggering the adjustments described herein, but this sentence does not require Holder to convert the Note upon any of the events that are the subject of this subsection 1.2.2. 1.3 Notice of Adjustment. Whenever events occur requiring the Conversion Price to be adjusted, the Corporation shall promptly file with its secretary or an assistant secretary at its principal office and with its stock transfer agent, if any, a certificate of its chief financial officer showing the adjusted Conversion Price, setting forth in reasonable detail the facts requiring such adjustment, and stating such other facts as shall be necessary to show the manner and figures used to compute such adjustment. Such chief financial officer's certificate shall be made available at all reasonable times for inspection by the Holder. Promptly after each such adjustment, the Corporation shall mail a copy of such certificate by certified mail to the Holder. The Corporation shall endorse on any Note executed and delivered by the Corporation a description of each adjustment, if any, under this Section as the result of events occurring before the execution and delivery of the Note. If, within 45 days of the mailing of such certificate, the Holder notifies the Corporation in writing of its disagreement with the adjustment to the Conversion Price contained in the certificate, then the Corporation will promptly obtain and mail to the Holder a certificate of a firm of independent certified public accountants selected by the Corporation's board of directors (who may be the regular auditors of the Corporation) covering the same items required by the chief financial officer's certificate. The certificate of the firm of independent public accountants will be conclusive evidence of the correctness of the computations with respect to any adjustment of the Conversion Price. 1.4 Authorized Shares. The Corporation covenants that during the period the conversion or purchase rights under this Article 1 exist, the Corporation will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the conversion of this Note. The Corporation agrees that its issuance of this Note shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the conversion of this Note or purchase of shares pursuant hereto. All shares of the Corporation's Common Stock (or other securities in the event of an adjustment of the Conversion Price) which may be issued upon the conversion of this Note shall, upon issuance, be deemed to be fully paid and nonassessable. 1.5 Exercise of Conversion Privilege. If the Spin-Off is consummated, the Holder shall receive a Conversion Privilege. The Conversion Privilege shall be exercisable by the Holder within 60 days after delivery, upon written notice to the Corporation or its successor and the surrender of this Note in exchange for the number of shares of Common Stock (or other securities and property, including cash, in the event of an adjustment of the Conversion Price) into which this Note is convertible based upon the Conversion Price. 1.6 Issuance of Stock Certificate. Upon the conversion of this Note, the Corporation shall forthwith issue to the Holder a certificate or certificates representing the number of shares of its Common Stock (or other securities in the event of an adjustment of the Conversion Price) to which the conversion relates. The Corporation shall not be required to issue fractional shares of Common Stock upon conversion of this Note and, in lieu thereof, shall pay a cash adjustment based upon the then current fair market value of the Common Stock as determined by the Board of Directors on the last business day prior to the date of conversion. If the entire principal amount of this Note is converted upon the surrender hereof, the Corporation shall pay within 20 days all interest accrued hereon to the date of conversion and issue and deliver to the Holder certificates evidencing the number of shares of Common Stock required herein. If a portion of the principal amount of this Note is converted, upon surrender hereof the Corporation shall pay within 20 days all interest accrued on the portion converted hereon to the date of conversion, issue and deliver to the Holder a certificate for the proper number of shares of Common Stock required for the portion converted, and deliver a new Note in the form hereof for the balance of the principal amount hereof. ARTICLE 2 REGISTRATION RIGHTS 2.1 Investment Representation. The Holder hereby represents and warrants that it has acquired this Note for purpose of investment and with no present intent to sell or distribute the same. Should it exercise the conversion or purchase rights under Article 1, any securities of the Corporation so acquired will be with the same investment intent. 2.2 Definitions. The following constitute definitions of certain of the terms used in this Article Eight: 2.2.1 "Act" means the Securities Act of 1933 as amended. 2.2.2 "Commission" means the Securities and Exchange Commission. 2.2.3 "Conversion Shares" means the common Stock issuable upon conversion of the Note. 2.2.4 "Securities" shall mean the Note, and any of the Conversion Shares. 2.3 Piggyback Registration Rights. Subject to the consent of the Corporation's underwriter in connection with such offering, if the Corporation proposes to register any of its securities under the Securities Act pursuant to an underwritten offering in an amount of not less than $10,000,000.00, (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 under the Securities Act is applicable or a registration using any form that does not permit secondary sales of securities), it will give written notice to the Holder of its intention to do so and the intended method of disposition. Upon written request of the Holder delivered to the Corporation within 30 days after receipt of such written notice (which request shall state the number of shares of Conversion Shares to be registered), the Corporation will use its best efforts in connection with such registrations of securities to be sold for the Corporation's account, at its own expense, to register under the Securities Act all shares of Conversion Shares requested to be registered by holder and outstanding as of the date of the written notice or to be outstanding upon conversion pursuant to any notice of conversion which is effective on or prior to the date of notice of the request for registration, all to the extent required to permit disposition in accordance with the intended method. 2.4 Registration Obligations. As a condition to the satisfaction of its obligations to file each of the registration statements required pursuant to Section 2.3, ("Registration Statement"), the Corporation shall: 2.4.1 Effect Registration. Deliver to Holder a copy of such Registration Statement and, as expeditiously as possible, use its best efforts to effect registration under the Act of the Securities to which such Registration Statement relates. 2.4.2 Declaration of Effectiveness. Promptly notify the Holder of the time when such Registration Statement has become effective or any supplement to any prospectus forming a part of such Registration Statement has been filed. 2.4.3 Notices of Effectiveness. Promptly notify the Holder of the time when such Registration Statement has become effective or any supplement to any prospectus forming a part of such Registration Statement has been filed. 2.4.4 Notices of Requests for Amendment. Promptly notify the Holder of any requests by the Commission for the amending or supplementing of such Registration Statement or prospectus or for additional information. 2.4.5 Amend Upon Request. Prepare and file with the Commission promptly upon the Holder's request any amendment or supplements to such Registration Statement or prospectus which, in the option of counsel for the Holder, may be necessary or advisable in connection with the distribution of the Securities by the Holder. 2.4.6 Amend to Correct. Promptly prepare and file with the Commission and promptly notify the Holder of the filing of such amendment or supplement to such Registration Statement or prospectus as may be necessary to correct any statements or omission, if at any time when a prospectus relating to the securities is required to be delivered under the Act, any event shall have occurred as a result of which such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. 2.4.7 Amend for Prospectus Delivery. In case the Holder or any underwriter for the Holder is required to deliver a prospectus, at a time when the prospectus then in effect may no longer be used under the Act, prepare promptly upon request such amendment or amendments to such Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10 of the Act. 2.4.8 Prior Notice of Amendment. Furnish to the Holder as soon as available copies of any amendment or supplement to the Registration Statement and each preliminary or final prospectus or supplement a reasonable time prior to the filing thereof, all in such quantities as the Holder may from time to time reasonably request, and not file any such amendment or supplement to which the Holder shall reasonably object after having been furnished a copy. 2.4.9 Stop Orders. Advise promptly after the Corporation shall receive notice or obtain knowledge of the issuance of any stop order by the Commission suspending the effectiveness of any such Registration Statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order shall be issued. 2.4.10 Blue Sky Compliance. Use its best efforts to qualify or register the Securities for transfer under the securities laws of such states as the Holder may designate. 2.4.11 Comfort Letter. Obtain a cold comfort letter from the independent public accountants of the Corporation in customary form and covering such matters of the type customarily covered by cold comfort letters as the Holder or the underwriter reasonably requests. 2.4.12 Opinion. Cause to be issued in favor of the Holder an opinion of counsel in customary form and covering such matters of the type customarily covered by opinions in connection with registered offerings as the Holder reasonably requests. 2.4.13 Compliance. Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but no more than 18 months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Act. 2.4.14 Costs and Expenses. Holder shall pay for all fees and expenses of its legal, tax, accounting and other advisors in connection with the Registration Statement. Corporation shall pay all other expenses in connection with the Registration Statement. 2.4.15 Indemnification. Indemnify and hold harmless the Holder and each person, if any, who controls the Holder within the meaning of the Act against any losses, claims, damages or liabilities (or actions in respect thereof), joint or several, to which the Holder or such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) are cause by any untrue statement or alleged untrue statement or any material fact contained, on the effective date thereof, in any Registration Statement under which the Securities were registered under the Act, any prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and reimburse the Holder and each controlling person for any legal or other expenses reasonably incurred by the Holder or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Corporation will not be liable in any such case to the extent that any such loss, claim, damage, expense or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in conformity with written information furnished by the Holder in writing specifically for use in the preparation thereof. 2.5 Limitations. Notwithstanding any other provision of this Article 2, (a) the Corporation shall not be obliged to file on behalf of the Holder of the Note more than one registration statement pursuant to the terms of this Article 2 in any twelve-month period, not including for this purpose any registration statement or notification described in Section 2.3 and (b) the Corporation shall have the privilege of postponing action under this paragraph for a reasonable period of time (not exceeding 120 days) in the event the filing would, in the opinion of the Corporation's Board of Directors, adversely affect a material financing project, or a proposed or pending acquisition, merger, or other corporate reorganization for which the Corporation is or is expected to be a party. 2.6 Indemnification by the Holder. In the event of any registration of any Securities pursuant to this Article 2, the Holder will indemnify and hold harmless the Corporation, each of its directors, each of its officers who has signed any such registration statement, and such person, if any, who controls the Corporation within the meaning of the Act, against any losses, claims, damages or liabilities to which the Corporation or any such director, officer, or controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in such registration statement, prospectus, or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, prospectus, amendment or supplement, in reliance upon and in conformity with written information furnished by the Holder for use in the preparation thereof; and will reimburse any legal or other expenses reasonably incurred by the Corporation or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. 2.7 Indemnification Procedures. Promptly after receipt by an indemnified party under this Article 2 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Article 2 notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Article 2. In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party. In the event the indemnifying party gives notice to the indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Article 2 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof subsequent to the date of such notice other than reasonable costs of investigation. 2.8 Legend. Any certificate representing Securities shall be stamped with a suitable endorsement to the effect that said Securities are subject to the terms and conditions of this Article 2, a copy of which is on file and available for the inspection at the main office of the Corporation. 2.9 Lockup Agreement. In consideration for the Corporation agreeing to its obligations under this Article 2, the Holder agrees in connection with any registration of the Corporation's securities that, upon the request of the underwriter(s) managing any underwritten offering of the Corporation's securities, such holders shall execute an agreement not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Conversion Shares, other than shares included in the registration, without the prior written consent of the underwriter(s) for the period of time (not to exceed 180 days) from the effective date of the registration as the underwriter(s) may specify unless a longer period is requested by any state securities administrator exercising jurisdiction over the offer or sale of securities in its state. ARTICLE 3 PREPAYMENT RIGHTS 3.1 Prepayment. Corporation shall not, without the prior written consent of the Holder, be entitled to make any prepayment(s) of any portion of principal or interest of this Note, in whole or in part, provided that the Corporation may, in its sole discretion, prepay all or any portion of principal or interest of this Note in the event of a Sale of the Corporation (as defined in Section 1.1). If the principal amount of this Note is prepaid in whole or in part, the prepayment shall be applied first to any interest accrued hereon to the date of prepayment. From the date of prepayment forward, interest shall accrue on a principal amount equal to the principal amount immediately prior to prepayment less the prepayment amount. ARTICLE 4 SUBORDINATION 4.1 Subordination and Priority. The indebtedness evidences by this Note, including the principal and accrued interest, is expressly subordinate and subject in right of payment to the prior payment in full of all "Senior Indebtedness," whether now outstanding or hereafter created, incurred, assumed or guaranteed. Upon any terminating liquidation of assets of the Corporation, or upon the occurrence of any dissolution, winding up, liquidation, whether or not in bankruptcy, insolvency or receivership proceedings, the Corporation shall not pay thereafter, and the Holder of this Note shall not be entitled to receive thereafter, any amount in respect of the principal and interest of this Note unless and until the Senior Indebtedness shall have been paid or otherwise discharged. 4.2 Senior Indebtedness. The term "Senior Indebtedness" shall mean the principal of, premium, if any, and interest on (a) indebtedness (other than this Note or any previously issued subordinated Note) of the Corporation evidenced by notes or similar obligations for money borrowed for trade purposes from or guaranteed to persons, firms or corporations which engage in lending money, including, but without limitation, individuals, banks, trust companies, insurance companies and other financing institutions and charitable trusts, pension trusts and other investing entities or organizations, (b) indebtedness of the Corporation for trade purposes evidenced by notes or Notes issued under the provisions of an indenture or similar instrument between the Corporation and a bank or trust Corporation and (c) indebtedness incurred, assumed or guaranteed by the Corporation in connection with the acquisition by it of any property or asset for trade purposes; provided that Senior Indebtedness shall exclude indebtedness which, by the terms of the instrument creating or evidencing such indebtedness, expressly provides that such indebtedness is not superior in right of payment to this Note. Senior Indebtedness shall exclude, and the indebtedness evidenced by this Note is expressly senior and entitled to priority in payment and upon liquidation with respect to, (i) all capital stock of the Corporation, and (ii) any indebtedness issued after the date of this Note and convertible into shares of the Corporation's Common Stock. Upon request by the Corporation, Holder shall promptly sign any subordination agreement or other acknowledgment consistent with the foregoing provisions. 4.3 Rights Against the Corporation and Others. It is understood that the provisions of this Article 4 are solely for the purpose of defining the relative rights of the Holder of this Note and the holder of the Senior Indebtedness of the Corporation. Nothing contained in this Article 4 or elsewhere in this Note shall or is intended to impair, as between the Corporation, its creditors other than the holder of Senior Indebtedness, and the Holder of this Note, the unconditional and absolute obligation of the Corporation to pay the Holder of this Note the principal of and interest on this Note as and when the same shall become due and payable in accordance with its terms or affect the relative rights of the Holder of this Note and the creditors of the Corporation, other than the holder of such Senior Indebtedness; nor shall anything herein prevent the Holder of this Note from exercising all remedies otherwise permitted by applicable law upon default under this Note, subject to the rights, if any, of the holders of Senior Indebtedness in respect to cash, property or securities of the Corporation received upon the exercise of any such remedy. ARTICLE 5 CORPORATION'S COVENANTS 5.1 Affirmative Covenants. The Corporation agrees that until this Note is paid in full, the Corporation will: 5.1.1 Records and Reports. Maintain a standard system of accounting in substantial conformity with generally accepted accounting principles and on a consistent basis; permit representatives of the Holder, as long as it holds this Note, or any securities acquired upon conversion of this Note, to have access to and to examine its properties, books and records at all reasonable times. 5.1.2 Maintain Corporate Rights and Facilities. Maintain and preserve its corporate existence and all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair and conduct its business in an orderly manner without voluntary interruption. 5.1.3 Maintain Insurance. Maintain public liability, property damage and workmen's compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by companies of similar size engaged in the same business. 5.1.4 Pay Taxes and Other Liabilities. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other material liabilities at any time existing, except to the extent and so long as: (i) the same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and (ii) it shall have set aside on its books reserves (segregated to the extent required by sound accounting practice) deemed by it adequate with respect thereto. 5.1.5 Notice of Default. Promptly notify the Holder of this Note in writing of the occurrence of any Event of Default hereunder or of any event which would become an Event of Default hereunder upon the lapse of time specified in this Note. 5.1.6 Conduct of Business. Conduct the business of the Corporation in accordance with all applicable provisions of law. 5.1.7 Related Party Transactions. Conduct any transactions or dealings with its affiliates on an arm's-length basis. ARTICLE 6 EVENTS OF DEFAULT The occurrence of any of the following events of default shall, at the option of the Holder hereof, cause interest to accrue on the unpaid principal balance of the Note at the default rate of 12% per year: 6.1 Failure to Pay Principal or Interest. Failure to pay any installment of principal or interest hereon when due and continuance thereof for a period of five days after written notice to the Corporation from the Holder. 6.2 Breach of Covenant. The breach of any covenant or other term or condition of this Note or the Secured Promissory Note dated as of the date of this Note, payable by the Corporation to James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky and continuance thereof for a period of thirty days after written notice to the Corporation from the Holder. 6.3 Breach of Representations and Warranties. Any of the Corporation's representations or warranties made herein or any statement or certificate at time given in writing pursuant hereto or in connection herewith shall be false or misleading in any material respect. 6.4 Insolvency; Receiver or Trustee. The Corporation shall become insolvent or admit in writing its inability to pay its debts as they mature; or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee otherwise shall be appointed. 6.5 Judgments. Any material money judgment, writ or similar process shall be entered or filed against the Corporation or any of its property or other assets and shall remain unvacated, unbonded or unstayed for a period of 60 days or in any event later than five days prior to the date of any proposed sale thereunder. 6.6 Attachments. If any material writ of attachment shall be levied against any property or other assets of the Corporation and the Corporation shall not post a bond for the release of such attachment. ARTICLE 7 TRANSFER 7.1 Restriction on Transfer. This Note may not be partially transferred but may be transferred, before or after any conversion. The Holder may not transfer any Conversion Shares until he has first given written notice to the Corporation describing briefly the manner of any such proposed transfer and until (i) the Corporation has received from the Holder's counsel an opinion satisfactory to the Corporation and its counsel that such transfer can be made without compliance with the registration provisions of the Act, or (ii) a registration statement filed by the Corporation is declared effective by the Commission; upon satisfaction of such conditions, the transfer by the Holder of any Conversion Shares shall cause the automatic termination of all rights of the Holder. 7.2 Rights Upon Permitted Transfer. Upon any transfer of this Note permitted under this Article 8, the then unexercised conversion right set forth in Article 1 shall inure to the transferee(s) in proportion to their respective interests in remaining principal, or as the Holder shall allocate such conversion right or purchase right. 7.3 Register. The Corporation shall maintain a register for the recordation of transfers of this Note, which shall be transferable in whole or in part. Upon presentation by the Holder and surrender of this Note, the Corporation shall register such transfer and issue a new Note or Notes of like aggregate principal amount and bearing the same date. ARTICLE 8 MISCELLANEOUS 8.1 Status of the Holder of Note. This Note shall not entitle the Holder to any voting rights or other rights as a shareholder of the Corporation, and no dividends shall be payable or accrue in respect of this Note or the securities issuable upon conversion, unless and until this Note is converted. Upon the conversion of this Note, the Holder shall, to the extent permitted by law, be deemed to be the holder of record of the shares of Common Stock issuable upon such conversion, notwithstanding that the stock transfer books of the Corporation are then closed or that the certificates representing such shares of Common Stock are not then actually delivered. 8.2 Loss or Destruction of Note. The Corporation shall execute and deliver a new Note of like tenor and date upon receipt by the Corporation of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note and, in the case of loss, theft or destruction, of an indemnity by the original Holder hereof or in case of any transfer upon such terms as may be satisfactory to the Corporation, or, in the case of mutilation, upon surrender and cancellation of this Note. 8.3 Survival of Warranties. All agreements, representations and warranties made herein shall survive the execution and delivery hereof. 8.4 Purchase Agreement. This Note and the terms of the indebtedness evidenced hereby are issued and incurred subject to the terms of a certain Stock Purchase Agreement of even date herewith by and between the Corporation and the original Holder hereof, among others, the terms and conditions of which shall become binding upon any subsequent Holder or transferee of this Note. 8.5 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 8.6 Notices. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when delivered or five days after they are deposited in the United States mails, first class postage prepaid, addressed as set forth below: (a) If to the Corporation: Food For Health Co. Inc. 3655 W. Washington Street Phoenix, AZ 85009 Attention: Jerry Fleming, President with a copy to: Lewis and Roca LLP 40 North Central Avenue Phoenix, Arizona 85004 Attention: Scott DeWald, Esq. (b) If to the Holder: Health Food Associates, Inc. d.b.a. Akin's, 7807 East 51st Street Tulsa, Oklahoma 74145 Attention: Eric Hinkefent with a copy to: Atkins and Atkins, P.C. 427 South Boston Avenue, Suite 815 Tulsa, Oklahoma 74103-4154 Attention: R. Blake Atkins Either party may alter the person, office or address to which communications or copies are to be sent by giving notice. 8.7 Binding Nature of Note. This Note shall be binding upon any successors and assigns of the Corporation and shall inure to the benefit of the Holder and its successors and assigns, except that the Holder may not assign or transfer its rights under this Note as expressly permitted by this Note. 8.8 Cost of Collection. If default is made in the payment of this Note, the Corporation shall pay the Holder hereof costs of collection, including attorneys' fees. 8.9 Governing Law. This Note has been executed in and shall be governed by the laws of the State of Arizona. 8.10 Maximum Interest Rate. Notwithstanding the foregoing, the maximum total compensation that the Holder shall be entitled to receive hereunder shall not exceed the maximum rate permitted under applicable law. FOOD FOR HEALTH CO., INC., an Arizona corporation Jerry Fleming ----------------------------------- Jerry Fleming, President EXHIBIT A NAME PRINCIPAL AMOUNT PAYEE PERCENTAGE ---------------- ---------------- ---------------- Eric Hinkefent $500,000.00 25 Mary Ann O'Dell $500,000.00 25 Sally Sobol $500,000.00 25 Amy Laminsky $500,000.00 25 ------------- --- TOTAL $2,000,000.00 100% ============= === EX-10.2 4 SECURED PROMISSORY NOTE FOOD FOR HEALTH CO., INC. SECURED PROMISSORY NOTE $8,000,000.00 Phoenix, Arizona September 15, 1999 FOR VALUE RECEIVED, the undersigned, FOOD FOR HEALTH CO., INC., an Arizona Corporation (the "Corporation"), promises to pay to James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky, or any transferee permitted under this Note (each of which is a "Payee" and all of which are, collectively, the "Holder"), the principal sum of $8,000,000.00, with interest at eight percent (8%) per annum, on the following terms and conditions: 1. Payments. Interest shall accrue from the date hereof and shall be paid in quarterly installments on the 15th day of March, June, September and December, commencing December 15, 1999. Interest shall be paid on the basis of a 360-day year of twelve 30-day months. Principal payments in the amount of Eight Hundred Thousand Dollars ($800,000) shall be paid annually, on each anniversary of the Closing, commencing with the first anniversary of the Closing. All unpaid principal and unpaid accrued interest shall be paid on September 15, 2004 ("Maturity"). Both principal and interest are payable in lawful money of the United States of America at Health Food Associates, Inc., d.b.a. Akin's, 7807 East 51st Street, Tulsa, Oklahoma 74145, to the attention of Eric Hinkefent. Exhibit A sets forth, for each Payee, the amount of the initial principal balance of this Note to which that Payee is entitled, and the percentage obtained from dividing such amount by the initial principal balance of this Note ("Payee Percentage"). Each time the Corporation makes a payment under this Note, such payment will deemed properly made to all Payees if the Corporation delivers to Eric Hinkefent separate checks, one payable to each of the Payees, with the amount of each respective separate check equal to the total payment made by the Corporation multiplied by the Payee Percentage for the respective Payee. Eric Hinkefent assumes all responsibility for distributing the separate checks to the Payees, and the Corporation shall be entitled to assert as a complete defense to any claim of nonpayment by any Payee that the relevant payment was delivered to Eric Hinkefent. 2. Security. This Note is secured by a pledge of stock pursuant to the terms of the Pledge Agreement between Corporation and Holder. Any and every right and action that may be taken by the Holder under this Note is valid only if such right or action has been authorized in advance by unanimous written consent of all of the Payees, and if such written consent is delivered to the Corporation upon request. 3. Covenant. As long as any amount remains unpaid under this Note, the Corporation will take such actions as may be necessary to cause the year-end net worth of HFA Associates, Inc. ("HFA"), or any successor or division whose business is a successor thereto, to be not less than the net worth of HFA as of the end of the month preceding the date of this Note. Compliance with this covenant shall be determined exclusively by certification of the net worth of HFA as of its fiscal year-end delivered to Holder not later than April 1 of each year. 4. Prepayment. At any time during the term of this Note, Corporation may prepay all or any portion of the principal and accrued interest on the indebtedness under this Note without penalty of any kind. 4.1 Subordination and Priority. The indebtedness evidences by this Note, including the principal and accrued interest, is expressly subordinate and subject in right of payment to the prior payment in full of all "Senior Indebtedness," whether now outstanding or hereafter created, incurred, assumed or guaranteed. Upon any terminating liquidation of assets of the Corporation, or upon the occurrence of any dissolution, winding up, liquidation, whether or not in bankruptcy, insolvency or receivership proceedings, the Corporation shall not pay thereafter, and the Holder of this Note shall not be entitled to receive thereafter, any amount in respect of the principal and interest of this Note unless and until the Senior Indebtedness shall have been paid or otherwise discharged. 4.2 Senior Indebtedness. The term "Senior Indebtedness" shall mean the principal of, premium, if any, and interest on (a) indebtedness (other than this Note or any previously issued subordinated Note) of the Corporation evidenced by notes or similar obligations for money borrowed for trade purposes from or guaranteed to persons, firms or corporations which engage in lending money, including, but without limitation, individuals, banks, trust companies, insurance companies and other financing institutions and charitable trusts, pension trusts and other investing entities or organizations, (b) indebtedness of the Corporation for trade purposes evidenced by notes or Notes issued under the provisions of an indenture or similar instrument between the Corporation and a bank or trust Corporation and (c) indebtedness incurred, assumed or guaranteed by the Corporation in connection with the acquisition by it of any property or asset for trade purposes; provided that Senior Indebtedness shall exclude indebtedness which, by the terms of the instrument creating or evidencing such indebtedness, expressly provides that such indebtedness is not superior in right of payment to this Note. Senior Indebtedness shall exclude, and the indebtedness evidenced by this Note is expressly senior and entitled to priority in payment and upon liquidation with respect to, (i) all capital stock of the Corporation, and (ii) any indebtedness issued after the date of this Note and convertible into shares of the Corporation's Common Stock. Upon request by the Corporation, Holder shall promptly sign any subordination agreement or other acknowledgment consistent with the foregoing provisions. 4.3 Rights Against the Corporation and Others. It is understood that the provisions of this Section 4 are solely for the purpose of defining the relative rights of the Holder of this Note and the holder of the Senior Indebtedness of the Corporation. Nothing contained in this Section 4 or elsewhere in this Note shall or is intended to impair, as between the Corporation, its creditors other than the holder of Senior Indebtedness, and the Holder of this Note, the unconditional and absolute obligation of the Corporation to pay the Holder of this Note the principal of and interest on this Note as and when the same shall become due and payable in accordance with its terms or affect the relative rights of the Holder of this Note and the creditors of the Corporation, other than the holder of such Senior Indebtedness; nor shall anything herein prevent the Holder of this Note from exercising all remedies otherwise permitted by applicable law upon default under this Note, subject to the rights, if any, of the holders of Senior Indebtedness in respect to cash, property or securities of the Corporation received upon the exercise of any such remedy. 5. Default. In the event of default in payment of any amount when due, at the option of the Holder, interest may be charged on the amount delinquent at a rate of twelve percent (12%) per annum (the "Default Rate"), effective from the date that such amount shall become delinquent and in default pursuant to Section 6 below. Interest shall continue until such delinquent amount, with interest thereon at the Default Rate, shall have been paid. 6. Notice and Cure. Notwithstanding any other provision of this Note to the contrary, Corporation shall be entitled to cure any failure to observe or perform any condition or obligation under this Note or under any instrument securing it within 20 days after written notice there of by Holder, and no default hereunder shall be deemed to exist until the expiration of such 20-day period without such failure having been cured. 7. Waivers. Failure of the Holder to exercise any option hereunder shall not constitute a waiver of the right to exercise the same in the event of any subsequent default or in the event of continuance of any existing default after demand for strict performance hereof. Corporation hereby waives demand, diligence, presentment for payment, notice of dishonor or nonpayment, protest, and notice of protest in collection of this Note or in enforcing the pledge of stock which is security for this Note. Corporation also agrees that the granting without notice of any renewal or extension or extensions of time for payment of any sum due hereunder of for the performance of any covenant, condition or agreement of this Note shall in no way release or discharge the liability of the Corporation. 8. Notices. All notices, requests, demands and other communications under this Note must be in writing. Notices are deemed given (a) when personally delivered, (b) on the date of receipt when given by facsimile or by overnight courier service, or (c) on the fifth business day after mailing by first class mail. Notices must be sent to the following addresses (or any other address designated in writing by a party to change its address): To Corporation: Food for Health Co., Inc. 3655 W. Washington Street Phoenix, AZ 85009 Attention: Jerry Fleming, President Copy to: Lewis and Roca LLP 40 North Central Avenue Phoenix, Arizona 85004 Attention: Scott DeWald, Esq. To Holder: Health Food Associates, Inc. d.b.a. Akin's, 7807 East 51st Street Tulsa, Oklahoma 74145 Attention: Eric Hinkefent with a copy to: Atkins and Atkins, P.C. 427 South Boston Avenue, Suite 815 Tulsa, Oklahoma 74103-4154 Attention: R. Blake Atkins 9. Law Governing. This Note is to be governed by and construed in accordance with the laws of the State of Arizona. 10. Negotiability and Assignability. This note is not negotiable by the Holder, and the Holder's interest shall not be assignable without prior written consent of the Corporation, such consent shall not be unreasonably withheld. This Note is binding upon the heirs, legal representatives, successors and assigns of Corporation, and inures to the benefit of Holder, its legal representatives, successors and permitted assigns. 11. No Conflict. This Note provides for payment of amounts owed to Holder in connection with the Stock Purchase Agreement. To the extent the amount and terms of payment of this Note vary from those specified in the Stock Purchase Agreement, the terms of this Note control. 12. Attorney's Fees. In the event of any dispute regarding this Note, the prevailing party shall be entitled to receive, in addition to any other award, reasonable attorneys' fees and costs, determined by the court or arbitrator and not a jury. 13. Legal Limits on Interest. In no event shall interest on this Note (including prepaid interest, additional interest, or any charge, fee, cost or expense) exceed the amount Holder may lawfully collect. If the effective rate of interest for any monthly installment period exceeds the amount Holder may lawfully collect, all excess sums will be applied to reduce the principal balance of this Note immediately upon receipt of such sums by Holder or, if in excess of the amount due under the Note, waived or refunded to Corporation. 14. Severability. If any of the provisions of this Note shall be held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity of the remaining provisions of this Note shall in no way be affected, prejudiced or disturbed thereby. CORPORATION: FOOD FOR HEALTH CO., INC., an Arizona Corporation Jerry Fleming ----------------------------------- Jerry Fleming, President EXHIBIT A TO SECURED NOTE AGGREGATE PRINCIPAL PAYEE NAME AMOUNT PERCENTAGE - -------------------------------------- ------------- ---------- James C. Hinkefent and Marilyn M. $2,160,000.00 27.00% Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended Eric Hinkefent $1,460,000.00 18.25% Mary Ann O'Dell $1,460,000.00 18.25% Sally Sobol $1,460,000.00 18.25% Amy Laminsky $1,460,000.00 18.25% ------------- ------ TOTAL $8,000,000.00 100.00% ============= ====== EX-10.3 5 PLEDGE AGREEMENT PLEDGE AGREEMENT This PLEDGE AGREEMENT ("Agreement") is dated as of September 15, 1999, between James C. Hinkefent and Marilyn M. Hinkefent, as trustees of the James C. Hinkefent Trust dated July 11, 1994, as amended, Eric Hinkefent, Mary Ann O'Dell, Sally Sobol, and Amy Laminsky (each of which is a "Shareholder" and all of which are, collectively, "Pledgee"), and Food for Health Co., Inc., an Arizona corporation ("Pledgor"). RECITALS: A. Pledgor and Pledgee are parties to a Stock Purchase Agreement dated August 30, 1999, under which Pledgor has agreed to purchase all outstanding shares of the common stock of HFA Associates, Inc., an Oklahoma corporation (the "Corporation"), including 140,000 shares of Class A common stock and 750,000 shares of Class B common stock (the "Shares") from Pledgee for a purchase price payable in part by a Secured Promissory Note in the principal amount of $8,000,000, signed by Pledgor (the "Secured Note"). B. Under the terms of the Stock Purchase Agreement, Pledgor has agreed to pledge the Shares to Pledgee as security for the performance of its obligations under the Secured Note and this Agreement. AGREEMENTS: In consideration of the recitals and the mutual agreements set forth in this Agreement, the parties agree as follows: 1. Delivery of Certificates to Pledgee. Pledgor pledges to Pledgee and grants to Pledgee a security interest in the Shares (together with all proceeds or distributions arising from ownership of the Shares, which shall be included in the definition of "Shares" for purposes of this Agreement) to secure the payment of the amounts due and the performance of Pledgor's obligations under the Secured Note, and this Agreement (collectively, "Obligations"). Pledgor hereby delivers to Pledgee the certificates (the "Certificates") evidencing the Shares. 2. Shares Held as Security. Pledgee shall hold the Shares as security for the Obligations subject to the terms of this Agreement. If permitted by law, Pledgor authorizes Pledgee to file a financing statement with respect to the Shares signed only by Pledgee, and to file a copy of this Agreement with such financing statement. 3. Release of Shares. Unless the parties agree otherwise, Pledgee shall deliver to Pledgor the Certificates within 10 days after the earliest to occur of the following conditions: 3.1 Pledgee receives payment or prepayment (as defined in the Secured Note) of the entire amount due under the Secured Note, including all principal, interest, and any other amounts due under the Secured Note; or 3.2 Any event by which Pledgor's liability under the Secured Note is completely discharged. 4. Actions By Pledgee. Any and every right and action that may be taken by the Pledgee under this Agreement is valid only if such right or action has been authorized in advance by unanimous written consent of all of the Shareholders and if such written consent is delivered to Pledgor upon request. 5. Remedies Upon Default. If Pledgor defaults in its Obligations and such default is not cured within 30 days after notice as permitted under the Secured Note, Pledgee has at its option all of the rights and remedies of a secured party accorded by Arizona law. Pledgee's rights under this section will be cumulative with respect to any other rights and remedies it may have under this Agreement. 5.1 Expenses of Disposition. Pledgee is entitled to reimbursement for any expenses (including reasonable attorneys' fees and legal expenses) involved in the retaking, holding, preparing for sale, selling or similar charges, incurred in connection with the disposition of the Shares if Pledgor defaults, including any amounts paid to discharge prior security interests or liens or in settlement of prior security interests or liens. 6. Voting and Dividend Rights. If Pledgor has not breached the Secured Note, and the Shares have not been deemed transferred to Pledgee because of a default by Pledgor: 6.1 Pledgor has the right to vote the Shares without any notice to or consent by Pledgee; and 6.2 Pledgor has the right to receive all dividends declared with respect to the Shares so long as: 6.2.1 any dividend in connection with a partial or total liquidation, dissolution, or reduction in capital, capital surplus, or paid in surplus, any redemption or exchange for the Shares, or any dividend that results from the sale of the Corporation or its assets, is paid to Pledgee and applied to amounts due under the Secured Note, with the remainder, if any, returned to Pledgor; and 6.2.2 any dividend in shares or property is delivered to Pledgee and held as security for the Obligations, to be returned to Pledgor upon release of the Shares under Section 3. 7. Other Liens. Pledgor agrees it will not sell or otherwise dispose of the Shares and agrees to keep the Shares free and clear of all liens and encumbrances for as long as they are pledged to Pledgee under this Agreement. 8. Reasonable Care. Pledgee is deemed to have exercised reasonable care in the custody and preservation of the Shares in its possession if it accords the Shares treatment substantially equal to that which Pledgee accords its own property. Pledgee will have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, tenders or other matters relative to the Shares, whether or not Pledgee has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any parties with respect to the Shares. 9. Cooperation. In order to carry out this Agreement, each party will cooperate, will take further action, and will execute, acknowledge and deliver any further instruments reasonably requested by either party. 10. Amendment. The parties may amend this Agreement only by a written agreement signed by both parties or their respective successors or assigns. 11. Governing Law. This Agreement is governed by and construed and enforced in accordance with the laws of the State of Arizona. 12. Headings. The descriptive section headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 13. Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together are one original. 14. Notices. All notices, requests, demands and other communications under this Agreement must be in writing. Notices are deemed given (a) when personally delivered (b) on the date of receipt when given by facsimile or by overnight courier service, or (c) on the fifth business day after mailing by first class mail. Notices must be sent to the parties at the following addresses: To Corporation: Food for Health Co., Inc. 3655 W. Washington Street Phoenix, AZ 85009 Attention: Jerry Fleming, President Copy to: Lewis and Roca LLP 40 North Central Avenue Phoenix, Arizona 85004 Attention: Scott DeWald, Esq. To Holder: Health Food Associates, Inc. 7807 East 51st Street Tulsa, Oklahoma 74145 Attention: Eric Hinkefent with a copy to: Atkins and Atkins, P.C. 427 South Boston Avenue, Suite 815 Tulsa, Oklahoma 74103-4154 Attention: R. Blake Atkins 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Pledgor, Pledgee and their respective personal representatives, successors and assigns and shall be binding upon any person or entity to whom any of the Shares is transferred and the legal representatives of any such person or persons, entity or entities. 16. Attorneys' Fees. If any dispute regarding this Agreement arises, the prevailing party is entitled to receive, in addition to any other award, reasonable attorneys' fees and costs, determined by the court or arbitrator and not a jury. "PLEDGEE" September 15, 1999 James C. Hinkefent Date of Signing:------------------ -------------------------------------- James C. Hinkefent, as trustee of the James C. Hinkefent Trust dated July 11, 1994, as amended September 15, 1999 Marilyn M. Hinkefent Date of Signing:------------------ -------------------------------------- Marilyn M. Hinkefent, as trustee of the James C. Hinkefent Trust dated July 11, 1994, as amended September 15, 1999 Eric Hinkefent Date of Signing:------------------ -------------------------------------- Eric Hinkefent 6384 South 86th East Avenue Tulsa, Oklahoma 74133 September 15, 1999 Mary Ann O'Dell Date of Signing:------------------ -------------------------------------- Mary Ann O'Dell 4104 West Elgin Broken Arrow, Oklahoma 74012 September 15, 1999 Sally Sobol Date of Signing:------------------ -------------------------------------- Sally Sobol 11533 East 7th Tulsa, Oklahoma 74128 September 15, 1999 Amy Laminsky Date of Signing:------------------ -------------------------------------- Amy Laminsky 5611 South 95th East Avenue Tulsa, Oklahoma 74145 "PLEDGOR" FOOD FOR HEALTH CO., INC., an Arizona corporation September 15, 1999 Jerry Fleming Date of Signing:------------------ -------------------------------------- Jerry Fleming, President September 15, 1999 Grant Anderson Date of Signing:------------------ -------------------------------------- Grant Anderson, Secretary EX-99.1 6 PRESS RELEASE NEWS RELEASE FOR FURTHER INFORMATION CONTACT: FOR IMMEDIATE RELEASE Jerry Fleming, President Food For Health Co., Inc. Telephone: (602) 269-2371 Facsimile: (602) 278-1630 Food For Health Acquires Akin's Natural Foods Market ---------------------------------------------------- Phoenix, AZ, September 16, 1999 Food For Health Company, Inc., a wholly- owned subsidiary of AMCON Distributing Company (NASDAQ: DIST), announced today that it has completed the acquisition of all of the outstanding stock of Health Food Associates, Inc. (dba Akin's Natural Foods Market) for an undisclosed price. Akin's Natural Foods Market, first established in 1935 and headquartered in Tulsa, is a highly acclaimed chain of six health and natural product retail stores, all offering an extensive selection of natural supplements and herbs, dairy products, delicatessen items and organic produce. Akin's has locations in Tulsa (2 stores) and Oklahoma City, Oklahoma; Lincoln, Nebraska; Springfield, Missouri; and Topeka, Kansas. Earlier this year, Food For Health announced its acquisition of Chamberlin's Market and Cafe, an award winning chain of natural food stores headquartered in Orlando, Florida. Prior to that, Food For Health announced its acquisition of U.S. Health, a health food distribution company headquartered in Melbourne, Florida. Food For Health Co., Inc., which primarily serves the western and southern United States, is a leading wholesale distributor of health and beauty care products, dairy and frozen foods, and organic produce. Food For Health has three facilities located in Texas, Arizona and Florida. Chamberlin Natural Foods, Inc., a wholly-owned subsidiary of Food For Health, operates six health and natural product retail stores in central Florida. Chamberlin's was designated last year by a trade publication as the number one health food retail chain in America. AMCON is a leading wholesale distributor of consumer products, with seven distribution centers in Kansas, Missouri (2), Nebraska, North Dakota, South Dakota and Wyoming. -end- -----END PRIVACY-ENHANCED MESSAGE-----