Document:

Exhibit
10.1

 

STOCK
PURCHASE AGREEMENT

 

 

This Stock Purchase
Agreement (“Agreement”) is made as of June 27, 2002, by Nortech Systems
Incorporated, a Minnesota corporation (“Buyer”), and SAE Circuits Colorado,
Inc., a Colorado corporation, Thomas J. Hansing, Barbara E. Aune and Stephen W.
Cecil, Jr., (hereinafter collectively and jointly and severally referred to as
“Seller”).

 

RECITALS

 

Seller desires to sell,
and Buyer desires to purchase, all of the issued and outstanding shares (the
“Shares”) of capital stock of Manufacturing Assembly Solutions of Monterrey,
Inc., a Mexican corporation (the “Company”), for the consideration and on the
terms set forth in this Agreement.

 

AGREEMENT

 

The parties, intending to
be legally bound, agree as follows:

 

1.             DEFINITIONS

 

For purposes of this
Agreement, the following terms have the meanings specified or referred to in
this Section 1:

 

“Applicable Contract”—any Contract (a)
under which the Company has or may acquire any rights, (b) under which the
Company has or may become subject to any obligation or liability, or (c) by
which the Company or any of the assets owned or used by it is or may become
bound.

 

“Balance Sheet”—as defined in Section
3.4.

 

“Best Efforts”—the efforts that a
prudent Person desirous of achieving a result would use in similar
circumstances to ensure that such result is achieved as expeditiously as
possible; provided, however, that an obligation to use Best Efforts
under this Agreement does not require the Person subject to that obligation to
take actions that would result in a materially adverse change in the benefits
to such Person of this Agreement and the Contemplated Transactions.

 

“Breach”—a “Breach” of a
representation, warranty, covenant, obligation, or other provision of this
Agreement or any instrument delivered pursuant to this Agreement will be deemed
to have occurred if there is or has been (a) any inaccuracy in or breach of, or
any failure to perform or comply with, such representation, warranty, covenant,
obligation, or other provision, or (b) any claim (by any Person) or other
occurrence or circumstance that is or was inconsistent with such
representation, warranty, covenant, obligation, or other provision, and the
term “Breach” means any such inaccuracy, breach, failure, claim, occurrence, or
circumstance.

 

“Business Day—means any day on which
banks are open for business in Santa Clara, California.

 

 

“Buyer”—as defined in the first
paragraph of this Agreement.

 

 “Closing”—as defined in Section 2.3.

 

“Closing Date”—the date and time as of
which the Closing actually takes place.

 

“Company”—as defined in the Recitals of
this Agreement.

 

“Consent”—any approval, consent,
ratification, waiver, or other authorization (including any Governmental
Authorization).

 

“Contemplated Transactions”—all of the
transactions contemplated by this Agreement, including:

 

(a)           the sale of the Shares by Seller to
Buyer;

 

(b)                               the
execution, delivery, and performance of the Non-Competition Agreement and the
Escrow Agreement;

 

(c)                                the
performance by Buyer and Seller of their respective covenants and obligations
under this Agreement; and

 

(d)                               Buyer’s
acquisition and ownership of the Shares and exercise of control over the
Company.

 

“Contract”—any agreement, contract,
obligation, promise, or undertaking (whether written or oral and whether
express or implied) that is legally binding..

 

“Damages”—as defined in Section 10.2.

 

“Dollars(s)—all dollar figures in this
Agreement are United States dollars.

 

“Encumbrance”—any charge, claim,
community property interest, condition, equitable interest, lien, option,
pledge, security interest, right of first refusal, or restriction of any kind,
including any restriction on use, voting, transfer, receipt of income, or
exercise of any other attribute of ownership.

 

“Environment”—soil, land surface or
subsurface strata, surface waters (including navigable waters, ocean waters,
streams, ponds, drainage basins, and wetlands), groundwaters, drinking water
supply, stream sediments, ambient air (including indoor air), plant and animal
life, and any other environmental medium or natural resource.

 

“Environmental, Health, and Safety Liabilities”—any
cost, damages, expense, liability, obligation, or other responsibility arising
from or under Environmental Law or Occupational Safety and Health Law.

 

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“Environmental Law”—any Legal
Requirement that requires or relates to:

 

(a)                                advising
appropriate authorities, employees, and the public of intended or actual
releases of pollutants or hazardous substances or materials, violations of
discharge limits, or other prohibitions that could have significant impact on
the Environment;

 

(b)                               preventing
or reducing to acceptable levels the release of pollutants or hazardous
substances or materials into the Environment;

 

(c)                                reducing
the quantities, preventing the release, or minimizing the hazardous
characteristics of wastes that are generated;

 

(d)                               assuring
that products are designed, formulated, packaged, and used so that they do not
present unreasonable risks to human health or the Environment when used or
disposed of;

 

(e)                                protecting
resources, species, or ecological amenities;

 

(f)                                  reducing
to acceptable levels the risks inherent in the transportation of hazardous
substances, pollutants, oil, or other potentially harmful substances;

 

(g)                               cleaning
up pollutants that have been released, preventing the threat of release, or
paying the costs of such clean up or prevention; or

 

(h)                               making
responsible parties pay private parties, or groups of them, for damages done to
their health or the Environment, or permitting self-appointed representatives
of the public interest to recover for injuries done to public assets.

 

 

“Facilities”—any real property,
leaseholds, or other interests currently or formerly owned or operated by the
Company and any buildings, plants, structures, or equipment currently or
formerly owned or operated by the Company.

 

“GAAP”—generally accepted United States
accounting principles, applied on a basis consistent with the basis on which
the Balance Sheet and the other financial statements referred to in Section 3.4
were prepared.

 

“Governmental Authorization”—any
approval, consent, license, permit, waiver, or other authorization issued,
granted, given, or otherwise made available by or under the authority of any
Governmental Body or pursuant to any Legal Requirement.

 

“Governmental Body”—any:

 

(a)           nation, state, county, city, town,
village, district, or other jurisdiction of any nature;

 

(b)           federal, state, local, municipal,
foreign, or other government;

 

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(c)                                governmental
or quasi-governmental authority of any nature (including any governmental
agency, branch, department, official, or entity and any court or other
tribunal);

 

(d)           multi-national organization or body;
or

 

(e)                                body
exercising, or entitled to exercise, any administrative, executive, judicial,
legislative, police, regulatory, or taxing authority or power of any nature.

 

“Hazardous Activity”—the distribution,
generation, handling, importing, management, manufacturing, processing,
production, refinement, Release, storage, transfer, transportation, treatment,
or use (including any withdrawal or other use of groundwater) of Hazardous
Materials in, on, under, about, or from the Facilities or any part thereof into
the Environment, and any other act, business, operation, or thing that
increases the danger, or risk of danger, or poses an unreasonable risk of harm
to persons or property on or off the Facilities, or that may affect the value
of the Facilities or the Company.

 

“Hazardous Materials”—any waste or
other substance that is listed, defined, designated, or classified as, or
otherwise determined to be, hazardous, radioactive, or toxic or a pollutant or
a contaminant under or pursuant to any Environmental Law, including any
admixture or solution thereof, and specifically including petroleum and all
derivatives thereof or synthetic substitutes therefor and asbestos or
asbestos-containing materials.

 

“Intellectual Property Assets”—as defined
in Section 3.22.

 

“Knowledge”—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.

 

“Legal Requirement”—any federal, state,
local, municipal, foreign, international, multinational, or other
administrative order, constitution, law, ordinance, principle of common law,
regulation, statute, or treaty.

 

“Non-Competition Agreement”—as defined
in Section 2.4(a)(ii).

 

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“Occupational Safety and Health Law”—any
Legal Requirement designed to provide safe and healthful working conditions and
to reduce occupational safety and health hazards, and any program, whether
governmental or private (including those promulgated or sponsored by industry
associations and insurance companies), designed to provide safe and healthful
working conditions.

 

“Order”—any award, decision,
injunction, judgment, order, ruling, subpoena, or verdict entered, issued,
made, or rendered by any court, administrative agency, or other Governmental
Body or by any arbitrator.

 

“Ordinary Course of Business”—an action
taken by a Person will be deemed to have been taken in the “Ordinary Course of
Business” only if:

 

(a)                                such
action is consistent with the past practices of such Person and is taken in the
ordinary course of the normal day-to-day operations of such Person;

 

(b)                               such
action is not required to be authorized by the board of directors of such
Person (or by any Person or group of Persons exercising similar authority) [and
is not required to be specifically authorized by the parent company (if any) of
such Person]; and

 

(c)                                such
action is similar in nature and magnitude to actions customarily taken, without
any authorization by the board of directors (or by any Person or group of
Persons exercising similar authority), in the ordinary course of the normal
day-to-day operations of other Persons that are in the same line of business as
such Person.

 

“Organizational Documents”—(a) the
articles or certificate of incorporation and the bylaws of the Company; (b) the
minute book and stock transfer records of the Company; and (c) any amendment to
any of the foregoing.

 

“Person”—any individual, corporation
(including any non-profit corporation), general or limited partnership, limited
liability company, joint venture, estate, trust, association, organization,
labor union, or other entity or Governmental Body.

 

“Proceeding”—any action, arbitration,
audit, hearing, investigation, litigation, or suit (whether civil, criminal,
administrative, investigative, or informal) commenced, brought, conducted, or
heard by or before, or otherwise involving, any Governmental Body or
arbitrator.

 

“Related Person”—with respect to a
particular individual:

 

(a)                                each
other member of such individual’s Family;

 

(b)                               any
Person that is directly or indirectly controlled by such individual or one or
more members of such individual’s Family;

 

(c)                                any
Person in which such individual or members of such individual’s Family hold

 

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(individually or in the
aggregate) a Material Interest; and

 

(d)                               any
Person with respect to which such individual or one or more members of such
individual’s Family serves as a director, officer, partner, executor, or
trustee (or in a similar capacity).

 

With respect to a
specified Person other than an individual:

 

(a)                                any
Person that directly or indirectly controls, is directly or indirectly controlled
by, or is directly or indirectly under common control with such specified
Person;

 

(b)                               any
Person that holds a Material Interest in such specified Person;

 

(c)                                each
Person that serves as a director, officer, partner, executor, or trustee of such
specified Person (or in a similar capacity);

 

(d)                               any
Person in which such specified Person holds a Material Interest;

 

(e)                                any
Person with respect to which such specified Person serves as a general partner
or a trustee (or in a similar capacity); and

 

(f)                                  any
Related Person of any individual described in clause (b) or (c).

 

For purposes of this
definition, (a) the “Family” of an individual includes (i) the individual, (ii)
the individual’s spouse, (iii) any other natural person who is related to the individual
or the individual’s spouse within the second degree, and (iv) any other natural
person who resides with such individual, and (b) “Material Interest” means
direct or indirect beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934) of voting securities or other voting
interests representing at least 1% of the outstanding voting power of a Person
or equity securities or other equity interests representing at least 1% of the
outstanding equity securities or equity interests in a Person.

 

“Release”—any spilling, leaking,
emitting, discharging, depositing, escaping, leaching, dumping, or other
releasing into the Environment, whether intentional or unintentional.

 

“Representative”—with respect to a
particular Person, any director, officer, employee, agent, consultant, advisor,
or other representative of such Person, including legal counsel, accountants,
and financial advisors.

 

“Securities Act”—the Securities Act of
1933 or any successor law, and regulations and rules issued pursuant to that
Act or any successor law.

 

“Seller”—as defined in the first
paragraph of this Agreement.

 

“Shares”—as defined in the Recitals of
this Agreement.

 

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“Subsidiary”—with respect to any Person
(the “Owner”), any corporation or other Person of which securities or other
interests having the power to elect a majority of that corporation’s or other
Person’s board of directors or similar governing body, or otherwise having the
power to direct the business and policies of that corporation or other Person
(other than securities or other interests having such power only upon the
happening of a contingency that has not occurred) are held by the Owner or one
or more of its Subsidiaries; when used without reference to a particular
Person, “Subsidiary” means a Subsidiary of the Company.

 

“Tax Return”—any return (including any
information return), report, statement, schedule, notice, form, or other
document or information filed with or submitted to, or required to be filed
with or submitted to, any Governmental Body in connection with the
determination, assessment,  collection,
or payment of any Tax or in connection with the administration, implementation,
or enforcement of or compliance with any Legal Requirement relating to any Tax.

 

“Threat of Release”—a substantial
likelihood of a Release that may require action in order to prevent or mitigate
damage to the Environment that may result from such Release.

 

“Threatened”—a claim, Proceeding,
dispute, action, or other matter will be deemed to have been “Threatened” if
any demand or statement has been made (orally or in writing) or any notice has
been given (orally or in writing), or if any other event has occurred or any
other circumstances exist, that would lead a prudent Person to conclude that
such a claim, Proceeding, dispute, action, or other matter is likely to be
asserted, commenced, taken, or otherwise pursued in the future.

 

2.        SALE AND TRANSFER OF
SHARES; CLOSING

 

2.1.          SHARES

 

Subject to the terms and conditions
of this Agreement, at the Closing, Seller will sell and transfer the Shares to
Buyer, and Buyer will purchase the Shares from Seller.

 

2.2.          PURCHASE PRICE

 

The purchase price (the
“Purchase Price”) for the Shares will be (i) $650,000 in cash and (ii)
$1,200,000 payable according to the terms of the Promissory Note attached
hereto as Exhibit 2.2 (the “Promissory Note”).

 

2.3.          CLOSING

 

For all purposes, under
this Agreement, the “Closing” or “Closing Date” shall be June 27, 2002.

 

2.4.          CLOSING OBLIGATIONS

 

At the Closing:

 

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(a)       Seller will deliver to
Buyer:

 

(i)            certificates representing the Shares,
duly endorsed (or accompanied by duly executed stock powers) for transfer to
Buyer;

 

(ii)           non-competition agreement in the form
of Exhibit 2.4(a)(ii), executed by Seller (the “Non-Competition Agreement”);

 

(iii)          originals or copies of all of  the
Organizational Documents; and

 

(iv)          a Certificate of Good Standing for the
Company issued by the appropriate governing body in Mexico.

 

(b)       Buyer will deliver to
Seller:

 

(i)                                     $650,000
by wire transfer to accounts specified by Seller;

 

(ii)                                  the
Promissory Note; payable to Seller or Seller’s assignee and

 

(iii)                             126,815 Nortech Shares, to be delivered to
Seller or Seller’s assignee, as hereinafter set forth in paragraphs 2.5 and 2.6
below.

 

2.5.      STOCK DELIVERY / NOTE
PAYMENT SCHEDULE

 

Buyer will deliver the Nortech shares to Seller as follows:

 

(i)                                     25%
of the shares (31,704 shares) or
or before December 27, 2002;

 

(ii)                                  25%
of the shares (31,704  shares) or or before June 27, 2003;

 

(iii)                               25%
of the shares (31,704  shares) or or before December 27, 2003;

 

(iv)                              25%
of the shares (31,703 shares) or
or before June 27, 2004.

 

2.6.      PRICE GUARANTEE

 

Buyer hereby
guarantees (the “Price Guarantee”) that the Nortech Shares held by Seller as
security for payment of the Promissory Note will reach a price per share of at
least $7.00 based on the average closing price of the Nortech Shares for a
four-week period during each of the four six-month periods commencing on the
date such Shares are transferred to Seller. 
If the price per share reaches or exceeds the $7.00 guaranteed price for
such four-week period during any such six-month period, the Price Guarantee
shall be deemed to have been fulfilled for such six-month period and shall
thereupon become null and void for such six-month period.  If the price should fail to reach or exceed
the $7.00 guaranteed price for such four-week period during any such six-month
period, Buyer shall, within thirty days after the end of such six-

 

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month period,
repurchase such shares at the $7.00 guaranteed price.  All proceeds received by Seller from the sale of the Nortech
Shares and all amounts paid by Buyer to repurchase Nortech Shares shall be
credited against amounts owing under the Promissory Note.

 

3.        REPRESENTATIONS AND
WARRANTIES OF SELLER

 

Seller jointly and severally represents and warrants to Buyer as
follows:

 

3.1.      ORGANIZATION AND GOOD
STANDING

 

The Company is a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation, with full corporate power and
authority to conduct its business as it is now being conducted, to own or use
the properties and assets that it purports to own or use, and to perform all
its obligations under Applicable Contracts. The Company is duly qualified to do
business as a corporation and is in good standing under the laws of each state
or other jurisdiction in which either the ownership or use of the properties
owned or used by it, or the nature of the activities conducted by it, requires
such qualification.

 

3.2.      AUTHORITY; NO CONFLICT

 

(a)       This Agreement constitutes
the legal, valid, and binding obligation of Seller, enforceable against Seller
in accordance with its terms. Upon the execution and delivery by Seller of this
Agreement, the Escrow Agreement and the Non-Competition Agreement
(collectively, the “Seller’s Closing Documents”), the Seller’s Closing
Documents will constitute the legal, valid, and binding obligations of Seller,
enforceable against Seller in accordance with their respective terms. Seller
has the absolute and unrestricted right, power, authority, and capacity to
execute and deliver the Seller’s Closing Documents and to perform its
obligations under the Seller’s Closing Documents.

 

(b)       Neither the execution and
delivery of this Agreement nor the consummation or performance of any of the
Contemplated Transactions will, directly or indirectly (with or without notice
or lapse of time):

 

(i)            contravene, conflict with, or result
in a violation of (A) any provision of the Organizational Documents of the
Company, or (B) any resolution adopted by the board of directors or the
stockholders of the Company;

 

(ii)           contravene, conflict with, or result
in a violation of, or give any Governmental Body or other Person the right to
challenge any of the Contemplated Transactions or to exercise any remedy or
obtain any relief under, any Legal Requirement or any Order to which the
Company or either Seller, or any of the assets owned or used by the Company,
may be subject;

 

(iii)          contravene, conflict with, or result in
a violation of any of the

 

9

 

terms or requirements of, or give any Governmental
Body the right to revoke, withdraw, suspend, cancel, terminate, or modify, any
Governmental Authorization that is held by the Company or that otherwise
relates to the business of, or any of the assets owned or used by, the Company;

 

(iv)          cause Buyer or the Company to become
subject to, or to become liable for the payment of, any income Tax;

 

(v)           to the best of Seller’s knowledge  cause
any of the assets owned by the Company to be reassessed or revalued by any
taxing authority or other Governmental Body;

 

(vi)          contravene, conflict with, or result in
a violation or breach of any provision of, or give any Person the right to
declare a default or exercise any remedy under, or to accelerate the maturity
or performance of, or to cancel, terminate, or modify, any Applicable Contract;
or

 

(vii)         result in the imposition or creation of
any Encumbrance upon or with respect to any of the assets owned or used by the
Company, except as otherwise set forth herein.

 

Neither the Seller nor
the Company is or will be required to give any notice to or obtain any Consent
from any Person in connection with the execution and delivery of this Agreement
or the consummation or performance of any of the Contemplated Transactions,
except for the consents set forth in Sections 5.1 and 7.3 herein.

 

3.3.      CAPITALIZATION

 

The authorized equity
securities of the Company consist of 3,000 shares of common stock, par value
1.00 peso per share, of which 3,000 shares are issued and outstanding and
constitute the Shares. Seller is and will be on the Closing Date the record and
beneficial owners and holder of the Shares, free and clear of all
Encumbrances.  With the exception of the
Shares (which are owned by Seller), all of the outstanding equity securities and
other securities of the Company are owned of record and beneficially by the
Company, free and clear of all Encumbrances. No legend or other reference to
any purported Encumbrance appears upon any certificate representing equity
securities of the Company. All of the outstanding equity securities of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable. There are no Contracts relating to the issuance, sale, or
transfer of any equity securities or other securities of the Company. None of
the outstanding equity securities or other securities of the Company was issued
in violation of the Securities Act or any other Legal Requirement.  The Company does not own, or have any Contract
to acquire, any equity securities or other securities of any Person (other than
the Company) or any direct or indirect equity or ownership interest in any
other business.

 

10

 

3.4.          FINANCIAL STATEMENTS

 

 Seller has delivered to Buyer: unaudited balance
sheets of the Company and the related unaudited statements of income, changes
in stockholders’ equity, and cash flow for the year 2001 (the “Financial
Statements”).  The Financial Statements
fairly present the financial condition and the results of operations, changes
in stockholders’ equity, and cash flow of the Company as at the respective
dates of and for the periods referred to in such Financial Statements, all in
accordance with GAAP, and reflect the consistent application of such accounting
principles throughout the periods involved. No financial statements of any
Person other than the Company are required by GAAP to be included in the
Financial Statements of the Company. 
The shareholders’ equity of the Company as of the date of Closing shall be
10% less than the shareholders’ equity as reflected on the latest Financial
Statements (in both cases, after eliminating the amount payable by the Company
to Seller).

 

3.5.          BOOKS AND RECORDS

 

The books of account,
minute books, stock record books, and other records of the Company, all of
which have been made available to Buyer, are complete and correct and have been
maintained in accordance with sound business practices, including the
maintenance of an adequate system of internal controls. The minute books of the
Company contain accurate and complete records of all meetings held of, and
corporate action taken by, the stockholders, the Board of Directors, and
committees of the Board of Directors of the Company, and no official meeting of
any such stockholders, Board of Directors, or committee has been held for which
minutes have not been prepared and are not contained in such minute books. At
the Closing, all of those books and records will be in the possession of the
Company.  Seller shall be provided periodic
access to the books and records of the company upon reasonable request after
closing to fulfill Seller’s tax, accounting and other reporting needs.

 

3.6.          TITLE TO PROPERTIES; ENCUMBRANCES

 

The Company owns (with good and marketable title in the case of real
property, subject only to the matters permitted by the following sentence) all
the properties and assets (whether real, personal, or mixed and whether
tangible or intangible) that they purport to own, including all of the
properties and assets reflected in the Financial Statements (except for assets
held under capitalized leases disclosed or sold since the date of the latest
Financial Statements, in the Ordinary Course of Business), and all of the
properties and assets purchased or otherwise acquired by the Company since the
date of the latest Financial Statements (except for personal property acquired
and sold since the date of the latest Financial Statements in the Ordinary
Course of Business and consistent with past practice).  All material properties and assets reflected
in the Financial Statements are free and clear of all Encumbrances and are not,
in the case of real property, subject to any rights of way, building use
restrictions, exceptions, variances, reservations, or limitations of any nature
except, with respect to all such properties and assets, (a) mortgages or
security interests shown on the Financial Statements as securing specified
liabilities or obligations, with respect to which no default (or event that,
with notice or lapse of time or both, would constitute a default) exists,
(b) mortgages or security interests incurred in connection with the
purchase of property or assets after the date of the Financial

 

11

 

Statements (such mortgages and security interests being limited to the
property or assets so acquired), with respect to which no default (or event
that, with notice or lapse of time or both, would constitute a default) exists,
and (c) liens for current taxes not yet due.

 

3.7.          CONDITION AND SUFFICIENCY OF ASSETS

 

To the best of Seller’s
knowledge, information and belief,  the property and equipment of the Company
are in good operating condition and repair, and are adequate for the uses to
which they are being put, and none of such property or equipment is in need of
maintenance or repairs except for ordinary, routine maintenance and repairs
that are not material in nature or cost. The property and equipment of the
Company are sufficient for the continued conduct of the Company’s existing  business
after the Closing in substantially the same manner as conducted prior to the
Closing.  The assets as of the Closing
Date shall be at least equal to the assets set forth on the Balance Sheet, less
normal customary depreciation from the date of the Balance Sheet until the
Closing Date.

 

3.8.                              ACCOUNTS
RECEIVABLE

 

All accounts receivable
of the Company that are reflected on the Financial Statements (collectively,
the “Accounts Receivable”) represent or will represent valid obligations
arising from sales actually made or services actually performed in the Ordinary
Course of Business.  Unless paid prior
to the Closing Date, the Accounts Receivable are or will be as of the Closing
Date current and collectible net of the respective reserves shown on the
Financial Statements or on the accounting records of the Company as of the
Closing Date (which reserves are adequate and calculated consistent with past
practice and, in the case of the reserve as of the Closing Date, will not
represent a greater percentage of the Accounts Receivable as of the Closing
Date than the reserve reflected in the Financial Statements represented of the
Accounts Receivable reflected therein and will not represent a material adverse
change in the composition of such Accounts Receivable in terms of aging). There
is no contest, claim, or right of set-off, other than returns in the Ordinary
Course of Business, under any Contract with any obligor of an Accounts
Receivable relating to the amount or validity of such Accounts Receivable.

 

3.9.          INVENTORY

 

All inventory of the
Company consists of a quality and quantity usable and salable in the Ordinary
Course of Business, except for obsolete items and items of below-standard
quality, all of which have been written off or written down to net realizable
value in the Financial Statements or on the accounting records of the Company
as of the Closing Date, as the case may be. All inventories not written off
have been priced at the lower of cost or market on a first in, first out basis.

 

3.10.          NO UNDISCLOSED LIABILITIES

 

The Company has no
material liabilities or obligations of any nature (whether known or unknown and
whether absolute, accrued, contingent, or otherwise) except for liabilities or

 

12

 

obligations set forth or
reflected or reserved against in the Financial Statements and current
liabilities incurred in the Ordinary Course of Business since the date thereof.

 

3.11.     TAXES

 

The Company has
filed or caused to be filed all Tax Returns that are or were required to be
filed, pursuant to applicable Legal Requirements. Seller has delivered to Buyer
copies of all such Tax Returns filed since the inception of the company. The
Company has paid, or made provision for the payment of, all Taxes that have or
may have become due pursuant to those Tax Returns or otherwise, or pursuant to
any assessment received by Seller or the Company.

 

3.12.     NO MATERIAL ADVERSE CHANGE

 

To the best of Seller’s
knowledge, information and belief, since the date of the latest Financial
Statements there has not been any material adverse change in the business,
operations, properties, prospects, assets, or condition of the Company, and no
event has occurred or circumstance exists that may result in such a material
adverse change.

 

3.13.     EMPLOYEE BENEFITS

 

(a)       As used in this Section
3.13, the following terms have the meanings set forth below.

 

“Company Plan” means all plans of which
the Company is or was a sponsor, or to which the Company otherwise contributes
or has contributed, or in which the Company otherwise participates or has
participated.

 

“Other Benefit Obligations” means all
obligations, arrangements, or customary practices, whether or not legally
enforceable, to provide benefits, other than salary, as compensation for
services rendered, to present or former directors, employees, or agents, other
than obligations, arrangements, and practices that are Plans.

 

(d)       Except
as set forth in Exhibit 3.13, to the best of Seller’s knowledge, information
and belief:

 

(i)            The Company has performed all of its
obligations under all Company Plans. The Company has made appropriate entries
in its financial records and statements for all obligations and liabilities
under such Plans and Obligations that have accrued but are not due.

 

(ii)           The Company, with respect to all
Company Plans, is, and each Company Plan is, in full compliance with all
applicable Laws.

 

(iii)          Each Company Plan can be terminated
within thirty days, without payment of any additional contribution or amount
and without the vesting or

 

13

 

acceleration of any benefits promised by such Plan.

 

(iv)          Since January 1, 1999, there has been
no establishment or amendment of any Company Plan.

 

(v)           No event has occurred or circumstance
exists that could result in a material increase in premium costs of Company
Plans that are insured, or a material increase in benefit costs of such Plans
and Obligations that are self-insured.

 

(vi)          Other than claims for benefits
submitted by participants or beneficiaries, no claim against, or legal
proceeding involving, any Company Plan is pending or, to Seller’s Knowledge, is
Threatened.

 

(vii)         No accumulated funding deficiency,
whether or not waived, exists with respect to any Company Plan; no event has
occurred or circumstance exists that may result in an accumulated funding
deficiency as of the last day of the current plan year of any such Plan.

 

 

3.14.     COMPLIANCE WITH LEGAL
REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS

 

Except as set
forth in Exhibit 3.14, to the best of Seller’s knowledge, information and
belief:

 

(i) the Company is, and
at all times since January 1, 1999 has been, in full compliance with each Legal
Requirement that is or was applicable to it or to the conduct or operation of
its business or the ownership or use of any of its assets;

 

(ii) no event has
occurred or circumstance exists that (with or without notice or lapse of time)
(A) may constitute or result in a violation by the Company of, or a failure on
the part of the Company to comply with, any Legal Requirement, or (B) may give
rise to any obligation on the part of the Company to undertake, or to bear all
or any portion of the cost of, any remedial action of any nature; and

 

(iii) the Company has not
received, at any time since January 1, 1999, any notice or other communication
(whether oral or written) from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible, or potential violation of, or
failure to comply with, any Legal Requirement, or (B) any actual, alleged,
possible, or potential obligation on the part of the Company to undertake, or
to bear all or any portion of the cost of, any remedial action of any nature.

 

14

 

3.15.     LEGAL PROCEEDINGS; ORDERS

 

(a)       Except as set forth in
Exhibit 3.15, there is no pending Proceeding:

 

(i)            that has been commenced by or against
the Company or that otherwise relates to or may affect the business of, or any
of the assets owned or used by, the Company; or

 

(ii)           that challenges, or that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with,
any of the Contemplated Transactions.

 

To the Knowledge of
Seller and the Company, (1) no such Proceeding has been Threatened, and (2) no
event has occurred or circumstance exists that may give rise to or serve as a
basis for the commencement of any such Proceeding. Seller has delivered to
Buyer copies of all pleadings, correspondence, and other documents relating to
each Proceeding listed in Exhibit 3.15. 
The Proceedings listed in Exhibit 3.15 will not have a material adverse
effect on the business, operations, assets, condition, or prospects of the
Company.

 

(b)       Except as set forth in
Exhibit 3.15:

 

(i)            there is no Order to which the
Company, or any of the assets owned or used by the Company, is subject;

 

(ii)           neither Seller is subject to any Order
that relates to the business of, or any of the assets owned or used by, the
Company; and

 

(iii)          no officer, director, agent, or
employee of the Company is subject to any Order that prohibits such officer,
director, agent, or employee from engaging in or continuing any conduct,
activity, or practice relating to the business of the Company.

 

(c)       Except as set forth in
Exhibit 3.15:

 

(i)            the Company is, and at all times
since January 1, 1999 has been, in full compliance with all of the terms and
requirements of each Order to which it, or any of the assets owned or used by
it, is or has been subject;

 

(ii)           no event has occurred or circumstance
exists that may constitute or result in (with or without notice or lapse of
time) a violation of or failure to comply with any term or requirement of any
Order to which the Company, or any of the assets owned or used by the Company,
is subject; and

 

(iii)          the Company has not received, at any
time since January 1, 1999, any notice or other communication (whether oral or
written) from any Governmental Body or any other Person regarding any actual,
alleged, possible, or

 

15

 

potential violation of, or failure to comply with, any
term or requirement of any Order to which the Company, or any of the assets
owned or used by the Company, is or has been subject.

 

3.16.     ABSENCE OF CERTAIN CHANGES
AND EVENTS

 

Except as set forth in Exhibit 3.16, to the best of Seller’s knowledge,
information and belief, since the date of the latest Financial Statements, the
Company has conducted its business only in the Ordinary Course of Business and
there has not been any:

 

(a)           change in the Company’s authorized or
issued capital stock; grant of any stock option or right to purchase shares of
capital stock of the Company; issuance of any security convertible into such
capital stock; grant of any registration rights; purchase, redemption,
retirement, or other acquisition by the Company of any shares of any such
capital stock; or declaration or payment of any dividend or other distribution
or payment in respect of shares of capital stock;

 

(b)            amendment to the Organizational
Documents of the Company;

 

(c)           payment or increase by the Company of
any bonuses, salaries, or other compensation to any stockholder, director,
officer, or (except in the Ordinary Course of Business) employee or entry into
any employment, severance, or similar Contract with any director, officer, or
employee;

 

(d)           adoption of, or increase in the
payments to or benefits under, any profit sharing, bonus, deferred
compensation, savings, insurance, pension, retirement, or other employee
benefit plan for or with any employees of the Company;

 

(e)           damage to or destruction or loss of
any asset or property of the Company, whether or not covered by insurance,
materially and adversely affecting the properties, assets, business, financial
condition, or prospects of the Company;

 

(f)            entry into, termination of, or
receipt of notice of termination of (i) any license, distributorship,
dealer,  credit, or similar agreement,
or (ii) any Contract or transaction involving a total remaining commitment by
or to the Company of at least $5,000;

 

(g)           sale (other than sales of inventory in
the Ordinary Course of Business), lease, or other disposition of any asset or
property of the Company or mortgage, pledge, or imposition of any lien or other
encumbrance on any material asset or property of the Company, including the
sale, lease, or other disposition of any of the Intellectual Property Assets;

 

(h)           material change in the accounting
methods used by the Company; or

 

(i)            agreement, whether oral or written,
by the Company to do any of the foregoing.

 

16

 

3.17.       CONTRACTS; NO DEFAULTS

 

(a)       Exhibit 3.17 contains a
complete and accurate list, and Seller has delivered to Buyer true and complete
copies, of:

 

(i) each Applicable
Contract that involves performance of services or delivery of goods or
materials by the Company of an amount or value in excess of $5,000;

 

(ii) each Applicable
Contract that involves performance of services or delivery of goods or
materials to the Company of an amount or value in excess of $5,000;

 

(iii)  each Applicable Contract that was not
entered into in the Ordinary Course of Business and that involves expenditures
or receipts of the Company in excess of $5,000;

 

(iv)  each lease, rental or occupancy agreement,
license, installment and conditional sale agreement, and other Applicable
Contract affecting the ownership of, leasing of, title to, use of, or any
leasehold or other interest in, any real or personal property (except personal
property leases and installment and conditional sales agreements having a value
per item or aggregate payments of less than $5,000 and with terms of less than
one year);

 

(v)           each licensing agreement or other
Applicable Contract with respect to trademarks, copyrights, or other
intellectual property, including agreements with current or former employees,
consultants, or contractors regarding the appropriation or the non-disclosure
of any of the Intellectual Property Assets;

 

(vi)          each collective bargaining agreement
and other Applicable Contract to or with any labor union or other employee
representative of a group of employees;

 

(vii)         each joint venture, partnership, and
other Applicable Contract (however named) involving a sharing of profits,
losses, costs, or liabilities by the Company with any other Person;

 

(viii)        each Applicable Contract containing
covenants that in any way purport to restrict the business activity of the
Company or limit the freedom of the Company to engage in any line of business
or to compete with any Person;

 

(ix)           each Applicable Contract providing for
payments to or by any Person based on sales, purchases, or profits, other than
direct payments for goods;

 

(x)            each power of attorney that is
currently effective and outstanding;

 

17

 

(xi)      each Applicable Contract
entered into other than in the Ordinary Course of Business that contains or
provides for an express undertaking by the Company to be responsible for
consequential damages;

 

(xii)      each Applicable Contract for
capital expenditures in excess of $10,000.00;

 

(xiii)     each written warranty,
guaranty, and or other similar undertaking with respect to contractual
performance extended by the Company other than in the Ordinary Course of
Business; and

 

(xiv)     each amendment, supplement,
and modification (whether oral or written) in respect of any of the foregoing.

 

3.18.     INSURANCE

 

(a)           Seller has delivered to Buyer:

 

(i)       true and complete copies of
all policies of insurance to which the Company is a party or under which the Company,
or any director of the Company, is or has been covered at any time within the
two (2) years preceding the date of this Agreement;

 

(ii)       true and complete copies of
all pending applications for policies of insurance; and

 

(iii)      any statement by the auditor
of the Company’s financial statements with regard to the adequacy of such
entity’s coverage or of the reserves for claims.

 

(b)       Except as set forth on
Exhibit 3.18(b), to the best of Seller’s knowledge, information and belief:

 

(i)       All policies to which the
Company is a party or that provide coverage to either Seller, the Company, or
any director or officer of the Company:

 

(A)  are valid, outstanding, and enforceable;

 

(B)  are issued by an insurer that is financially
sound and reputable;

 

(C)
are sufficient for compliance with all Legal Requirements and Contracts to
which Company is a party or by which any of them is bound;

 

18

 

(D)
will continue in full force and effect following the consummation of the
Contemplated Transactions; and

 

(E) do
not provide for any retrospective premium adjustment or other experienced-based
liability on the part of the Company.

 

(ii)       Seller or the Company has
not received (A) any refusal of coverage or any notice that a defense will be
afforded with reservation of rights, or (B) any notice of cancellation or any
other indication that any insurance policy is no longer in full force or effect
or will not be renewed or that the issuer of any policy is not willing or able
to perform its obligations thereunder.

 

(iii)      The Company has paid all
premiums due, and has otherwise performed all of its respective obligations,
under each policy to which the Company is a party or that provides coverage to
the Company or any director thereof.

 

(iv)      The Company has given notice
to the insurer of all claims that may be insured thereby.

 

3.19.     ENVIRONMENTAL MATTERS

 

Except as set forth in
Exhibit 3.19:

 

(a)       The Company is, and at all
times has been, in full compliance with, and has not been and is not in
violation of or liable under, any Environmental Law.

 

(b)       There are no pending or, to
the Knowledge of Seller and the Company, Threatened claims, Encumbrances, or
other restrictions of any nature, resulting from any Environmental, Health, and
Safety Liabilities or arising under or pursuant to any Environmental Law, with
respect to or affecting any of the Facilities or any other properties and
assets in which Seller or the Company has or had an interest.

 

3.20.     EMPLOYEES

 

(a)       Exhibit 3.20(a) contains a
complete and accurate list of the following information for each home office
employee or director of the Company, including each employee on leave of
absence or layoff status: name; job title; current compensation paid or payable
and any change in compensation since January 1, 2002. All of the employees
referred to in Exhibit 3.20(a) are parties to a written employment contract
with the Company.

 

(b)       Except as set forth in
Exhibit 3.20(b), no employee or director of the Company is a party to, or is otherwise
bound by, any agreement or arrangement, including any confidentiality,
non-competition, or proprietary rights agreement, between such employee or
director and any

 

19

 

other Person
(“Proprietary Rights Agreement”) that in any way adversely affects or will
affect (i) the performance of his duties as an employee or director of the
Company, or (ii) the ability of any Company to conduct its business, including
any Proprietary Rights Agreement with Seller or the Company by any such
employee or director.  To Seller’s
Knowledge, no director, officer, or other key employee of the Company intends
to terminate his employment with such Company.

 

(c)           Exhibit 3.20(c) contains a complete
and accurate list of the following information for each retired employee or
director of the Company, or their dependents, receiving benefits or scheduled
to receive benefits in the future: name, retiree medical insurance coverage,
retiree life insurance coverage, and other benefits.

 

3.21.     LABOR RELATIONS;
COMPLIANCE

 

It is understood between the parties that all of the non-management
employees of the company are members of a local white union and that all such
employees have written employment contracts with the company.  With the exception of such contracts, since
January 1, 1999, the Company has not been or is not a party to any collective
bargaining or other labor Contract. Since January 1, 1999, there has not been,
there is not presently pending or existing, and there is not Threatened, (a)
any strike, slowdown, picketing, work stoppage, or employee grievance process,
(b) any Proceeding against or affecting the Company relating to the alleged
violation of any Legal Requirement pertaining to labor relations or employment
matters, including any charge or complaint filed by an employee or union with
the National Labor Relations Board, the Equal Employment Opportunity
Commission, or any comparable Governmental Body, organizational activity, or
other labor or employment dispute against or affecting the Company or its
premises, or (c) any application for certification of a collective bargaining
agent. To the best of Seller’s knowledge, information and belief no event has
occurred or circumstance exists that could provide the basis for any work
stoppage or other labor dispute. There is no lockout of any employees by the
Company, and no such action is contemplated by the Company. To the best of
Seller’s knowledge, information and belief the Company has complied in all
respects with all Legal Requirements relating to employment, equal employment
opportunity, nondiscrimination, immigration, wages, hours, benefits, collective
bargaining, the payment of social security and similar taxes, occupational
safety and health, and plant closing. The Company is not liable for the payment
of any compensation, damages, taxes, fines, penalties, or other amounts,
however designated, for failure to comply with any of the foregoing Legal
Requirements.

 

3.22.     INTELLECTUAL PROPERTY

 

(a)                                                                                  Intellectual
Property Assets  - The term
“Intellectual Property Assets” includes:

 

(i)                                   the
names Manufacturing Assembly Solutions of Monterey, and MAS of Monterey, all
fictional business names, trading names, registered and unregistered
trademarks, service marks, and applications (collectively, “Marks”);

 

20

 

(ii)                                all
copyrights in both published works and unpublished works (collectively,
“Copyrights”);

 

(iii)                               all
know-how, trade secrets, confidential information, customer lists, software,
technical information data, process technology, plans, drawings, and blue
prints (collectively, “Trade Secrets”); owned, used, or licensed by the Company
as licensee or licensor; and (iv) all rights in internet web sites and internet
domain names presently used by the Company.

 

(b)       Agreements — Exhibit
3.22(b) contains a complete and accurate list and summary description,
including any royalties paid or received by the Company, of all Contracts
relating to the Intellectual Property Assets to which the Company is a party or
by which the Company is bound.  There
are no outstanding and, to Seller’s Knowledge, no Threatened disputes or
disagreements with respect to any such agreement.

 

(c)       Know-How Necessary for the
Business

 

(i)            The Intellectual Property Assets are
all those necessary for the operation of the Company’s businesses as they are
currently conducted. The Company is the owner of all right, title, and interest
in and to each of the Intellectual Property Assets, free and clear of all
liens, security interests, charges, encumbrances, equities, and other adverse
claims, and has the right to use without payment to a third party all of the
Intellectual Property Assets.

 

(d)       Trademarks

 

(i)            Exhibit 3.22(d) contains a complete
and accurate list and summary description of all Marks. The Company is the
owner of all right, title, and interest in and to each of the Marks, free and
clear of all liens, security interests, charges, encumbrances, equities, and
other adverse claims.

 

(ii)           All Marks are currently in compliance
with all formal Legal Requirements (including the timely post registration
filing of affidavits of use and incontestability and renewal applications), are
valid and enforceable, and are not subject to any maintenance fees or taxes or
actions falling due within ninety days after the Closing Date.

 

(iii)          No Mark has been or is now involved in
any opposition, invalidation, or cancellation and, to Seller’s Knowledge, no
such action is Threatened with the respect to any of the Marks.

 

(iv)          To Seller’s Knowledge, there is no
potentially interfering trademark or trademark application of any third party.

 

(v)           No Mark is infringed or, to Seller’s
Knowledge, has been challenged or threatened in any way.  None of the Marks used by the Company
infringes or is alleged to

 

21

 

infringe any trade name, trademark, or service mark of
any third party.

 

(e)       Copyrights

 

(i)            Exhibit 3.22(e) contains a complete
and accurate list and summary description of all Copyrights.  The Company is the owner of all right,
title, and interest in and to each of the Copyrights, free and clear of all
liens, security interests, charges, encumbrances, equities, and other adverse
claims.

 

(ii)           All the Copyrights have been
registered and are currently in compliance with formal legal requirements, are
valid and enforceable, and are not subject to any maintenance fees or taxes or
actions falling due within ninety days after the date of Closing.

 

(iii)          No Copyright is infringed or, to
Seller’s Knowledge, has been challenged or threatened in any way.  None of the subject matter of any of the
Copyrights infringes or is alleged to infringe any copyright of any third party
or is a derivative work based on the work of a third party.

 

(iv)          All works encompassed by the
Copyrights have been marked with the proper copyright notice.

 

(f)       Trade Secrets

 

(i)            With respect to each Trade Secret,
the documentation relating to such Trade Secret is current, accurate, and
sufficient in detail and content to identify and explain it and to allow its
full and proper use without reliance on the knowledge or memory of any
individual.

 

(ii)           Seller and the Company have taken all
reasonable precautions to protect the secrecy, confidentiality, and value of
their Trade Secrets.

 

(iii)          The Company has good title and an
absolute (but not necessarily exclusive) right to use the Trade Secrets.  The Trade Secrets are not part of the public
knowledge or literature, and, to Seller’s Knowledge, have not been used,
divulged, or appropriated either for the benefit of any Person (other than the
Company) or to the detriment of the Company. 
No Trade Secret is subject to any adverse claim or has been challenged
or threatened in any way.

 

3.23.     DISCLOSURE

 

(a)       No representation or
warranty of Seller in this Agreement omits to state a material fact necessary
to make the statements herein or therein, in light of the circumstances in
which they were made, not misleading.

 

22

 

(b)           No notice given pursuant to
Section 5.6 will contain any untrue statement or omit to state a material
fact necessary to make the statements therein or in this Agreement, in light of
the circumstances in which they were made, not misleading.

 

(c)           There is no fact known to Seller that
has specific application to Seller or the Company and that materially adversely
affects the assets, business, prospects, financial condition, or results of
operations of the Company that has not been set forth in this Agreement.

 

(d)           All parties acknowledge their
respective understanding that Seller’s representations hereunder are based upon
Seller’s good faith reliance upon the statements and representations of Thomas
Hansing relating to the organization of the company and the company’s business
operations.

 

3.24.        BROKERS OR FINDERS

 

Seller and its agents
have incurred no obligation or liability, contingent or otherwise, for
brokerage or finders’ fees or agents’ commissions or other similar payment in
connection with this Agreement.

 

4.        REPRESENTATIONS AND
WARRANTIES OF BUYER

 

Buyer represents and
warrants to Seller as follows:

 

4.1.      ORGANIZATION AND GOOD
STANDING

 

Buyer is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Minnesota.

 

4.2.      AUTHORITY; NO CONFLICT

 

(a)       This Agreement constitutes
the legal, valid, and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms. Upon the execution and delivery by Buyer of this
Agreement, the Escrow Agreement and the Non-Competition Agreement
(collectively, the “Buyer’s Closing Documents”), the Buyer’s Closing Documents
will constitute the legal, valid, and binding obligations of Buyer, enforceable
against Buyer in accordance with their respective terms. Buyer has the absolute
and unrestricted right, power, and authority to execute and deliver the Buyer’s
Closing Documents and to perform its obligations under the Buyer’s Closing
Documents.

 

(b)       Neither the execution and
delivery of this Agreement nor the consummation or performance of any of the
Contemplated Transactions will give any Person the right to prevent, delay, or
otherwise interfere with any of the Contemplated Transactions pursuant to:

 

(i)            any provision of Buyer’s
Organizational Documents;

 

23

 

(ii)           any resolution adopted by the board of
directors or the stockholders of Buyer;

 

(iii)          any Legal Requirement or Order to which
Buyer may be subject; or

 

(iv)          any Contract to which Buyer is a party
or by which Buyer may be bound.

 

Buyer is not and will not
be required to obtain any Consent from any Person in connection with the
execution and delivery of this Agreement or the consummation or performance of
any of the Contemplated Transactions.

 

4.3.      CERTAIN PROCEEDINGS

 

There is no pending
Proceeding that has been commenced against Buyer and that challenges, or may
have the effect of preventing, delaying, making illegal, or otherwise
interfering with, any of the Contemplated Transactions. To Buyer’s Knowledge,
no such Proceeding has been Threatened.

 

4.4.      BROKERS OR FINDERS

 

Buyer and its officers
and agents have incurred no obligation or liability, contingent or otherwise,
for brokerage or finders’ fees or agents’ commissions or other similar payment
in connection with this Agreement and will indemnify and hold Seller harmless
from any such payment alleged to be due by or through Buyer as a result of the
action of Buyer or its officers or agents.

 

5.        COVENANTS OF SELLER
PRIOR TO CLOSING DATE

 

5.1.      LANDLORDS’ CONSENTS

 

Seller shall obtain (where required by the terms of such lease) the
written consents (“Consents”) from the landlords to assignments of the leases
(for each location set forth on Exhibit 5.1) with no increase in rent, but with
such modifications as Buyer, in its sole discretion, may deem necessary.  Seller shall pay all fees or other
compensation required by any of the landlords, as consideration for consenting
to a lease assignment.  This covenant
shall continue after Closing to the extent not completed prior to Closing.

 

5.2.      ACCESS AND INVESTIGATION

 

Between the date of this
Agreement and the Closing Date, Seller will, and will cause the Company and its
Representatives to, (a) afford Buyer and its Representatives and prospective
lenders and their Representatives (collectively, “Buyer’s Advisors”) full and
free access to the Company’s personnel, properties, contracts, books and
records, and other documents and data, (b) furnish Buyer and Buyer’s Advisors
with copies of all such contracts, books and records, and other existing
documents and data as Buyer may reasonably request, and (c) furnish Buyer and

 

24

 

Buyer’s Advisors with
such additional financial, operating, and other data and information as Buyer may
reasonably request.

 

5.3.          OPERATION OF THE BUSINESS OF THE
COMPANY

 

Between the date of this
Agreement and the Closing Date, Seller will, and will cause the Company to:

 

(a)           conduct the business of the Company
only in the Ordinary Course of Business;

 

(b)           use its Best Efforts to preserve
intact the current business organization of the Company, keep available the
services of the current officers, employees, and agents of the Company, and
maintain the relations and good will with suppliers, customers, landlords,
creditors, employees, agents, and others having business relationships with the
Company;

 

(c)           confer with Buyer concerning
operational matters of a material nature; and

 

(d)           otherwise report periodically to Buyer
concerning the status of the business, operations, and finances of the Company.

 

5.4.          NEGATIVE COVENANT

 

Except as otherwise
expressly permitted by this Agreement, between the date of this Agreement and
the Closing Date, Seller will not, and will cause the Company not to, without
the prior consent of Buyer, take any affirmative action, or fail to take any
reasonable action within their or its control, as a result of which any of the
changes or events listed in Section 3.15 is likely to occur.

 

5.5.          REQUIRED APPROVALS

 

As promptly as practicable
after the date of this Agreement, Seller will, and will cause the Company to,
make all filings required by Legal Requirements to be made by them in order to
consummate the Contemplated Transactions. Between the date of this Agreement
and the Closing Date, Seller will, and will cause the Company to, (a) cooperate
with Buyer with respect to all filings that Buyer elects to make or is required
by Legal Requirements to make in connection with the Contemplated Transactions.

 

5.6.            NOTIFICATION

 

Between the date of this
Agreement and the Closing Date, Seller will promptly notify Buyer in writing if
Seller or the Company becomes aware of any fact or condition that causes or
constitutes a Breach of any of Seller’s representations and warranties as of the
date of this Agreement, or if Seller or the Company becomes aware of the
occurrence after the date of this Agreement of any fact or condition that would
(except as expressly contemplated by this Agreement) cause or constitute a
Breach of any such representation or warranty had such

 

25

 

representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition.  During the same period,
Seller will promptly notify Buyer of the occurrence of any Breach of any
covenant of Seller in this Section 5 or of the occurrence of any event that may
make the satisfaction of the conditions in Section 7 impossible or unlikely.

 

5.7.          NO NEGOTIATION

 

Until such time, if any,
as this Agreement is terminated pursuant to Section 9, Seller will not, and
will cause the Company and each of its Representatives not to, directly or
indirectly solicit, initiate, or encourage any inquiries or proposals from,
discuss or negotiate with, provide any non-public information to, or consider
the merits of any unsolicited inquiries or proposals from, any Person (other
than Buyer) relating to any transaction involving the sale of the business or
assets (other than in the Ordinary Course of Business) of the Company, or any
of the capital stock of the Company, or any merger, consolidation, business
combination, or similar transaction involving the Company.

 

5.8.          BEST EFFORTS

 

Between the date of this
Agreement and the Closing Date, Seller will use its Best Efforts to cause the
conditions in Sections 7 and 8 to be satisfied.

 

5.9           INTERCOMPANY OBLIGATIONS

 

Seller shall cause to be
eliminated, prior to Closing, all obligations of the Company to the Seller or
to any Related Person.

 

6.        COVENANTS OF BUYER
PRIOR TO CLOSING DATE

 

Between the date of this
Agreement and the Closing Date, Buyer will use its Best Efforts to cause the
conditions in Sections 7 and 8 to be satisfied.

 

7.        CONDITIONS PRECEDENT TO
BUYER’S OBLIGATION TO CLOSE

 

Buyer’s obligation to
purchase the Shares and to take the other actions required to be taken by Buyer
at the Closing is subject to the satisfaction, at or prior to the Closing, of
each of the following conditions (any of which may be waived by Buyer, in whole
or in part):

 

7.1.          ACCURACY OF REPRESENTATIONS

 

All of Seller’s
representations and warranties in this Agreement (considered collectively), and
each of these representations and warranties (considered individually), must
have been accurate in all material respects as of the date of this Agreement,
and must be accurate in all material respects as of the Closing Date as if made
on the Closing Date.

 

26

 

7.2.          SELLER’S PERFORMANCE

 

(a)           All of the covenants and obligations
that Seller is required to perform or to comply with pursuant to this Agreement
at or prior to the Closing (considered collectively), and each of these
covenants and obligations (considered individually), must have been duly
performed and complied with in all material respects.

 

(b)           Each document required to be delivered
pursuant to Section 2.4 must have been delivered, and each of the other
covenants and obligations must have been performed and complied with in all
respects.

 

(c)           In the event that Buyer believes
Seller has failed to materially perform or comply with any of its obligations
hereunder, Buyer shall provide written notice of such material nonperformance
or noncompliance to Seller.  Seller
shall have a period of thirty (30) days following receipt of such written
notice to cure any legitimate nonperformance or noncompliance.  In the event that Seller is unable to cure
the nonperformance or noncompliance within the thirty (30) day cure period,
then at Buyuer’s option this contract shall terminate and both parties shall be
freed from their respective obligations hereunder, absent other agreement of
the parties.

 

7.3           CONSENTS

 

Each of the Consents
identified in Section 5.1 of this Agreement must have been obtained and
delivered to Buyer.

 

7.4.          NO PROCEEDINGS

 

Since the date of this Agreement,
there must not have been commenced or Threatened against Buyer, or against any
Person affiliated with Buyer, any Proceeding (a) involving any challenge
to, or seeking damages or other relief in connection with, any of the
Contemplated Transactions, or (b) that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with any of the Contemplated
Transactions.

 

7.5.          NO CLAIM REGARDING STOCK OWNERSHIP
OR SALE PROCEEDS

 

There must not have been
made or Threatened by any Person any claim asserting that such Person
(a) is the holder or the beneficial owner of, or has the right to acquire
or to obtain beneficial ownership of, any stock of, or any other voting,
equity, or ownership interest in, the Company, or (b) is entitled to all
or any portion of the Purchase Price payable for the Shares.

 

7.6.          NO PROHIBITION

 

Neither the consummation
nor the performance of any of the Contemplated Transactions will, directly or
indirectly (with or without notice or lapse of time), materially contravene, or
conflict with, or result in a material violation of, or cause Buyer or any
Person affiliated with Buyer to suffer any material adverse consequence under,
(a) any applicable Legal Requirement or Order,

 

27

 

or (b) any Legal
Requirement or Order that has been published, introduced, or otherwise proposed
by or before any Governmental Body.

 

8.        CONDITIONS PRECEDENT TO
SELLER’S OBLIGATION TO CLOSE

 

Seller’s obligation to
sell the Shares and to take the other actions required to be taken by Seller at
the Closing is subject to the satisfaction, at or prior to the Closing, of each
of the following conditions (any of which may be waived by Seller, in whole or
in part):

 

8.1.           ACCURACY OF REPRESENTATIONS

 

All of Buyer’s
representations and warranties in this Agreement (considered collectively), and
each of these representations and warranties (considered individually), must
have been accurate in all material respects as of the date of this Agreement
and must be accurate in all material respects as of the Closing Date as if made
on the Closing Date.

 

8.2.            BUYER’S PERFORMANCE

 

(a)           All of the covenants and obligations
that Buyer is required to perform or to comply with pursuant to this Agreement
at or prior to the Closing (considered collectively), and each of these
covenants and obligations (considered individually), must have been performed
and complied with in all material respects.

 

(b)           Buyer must have delivered each of the
documents required to be delivered by Buyer pursuant to Section 2.4 and must
have made the cash payments and delivered the Nortech Shares required to be
made and delivered by Buyer pursuant to Sections 2.4.

 

(c)           In the event that Seller believes
Buyer has failed to materially perform or comply with any of its obligations
hereunder, Seller shall provide written notice of such material nonperformance
or noncompliance to Buyer.  Buyer shall
have a period of thirty (30) days following receipt of such written notice to
cure any legitimate nonperformance or noncompliance.  In the event that Buyer is unable to cure the nonperformance or
noncompliance within the thirty (30) day cure period, then at Seller’s option
this contract  shall terminate and both parties shall be freed from
their respective obligations hereunder, absent other agreement of the parties.

 

9.        TERMINATION

 

9.1.          TERMINATION EVENTS

 

This Agreement may, by
notice given prior to or at the Closing, be terminated:

 

(a)           by either Buyer or Seller if a
material Breach of any provision of this Agreement has been committed by the
other party and such Breach has not been waived;

 

28

 

(b)           (i) by Buyer if any of the conditions
in Section 7 has not been satisfied as of the Closing Date or if satisfaction
of such a condition is or becomes impossible (other than through the failure of
Buyer to comply with its obligations under this Agreement) and Buyer has not
waived such condition on or before the Closing Date; or (ii) by Seller, if any
of the conditions in Section 8 has not been satisfied of the Closing Date or if
satisfaction of such a condition is or becomes impossible (other than through
the failure of Seller to comply with its obligations under this Agreement) and
Seller has not waived such condition on or before the Closing Date;

 

(c)           by mutual consent of Buyer and Seller;
or

 

(d)           by either Buyer or Seller if the
Closing has not occurred (other than through the failure of any party seeking
to terminate this Agreement to comply fully with its obligations under this
Agreement) on or before August 31, 2002, or such later date as the parties may
agree upon.

 

9.2.            EFFECT OF TERMINATION

 

Each party’s right of
termination under Section 9.1 is in addition to any other rights it may have
under this Agreement or otherwise, and the exercise of a right of termination
will not be an election of remedies. If this Agreement is terminated pursuant
to Section 9.1, all further obligations of the parties under this
Agreement will terminate, except that the obligations in Section 11.1 will
survive; provided, however, that if this Agreement is terminated by a party
because of the Breach of the Agreement by the other party or because one or
more of the conditions to the terminating party’s obligations under this
Agreement is not satisfied as a result of the other party’s failure to comply
with its obligations under this Agreement, the terminating party’s right to
pursue all legal remedies will survive such termination unimpaired.

 

10.       INDEMNIFICATION;
REMEDIES

 

10.1.        SURVIVAL; RIGHT TO INDEMNIFICATION
NOT AFFECTED BY KNOWLEDGE

 

All representations, warranties, covenants, and obligations in this
Agreement, or any other document delivered pursuant to this Agreement will
survive the Closing.

 

10.2.        INDEMNIFICATION AND PAYMENT OF DAMAGES
BY SELLER 

 

Seller will indemnify and hold harmless Buyer, the Company, and their
respective Representatives, stockholders, controlling persons, and affiliates
(collectively, the “Indemnified Persons”) for, and will pay to the Indemnified
Persons the amount of, any loss, liability, claim, damage (including incidental
and consequential damages), expense (including costs of investigation and
defense and reasonable attorneys’ fees) or diminution of value, whether or not
involving a third-party claim (collectively, “Damages”), arising, directly or
indirectly, from or in connection with:

 

29

 

(a)           any Breach of any representation or
warranty made by Seller in this Agreement, or any other document delivered by
Seller pursuant to this Agreement;

 

(b)           any Breach of any representation or
warranty made by Seller in this Agreement as if such representation or warranty
were made on and as of the Closing Date;

 

(c)           any Breach by Seller of any covenant
or obligation of Seller in this Agreement;

 

(d)           any claim by any Person for brokerage
or finder’s fees or commissions or similar payments based upon any agreement or
understanding alleged to have been made by any such Person with either Seller
or the Company (or any Person acting on their behalf) in connection with any of
the Contemplated Transactions.

 

The remedies provided in
this Section 10.2 will not be exclusive of or limit any other remedies that may
be available to Buyer.

 

10.3.        INDEMNIFICATION AND PAYMENT OF DAMAGES
BY BUYER

 

Buyer will indemnify and
hold harmless Seller, and will pay to Seller the amount of any loss, liability,
claim, damages (including incidental and consequential damages) or expense
(including the costs of investigation and defense and reasonable attorney’s
fees) arising, directly or indirectly, from or in connection with (a) any
Breach of any representation or warranty made by Buyer in this Agreement, (b)
any Breach by Buyer of any covenant or obligation of Buyer in this Agreement,
or (c) any claim by any Person for brokerage or finder’s fees or commissions or
similar payments based upon any agreement or understanding alleged to have been
made by such Person with Buyer (or any Person acting on its behalf) in
connection with any of the Contemplated Transactions.

 

10.4.          RIGHT OF SET-OFF

 

Upon notice to Seller
specifying in reasonable detail the basis for such set-off, Buyer may set off
any amount to which it may be entitled under this Section 10 against amounts
otherwise payable under this Agreement. 
Neither the exercise of nor the failure to exercise such right of
set-off will constitute an election of remedies or limit Buyer in any manner in
the enforcement of any other remedies that may be available to it.

 

10.5.        PROCEDURE FOR INDEMNIFICATION—THIRD
PARTY CLAIMS

 

(a)           Promptly after receipt by an
indemnified party under Section 10.2 or 10.3 of notice of the commencement of
any Proceeding against it, such indemnified party will, if a claim is to be
made against an indemnifying party under such Section, give notice to the
indemnifying party of the commencement of such claim, but the failure to notify
the indemnifying party will not relieve the indemnifying party of any liability
that it may have to any indemnified party, except to the extent that the
indemnifying party demonstrates that the defense of such action is

 

30

 

prejudiced by the
indemnifying party’s failure to give such notice.

 

(b)           If any Proceeding referred to in
Section 10.5(a) is brought against an indemnified party and it gives notice to
the indemnifying party of the commencement of such Proceeding, the indemnifying
party will, unless the claim involves Taxes, be entitled to participate in such
Proceeding and, to the extent that it wishes (unless (i) the indemnifying party
is also a party to such Proceeding and the indemnified party determines in good
faith that joint representation would be inappropriate, or (ii) the
indemnifying party fails to provide reasonable assurance to the indemnified
party of its financial capacity to defend such Proceeding and provide
indemnification with respect to such Proceeding), to assume the defense of such
Proceeding with counsel satisfactory to the indemnified party and, after notice
from the indemnifying party to the indemnified party of its election to assume
the defense of such Proceeding, the indemnifying party will not, as long as it
diligently conducts such defense, be liable to the indemnified party under this
Section 10 for any fees of other counsel or any other expenses with respect to
the defense of such Proceeding, in each case subsequently incurred by the
indemnified party in connection with the defense of such Proceeding, other than
reasonable costs of investigation. If the indemnifying party assumes the
defense of a Proceeding, (i) it will be conclusively established for purposes
of this Agreement that the claims made in that Proceeding are within the scope
of and subject to indemnification; (ii) no compromise or settlement of such
claims may be effected by the indemnifying party without the indemnified
party’s consent unless (A) there is no finding or admission of any violation of
Legal Requirements or any violation of the rights of any Person and no effect
on any other claims that may be made against the indemnified party, and (B) the
sole relief provided is monetary damages that are paid in full by the
indemnifying party; and (iii) the indemnified party will have no liability with
respect to any compromise or settlement of such claims effected without its
consent. If notice is given to an indemnifying party of the commencement of any
Proceeding and the indemnifying party does not, within ten days after the
indemnified party’s notice is given, give notice to the indemnified party of
its election to assume the defense of such Proceeding, the indemnifying party
will be bound by any determination made in such Proceeding or any compromise or
settlement effected by the indemnified party.

 

(c)           Notwithstanding the foregoing, if an
indemnified party determines in good faith that there is a reasonable
probability that a Proceeding may adversely affect it or its affiliates other
than as a result of monetary damages for which it would be entitled to
indemnification under this Agreement, the indemnified party may, by notice to
the indemnifying party, assume the exclusive right to defend, compromise, or
settle such Proceeding, but the indemnifying party will not be bound by any
determination of a Proceeding so defended or any compromise or settlement
effected without its consent (which may not be unreasonably withheld).

 

(d)           Seller hereby consents to the
non-exclusive jurisdiction of any court in which a Proceeding is brought
against any Indemnified Person for purposes of any claim that an Indemnified
Person may have under this Agreement with respect to such Proceeding or the
matters alleged therein, and agree that process may be served on Seller with
respect to such a claim anywhere in the world.

 

31

 

10.6.        PROCEDURE FOR INDEMNIFICATION—OTHER
CLAIMS

 

A claim for
indemnification for any matter not involving a third-party claim may be
asserted by notice to the party from whom indemnification is sought.

 

11.       GENERAL PROVISIONS

 

11.1.        REGISTRATION OF NORTECH SHARES

 

The Nortech Shares to be delivered to the Seller have not been
registered under the Securities Act. The Nortech Shares may not be transferred
or resold without either registration under the Securities Act or an exemption
from the registration requirements of the Securities Act.  Within 60 days after the Closing Date, Buyer
shall cause to be filed a registration statement at its expense under the
Securities Act covering the Nortech Shares and shall use its Best Efforts to
cause such shares to be registered and available for public distribution by the
holders thereof, without restriction, within 120 days after the closing
date.  Nortech shall keep the
registration effective for a period of 36 months after the Effective Date.

 

11.2                           PUBLIC
ANNOUNCEMENTS

 

Any public announcement
or similar publicity with respect to this Agreement or the Contemplated
Transactions will be issued, if at all, at such time and in such manner as
Buyer determines.  Unless consented to
by Buyer in advance or required by Legal Requirements, prior to the Closing,
Seller shall, and shall cause the Company to, keep this Agreement strictly
confidential and may not make any disclosure of this Agreement to any
Person.  Seller and Buyer will consult
with each other concerning the means by which the Company employees, customers,
and suppliers and others having dealings with the Company will be informed of
the Contemplated Transactions, and Buyer will have the right to be present for
any such communication.

 

11.3.        EXPENSES

 

Except as otherwise
expressly provided in this Agreement, each party to this Agreement will bear
its respective expenses incurred in connection with the preparation, execution,
and performance of this Agreement and the Contemplated Transactions, including
all fees and expenses of agents, representatives, counsel, and accountants.

 

11.4.        NOTICES

 

All notices, consents,
waivers, and other communications under this Agreement must be in writing and
will be deemed to have been duly given when (a) delivered by hand (with written
confirmation of receipt), (b) sent by telecopier (with written confirmation of
receipt), provided that a copy is mailed by registered mail, return receipt
requested, or (c) when received by the addressee, if sent by a nationally
recognized overnight delivery service (receipt requested), in each case to the
appropriate addresses and telecopier numbers set forth below (or to such other
addresses and telecopier numbers as a party may designate by notice to the
other parties):

 

32

 

Seller:

 

SAE Circuits Colorado,
Inc.

4820 N. 63rd
Street, Suite 100

Boulder, CO  80301

 

Attention:   Erv Hammen

Facsimile No.: (303)
530-7454

 

with copies to:

 

Brian J. Holst

Shively & Holst, LLP

515 Kimbark Street, Suite
107

P.O. Box 298

Longmont, CO  80501

Facsimile No.: (303)
772-2822

 

and

 

Thomas Hansing

906 East 132nd Drive

Thornton, CO  80241

 

Buyer: 

 

Nortech Systems
Incorporated

1120 Wayzata Boulevard
East, Suite 201

Wayzata, MN  55391

Attention:  President

Facsimile No.: (952)
449-0442

 

with a copy to:

 

Bert M. Gross

7201 Metro Boulevard

Minneapolis, MN  55439

Facsimile No.: (952)
947-7200

 

11.5.     JURISDICTION; SERVICE OF
PROCESS

 

Any action or proceeding seeking to enforce any provision of, or based
on any right arising out of, this Agreement may be brought against any of the
parties in the courts of the State of Minnesota, County of Hennepin, and each
of the parties consents to the jurisdiction of such courts (and of the
appropriate appellate courts) in any such action or proceeding and waives any

 

33

 

objection to venue laid therein. Process in any action or proceeding
referred to in the preceding sentence may be served on any party anywhere in
the world.

 

11.6.        FURTHER ASSURANCES

 

The parties agree
(a) to furnish upon request to each other such further information,
(b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may
reasonably request for the purpose of carrying out the intent of this Agreement
and the documents referred to in this Agreement.

 

11.7.        ARBITRATION. All disputes between the parties relating to
this Agreement or the transaction contemplated thereby or negotiations leading
up to execution of this Agreement shall be resolved by arbitration in
Minneapolis, Minnesota, pursuant to the rules of the American Arbitration
Association then in effect.  The
arbitrators shall have the power to award costs, including reasonable
attorneys’ fees, as they deem appropriate. 
This Agreement shall be construed in accordance with the laws of the
State of Minnesota.

 

11.8.        WAIVER

 

The rights and remedies
of the parties to this Agreement are cumulative and not alternative. Neither
the failure nor any delay by any party in exercising any right, power, or
privilege under this Agreement or the documents referred to in this Agreement
will operate as a waiver of such right, power, or privilege, and no single or
partial exercise of any such right, power, or privilege will preclude any other
or further exercise of such right, power, or privilege or the exercise of any
other right, power, or privilege. To the maximum extent permitted by applicable
law, (a) no claim or right arising out of this Agreement or the documents
referred to in this Agreement can be discharged by one party, in whole or in
part, by a waiver or renunciation of the claim or right unless in writing
signed by the other party; (b) no waiver that may be given by a party will
be applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one party will be deemed to be a waiver of
any obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement or the documents referred to in this Agreement.

 

11.9.          ENTIRE AGREEMENT AND MODIFICATION

 

This Agreement supersedes all prior agreements between the parties with
respect to its subject matter and constitutes (along with the documents
referred to in this Agreement) a complete and exclusive statement of the terms
of the agreement between the parties with respect to its subject matter. This
Agreement may not be amended except by a written agreement executed by the
party to be charged with the amendment.

 

11.10.        ASSIGNMENTS, SUCCESSORS, AND NO
THIRD-PARTY RIGHTS

 

Neither party may assign
any of its rights under this Agreement without the prior consent of the other
parties, except that Buyer may assign any of its rights under this Agreement to
any

 

34

 

Subsidiary of Buyer.
Subject to the preceding sentence, this Agreement will apply to, be binding in
all respects upon, and inure to the benefit of the successors and permitted
assigns of the parties. Nothing expressed or referred to in this Agreement will
be construed to give any Person other than the parties to this Agreement any
legal or equitable right, remedy, or claim under or with respect to this
Agreement or any provision of this Agreement. This Agreement and all of its
provisions and conditions are for the sole and exclusive benefit of the parties
to this Agreement and their successors and assigns.

 

11.11.      SEVERABILITY

 

If any provision of this
Agreement is held invalid or unenforceable by any court of competent
jurisdiction, the other provisions of this Agreement will remain in full force
and effect. Any provision of this Agreement held invalid or unenforceable only
in part or degree will remain in full force and effect to the extent not held
invalid or unenforceable.

 

11.12.      SECTION HEADINGS, CONSTRUCTION

 

The headings of Sections
in this Agreement are provided for convenience only and will not affect its
construction or interpretation. All references to “Section” or “Sections” refer
to the corresponding Section or Sections of this Agreement. All words used in
this Agreement will be construed to be of such gender or number as the
circumstances require. Unless otherwise expressly provided, the word
“including” does not limit the preceding words or terms.

 

11.13.      TIME OF ESSENCE

 

With regard to all dates and time periods set forth or referred to in
this Agreement, time is of the essence.

 

11.14.      GOVERNING LAW

 

This Agreement will be
governed by the laws of the State of Minnesota without regard to conflicts of
laws principles.

 

11.15.      COUNTERPARTS

 

This Agreement may be
executed in one or more counterparts, each of which will be deemed to be an
original copy of this Agreement and all of which, when taken together, will be
deemed to constitute one and the same agreement.

 

35

 

IN WITNESS WHEREOF, the
parties have executed and delivered this Agreement as of the date first written
above.

 

	
  Buyer:

  	
   

  	
  Seller:

  
	
   

  	
   

  	
   

  
	
  NORTECH SYSTEMS
  INCORPORATED

  	
   

  	
  SAE CIRCUITS COLORADO,
  INC.

  
	
   

  	
   

  	
   

  
	
  By:

  	
    Michaels J. Degen

  	
   

  	
  By:

  	
    Ervin Hammer

  
	
  Michael
  J. Degen,

  	
   

  	
                                        ,
  President

  
	
  President

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
    Thomas J. Hansing

  
	
   

  	
   

  	
  Thomas J. Hansing

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
    Barbara J. Aune

  
	
   

  	
   

  	
  Barbara E. Aune

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
    Stephen W. Cecil, Jr

  
	
   

  	
   

  	
  Stephen W. Cecil, Jr.

  
					

 

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EXHIBIT 10.42    
  

EMPLOYMENT AGREEMENT  

        EMPLOYMENT AGREEMENT dated as of June 4th, 2001 (the "Execution Date") by and between ArQule, Inc., a Delaware corporation (the
"Company") with its principal offices at 19 Presidential Way, Woburn, Massachusetts 01801, and J. David Jacobs ("Executive") whose current principal residential address is 2622 Oakenshield Drive,
Potomac, Maryland 20854. 

        WHEREAS,
the Company desires to employ Executive in a senior executive capacity and to enter into an Agreement embodying the terms of such employment (the "Agreement"); and 

        WHEREAS,
Executive desires to accept such employment and enter into such an Agreement; 

        NOW,
THEREFORE, in consideration of the premises, and the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt, adequacy and
sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 

        1.    Term of Employment.    The Company hereby agrees to employ Executive, and Executive hereby accepts employment
with the Company, upon the terms and subject to the conditions set forth in this Agreement, for a period commencing on June 4th, 2001 (the "Effective Date") and continuing until
terminated in accordance with the provisions of Section 5 (the "Employment Term"). 

        2.    Title; Duties.    During the Employment Term, Executive shall serve as the General Counsel and a Vice President
of the Company reporting directly to the Chief Executive Officer. The Executive hereby agrees to undertake the duties and responsibilities inherent in such position and such other duties and
responsibilities consistent with such position as the Chief Executive Officer shall from time to time reasonably assign to him. 

        3.    No Conflict.    During the Employment Term, Executive shall devote substantially all of his business time and
best efforts to the performance of his duties hereunder and shall not, directly or indirectly, engage in any other business, profession or occupation for compensation or otherwise which would conflict
with the rendition of such duties without the prior written consent of the Chief Executive Officer, which consent shall not unreasonably be withheld, delayed or conditioned. Executive represents and
warrants that Schedule A attached hereto states all current business relationships, including, but not limited to, consulting agreements, confidentiality agreements and
non-competition agreements that Executive is currently a party to. 

        4.    Compensation and Benefits.    

        4.1.    Base Salary and Bonus.    During the Employment Term, the Company shall pay Executive for his services
hereunder a base salary at the initial annual rate of $216,000.00, payable in regular installments in accordance with the Company's usual payment practices and subject to annual review and adjustment
by the Chief Executive Officer or its designee in its sole discretion. Such amount and regular installments shall be referred herein to as the "Base Salary". The Executive shall also be eligible to
receive an annual cash bonus in accordance with the policies and practices of the Board. 

        4.2.    Additional Compensation.    

        4.2.1.    Stock Option.    As further compensation for his services hereunder, the Company shall grant to Executive,
on or after the Effective Date, a stock option (the "Stock Option") to purchase 46,000 shares of the Company's Common Stock, $0.01 par value per share (the "Common Stock"), pursuant to the Company's
Amended and Restated 1994 Equity Incentive Plan (the "Plan") and in accordance with the terms, and subject to the vesting schedule of twenty-five percent annually commencing on the first
anniversary of the Effective Date and other conditions, set forth in the form of Option Certificate attached hereto as Exhibit A. The method of determining the exercise price of such Stock
Option is set forth in Exhibit B. Starting on the Effective Date, in the event that (i) Executive's employment is terminated without Cause during the first year of employment or
(ii) the Company substantially reduces 

 

or alters Executive's responsibilities without Cause during the first year of employment (each event an "Early Termination"), the Stock Option shall become immediately exercisable as to all option
shares without regard to the vesting schedules set forth on the Option Certificate. Furthermore, in the event that Executive's employment hereunder is subsequently terminated without Cause, or the
scope of his responsibilities substantially reduced or altered by the Company without Cause (as defined in Section 5.2) within one year of a Change of Control of the Company (as defined herein)
that occurs at any time during the Employment Term (either event being a "Later Termination"), the Stock Option
shall become immediately exercisable as to all option shares without regard to the vesting schedule set forth on the form of Option Certificate. 

        For
purposes of this Section 4.2.1, any one of the following events shall be considered a Change of Control: 

	(i)
	the
acquisition by any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934) of any amount of the
Company's Common Stock so that it holds or controls fifty percent (50%) or more of the Company's Common Stock;

	(ii)
	a
merger or consolidation after which fifty percent (50%) or more of the voting stock of the surviving corporation is held by persons who were not
stockholders of the Company immediately prior to such merger or combination;

	(iii)
	a
sale of all or substantially all of the assets of the Company to a third party,

	(iv)
	the
election by the stockholders of the Company of twenty percent (20%) or more of the directors of the Company other than pursuant to nomination by the
Company's management, or

	(v)
	a
legally binding, definitive agreement approved by the Board of Directors providing for any of the foregoing events (i) through
(iv) inclusive. 

        4.3.    Executive Benefits.    During the Employment Term and subject to any contributions therefor generally required
of senior executives of the Company, Executive shall be entitled to receive such employee benefits (including fringe benefits, 401(k) plan participation, and life, health, accident and disability
insurance) which the Company may, in its sole and absolute discretion, make available generally to its senior executives, or for personnel similarly situated; provided,
however, that it is hereby acknowledged and agreed that any such employee benefit plans may be altered, modified or terminated by the Company at any time in its sole discretion
without recourse by Executive. 

        4.4.    Vacation.    Executive shall be entitled to three weeks (15 working days) of paid vacation and one week (5
working days) of personal time per annum during the Employment Term, to be taken at such time or times as shall be mutually convenient for the Company and Executive. Unused vacation and personal time
will be allocated pursuant to the Company's existing policies and practices. 

        4.5.    Expenses.    

        4.5.1.    Relocation.    Upon receipt of adequate documentation (receipts, credit card bills, or other evidence of
payment) of expenses incurred by the Executive for (I) reasonable "qualified moving expenses," as defined by I.R.S. Regulation Section 31.3401(a)(15)-1 under the Internal
Revenue Code, the Company shall reimburse Executive for such relocation expenses, including moving expenses and travel expenses incurred by Executive in traveling to his new location of employment, up
to a maximum of $50,000.00 in the aggregate and (ii) any taxes payable by Executive (including any tax on the gross-up) as a result of the reimbursement by the Company of
Executive's relocation expenses under this Section 4.5.1; provided, however, that the Executive shall reimburse the Company for all such expenses
paid 

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by the Company if the Executive terminates his employment without Cause prior to the expiration of the period from the Effective Date until one year thereafter. 

        4.5.2.    Business Expenses and Perquisites.    Upon delivery of adequate documentation of expenses incurred,
Executive shall be entitled to reimbursement by the Company during the Employment Term for reasonable travel, entertainment and other business expenses incurred by Executive in the performance of his
duties hereunder in accordance with such policies as the Company may from time to time have in effect. 

        5.    Termination.    

        5.1.    Without Cause by the Company.    The Executive's employment hereunder may be terminated by the Company at any
time without Cause upon not less than 60 days prior written notice from the Company to Executive. If Executive's employment is terminated by the Company by means of an Early Termination or a
Later Termination, the Company shall pay Executive the Base Salary and a portion of any targeted bonus prorated for the portion of the year worked prior to such termination plus any benefits to which
Executive is entitled under Section 4.3 of this Agreement (to the extent permitted by the then-current terms of the applicable benefit plans and subject to any employee contribution
requirements applicable to Executive on the date of termination) through the conclusion of a period of six months from the date of such termination plus any accrued but not used vacation. The payment
to Executive of any other benefits following the termination of Executive's employment pursuant to this Section 5.1 shall be determined by the Board in its sole discretion in accordance with
the policies and practices of the Company. 

        5.2.    For Cause by the Company.    Notwithstanding any other provision of this Agreement, Executive's employment
hereunder may be terminated by the Company at any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) Executive's arbitrary, unreasonable, or willful failure to perform his
duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness) for thirty (30) days after a written demand for performance is delivered to Executive
on behalf of the Company which specifically identifies the manner in which it is alleged that Executive has not substantially performed his duties, (ii) Executive's arbitrary, unreasonable, or
willful refusal to follow the
reasonable instructions of the Chief Executive Officer not cured within the time period following the notice set forth in (i), (iii) Executive's dishonesty in the performance of his duties
hereunder, (iv) an act or acts on Executive's part involving moral turpitude or constituting a felony under the laws of the United States or any state thereof, or (v) Executive's
material breach of his obligations under Section 6 and 7 hereof, which breach shall remain uncured by Executive for thirty (30) days following receipt of notice from the Company
specifying such breach. If Executive's employment is terminated by the Company for Cause, the Company shall pay Executive all amounts owed to Executive for work performed through the last day of his
actual employment by the Company, plus any accrued but not used vacation. The payment to Executive of any other benefits following the termination of Executive's employment pursuant to this
Section 5.2 shall be determined by the Board in its sole discretion in accordance with the policies and practices of the Company. 

        5.3.    Disability.    Subject to the requirements of the Americans with Disabilities Act and Massachusetts General
Laws Chapter 151B, Executive's employment hereunder may be terminated by the Company at any time in the event of the Disability of the Executive. For purposes of this Agreement, "Disability" shall
mean the inability of Executive to perform substantially his duties hereunder due to physical or mental disablement which continues for a period of six (6) consecutive months during the
Employment Term, as determined by an independent qualified physician mutually acceptable to the Company and Executive (or his personal representative) or, if the Company and Executive (or such
representative) are unable to agree on an independent qualified physician, as determined by a panel of three physicians, one designated by the Company, one designated by Executive (or his personal
representative) and one designated by the two physicians so designated. If 

3

 

Executive's employment is terminated by the Company for Disability, the Company shall continue to pay Executive his then-current Base Salary and a portion of any targeted bonus prorated
for the portion of the year worked prior to such termination plus any benefits to which Executive is entitled under Section 4.3 of this Agreement (to the extent permitted by the
then-current terms of the applicable benefit plans and subject to any employee contribution requirements applicable to Executive on the date of termination) plus any accrued but not used
vacation through the date on which Executive is first eligible to receive payment of disability benefits in lieu of Base Salary under the Company's employee benefit plans as then in effect. The
payment to Executive of any other benefits following the termination of Executive's employment pursuant to this Section 5.3 shall be determined by the Company in its sole discretion in
accordance with the policies and practices of the Company. 

        5.4.    Death.    Executive's employment hereunder shall automatically terminate in the event of the Executive's
death. If Executive's employment is terminated by the death of Executive, the Company shall pay to Executive's estate or legal representative an amount equal to the Base Salary at the rate in effect
at the time of Executive's death through the last day of the month in which his death occurs and a portion of any targeted bonus prorated for the portion of the year worked prior to the death plus any
accrued but not used vacation. The payment to Executive of any other benefits following the termination of Executive's employment pursuant to this Section 5.4 shall be determined by the Board
in its sole discretion in accordance with the policies and practices of the Company. 

        5.5.    Termination by Executive.    Executive's employment hereunder may be terminated by Executive at any time upon
not less than thirty (30) days prior written notice from Executive to the Company. If Executive terminates his employment with the Company pursuant to this Section 5.5, the Company shall
pay Executive an amount equal to the Base Salary through the last day of his actual employment by the Company, plus any accrued but not used vacation. 

        5.6.    Notice of Termination.    Any purported termination of employment by the Company or by Executive shall be
communicated by written Notice of Termination to the other party hereto in accordance with Section 8hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of
employment under the provision so indicated. 

        5.7.    Survival.    The provisions of Sections 6 shall survive the termination of this Agreement. 

        6.    Confidentiality.    

        (a)    Definitions.    As used herein, the term "Confidential Information" shall mean all Proprietary Materials (as
defined below) of the Company, any and all confidential, proprietary and non-public information about inventions, improvements, modifications, discoveries, costs, profits, markets, sales,
products, key personnel, pricing policies, operational methods, concepts, technical processes and applications, and other business affairs and methods of the Company and of its affiliates,
collaborators, consultants, suppliers, and customers, as well as any other information of the Company not readily available to the public, including without limitation any information supplied by
third parties to the Company under an obligation of confidence. As used in this Agreement "Proprietary Materials" shall include, without limitation, the following materials to the extent proprietary
to the Company and not publicly available: any and all reagents, substances, chemical compounds, subcellular constituents, cells or cell lines, organisms and progeny, and mutants, as well as any and
all derivatives or replications derived from or relating to such materials. Confidential Information may be contained in various media, including without limitation patent applications, computer
programs in object and/or source code, flow charts and other program documentation, manuals, plans, drawings, designs, technical specifications, laboratory notebooks, supplier and customer lists,
internal financial data, and other documents and records of the Company, whether or not in written form and whether or not labeled or identified as confidential or proprietary. 

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        (b)    Non-Disclosure.    Executive will not at any time (whether during or after his employment with the
Company) disclose or use for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other organization, entity or
enterprise (a "Person") other than the Company, any Confidential Information. 

        (c)    Exceptions.    Notwithstanding any other provision in the Agreement, Confidential Information shall not include
information or material which: 

	(i)
	is
or becomes generally available to the public other than as a result of disclosure thereof by Executive:

	(ii)
	is
lawfully received by Executive on a non-confidential basis from a third party that is not itself under an obligation of confidentiality
or non-disclosure to the Company with respect to such information;

	(iii)
	can
be shown by Executive to have been independently developed by Executive;

	(iv)
	which
Executive establishes by competent proof was in its possession at the time of disclosure by the Company and was not acquired, directly or
indirectly from the Company; or

	(v)
	is
required to be publicly disclosed by law or by regulation; provided, however, that in such event Executive shall provide the Company with prompt
advance notice of such disclosure so that the Company has the opportunity if it so desires to seek a protective order or other appropriate remedy. 

        (d)    Return of Company Property.    Executive agrees that upon termination of his employment hereunder, Executive
will return immediately to the Company any Proprietary Materials, any materials containing Confidential Information and any other Company property then in Executive's possession or under Executive's
control, including, without limitation all Confidential Information in the Executive's possession or control, and notes, drawings, lists, memoranda, magnetic disks or tapes, or other recording media
containing such Confidential Information, whether alone or together with non-confidential information, all documents, reports, files, memoranda, records, software, credit cards, door and
file keys, computer access codes, disks and instructional manuals, or any other physical property that the Executive received, prepared, or helped prepare in connection with his employment under this
Agreement. Upon termination, the Executive will not retain any copies, duplicates, reproductions, or excerpts of Confidential Information, nor will he show or give any of the above to any third party.
Executive further agrees that he will not retain or use for his account at any time any trade name, trademark or other proprietary business designation used or owned in connection with the business of
the Company. 

        7.    Specific Performance.    Executive acknowledges and agrees that the Company's remedies at law for a breach or
threatened breach of any of the provisions of Section 6 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in
addition to any remedies at law, the Company, without posting any bond, shall be entitled to seek equitable relief in the form of specific performance, temporary restraining orders, temporary or
permanent injunctions or any other equitable remedy which may then be available. 

        8.    Notices.    Any notice hereunder by either party to the other shall be given in writing by personal delivery,
telex, telecopy, overnight courier or registered mail, return receipt requested, addressed, if to the Company, to the attention of Chairman of the Board at the Company's executive offices or to such
other address as the Company may designate in writing at any time or from time to time to the Executive, and if to the Executive, to his most recent address on file with the Company. Notice shall be
deemed given, if by personal delivery or by overnight courier, on the date of such delivery or, if by telex or telecopy, on the business day following receipt of answer back or telecopy information
or, if by registered mail, on the date shown on the applicable return receipt. 

5

 

        9.    Assignment.    This Agreement may not be assigned by either party without the prior written consent of the other
party. The Company shall require any Person succeeding to all or substantially all of the business or assets of the Company whether by purchase, merger or consolidation to expressly assume and agree
to perform this Agreement. 

        10.    Entire Agreement.    This Agreement contains the entire agreement between the Company and Executive with
respect to the subject matter thereof and there have been no oral or other agreements of any kind whatsoever as a condition precedent or inducement to the signing of this Agreement or otherwise
concerning this Agreement or the subject matter hereof. 

        11.    Expenses.    The Company and executive shall pay their own respective expenses incident to the, enforcement or
interpretation of or dispute resolution with respect to this Agreement, including all fees and expenses of their counsel for all activities of such counsel undertaken pursuant to this Agreement. 

        12.    Arbitration.    In the event any dispute shall arise between the Company and the Executive with respect to any
of the terms and conditions of this Agreement, then such dispute shall be submitted and finally settled by arbitration in Boston, Massachusetts under the rules of the American Arbitration Association.
The award rendered by the arbitrator shall be final and binding upon the parties hereto, and judgment upon the award rendered may be entered by either party in any court that would ordinarily have
jurisdiction over the parties or the subject matter of the controversy or claim. The parties agree not to institute any litigation or proceedings against each other in connection with this Agreement
except as provided in this Section 12. 

        13.    Waivers and Further Agreements.    Any waiver of any terms or conditions of this Agreement shall not operate as
a waiver of any other breach of such terms or conditions or any other term or condition, nor shall any failure to enforce any provision hereof operate as a waiver of such provision or of any other
provision hereof; provided, however, that no such written wavier, unless it, by its own terms, explicitly provides to the contrary, shall be construed to effect a continuing waiver of the provision
being waived and no such waiver in any instance shall constitute a waiver in any other instance or for
any other purpose or impair the right of the party against whom such waiver is claimed in all other instances or for all other purposes to require full compliance with such provision. Each of the
parties hereto agrees to execute all such further instruments and documents and to take all such further action as the other party may reasonably require in order to effectuate the terms and purposes
of this Agreement. 

        14.    Amendments.    This Agreement may not be amended, nor shall any waiver, change, modification, consent or
discharge be effected except by an instrument in writing executed by or on behalf of the party against whom enforcement of any waiver, change, modification, consent or discharge is sought. 

        15.    Severability.    If any provision of this Agreement shall be held or deemed to be, or shall in fact be,
invalid, inoperative or unenforceable as applied to any particular case in any jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because of the conflict of any provision with any
constitution or statute or rule of public policy or for any other reason, such circumstance shall not have the effect of rendering the provision or provisions in question invalid, inoperative or
unenforceable in any other jurisdiction or in any other case or circumstance or of rendering any other provision or provisions herein contained invalid, inoperative or unenforceable to the extent that
such other provisions are not themselves actually in conflict with such constitution, statute or rule of public policy, but this Agreement shall be reformed and construed in any such jurisdiction or
case as if such invalid, inoperative or unenforceable provision had never been contained herein and such provision reformed so that it would be valid, operative and enforceable to the maximum extent
permitted in such jurisdiction or in such case. 

6

 

        16.    Counterparts.    This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument. 

        17.    Section Headings.    The headings contained in this Agreement are for reference purposes only and shall not in
any way affect the meaning or interpretation of this Agreement. 

        18.    Governing Law.    This Agreement shall be governed by and construed and enforced in accordance with the law
(other than the law governing conflict of law questions) of the Commonwealth of Massachusetts. 

        IN
WITNESS WHEREOF, the parties have been executed or caused to be executed this Agreement as of the date first above written. 

	 	 	ARQULE, INC.
	

 	
 	

By:	

/s/  STEPHEN A. HILL      
 Name: Stephen A. Hill

Title: President and Chief Executive Officer
	

 	
 	

 	

/s/  J. DAVID JACOBS      
 J. David Jacobs

7

 
 
 

SCHEDULE A
  
    Business Relationships    
  

Director
of and counsel to the Volpi Foundation for the Performing Arts, Inc 

8

 
 
 

EXHIBIT A    
  

Option Certificate  

9

 
  
 

    EXHIBIT B    
  

 
  Determination of Option Price    
  

        The exercise price of the Stock Option is the Fair Market Value of ArQule's Common Stock (as defined below) as of the date the Board of Directors grants the stock
options to the Executive (by written consent or at a meeting) which is either on or after the Effective Date. 

        The
Fair Market Value of ArQule's Common Stock shall be the closing price of the Common Stock as reported by the Nasdaq National Market on the trading day immediately prior to the
appropriate date discussed above. 

10

QuickLinks

EXHIBIT 10.42

SCHEDULE A Business Relationships

EXHIBIT A

EXHIBIT B

Determination of Option Price

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