EXHIBIT 10.27
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
PACKETEER, INC.
P ACQUISITION CORPORATION,
MENTAT INC.
AND
CERTAIN SHAREHOLDERS OF MENTAT INC.
December 21, 2004
TABLE OF CONTENTS
PAGE
1. Definitions................................................................. 1
2. The Merger.................................................................. 8
2.1 The Merger............................................................ 8
2.2 Closing; Effective Time............................................... 9
2.3 Effect of the Merger.................................................. 9
2.4 Articles of Incorporation; Bylaws..................................... 9
2.5 Directors and Officers................................................ 9
2.6 Effect on Capital Stock............................................... 9
2.7 Surrender of Certificates............................................. 12
2.8 No Further Ownership Rights in Target Common Stock.................... 13
2.9 Lost, Stolen or Destroyed Certificates................................ 14
2.10 Taking of Necessary Action; Further Action............................ 14
3. Representations and Warranties of Target.................................... 14
3.1 Authority............................................................. 14
3.2 Corporate Existence of Target......................................... 15
3.3 Capital Stock......................................................... 15
3.4 No Conflicts.......................................................... 15
3.5 Governmental Approvals and Filings.................................... 16
3.6 Financial Statements and Condition; Absence of Changes................ 16
3.7 Taxes................................................................. 18
3.8 Legal Proceedings..................................................... 19
3.9 Compliance With Laws and Orders....................................... 19
3.10 Restrictions on Business Activities................................... 19
3.11 Employees............................................................. 19
3.12 Target Employee Benefit Plans......................................... 20
3.13 Real Property......................................................... 23
3.14 Adequacy of Assets.................................................... 24
3.15 Tangible Personal Property............................................ 24
3.16 Intellectual Property Rights.......................................... 24
3.17 Privacy Policies...................................................... 27
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TABLE OF CONTENTS
(continued)
PAGE
3.18 Contracts............................................................. 27
3.19 Permits and/or Approvals.............................................. 28
3.20 Affiliate Transactions................................................ 28
3.21 Minute Books.......................................................... 29
3.22 Complete Copies of Materials.......................................... 29
3.23 Environmental Matters................................................. 29
3.24 Accounts Receivable; Inventory........................................ 29
3.25 Customers and Suppliers............................................... 30
3.26 Insurance............................................................. 30
3.27 Disclosure............................................................ 30
3.28 Product Liability Claims.............................................. 30
3.29 Brokers; Finders...................................................... 30
3.30 Questionable Payments................................................. 31
3.31 Compliance with United States Customs Regulations..................... 31
4. Representations and Warranties of Acquiror and Merger Sub................... 31
4.1 Corporate Existence of Acquiror....................................... 31
4.2 Authority............................................................. 31
4.3 No Conflicts.......................................................... 32
4.4 Governmental Approvals and Filings.................................... 32
4.5 Interim Operations of Merger Sub...................................... 32
4.6 Legal Proceedings..................................................... 32
4.7 SEC Filings........................................................... 32
4.8 Compliance With Laws.................................................. 33
4.9 Disclosure............................................................ 33
5. Target Covenants; Conduct Prior to the Effective Time....................... 33
5.1 Regulatory and Other Approvals........................................ 33
5.2 Investigation by Acquiror............................................. 34
5.3 Conduct of Business................................................... 34
5.4 Certain Restrictions.................................................. 34
5.5 Litigation............................................................ 35
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TABLE OF CONTENTS
(continued)
PAGE
5.6 Insurance............................................................. 36
5.7 Exclusivity........................................................... 36
5.8 Termination of 401(k) Plan............................................ 36
5.9 Approval of Shareholders.............................................. 36
5.10 Restricted Shares..................................................... 36
5.11 Fulfillment of Conditions............................................. 36
6. Acquiror Covenants.......................................................... 37
6.1 Regulatory and Other Approvals........................................ 37
6.2 Fulfillment of Conditions............................................. 37
6.3 Sale of Purchaser Stock............................................... 37
7. Conditions to the Merger.................................................... 38
7.1 Obligations of the Parties............................................ 38
7.2 Obligations of Acquiror and Merger Sub................................ 39
7.3 Obligations of Target................................................. 41
8. Termination, Amendment and Waiver........................................... 41
8.1 Termination........................................................... 41
8.2 Effect of Termination................................................. 42
9. Escrow and Indemnification.................................................. 42
9.1 Survival of Representations and Warranties; Indemnification Period.... 42
9.2 Indemnification by Target............................................. 43
9.3 Limitation of Target' Liability....................................... 43
9.4 Escrow Period......................................................... 43
9.5 Defense of Third Party Claims......................................... 44
9.6 Shareholders' Agent................................................... 44
10. Tax Matters................................................................. 46
10.1 Section 338 Election.................................................. 46
10.2 Returns; Indemnification; Liability for Taxes......................... 46
10.3 Refunds and Credits................................................... 47
10.4 Conduct of Audits and Other Procedural Matters........................ 48
10.5 Assistance and Cooperation............................................ 48
iii
TABLE OF CONTENTS
(continued)
PAGE
10.6 FIRPTA Certificate.................................................... 49
11. General Provisions.......................................................... 49
11.1 Notices............................................................... 49
11.2 Entire Agreement...................................................... 50
11.3 Expenses.............................................................. 50
11.4 Public Announcements.................................................. 50
11.5 Confidentiality....................................................... 51
11.6 Further Assurances; Post-Closing Cooperation.......................... 51
11.7 Waiver................................................................ 52
11.8 Amendment............................................................. 52
11.9 No Third Party Beneficiary............................................ 52
11.10 No Assignment; Binding Effect......................................... 52
11.11 Invalid Provisions.................................................... 52
11.12 Governing Law......................................................... 52
11.13 Counterparts.......................................................... 53
11.14 Construction.......................................................... 53
iv
LIST OF EXHIBITS
Exhibit A Agreement of Merger
Exhibit B Escrow Agreement
Exhibit C Opinion of Target Counsel
Exhibit D Opinion of Acquiror Counsel
v
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of December 21, 2004 by and among Packeteer, Inc., a Delaware
corporation ("Acquiror"), P Acquisition Corporation, a California corporation
("Merger Sub") and wholly owned subsidiary of Acquiror, Mentat Inc., a
California corporation ("Target"), and, with respect to Sections 2.7(f), 9, 10
and 11 only, the shareholders of Target identified on the signature page hereto
(the "Principal Shareholders").
RECITALS
A The Boards of Directors of Target, Acquiror and Merger Sub believe
it is in the best interests of their respective companies and the shareholders
of their respective companies that Target and Merger Sub combine into a single
company through the statutory merger of Merger Sub with and into Target (the
"Merger") and, in furtherance thereof, have approved the Merger.
B Pursuant to the Merger, among other things, the outstanding shares
of Target Common Stock, shall be converted into the right to receive the Merger
Consideration, upon the terms and subject to the conditions set forth herein.
C Target, Acquiror and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
1. Definitions.
(a) Defined Terms. As used in this Agreement, the following
terms shall have the following meanings:
"Acquiror" has the meaning assigned in the first paragraph of this
Agreement.
"Acquiror Common Stock" means shares of Acquiror's Common Stock, par value
$0.001 per share.
"Acquiror Indemnified Parties" has the meaning assigned in Section 9.2.
"Acquiror Losses" has the meaning assigned in Section 9.2
"Acquiror SEC Filings" has the meaning assigned in Section 4.7
"Acquiror's Knowledge" means that Acquiror shall be deemed to have
knowledge of a particular fact or other matter if an executive officer of
Acquiror or an employee of Acquiror actively involved in the transactions
contemplated by this Agreement has or at any time had knowledge of such fact or
matter.
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"Acquisition Allocation Schedule" has the meaning assigned in Section
10.1(b).
"Actions" or "Proceedings" means any action, suit, proceeding, arbitration
or Governmental or Regulatory Authority investigation.
"Affiliate" means any person that directly, or indirectly through one or
more intermediaries, controls or is controlled by or is under common control
with the person specified.
"Agreement of Merger" has the meaning assigned in Section 2.1.
"Ancillary Agreements" means the Agreement of Merger, the Shareholder
Agreements, the Escrow Agreement and the Offer Letters.
"Average Closing Price" the average of the last reported sales prices of
Acquiror Common Stock for the 10 trading days immediately preceding the
Effective Time.
"Balance Sheet" has the meaning assigned in Section 3.6(a).
"Business Day" means a day that is not a Saturday, a Sunday or a statutory
or civic holiday in the State of California.
"CA Corp. Tax" has the meaning assigned in Section 10.2(b).
"California Law" has the meaning assigned in Section 2.1.
"CERCLA" means the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., as
amended.
"Certificates" has the meaning assigned in Section 2.7(a).
"Closing" has the meaning assigned in Section 2.2.
Closing Balance Sheet" means the balance sheet of the Target, prepared in
accordance with GAAP, dated as of the Closing Date.
"Closing Date" has the meaning set forth in Section 2.2.
"COBRA" means the Consolidated Omnibus Reconciliation Act of 1985, as
amended, and the rules and regulations promulgated thereunder.
"Code" means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder.
"Commercially Available Intellectual Property" means software, tools or
other Intellectual Property that is made generally commercially available
pursuant to shrinkwrap or other nonexclusive licenses and has an individual
acquisition cost of ten thousand dollars ($10,000.00) or less; provided that
Commercially Available Intellectual Property shall not include any of the
foregoing that are incorporated into Target's products.
2
"Common Stock" has the meaning assigned in Section 3.3.
"Contingent Cash Consideration" means up to $1,750,000 payable by Acquiror
to the shareholders of Target in accordance with Section 2.7(g).
"Contingent Cash Payment" that amount of cash paid by Sun Microsystems,
Inc. ("Sun") to Acquiror or Surviving Corporation with respect to Target
accounts receivable outstanding as of the Closing.
"Contract" means any written or oral contract, agreement or understanding
between two or more parties.
"Disclosure Schedule" has the meaning assigned in the forepart of
Section 3.
"Dissenting Shares" has the meaning set forth in Section 2.6(f).
"Dissenting Shareholder" has the meaning set forth in Section 2.6(f).
"Effective Time" has the meaning set forth in Section 2.2.
"Election" has the meaning assigned in Section 10.1(a).
"Encumbrances" means any mortgage, pledge, assessment, security interest,
lease, lien, adverse claim, levy, charge, option, right of first refusal,
restriction of any kind, or any conditional sale contract, title retention
contract or other Contract to give any of the foregoing.
"Environmental Encumbrance" means any lien, claim, charge, security
interest, mortgage, pledge, easement, conditional sale or other title retention
agreement, defect in title, covenant or other restrictions of any kind in favor
of any Governmental or Regulatory Authority for: (i) any liability under any
Environmental Law; or (ii) damages arising from, or costs incurred by such
Governmental or Regulatory Authority in response to, a release or threatened
release of a Hazardous Material into the environment.
"Environmental Laws" means any applicable foreign, federal, state or local
governmental laws (including common laws), statutes, ordinances, codes,
regulations, rules, policies, permits, licenses, certificates, approvals,
judgments, decrees, orders, directives, or requirements that pertain to the
protection of the environment, protection of public health and safety, or
protection of worker health and safety, or that pertain to the handling, use,
manufacturing, processing, storage, treatment, transportation, discharge,
release, emission, disposal, re-use, recycling, or other contact or involvement
with Hazardous Materials, including, without limitation, CERCLA and RCRA.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" has the meaning assigned in Section 3.12(a).
"Escrow Agent" means U.S. Bank, National Association.
3
"Escrow Agreement" means the Escrow Agreement substantially in the form of
Exhibit B hereto among Acquiror, Shareholders' Agent and the Escrow Agent.
"Escrow Amount" means an amount equal to Two Million Dollars ($2,000,000).
"Escrow Funds" means the aggregate of the Escrow Amount, plus interest
accumulated thereon, as adjusted for any deliveries of such monies made pursuant
to the terms of the Escrow Agreement.
"Escrow Period" has the meaning assigned in Section 9.4.
"Escrow Termination Date" has the meaning assigned in Section 9.1.
"Financial Statement Date" means October 31, 2004.
"GAAP" means United States generally accepted accounting principles,
consistently applied throughout the specified period and in the immediately
prior comparable period.
"Governmental or Regulatory Authority" means any court, tribunal,
arbitrator, authority, agency, commission, official or other instrumentality of
the United States, any foreign country or any domestic or foreign state, county,
city or other political subdivision.
"Hazardous Material" means any material, chemical, compound, substance,
mixture or by-product that is identified, defined, designated, listed,
restricted or otherwise regulated under Environmental Laws as a "hazardous
constituent," "hazardous substance," "hazardous material," "acutely hazardous
material," "extremely hazardous material," "hazardous waste," "hazardous waste
constituent," "acutely hazardous waste," "extremely hazardous waste,"
"infectious waste," "medical waste," "biomedical waste," "pollutant," "toxic
pollutant," "contaminant" or any other formulation or terminology intended to
classify or identify substances, constituents, materials or wastes by reason of
properties that are deleterious to the environment, natural resources, worker
health and safety, or public health and safety, including without limitation
ignitability, corrosivity, reactivity, carcinogenicity, toxicity and
reproductive toxicity. The term "Hazardous Materials" shall include without
limitation any "hazardous substances" as defined, listed, designated or
regulated under CERCLA, any "hazardous wastes" or "solid wastes" as defined,
listed, designated or regulated under RCRA, any asbestos or asbestos-containing
materials, any polychlorinated biphenyls, and any petroleum or hydrocarbonic
substance, fraction, distillate or by-product.
"HIPAA" means the Health Insurance Portability and Accountability Act of
1996, as amended.
"Initial Cash Consideration" means an amount equal to Sixteen Million Five
Hundred Thousand Dollars ($16,500,000).
"Indebtedness" of any person means all obligations of such person (i) for
borrowed money, (ii) evidenced by notes, bonds, debentures or similar
instruments, (iii) for the deferred purchase price of goods or services (other
than trade payables or accruals incurred in the
4
ordinary course of business), (iv) under capital leases and (v) in the nature of
guarantees of the obligations described in clauses (i) through (iv) above of any
other person.
"Intellectual Property" means any and all of the following and all rights
in, arising out of, or associated therewith throughout the world including any
registrations or applications therefor: (i) all United States and foreign
patents and applications therefor and all reissues, divisions, renewals,
extensions, provisionals, continuations and continuations-in-part thereof; (ii)
all inventions (whether patentable or not), invention disclosures, improvements,
trade secrets, proprietary information, know how, schematics, technology,
process and manufacturing information, research and development data, technical
data and customer lists, and all documentation relating to any of the foregoing;
(iii) all United States and foreign copyrights, copyrights registrations and
applications therefor and all other rights corresponding thereto; (iv) all
United States and foreign mask works, mask work registrations and applications
therefor; (v) all United States and foreign industrial designs and any
registrations and applications therefor; (vi) all United States and foreign
trade names, logos, slogans, common law trademarks and service marks; trademark
and service ▇▇▇▇ registrations and applications therefor and all goodwill
associated therewith; (vii) all databases and data collections and all rights
therein; and (viii) all computer software including all source code, object
code, firmware, development tools, files, records and data, all media on which
any of the foregoing is recorded, all Internet addresses, sites (and all content
contained therein) and domain names; (ix) any similar, corresponding or
equivalent rights to any of the foregoing; and (x) all documentation related to
any of the foregoing.
"IRS" means the United States Internal Revenue Service.
"Knowledge of Target" means, where any representation or warranty
contained in this Agreement is expressly qualified by reference to the Knowledge
of Target, Target confirms that the members of Target's management have made
diligent inquiry as to the matters that are the subject of such representations
and warranty. Target shall be deemed to have knowledge of a particular fact or
other matter if any of the following employees of Target has or at any time had
knowledge of such fact or other matter: ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇,
▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇ ▇▇▇▇▇▇▇.
"Liabilities" means all Indebtedness, obligations and other liabilities of
a person (whether absolute, accrued, contingent, asserted, unasserted, fixed or
otherwise, or whether due or to become due).
"Loss" or "Losses" means any and all damages, fines, penalties,
deficiencies, losses, judgments, costs and expenses (including interest, court
costs, reasonable fees of attorneys, accountants and other experts) and other
reasonable expenses of litigation or other proceedings with respect to any
claim, default or assessment.
"Material Adverse Effect" with respect to any person means a material
adverse effect on the business, financial condition, assets, properties,
operations or results of operations of such person and any subsidiaries of such
person taken as a whole.
"Merger" has the meaning assigned in Recital A.
5
"Merger Consideration" shall mean the total cash and number of shares of
Acquiror Common Stock issuable pursuant to Section 2.6(a) hereof.
"Merger Sub" has the meaning assigned in the first paragraph of this
Agreement.
"Offer Letter" means the employment offer letter from Acquiror and
accepted by the employees of Target.
"Order" means any writ, judgment, decree, injunction or similar order of
any Governmental or Regulatory Authority (in each such case whether preliminary
or final).
"Permits and/or Approvals" means all permits, licenses, certificates of
authority, authorizations, approvals, registrations, franchises and similar
consents granted or issued by any Governmental or Regulatory Authority.
"Pre-Closing Period" has the meaning assigned in Section 10.2(a).
"Principal Shareholders" means ▇▇▇ ▇▇▇▇▇ and ▇▇▇▇▇ ▇▇▇▇▇▇▇.
"Public Software" means any software that contains, or is derived in any
manner (in whole or in part) from, any software that is distributed as free
software (as defined by the Free Software Foundation), open source software
(e.g., Linux or software distributed under any license approved by the Open
Source Initiative as of the date of this Agreement as set forth ▇▇▇.▇▇▇.▇▇▇) or
similar licensing or distribution models which requires the distribution of
source code to licensees.
"RCRA" means the federal Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., as amended.
"Representatives" means a party's officers, employees, counsel,
accountants, financial advisors, consultants and other representatives.
"Resellers" has the meaning assigned in Section 3.16(b)(iv).
"SEC" means the U. S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Shareholder Agreements" means the Shareholder Agreements being executed
and delivered by the shareholders of Target as of the date of this Agreement.
"Shareholder" means any shareholder of Target who has executed a
Shareholder Agreement.
"Shareholders' Agent" means ▇▇▇ ▇▇▇▇▇.
"Surviving Corporation" has the meaning set forth in Section 2.1.
6
"Stock Consideration" means that number of shares of Acquiror Common Stock
determined by dividing One Million Five Hundred and Fifty-Three Thousand Dollars
($1,553,000) by the Average Closing Price.
"Straddle Period" has the meaning assigned in Section 10.2(a).
"Target" has the meaning assigned in the first paragraph of this
Agreement.
"Target Common Stock" means shares of Target's Common Stock, par value
$0.001 per share.
"Target Employee Plan" means any bonus, incentive compensation, deferred
compensation, pension, profit sharing, retirement, stock purchase, stock option,
stock ownership, stock appreciation rights, phantom stock, leave of absence,
layoff, vacation, day or dependent care, legal services, cafeteria, life,
health, accident, disability, workmen's compensation or other insurance,
severance, separation or other employee benefit plan, practice, policy or
arrangement of any kind, whether written or oral, funded or unfunded, including,
but not limited to, any "employee benefit plan" within the meaning of Section
3(3) of ERISA established by Target or any predecessor or ERISA Affiliate of any
of the foregoing which Target maintains, or to which Target contributes or has
contributed or under which any employee, officer, former employee or director of
Target or any beneficiary thereof is covered, is eligible for coverage or has
benefit rights.
"Target Intellectual Property" means any and all Target-Owned Intellectual
Property and Target-Licensed Intellectual Property.
"Target-Licensed Intellectual Property" means any and all Intellectual
Property that the Target is licensed to use, other than Target-Owned
Intellectual Property and Commercially Available Intellectual Property.
"Target-Owned Intellectual Property" means any and all Intellectual
Property, both registered and unregistered, in any jurisdiction worldwide, that
is owned in whole or in part by or is subject to any agreement or other
obligation to assign or transfer ownership in whole or in part to or exclusively
licensed to the Target, and expressly includes, but is not limited to, the
Intellectual Property identified by Section 3.16(a) of the Disclosure Schedule
"Target Tax Returns" has the meaning assigned in Section 10.2(a).
"Target's Current Facilities" has the meaning assigned in Section 3.23.
"Target's Facilities" has the meaning assigned in Section 3.23.
"Tax Proceedings" has the meaning assigned in Section 10.4.
"Tax Returns" means a report, return or other information required to be
supplied to a governmental entity with respect to Taxes including combined or
consolidated returns for any group of entities that includes Target.
7
"Taxes" means any federal, state, county, local or foreign taxes, charges,
fees, levies, or other assessments, including all net income, gross income,
sales and use, ad valorem, transfer, gains, profits, excise, franchise, real and
personal property, gross receipt, capital stock, production, business and
occupation, disability, employment, payroll, license, estimated, stamp, custom
duties, severance or withholding taxes or charges imposed by a governmental
entity, and includes any interest and penalties (civil or criminal) on or
additions to any such taxes and any reasonable third party expenses incurred in
connection with the determination, settlement or litigation of any tax
liability.
"Third Party" means any person (including, but not limited to, a
Governmental or Regulatory Authority) not an Affiliate of the other referenced
person or persons.
"Third-Party Claim" has the meaning assigned in Section 9.5(a).
"Transaction Expenses" means any and all legal, accounting, financial
advisory, investment banking, consulting and other advisory fees and expenses of
third parties, whether invoiced before or after the Closing, incurred or payable
by Target, the Shareholder's Agent or the shareholders of Target in connection
with the negotiation, execution and consummation of this Agreement and the
transactions contemplated hereby.
"100S Return" has the meaning assigned in Section 10.2(b).
(b) Construction of Certain Terms and Phrases. Unless the context
of this Agreement otherwise requires: (i) words of any gender include each other
gender; (ii) words using the singular or plural number also include the plural
or singular number, respectively; (iii) the terms "hereof," "herein," "hereby"
and derivative or similar words refer to this entire Agreement; (iv) the term
"Section" refers to the specified Section of this Agreement; (v) the phrase
"ordinary course of business" refers to the business of Target as currently
conducted; (vi) whenever the words "include," "includes" or "including" are used
in this Agreement they shall be deemed to be followed by the words "without
limitation;" (vii) the phrase "made available" shall mean that the information
referred to has been made available if requested by the party to whom such
information is to be made available; (viii) whenever this Agreement refers to a
number of days, such number shall refer to calendar days unless Business Days
are specified; (ix) all accounting terms used herein and not expressly defined
herein shall have the meanings given to them under GAAP; (x) any representation
or warranty contained herein as to the enforceability of a Contract shall be
subject to the effect and limitations of any bankruptcy, insolvency,
reorganization, moratorium or other similar law affecting the enforcement of
creditors' rights generally and to general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law);
and (xi) the table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
2. The Merger.
2.1 The Merger. At the Effective Time and subject to and upon the
terms and conditions of this Agreement, the Agreement of Merger attached hereto
as Exhibit A (the "Agreement of Merger") and the applicable provisions of the
California Corporations Code
8
("California Law"), Merger Sub shall be merged with and into Target, the
separate corporate existence of Merger Sub shall cease and Target shall continue
as the surviving corporation (the "Surviving Corporation").
2.2 Closing; Effective Time. The closing of the transactions
contemplated hereby (the "Closing") shall take place as soon as practicable, but
no later than two (2) Business Days, after the satisfaction or waiver of each of
the conditions set forth in Section 7 hereof, or at such other time as the
parties hereto agree (the "Closing Date"). The Closing shall take place at the
offices of ▇▇▇▇ ▇▇▇▇ ▇▇▇▇ & Freidenrich LLP, ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇
▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, or at such other location as the parties hereto agree. In
connection with the Closing, the parties hereto shall cause the Merger to be
consummated by filing the Agreement of Merger, together with any required
certificates, with the Secretary of State of the State of California, in
accordance with the relevant provisions of California Law (the time of such
filing being the "Effective Time").
2.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement, the Agreement of Merger and the
applicable provisions of California Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Target and Merger Sub shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Target and
Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
2.4 Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Articles of Incorporation of
the Surviving Corporation shall beamended and restated in its entirety to read
as provided in Exhibit A to the Agreement of Merger.
(b) The Bylaws of Merger Sub, as in effect immediately prior
to the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
2.5 Directors and Officers. At the Effective Time, the directors
and officers of Merger Sub immediately prior to the Effective Time shall be the
directors and officers of the Surviving Corporation, to serve until their
respective successors are duly elected or appointed and qualified.
2.6 Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of Merger Sub, Target or the
holders of the Target Common Stock:
(a) Conversion of Target Common Stock. Each share of Target
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted and exchanged, without any action on the part of the holders
thereof, into the right to receive: (i) that dollar amount equal to the amount
obtained by dividing the Initial Cash Consideration by the number of shares of
Target Common Stock issued and outstanding immediately prior to the Effective
Time; (ii) the number of shares equal to the Stock Consideration divided by the
number of shares of Target Common Stock issued and outstanding immediately prior
to the Effective Time; and (iii) subject to Section 2.7(g), that dollar amount
9
equal to the amount obtained by dividing the Contingent Cash Consideration by
the number of shares of Target Common Stock issued and outstanding immediately
prior to the Effective Time.
(b) Cancellation of Target Common Stock Owned by Acquiror.
At the Effective Time, each share of Target Common Stock owned by Acquiror or
any direct or indirect wholly owned subsidiary of Acquiror immediately prior to
the Effective Time shall be canceled and extinguished without any conversion
thereof.
(c) Capital Stock of Merger Sub. At the Effective Time, each
share of common stock of Merger Sub issued and outstanding immediately prior to
the Effective Time shall be converted into and exchanged for one validly issued,
fully paid and nonassessable share of common stock of the Surviving Corporation.
Each stock certificate of Merger Sub evidencing ownership of any such shares
shall continue to evidence ownership of such shares of capital stock of the
Surviving Corporation.
(d) Adjustments to Exchange Ratio. The Stock Consideration
shall be adjusted to reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities convertible
into Acquiror Common Stock), reorganization, recapitalization or other like
change with respect to Acquiror Common Stock occurring after the date hereof and
prior to the Effective Time.
(e) Fractional Shares. No fraction of a share of Acquiror
Common Stock will be issued, but in lieu thereof each holder of shares of Target
Common Stock who would otherwise be entitled to a fraction of a share of
Acquiror Common Stock (after aggregating all fractional shares of Acquiror
Common Stock to be received by such holder) shall receive from Acquiror an
amount of cash (rounded to the nearest whole cent) equal to the product of (i)
such fraction, multiplied by (ii) the Average Closing Price.
(f) Dissenters' Rights. Notwithstanding any provision of
this Agreement to the contrary, any shares of Target Common Stock held by a
holder who has demanded and perfected such holder's right for appraisal of such
shares in accordance with California Law and who, as of the Effective Time, has
not effectively withdrawn or lost such right to appraisal ("Dissenting Shares"),
if any, shall not be converted into the Merger Consideration but shall instead
be converted into the right to receive such consideration as may be determined
to be due with respect to such Dissenting Shares pursuant to California Law.
Target shall give Acquiror prompt notice of any demand received by Target to
require Target to purchase shares of Common Stock of Target, and Acquiror shall
have the right to direct and participate in all negotiations and proceedings
with respect to such demand. Target agrees that, except with the prior written
consent of Acquiror, or as required under the California Law, it will not
voluntarily make any payment with respect to, or settle or offer to settle, any
such purchase demand. Each holder of Dissenting Shares ("Dissenting
Shareholder") who, pursuant to the provisions of California Law, becomes
entitled to payment of the fair value for shares of Target Common Stock shall
receive payment therefore (but only after the value therefore shall have been
agreed upon or finally determined pursuant to such provisions). If, after the
Effective Time, any Dissenting Shares shall lose their status as Dissenting
Shares, Acquiror shall issue and deliver, upon surrender by such shareholder of
a certificate or certificates representing shares of Target Common Stock, the
portion of the Merger Consideration to which such shareholder
10
would otherwise be entitled under this Section 2.6 and the Agreement of Merger
less the portion of the Merger Consideration allocable to such shareholder that
has been deposited in the Escrow Funds in respect of such shares of Target
Common Stock pursuant to Section 2.7(f) and Section 9 hereof.
(g) Certificate Legends. The shares of Acquiror Common Stock
to be issued pursuant to this Section 2.6 shall not have been registered and
shall be characterized as "restricted securities" under the federal securities
laws, and under such laws such shares may be resold without registration under
the Securities Act only in certain limited circumstances. Each certificate
evidencing shares of Acquiror Common Stock to be issued pursuant to this Section
2.6 shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION WITHOUT AN EXEMPTION UNDER THE SECURITIES ACT OR AN
OPINION OF LEGAL COUNSEL REASONABLY ACCEPTABLE TO TARGET THAT SUCH
REGISTRATION IS NOT REQUIRED."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A REPURCHASE
OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE, AND OTHER RESTRICTIONS
ON TRANSFER SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST, A COPY OF WHICH
IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION."
and any legends required by state securities laws.
(h) Transaction Expenses. Transaction Expenses. Prior to the
Closing, Target shall provide to Acquiror a certificate signed by an officer of
Target setting forth the Transaction Expenses incurred or otherwise payable with
respect to this Agreement and the transactions contemplated hereby, and Target
and its legal counsel, auditors, investment bankers and financial advisors shall
have confirmed in writing that they have agreed to the amounts set forth in such
certificate. Of the Initial Cash Consideration, $230,462.68 shall be withheld by
Acquiror and paid by Acquiror to ▇▇▇▇▇▇ ▇▇▇▇▇▇ White & ▇▇▇▇▇▇▇▇▇ LLP
($208,462.68) and Good ▇▇▇▇▇▇ ▇▇▇▇▇ & ▇▇▇▇▇ LLP ($22,000.00) in payment of the
unpaid Transaction Expenses. Such reduction shall be applied pro rata to the
shareholders of Target in proportion to the number of shares of Target Common
Stock held by each. In addition, Acquiror shall pay $455,449.88 to Seven Hills
Partners LLC in payment of its fee, provided that the foregoing amount shall not
be withheld from the Initial Cash Consideration.
(i) Options. Any outstanding options to purchase Target
Common Stock shall terminate as of the Effective Time and will not be assumed as
a result of the Merger.
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2.7 Surrender of Certificates.
(a) Acquiror to Provide Common Stock and Cash. At the
Effective Time, each holder of record of a certificate or certificates that
immediately prior to the Effective Time represented outstanding shares of Target
Common Stock (the "Certificates"), whose shares were converted into the right to
receive Merger Consideration (and cash in lieu of fractional shares) pursuant to
Section 2.6, shall deliver to Acquiror (i) a letter of transmittal (the form of
which has been provided by Acquiror to each such individual prior to Closing);
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration (and cash in lieu of fractional shares).
Upon surrender of a Certificate for cancellation to Acquiror, together with such
letter of transmittal and other documents specified in the letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, and following the Effective Time, the holder of such
Certificate shall be entitled to receive in exchange therefor such shareholder's
pro rata portion of: (i) the Initial Cash Consideration (which shall be wired
upon confirmation of the acceptance of the Agreement of Merger for filing or, if
too late in the day for a wire to be processed, at the beginning of the next
Business Day); (ii) the Contingent Cash Consideration (which shall be paid in
accordance with Section 2.7(g) below); (iii) the Stock Consideration (which
shall be issued promptly following the Effective Time); (iv) any dividends or
other distributions to which such holder is entitled pursuant to Section 2.7(b);
and (v) cash (without interest) in respect of fractional shares as provided in
Section 2.6(e), and the Certificate so surrendered shall forthwith be canceled.
Until so surrendered, each outstanding Certificate that prior to the Effective
Time represented shares of Target Common Stock will be deemed from and after the
Effective Time, for all corporate purposes other than the payment of dividends,
to evidence the ownership of (i) the right to receive an amount of Initial Cash
Consideration into which such shares of Target Common Stock shall have been
converted; (ii) the right to receive an amount of Contingent Cash Consideration
into which such shares of Target Common Stock shall have been converted and
(iii) the number of full shares of Acquiror Common Stock into which such shares
of Target Common Stock shall have been so converted and the right to receive an
amount in cash in lieu of the issuance of any fractional shares in accordance
with Section 2.6.
(b) Distributions With Respect to Unexchanged Shares. No
dividends or other distributions with respect to Acquiror Common Stock with a
record date after the Effective Time will be paid to the holder of any
unsurrendered Certificate with respect to the shares of Acquiror Common Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Acquiror Common Stock issued in
exchange therefor, without interest at the time of such surrender, the amount of
any such dividends or other distributions with a record date after the Effective
Time theretofore payable (but for the provisions of this Section 2.7(b)) with
respect to such shares of Acquiror Common Stock.
(c) Transfers of Ownership. At the Effective Time, the stock
transfer books of Target shall be closed, and there shall be no further
registration of transfers of Target Common Stock thereafter on the records of
Target. If any certificate for shares of Acquiror Common Stock is to be issued
in a name other than that in which the Certificate surrendered in exchange
therefor is registered, it will be a condition of the issuance thereof that the
Certificate
12
so surrendered will be properly endorsed and otherwise in proper form for
transfer and that the person requesting such exchange will have paid to Acquiror
or any agent designated by it any transfer or other taxes required by reason of
the issuance of a certificate for shares of Acquiror Common Stock in any name
other than that of the registered holder of the Certificate surrendered, or
established to the satisfaction of Acquiror or any agent designated by it that
such tax has been paid or is not payable.
(d) No Liability. Notwithstanding anything to the contrary
in this Section 2.7, none of the Acquiror, the Surviving Corporation or any
party hereto shall be liable to any person for any amount properly paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(e) Dissenting Shares. The provisions of this Section 2.7
shall also apply to Dissenting Shares that lose their status as such, except
that the obligations of Acquiror under this Section 2.7 shall commence on the
date of loss of such status and the holder of such shares shall be entitled to
receive in exchange for such shares the Merger Consideration to which such
holder is entitled pursuant to Section 2.6 hereof.
(f) Escrow. Within one (1) Business Day after the Effective
Time, and subject to and in accordance with the provisions of Section 9 hereof,
Acquiror shall cause to be distributed to the Escrow Agent (as defined in
Section 9 hereof) the Escrow Amount. Such amount shall be deducted from the
Initial Cash Consideration payable to the Principal Shareholders in the amounts
specified in the Escrow Agreement. Such monies shall be beneficially owned by
the Principal Shareholders and shall be held in escrow and shall be available to
compensate Acquiror for certain damages as provided in Section 9. To the extent
not used for such purposes, such Escrow Funds shall be released, all as provided
in Section 9 and the Escrow Agreement.
(g) Contingent Cash Consideration. Within ten (10) Business
Days after receipt by Acquiror or the Surviving Corporation from Sun of all or
any portion of the Contingent Cash Payment, Acquiror shall distribute the amount
received to the former shareholders of Target. Such amounts shall be paid in
proportion to the number of shares of Target Common Stock held by each such
former shareholder as of the Effective Time. The Shareholders' Agent, on behalf
of the former shareholders of Target, shall have the right, exercisable on not
less than ten (10) business days written notice (and not more than one time
within any twelve month period), to examine such books, records and accounts of
Acquiror as reasonably necessary to verify the accuracy of any payments made
pursuant to this Section. Acquiror agrees to pursue the Contingent Cash Payment
consistent with its customary practices in the ordinary course of business;
provided that any reasonable out-of-pocket expenses incurred by Acquiror in such
pursuit shall reduce the Contingent Cash consideration payable by Acquiror
dollar for dollar. Notwithstanding the foregoing, no further payments shall be
due under this Section after the earlier of (i) an aggregate of $1,750,000 (less
any costs of collection as provided for in the immediately prior sentence) in
payments have been made or (ii) two years following the Closing Date.
2.8 No Further Ownership Rights in Target Common Stock. The Merger
Consideration delivered upon the surrender for exchange of shares of Target
Common Stock in
13
accordance with the terms hereof (including any dividends, distributions or cash
paid in lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Common Stock, and
there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Target Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Section 2.
2.9 Lost, Stolen or Destroyed Certificates. In the event any
Certificates shall have been lost, stolen or destroyed, Acquiror shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof such Merger Consideration (and
dividends, distributions and cash in lieu of fractional shares) as may be
required pursuant to Section 2.6; provided, however, that Acquiror may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificates to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may be made
against Acquiror or the Surviving Corporation with respect to the Certificates
alleged to have been lost, stolen or destroyed.
2.10 Taking of Necessary Action; Further Action. Each of Acquiror,
Merger Sub and Target will take all such reasonable and lawful action as may be
necessary or desirable in order to effectuate the Merger in accordance with this
Agreement as promptly as possible. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, property, rights, privileges, powers and franchises of
Target and Merger Sub, the officers and directors of Target and Merger Sub are
fully authorized in the name of their respective corporations or otherwise to
take, and will take, all such lawful and necessary action, so long as such
action is not inconsistent with this Agreement.
3. Representations and Warranties of Target. Target represents and
warrants to Acquiror and Merger Sub that the statements contained in this
Section 3 are true and correct, except as disclosed in a document of even date
herewith and delivered by Target to Acquiror and Merger Sub on the date hereof
referring to the representations and warranties in this Agreement (the
"Disclosure Schedule"). The Disclosure Schedule will be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Section
3, and the disclosure in any such numbered and lettered section of the
Disclosure Schedule shall qualify only the corresponding subsection in this
Section 3 (except to the extent disclosure in any numbered and lettered section
of the Disclosure Schedule is specifically cross-referenced in another numbered
and lettered section of the Disclosure Schedule or to the extent that it is
readily apparent from such disclosure that the information is clearly applicable
to such other sections of the Disclosure Schedule or such other representations
and warranties).
3.1 Authority. Target has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Target. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Target subject only to
14
the approval of the Merger by Target's shareholders. The affirmative vote of the
holders of a majority of the shares of Target's Common Stock outstanding on the
record date for the Written Consent of Shareholders relating to this Agreement
is the only vote of the holders of any of Target's Capital Stock necessary under
California Law to approve this Agreement and the transactions contemplated
hereby. The Board of Directors of Target has unanimously (a) approved this
Agreement and the Merger; (b) determined that in its opinion the Merger is in
the best interests of the shareholders of Target and is on terms that are fair
to such shareholders; and (c) recommended that the shareholders of Target
approve this Agreement and the Merger. This Agreement has been duly executed and
delivered by Target and constitutes the valid and binding obligation of Target
enforceable against Target in accordance with its terms, except that such
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting or relating to creditors' rights generally, and is
subject to general principles of equity.
3.2 Corporate Existence of Target. Target is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of California, and has full corporate power and authority to conduct its
business as now conducted and as proposed to be conducted, and to own, use and
lease its assets and properties. Target is duly qualified, licensed or admitted
to do business and is in good standing in those jurisdictions in which the
ownership, use or leasing of its assets and properties or the conduct of its
business makes such qualification, licensing or admission necessary. Target has
delivered a true and correct copy of the articles of incorporation and bylaws of
Target, each as amended to date, to Acquiror. Target is not in violation of any
of the provisions of its articles of incorporation or bylaws. Target has no
subsidiaries and does not directly or indirectly own any equity or similar
interest in, or any interest convertible or exchangeable or exercisable for, any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity.
3.3 Capital Stock. The authorized capital stock of Target consists
of ten million (10,000,000) shares of Target Common Stock, of which two million
two hundred eighty five thousand (2,285,000) will be issued and outstanding
immediately prior to the Closing (the "Common Stock"). A true and correct list
of all holders of the Common Stock as of the date hereof is set forth in Section
3.3 of the Disclosure Schedule. All of the Common Stock is duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. There are no outstanding options, warrants or other rights to purchase
shares of Target's capital stock or any securities exchangeable or convertible
into or exercisable for shares of Target's capital stock. At the Closing, the
Common Stock shall constitute all of the issued and outstanding capital stock of
Target. Neither Target, nor, to the Knowledge of Target, any shareholder of
Target, is a party to, or bound by, any agreement, instrument or understanding
restricting or contemplating the restriction of the transfer of any shares of
the capital stock of Target. There are no voting trusts or other agreements or
understandings to which Target, or to the Knowledge of Target, any of Target's
shareholders, is a party with respect to the voting, purchase or sale of the
capital stock of Target. All shares of Common Stock and rights to acquire Common
Stock were issued in compliance with applicable federal and state securities
laws.
3.4 No Conflicts. The execution and delivery by Target of this
Agreement does not, and the execution and delivery by Target of this Agreement
and the Agreement of Merger, the performance by Target of its obligations under
this Agreement and the Agreement of
15
Merger and the consummation of the transactions contemplated hereby and thereby
will not: (a) subject to obtaining the consents, approvals and actions, making
the filings and giving the notices described in Section 3.5, conflict with or
result in a violation or breach of any law or Order applicable to Target, or any
of its assets and properties; or (b) (i) conflict with or result in a violation
or breach of, (ii) constitute (with or without notice or lapse of time or both)
a default under, (iii) require Target to obtain any consent, approval or action
of, make any filing with or give any notice to any person as a result or under
the terms of, (iv) result in or give to any person any right of termination,
cancellation, acceleration or modification in or with respect to, or (v) result
in the creation or imposition of any Encumbrance upon Target or any of its
assets and properties under any agreement to which Target is a party or by which
any of its respective assets or properties is bound.
3.5 Governmental Approvals and Filings. No consent, approval or
action of, filing with or notice to any Governmental or Regulatory Authority on
the part of Target is required in connection with the due execution, delivery or
performance of this Agreement or the Agreement of Merger or the consummation of
the transactions contemplated hereby or thereby or the continuation by Target of
its business as presently conducted as a consequence of the Closing, except for
the filing of the Agreement of Merger with the Secretary of State of the State
of California.
3.6 Financial Statements and Condition; Absence of Changes.
(a) Schedule 3.6(a) of the Disclosure Schedule sets forth
copies of the unaudited balance sheet of Target as of October 31, 2004 (the
"Balance Sheet") and the income statement for the ten month period then ended
and the balance sheet of Target at December 31, 2003 and the related income
statement for the twelve month period then ended, each together with, a true and
correct copy of the audit report related thereto. Except as set forth in the
notes thereto, all such financial statements were prepared in accordance with
GAAP and fairly present in all material respects the financial condition and
results of operations of Target as of the respective dates thereof and for the
respective periods covered thereby.
(b) Target has no Liabilities, except for (i) Liabilities
set forth on the face of the Balance Sheet (or which are disclosed in the
footnotes thereto), (ii) Liabilities which have arisen after the date of the
Balance Sheet in the ordinary course of business and which are not required to
be disclosed pursuant to the terms of Section 3.6(d) hereof and (iii) payment or
performance obligations arising out of contracts and agreements to which Target
is a party and which are disclosed pursuant to Section 3.18 hereof or are not
required to be disclosed pursuant to the terms of Section 3.18 hereof.
(c) Target maintains and will continue to maintain a system
of internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements of Target and to maintain accountability for
assets; (iii) access to Target's assets is permitted only in accordance with
management's authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences. Target is
16
not party to or otherwise involved in any "off-balance sheet arrangements" (as
defined in Item 303 of Regulation S-K under the Securities Exchange Act).
(d) Since the Financial Statement Date:
(i) Target has not (i) amended, or agreed to amend,
its articles of incorporation or bylaws, (ii) merged with or into or
consolidated with, or agreed to merge with or into or consolidate with, any
other person, or (iii) except as reasonably required in connection with the
transactions contemplated by this Agreement or as described elsewhere in this
Agreement, changed, or agreed to change, in any material manner the character of
its business;
(ii) Target has conducted its business only in the
usual and ordinary course and in accordance with past practices;
(iii) there has been no change (or series of changes,
casualty or otherwise) in the business, condition (financial or otherwise),
results of operations, assets, Liabilities or earnings of Target, other than
changes arising in the ordinary course of business consistent with past practice
and experience, none of which changes, individually or in the aggregate, has had
or reasonably could be expected to have a Material Adverse Effect on Target;
(iv) Target has not made or promised to make any
increase in any salaries, rates of pay or other compensation or benefits of any
business of its employees, nor has Target made any accrual for or commitment or
agreement to make or pay the same, nor any payment or commitment to pay any
severance or termination pay to any of the business of its employees;
(v) Target has not suffered any strike or other labor
trouble, and Target has not entered into any agreement or negotiation with any
labor union or other collective bargaining representative of any business of its
employees;
(vi) to the Knowledge of Target, there has been no
change or any threat of any change, in any of Target's relations with, or any
loss of or threat of loss of, any of the suppliers, distributors or customers of
its business, or any decrease or limitation, of any such supplier's provision of
services, supplies or materials to Target or any such customer's usage or
purchase of services or products of Target;
(vii) there has been no change in the method of
accounting or keeping of books of account or accounting practices with respect
to Target;
(viii) Target has not waived, or agreed to waive, any
right of material value with respect to Target, or any of its assets or
properties;
(ix) Target has not changed, or agreed to change, any
of its business policies or practices, including advertising, marketing,
pricing, purchasing, personnel, sales, returns or budget policies or practices;
(x) except in the ordinary course of business or as
otherwise permitted or required by this Agreement, Target has not (i) entered
into, or agreed to enter into,
17
any lease (as lessor or lessee) or any license (as licensee or licensor) on
behalf of Target, (ii) sold, abandoned or made, or agreed to sell, abandon or
make, any other disposition of any of the assets or properties of Target; or
(iii) waived or relinquished any other rights of value;
(xi) Target has not granted or suffered, or agreed to
grant or suffer, any Encumbrance on any assets or stock of Target;
(xii) except as provided herein, Target has not entered
into or amended, or agreed to enter into or amend, any contract or other
agreement by or to which Target is bound or subject, pursuant to which it agrees
to indemnify any party on behalf of Target or pursuant to which it agrees to
refrain from competing with any party;
(xiii) Target has not, except in the ordinary course of
business, incurred or assumed, or agreed to incur or assume, any Liability
(whether or not currently due and payable);
(xiv) Target has not terminated, or agreed to terminate,
or failed to renew or received any written threat (that was not subsequently
withdrawn) to terminate or fail to renew, any Contract, license or Permit and/or
Approval;
(xv) no pre-existing or continuing Environmental
Encumbrances which would be required to be reflected on the balance sheet of
Target have arisen; and
(xvi) Target has not entered into, or agreed to enter
into, any transaction out of the ordinary course of business or where the same
could reasonably be expected to have a Material Adverse Effect on Target.
(e) As of the Effective Time, the amount of Target's cash in
excess of total liabilities, each as determined in accordance with GAAP, is not
less than $450,000.
3.7 Taxes. Target has filed or caused to be filed all Tax Returns
required to be filed by or on behalf of it under applicable law, and such Tax
Returns are true and correct in all material respects. Target has, within the
time and in the manner prescribed by law, paid directly or indirectly (and until
the Closing will pay directly or indirectly within the time and in the manner
prescribed by law) all Taxes that are due and payable by or on behalf of it. To
the Knowledge of Target, except as set forth on Section 3.7 of the Disclosure
Schedule, no examination of any Tax Return is underway as of the date of this
Agreement. There are no outstanding (a) powers of attorney granted by Target
concerning any Tax matter, (b) agreements or waivers extending the statutory
period of limitation applicable to any Tax Return of Target, (c) agreements
entered into with any taxing authority that would have a material and continuing
effect on Target after the Closing Date or (d) Encumbrances (and immediately
following the Closing Date there will be no Encumbrances) on the assets of
Target relating to or attributable to Taxes other than Encumbrances for Taxes
not yet due and payable. Target is not a party to any Tax allocation or sharing
agreement. Target has no liability for the Taxes of any other person other than
Target under Treasury Regulation Section 1.1502-6 (or any similar provision of
state, local or foreign law), as a transferee or successor, by contract, or
otherwise. Target has not been notified of any request for an audit or other
examination of any Tax Return of Target. Target has no liabilities for unpaid
Taxes which have not been accrued or reserved against in accordance
18
with GAAP on Target's financial statements, whether asserted or unasserted,
contingent or otherwise. Target has no knowledge of any basis for the assertion
of any claim relating or attributable to Taxes that would be more likely than
not to be sustained if asserted and which, if adversely determined, would result
in any Encumbrance on the assets of Target. None of Target's assets are treated
as "tax-exempt use property", within the meaning of Section 168(h) of the Code.
Target is not, and has not been at any time, a "United States Real Property
Holding Corporation" within the meaning of Section 897(c)(2) of the Code. There
is no contract, agreement, plan or arrangement to which Target is a party as of
the date of this Agreement, including but not limited to the provisions of this
Agreement, covering any employee or former employee of Target, individually or
collectively, which could give rise to the payment of any amount that would not
be deductible pursuant to Sections 280G, 404 or 162(m) of the Code. Target has
been a validly electing S corporation within the meaning of Code Sections 1361
and 1362 at all times during its existence and Target will be an S corporation
up to and including the day prior to the Closing Date. Target shall not be
liable for any Tax under Code Section 1374 in connection with the deemed sale of
Target's assets (including the assets of any qualified subchapter S subsidiary)
caused by the Election. Target has not, in the past 10 years, (A) acquired
assets from another corporation in a transaction in which Target's Tax basis for
the acquired assets was determined, in whole or in part, by reference to the Tax
basis of the acquired assets (or any other property) in the hands of the
transferor or (B) acquired the stock of any corporation which is a qualified
subchapter S subsidiary. Target has withheld and paid over all Taxes that it was
required to withhold from amounts owing to any employee, creditor or third
party, and has complied with all applicable laws, rules and regulations relating
to the withholding and payment of Taxes.
3.8 Legal Proceedings. There are no Orders outstanding and no
Actions or Proceedings pending against Target, its business, assets and
properties or any of its officers and directors their capacities as such. To the
Knowledge of Target, there are no claims, Actions or Proceedings threatened
against Target or its business, assets or properties. To the Knowledge of
Target, no employee has filed a complaint with any Governmental or Regulatory
Authority pertaining to labor or employment matters.
3.9 Compliance With Laws and Orders. Target is in compliance in
all material respects with all applicable laws, rules, regulations, ordinances,
decrees, Orders, judgments or Permits and/or Approvals, and has not received any
notices of violation with respect to any federal, state, local or foreign
statute, law or regulation regarding the conduct of its business or the
ownership or operation of its business.
3.10 Restrictions on Business Activities. There is no agreement,
judgment, injunction, order or decree binding upon Target that has or could
reasonably be expected to have the effect of prohibiting or impairing any
current or future business practice of Target, any acquisition of property by
Target or the conduct of business by Target as currently conducted or as
proposed to be conducted by Target.
3.11 Employees. Section 3.11 of the Disclosure Schedule lists all
Contracts providing for a commitment of employment or consulting services (and
provides a description of all such oral agreements) to which Target is a party
which either (i) contain severance, bonus or other provisions triggered by the
Closing or (ii) contain obligations continuing beyond the
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Closing Date, and true, correct and complete copies of all such written
agreements have been delivered to Acquiror. In addition, Section 3.11 of the
Disclosure Schedule identifies all current employees and consultants of Target,
including, without limitation, all officers of Target, and describes the job
title of and compensation (including, without limitation, salary, bonuses and
perks) payable to, each such individual. None of such employees has indicated to
Target present intention to resign or retire, and Target does not have a present
intention to terminate the employment of any of them. No employee of Target is
in violation of any term of any employment contract (whether written or oral),
patent disclosure agreement or any other contract or agreement relating to the
relationship of any such employee with Target or any other party (including
prior employers) because of the nature of the business now conducted or now
proposed to be conducted by Target. There is no strike, labor dispute or union
organization activities pending or, to the Knowledge of Target, threatened,
involving Target, or its employees. With respect to all of their employees in
the United States, Target has obtained documentation within the initial three
days of employment of each employee's identity and eligibility to work in the
United States, and no such employees will lose their eligibility to work in the
United States for the period of one year following the Closing Date. Section
3.11 of the Disclosure Schedule identifies each of Target's employees in the
United States whose eligibility to work in the United States exists pursuant to
an issued work permit or visa, and describes the current status of each such
individual's immigration status. Target has taken, and will have taken at all
times prior to the Closing Date, all steps to perfect each such employee's
immigration status. Target is in compliance with all applicable United States
and foreign immigration laws with respect to their employees.
3.12 Target Employee Benefit Plans.
(a) Section 3.12 of the Disclosure Schedule contains a
complete and accurate list of each Target Employee Plan established, sponsored
or maintained by Target and any trade or business (whether or not incorporated)
which is treated as a single employer with Target within the meaning of Section
414(b), (c), (m) or (o) of the Code (an "ERISA Affiliate"), for the benefit of
any person who performs or who has performed services for Target or with respect
to which Target or ERISA Affiliate has or may have any liability or obligation.
There has been no amendment to, written interpretation or announcement by Target
or ERISA Affiliate which would increase the expense of maintaining any Target
Employee Plan above the level of expense incurred with respect to such Target
Employee Plan for the most recent fiscal year included in Target's financial
statements. Neither Target nor any ERISA Affiliate has made any plan or
commitment to establish or enter into any new Target Employee Plan.
(b) Documents. Target has furnished to Acquiror: (i) correct
and complete copies of all documents embodying each Target Employee Plan
including all amendments thereto and all related trust documents, (ii) the three
most recent annual reports (Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under ERISA or the Code in
connection with each Target Employee Plan, (iii) if Target Employee Plan is
funded, the most recent annual and periodic accounting of Target Employee Plan
assets, (iv) the most recent summary plan description together with the
summary(ies) of material modifications thereto, if any, required under ERISA
with respect to each Target Employee Plan, (v) all material written agreements
and contracts relating to each Target Employee Plan, including administrative
service agreements and group insurance contracts, (vi)
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all communications, including without limitation any notice required under
Section 4980F of the Code and Section 204(h) of ERISA, material to any employee
or employees relating to any Target Employee Plan and any proposed Target
Employee Plan, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any liability to Target
or any ERISA Affiliate, (vii) all correspondence to or from any governmental
agency relating to any Target Employee Plan, (viii) all model COBRA forms and
related notices, (ix) all policies pertaining to fiduciary liability insurance
covering the fiduciaries for each Target Employee Plan, (x) all discrimination
tests for each Target Employee Plan for the three most recent plan years, (xi)
all registration statements, annual reports (Form 11-K and all attachments
thereto) and prospectuses prepared in connection with each Target Employee Plan,
(xii) all HIPAA policies and procedures, privacy notices and business associate
agreements to the extent required under HIPAA and (xiv) the most recent IRS
determination or opinion letter issued with respect to each Target Employee
Plan.
(c) Compliance. (i) Each Target Employee Plan has been
administered in accordance with its terms and in compliance with the
requirements prescribed by any and all statutes, rules and regulations
(including ERISA and the Code) which are applicable to it, and Target or ERISA
Affiliate have performed all obligations required to be performed by them under,
are not in default under or violation of and have no knowledge of any default or
violation by any other party to, any of Target Employee Plans; (ii) each Target
Employee Plan intended to be qualified under Section 401(a) of the Code and each
trust intended to qualify under Section 501(a) of the Code has either obtained
from the IRS a favorable determination, opinion advisory or notification letter,
as applicable, to its qualified status under the Code or has applied to, but has
not yet received a response from, the IRS for such a determination letter, if
applicable, prior to the expiration of the requisite period under applicable
Treasury Regulations or IRS pronouncements in which to apply for such
determination letter and to make any amendments necessary to obtain a favorable
determination, or has been established under a standardized prototype plan for
which an IRS opinion letter has been obtained by the plan sponsor and is valid
as to the adopting employer and nothing has occurred since the issuance of such
letter which could reasonably be expected to cause any such Target Employee Plan
or trust to fail to qualify under Section 401(a) or 501(a) of the Code; (iii)
there has been no "prohibited transaction," within the meaning of Section 4975
of the Code and Sections 406 and 407 of ERISA, and not otherwise exempt under
Section 408 of ERISA, with respect to any Target Employee Plan; (iv) neither
Target nor any ERISA Affiliate is subject to any liability or penalty under
Sections 4975 through 4980 of the Code or Title I of ERISA with respect to any
of Target Employee Plans; (v) all contributions and other payments required to
be made by Target or ERISA Affiliate to any Target Employee Plan have been made
on or before their due dates and a reasonable amount has been accrued for
contributions and payments to each Target Employee Plan as applicable for the
current plan years; (vi) with respect to each Target Employee Plan, no
"reportable event" within the meaning of Section 4043 of ERISA (excluding any
such event for which the thirty (30) day notice requirement has been waived
under the regulations to Section 4043 of ERISA) nor any event described in
Section 4062, 4063 or 4041 or ERISA has occurred; (vii) each Target Employee
Plan subject to ERISA, has prepared in good faith and timely filed all requisite
governmental reports (which were true and correct as of the date filed) and has
properly and timely filed and distributed or posted all notices and reports to
employees required to be filed, distributed or posted with respect to each such
Target Employee Plan; and
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(viii) no suit, administrative proceeding, action or other litigation has been
brought, or to the Knowledge of Target is threatened or reasonably anticipated,
against or with respect to any such Target Employee Plan, including any audit,
inquiry or proceeding by the IRS, United States Department of Labor or any other
governmental entity.
(d) No Title IV, Multiemployer or Multiple Employer Plan.
Neither Target nor any ERISA Affiliate has ever maintained, established,
sponsored, participated in, contributed to, or otherwise incurred any obligation
or liability (including without limitation, contingent liability) under any
"multiemployer plan" (as defined in Section 3(37) of ERISA) or to any "pension
plan" (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA or
Section 412 of the Code. Neither Target nor any ERISA Affiliate has at any time
ever maintained, established, sponsored, participated in or contributed to any
multiple employer plan or to any plan described in Section 413 of the Code.
Neither Target nor any ERISA Affiliate has any actual or potential withdrawal
liability (including without limitation, any contingent liability) for any
complete or partial withdrawal (as defined in Sections 4203 and 4205 of ERISA)
from any multiemployer plan.
(e) No Self-Insured Target Employee Plan. Neither Target nor
any ERISA Affiliate has ever maintained, established, sponsored, participated in
or contributed to any self-insured plan that provides benefits to employees
(including any such plan pursuant to which a stop-loss policy or contract
applies).
(f) No Post-Employment Obligations. No Target Employee Plan
provides, or reflects or represents any liability to provide, post-termination
or retiree life insurance, health or other employee welfare benefits to any
person for any reason, except as may be required by COBRA or other applicable
statute, and neither Target nor any ERISA Affiliate has ever represented,
promised or contracted (whether in oral or written form) to any employee (either
individually or to employees as a group) or any other person that such
employee(s) or other person would be provided with life insurance, health or
other employee welfare benefits, except to the extent required by statute.
(g) COBRA, FMLA, HIPAA, Cancer Rights. With respect to each
Target Employee Plan, Target has complied with the applicable health care
continuation and notice provisions of COBRA and the regulations thereunder, the
applicable requirements of the Family and Medical Leave Act of 1993 and the
regulations thereunder, HIPAA, the Cancer Rights Act of 1998, the Newborns' and
Mothers' Health Protection Act of 1996, and any similar provisions of state law
applicable to employees. To the extent required under HIPAA and the regulations
issued thereunder, Target and each ERISA Affiliate has, prior to the Closing
Date, performed all obligations under the medical privacy rules of HIPAA, the
electronic data interchange requirements of HIPAA, and the security requirements
of HIPAA. Neither Target nor any ERISA Affiliate has any unsatisfied obligations
to any employees, former employees, or qualified beneficiaries pursuant to
COBRA, HIPAA, or any state law governing health care coverage extension or
continuation.
(h) Effect of Transaction. The consummation of the
transactions contemplated by this Agreement will not (i) entitle any current or
former employee or other service provider of Target or any ERISA Affiliate to
severance benefits or any other payments
22
(including, without limitation, unemployment compensation, golden parachute
bonus or benefits under any Target Employee Plan), except as expressly provided
in this Agreement, (ii) accelerate the time of payment or vesting of any such
benefits, or increase the amount of compensation due any such employee or
service provider (other than full or partial vesting as a result of the actions
required under the Agreement), (iii) materially increase any benefits otherwise
payable by Target or an ERISA Affiliate, or (iv) result in any forgiveness of
indebtedness. There is no agreement, plan, arrangement or other contract
covering any employee that, considered individually or considered collectively
with any other such agreements, plans, arrangements or other contracts, will, or
could reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would be characterized as a "parachute payment" within the
meaning of Section 280G(b)(1) of the Code. There is no agreement, plan,
arrangement or other contract by which Target or any ERISA Affiliate is bound to
compensate any employee for excise taxes paid pursuant to Section 4999 of the
Code. Each Target Employee Plan can be amended, terminated or otherwise
discontinued after the Closing Date in accordance with its terms, without
liability to Acquiror or Target (other than ordinary administration expenses
typically incurred in a termination event).
(i) International Employee Plan. Neither Target nor any
ERISA Affiliate currently has or has ever had the obligation to maintain,
establish, sponsor, participate in, be bound by or contribute to any each Target
Employee Plan that has been adopted or maintained by Target or any ERISA
Affiliate, whether formally or informally or with respect to which Target or any
ERISA Affiliate will or may have any liability with respect to employees who
perform services outside the United States.
3.13 Real Property.
(a) Section 3.13(a) of the Disclosure Schedule contains a
list of (i) each parcel of real property owned by Target, (ii) each parcel of
real property leased by Target (as lessor or lessee), and (iii) all Encumbrances
(other than Encumbrances that will be removed at or prior to the Closing, or
Encumbrances disclosed, or given as security for a monetary Liability shown, on
the Balance Sheet) on any parcel of real property referred to in clause (i).
(b) Target has, and at the Closing will have, good and
marketable title to each parcel of real property described in clause (i) of
paragraph (a) above, free and clear of any Encumbrances, other than Encumbrances
that will be extinguished prior to the Closing, Encumbrances that will be
removed at or prior to the Closing, or Encumbrances disclosed, or given as
security for a monetary Liability shown, on the Balance Sheet, and have valid
and subsisting leasehold estates in the respective real properties otherwise
leased by them as lessee under leases referred to in clause (ii) of paragraph
(a) above free and clear of Encumbrances upon the lessee's interest other than
Encumbrances that will be extinguished at or prior to the Closing, or
Encumbrances disclosed, or given as security for a monetary Liability shown, on
the Balance Sheet. Each such lease is a legal, valid and binding agreement,
enforceable in accordance with its terms, and no default has occurred, nor has
there occurred any event which with notice, the passage of time, or both, would
constitute a default under such lease.
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(c) To the Knowledge of Target, (i) there are no structural,
electrical, mechanical, plumbing, roof, paving or other defects in any
improvements located on any such real property as could, either individually or
in the aggregate, have a material effect on the use, development, occupancy or
operation thereof as presently contemplated, (ii) there are no natural or
artificial conditions upon any such real property or any other facts or
conditions which could, in the aggregate, have a material effect on the
transferability, financeability, ownership, leasing, use, development, occupancy
or operation of any such real property, (iii) there are no parties in possession
of any portion of any such real property, whether as tenants, trespassers or
otherwise, except Target, (iv) there are no pending or, to the Knowledge of
Target, threatened assessments, improvements or activities of any public or
quasi-public body either planned, in the process of construction or completed
which may give rise to any material assessment against any such real property,
and (v) all utilities required for the conduct of the business as presently
conducted are installed and legally available for use at such real property upon
payment at market rate consumption charges.
3.14 Adequacy of Assets. Target has possession of, and right to use,
all of the tangible and intangible, real and personal property assets required
for the conduct of its business as presently conducted, including, but not
limited to, all Intellectual Property rights (except as modified pursuant to
Section 3.16).
3.15 Tangible Personal Property. Target is in possession of and have
good title to, or valid leasehold interests in or valid rights to use, all
tangible personal property which is used in the business of Target free of
Encumbrances other than Encumbrances that will be removed at or prior to the
Closing, or Encumbrances disclosed, or given as security for a monetary
Liability shown, on the Balance Sheet.
3.16 Intellectual Property Rights.
(a) The Target Intellectual Property includes all tangible and
intangible information that is used or currently proposed to be used in the
business of Target as currently conducted or as proposed to be conducted.
Section 3.16 of the Disclosure Schedule contains an accurate and complete
description of all registered Target-Owned Intellectual Property and common law
trademarks that are Target-Owned Intellectual Property.
(b)
(i) Each item of Target-Owned Intellectual Property is
free and clear of any Encumbrances;
(ii) Target is the owner of all right, title and
interest in or is the exclusive licensee of all Target-Owned Intellectual
Property;
(iii) Target is the owner of all right, title and
interest in, and has good title to, (a) to the Knowledge of Target, all
trademarks, service marks and trade names used in connection with the operation
or conduct of the business of Target, including the sale of any products or
technology or the provision of any services by Target, (b) all copyrighted works
that are or are part of Target products, (c) all patents and patent applications
of Target Intellectual
24
Property, and (d) other works of authorship and, to the Knowledge of Target,
inventions that Target otherwise purports to own;
(iv) Target has not transferred ownership of any right,
title or interest in, or granted any license under or right to use or authorized
the retention of any rights to use, any Intellectual Property that is or was
Target Intellectual Property, to any other person or entity other than (i)
nonexclusive customer licenses granted in the ordinary course of business and
(ii) nonexclusive licenses granted to distributors, OEMs and other resellers
(collectively, "Resellers") in the ordinary course of business;
(v) there are no persons or entities to whom Target has
delivered copies of the source code to any Target Intellectual Property, whether
under an escrow arrangement or otherwise, or persons or entities who have the
right to receive such source code;
(vi) all Target Intellectual Property, including any
item thereof, is and will be fully transferable, assignable and licensable by or
between Target or Acquiror without restriction and without payment of any kind
to any third party;
(vii) the consummation of the transactions contemplated
by this Agreement will not result in the loss of, or otherwise adversely affect,
any ownership rights of Target in any Target Intellectual Property;
(viii) the consummation of the transactions contemplated
by this Agreement will not result in the breach or termination of any license,
contract or agreement to which Target is a party respecting any Intellectual
Property;
(ix) the operation of the business of Target and to the
Knowledge of Target does not and will not, when conducted in substantially the
same manner following the Closing, infringe or misappropriate any Intellectual
Property of any person or entity, violate the rights of any person or entity, or
constitute unfair competition or trade practices under the laws of any
jurisdiction, and Target has not received notice within ten (10) years prior to
the Closing Date from any person or entity claiming that such operation or any
act, product, process, technology or service (including products, processes,
technology or services currently under development) of Target infringes or
misappropriates any Intellectual Property of any person or entity or constitutes
unfair competition or trade practices under the laws of any jurisdiction or any
claim challenging the ownership, validity or effectiveness of any of Target
Intellectual Property (nor is Target aware of any basis therefor);
(x) to the Knowledge of Target, there are no contracts,
licenses or agreements between Target and any other person or entity with
respect to Target Intellectual Property under which there is currently pending
any dispute regarding the scope of such agreement or performance under such
agreement, including with respect to any payments to be made or received by
Target thereunder;
(xi) to the Knowledge of Target, no person or entity
(including any employee or former employee of Target) is infringing, misusing or
misappropriating any Target Intellectual Property;
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(xii) no Target-Owned Intellectual Property or product,
process, technology or service of Target that is Target-Owned Intellectual
Property, and to the Knowledge of Target, no Target-Licensed Intellectual
Property or other product, process, technology or service of Target, is subject
to any proceeding, lawsuit or action or outstanding decree, order, judgment,
agreement or stipulation that restricts in any manner the manufacture, use,
sale, transfer or licensing by Target of Target Intellectual Property or any
product, process, technology or service of Target or may affect the validity,
use or enforceability of such Target Intellectual Property, and Target has not,
within ten (10) years prior to the Closing Date, received written notice of any
claims challenging or questioning the validity or effectiveness of any license
or agreement relating to any Target-Licensed Intellectual Property;
(xiii) Target has not entered into any agreement or
offered to indemnify any other person or entity against any charge of
infringement with respect to any Target Intellectual Property other than in
connection with nonexclusive customer licenses granted in the ordinary course of
business and nonexclusive licenses granted to Resellers in the ordinary course
of business;
(xiv) Target has not entered into any agreement granting
any third party the right to bring infringement actions with respect to, or
otherwise enforce rights with respect to, any Target-Owned Intellectual
Property;
(xv) Target has the exclusive right to file, prosecute
and maintain all existing applications and registrations with respect to
Target-Owned Intellectual Property;
(xvi) the ownership of Target by Acquiror upon the
Closing will not, as a result of any agreement entered into by Target upon the
Closing Date, result in the granting by Acquiror of any Intellectual Property
rights of Acquiror (other than Target Intellectual Property rights) to any
person or entity;
(xvii) Target has filed applications for registration or
issuance of Target Intellectual Property listed in Section 3.16(b)(xvii) of the
Disclosure Schedule in the jurisdictions set forth thereon and those
applications are currently pending, in good standing, and have not been
abandoned or withdrawn;
(xviii) to the Knowledge of Target, no third party has a
reasonable basis for objecting to or opposing any application filed by Target
prior to Closing to register any Target Intellectual Property; and
(xix) to the Knowledge of Target, all registrations and
patents associated with Target Intellectual Property, whether owned by Target or
licensed, are valid and subsisting.
(c) There are no actions that must be taken by Target within
ninety (90) days of the date of this Agreement, including the payment of any
registration, maintenance or renewal fees or the filing of any documents,
applications or certificates for the purposes of maintaining, perfecting or
preserving or renewing any registered Target Intellectual Property.
26
(d) In each case in which Target has acquired any Target-Owned
Intellectual Property rights from any person, it has obtained a valid and
enforceable assignment sufficient to irrevocably transfer all rights in such
Target-Owned Intellectual Property (including the right to seek past and future
damages with respect thereto) to it.
(e) Except as set forth in Section 3.16(e) of the Disclosure
Schedule, none of the products of Target are, in whole or in part, subject to
the provisions of any Public Software or other source code license agreement
that (i) requires the distribution of source code in connection with the
distribution of or otherwise making available the licensed software in object
code form; (ii) prohibits or limits Target from charging a fee or receiving
consideration in connection with sublicensing or distributing such licensed
software (whether in source code or object code form); or (iii) allows a
customer, or requires that a customer have, the right to decompile, disassemble
or otherwise reverse engineer the software by its terms and not by operation of
law.
3.17 Privacy Policies. Target and its employees, have (i) complied
at all times with all applicable privacy laws and regulations and contractual
obligations regarding the collection, processing, disclosure and use of all data
consisting of personally identifiable information that is, or is capable of
being, associated with specific individuals; (ii) complied with Target's privacy
policy substantially in the form provided to Acquiror or its counsel with
respect to personally identifiable information; and (iii) taken all appropriate
and industry standard measures to protect and maintain the confidential nature
of any personally identifiable information that Target has collected or
otherwise acquired.
3.18 Contracts.
(a) Section 3.18(a) of the Disclosure Schedule (with
paragraph references corresponding to those set forth below) contains a list of
each of the following Contracts to which Target is a party or by which any of
their respective assets and properties is bound as of the date of this
Agreement:
(i) all Contracts (excluding Target Employee Plans)
providing for a commitment of employment or consulting services;
(ii) all Contracts with any person containing any
provision or covenant prohibiting or limiting the ability of Target to engage in
any business activity or compete with any person or prohibiting or limiting the
ability of any person to compete with Target;
(iii) all partnership or joint venture agreements;
(iv) all Contracts relating to Indebtedness;
(v) all Contracts providing for (A) the future
disposition or acquisition of any assets and properties, other than dispositions
or acquisitions in the ordinary course of business, and (B) any merger or other
business combination;
27
(vi) all Contracts between or among Target, on the one
hand, and any shareholders of Target or any Affiliate of any shareholders of
Target;
(vii) all Contracts that (A) limit or contain
restrictions on the ability of Target to declare or pay dividends on, to make
any other distribution in respect of or to issue or purchase, redeem or
otherwise acquire its capital stock, to incur Indebtedness, to incur or suffer
to exist any Encumbrance, to purchase or sell any assets and properties, to
change the lines of business in which it participates or engages or to engage in
any merger or other business combination or (B) require Target to maintain
specified financial ratios or levels of net worth or other indicia of financial
condition;
(viii) any collective bargaining agreement;
(ix) all licensing agreements; and
(x) all other Contracts that (A) involve the payment or
potential payment, pursuant to the terms of any such Contract, by or to Target
of more than ten thousand ($10,000) and (B) cannot be terminated within one
hundred eighty (180) days after giving notice of termination without resulting
in any cost or penalty to Target.
(b) Target has previously delivered to Acquiror a true,
correct and complete copy of each written Contract listed in Section 3.18(a) of
the Disclosure Schedule, (as amended to date) and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
3.18(a) of the Disclosure Schedule; each such Contract constitutes the entire
agreement between Target, on the one hand, and the other party(ies) to such
Contract, on the other hand; no such Contract has been modified or amended in
any respect; and no party has repudiated any provision of any Contract. Each
Contract disclosed in Section 3.18(a) of the Disclosure Schedule is in full
force and effect and constitutes a legal, valid and binding agreement,
enforceable in accordance with its terms, and neither Target, nor, to the
Knowledge of Target, any other party to such Contract is in violation of or
default under any such Contract (or with notice or lapse of time or both, would
be in violation of or material default under any such Contract).
(c) No party to any Contract has communicated to Target or
Target any intention to cancel, withdraw, modify or amend such contract,
agreement or arrangement whether by reason of the transactions contemplated by
this Agreement or otherwise.
3.19 Permits and/or Approvals. Target has or will have applied for all
Permits and/or Approvals required for the conduct of the business of Target as
presently conducted and as proposed to be conducted and for the ownership,
leasing, use, development, occupancy and operation of their respective assets
and properties. Each such Permit and/or Approval is valid, binding and in full
force and effect, and the status of such Permit and/or Approval will not be
affected by the Closing. To the Knowledge of Target, Target is not in default
(or with the giving of notice or lapse of time or both, would be in default)
under any such Permit and/or Approval.
3.20 Affiliate Transactions. There is no Indebtedness or other amounts
owing under Contracts between Target, on the one hand, and any officer, director
or shareholder of Target or any Affiliate (other than Target) of any
shareholder, on the other hand.
28
3.21 Minute Books. The minute book of Target contains a materially
complete and accurate summary of all meetings of directors and shareholders or
actions by written consent since the time of incorporation of Target through the
date of this Agreement, and reflect all transactions referred to in such minutes
accurately in all material respects.
3.22 Complete Copies of Materials. Target has delivered or made available
true and complete copies of each document that has been requested by the
Acquiror or its counsel in connection with their due diligence review of Target.
3.23 Environmental Matters. Target is and has been in compliance with all
Environmental Laws relating to the properties or facilities used, leased or
occupied by Target at any time (collectively, "Target's Facilities;" such
properties or facilities currently used, leased or occupied by Target are
defined herein as "Target's Current Facilities"), and no discharge, emission,
release, leak or spill of Hazardous Materials has occurred at any of Target's
Facilities that may or will give rise to liability of Target under Environmental
Laws. To the Knowledge of Target, there are no Hazardous Materials (including
without limitation asbestos) present in the surface waters, structures,
groundwaters or soils of or beneath any of Target's Current Facilities. To the
Knowledge of Target, there neither are nor have been any aboveground or
underground storage tanks for Hazardous Materials at Target's Current
Facilities. To the Knowledge of Target, no Target employee or other person has
claimed that Target is liable for alleged injury or illness resulting from an
alleged exposure to a Hazardous Material. No civil, criminal or administrative
action, proceeding or investigation is pending against Target, or, to the
Knowledge of Target, threatened against Target, with respect to Hazardous
Materials or Environmental Laws; and Target is not aware of any facts or
circumstances that could form the basis for assertion of a claim against Target
or that could form the basis for liability of Target, regarding Hazardous
Materials or regarding actual or potential noncompliance with Environmental
Laws.
3.24 Accounts Receivable; Inventory. Subject to any allowances set forth
in Target's Balance Sheet, the accounts receivable shown in the Balance Sheet,
arose in the ordinary course of business; were not, as of the date of the
Balance Sheet, subject to any discount, contingency, claim of offset or
recoupment or counterclaim; and represented, as of the date of the Balance
Sheet, bona fide claims against debtors for sales, leases, licenses and other
charges. All accounts receivable of Target arising after the date of the Balance
Sheet through the date of this Agreement arose in the ordinary course of
business and, as of the date of this Agreement, are not subject to any discount,
contingency, claim of offset or recoupment or counterclaim, except for normal
allowances consistent with past practice. The amount carried for doubtful
accounts and allowances disclosed in the Balance Sheet is sufficient to provide
for any losses which may be sustained on realization of the accounts receivable
shown in the Balance Sheet. As of the date of the Balance Sheet, the inventories
shown on the Balance Sheet consisted of items of a merchantable condition and of
a quantity and quality suitable, usable and salable in the ordinary course of
business for the purpose for which they are intended. All such inventories are
valued on the Balance Sheet in accordance with GAAP and sufficient allowances
have been established on the Balance Sheet, in each case in an adequate amount
for slow-moving, obsolete or unusable inventories. The inventories shown in the
Balance Sheet do not consist of any manufactured to customer specifications
effectively rendering the Inventories saleable only to that customer.
29
3.25 Customers and Suppliers. As of the date hereof, no customer that
individually accounted for more than 5% of Target's gross revenues during the
12-month period preceding the date hereof and no supplier of Target that
individually accounted for more than 5% of Target's purchases during the
12-month period preceding the date hereof has canceled or otherwise terminated,
or made any written threat to Target to cancel or otherwise terminate its
relationship with Target or has at any time on or after the Financial Statement
Date, decreased materially its services or supplies to Target in the case of any
such supplier, or its usage of the services or products of Target in the case of
such customer, and to the Knowledge of Target no such supplier or customer has
indicated either orally or in writing that it intends to cancel or otherwise
terminate its relationship with Target or to decrease materially its services or
supplies to Target or its usage of the services or products of Target, as the
case may be. Target has not knowingly breached, so as to provide a benefit to
Target that was not intended by the parties, any agreement with, or engaged in
any fraudulent conduct with respect to, any customer or supplier of Target.
3.26 Insurance. Target has delivered to Acquiror copies of each insurance
policy (including policies providing property, casualty, liability, and workers'
compensation coverage and bond and surety arrangements) with respect to which
Target is a party, a named insured, or otherwise the beneficiary of coverage as
of the date of this Agreement and such policies are sufficient to meet Target's
existing legal and contractual obligations. With respect to each such insurance
policy: (A) the policy is legal, valid, binding, enforceable and in full force
and effect in all respects and there has been no notice of cancellation or
nonrenewal of the policy received; (B) Target is not in breach or default
(including with respect to the payment of premiums or the giving of notices),
and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination, modification, or
acceleration, under the policy; and (C) Target and, to the Knowledge of Target,
no other party to the policy has repudiated any provision thereof. Section 3.26
of the Disclosure Schedule describes all insurance policies and any
self-insurance arrangements presently maintained by, or for the benefit of,
Target as of the date of this Agreement.
3.27 Disclosure. No representation or warranty made by Target in this
Agreement or the exhibits or schedules hereto or certificates delivered
hereunder, contains or will contain any untrue statement of a material fact, or
omits or will omit to state a material fact necessary to make the statements or
facts contained herein or therein not misleading in light of the circumstances
under which they were furnished.
3.28 Product Liability Claims. At no time during the five years preceding
the date of this Agreement has Target or, to the Knowledge of Target, any of
Target's predecessors in interest, been subject to any product liability claim
relating to any of Target's products and, to the Knowledge of Target, no such
claim is threatened nor does any circumstance or condition exist that Target
reasonably expects to give rise to any such claim.
3.29 Brokers; Finders. No broker, investment bank, financial advisor or
other person or entity, other than Seven Hills, the fees and expenses of which
will be paid by Target, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement or based upon the
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arrangements made by or on behalf of Target. Target has provided a complete and
correct copy of its agreement with Seven Hills to Acquiror or its counsel.
3.30 Questionable Payments. Neither Target nor, to the Knowledge of
Target, any director, officer or other employee, agent or representative of
Target: (i) has made any payments or provided services or other favors in the
United States or in any foreign country in order to obtain preferential
treatment or consideration by any Governmental or Regulatory Authority with
respect to any aspect of the business of Target; or (ii) has made any political
contributions which would not be lawful under the laws of the United States or
the foreign country in which such payments were made. To the Knowledge of
Target, neither Target, nor any director, officer or other employee, agent or
representative of Target or any customer or supplier of any of them has been the
subject of any inquiry or investigation by any Governmental or Regulatory
Authority in connection with payments or benefits or other favors to or for the
benefit of any governmental or armed services official, agent, representative or
employee with respect to any aspect of the business of Target or with respect to
any political contribution.
3.31 Compliance with United States Customs Regulations. Target has not
received any correspondence from the United States Customs Service regarding any
pre-penalty notice, notice of penalty, notice of redelivery, marking notice,
customs inquiry, notice of proposed rate or value advance, notice of audit or
investigation by a special agent, import specialist or other United States
Customs Service Official. Target has not paid and does not currently pay any
buying commissions, quota charges, fees or royalties for design services,
royalties or license fees or management fees.
4. Representations and Warranties of Acquiror and Merger Sub. Acquiror and
Merger Sub represent and warrant to Target as follows:
4.1 Corporate Existence of Acquiror. Acquiror is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware. Merger Sub is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of California. Each of Acquiror and
Merger Sub has full corporate power and authority to execute and deliver this
Agreement and the Ancillary Agreements, to perform its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and thereby.
Each of Acquiror and Merger Sub is duly qualified, licensed or admitted to do
business and is in good standing in those jurisdictions in which the ownership,
use or leasing of its assets and properties or the conduct of its business makes
such qualification, licensing or admission necessary. Neither Acquiror nor
Merger Sub is in violation of any of the provisions of their respective
certificate of incorporation or bylaws.
4.2 Authority. The execution and delivery by each of Acquiror and Merger
Sub of this Agreement and the Ancillary Agreements and the performance by each
of Acquiror and Merger Sub of its obligations hereunder and thereunder have been
duly and validly authorized by the Board of Directors of each of Acquiror and
Merger Sub, no other corporate action on the part of Acquiror or Merger Sub or
their stockholders being necessary. This Agreement has been duly and validly
executed and delivered by each of Acquiror and Merger Sub and constitutes, and
upon the execution and delivery by each of Acquiror and Merger Sub of the
Ancillary Agreements, such Ancillary Agreements will constitute, legal, valid
and binding obligations of
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each of Acquiror and Merger Sub enforceable against each of Acquiror and Merger
Sub in accordance with their terms. The Stock Consideration, when issued in
accordance with the provisions of this Agreement, will be validly issued, fully
paid and nonassessable and will be issued in compliance with all applicable
federal and state securities laws.
4.3 No Conflicts. The execution and delivery by each of Acquiror and
Merger Sub of this Agreement do not, and the execution and delivery by each of
Acquiror and Merger Sub of the Ancillary Agreements, the performance by each of
Acquiror and Merger Sub of its obligations under this Agreement and such
Ancillary Agreements and the consummation of the transactions contemplated
hereby and thereby will not: (a) conflict with or result in a violation or
breach of any of the terms, conditions or provisions of the certificate of
incorporation or by-laws of Acquiror or Merger Sub; or (b) subject to obtaining
the consents, approvals and actions, making the filings and giving the notices
described in Section 4.4, conflict with or result in a violation or breach of
any law or Order applicable to Acquiror or Merger Sub or any of their assets and
properties; except as could not reasonably be expected to have a Material
Adverse Effect on the validity or enforceability of this Agreement or the
Ancillary Agreements or on the ability of each of Acquiror and Merger Sub to
consummate the transactions contemplated hereby or by any of the Ancillary
Agreements or to perform any of their obligations hereunder or thereunder.
4.4 Governmental Approvals and Filings. No consent, approval or
action of, filing with or notice to any Governmental or Regulatory Authority on
the part of Acquiror or Merger Sub is required in connection with the due
execution, delivery or performance of this Agreement or the Ancillary Agreements
or the consummation of the transactions contemplated hereby or thereby, except
for (i) the filing of the Agreement of Merger with the Secretary of State of the
State of California, (ii) the filing by Acquiror of a Current Report on Form 8-K
with the SEC and (iii) any filings required by the Acquiror in connection with
the issuance of the Stock Consideration and the Acquiror Common Stock issuable
pursuant to the Shareholder Agreements.
4.5 Interim Operations of Merger Sub. Merger Sub was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement, has
engaged in no other business activities and has conducted its operations only as
contemplated by this Agreement.
4.6 Legal Proceedings. There are no Orders outstanding and no Actions or
Proceedings pending or, to Acquiror's Knowledge, threatened against, relating to
or affecting Acquiror or Merger Sub which could reasonably be expected to delay
or to result in the issuance of an Order restraining, enjoining or otherwise
prohibiting or making illegal the consummation of any of the transactions
contemplated by this Agreement or any of the Ancillary Agreements or otherwise
to impair the ability of Acquiror or Merger Sub to perform their obligations
under this Agreement and the Ancillary Agreements and to consummate the
transactions contemplated hereby and thereby.
4.7 SEC Filings. As of their respective filing dates, all of the forms,
reports and documents filed by Acquiror with the SEC since December 31, 2003
(together, the "Acquiror SEC Filings") complied in all material respects with
the requirements of the Securities Act and the Securities and Exchange Act, as
the case may be. The financial statements of the Acquiror,
32
including the notes thereto, included in the Acquiror SEC Filings (the "Acquiror
Financial Statements") were complete and correct in all material respects as of
their respective filing dates, complied as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto as of their respective dates, and have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto or, in the case of
unaudited statements, included in Quarterly Reports on Forms 10-Q). The Acquiror
Financial Statements fairly present the consolidated financial condition and
operating results of the Acquiror and its subsidiaries at the dates and during
the periods indicated therein (subject, in the case of unaudited statements, to
normal, recurring year-end adjustments).
4.8 Compliance With Laws. Each of the Acquiror and each of its
subsidiaries has complied with, is not in violation of, and has not received any
notices of violation with respect to, any federal, state, local or foreign
statute, law or regulation with respect to the conduct of its business, or the
ownership or operation of its business, except for such violations or failures
to comply as could not reasonably be expected to have a Material Adverse Effect
on the Acquiror.
4.9 Disclosure. No representation or warranty made by the Acquiror in this
Agreement or the exhibits or schedules hereto or certificates delivered
hereunder or the Acquiror SEC Filings (except to the extent corrected by a
subsequent Acquiror SEC Filing), contains or will contain any untrue statement
of a material fact, or omits or will omit to state a material fact necessary to
make the statements or facts contained herein or therein not misleading in light
of the circumstances under which they were furnished.
5. Target Covenants; Conduct Prior to the Effective Time. Target covenants
and agrees with Acquiror and Merger Sub that, at all times from and after the
date hereof until the Closing, Target will comply with all applicable covenants
and provisions of this Section 5, except to the extent Acquiror and Merger Sub
may otherwise consent in writing.
5.1 Regulatory and Other Approvals. Target will (a) proceed diligently,
expeditiously and in good faith as promptly as practicable to obtain all
consents, approvals or actions of, to make all filings with and to give all
notices to Governmental or Regulatory Authorities or any other person required
of Target to consummate the transactions contemplated hereby and by the
Ancillary Agreements, (b) provide such other information and communications to
such Governmental or Regulatory Authorities or other persons as such
Governmental or Regulatory Authorities or other persons may reasonably request
in connection therewith, and (c) cooperate with Acquiror in obtaining all
consents, approvals or actions of, making all filings with and giving all
notices to Governmental or Regulatory Authorities or other persons required of
Acquiror to consummate the transactions contemplated hereby and by the Ancillary
Agreements. Target will provide prompt notification to Acquiror when any such
consent, approval, action, filing or notice referred to in clause (a) above is
obtained, taken, made or given, as applicable, and will advise Acquiror of any
communications (and, unless precluded by law, provide copies of any such
communications that are in writing) with any Governmental or Regulatory
Authority or other person regarding any of the transactions contemplated by this
Agreement or any of the Ancillary Agreements.
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5.2 Investigation by Acquiror. Target will (a) provide (i) Acquiror and
(ii) the Representatives of Acquiror with access during normal business hours,
to all officers, employees, agents and accountants of Target and Target's
assets, properties, books and records, and (b) make available to Acquiror and
such other persons all such information and data concerning the business and
operations of Target as Acquiror or any of such other persons reasonably may
request in connection with such investigation (including such access and
information as may be required for an environmental audit), except to the extent
that furnishing any such information or data would violate any law, Order,
Contract or Permit and/or Approval applicable to Target or by which any of its
assets or properties is bound.
5.3 Conduct of Business. Except as set forth in Section 5.3 of the
Disclosure Schedule, Target will conduct its business only in the ordinary
course. Without limiting the generality of the foregoing, Target will (a)
preserve intact the present business organization and reputation of Target in
all material respects, (b) use its commercially reasonable efforts to keep
available and retain the services of all employees of Target and to encourage
such employees to continue in the employment of Target, (c) maintain the assets
and properties of Target in good working order and condition, subject to
ordinary wear and tear, (d) use its commercially reasonable efforts to maintain
the good will of key customers, suppliers and lenders and other persons with
whom Target otherwise has significant business relationships, and (e) maintain
Target Intellectual Property and preserve all protections thereof, including but
not limited to responding appropriately and in a timely manner to any office
action issued by the United States Patent and Trademark Office or to any other
inquiry by any other governmental or regulatory agency or any third party
regarding Target Intellectual Property.
5.4 Certain Restrictions. Except as contemplated by this Agreement or as
set forth in Section 3.6 of the Disclosure Schedule, Target will refrain from:
(a) amending its articles of incorporation or by-laws (or other
comparable corporate charter documents) or taking any action with respect to any
such amendment or any recapitalization, reorganization, liquidation or
dissolution of any such corporation;
(b) authorizing, issuing, selling or otherwise disposing of any
shares of capital stock of or any option, warrant or other right with respect to
the capital stock of Target, or modifying or amending any right of any holder of
outstanding shares of capital stock of or options with respect to Target;
(c) declaring, setting aside or paying any dividend or other
distribution, directly or indirectly, by Target, or directly or indirectly
redeeming, purchasing or otherwise acquiring any capital stock of or any option
with respect to Target;
(d) other than in the ordinary course of business, acquiring or
disposing of, or incurring any Encumbrance on, any assets and properties;
(e) transferring to any person or entity any rights to Target
Intellectual Property;
(f) entering into, amending, modifying, terminating (partially or
completely), granting any waiver under or giving any consent with respect to any
Contracts or licenses that
34
exceed ten thousand ($10,000) in the aggregate or have a term exceeding six
months, except for revenue related licensing agreement and other Contracts
entered into in the ordinary course of business;
(g) (i) incurring or obtaining a draw on any Indebtedness or (ii)
other than as contemplated by this Agreement, purchasing, canceling, prepaying
or otherwise providing for a complete or partial discharge in advance of a
scheduled payment date with respect to, or waiving any right under, any
Indebtedness;
(h) engaging with any person in any merger or other business
combination;
(i) making capital expenditures or commitments for additions to
property, plant or equipment constituting capital assets or entering into any
operating lease;
(j) except to the extent required by applicable law, making any
change in (A) any pricing, investment, accounting, financial reporting,
inventory, credit, allowance or Tax practice or policy, (other than the Merger
causing Target no longer to qualify as an S corporation under Section 1361 of
the Code) or (B) any method of calculating any bad debt, contingency or other
reserve for accounting, financial reporting or Tax purposes;
(k) except to the extent required by applicable law, adopting,
entering into or becoming bound by any Target Employee Plan, employment-related
Contract or collective bargaining agreement, or amending, modifying or
terminating (partially or completely) any such Target Employee Plan,
employment-related Contract or collective bargaining agreement;
(l) making any change in its fiscal year;
(m) causing or committing the damage, destruction, or loss of
(whether or not covered by insurance) any property other than dispositions of
property in the ordinary course of business;
(n) making any loan to, any director, officer, or employee, except
cash advances in the ordinary course of business;
(o) granting any increase in the base compensation of any director,
or, except in the ordinary course of business, any officer or employee;
(p) making any other change in employment terms that will be in
force on the Closing Date for any director, officer, or employee;
(q) initiating any lawsuit or similar grievance except in the
ordinary course of business; or
(r) entering into any Contract to do or engage in any of the
foregoing.
5.5 Litigation. From the date hereof through the Closing Date, Target
shall promptly notify Acquiror of any investigations of which Target has
knowledge or any lawsuits, claims,
35
notices of violation or proceedings that after the date hereof are commenced or,
to the Knowledge of Target, threatened, against Target.
5.6 Insurance. From the date hereof through the Closing Date, Target shall
maintain in force (including necessary renewals thereof) any insurance policies
listed on Section 3.26 of the Disclosure Schedule, except to the extent that
they may be replaced with policies or self-insurance determinations appropriate
to insure that the assets, properties and business of Target to the same extent
as currently insured.
5.7 Exclusivity. Neither Target nor any of its Affiliates, agents, or
representatives will (i) solicit, initiate, or encourage the submission of any
proposal or offer from any person relating to the acquisition of any capital
stock or other voting securities of Target (other than pursuant to director and
employee stock options and contractual obligations disclosed in the Disclosure
Schedule), or any substantial portion of the assets, of Target (including any
acquisition structured as a merger, consolidation, or share exchange) or (ii)
participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any person to do or seek any of the
foregoing.
5.8 Termination of 401(k) Plan. Target shall have taken all actions
necessary or appropriate to terminate, effective no later than the date
immediately prior to the Closing, any Target Employee Plan that contains a cash
or deferred arrangement intended to qualify under Section 401(k) of the Code,
unless the Acquiror, in its sole and absolute discretion, agrees to sponsor and
maintain any such plans by providing Target with written notice of such election
at least three (3) days before the Closing Date. Unless the Acquiror provides
such written notice, the Acquiror shall have received from Target evidence that
that Target's board of directors has adopted resolutions to terminate such plans
effective as of the date immediately preceding the Closing (the form and
substance of which resolutions shall be subject to the review and approval of
the Acquiror).
5.9 Approval of Shareholders. Target shall promptly take all action
necessary in accordance with the California Law and its Articles of
Incorporation and Bylaws to obtain the written consent of the Target
shareholders approving the Merger as soon as practicable. Target shall use its
efforts to solicit from shareholders of Target written consents in favor of the
Merger and shall take all other action necessary or advisable to secure the vote
or consent of shareholders required to effect the Merger.
5.10 Restricted Shares. The parties hereto acknowledge and agree
that the shares of Acquiror Common Stock issuable to the Shareholders pursuant
to Section 2.6 hereof shall constitute "restricted securities" within the
Securities Act. The certificates of Acquiror Common Stock shall bear the legends
set forth in Section 2.6(g). It is acknowledged and understood that Acquiror is
relying on the written representations made by each shareholder of Target in the
Shareholder Agreements.
5.11 Fulfillment of Conditions. Target will use commercially reasonable
efforts to satisfy each condition to the obligations of Acquiror contained in
this Agreement and will not, take or fail to take any action that could
reasonably be expected to result in the nonfulfillment of
36
any such condition. Target shall give prompt written notice to Acquiror of any
event, condition or circumstance occurring from the date hereof through the
Closing Date that would cause the representations and warranties set forth in
Section 3 of this Agreement to become untrue in any material respect or that
would constitute a material violation or breach of this Agreement. No disclosure
pursuant to this Section 5.11 shall be deemed to amend or supplement the
Disclosure Schedule, to prejudice any right of Acquiror to assert a claim for
indemnity under Section 9 hereof, or to prevent or cure any misrepresentation or
breach of this Agreement. Notwithstanding the foregoing, the delivery of any
notice pursuant to this Section 5.11 shall not (a) constitute an admission that
such an event has occurred or (b) limit or otherwise effect any remedies or
defenses available to the party giving such notice.
6. Acquiror Covenants. Acquiror covenants and agrees that, at all times
from and after the date hereof until the Closing (or as otherwise provided in
this Section 6), Acquiror will comply with all covenants and provisions of this
Section 6, except to the extent Target may otherwise consent in writing.
6.1 Regulatory and Other Approvals. Acquiror will (a) proceed
diligently, expeditiously and in good faith obtain as promptly as practicable
all consents, approvals or actions of, to make all filings with and to give all
notices to Governmental or Regulatory Authorities or any other person required
of Acquiror and Merger Sub to consummate the transactions contemplated hereby
and by the Ancillary Agreements, (b) provide such other information and
communications to such Governmental or Regulatory Authorities or other persons
as such Governmental or Regulatory Authorities or other persons may reasonably
request in connection therewith, and (c) provide reasonable cooperation to
Target in obtaining all consents, approvals or actions of, making all filings
with and giving all notices to Governmental or Regulatory Authorities or other
persons required of Target to consummate the transactions contemplated hereby
and by the Ancillary Agreements. Acquiror will provide prompt notification to
Target when any such consent, approval, action, filing or notice referred to in
clause (a) above is obtained, taken, made or given, as applicable, and will
advise Target of any communications (and, unless precluded by law, provide
copies of any such communications that are in writing) with any Governmental or
Regulatory Authority or other person regarding any of the transactions
contemplated by this Agreement or any of the Ancillary Agreements.
6.2 Fulfillment of Conditions. Acquiror will use its commercially
reasonable efforts to satisfy each condition to the obligations of Target
contained in this Agreement and will not take or fail to take any action that
could reasonably be expected to result in the nonfulfillment of any such
condition. Acquiror shall give prompt written notice to Target of any event,
condition or circumstance occurring from the date hereof through the Closing
Date that would cause the representations and warranties set forth in Section 4
of this Agreement to become untrue in any material respect or that would
constitute a material violation or breach of this Agreement.
6.3 Sale of Purchaser Stock. For a period of forty-eight months
after the Effective Time, with a view to making available to the Shareholders
the benefits of Rule 144 promulgated under the Securities Act and any other rule
or regulation of the SEC that may at any time permit a party to the Shareholder
Agreement to sell the Acquiror Common Stock issued pursuant to this Agreement to
the public without registration, Acquiror agrees to:
37
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times so long as Acquiror remains
subject to the periodic reporting requirements under Sections 13 or 15(d) of the
Exchange Act;
(b) file with the SEC in a timely manner all reports and other
documents required of Acquiror under the Securities Act and the Exchange Act;
(c) furnish to any Shareholder, so long as such Shareholder owns any
Acquiror Common Stock acquired hereunder, forthwith upon request (i) a written
statement by Acquiror that it has complied with the reporting requirements of
SEC Rule 144, the Securities Act and the Exchange Act, and (ii) such other
information as may be reasonably requested in availing any Shareholder of any
rule or regulation of the SEC which permits the selling of any such securities
without registration;
(d) instruct its legal counsel to furnish an opinion with respect to
adherence with Rule 144 if such sale of Acquiror Common Stock is in a routine
transaction and the Shareholder delivers customary supporting documentation; and
(e) remove all restrictive legends from the certificates
representing shares of the Acquiror Common Stock held by non-affiliates on the
two year anniversary of the Closing Date pursuant to Rule 144(k).
7. Conditions to the Merger.
7.1 Obligations of the Parties. The respective obligations of each
party to this Agreement to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, by agreement of all the parties hereto:
(a) Orders and Laws. There shall not be in effect on the
Closing Date any Order or law restraining, enjoining or otherwise prohibiting or
making illegal the consummation of any of the transactions contemplated by this
Agreement or any of the Ancillary Agreements.
(b) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be and remain in
effect, nor shall any proceeding brought by an administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending, which could reasonably be
expected to have a Material Adverse Effect on the Acquiror after the Closing,
nor shall there be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger, which makes the
consummation of the Merger illegal.
(c) Regulatory Consents and Approvals. All consents, approvals
and actions of, filings with and notices to any Governmental or Regulatory
Authority necessary to permit Target, Merger Sub and Acquiror to perform their
obligations under this Agreement and the Ancillary Agreements and to consummate
the transactions contemplated hereby and thereby
38
shall have been duly obtained, made or given and shall be in full force and
effect, and all waiting periods imposed by any Governmental or Regulatory
Authority necessary for the consummation of the transactions contemplated by
this Agreement and the Ancillary Agreements, shall have expired or been
terminated.
(d) Ancillary Agreement. The parties shall execute the
Ancillary Agreements at or before the Closing.
(e) Certain Actions. In addition to and not in limitation of
the parties' obligations pursuant to Section 5.1 and Section 6.1, each party
shall act diligently, expeditiously and in good faith (i) to obtain any
government clearances required for the consummation of the transactions
contemplated by this Agreement, and (ii) to resolve any issues raised by any
Governmental or Regulatory Authority, so as to consummate the Merger and the
transactions contemplated by this Agreement, as promptly as practicable.
(f) Offer Letters. Prior to the Closing, the Acquiror and the
employees of Target shall have executed the Offer Letters. The Offer Letters
shall be mutually acceptable and provide for the grant of options to the
employees of Target for an aggregate of 200,000 shares of Acquiror Common Stock.
7.2 Obligations of Acquiror and Merger Sub. The obligations of Acquiror
and Merger Sub to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, by Acquiror:
(a) Representations and Warranties. The representations
and warranties made by Target in this Agreement, disregarding (solely for
purposes of this Section 7.2(a)) any additional materiality or Material Adverse
Effect limitations therein, shall be true and correct on and as of the Closing
Date or, in the case of representations and warranties made as of a specified
date earlier than the Closing Date, on and as of such earlier date, except where
the failure of such representations and warranties to be true and correct could
not reasonably be expected to have a Material Adverse Effect on Acquiror or
Merger Sub.
(b) Performance. Target in all material respects shall have
performed and complied with, the agreements, covenants and obligations required
by this Agreement to be so performed or complied with by Target at or before the
Closing.
(c) Shareholder Approval. This Agreement and the Merger shall
be approved by the holders of 100% of the outstanding shares of Target Common
Stock.
(d) Officers' Certificates. Target shall have delivered to
Acquiror (i) a certificate, dated the Closing Date and executed by the President
of Target certifying to the satisfaction of the conditions set forth in Sections
7.2(a) and (b) and (ii) a certificate, dated the Closing Date and executed by
the Secretary or any Assistant Secretary of Target, certifying as to the truth
and accuracy of, and attaching copies of the certificate or articles of
incorporation, bylaws and all board resolutions adopted in connection with this
Agreement and the Ancillary Agreements, of Target, in each case in a form
reasonably satisfactory to Acquiror.
39
(e) Shareholder Agreements. Each of the holders of the
outstanding shares of Target Common Stock shall have executed and delivered a
Shareholder Agreement to Acquiror.
(f) Third Party Consents and Releases. The consents (or in
lieu thereof waivers), including, but not limited to, any releases and/or
substitutions of guarantees or letters of credit relating to intellectual
property, real estate or otherwise, as listed in Section 3.4 to the Disclosure
Schedule, shall have been obtained and shall be in full force and effect.
(g) Opinion of Counsel. Acquiror shall have received the
opinion of outside counsel to Target, dated the Closing Date, substantially in
the form and substance set forth in Exhibit C attached hereto.
(h) Financial Statements. Target shall have delivered to
Acquiror a certificate, dated the Closing Date and executed by the President of
Target certifying the accuracy of the Closing Balance Sheet.
(i) No Other Litigation. There shall not be pending any legal
proceeding: (i) challenging or seeking to restrain or prohibit the consummation
of the Merger or any of the other transactions contemplated by this Agreement;
(ii) relating to the Merger and seeking to obtain from Acquiror or any of its
subsidiaries or Target, any damages or other relief that would be material to
the Acquiror; (iii) seeking to prohibit or limit in any material respect
Acquiror's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to any of shares of Target Common Stock;
or (iv) which would affect adversely the right of Acquiror or Target to own the
assets or operate the business of Target.
(j) Resignations. Each of the directors of Target shall have
resigned and each of the officers of Target, if requested by Acquiror, shall
have resigned from such positions.
(k) Escrow Agreement. Target and the Shareholders' Agent shall
have executed the Escrow Agreement.
(l) Dissenters' Rights. No shares of Target Common Stock
outstanding immediately prior to the Effective Time shall be eligible as
Dissenting Shares.
(m) Termination of 401(k) Plan. Target shall have taken all
actions necessary or appropriate to terminate, effective no later than the date
immediately prior to the Closing, any Target Employee Plan that contains a cash
or deferred arrangement intended to qualify under Section 401(k) of the Code,
unless the Acquiror, in its sole and absolute discretion, agrees to sponsor and
maintain any such plans by providing Target with written notice of such election
at least three (3) days before the Closing Date. Unless the Acquiror provides
such written notice, the Acquiror shall have received from Target evidence that
that Target's board of directors has adopted resolutions to terminate such plans
effective as of the date immediately preceding the Closing (the form and
substance of which resolutions shall be subject to the review and approval of
the Acquiror).
40
7.3 Obligations of Target. The obligations of Target to consummate
and effect this Agreement and the transactions contemplated hereby shall be
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, by Target:
(a) Representations and Warranties. The representations and
warranties made by Acquiror and Merger Sub in this Agreement, disregarding
(solely for purposes of this Section 7.3(a)) any additional materiality or
Material Adverse Effect limitations therein, shall be true and correct on and as
of the Closing Date or, in the case of representations and warranties made as of
a specified date earlier than the Closing Date, on and as of such earlier date,
except where the failure of such representations and warranties to be true and
correct could not reasonably be expected to have a Material Adverse Effect on
Target or Merger Sub.
(b) Performance. Acquiror in all material respects shall have
performed and complied with, the agreements, covenants and obligations required
by this Agreement to be so performed or complied with by Acquiror and Merger Sub
at or before the Closing.
(c) Officers' Certificates. Acquiror shall have delivered to
Target (i) a certificate, dated the Closing Date and executed by a proper
officer of Acquiror certifying to the satisfaction of the conditions set forth
in Sections 7.2(a) and (b) and (ii) a certificate, dated the Closing Date and
executed by a proper officer of Acquiror and Merger Sub, certifying as to the
truth and accuracy of, and attaching copies of the articles of incorporation and
bylaws of Acquiror and Merger Sub and all board resolutions adopted in
connection with this Agreement and the Ancillary Agreements, of Acquiror and
Merger Sub, in each case in a form reasonably satisfactory to Target.
(d) Escrow Agreement. Acquiror and the Escrow Agent shall have
executed the Escrow Agreement.
(e) Offer Letters. Each of the Offer Letters shall continue in
full force and effect with respect to Acquiror as of the Closing Date.
(f) Opinion of Counsel. Target shall have received the opinion
of outside counsel to Acquiror and Merger Sub, dated the Closing Date,
substantially in the form and substance set forth in Exhibit D attached hereto.
8. Termination, Amendment and Waiver.
8.1 Termination. This Agreement may be terminated, and the transactions
contemplated hereby may be abandoned:
(a) at any time before the Effective Time, by mutual written
agreement of Acquiror and Target;
(b) at any time before the Effective Time, by Target or Acquiror, in
the event that any Order or law becomes effective restraining, enjoining or
otherwise prohibiting or making illegal the consummation of any of the
transactions contemplated by this Agreement or
41
any of the Ancillary Agreements, upon notice to the non-terminating party by the
terminating party;
(c) at any time after December 31, 2004, by Target or Acquiror, by
notice to the other party if the Closing shall not have occurred on or before
such date and the failure of the Closing to occur is not caused by a material
breach of this Agreement by the terminating party;
(d) at any time before the Effective Time, by Target, by notice to
Acquiror, in the event of a breach of this Agreement by Acquiror which if
uncured would cause one or more of the conditions to Closing set forth in
Section 7.3 not to be satisfied and which remains uncured for ten (10) days
after notice thereof is given to Acquiror by Target; or
(e) at any time before the Closing, by Acquiror, by notice to
Target, in the event of a breach of this Agreement by Target which if uncured
would cause one or more of the conditions to Closing set forth in Section 7.2
not to be satisfied and which remains uncured for ten (10) days after notice
thereof is given to Target by Acquiror.
8.2 Effect of Termination. If this Agreement is validly terminated
pursuant to Section 8.1, this Agreement will forthwith become null and void, and
there will be no liability or obligation on the part of Target, Merger Sub or
Acquiror (or any of their respective officers, directors, employees, agents or
other representatives or Affiliates), except that the provisions with respect to
fees and expenses in Section 11.3 and confidentiality in Section 11.5 will
continue to apply following any such termination. Notwithstanding any other
provision in this Agreement to the contrary, upon termination of this Agreement
pursuant to Section 8.1 (other than pursuant to Section 8.1(a)) Target will
remain liable to Acquiror for any willful breach of Section 5.11 of this
Agreement by Target existing at the time of such termination, and Acquiror will
remain liable to Target or any willful breach of Section 6.3 of this Agreement
by Acquiror existing at the time of such termination, and either party may seek
such remedies, including damages and fees of attorneys, against the other with
respect to any such breach as are provided in this Agreement or as are otherwise
available at law or in equity.
9. Escrow and Indemnification. The rights and obligations of the parties
under this Agreement shall be subject to the following terms and conditions:
9.1 Survival of Representations and Warranties; Indemnification Period.
Notwithstanding any right of Acquiror to fully to investigate the business of
Target, and notwithstanding any facts determinable by Acquiror pursuant to such
investigation or right of investigation, the representations and warranties of
Target, Acquiror and Merger Sub contained in this Agreement and in any
certificates delivered pursuant to Section 7.2(d) and 7.3(c) shall survive the
Closing for a period of one year from the Closing Date (the "Escrow Termination
Date"). Subsequent to the Closing Date, the provisions of this Section 9 shall
be the sole and exclusive remedy against the Principal Shareholders and the
other Shareholders for the breach of this Agreement and the certificates
delivered pursuant to Section 7.2(d). The Principal Shareholders, the other
Shareholders and Acquiror shall not have any liability whatsoever with respect
to any breach of such representations, warranties, agreements or covenants after
the Escrow Termination Date, except for claims then pending or theretofore
asserted in writing by any party and delivered to the other party in accordance
with the terms and conditions of this
42
Agreement and the Escrow Agreement. Notwithstanding the foregoing, Acquiror
shall not be limited in any manner from exercising any remedy at law or in
equity to which it may be entitled as a result of fraud by Target or any of its
Affiliates in connection with the transactions contemplated hereby. All
post-closing covenants and agreements shall continue indefinitely unless
otherwise provided for herein. Acquiror Losses in each case shall be net of the
amount of any insurance proceeds and indemnity contribution recovered by the
Acquiror Indemnified Parties.
9.2 Indemnification by Target. Subject to the provisions and limitations
contained in this Section 9, from and after the Closing, Principal Shareholders
hereby agree to indemnify, defend and hold harmless Acquiror, its Affiliates and
Merger Sub (collectively, the "Acquiror Indemnified Parties") from and against
any and all Losses, Actions, Proceedings, claims and Liabilities, including,
without limitation, reasonable out of pocket expenses of investigation and
reasonable attorneys' fees and expenses in connection with any action, suit or
proceeding, including proceedings between the parties hereto (collectively
"Acquiror Losses") which the Acquiror Indemnified Parties may at any time
sustain or incur, which are occasioned by, caused by or arise out of any
inaccuracy in or breach of any of the representations and warranties of Target
in this Agreement, or any breach of any covenants or other agreements made by
Target in this Agreement to the extent not waived in writing by Acquiror. For
the purposes of this Section 9, references to the terms "material" and
"materially" and Material Adverse Effect limitations shall be ignored for the
purposes of determining if there was a breach or inaccuracy of the
representations and warranties. Principal Shareholders shall not have any right
of contribution from Target with respect to any Acquiror Losses claimed by any
Acquiror Indemnified Parties after the Closing.
9.3 Limitation of Target' Liability. The liability of the Principal
Shareholders under Section 9.2 shall be limited as follows:
(a) The maximum amount payable by the Principal Shareholders
in respect of all claims for indemnification under this Agreement will not
exceed the Escrow Amount.
(b) The Escrow Funds shall be the sole source of recovery for
the Acquiror Indemnified Parties for all claims under this Agreement, excluding
claims for fraud.
(c) Any and all claims for indemnification under this Section
must be made prior to the Escrow Termination Date.
(d) No amounts shall be withdrawn from the Escrow Funds and no
indemnification shall be owed to the Acquiror unless and until the aggregate
amount of Acquiror Losses exceeds One Hundred Thousand Dollars ($100,000). Once
this threshold is reached all Acquiror Losses from the first dollar shall be
subject to the indemnity and withdrawal from Escrow Funds subject to the
limitations set forth herein.
9.4 Escrow Period. Subject to the following requirements, the Escrow Funds
shall remain in existence from the Closing Date until the Escrow Termination
Date (the "Escrow Period"). Upon the expiration of the Escrow Period, the Escrow
Agent shall deliver to the
43
Principal Shareholders the remaining Escrow Funds; provided, however that the
amount of Escrow Funds, which, in the reasonable judgment of Acquiror, subject
to the objection of the Shareholders' Agent and the subsequent arbitration of
the claim in the manner provided in the Escrow Agreement, are necessary to
satisfy any unsatisfied claims for Acquiror Losses delivered to the Escrow Agent
in accordance with the terms of the Escrow Agreement prior to the expiration of
such Escrow Period with respect to facts and circumstances existing on or prior
to the Escrow Termination Date shall remain in the Escrow Fund (and the Escrow
Funds shall remain in existence) until such unsatisfied claims for Acquiror
Losses have been resolved. As soon as such claims for Acquiror Losses have been
resolved, the Escrow Agent shall deliver to the Principal Shareholders the
reserved Escrow Funds and all property remaining in the Escrow Funds and not
required to satisfy such claims. Delivery of the Escrow Funds to the Principal
Shareholders pursuant to this Section 9.4 shall be made in proportion to their
respective original contributions to the Escrow Funds.
9.5 Defense of Third Party Claims.
(a) The indemnified party seeking indemnification under this
Agreement shall promptly notify the indemnifying party of the assertion of any
Claim, Actions and/or Proceedings, or the commencement of any Action and/or
Proceeding by any Third Party, in respect of which indemnity may be sought
hereunder and will give the indemnifying party such information with respect
thereto as the indemnifying party may reasonably request, but failure to give
such notice shall not relieve the indemnifying party of any liability hereunder
(except to the extent that the indemnifying party has suffered actual prejudice
by such failure).
(b) The indemnifying party or the indemnified party, as the
case may be, shall have the right to participate in (but not control), at its
own expense, the defense of any Claim, Action, and/or Proceeding by a Third
Party in respect of which indemnity may be sought hereunder (a "Third-Party
Claim"), that the other is defending, as provided in this Agreement.
(c) The indemnified party shall have the sole and exclusive
right to settle any Third-Party Claim, with the consent of the indemnifying
party, which shall not be unreasonably withheld or delayed, on such terms and
conditions as it deems reasonably appropriate, provided that no settlement of
any such claim will alone be determinative of the amount of any indemnity
hereunder.
9.6 Shareholders' Agent. The Shareholders' Agent shall be hereby appointed
as the representative of the Principal Shareholders and as the attorney-in-fact
and agent for and on behalf of the Principal Shareholders with respect to the
execution of the Escrow Agreement, any claims by any Acquiror Indemnified Party
against the Escrow Funds under this Section 9 and any amendments to the Escrow
Agreement. The Shareholders' Agent hereby accepts such appointment. The
Shareholders' Agent will take any and all actions and make any decisions
required or permitted to be taken by the Shareholders' Agent under the Escrow
Agreement and this Agreement, including the exercise of the power to (1) agree
to, negotiate, enter into settlements and compromises of, commence any suit,
action or proceeding, and comply with orders of courts with respect to, claims
for indemnification, (2) litigate, resolve, settle or compromise any contested
claim, and (3) take all actions necessary in the judgment of the Shareholders'
Agent for the accomplishment of the foregoing. The Shareholders' Agent will
44
have authority and power to act on behalf of each Principal Shareholder with
respect to the disposition, settlement or other handling of all claims against
the Escrow Funds under this Section 9 and all related rights or obligations of
the Principal Shareholder arising under this Section 9. The Shareholders' Agent
will also have authority and power to act on behalf of Principal Shareholders
with respect to any amendments to the Escrow Agreement.
(a) A decision, act, consent or instruction of the
Shareholders' Agent hereunder shall constitute a decision, act, consent or
instruction of the Principal Shareholders and shall be final, binding and
conclusive upon each of the Principal Shareholders, and the Escrow Agent and
Acquiror may rely upon any such decision, act, consent or instruction of the
Shareholders' Agent as being the decision, act, consent or instruction of each
Principal Shareholder. The Escrow Agent and Acquiror shall be relieved from any
liability to any other party for any acts done by them in accordance with such
decision, act, consent or instruction of the Shareholders' Agent.
(b) The Shareholders' Agent will incur no liability with
respect to any action taken or suffered by any party in reliance upon any
notice, direction, instruction, consent, statement or other document believed by
such Shareholders' Agent to be genuine and to have been signed by the proper
person (and shall have no responsibility to determine the authenticity thereof),
nor for any other action or inaction, except his own gross negligence, bad faith
or willful misconduct. In all questions arising under this Agreement or the
Escrow Agreement, the Shareholders' Agent may rely on the advice of outside
counsel, and the Shareholders' Agent will not be liable to anyone for anything
done, omitted or suffered in good faith by the Shareholders' Agent based on such
advice. Except as expressly provided herein, the Shareholders' Agent will not be
required to take any action involving any expense unless the payment of such
expense is made or provided for in a manner satisfactory to such Shareholders'
Agent.
(c) Each Principal Shareholder shall severally but not jointly
indemnify the Shareholders' Agent and hold the Shareholders' Agent harmless
against any loss, liability or expense incurred without gross negligence, bad
faith or willful misconduct, to the extent permitted by applicable law, on the
part of the Shareholders' Agent and arising out of or in connection with the
acceptance or administration of the Shareholders' Agent's duties hereunder,
including the reasonable fees and expenses of any legal counsel retained by the
Shareholders' Agent.
(d) At any time during the term of the Escrow Agreement,
Principal Shareholders may, by written consent, appoint a new representative as
the Shareholders' Agent. Notice together with a copy of the written consent
appointing such new representative and bearing the signatures of the Principal
Shareholders must be delivered to Acquiror and the Escrow Agent not less than
ten (10) calendar days prior to such appointment. Such appointment will be
effective upon the later of the date indicated in the consent or the date such
consent is received by Acquiror and the Escrow Agent.
(e) In the event that the Shareholders' Agent becomes unable
or unwilling to continue in her or its capacity as Shareholders' Agent, or if
the Shareholders' Agent resigns as a Shareholders' Agent, Principal Shareholders
may, by written consent, appoint a new representative as the Shareholders'
Agent. Notice and a copy of the written consent appointing
45
such new representative and bearing the signatures of the Principal Shareholders
must be delivered to Acquiror and the Escrow Agent. Such appointment will be
effective upon the later of the date indicated in the consent or the date such
consent is received by Acquiror and the Escrow Agent.
10. Tax Matters
10.1 Section 338 Election.
(a) Upon the written request of Acquiror to be made within 60
days of the Closing Date (i) Target and the Shareholder's Agent, on behalf of
each Shareholder under the special power of attorney provided for in the
Shareholder Agreements shall join with Acquiror in making a timely election
under Section 338(h)(10) of the Code and any corresponding elections under state
and local tax laws (collectively, the "Election") with respect to the Merger and
(ii) Target and the Shareholders' Agent shall cooperate with Acquiror to take
all actions necessary and appropriate (including executing and filing Form 8023
and such other forms, returns, elections, schedules and other documents as may
be required) to effect and preserve a timely Election in accordance with Section
338(h)(10) of the Code or any successor provisions (and all corresponding state
and local tax laws). Acquiror will indemnify each Shareholder for any Taxes that
may be imposed upon such Shareholder attributable to making the Election to the
extent that such Taxes (i) exceed the Taxes that such Shareholder would have
owed in respect of the disposition of such Shareholder's Target Common Stock in
the Merger had the Election not been made, and (ii) arise from an adjustment to
such Shareholder's Taxes by the IRS or other taxing authority (including any
Taxes, determined on a grossed-up basis, incurred as a result of receipt of an
indemnification payment made pursuant to this sentence).
(b) In connection with the Election, Acquiror shall provide to
Target a schedule, which shall be subject to approval by Target (not to be
unreasonably delayed or withheld) and which sets forth the allocation (the
"Acquisition Allocation Schedule") of the Merger Consideration among the assets
of Target. Such allocation shall be made in accordance with Section 338(h)(10)
of the Code and any applicable Treasury Regulations, provided that the
allocation will allocate to Target assets that would give rise to ordinary
income (rather than capital gain) upon the deemed disposition of Target's assets
in connection with the Election, amounts not in excess of the adjusted tax basis
of such ordinary income assets. The parties hereto shall take no position
inconsistent with the Acquisition Allocation Schedule.
10.2 Returns; Indemnification; Liability for Taxes.
(a) The Shareholders' Agent shall cause Target to prepare and file
on a timely basis all Tax Returns with respect to Target for all taxable periods
ending on or before the Closing Date ("Target Tax Returns") and shall cause the
Shareholders to pay directly all Taxes payable with respect to such Target Tax
Returns, other than Taxes attributable to the Election as described below. The
Principal Shareholders shall indemnify and hold Acquiror harmless against and
from (i) all Taxes of Target for all taxable years or periods which end on or
before the Closing Date (excluding Taxes attributable to the Election which
shall be the responsibility of Target and Acquiror as provided in Section
10.2(b); (ii) all Taxes for all taxable years or periods of all members or
subsidiaries of any affiliated, unitary or combined group of which
46
Target is or has been a member prior to the Closing Date; and (iii) with respect
to any taxable period commencing before the Closing Date and ending after the
Closing Date (a "Straddle Period") all Taxes of Target attributable to the
portion of the Straddle Period prior to and including the Closing Date (the
"Pre-Closing Period") other than Taxes attributable to the Election. For
purposes of this Agreement, the portion of any Tax that is attributable to the
Pre-Closing Period shall be (i) in the case of a Tax that is not based on net
income, gross income, sales, premiums or gross receipts, the total amount of
such Tax for the period in question multiplied by a fraction, the numerator of
which is the number of days in the Pre-Closing Period, and the denominator of
which is the total number of days in such Straddle Period, and (ii) in the case
of a Tax that is based on any of net income, gross income, sales, premiums or
gross receipts, the Tax that would be due with respect to the Pre-Closing Period
if such Pre-Closing Period were a separate taxable period, except that
exemptions, allowances, deductions or credits that are calculated on an annual
basis (such as the deduction for depreciation or capital allowances) shall be
apportioned on a per diem basis.
(b) Shareholders' Agent shall provide Acquiror with a copy of
Target's final California S corporation return Form 100S (the "100S Return") no
later than thirty days prior to filing of the 100S Return. The 100S Return shall
not be filed until Acquiror provides its written consent to the proposed
calculation of the California 1.5% corporate income tax (the "CA Corp. Tax)
shown as payable on the 100S Return, which consent shall not be unreasonably
withheld or delayed. Within five days prior to the Shareholders' Agent's filing
of the Target Tax Returns described in Section 10.2(a), Acquiror shall pay to
Shareholders' Agent the Taxes attributable to the Election, including the CA
Corp. Tax. For clarification purposes, the additional CA Corp. Tax payable as a
result of the Election shall be an amount equal to the difference between (x)
the aggregate amount of CA Corp. Tax payable by Target with the Election in
effect (including any additional CA Corp. Tax resulting from receipt of the
payment described herein) and (y) the aggregate amount of CA Corp. Tax which
Target would have been required to pay with respect to such 100S Return without
the Election. If there is any adjustment to the additional CA Corp. Tax
attributable to the Election that is payable with respect to the 100S Return as
a result of any California income tax audit, Acquiror shall pay any increased
additional CA Corp. Tax payable as a result of such adjustment and shall receive
a refund of any decreased additional CA Corp. Tax payable as a result of such
adjustment.
(c) Acquiror shall prepare and file (or cause to be prepared and
filed) on a timely basis all Tax Returns of Target relating to periods ending
after the Closing Date and shall pay, and shall indemnify and hold Target and
the Shareholders harmless against and from (i) all Taxes of Target for any
taxable year or period commencing after the Closing Date; and (ii) all Taxes of
Target for any Straddle Period (other than Taxes, excluding Taxes attributable
to the Election, attributable to the Pre-Closing Period which if paid by
Acquiror pursuant to this Section 10.2(b)) shall be promptly reimbursed by
Target).
10.3 Refunds and Credits.
(a) All refunds or credits of Taxes for or attributable to taxable
years or periods of Target ending on or before the Closing Date (or the
Pre-Closing Period, in the case of a Straddle Period) which are not reflected on
the Closing Balance Sheet shall be for the account of Target; all other refunds
or credits of Taxes, for or attributable to Target shall be for the
47
account of Acquiror. Following the Closing, Acquiror shall cause Target to
forward to the Shareholders any such refunds or credits due Target pursuant to
this section after receipt or realization thereof by Acquiror, and Target shall
promptly forward (or cause to be forwarded) to Acquiror any refunds or credits
due to Acquiror pursuant to this section after receipt or realization thereof by
Target, in each case in accordance with the provisions of subsection (b) below.
(b) Any payments of refunds or credits for Taxes required to be paid
under this Agreement shall be made within 20 Business Days of the receipt of any
refund or realization of any credit, as the case may be. Any payments not made
within such time period shall be subject to an interest charge of 6% per annum.
10.4 Conduct of Audits and Other Procedural Matters. Each of Acquiror and
Shareholders' Agent shall, at its own expense, control any audit or examination
by any taxing authority, and have the right to initiate any claim for refund or
amended return, and contest, resolve and defend against any assessment, notice
of deficiency or other adjustment or proposed adjustment of Taxes ("Tax
Proceedings") for any taxable period for which that party is charged with
payment or indemnification responsibility under this Agreement. Each party shall
promptly forward to the other in accordance with Section 11.1 all written
notifications and other written communications, including if available the
original envelope showing any postmark, from any taxing authority received by
such party or its Affiliates relating to any liability for Taxes for any taxable
period for which such other party or any of its Affiliates is charged with
payment or indemnification responsibility under this Agreement and each
indemnifying party shall promptly notify, and consult with, each indemnified
party as to any action it proposes to take with respect to any liability for
Taxes for which it is required to indemnify another party and shall not enter
into any closing agreement or final settlement with any taxing authority with
respect to any such liability without the written consent of the indemnified
parties, which consent shall not be unreasonably withheld, unless such
settlement would be reasonable in the case of a Person that owned Target both
before and after the Closing Date. In the case of any Tax Proceedings relating
to any Straddle Period, Acquiror shall control such Tax Proceedings and shall
consult in good faith with Target as to the conduct of such Tax Proceedings and
not settle any Tax Proceedings on terms that would result in the Shareholders
having an obligation to indemnify for Taxes without the prior consent of the
Shareholders' Agent, which will not be unreasonably withheld. Each party shall,
at the expense of the requesting party, execute or cause to be executed any
powers of attorney or other documents reasonably requested by such requesting
party to enable it to take any and all actions such party reasonably requests
with respect to any Tax Proceedings which the requesting party controls. The
failure by a party to provide timely notice under this subsection shall relieve
the other party from its obligations under this Section 10 with respect to the
subject matter of any notification not timely forwarded, to the extent the other
party has suffered a Loss or other economic detriment because of such failure to
provide notification in a timely fashion.
10.5 Assistance and Cooperation. After the Closing Date, each of Target
and Acquiror shall (and cause their respective Affiliates to):
(i) assist the other party in preparing any Tax Returns which
such other party is responsible for preparing and filing in accordance with
Section 10.2.
48
(ii) cooperate fully in preparing for any audits of, or
disputes with taxing authorities regarding, any Tax Returns of Target;
(iii) make available to the other and to any taxing authority
as reasonably requested all information, records, and documents relating to
Taxes of Target;
(iv) provide timely notice to the other in writing of any
pending or threatened Tax audits or assessments of Target for taxable periods
for which the other may have a liability under this Section 10; and
(v) furnish the other with copies of all correspondence
received from any taxing authority in connection with any Tax audit with respect
to any taxable period for which the other may have a liability under this
Section 10.
10.6 FIRPTA Certificate. At or prior to the Closing, Target shall provide
Acquiror with a certificate described in Treas. Reg. Section 1.1445-2(b)(2) to
the effect that, as contemplated by such certificate, Target is not a foreign
corporation, foreign partnership, foreign trust or foreign estate (as those
terms are defined in the Code and Treasury Regulations).
11. General Provisions.
11.1 Notices. All notices, requests and other communications hereunder
must be in writing and will be deemed to have been duly given only if delivered
personally or by facsimile transmission or mailed (first class postage prepaid)
to the parties at the following addresses or facsimile numbers:
If to Acquiror or Merger Sub, to:
PACKETEER, INC.
▇▇▇▇▇ ▇. ▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: Chief Financial Officer
with a copy to:
▇▇▇▇ ▇▇▇▇ ▇▇▇▇ & Freidenrich LLP
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Facsimile No.: ▇▇▇-▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇ ▇▇▇▇▇, Esq.
If to Target, to:
MENTAT INC.
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to:
▇▇▇▇▇▇ ▇▇▇▇▇▇ White & ▇▇▇▇▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile No.: ▇▇▇-▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section 11.1, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section 11.1, be deemed given upon receipt, and (iii) if
delivered by mail in the manner described above to the address as provided in
this Section 11.1, be deemed given upon receipt (in each case regardless of
whether such notice, request or other communication is received by any other
person to whom a copy of such notice, request or other communication is to be
delivered pursuant to this Section 11.1). Any party from time to time may change
its address, facsimile number or other information for the purpose of notices to
that party by giving notice specifying such change to the other party hereto.
11.2 Entire Agreement. This Agreement and the Ancillary Agreements
supersede all prior discussions and agreements between the parties with respect
to the subject matter hereof and thereof, and contain the sole and entire
agreement between the parties hereto with respect to the subject matter hereof
and thereof.
11.3 Expenses. Except as otherwise expressly provided in this Agreement
whether or not the transactions contemplated hereby are consummated, Acquiror
will pay its own costs and expenses (including all legal and accounting fees and
expenses), and the Target will pay its costs and expenses, the costs and
expenses of the Shareholders' Agent (including all legal and accounting fees and
expenses), incurred in connection with the negotiation, execution and closing of
this Agreement and the Ancillary Agreements and the transactions contemplated
hereby and thereby (including regulatory filings and proceedings).
11.4 Public Announcements. At all times at or before the Closing, Target,
Merger Sub and Acquiror will not issue or make any reports, statements or
releases to the public or generally to the employees, customers, suppliers or
other persons to whom Target sells goods or provides services or with whom
Target otherwise has significant business relationships with respect to this
Agreement, or the transactions contemplated hereby without the consent of the
other, which consent shall not be unreasonably withheld. If either party is
unable to obtain the approval of its public report, statement or release from
the other party and such report, statement or release is, in the opinion of
legal counsel to such party, required by law in order to discharge such party's
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disclosure obligations, then such party may make or issue the legally required
report, statement or release and promptly furnish the other party with a copy
thereof.
11.5 Confidentiality. Each party hereto will hold, and will cause its
Affiliates, and their respective Representatives, to hold in strict confidence
from any person (other than any such Affiliate), unless (i) compelled to
disclose by judicial or administrative process (including without limitation in
connection with obtaining the necessary approvals of this Agreement and the
transactions contemplated hereby of Governmental or Regulatory Authorities) or
by other requirements of law or (ii) disclosed in an Action or Proceeding
brought by a party hereto in pursuit of its rights or in the exercise of its
remedies hereunder (but only to the extent such party uses reasonable efforts to
seek judicial protection from the public disclosure of such information), all
documents and information concerning the other party or any of its Affiliates
furnished to it by the other party or such other party's Representatives in
connection with this Agreement or the transactions contemplated hereby, except
to the extent that such documents or information can be shown to have been (a)
previously known by the party receiving such documents or information; (b) in
the public domain (either prior to or after the furnishing of such documents or
information hereunder) through no fault of such receiving party, or (c) later
acquired by the receiving party from another source if such source is under no
obligation to another party hereto to keep such documents and information
confidential; provided that following the Closing the foregoing restrictions
will not apply to Acquiror's use of documents and information concerning Target
furnished by Target hereunder. In the event the transactions contemplated hereby
are not consummated, upon the request of the other party, each party hereto
will, and will cause its Affiliates, and their respective Representatives to,
promptly (and in no event later than three (3) business days after such request)
destroy or redeliver or cause to be destroyed or redelivered all copies of
confidential documents and information furnished by the other party in
connection with this Agreement or the transactions contemplated hereby as well
as all notes, memoranda, summaries, analyses, compilations and other writings
related thereto or based thereon prepared by the party furnished such documents
and information or its Representatives.
11.6 Further Assurances; Post-Closing Cooperation.
(a) Subject to the terms and conditions of this Agreement, at any
time or from time to time after the Closing, each of the parties hereto shall
execute and deliver such other documents and instruments, provide such materials
and information and take such other actions as may reasonably be necessary to
fulfill its obligations under this Agreement and the Ancillary Agreements to
which it is a party and to vest to Acquiror full title to all properties,
assets, rights, approvals, immunities and franchises of Target.
(b) If, in order properly to prepare its Tax Returns, other
documents or reports required to be filed with Governmental or Regulatory
Authorities or its financial statements or to fulfill its obligations hereunder,
it is necessary that a party be furnished with additional information, documents
or records relating to the business or condition of Target and such information,
documents or records are in the possession or control of another party, such
other party agrees to use commercially reasonable efforts to furnish or make
available such information, documents or records (or copies thereof) at the
recipient's request, cost and
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expense. Any information obtained by Target in accordance with this paragraph
shall be held confidential by Target in accordance with Section 11.5.
(c) Notwithstanding anything to the contrary contained in this
Section, if the parties are in an adversarial relationship in litigation or
arbitration, the furnishing of information, documents or records in accordance
with any provision of this section shall be subject to applicable rules relating
to discovery.
11.7 Waiver. Any term or condition of this Agreement may be waived at any
time by the party that is entitled to the benefit thereof, but no such waiver
shall be effective unless set forth in a written instrument duly executed by or
on behalf of the party against whom such waiver is asserted. No waiver by any
party of any term or condition of this Agreement, in any one or more instances,
shall be deemed to be or construed as a waiver of the same or any other term or
condition of this Agreement on any future occasion. All remedies, either under
this Agreement or by law or otherwise afforded, shall be cumulative and not
alternative.
11.8 Amendment. This Agreement may be amended, supplemented or modified
only by a written instrument duly executed by or on behalf of Acquiror, Merger
Sub, Target and Shareholders' Agent.
11.9 No Third Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and it is not the intention of the
parties to confer third-party beneficiary rights upon any other person other
than (i) any person entitled to indemnity under Section 9 or (ii) any
Shareholder entitled to the benefits and rights provided under Section 2.6, 2.7,
6.3, 9, 10 and 11.
11.10 No Assignment; Binding Effect. Neither this Agreement nor any right,
interest or obligation hereunder may be assigned by any party hereto without the
prior written consent of the each of the other parties hereto and any attempt to
do so will be void. Subject to the preceding sentence, this Agreement is binding
upon, inures to the benefit of and is enforceable by the parties hereto and
their respective successors and assigns.
11.11 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially affected thereby, (a) such provision will be fully severable, (b)
this Agreement will be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, (c) the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid or unenforceable provision or by its
severance herefrom, and (d) in lieu of such illegal, invalid or unenforceable
provision, there will be added automatically as a part of this Agreement a
legal, valid and enforceable provision as similar in economic and legal effect
to such illegal, invalid or unenforceable provision as may be possible.
11.12 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to a contract
executed and performed in such state, without giving effect to the conflicts of
laws principles thereof. Each of the parties hereto irrevocably consents to the
exclusive jurisdiction of any court located within
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the County of Santa ▇▇▇▇▇ in connection with any matter based upon or arising
out of this Agreement or the matters contemplated hereby and it agrees that
process may be served upon it in any manner authorized by the laws of the State
of California for such persons and waives and covenants not to assert or plead
any objection which it might otherwise have to such jurisdiction and such
process.
11.13 Counterparts. This Agreement may be executed in counterparts, each
of which will be deemed an original, but all of which together will constitute
one and the same instrument.
11.14 Construction. The parties hereby acknowledge and agree that the
drafting of this Agreement has been a collaborative effort and that no party
shall be deemed to be the sole or primary drafter. Any rule or provision of law
which provides that a contract or agreement is to be construed against the
author of the contract or agreement shall not apply to this Agreement, the
Ancillary Agreements or the documents attached hereto as exhibits or schedules
hereto or thereto.
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IN WITNESS WHEREOF, Target, Acquiror, Merger Sub and Principal
Shareholders have caused this Agreement to be executed and delivered by each of
them or their respective officers thereunto duly authorized, all as of the date
first written above.
MENTAT INC.
By: /s/ ▇▇▇ ▇ ▇▇▇▇▇
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▇▇▇ ▇. ▇▇▇▇▇
President
PACKETEER, INC.
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇
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▇▇▇▇▇ ▇▇▇▇▇▇
Chief Financial Officer
P ACQUISITION CORPORATION
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇
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▇▇▇▇▇ ▇▇▇▇▇▇
President
PRINCIPAL SHAREHOLDERS
/s/ ▇▇▇ ▇ ▇▇▇▇▇
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▇▇▇ ▇. ▇▇▇▇▇
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
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SIGNATURE PAGE FOR AGREEMENT AND PLAN OF REORGANIZATION