PLAN OF REORGANIZATION
AND
AGREEMENT OF MERGER
by and among
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.,
ESI ACQUISITION CORPORATION
and
EXPERT SYSTEMS, INC.
Dated: As of February , 1997
ARTICLE I
THE MERGER AND RELATED MATTERS...........................................................................1
1.1 The Merger.............................................................................1
1.2 Effective Time.........................................................................2
1.3 Articles of Incorporation..............................................................2
1.4 Bylaws.................................................................................2
1.5 The Closing............................................................................2
ARTICLE II
CONVERSION AND EXCHANGE OF MERGER CONSIDERATION..........................................................2
2.1 Conversion Ratio.......................................................................2
2.2 Shares Owned by ESI, Parent or Newco...................................................3
2.3 Fractional Shares......................................................................3
2.4 Exchange of Consideration..............................................................3
2.5 Merger Consideration; Escrow...........................................................4
2.6 Adjustment.............................................................................6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ESI....................................................................6
3.1 Corporate Organization and Good Standing...............................................6
3.2 Corporate Authority; Enforceability....................................................6
3.3 Capitalization.........................................................................6
3.4 Subsidiaries...........................................................................7
3.5 Financial Statements of ESI............................................................7
(b) No Undisclosed Liabilities............................................7
(c) Discharge of Liabilities..............................................7
3.6 No Material Adverse Change.............................................................8
3.7 Litigation, etc........................................................................8
3.8 Intellectual Property; Software........................................................8
3.9 Contracts.............................................................................12
3.10 Title.................................................................................12
3.11 Environmental Matters.................................................................12
3.12 Tax Returns and Audits................................................................13
3.13 Compensation..........................................................................13
3.14 Employee Benefit Plans................................................................13
3.15 Labor Relations.......................................................................14
3.16 Increases in Compensation or Benefits.................................................14
3.17 Insurance.............................................................................14
3.18 Compliance............................................................................15
3.19 Information Provided by ESI and Shareholders..........................................15
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT................................................................15
4.1 Corporate Organization, Good Standing.................................................15
4.2 Capitalization........................................................................15
4.3 Corporate Authority; Enforceability...................................................15
4.4 Subsidiaries..........................................................................15
4.5 SEC Reporting.........................................................................16
4.6 Financial Statements of Parent........................................................16
4.7 Shares and Options to be Issued.......................................................16
4.8 No Material Adverse Change............................................................17
4.9 Litigation, etc.......................................................................17
4.10 Permits, Patents, Trademarks, and Trade Secrets.......................................17
4.11 Title to Assets.......................................................................17
4.12 Tax Returns and Audits................................................................17
4.13 No Defaults; Insurance................................................................18
4.14 Information Provided by Parent........................................................18
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF NEWCO.................................................................18
5.1 Corporate Organization, Good Standing and Capitalization..............................18
5.2 Corporate Authority...................................................................18
5.3 Liabilities...........................................................................18
ARTICLE VI
CONDUCT OF ESI PENDING THE EFFECTIVE TIME...............................................................18
6.1 Articles of Incorporation and Bylaws..................................................18
6.2 Capitalization, etc...................................................................19
6.3 Shareholders' Meeting.................................................................19
6.4 Conduct of Business...................................................................19
ARTICLE VII
COVENANTS OF PARENT AND NEWCO PENDING THE EFFECTIVE TIME................................................19
7.1 Meeting of Newco Shareholder..........................................................19
ARTICLE VIII
COVENANTS OF PARENT AND ESI PENDING THE EFFECTIVE TIME..................................................19
8.1 Announcement..........................................................................19
8.2 Access to Information.................................................................19
8.3 Confidentiality.......................................................................20
8.4 No Further Solicitation...............................................................20
8.5 Pooling of Interests; Tax-free Reorganization.........................................20
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF PARENT AND NEWCO...........................................................20
9.1 Representations and Warranties True...................................................20
9.2 Absence of Litigation.................................................................21
9.3 Requisite Approvals...................................................................21
9.4 Opinion of ESI's Counsel..............................................................21
9.5 Employment Agreements.................................................................22
9.6 Escrow Agreement......................................................................22
9.7 Investor Rights Agreement.............................................................22
9.8 Pooling of Interests..................................................................22
9.9 Exercise of Options...................................................................22
ARTICLE X
CONDITIONS TO OBLIGATIONS OF ESI........................................................................22
10.1 Representations and Warranties True...................................................23
10.2 Absence of Litigation.................................................................23
10.3 Opinion of the Parent's Counsel.......................................................23
10.4 Employment Agreements.................................................................24
10.5 Escrow Agreement......................................................................24
10.6 Requisite Approval....................................................................24
ARTICLE XI
TERMINATION.............................................................................................24
11.1 Circumstances of Termination..........................................................24
11.2 Effect of Termination.................................................................25
ARTICLE XII
MERGER PRICE ADJUSTMENT.................................................................................25
12.1 Scope of Adjustment...................................................................25
ARTICLE XIII
LIMITATION OF LIABILITY.................................................................................28
13.1 Limitation of Liability...............................................................28
ARTICLE XIV
GENERAL PROVISIONS......................................................................................28
14.1 Further Assurances....................................................................28
14.2 Survival of Representations and Warranties............................................28
14.3 Notices...............................................................................28
14.4 Severability..........................................................................29
14.5 Dispute Resolution....................................................................29
14.6 Reliance on Advisors..................................................................30
14.7 Definition............................................................................31
14.8 Registration Statement on Form S-8....................................................31
14.9 Counterparts..........................................................................31
14.10 Waiver................................................................................31
14.11 Integration Clause; No Oral Modification.............................................31
14.12 Captions..............................................................................31
14.13 Governing Law.........................................................................31
14.14 Interpretations.......................................................................31
14.15 Specific Performance..................................................................31
14.16 Schedules; Exhibits...................................................................32
14.17 Transaction Expenses..................................................................32
14.18 Successors and Assigns................................................................32
PLAN OF REORGANIZATION AND
AGREEMENT OF MERGER
PLAN OF REORGANIZATION AND AGREEMENT OF MERGER (the "Agreement"), dated
as of February __, 1997, by and among National Health Enhancement Systems, Inc.,
a Delaware corporation ("Parent"), ESI Acquisition Corporation, an Arizona
corporation ("Newco") and Expert Systems, Inc., a Georgia corporation ("ESI").
Newco and ESI shall sometimes be referred to as the "Constituent Corporations".
WHEREFORE, the Boards of Directors of Newco, ESI and Parent desire to
adopt a plan of reorganization for a transaction intended to qualify as a
reorganization within the meaning of Section 368(a)(2)(D) of the Internal
Revenue Code, as amended; deem the merger of ESI into Newco on the terms herein
set forth to be desirable and in the best interests of their respective
stockholders; and have approved the transactions contemplated by this Agreement;
NOW, THEREFORE, in accordance with the applicable provisions of the
General Corporation Law of the State of Arizona ("AGCL") and of the Georgia
Business Corporation Code ("GBCC"), Newco, ESI and Parent agree that ESI shall
be merged into Newco, Newco to be the surviving corporation, and that the plan,
terms and conditions of such merger shall be as follows:
ARTICLE I
THE MERGER AND RELATED MATTERS
1.1 The Merger. At the Effective Time (as set forth in Section 1.2),
ESI shall be merged into Newco (the "Merger"), the separate existence of ESI
shall cease, and Newco shall be the surviving corporation and shall continue its
corporate existence under the laws of the State of Arizona under the name of
Expert Systems, Inc.; Newco shall possess all the rights, privileges, immunities
and franchises, of a public as well as of a private nature, of each of the
Constituent Corporations; and all property, real, personal and mixed, and all
debts due on whatever account, including subscriptions to shares, and all other
causes in action, and all and every other interest of or belonging to or due to
each of the Constituent Corporations shall be taken and deemed to be transferred
to and vested in Newco without further act or deed; and the title to any real
estate, or any interest therein, vested in any of the Constituent Corporations
shall not revert or be in any way impaired by reason of such merger or
consolidation; and Newco shall thenceforth be responsible and liable for all the
liabilities and obligations of each of the Constituent Corporations; and any
claim existing or action or proceeding pending by or against a Constituent
Corporation may be prosecuted as if such merger or consolidation had not taken
place, or Newco
may be substituted in its place; and neither the rights of creditors nor any
liens upon the property of any Constituent Corporation shall be impaired by the
Merger.
1.2 Effective Time. After adoption and approval of this Agreement by
the shareholders of ESI and Newco, respectively, in accordance with the
requirements of applicable law, and upon satisfaction of each of the conditions
set forth in Articles IX and X (unless waived in accordance with this Agreement)
and in the absence of any facts that would give any party hereto a right to
terminate this Agreement (which right has not been waived), and on or before the
Closing Date, appropriate articles or certificates of merger in compliance with
the AGCL shall be submitted for filing with the Arizona Corporation Commission
("ACC") and in compliance with the GBCC shall be submitted for filing with the
Georgia Secretary of State ("GSS"). The merger shall become effective on the
filing with the ACC and GSS of articles and/or certificates of merger in the
form and manner required by the AGCL and the GBCC, as the case may be (the
"Articles of Merger"). The date of the last of such filings shall be called the
"Effective Time". The information required by Section 10-1105 of Arizona Revised
Statutes and by Section 14-2-1105.1 of the GBCC shall be published, and any
required affidavit of publication shall be filed, in the manner and within the
time period provided by the AGCL and the GBCC, as the case may be.
1.3 Articles of Incorporation. The Articles of Incorporation of Newco
will be amended, effective at the Effective Time, by amending Article I thereof
to read in its entirety as follows: "The name of the corporation is Expert
Systems, Inc." At the Effective Time, the Articles of Incorporation of Newco, as
hereby amended, but otherwise as in effect immediately prior to the Effective
Time, shall be the Articles of Incorporation of the surviving corporation.
1.4 Bylaws. The Bylaws of Newco, as in effect immediately prior to the
Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by law.
1.5 The Closing. The closing of the transaction contemplated by this
Agreement (the "Closing") shall take place (i) at the offices of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇,
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇, at 10:00 a.m., local
time, on the later of February 11, 1997 or (ii) at such other time and place and
on such other date as ESI, Parent and Newco shall agree (the "Closing Date").
ARTICLE II
CONVERSION AND EXCHANGE OF MERGER CONSIDERATION
2.1 Conversion Ratio. The manner of converting or exchanging the shares
of each of the Constituent Corporations shall be as follows:
(a) The Merger shall effect no change in any of the shares of
Newco stock and none of its shares shall be converted as a result of the Merger.
2
(b) The total common stock of ESI ("ESI Common Stock") issued
and outstanding at the Effective Time (except shares of ESI Common Stock issued
and held in the treasury of ESI), consisting of 4,878,920 shares, shall by
virtue of the Merger and at the Effective Time be converted into and become, in
the aggregate and without action on the part of the holder thereof, Four Hundred
Sixty-Five Thousand Two Hundred Ninety-Nine (465,299) shares of fully paid and
nonassessable common stock, $.001 par value, newly issued by Parent (the "Merger
Shares"). The total options to purchase Six Hundred Twenty-Six Thousand
(626,000) shares of ESI Common Stock ("ESI Options") issued and outstanding at
the Effective Time, shall be converted into, in the aggregate, the right to
purchase Fifty-Nine Thousand Seven Hundred One (59,701) shares of the common
stock of Parent ("Option Shares"), under the terms and conditions set forth in
the ESI Options and herein. The Merger Shares and Option Shares shall be
referred to collectively as the "Merger Consideration". The number of shares of
ESI Common Stock outstanding as of the Effective Time may hereafter increase
upon the exercise of outstanding ESI Options. In such event the Merger Shares
shall be appropriately increased and the Option Shares appropriately reduced.
Schedule 2.1(b) contains a list of the number of shares of ESI Common
Stock owned of record by each shareholder (the "Shareholders"), the options to
purchase ESI Common Stock owned by each holder thereof (the "Option Holders"),
and the Merger Shares and Option Shares such securities shall be converted into,
at the Effective Time.
2.2 Shares Owned by ESI, Parent or Newco. Each share of ESI Common
Stock issued and held in the treasury of ESI or beneficially owned by Parent or
Newco at the Effective Time shall be automatically canceled and retired, and no
shares of stock or other securities of Parent or Newco shall be issuable with
respect thereto.
2.3 Fractional Shares. No fractional shares of Merger Shares or Option
Shares convertible into the common stock of Parent ("Parent Common Stock") shall
be issued to any Shareholder or Option Holder hereunder, and any fractional
share to which any Shareholder or Option Holder would otherwise be entitled
shall be rounded off to the nearest whole share, as set forth in Schedule
2.1(b).
2.4 Exchange of Consideration.
(a) Merger Shares. At and after the Effective Time, each
holder of ESI Common Stock, upon presentation and surrender of a certificate or
certificates therefor to Newco, shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of Merger Shares
to which such Shareholder is entitled as provided in Section 2.1(b), subject to
Sections 2.5, 2.6 and Article XII. Until so presented and surrendered in
exchange for a certificate representing Merger Shares, each certificate which
represented issued and outstanding shares of ESI Common Stock at the Effective
Time shall be deemed for all purposes to evidence ownership of the number of
shares of Merger Shares into which such shares of ESI Common
3
Stock have been converted pursuant to the Merger. Until surrender of such
certificates in exchange for certificates representing Merger Shares, the holder
thereof shall not be entitled to vote at any meeting of Parent stockholders or
to receive any dividend or other distribution payable to holders of shares of
Merger Shares; provided, however, that upon surrender of such certificates
representing ESI Common Stock in exchange for certificates representing Merger
Shares, there shall be paid to the record holder of the certificate representing
Merger Shares issued upon such surrender the amount of dividends or other
distributions (without interest) which theretofore became payable with respect
to the number of shares of Merger Shares represented by the certificate issued
upon such surrender.
(b) Option Shares. At and after the Effective Time, each
Option Holder, upon presentation and exercise of an ESI Option in accordance
with its terms, shall be entitled to receive and purchase such number of shares
of Parent Common Stock to which such Option Holder is entitled as provided in
Section 2.1(b), subject to Sections 2.5, 2.6 and Article XII.
2.5 Merger Consideration; Escrow.
(a) Merger Shares. The Merger Shares shall be issued and
delivered at the Closing, subject to the following conditions:
(i) Four Hundred Eighteen Thousand Seven Hundred and
Seventy (418,770) Merger Shares shall be issued and delivered
to the Shareholders, pro rata in accordance with Schedule
2.1(b), free of any restrictions other than as set forth in
that certain Investor Rights Agreement (the "Investor Rights
Agreement"), a counterpart of which executed by each
Shareholder will be delivered to Parent at or prior to
Closing.
(ii) The remaining Forty-Six Thousand Five Hundred
and Twenty Nine (46,529) Merger Shares (the "Escrowed Merger
Shares") shall be issued and delivered on behalf of the
Shareholders, pro rata in accordance with Schedule 2.1(b), to
the Escrow Holder identified as such in the form of Escrow
Agreement attached hereto as Exhibit 2.5 (the "Escrow
Agreement"), to be held in escrow (the "Escrow") for a period
of one year, pursuant to the Escrow Agreement, and also shall
be subject to the terms of the Investor Rights Agreement, and
to the following additional terms:
(A) During the term of the Escrow, each
Shareholder shall have the right to vote his or her
Escrowed Merger Shares, and to receive any dividends
or distributions made in respect thereof, provided
that any stock dividends or shares in respect of
stock splits shall continue to be held in Escrow
subject to the conditions applicable to the Escrowed
Merger Shares related thereto.
4
(B) All of the Escrowed Merger Consideration
shall be eligible for delivery to the Shareholders,
respectively, with respect to the Parent on the first
anniversary of this Agreement, and shall be delivered
promptly thereafter by the Escrow Agent.
(c) In the event that Parent shall propose
to enter into any agreement or plan under which its
common stock will be, in whole or in part, exchanged
for or converted into securities issued by an
unrelated corporation, Parent shall give notice
thereof to the Shareholders, and the Shareholders
may, if they so elect within ten days after such
notice, direct that the Escrow be terminated and that
all of the Escrowed Merger Consideration be
immediately released from Escrow and delivered to
them.
(D) The Escrowed Merger Consideration shall
be immediately released from Escrow and delivered to
the Shareholders, upon the occurrence of any of the
following events:
(1) The making by Parent of any
general assignment or general arrangement
for the benefit of creditors.
(2) The filing by or against Parent
of a petition to have Parent adjudged a
bankrupt or a petition for reorganization or
arrangement under any law relating to
bankruptcy (unless, in the case of a
petition filed against Parent, the same is
dismissed within ninety days).
(3) The appointment of a trustee or
receiver to take possession of substantially
all of Parent's assets if possession is not
restored to Parent within thirty days, or
the attachment, execution, or other judicial
seizure of substantially all of Parent's
assets if the seizure is not discharged
within thirty days.
(E) The right to receive Escrowed Merger
Shares or any interest therein shall not be
transferable or assignable by the Shareholders
otherwise than by will, by trust (the beneficiaries
of which are one or more of a Shareholder's spouse or
lineal descendants) or the laws of descent and
distribution; however, a Shareholder shall have the
right to name a spouse as a beneficiary of the right
to Escrowed Merger Shares under this Agreement.
5
(b) ESI Options/Option Shares. At and after the Effective Time
the holders of the ESI Options shall be entitled to purchase from the Parent
(which assumes the obligations under the ESI Options) such number of shares of
Parent Common Stock, determined as provided in Section 2.1(b), for each shares
of ESI Common Stock the holder otherwise was entitled to purchase pursuant to
the terms and conditions of the applicable ESI Option, subject to Section 2.6
and Article XII.
2.6 Adjustment.
(a) Change in Capital. The number of Merger Shares and Option
Shares to be issued and delivered hereunder shall be appropriately adjusted to
take into account any stock split, stock dividend, reverse stock split,
recapitalization, or like change that may occur between the date of this
Agreement and the date on which any or all of such Merger Shares and Option
Shares, as the case may be, are delivered to the Shareholders and the Option
Holders pursuant to this Agreement.
(b) Adjustment to Merger Consideration. The Merger
Consideration is to be adjusted pro rata in accordance with the provisions of
Article XII hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ESI
ESI represents and warrants to Parent and Newco as follows:
3.1 Corporate Organization and Good Standing. ESI is a corporation duly
organized, existing and in good standing under the laws of the State of Georgia,
with the corporate power to own its properties and to carry on its business as
now being conducted. ESI is qualified to do business as a foreign corporation in
each jurisdiction, if any, in which its property or business requires such
qualification and the failure to so qualify would materially and adversely
affect ESS's business. Complete and correct copies of ESI's Articles of
Incorporation and Bylaws, as amended to the date hereof, have been delivered to
Parent.
3.2 Corporate Authority; Enforceability. Execution, delivery and
performance of this Agreement has been approved by the Board of Directors of ESI
and each Shareholder. Neither the execution and delivery of this Agreement, nor
performance hereunder, will conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, the Articles of
Incorporation or Bylaws of ESI or any agreement or instrument to which ESI is a
party or by which it is bound, including without limitation, any of the Material
Contracts (defined below) except as set forth in Schedule 3.2. This Agreement
constitutes the legal, valid and binding obligation of ESI enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, and moratorium laws and other similar laws of general
application relating to the enforcement of creditors' rights.
6
3.3 Capitalization. ESI's authorized capital stock consists solely of
10,000,000 shares of ESI Common Stock, no par value, of which 4,878,920 shares
are issued and outstanding, fully paid and nonassessable; and options to
purchase 626,000 ESI Common Stock are outstanding. As of the date of this
Agreement and immediately prior to the Effective Time, there are no other
options, warrants or any other rights outstanding to purchase shares of ESI
Common Stock from ESI or from any Shareholder other than as set forth on
Schedule 3.3. The Shareholders are the sole owners of record of issued and
outstanding ESI Common Stock, and all such issued and outstanding shares are
duly and validly issued and, to the knowledge of ESI Management (defined below),
are held by the Shareholders free and clear of any and all liens, claims or
encumbrances.
3.4 Subsidiaries. ESI has no subsidiaries and does not have any
ownership interests in any other Person. "Person" means an individual, a
partnership, a corporation, a limited liability company, an association, a joint
stock company, a trust, a joint venture, any other legal entity, an
unincorporated organization, or a governmental entity (or any department,
agency, or political subdivision thereof). ESI has not been a subsidiary or
division of another Person within the five (5) years prior to the date of this
Agreement.
3.5 Financial Statements of ESI.
(a) Accuracy and Fairness. True and complete copies of the
following financial statements of ESI have been delivered by ESI to Parent: (i)
the unaudited balance sheet as of June 30, 1994 and the related statements of
income for the year then ended; (ii) the unaudited balance sheet as of June 30,
1995 and the related statements of income for the year then ended; (iii) the
unaudited balance sheet as of June 30, 1996, and the related statements of
income for the year then ended; and (iv) the unaudited balance sheet as of
December 31, 1996, and the related statements of income for the six-month period
then ended. Except as set forth in Schedule 3.5(a), those financial statements
(including in all cases the notes thereto, if any) (a) are in accordance with
the books and records of ESI; (b) are prepared in accordance with generally
accepted accounting principles consistently applied ("GAAP"), subject to changes
resulting from year-end adjustments; (c) present fairly in all material respects
the financial position of ESI at the dates, and the results of its operations
for the periods, indicated in those statements; (d) include only accounts
receivable that are stated at their net realizable value and all appropriate
reserves or allowances for doubtful accounts have been reflected; (e) include
only inventory items that are stated at cost and do not reflect any obsolete
items that have not been properly reserved for; and (f) include all appropriate
reserves and allowances. There have been no accounting management letters, audit
response letters directed to or concerning ESI since January 1, 1994, and, to
the knowledge of the ESI Management, there have been no irregularities involving
management or employees that would adversely impact that internal control
structure of ESI or ESI's financial statements.
(b) No Undisclosed Liabilities. Except for those liabilities
or obligations which are not in the aggregate material to the operating results
or financial condition of ESI, ESI
7
does not have any liabilities or obligations of any nature, secured or unsecured
(absolute, accrued or unaccrued, liquidated or unliquidated, executory,
contingent or otherwise and whether due or to become due), of a nature required
to be reflected in a balance sheet prepared consistently with past practices, or
disclosed in the notes thereto, which were not adequately and completely
disclosed or reserved for in the financial statements listed on Schedule 3.5(b),
disclosed in the notes thereto in accordance with generally accepted accounting
principles, incurred in the ordinary course of business since December 31, 1996
or disclosed in Schedule 3.5(a) or Schedule 3.5(b).
(c) Discharge of Liabilities. Since December 31, 1996, ESI has
not (i) paid, discharged or satisfied any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise) other than payment, discharge, or
satisfaction in the ordinary course of business and consistent with past
practice, or (ii) terminated, amended or suffered the termination or amendment
of, or failed to perform all of its obligations under, any of the Material
Contracts to which it is a party or by which it is bound which failure to
perform would permit the other party to terminate the Material Contract, or
exercise any material right or remedy thereunder.
3.6 No Material Adverse Change. There has been no material adverse
change in the business, properties, net worth or financial condition of ESI
since December 31, 1996.
3.7 Litigation, etc. Except as disclosed on Schedule 3.7, there is no
litigation, proceeding or investigation pending or, to the knowledge of the ESI
Management, threatened against ESI or any Shareholder which if successful might
result in a material adverse change in the business, properties or financial
condition of ESI or which questions the validity or legality of this Agreement
or of any action taken or to be taken by ESI or any Shareholder in connection
with this Agreement.
3.8 Intellectual Property; Software.
(a) Schedule 3.8(a)(i) contains a complete and accurate list
and description of all computer programs owned by ESI (including without
limitation source code, object code and documentation) including computer
programs in development (the "Software"). Schedule 3.8(a)(ii) contains a
complete and accurate list of all computer programs other than the Software,
which ESI sells, licenses or otherwise distributes, all of which are produced
solely by third parties and sold or licensed to ESI ("Third Party Software").
Schedule 3.8(a)(iii) contains a complete and accurate list of all computer
programs, other than the Software and Third Party Software which ESI uses in the
conduct of its business ("In House Software"). Except as set forth in Schedule
3.8(a)(i), ESI is the exclusive owner of all rights to the Software (including,
the exclusive right to make, copy, sell, exploit, modify, and provide to others
the use of the Software and all derivative works thereof) free and clear of any
Encumbrances (defined below), subject to the licenses to use the Software
granted to distributors and end users. ESI is in actual and sole possession of
the complete source code of the Software and all related documentation except
for any source code and related documentation that are in possession of an
escrow agent pursuant to
8
an agreement listed in Schedule 3.8(a)(i), and has not disclosed such source
code or related documentation to any third party, except for disclosure to
employees and agents of ESI pursuant to agreements sufficient to protect ESI's
Intellectual Property (defined below) rights therein. Each Person who authored
or participated in the development of the Software or any portion thereof
("Software Authors") made his or her contribution to the Software within the
scope of employment with ESI, as a "work made for hire" and was directed by ESI
to work on the Software or as an independent contractor pursuant to a written
agreement in which all work product and the Intellectual Property rights
therein, including copyrights first conceived, were exclusively conveyed to ESI
(and its successors and assigns). "Intellectual Property" means (a) inventions
(whether patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, utility models, design patents, patent
applications, and patent disclosures, together with all reissuances,
continuations, continuations- in-part, revisions, extensions, and reexaminations
thereof, (b) trademarks, service marks, trade dress, logos, trade names, and
corporate names, together with translations, adaptations, derivations, and
combinations thereof and including goodwill associated therewith, and
applications, registrations, and renewals in connection therewith, including the
Trademarks, (c) copyrightable works, copyrights, and applications,
registrations, and renewals in connection therewith, including the Copyrights,
(d) mask works and applications, registrations, and renewals in connection
therewith, (e) trade secrets and confidential business information (including
ideas, research and development, know-how, formulas, compositions, manufacturing
and production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information, and
business and marketing plans and proposals), including the Know-How and the
Trade Secrets, (f) computer software (including data and related documentation),
(g) other proprietary rights, and (h) copies and tangible embodiments thereof
(in whatever form or medium). "Encumbrances" means any title defects,
objections, liens, mortgages, security interests, pledges, charges and
encumbrances, adverse claims, equities, or any other rights of others or other
adverse interests of any kind including without limitation, licenses, escrow
arrangements, leases, chattel mortgages, conditional sales contracts, collateral
security arrangements and other title or interest retention arrangements except
(i) liens for taxes not yet due and payable and (ii) liens that are not
delinquent and are incidental to the conduct of business and ownership of
property and which do not in the aggregate materially detract from the value of
the asset or materially impair its use (excluding liens to secure any
indebtedness).
(b) Except as set forth in Schedule 3.8(b):
(1) There are no material defects in the Software,
and there are no material errors in any related
documentation, which defects or errors would in any
material respect affect the Buyer's or any licensee's
use of the Software or the functioning of the
Software in accordance with the specifications for
the Software published by ESI (excluding any "bugs"
arising or discovered in the normal course of
business which as a whole are not material to the
overall function of the Software or do not require
any material changes to the Software in order to
correct the bug); the
9
Software has substantially all the features
(including all of the material features) described in
the related user manual or advertisements and
materials made available to ESI's customers and the
Software does not contain any "back door," "time
bomb," "Trojan horse," "drop dead device" (as these
terms are commonly used in the computer software
industry), or other software routines designed to
permit unauthorized access, to disable or erase
software or data or to perform any other similar type
of functions and, to the knowledge of the ESI
Management, after running a worm and virus check
using the procedures described in Schedule 3.8(b)(1)
at a date not earlier than Monday, February 17, 1997,
the Software does not contain any worm or virus;
(2) The programming design and performance
capabilities of the Software does not ensure year
2000 compatibility include, but are not limited to,
date data century recognition, calculations which
accommodate same century and multi-century formulas
and date values, and date data interface values which
reflect the correct century. ESI reasonably estimates
that it will take three-man months' of work to ensure
that ESI's Windows NT platform is year 2000
compatible.
(3) Except with respect to licenses granted to
end-user ("End-User Licenses") and the rights of
distributors and others listed in Schedule 3.8(e)
pursuant to the agreements listed therein, no Person
other than ESI has any interest of any kind or nature
in or with respect to the Software, including without
limitation the right to use, make, copy, sell,
exploit, modify and provide to others the use of, the
Software and all derivative works thereof, and no
funds or facilities of any Person (other than ESI),
including any university or college, were used in the
development of the Software, and the Software was not
developed pursuant to a contract with any Person
(except for Software Authors hired by ESI in
accordance with Section 3.8(a) above), and there is
no basis or agreement that would preclude Newco or
Parent from making any change to the Software or
combining it with other software in any lawful
manner; provided, however, that ESI has sold, under
one-time licenses to the following four companies,
source code for the Software that is substantially
less functional than the source code used for the
current version of the Software: Cognotronics
Corporation, Comverse Technology, Microlog
Corporation and NTT American;
(4) The Management of ESI has no knowledge that any
third party is violating or has violated any of ESI's
proprietary rights in the Software; no third party
has any right to compensation from ESI (or its
successors and assigns) by reason of, the use,
exploitation, or sale of the Software; there
10
are no restrictions on the ability of ESI (or its
successors or assigns) to use, sell or otherwise
exploit the Software, and such use, sale or
exploitation does not obligate ESI (or any successor
or assign of ESI) to pay any royalty, fee, or other
compensation to any Person; and ESI has not received
any notice and, to the knowledge of the ESI
Management, has not received any complaint,
assertion, threat, or allegation inconsistent with
the preceding statements in this paragraph.
(c) Software Problems. ESI has provided access to Newco and
the Parent to all records of ESI with respect to Software fixes (including fixes
currently in progress), problem lists, maintenance of the Software, and customer
complaints. All material warranty claims within the last three (3) years
(including any pending claims) relating to the Software are described in
Schedule 3.8(c).
(d) Schedule 3.8(d) contains a complete list of any
restrictions on ESI's right to use, incorporate or distribute the Third Party
Software. ESI is not in violation of any license, sublicense or agreement with
respect to any Third Party Software.
(e) Schedule 3.8(e) contains a complete list of all existing
distribution or sales representative agreements ("Distribution Agreements") in
which ESI authorizes any other Person to use, sell, distribute, or license any
of the Software or other Intellectual Property of ESI, including without
limitation any agreements that permit software sale, distribution or license to
end-users ("End Users") in the ordinary course of business. Schedule 3.8(e) also
contains a complete list of the key terms of any commitments to enter into or
advanced negotiations to enter into any distribution or sales representative
agreements.
(f) Except as set forth in Schedule 3.8(f), ESI has good, sole
and marketable title to all Intellectual Property rights embodied in or used to
design the Software, free and clear of any Encumbrances subject to licenses
granted pursuant to Distribution Agreement and End- User Licenses, and the
Management of ESI is not aware of any claims that such Intellectual Property
rights are being challenged in any way.
(g) Except as set forth in Schedule 3.8(g):
(1) ESI has no patents or inventions, domestic or
foreign, or pending applications for patents on
inventions, and no copyrights, registrations or
pending applications for registration of copyrights;
(2) no Person has any right of renewal, reversion, or
termination with respect to any copyrights owned by
ESI or any rights under such copyrights;
11
(3) ESI has no common law or registered trademarks,
trade names, service marks or pending applications to
register trademarks, trade names, or service marks,
related to the Software or any other products or
services sold or licensed by it or which it otherwise
uses in the conduct of its business;
(4) ESI does not own any patents or applications for
patents that relate to or affect the Software, any
other products sold or licensed to End-Users by it or
any Intellectual Property rights owned by it; and
(5) there are, and have been, no options, licenses or
agreements of any kind relating to any of the
Intellectual Property owned by ESI or to the use,
manufacture, sale or other exploitation of products
or services based on or embodied in such Intellectual
Property except pursuant to End-User Licenses and
Distribution Agreements.
(h) ESI has taken commercially reasonably security measures to
protect the secrecy, confidentiality, and value of the portions of Intellectual
Property owned by ESI which constitute trade secrets (the "Trade Secrets"), and
any other persons who have knowledge of or access to information relating to
such Trade Secrets have been put on notice and, have entered into agreements
that the Trade Secrets are proprietary to ESI and are not to be divulged (except
as authorized by ESI) or misused. The Trade Secrets are not part of the public
domain, and, to the knowledge of the Management of ESI, have not been used,
divulged, or appropriated for the benefit of any Persons other than ESI (except
with ESI's consent) as described in Schedule 3.8(h) delivered hereunder.
(i) ESI has not infringed or misappropriated, and is not
infringing or misappropriating any Intellectual Property of another Person and
there is no claim pending, or to the knowledge of the Management of ESI,
threatened, against ESI with respect to any alleged infringement or
misappropriation of any Intellectual Property owned by another Person. The
Management of ESI has no knowledge that any Person is infringing or
misappropriating any Intellectual Property of ESI.
3.9 Contracts. Attached hereto as Schedule 3.9 is a list of each
material contract, lease, agreement, covenant, condition, restriction or
obligation to any third party of ESI (as qualified below, "Material Contracts").
ESI is not in breach of any term of any Material Contract which would give the
other party thereto the right to terminate the Material Contract or exercise any
right or remedy thereunder. ESI has fully disclosed to Parent, the terms of any
Material Contract. "Material" for purposes of this Section means (a) a contract
that accounts for at least five percent (5%) of ESI's annual revenues or
operating expenses, (b) a contract with the top 25 customers of ESI, as
determined by unit volume during the 24 months immediately preceding the
Effective Time, (c) a contract concerning the capital stock of ESI (including
without limitation
12
any repurchase of such stock), or (d) any other contract that if terminated
would materially adversely affect the business of ESI.
3.10 Title. ESI owns no real property. Except for leased equipment
described in Schedule 3.10, ESI has good and marketable title to all property
included in the balance sheet of ESI as of December 31, 1996, other than
property disposed of in the ordinary course of business after said date. Except
as set forth on Schedule 3.10 attached hereto, the properties of ESI are not
subject to any Encumbrance, except minor encumbrances which do not materially
interfere with the use of the property in the conduct of the business of ESI.
3.11 Environmental Matters. The term "Hazardous Substances" shall mean
without limitation any hazardous substance as that term is defined in 42 U.S.C.
ss.9601 or hazardous waste as that term is defined in 42 U.S.C. ss.6903 or any
regulated substance as that term is defined in 42 U.S.C. ss.6991, as any of such
term is defined under Arizona law, or economic poisons, hazardous wastes, toxic
substances and/or any similar such pollutants or contaminants. The business
operations of ESI and its assets have been, and are being, used and operated by
ESI in substantial compliance with all applicable local, state and federal laws,
ordinances, rules, regulations, permits, licenses, authorizations, agreements,
injunctions, decrees and orders relating to air, ground and water pollution or
regulation, soil monitoring, occupational health or safety, or the storage,
treatment, disposal, release, discharge or emission of any Hazardous Substances.
To the knowledge of the Management of ESI, no Hazardous Substances have been
disposed of on any property that is or has been owned or occupied by ESI at any
time, and no Hazardous Substances have been transported by or on behalf of ESI
or in connection with its business operations, for disposal in violation of
applicable laws. ESI and/or its business activities or assets are not, directly
or indirectly, subject to any obligations, liabilities (contingent or
otherwise), claims, judgments, orders, settlements, resolutions of disputes,
writs, injunctions or decrees relating to the treatment, storage, disposal,
release, discharge or emission of any Hazardous Substances, including the
occupational exposure of ESI's employees or agents thereto. There are no
threatened or pending litigation, proceedings, investigations, citations, or
notices of violation resulting from the business activities of ESI, or arising
from its use or occupancy of property, relating to the treatment, storage,
disposal, release, discharge or emission of any Hazardous Substances. There are
not now, nor to the knowledge of the Management of ESI has there ever been facts
or circumstances which may give rise to any litigation, claims, proceedings,
investigations, citations, or notices of violations resulting from the business
activities of ESI, or from or relating to properties owned or occupied by ESI,
directly or indirectly, relating to the treatment, storage, disposal, release,
discharge or emission of any Hazardous Substances.
3.12 Tax Returns and Audits. All required tax returns and extensions of
ESI have been prepared with reasonable accuracy and duly and timely filed, and
all taxes required to be paid with respect to the periods or transactions
covered by such returns have been duly and timely paid in all material respects.
ESI is not delinquent in the payment of any tax, assessment or governmental
charge, has not had any tax deficiency proposed or assessed against it, and has
not executed any waiver still in effect of any statute of limitations on the
assessment or collection of
13
any tax. Except as indicated on Schedule 3.12, none of the federal or state
income tax returns or state franchise tax returns of ESI has ever been audited
by governmental authorities. No examination of any tax return of ESI is
currently in progress.
3.13 Compensation. Set forth in Schedule 3.13 is a list of all
agreements between ESI and their respective employees or other Persons providing
periodic services for compensation for ESI, whether individually or
collectively. The consummation of the transactions contemplated by this
Agreement will not result in any liability for severance pay to any such
employee or other such Person. ESI has not informed any such employee or such
other Person that such Person will receive any increase in compensation or
benefits or any ownership interest in ESI, Parent or Newco other than as
provided in this Agreement. All current employees of ESI are "at will"
employees, and may be terminated by ESI at any time without any liability (other
than statutory liability, if any) in connection with the terms of the agreements
listed on Schedule 3.13.
3.14 Employee Benefit Plans.
(a) Other than as set forth in Schedule 3.14, ESI does not
maintain or sponsor, or is required to make contributions to, any pension,
profit-sharing, savings, bonus, incentive or deferred compensation, severance
pay, medical, life insurance, welfare or other employee benefit plan which
affects the employees of ESI. Schedule 3.14 fully discloses all of the plans,
funds, policies, programs, arrangements or understandings sponsored or
maintained by ESI pursuant to which any employee of ESI (or any dependent or
beneficiary of any such employee) might be or become entitled to (1) retirement
benefits; (2) severance or separation from service benefits; (3) incentive,
performance, stock, share appreciation or bonus awards or commissions; (4)
health care benefits; (5) disability income or wage continuation benefits; (6)
supplemental unemployment benefits; (7) life insurance, death or survivor's
benefits; (8) accrued sick pay or vacation pay; (9) any type of benefit offered
under any arrangement subject to characterization as an "employee welfare
benefit plan" within the meaning of section 3(3) of ERISA; or (10) benefits of
any other type offered through any arrangement that could be characterized as
providing for additional compensation or fringe benefits. As to any such plan,
fund, policy, program, arrangement or understanding, all of the following are
materially true: (A) all amounts due as contributions, insurance premiums and
benefits to the date hereof have been fully paid by ESI; (B) all applicable
material requirements of law have been observed with respect to the operation
thereof, and all applicable reporting and disclosure requirements have been
timely satisfied; and (C) no claim or demand has been made by any employee (or
beneficiary or dependent of any employee) for benefits (other than routine
claims for benefits), or by any taxing authority for taxes or penalties which
has not been satisfied in full or which may be or become subject to litigation
or arbitration.
(b) ESI does not have any obligation to provide health or
other welfare benefits to any of their former, retired or terminated employees,
except as specifically required under Section 4980B of the Code (COBRA). ESI has
substantially complied with any applicable
14
notice and continuation requirements of Section 4980B of the Code and the
regulations thereunder.
3.15 Labor Relations. There have been no material violations of any
federal, state or local statutes, laws, ordinances, rules, regulations, orders
or directives with respect to the employment of individuals by, or the
employment practices or work conditions, or the terms and conditions of
employment, wages (including overtime compensation) and hours of, ESI. ESI is
not engaged in any unfair labor practice or other unlawful employment practice
and there are no charges of unfair labor practices or other employee-related
complaints pending or threatened against ESI before any other Person.
3.16 Increases in Compensation or Benefits. Except as set forth in
Schedule 3.16, subsequent to December 31, 1996, there have been no increases in
the compensation payable or to become payable to any of the employees of ESI,
nor has ESI paid or granted any awards, bonuses, stock options, loans,
profit-sharing, pension, retirement or welfare plans or similar or other
payments or arrangements for or on behalf of such employees in each case other
than (a) pursuant to currently existing plans or arrangements set forth in
Schedule 3.16, or (b) as was required from time to time by governmental
legislation affecting wages. The vacation policies of ESI are set forth in
Schedule 3.16. No employee of ESI is entitled to vacation time in excess of
three weeks during the current calendar year and no such employee has any
accrued vacation time with respect to any period prior to the current calendar
year except as set forth in Schedule 3.16.
3.17 Insurance. ESI maintain insurance policies as summarized in
Schedule 3.17. Such policies maintained by ESI are in full force and effect and
all installments of premiums due thereon have been paid in full. ESI has not
breached any term of such policies which would give the carrier the right to
terminate the policy or to raise the premiums under such policies. There are no
notices of any pending or threatened termination or premium increases with
respect to any of such policies. There has been no casualty loss or occurrence
to ESI and ESI is not aware of any casualty occurrence which may give rise to
any claim of any kind not covered by insurance. No third party has filed any
claim against ESI for personal injury or property damage of a kind for which
liability insurance is generally available which is not fully insured, subject
only to the standard deductible.
3.18 Compliance. ESI and its business are not in material violation of
any applicable laws, rules and regulations of any governmental body, and ESI
possesses and materially complies with all necessary permits and authorizations
for operation of the business of ESI.
3.19 Information Provided by ESI and Shareholders. The information
provided and to be provided by ESI to Parent as specified in this Agreement,
including without limitation the Schedules and Exhibits, does not and will not
contain any untrue statement of a material fact, or omit to state any material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not false or misleading.
15
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to ESI as follows:
4.1 Corporate Organization, Good Standing. Parent is a corporation duly
organized, existing and in good standing under the laws of the State of
Delaware, with the corporate power to own its properties and to carry on its
business as now being conducted. Parent is qualified to do business as a foreign
corporation in each jurisdiction, if any, in which its property or business
requires such qualification and the failure to so qualify would materially and
adversely affect Parent's business. Complete and correct copies of Parent's
Certificate of Incorporation and Bylaws, as amended to the date hereof, have
been delivered to ESI.
4.2 Capitalization. Parent's authorized capital stock consists of (b)
10,000,000 shares of common stock, $.001 par value, of which 5,352,673 shares
were issued and 4,983,917 shares were outstanding on January 10, 1997, (b)
2,000,000 shares of preferred stock, of which no shares were issued and
outstanding on January 10, 1997, and (c) 1,525,541 issued and outstanding
options and warrants for common stock.
4.3 Corporate Authority; Enforceability. Execution, delivery and
performance of this Agreement has been approved by the Board of Directors of
Parent. Neither the execution and delivery of this Agreement, nor performance
hereunder, will conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default under, the Articles of Incorporation or
Bylaws of Parent or any agreement or instrument to which Parent is a party or by
which it is bound. This Agreement constitutes the legal, valid and binding
obligation of Parent, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, and moratorium laws and other
similar laws of general application relating to the enforcement of creditors'
rights.
4.4 Subsidiaries. Parent has no material subsidiaries (which terms
shall include any direct or indirect ownership interest in any other Person,
other than First Strategic Group, Inc., NHE Systems, Inc., Health Enhancement
International, Inc. and Newco.
4.5 SEC Reporting. Parent has filed all reports, registration
statements, proxy statements, and other materials required to be filed with the
Securities and Exchange Commission (the "Commission") pursuant to the federal
securities laws and rules and regulations thereunder (the "Federal Securities
Laws"). Parent has recently filed amended 10-QSBs for the quarters ending April
30, 1995, July 31, 1995, and October 31, 1995, and an amended 10-KSB for the
fiscal year ended January 31, 1995, in order to reflect certain restated
financial information as described therein. Subject to the foregoing, such
reports, registration statements, proxy statements, and other materials were
prepared in all material respects in accordance with
16
the requirements of the Federal Securities Laws, and none of such materials
contain any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. For so long as Parent has any class of securities registered
pursuant to the Federal Securities Laws, Parent shall timely file with the
Commission all periodic reports, proxy statements, registration statements and
other materials required to be so filed pursuant to the Federal Securities Laws.
Parent has provided ESI with copies of such filings specifically identified in
Sections 4.5 and 4.6. ESI has had the opportunity to review all of such Parent's
filings with the Commission.
4.6 Financial Statements of Parent. True and complete copies of the
following financial statements of Parent have been delivered by Parent to ESI:
Annual Financial Statements for the fiscal years ended January 31, 1996 and 1995
(Form 10KSB and Form 10KSB/A, respectively, and Annual Reports and Proxy
Statements for the same years); and Quarterly Financial Statements for fiscal
years 1996 and 1995 (Form 10QSB/A). Those financial statements (including the
notes thereto): (a) are in accordance with the books and records of Parent, (b)
are prepared in accordance with generally accepted accounting principles
consistently applied, subject to changes resulting from year end adjustments,
and (c) present fairly in all material respects the financial position of Parent
at the dates, and the results of its operations and cash flows for the periods,
indicated in those statements. As of the date of the most recent balance sheet
listed above, Parent did not have any material debts, liabilities or
obligations, whether absolute, accrued, contingent or otherwise, which are not
fully reflected in such balance sheet, nor has Parent suffered any material
adverse change in its business, assets, financial condition or prospects.
4.7 Shares and Options to be Issued. The Merger Shares, when issued and
sold in accordance with the terms of this Agreement, will be validly issued,
fully paid and nonassessable and will be free and clear of any lien, claim or
encumbrance created or suffered by Parent or Newco, excepting only restrictions
on transfer described in this Agreement, in the Investor Rights Agreement and in
the Escrow Agreement. Parent shall, at the time of Closing, have paid any
issuance, transfer or stamp tax connected with the sale of the Merger Shares and
will pay any such tax which may be assessed or levied on the conversion of the
Merger Shares. The Option Shares, when issued pursuant to the applicable ESI
Option and in accordance with the terms of this Agreement, will be validly
issued and be free and clear of any lien, claim or encumbrance created or
suffered by Parent or Newco, excepting only restrictions on transfer described
in this Agreement, in the Investor Rights Agreement and in the Escrow Agreement
4.8 No Material Adverse Change. There has been no material adverse
change in the business, properties, net worth or financial condition of Parent
since December 31, 1996.
4.9 Litigation, etc. Except as disclosed in Schedule 4.9, there is no
litigation, proceeding or investigation pending or, to the knowledge of Parent,
threatened against Parent which if successful might result in a material adverse
change in the business, properties or
17
financial condition of Parent or which questions the validity or legality of
this Agreement or of any action taken or to be taken by Parent in connection
with this Agreement.
4.10 Permits, Patents, Trademarks, and Trade Secrets. Parent has all
franchises, permits, licenses and other similar authority necessary for the
conduct of its business as now being conducted and as planned to be conducted,
and it is not in material default under any of them. Parent owns or possesses or
has applied for all patents, patent rights, trademarks, trademark rights, trade
names, trade name rights, rights to intellectual property and copyrights
necessary to conduct its business as now being conducted and as planned to be
conducted without conflict with or infringement upon any valid rights of others.
Except as disclosed on Schedule 4.10, Parent has not received any notice of
infringement upon or conflict with the asserted rights of others.
4.11 Title to Assets. Except as disclosed in Schedule 4.11 Parent has
good and marketable title to its assets, including, without limitation, those
reflected in the most recent balance sheet provided pursuant to Section 4.6
(other than those since disposed of in the ordinary course of business), free
and clear of all security interests, charges and other encumbrances, except (i)
liens for taxes not yet due and payable, and (ii) inchoate landlord's and
materialmen and like liens that are not delinquent and are incidental to the
conduct of business or the ownership of property and which were not incurred in
connection with the borrowing of money or the obtaining of credit and which do
not, in the aggregate, materially detract from the value of the assets affected
thereby and do not materially impair the use thereof by Parent.
4.12 Tax Returns and Audits. All required tax returns and extensions of
Parent have been prepared with reasonable accuracy and duly and timely filed,
and all taxes required to be paid with respect to the periods or transactions
covered by such returns have been duly and timely paid in all material respects.
Parent is not delinquent in the payment of any tax, assessment or governmental
charge, has not had any tax deficiency proposed or assessed against it, and has
not executed any waiver still in effect of any statute of limitations on the
assessment or collection of any tax. Except as indicated on Schedule 4.12, none
of the federal or state income tax returns or state franchise tax returns of
Parent has ever been audited by governmental authorities. No examination of any
tax return of Parent is currently in progress.
4.13 No Defaults; Insurance. In all material respects, Parent has
performed all obligations required to be performed by it, and is not in material
default under, any contract, commitment or instrument, and no event or condition
has occurred which, with the giving of notice or passage of time, or both, would
constitute such a default. Parent has insurance coverage in such amounts and
covering such risks as is usually carried by companies engaged in similar
businesses and is adequate for the business being conducted, and the properties
owned or leased, by Parent.
4.14 Information Provided by Parent. The information provided and to be
provided by Parent to ESI and its shareholders in connection with the Merger,
does not and will not contain
18
any untrue statement of a material fact, or omit to state any material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF NEWCO
Newco represents and warrants to ESI as follows:
5.1 Corporate Organization, Good Standing and Capitalization. Newco is
a corporation duly organized, existing and in good standing under the laws of
the State of Arizona, is qualified to do business in Georgia, has authorized
capital stock of 100 shares of common stock, no par value, all of which are
issued and outstanding, and owned on the date hereof by Parent.
5.2 Corporate Authority. Execution, delivery and performance of this
Agreement has been approved by the Board of Directors of Newco and no other
approvals, consents or filings are required except for the approval of the
Shareholders of Newco. Neither the execution and delivery of this Agreement, nor
performance hereunder, will conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, the Articles of
Incorporation or Bylaws of Newco or any agreement or instrument to which Newco
is a party or by which it is bound.
5.3 Liabilities. Newco has no liabilities.
ARTICLE VI
CONDUCT OF ESI PENDING THE EFFECTIVE TIME
ESI agrees that between the date of this Agreement and the Effective
Time:
6.1 Articles of Incorporation and Bylaws. No change will be made in
ESI's articles of incorporation or bylaws.
6.2 Capitalization, etc. ESI will not make any change in its authorized
or issued capital stock, or issue, encumber, purchase or otherwise acquire any
of its capital stock except the issuance of shares pursuant to outstanding ESI
Options or the redemption of capital stock pursuant to an outstanding agreement.
The foregoing redemption agreements are summarized in Schedule 6.2.
6.3 Shareholders' Meeting. ESI will promptly submit this Agreement to
its Shareholders for approval at a meeting called and held in accordance with
applicable law, with a favorable recommendation by its Board of Directors or
upon unanimous written consent of the
19
Shareholders. The Shareholders will have unanimously approve or consented to
this Agreement.
6.4 Conduct of Business. Until the Effective Time, ESI shall operate
its business in the ordinary course of business and shall preserve intact its
assets, corporate organization, goodwill and relationships with employees,
customers and suppliers, and shall not make or declare any distributions,
dividends, bonuses, extraordinary compensation or other payments to the
Shareholders (other than continuation of existing salary arrangements that have
been disclosed to Parent) without the prior consent of Parent.
ARTICLE VII
COVENANTS OF PARENT AND NEWCO PENDING THE EFFECTIVE TIME
Parent and Newco agree that between the date hereof and the Effective
Time:
7.1 Meeting of Newco Shareholder. Parent will vote all the outstanding
shares of common stock of Newco in favor of the Merger of ESI into Newco at a
special meeting of Newco to be duly and timely called and held on such date as
may be agreed upon by Newco and Parent.
ARTICLE VIII
COVENANTS OF PARENT AND ESI PENDING THE EFFECTIVE TIME
8.1 Announcement. The parties shall coordinate all publicity relating
to this Agreement and the Merger, and no party shall issue any press release or
other public notice relating to this Agreement or the matters contemplated
herein without the prior written consent of the other parties, provided that
Parent shall have the right to make such disclosures as it deems necessary to
comply with applicable securities laws. None of the contents of this Agreement,
or the fact of the negotiations between the parties with respect to the Merger,
shall be disclosed to any third party (other than professional advisors), except
by Parent in connection with due diligence procedures or as required by
applicable securities or corporate laws, without the prior written consent of
all parties hereto and except by ESI, to its Shareholders and the parties to the
Material Contracts, each of whom shall be under the same obligations of
confidentiality as apply to ESI under this Agreement. Parent shall provide ESI
with a copy of any publicity or filing simultaneously with or prior to its
release.
8.2 Access to Information. During the period commencing on the date
hereof and ending on the Closing Date, each party shall, upon reasonable notice,
afford to the other party and its respective counsel, accountants and other
authorized representatives, full access during normal business hours to the
properties, books and records of the other party in order that they may have the
opportunity to make such reasonable investigations as they shall desire of the
affairs of such other party, and such other party shall cause its officers and
employees to furnish such additional financial and operating data and other
information as the requesting party shall from time to time reasonably request.
20
8.3 Confidentiality. No information disclosed heretofore or hereafter
by either party to the other shall be used by such other party otherwise than as
contemplated herein, and all such information shall be kept confidential by the
other and disclosed only on a "need to know" basis to the other's officers,
directors, shareholders, employees, counsel and accountants, and shall not be
disclosed except to the extent that: it was known when received and is not
subject to a confidentiality undertaking; it is or hereafter becomes lawfully
obtainable from other sources and is not subject to a confidentiality
undertaking; it is necessary to disclose the information to regulatory
authorities or as may otherwise be required by law; or such duty as to
confidentiality is waived in writing by the party entitled to claim the benefits
of this Section 8.3.
8.4 No Further Solicitation. Unless and until this Agreement is
terminated, neither ESI nor any of its officers shall solicit or engage in any
discussions relating to the purchase by any third party of any ESI Common Stock
or the assets of ESI nor will Parent engage in any discussions relating to the
purchase of the assets or business of a competitor of ESI.
8.5 Pooling of Interests; Tax-free Reorganization. Parent, Newco and
ESI shall each use its best efforts to cause the business combination to be
effected by the Merger to be accounted for as a pooling of interests. Each of
Parent, Newco and ESI shall use its best efforts to cause its respective
employees, directors, stockholders and affiliates not to take any action that
they have reason to believe would adversely affect the ability of Parent to
account for the business combination to be effected by the Merger as a pooling
of interests. None of Parent, Newco or ESI shall take any action, including the
acceleration of vesting of any options, warrants, restricted stock or other
rights to acquire shares of the capital stock of ESI, which reasonably would be
expected to (i) interfere with Parent's ability to account for the Merger as a
pooling of interests or (ii) jeopardize the tax-free nature of the
reorganization hereunder.
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF PARENT AND NEWCO
The obligations of Parent and Newco to effect the Merger hereunder are
subject to the following conditions:
9.1 Representations and Warranties True. The representations and
warranties of ESI contained herein shall be true in all material respects at and
as of the Effective Time with the same effect as though made at and as of such
date (except for representations and warranties expressly and specifically
relating to a time or times other than the Effective Time, which shall be true
and correct in all material respects at and as of the time or times specified);
ESI shall have performed all obligations and complied with all covenants
required by this Agreement to be performed or complied with by it prior to the
Effective Time. The representations and warranties of the Shareholders in those
certain representations agreements (the "Representation Agreements") dated as of
the Closing Date shall be true in all material respects at and as of the
Effective Time.
21
9.2 Absence of Litigation. There shall be no actual or threatened
litigation to restrain or invalidate the Merger or any other transaction
contemplated in this Agreement, the defense of which would, in the judgment of
the Board of Directors of Parent, made in good faith and based upon the advice
of counsel, involve expense or lapse of time that would be materially adverse to
the interests of Parent.
9.3 Requisite Approvals. All requisite consents, authorizations, and
regulatory approvals of governmental bodies, and of private persons or entities,
necessary or advisable to consummate the transactions contemplated hereby,
including, without limitation, the consent of any other party to the transfer to
Newco of all the rights of ESI in, to and under any contract, agreement, lease
or other instrument and any property or asset, tangible or intangible, have been
received.
9.4 Opinion of ESI's Counsel. Parent shall have received a favorable
opinion, dated the Closing Date, of counsel for ESI under the laws of Georgia
and under applicable federal law, in form and substance reasonably satisfactory
to Parent and its counsel, to the effect that:
(a) ESI is a corporation duly incorporated, validly existing
and in good standing under the laws of Georgia, and has full corporate power to
own its properties and conduct its business as now being conducted;
(b) to the knowledge of such counsel, the par value and the
number of shares of authorized stock of ESI which are issued and outstanding are
as set forth in Section 3.3 of this Agreement, and all of said outstanding
shares are duly authorized, fully paid and non-assessable;
(c) all ESI Options will, upon the Effective Time, be
converted into the right to receive the Option Shares set forth in Schedule
2.1(b) to this Agreement, such that immediately following the Effective Time, no
options to purchase ESI Common Stock will be issued and outstanding, and, to
counsel's knowledge, there will be no other rights of any kind or nature
whatsoever in favor of any person or entity to purchase or acquire capital stock
of ESI;
(d) the Merger Shares are, and shall be when issued, in full
compliance with the blue sky laws of Georgia;
(e) all corporate acts required to be taken by or on the part
of ESI to approve and adopt this Agreement and to authorize the Merger have been
duly and validly taken;
(f) all Shareholder acts required to be taken by the
Shareholders to approve and adopt this Agreement and to authorize the Merger
have been duly and validly taken, and all Shareholders have voted affirmatively
to authorize the Merger or consented thereto in writing;
22
(g) this Agreement has been duly executed and delivered by
ESI, and is the legal, valid and binding obligation of ESI, except as may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the rights of creditors generally and except that
equitable remedies may not be available in connection with the enforcement
thereof;
(h) said counsel does not know, and has no reason to believe,
that any suit, proceeding or investigation is pending or threatened against ESI
or any Shareholder which might result in any material adverse change in the
financial condition or business of ESI, or which questions the validity of this
Agreement or any action taken or to be taken pursuant to or in connection with
this Agreement; and
(i) the execution and performance of this Agreement will not
result in a breach of or constitute a default under any provision of the
articles of incorporation or the bylaws of ESI which is binding on ESI or any
Shareholder, or, to the knowledge of said counsel, without any independent
verification or investigation, under any decree, order or rule of any court of
other governmental authority which is binding on ESI or any Shareholder.
9.5 Employment Agreements. ▇▇▇▇▇▇ and ▇▇▇▇▇▇ shall each have executed
and delivered to Parent and Newco, as applicable, employment agreements in the
forms attached hereto as Exhibit 9.5.
9.6 Escrow Agreement. Each Shareholder shall have executed and
delivered the Escrow Agreement in the form attached hereto as Exhibit 2.5.
9.7 Investor Rights Agreement. Each Shareholder shall have executed and
delivered to Parent the Investor Rights Agreement.
9.8 Pooling of Interests. Parent shall be reasonably satisfied that the
business combination effected by this Agreement will qualify as a pooling of
interests.
9.9 Exercise of Options. All outstanding options for the purchase of
ESI Common Stock shall have been converted pursuant to the Merger into a right
to receive Option Shares, such that Parent shall acquire 100% of all issued and
outstanding ESI Common Stock and that there shall be no other rights of any kind
or nature whatsoever in favor of any person or entity to purchase or acquire
capital stock of ESI.
23
ARTICLE X
CONDITIONS TO OBLIGATIONS OF ESI
The obligations of ESI to effect the Merger hereunder are subject to
the conditions that:
10.1 Representations and Warranties True. The representations and
warranties of Parent and Newco contained herein shall be true in all material
respects at and as of the Effective Time with the same effect as though made at
and as of such date (except for representations and warranties expressly and
specifically relating to a time or times other than the Closing, which shall be
true and correct in all material respects at and as of the time or times
specified) Parent and Newco shall have performed all obligations and complied
with all covenants required by this Agreement to be performed or complied with
by them prior to the Effective Time.
10.2 Absence of Litigation. There shall be no actual or threatened
litigation to restrain or invalidate the Merger or any other transaction
contemplated in this Agreement, the defense of which would, in the judgment of
the Board of Directors of ESI, made in good faith and based upon the advice of
counsel, involve expense or lapse of time that would be materially adverse to
the interests of ESI or its Shareholders.
10.3 Opinion of the Parent's Counsel. ESI shall have received a
favorable opinion, dated the Effective Time, of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, P.A., counsel to
Parent, under the laws of Arizona and under applicable federal law, in form and
substance satisfactory to ESI and its counsel, to the effect that:
(a) Parent is a corporation duly organized and legally
existing in good standing under the laws of the State of Delaware;
(b) Newco is a corporation duly organized and legally existing
in good standing under the laws of the State of Arizona and is qualified to
conduct business in Georgia;
(c) all corporate acts required to be taken by or on the part
of Parent and Newco to approve and adopt this Agreement and to authorize the
Merger have been duly and validly taken, including the approval of the Merger by
the sole shareholder of Newco;
(d) this Agreement, the Escrow Agreement and the Employment
Agreements have been duly executed and delivered by Parent and/or by Newco and
are the legal, valid and binding agreement of Parent and/or Newco, respectively,
enforceable in accordance with their terms, except as the same may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the rights of creditors generally and except that equitable
remedies may not be available in connection with the enforcement thereof;
(e) the par value and number of shares of authorized stock of
Parent which are issued and outstanding are as set forth in Section 4.1 of this
Agreement;
24
(f) the Merger Shares and Option Shares that are to be issued
and delivered to the stockholders of ESI upon the consummation of the Merger and
upon exercise of the ESI Options after the Effective Time and payment therefore,
are validly authorized and, when so issued, will be validly issued, fully paid,
and nonassessable;
(g) said counsel does not know, and has no reason to believe,
that any suit, proceeding or investigation is pending or threatened against
Parent or Newco which might result in any material adverse change in the
financial condition or business of Parent or Newco, or which questions the
validity of this Agreement or any action taken or to be taken pursuant to or in
connection with this Agreement; and
(h) neither the execution and delivery of this Agreement, nor
any performance hereunder, will conflict with, or result in a breach of the
terms, conditions or provisions of, or constitute a default under, Parent's
certificate of incorporation or bylaws, Newco's articles of incorporation or
bylaws, or any agreement, instrument, judgment, decree, regulation or other
restriction, of which such counsel has knowledge and to which Parent or Newco is
a party or by which either or their properties are bound.
10.4 Employment Agreements. Parent shall each have executed and
delivered to ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇ ▇▇▇▇▇▇, employment agreements in the forms
attached hereto as Exhibit 9.5.
10.5 Escrow Agreement. Parent and Newco shall have executed and
delivered the Escrow Agreement in the form attached hereto as Exhibit 2.5.
10.6 Requisite Approval. All requisite consents, authorizations, and
regulatory approvals of governmental bodies, and of private persons or entities,
necessary or advisable to consummate the transactions contemplated hereby,
including, without limitation, the consent of any other party to the Merger
under any contract, agreement, lease or other instrument and any property or
asset, tangible or intangible, of Newco or Parent.
ARTICLE XI
TERMINATION
11.1 Circumstances of Termination. This Agreement may be terminated
(notwithstanding approval by the shareholders of any party hereto):
(a) By the mutual consent in writing of the Boards of
Directors of ESI and Parent.
(b) By the Board of Directors of ESI if any condition provided
in Article X hereof has not been satisfied or waived on or before March 15,
1997.
25
(c) By the Board of Directors of Parent if any condition
provided in Article IX hereof has not been satisfied or waived on or before
March 15, 1997.
(d) By the Board of Directors of either ESI or Parent if the
Effective Time has not occurred by March 30, 1997.
11.2 Effect of Termination. In the event of a termination of this
Agreement pursuant to Section 11.1 hereof, each party shall pay the costs and
expenses incurred by it in connection with this Agreement, and no party (or any
of its officers, directors and shareholders) shall be liable to any other party
for any costs, expenses, damage or loss of anticipated profits hereunder.
ARTICLE XII
MERGER PRICE ADJUSTMENT
12.1 Scope of Adjustment. The parties agree that the Merger
Consideration payable to the Shareholders and Option Holders in respect of the
Merger has been determined based upon the assumption that the representations
and warranties set forth in Article III of this Agreement are true and complete.
To the extent that such representations and warranties are not true and
complete, the parties intend that the Merger Consideration payable to the
Shareholders and the Option Shares to be issued to the Option Holders be reduced
as provided herein. Accordingly, subject to the conditions set out in Section
12.2 of this Agreement, the parties agree that the Initial Exchange Ratio (as
hereinafter defined) and the Merger Consideration be subject to an adjustment,
to the extent of all reasonable out-of-pocket and direct losses actually
incurred ("Losses") arising out of the material breach of any representation or
warranty set forth in Article III of this Agreement ("Claims"). The adjustment
shall be made as provided in this Article XII.
12.2 Conditions to Adjustment. The amount of Escrow Property (as
defined in the Escrow Agreement) deliverable to Shareholders and Option Holders
under the Escrow shall be reduced in respect of all Losses (subject to Section
12.6(g)) only if Newco or Parent shall have given notice of the Claim in writing
("Claim Notice") to the Escrow Holder, the Shareholders and the Option Holders
promptly after learning of the Claim on which the Loss is based. Each Claim
Notice shall include a brief description of the nature of the Claim, the
identity of the party by whom it is being asserted, and an estimate of the
amount of loss (the "Estimated Loss") which may be sustained by Newco or Parent
by reason of such breach. Newco and Parent shall from time to time prior to the
final determination of any Claim and the amount of the Loss amend each such
Claim Notice to reflect any change in its estimate of the Estimated Loss as
thereto referred to in that Claim Notice. Newco or Parent shall deliver to the
Shareholders and the Option Holders copies of all pleadings and amended
pleadings filed in connection with any such Claim and will provide the
Shareholder, the Option Holders and their counsel with such further information
concerning the proceedings relating to such Claim and related Loss as the
Shareholders, the Option Holders or such counsel may reasonably request. Newco
and Parent will use all reasonable efforts to minimize the amount of any Loss.
If different from Newco's
26
regular counsel, counsel retained by Newco in the defense of any Claim shall be
subject to the reasonable approval of the Shareholders' Representative appointed
by the Shareholders. All Claim Notices must be given to the Shareholders and
Option Holders on or prior to the first anniversary of the Effective Time. No
adjustment shall be made with respect to any Claim Notice given thereafter.
"Shareholders' Representative" shall mean ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, unless a successor is
appointed by a majority in interest of the Shareholders and notice is given to
all parties to this Agreement.
12.3 Federal Income Tax Claims. If a Loss is based on federal income
taxes arising from an adjustment for any taxable year of ESI ending on or before
the Effective Time that will result in a federal income tax benefit in one or
subsequent taxable years of ESI or Parent or its successor (on a consolidated
basis), the amount of the Loss arising from such Claim shall be (1) reduced by
the amount of such tax benefits (computed on the basis of an assumed tax rate of
the maximum federal corporate tax rate than applicable) and (2) increased by an
amount equal to the present value (at the time of payment of such Claim)
calculated using an assumed interest rate of 8% of the interest that would
accrue (at the rate of 8 percent per annum, compounded annually) on the amount
of the reduction under (1) above, between the time of payment of such Claim and
the time when the related tax benefit will be realized; provided, however, that
the propriety and amount of any such adjustment in the amount of such Loss shall
be determined by Parent's regularly engaged independent certified public
accountants, whose determination shall be binding and final and whose fees for
making such determination shall be paid by Newco. Similar adjustment shall be
made with respect to state and local income taxes.
12.4 Third Party Actions. In the event that Newco or Parent timely
gives notice of a Claim regarding any third party action or claim, Newco and
Parent shall have a right to compromise or defend any such matter involving such
asserted liability, through counsel of its own choosing who shall be subject to
the approval of the Shareholders' Representative, which approval will not be
unreasonably withheld. The Shareholders' Representative shall have access to all
relevant information and at the expense of the Shareholders be entitled to
participate in the defense thereof. In the event of any proposed settlement,
Newco or Parent shall give the Shareholders' Representative at least fifteen
(15) days prior written notice thereof. The Shareholders' Representative shall
have the right to assume the defense of the Claim at any time upon reasonable
notice, and all amounts payable upon the final resolution of the Claim, and all
expenses in connection with such defense, shall be the sole expense of the
Shareholders. Should the Shareholders' Representative elect not to approve any
proposed settlement, the Shareholders shall defend any such Claim and pay all
amounts payable upon the final resolution of the Claims, and all expenses in
connection with such defense. Any settlement so approved shall be binding on the
Shareholders and the Option Holders.
12.5 Final Claim and Loss. The Shareholders' Representative shall,
within thirty (30) days after receipt of each Claim ("Claim Date") give notice
to Parent either that the Shareholders and Option Holders accept the Claim
and/or the amount of the stated Loss (if the Loss is stated in the Claim to be
the final Loss and not subject to adjustment) or objects to the Claim or the
27
amount of the Loss. If no written notice is given within said thirty (30) day
period, it shall be conclusively presumed that the Claim and/or Loss, as the
case may be, has been accepted. If the Shareholders' Representative timely
objects to the Claim and/or Loss, as the case may be, the matter shall be
resolved as set forth in Section 14.5.
12.6 Adjustment.
(a) In the event of any Loss for which a price adjustment is
applicable under this Article XII, the Exchange Ratio (as hereinafter defined)
shall be adjusted and the number of Merger Shares shall be reduced and the
number of shares to be issued upon the exercise of each ESI Option is to be
reduced as herein set forth. For each share of ESI Common Stock owned or subject
to an ESI Option immediately prior to the Merger, pursuant to the terms of this
Agreement each Shareholder (or Option Holder, upon proper exercise of options to
purchase Option Shares) is entitled to receive .095369233 ("Initial Exchange
Ratio") of a share of Parent Common Stock (equivalent of 10.48556194 shares of
ESI Common Stock for 1 share of Parent Common Stock).
(b) The Initial Exchange Ratio shall be adjusted to reflect
all Losses, if any, for which Newco or Parent is entitled to an adjustment in
the Merger Consideration as provided in this Article XII. Upon the final
resolution of all Claims and the final determination of all Losses, the Adjusted
Exchange Ratio shall be determined as follows;
525,000 less (Aggregate Losses / Per Share Value of Parent Common Stock)
------------------------------------------------------------------------
5,504,920 = Adjusted
Exchange Ratio
(c) The definitive number of shares of Parent Common Stock
each Shareholder and Option Holder is entitled to receive pursuant to the Merger
shall be calculated using the Adjusted Exchange Ratio times the number of shares
of ESI Common Stock owned of record at the Effective Time or being acquired
pursuant to the exercise of an ESI Option. No further adjustments will be made
with respect to the number of Parent Common Stock each Shareholder or Option
Holder is or will be entitled to receive. Each Shareholder shall receive such
number of Escrowed Merger Shares from the Escrow equal to the difference between
(i) the product of the Adjusted Exchange Ratio times the number of shares of ESI
Common Stock owned immediately prior to the Effective Time less (ii) the number
of shares of Parent Common Stock delivered to the Shareholder pursuant to
Sections 2.1 and 2.5. All Escrow Merger Shares in excess of those that are to be
delivered to the Shareholders shall be returned to Parent for cancellation.
(d) The Adjusted Exchange Ratio shall be determined promptly
after all Claims and the amounts of all Losses have been agreed upon by the
Parent and Shareholders' Representative or resolved as herein provided.
Notwithstanding the foregoing, the determination shall be made, if earlier, upon
the occurrence of an event as set forth in Section 2.5.
28
(e) The value of the Parent Common Stock shall be the average
of the highest and lowest sale prices at which a share of Parent Common Stock
was traded over the counter on Nasdaq or on the Nasdaq National Market System,
if applicable, during the five (5) trading days immediately prior to the
Effective Time.
(f) Such number of shares of Parent Common Stock and the
Initial and Adjusted Exchange Ratios shall be appropriately adjusted to reflect
each stock split, stock dividend, or other reclassification or recapitalization
of Parent and its successor.
(g) In determining the aggregate Losses for determining
whether and the extent of any adjustment to be made to the Merger Consideration,
only the portion of the Losses aggregating over $25,000 shall be considered.
(h) Option Holders, upon the exercise of an ESI Option after
the Effective Time, in whole or part, shall be entitled to receive, in lieu of
such number of shares of ESI Common Stock for which the ESI Option is exercised,
such number of shares of Parent Common Stock equal to the product of (i) the
number of ESI Common Stock for which the ESI Option is exercised times (ii) the
Initial Exchange Ratio, subject to adjustment as herein provided. If the ESI
Option is exercised prior to the determination of the Adjusted Exchange Ratio,
10% of the shares of Parent Common Stock to be delivered to the Option Holder
shall be held in Escrow pending the determination of the Adjusted Exchange
Ratio. Upon such determination the difference between the number of Parent
Common Stock that an Option Holder would have received using the Initial
Exchange Ratio and the Adjusted Exchange Ratio, shall be delivered to the Parent
and the balance of the Parent Common Stock held in Escrow shall be delivered to
such former Option Holder.
ARTICLE XIII
LIMITATION OF LIABILITY
13.1 Limitation of Liability. Parent and Newco hereby agree that the
adjustment to the Merger Consideration for breaches of Article III shall be
limited to an adjustment to the Initial Conversion Ratio to an Adjusted
Conversion Ratio which is not greater than 10% less than the Initial Conversion
Ratio, and no other property of the Shareholders or Option Holders shall be
liable therefor, provided that such limitation shall not apply to claims against
a Shareholder based upon the intentional fraud of such Shareholder.
ARTICLE XIV
GENERAL PROVISIONS
14.1 Further Assurances. From time to time as and when requested by
Newco or its successors or assigns, the officers and directors of ESI last in
office shall execute and deliver such deeds and other instruments and shall take
or cause to be taken such other actions as shall
29
be necessary to vest or perfect in or to confirm of record or otherwise Newco's
title to, and possession of, all the property, interests, assets, rights,
privileges, immunities, powers, franchises and authority of ESI, and otherwise
to carry out the purposes of this Agreement.
14.2 Survival of Representations and Warranties. All representations
and warranties contained in this Agreement (and in any certificate or other
instrument delivered by or on behalf of any party pursuant hereto), are true in
all material respects on and as of the date so made, and will survive the
Effective Time regardless of any investigation made by or on behalf of any
party.
14.3 Notices. Any notice to any party under this Agreement shall be in
writing, shall be effective on the earlier of (i) the date when received by such
party (including fax receipt), or (ii) the date which is three days after
mailing (postage prepaid) by certified or registered mail, return receipt
requested, to the address of such party set forth herein, or to such other
address as shall have previously been specified in writing by such party to all
parties hereto:
To Parent and Newco: National Health Enhancement Systems, Inc.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: Chief Financial Officer
With a copy to: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, P.A.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
To ESI (prior to the Expert Systems, Inc.
Effective Time): ▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, President
With a copy to: Glass, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇, LLP
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇.
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇ ▇. ▇▇▇▇▇▇▇▇
30
To the Shareholders (After: At the addresses set forth in the
the Effective Time) Representation Agreement of even date
With a copy to: Glass, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇, LLP
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇.
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax: 404/▇▇▇-▇▇▇▇
Attention: ▇▇▇ ▇. ▇▇▇▇▇▇▇▇
14.4 Severability. If any provision of this Agreement is declared void
or unenforceable, such provision shall be deemed severed from this Agreement,
which shall otherwise remain in full force and effect.
14.5 Dispute Resolution. The parties hereto deem it to be in their
respective best interests to settle any dispute as expeditiously and
economically as possible. Therefore, the parties expressly agree to submit any
dispute between them arising out of or relating to this Agreement, the Investor
Rights Agreement and the Escrow Agreement ("Dispute") to mediation and, if
necessary, arbitration, as set forth below, including the amount of any
adjustment to the Initial Exchange Ratio. The parties hereto thus expressly
waive any rights they may have to trial by jury with respect to such dispute.
The dispute resolution proceedings shall be conducted in Dallas, Texas, in the
English language. The parties agree to use the following procedure in good faith
to resolve any Dispute:
(a) A meeting shall be held among the parties within ten (10)
days after any party gives written notice of the Dispute to each other party
(the "Dispute Notice") attended by a representative of each party having
decision-making authority regarding the Dispute, to attempt in good faith to
negotiate a resolution of the Dispute.
(b) If, within thirty (30) days after the Dispute Notice, the
parties have not succeeded in negotiating a written resolution of the Dispute,
upon written request by any party to each other party all parties will promptly
negotiate in good faith to jointly appoint a mutually acceptable neutral person
not affiliated with any of the parties (the "Neutral"). If all parties so agree
in writing, a panel of two or more individuals (such panel also being referred
to as the Neutral") may be selected by the parties. The parties shall seek
assistance in such regard from the American Arbitration Association (the "AAA")
or the Center for Public Resources if they have been unable to agree upon such
appointment within forty (40) days after the Dispute Notice. The fees and costs
of the Neutral and of any such assistance shall be shared equally amount the
parties.
(c) In consultation with the Neutral, the parties will
negotiate in good faith to select or devise a nonbinding alternative dispute
resolution procedure ("Mediation") by which
31
they will attempt to resolve the Dispute, and a time and place for the Mediation
to be held, with the Neutral (at the written request of any party to each other
party) making the decision as to the procedure if the parties have been unable
to agree on any of such matters in writing within ten (10) days after selection
of the Neutral.
(d) The parties agree to participate in good faith in the
Mediation to its conclusion; provided, however, that no party shall be obligated
to continue to participate in the Mediation if the parties have not resolved the
Dispute in writing within one hundred twenty (120) days after the Dispute Notice
and any party shall have terminated the Mediation by delivery of written notice
of termination to each other party following expiration of said 120-day period.
Following any such termination notice after selection of the Neutral, and if any
party so requests in writing to the Neutral (with a copy to each other party),
then the Neutral shall make a recommended resolution of the Dispute in writing
to each party, which recommendation shall not be binding upon the parties;
provided, however, that the parties shall give good faith consideration to the
settlement of the Dispute on the basis of such recommendation, and if the
parties are unable to resolve the Dispute on the basis of such recommendation,
then at the election of either party the Dispute shall be submitted to binding
arbitration as provided below. In the event of binding arbitration, the party
seeking further resolution shall pay the reasonable attorneys' fees, costs and
other expenses (including expert witness fees) of the other party incurred in
connection with the pursuit of (and defense against) such arbitration, if the
result thereof is less favorable to the party pursuing the arbitration than the
recommendation of the Neutral.
(e) Notwithstanding anything herein to the contrary, nothing
in this Section shall preclude any party from seeking interim or provisional
relief, in the form of a temporary restraining order, preliminary injunction or
other interim equitable relief concerning the Dispute, either prior to or during
the Mediation if necessary to protect the interests of such party, or to obtain
specific performance of obligations under this Agreement, the Escrow Agreement
or the Investor Rights Agreement. Further, this Section shall be specifically
enforceable.
(f) Subject to the foregoing, a party may seek arbitration of
an unresolved Dispute in Dallas, Texas, in accordance with the Rules of the AAA
governing commercial transactions. The arbitration tribunal shall consist of
three (3) arbitrators if the Dispute is for more than $250,000 and one (1)
neutral arbitrator if it is for $250,000 or less. If three arbitrators are to be
appointed, the party initiating arbitration shall nominate one arbitrator (who
shall be knowledgeable in the industry but not be affiliated with such party) in
the request for arbitration and the other party shall nominate a second
arbitrator (who shall be knowledgeable in the industry but not be affiliated
with such party) in the answer thereto. The two arbitrators so named will then
jointly appoint the third arbitrator (who shall be knowledgeable in the industry
but shall not be affiliated with either party) as chairman of the arbitration
tribunal. If either party fails to nominate its arbitrator, or if the
arbitrators named by the parties fail to agree on the person to be named as
chairman (or to mutually select a single arbitrator is the amount is for
$250,000 or less) within sixty (60) days, the office of the AAA in Dallas, Texas
shall make the
32
necessary appointments of an arbitrator or the chairman of the arbitration
tribunal. The award of the arbitration tribunal shall be final and judgment upon
such an award may be entered in any competent court or application may be made
to any competent court for judicial acceptance of such an award and an order of
enforcement.
(g) At the reasonable request of either party, the mediator or
arbitration tribunal shall adopt rules and procedures designed to expedite the
dispute resolution process.
14.6 Reliance on Advisors. Each party hereto has independently reviewed
the terms and conditions of this Agreement with its own advisors, and
acknowledges that it is not relying upon any other party hereto with respect to
the interpretation of this Agreement and the legal and regulatory (including tax
and securities laws) treatment of the transactions contemplated by this
Agreement.
14.7 Definition. The term "ESI Management" shall mean ▇▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇▇▇ and Art Bottoms.
14.8 Registration Statement on Form S-8. Promptly after the first
anniversary of the Effective Time, Parent shall file a registration statement on
Form S-8 covering shares of Parent Common Stock to be issued to the Option
Holders.
14.9 Counterparts. This Agreement may be executed in any number of
counterparts, all such counterparts shall be deemed to constitute one and the
same instrument, and each of said counterparts shall be deemed an original
hereof.
14.10 Waiver. Failure of any party to exercise any right or option
arising out of a breach of this Agreement shall not be deemed a waiver of any
right or option with respect to any subsequent or different breach, or the
continuance of any existing breach.
14.11 Integration Clause; No Oral Modification. This Agreement
represents the entire agreement of the parties with respect to the subject
matter hereof, and all agreements entered into prior hereto are revoked and
superseded by this Agreement, and no representations, warranties, inducements or
oral agreements have been made by any of the parties except as expressly set
forth herein, or in other contemporaneous written agreements executed by the
parties. This Agreement may not be changed, modified or rescinded except in
writing, signed by all parties hereto, and any attempt at oral modification of
this Agreement shall be void and of no effect.
14.12 Captions. Captions and paragraph headings used herein are for
convenience only and are not a part of this Agreement and shall not be deemed to
limit or alter any provisions hereof and shall not be deemed relevant in
construing this Agreement.
14.13 Governing Law. This Agreement shall be deemed to be made under,
and shall be construed in accordance with and shall be governed by, the laws of
the State of Arizona.
33
14.14 Interpretations. To the extent permitted by the context in which
used, (i) words in the singular number shall include the plural, words in the
masculine gender shall include the feminine and neuter, and vice versa, and (ii)
references to "persons" or "parties" in this Agreement shall be deemed to refer
to natural persons, corporations, general partnerships, limited partnerships,
trusts and all other entities.
14.15 Specific Performance. In addition to such other remedies as may
be available under applicable law, the parties acknowledge that the remedies of
specific performance and/or injunctive relief shall be available and proper in
the event any party fails or refuses to perform its duties hereunder.
14.16 Schedules; Exhibits. Any Schedules or Exhibits attached hereto
shall be deemed to have been incorporated herein by this reference, with the
same force and effect as if fully set forth in the body hereof.
14.17 Transaction Expenses. ESI shall bear the Shareholders' and ESI's
legal, accounting and other expenses in connection with the transactions
contemplated hereby, and Parent shall bear its and Newco's legal, accounting and
other expenses in connection with the transactions contemplated hereby. ESI
represents that there are no amounts payable by ESI to any other advisor or any
broker or finder in connection with such transactions. Parent represents that
there are no other amounts payable by Parent or Newco to any advisor, broker or
finder in connection with such transactions (other than those of ▇▇▇▇ ▇▇▇▇▇▇ and
Associates) and that all such fees shall be paid by Parent.
14.18 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, and their respective successors in
interest and assigns, but in no event shall any party be relieved of its
obligations hereunder without the express written consent of each other party.
[SIGNATURES ON FOLLOWING PAGE]
34
IN WITNESS WHEREOF, this Agreement has been executed by the parties as
of the date first set forth above.
NATIONAL HEALTH ENHANCEMENT SYSTEMS, INC.
By_______________________________________
Name:
Its:
ESI ACQUISITION CORPORATION
By_______________________________________
Name:
Its:
EXPERT SYSTEMS, INC.
By_______________________________________
Name:
Its:
35