EXHIBIT 10.1
AMENDED AND RESTATED SUPPLEMENTAL AGREEMENT
DATED AS OF FEBRUARY 24, 2005
BY AND AMONG
PATRON SYSTEMS, INC.,
ESC ACQUISITION, INC.
AND
ENTELAGENT SOFTWARE CORP.
AMENDED AND RESTATED SUPPLEMENTAL AGREEMENT
AMENDED AND RESTATED SUPPLEMENTAL AGREEMENT dated as of
February 24, 2005 (this "AGREEMENT") by and among Patron Systems, Inc., a
Delaware corporation ("PARENT"), ESC Acquisition, Inc., a California corporation
("MERGERCO"), and Entelagent Software Corp., a California corporation (the
"COMPANY").
W I T N E S S E T H:
WHEREAS, on November 24, 2002, Parent, Mergerco and the
Company entered into that certain Supplemental Agreement ("ORIGINAL SUPPLEMENTAL
AGREEMENT") and that certain Merger Agreement ("ORIGINAL MERGER AGREEMENT" and
together with the Original Supplemental Agreement, the "ORIGINAL AGREEMENTS")
providing for the merger of Mergerco with and into the Company (the "MERGER");
WHEREAS, the Merger was not consummated pursuant to the
Original Agreements;
WHEREAS, Parent, Mergerco and the Company desire to amend and
restate the Original Agreements to provide for the consummation of the Merger as
further outlined herein;
WHEREAS, concurrently with the execution and delivery of this
Agreement, Parent, Mergerco and the Company are entering into an Amended and
Restated Agreement and Plan of Merger of even date herewith (the "MERGER
AGREEMENT"), in the form of EXHIBIT A attached hereto, which provides, among
other things, for the merger ("MERGER") of Mergerco with and into the Company
pursuant to the applicable laws of the State of California;
WHEREAS, the parties hereto believe it is desirable to enter
into this Agreement in order to set forth the representations and warranties
made by Parent and the Company in connection with the Merger, to set forth
certain covenants and agreements of the parties and to set forth various other
provisions relating to the Merger and the relative rights and obligations of the
parties with respect thereto;
WHEREAS, the parties hereto desire that the Merger qualify as
a reorganization in accordance with Section 368(a) of the Code; and
WHEREAS, certain capitalized terms are defined in the Merger
Agreement and shall have the same meaning when used in this Agreement unless
otherwise defined herein or in Section 10.15, the definitions of such terms
being incorporated herein as if set forth in full herein.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements hereinafter set forth, the parties hereto agree
as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Subject to the terms and conditions of this
Agreement and as more particularly described in the Merger Agreement, Mergerco
shall be merged with and into the Company at the Effective Time.
SECTION 1.2 FILING OF THE MERGER AGREEMENT. The Company, Parent and
Mergerco shall cause the Merger Agreement, duly executed in accordance with
Section 1103 of the California General Corporation Law (the "CGCL"), to be filed
on the Closing Date (or on such other date as Parent and the Company may agree)
with the Secretary of State of the State of California in accordance with the
CGCL.
SECTION 1.3 CLOSING. The closing of the Merger (the "CLOSING") shall
take place on March 25, 2005 or on such other date as Parent and the Company may
agree; PROVIDED, THAT, in either case, each of the conditions set forth in
ARTICLE VI has been satisfied or waived prior to such date. The time and date on
which the Closing is actually held is sometimes referred to herein as the
"CLOSING DATE."
SECTION 1.4 MERGER CONSIDERATION. Subject to the provisions of Article
I of the Merger Agreement, as of the Effective Time, by virtue of the Merger,
the aggregate outstanding shares of Company Stock immediately prior to the
Effective Time shall be converted, in the aggregate, into 3,000,000 validly
issued, fully paid and nonassessable shares of Parent Common Stock (the "MERGER
CONSIDERATION"). The Merger Consideration shall be allocated among the
Shareholders to be set forth on ANNEX A. The parties hereto acknowledge and
agree that for purposes of (i) determining the "Liquidation Preference" of the
Shareholders pursuant to Article III, Section B(2) of the Company's Articles of
Incorporation and (ii) the Shareholder Merger Consideration Approval, the value
of the shares of Parent Common Stock to be issued pursuant to this Agreement is
at least $1.00 per share.
SECTION 1.5 COMPANY STOCK OPTIONS AND STOCK PURCHASE WARRANTS.
(a) In accordance with the terms of the Merger Agreement,
each of the stock options to purchase shares of Company Common Stock issued by
the Company pursuant to the Company Stock Plan and set forth on SCHEDULE 3.3
hereto (the "COMPANY STOCK OPTIONS"), which are outstanding as of the Effective
Time shall terminate and be of no further force and effect at the Effective
Time, and each holder of a Company Stock Option shall execute and deliver to the
Company an Option Termination Agreement in the form attached hereto as EXHIBIT
B.
(b) In accordance with the terms of the Merger Agreement,
each outstanding warrant to purchase shares of Company Stock set forth on
SCHEDULE 3.3 hereto (the "STOCK PURCHASE WARRANTS"), which are outstanding as of
the Effective Time shall be terminated and be of no further force and effect at
the Effective Time, and each holder of a Company Warrant shall execute and
deliver to the Company a Warrant Termination Agreement in the form attached
hereto as EXHIBIT C.
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SECTION 1.6 DISSENTING SHARES. Any issued and outstanding shares of
Company Stock held by a Person (a "DISSENTING SHAREHOLDER") who properly
exercises such Person's dissenters' rights under the CGCL ("DISSENTING SHARES")
shall not be converted as described in Section 1.4, but rather shall be
converted into the right to receive such consideration as may be determined to
be due to such Dissenting Shareholder pursuant to the CGCL. Subject to the
foregoing, if, after the Effective Time, such Dissenting Shareholder withdraws
his demand for payment or fails to perfect or otherwise loses his right of
payment, in any case pursuant to the CGCL, the Dissenting Shares of such
Dissenting Shareholder shall be deemed to be converted as of the Effective Time
into the right to receive the amount to which such Dissenting Shareholder would
otherwise have been entitled to pursuant to Section 1.4. The Company shall give
Parent prompt notice of any demands for payment received by the Company. The
Company shall not, without the prior written consent of Parent, make any payment
with respect to, or settle or offer to settle, any such demands, and, prior to
the Effective Time, Parent shall have the right to participate in all
negotiations and proceedings with respect to such demands.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
SECTION 2.1 ORGANIZATION OF PARENT. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. No other jurisdiction has demanded, requested or otherwise indicated
that Parent is required to qualify to transact business as a foreign
corporation, and Parent is not otherwise currently required under the laws of
any other jurisdiction to qualify to transact business as a foreign corporation.
Parent has full corporate power and authority to own or lease and to operate and
use its properties and assets and to carry on its business as now conducted.
Parent has delivered or otherwise made available to the Company true, correct
and complete copies of Parent's Amended and Restated Certificate of
Incorporation, as in effect on the date hereof, Amended and Restated Bylaws, as
in effect on the date hereof, minute books and stock transfer records. Parent is
not in violation of any term or provision of its charter, bylaws or other
organizational document the consequences of which would reasonably be expected
to result in a Material Adverse Effect on Parent.
SECTION 2.2 SUBSIDIARIES AND INVESTMENTS OF PARENT. Except as set forth
on SCHEDULE 2.2 (which will include the percentage owned by Parent), Parent does
not, directly or indirectly, (i) own, of record or beneficially, or own or hold
the right to acquire, any outstanding voting or equity securities or other
voting or equity interests in any corporation, partnership, joint venture or
other entity or (ii) otherwise control any such corporation, partnership, joint
venture or other entity.
SECTION 2.3 PARENT ACQUISITION OPERATIONS. Other than the negotiation
and execution of the Original Agreements, this Agreement, the Merger Agreement
and the transactions contemplated hereby and thereby and the negotiation of
other transactions for the purchase by Parent of other business entities, each
as described in SCHEDULE 2.3, prior to the date hereof, Parent has not conducted
any material business acquisition or combination activities or operations.
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SECTION 2.4 CAPITAL STOCK OF PARENT. As of the date hereof, the
authorized capital of Parent consists of (i) 150,000,000 shares of Common Stock
of Parent, par value $.01 per share (the "PARENT COMMON STOCK"), of which, as of
the date hereof, 39,006,212 shares are issued and outstanding; and (ii)
75,000,000 shares of preferred stock, par value $.01 per share (the "PARENT
PREFERRED STOCK," together with the Parent Common Stock, the "PARENT CAPITAL
STOCK"), none of which is issued and outstanding or reserved for any purpose.
All outstanding shares of Parent Common Stock are validly issued, fully paid and
nonassessable. None of the issued and outstanding shares of Parent Common Stock
has been issued in violation of the preemptive rights of any person or in
violation of applicable federal or state securities laws, except where any such
violation or violations, individually or in the aggregate, would not have a
Material Adverse Effect on Parent. SCHEDULE 2.4 sets forth a true and complete
list of the names and addresses of each of the holders of record of options to
purchase Parent Common Stock (the "PARENT STOCK OPTIONS"), the respective number
of shares of Parent Common Stock subject to such Parent Stock Option, the
exercise price applicable to such Parent Stock Option and the expiration date of
such Parent Stock Option. Except for this Agreement, the Merger Agreement and
except as set forth on SCHEDULE 2.4 hereof, there are no agreements,
arrangements, warrants, options, puts, calls, rights or other commitments, plans
or understandings of any character relating to the issuance, sale, purchase,
redemption, conversion, exchange, registration, voting, or transfer of any
shares of Parent Common Stock or any other securities of Parent. Except as set
forth on SCHEDULE 2.4 and except pursuant to applicable laws, there are no
restrictions, including but not limited to self-imposed restrictions, on the
retained earnings of Parent or on the ability of Parent to declare and pay
dividends.
SECTION 2.5 MERGERCO. Mergerco is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
Mergerco has not conducted any business activities prior to the date of this
Agreement, other than the negotiation and execution of the Original Agreements,
this Agreement and the Merger Agreement. All outstanding shares of capital stock
of Mergerco are owned, beneficially and of record, by Parent.
SECTION 2.6 AUTHORIZATION. (a) Parent has full corporate power and
authority to enter into this Agreement, the Merger Agreement, the Registration
Rights Agreement and the Employment Agreements (collectively, the "TRANSACTION
DOCUMENTS"), to consummate the transactions contemplated hereby and thereby and
to comply with the terms and provisions hereof and thereof, subject to the
conditions hereof and thereof. The execution, delivery and performance by Parent
of each of the Transaction Documents, and the actions to be taken by Parent
contemplated hereby and thereby have been duly and validly authorized by the
Board of Directors of Parent, and no other corporate proceedings on the part of
Parent are necessary with respect hereto or thereto. Each of the Transaction
Documents constitutes the valid and binding obligations of Parent, in each case
enforceable in accordance with its terms, subject to (i) general principles of
equity, regardless of whether enforcement is sought in a proceeding in equity or
at law, and (ii) bankruptcy, reorganization, insolvency, fraudulent conveyance,
moratorium, receivership or other similar laws relating to or affecting
creditors' rights generally.
(b) Mergerco has full corporate power and authority to
enter into this Agreement and the Merger Agreement, to consummate the
transactions contemplated hereby and thereby and to comply with the terms,
conditions and provisions hereof and thereof. The
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execution, delivery and performance by Mergerco of this Agreement and the Merger
Agreement and the actions contemplated hereby and thereby have been duly and
validly authorized by the Board of Directors and Shareholders of Mergerco, and
no other corporate proceedings on the part of Mergerco are necessary with
respect hereto or thereto. This Agreement and the Merger Agreement constitute
the valid and binding obligations of Mergerco, in each case enforceable in
accordance with its terms, subject to (i) general principles of equity,
regardless of whether enforcement is sought in a proceeding in equity or at law,
and (ii) bankruptcy, reorganization, insolvency, fraudulent conveyance,
moratorium, receivership or other similar laws relating to or affecting
creditors' rights generally.
SECTION 2.7 NON-CONTRAVENTION. Except as set forth in SCHEDULE 2.7,
neither the execution or delivery of the Transaction Documents by Parent or this
Agreement and the Merger Agreement by Mergerco, nor the consummation of the
transactions contemplated hereby or thereby by Parent and Mergerco, will (a)
conflict with or result in the breach of any term or provision of, or constitute
a default under, the respective charters or Bylaws of Parent or Mergerco or any
material agreement, instrument or indenture to which Parent or Mergerco is a
party or by which either is bound; (b) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Parent or Mergerco; or (c)
require, as of the date hereof, the approval, consent, waiver, authorization or
act of, or the making by Parent or Mergerco of any declaration, filing or
registration with, any third party or any Governmental Body and the filing of a
copy of the Merger Agreement with the Secretary of State of the State of
California and such other consents, orders, authorizations, registrations,
declarations and filings the failure of which to be obtained or made would not,
individually or in the aggregate, have a Material Adverse Effect on Parent,
materially impair the ability of Parent or Mergerco to perform its obligations
hereunder or prevent the consummation of any of the transactions contemplated
hereby.
SECTION 2.8 VALID SHARES. The issuance of the Parent Common Stock in
connection with the Merger has been duly authorized on behalf of Parent and such
shares, when issued pursuant to this Agreement and the Merger Agreement, will be
duly and validly issued and outstanding, fully paid and nonassessable.
SECTION 2.9 FAILURE TO FILE SEC DOCUMENTS ON A TIMELY BASIS. On March
31, 2004, Parent filed a Form 12b-25 with the United States Securities and
Exchange Commission ("SEC") providing notification that it was unable to file
its Annual Report on Form 10-KSB, for the year ended December 31, 2003, on a
timely basis. In such filing Parent reported that certain financial and other
information necessary for an accurate and full completion of such Annual Report
could not be provided within the prescribed time period without unreasonable
effort or expense. Parent, to date, has not filed such Annual Report nor has it
made any other filings required pursuant to the reporting requirements of the
Securities and Exchange Act of 1934, as amended ("EXCHANGE ACT"), since such
date, except for a Current Report on Form 8-K filed with the SEC on December 2,
2004. Parent's failure to maintain its Exchange Act filing requirements on a
current basis may have materially adverse implications on Parent's stockholders
including, without limitation, causing sales of Parent's Common Stock pursuant
to the provisions of Rule 144 promulgated under the Securities Act of 1933, as
amended ("SECURITIES ACT") to be unavailable to Parent's stockholders. In
addition, there does not currently exist any current information on Parent which
is publicly available including, without limitation, current financial
statements, the last financial statements being unaudited financial statements
for the quarterly period ended September 30,
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2003, which were filed on December 29, 2003 with Parent's Form 10-QSB for the
period ended September 30, 2003. Although Parent, after the Closing Date,
intends to make all filings necessary to become current again in its Exchange
Act filing requirements, there can be no assurance that Parent will be able to
regain compliance in an expeditious manner.
SECTION 2.10 RESIGNATION OF INDEPENDENT ACCOUNTANTS. Effective as of
January 21, 2004, ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP, Parent's former independent accountants,
resigned as Parent's independent public accountants based on its determination
that it could not rely on Parent's representations, and was unwilling to be
associated with Parent's financial statements. Accordingly, ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
withdrew its audit reports and stated that such reports could no longer be
relied upon. A more detailed explanation of such resignation is set forth in
Parent's Current Report on Form 8-K filed with the SEC on January 26, 2004 and
its Current Report on Form 8-K/A filed with the SEC on February 10, 2004. Parent
has engaged ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ LLP as its new independent accountants to audit
Parent's financial statements for the period from April 30, 2002 through
December 31, 2002, and for the fiscal years ended December 31, 2003 and 2004.
SECTION 2.11 FINANCIAL STATEMENTS. Parent, to date, does not have
audited financial statements for the year ended December 31, 2003. Additionally,
although Parent filed audited financial statements with its Annual Report on
Form 10-KSB for the year ended December 31, 2002, ▇▇▇▇▇ ▇▇▇▇▇▇▇▇, upon its
resignation as Parent's independent public accountants, withdrew its audit
report for the year ended December 31, 2002, and stated that such audit report
could no longer be relied upon. As a result of the foregoing, Parent does not
have any financial statements which may be relied upon with respect to
compliance with audit requirements. The financial statements filed with the SEC
contain Parent's unaudited balance sheets and income statements from the period
of inception to September 30, 2003 (all of such financial statements being
hereafter collectively referred to as the "UNAUDITED FINANCIAL STATEMENTS"). The
Unaudited Financial Statements have been prepared in good faith, are complete
and correct in all material respects, have been prepared in accordance with GAAP
and in conformity with the practices consistently applied by Parent and present
fairly the financial position and results of operations of Parent as of the
dates and for the periods indicated.
SECTION 2.12 TITLE TO ASSETS. Parent has good title to all of its
assets, free and clear of all Encumbrances, except for Permitted Encumbrances
and except as set forth in SCHEDULE 2.12.
SECTION 2.13 NO UNDISCLOSED LIABILITIES. Except as set forth on
SCHEDULE 2.13, Parent is not subject to any obligation or liability of a kind
required to be included as a liability on the balance sheet set forth in
SCHEDULE 2.13 (including, without limitation, unasserted claims whether known or
unknown), whether absolute, contingent, accrued or otherwise, which is not shown
or which is in excess of amounts shown or reserved for on such balance sheet,
other than liabilities reasonably incurred in the ordinary course of business
after the date of such balance sheet or incurred with respect to the matters
disclosed in SCHEDULE 2.3, none of which, individually or in the aggregate,
would have a Material Adverse Effect on Parent and none of which is a liability
for breach of contract, breach of warranty, tort, infringement or other lawsuit.
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SECTION 2.14 NO VIOLATION, LITIGATION OR REGULATORY ACTION. Except as
set forth on SCHEDULE 2.14:
(a) To the Knowledge of Parent, Parent has complied with
all laws, regulations, rules, writs, injunctions, ordinances, franchises,
decrees, stipulations, awards or orders of any Governmental Body which are
applicable to Parent;
(b) No notice has been served upon Parent by any
Governmental Body or other person of any violation of any Requirements of Law or
calling attention to the necessity of any work, repairs, new construction,
installation or alteration of any real or personal property owned, leased or
used by Parent;
(c) There are no lawsuits, claims, suits, proceedings
pending or, to the Knowledge of Parent, threatened against Parent or
investigations pending regarding Parent nor, to the Knowledge of Parent, is
there any basis for any of the same, and there are no lawsuits, suits or
proceedings pending or contemplated in which Parent is the plaintiff or
claimant; and
(d) There is no action, suit or proceeding pending or, to
the Knowledge of Parent, threatened which questions the legality or propriety of
the transactions contemplated by this Agreement or the Merger Agreement.
SECTION 2.15 MATERIAL CONTRACTS AND AGREEMENTS. SCHEDULE 2.15 includes
a list of all material contracts, agreements and instruments to which Parent or
Mergerco is a party, true and complete copies of all of which have been
delivered by Parent to the Company. All of such material contracts, agreements
and instruments constitute valid and binding obligations of Parent and/or
Mergerco and, to the Knowledge of Parent, the other parties thereto and are in
full force and effect in all material respects, without any material breach by
Parent or Mergerco or, to the Knowledge of Parent, any other parties thereto.
SECTION 2.16 TRANSACTIONS WITH AFFILIATES. Except as set forth on
SCHEDULE 2.16, no officer, director or other Affiliate of Parent (including
spouses, children and other relatives of any of the foregoing) is a party to any
agreement, contract, arrangement or transaction with Parent or has any interest
in any property (real or personal or mixed, tangible or intangible) owned or
leased by Parent.
SECTION 2.17 STATUS OF PARENT. Neither Parent nor Mergerco nor any of
their officers, directors or affiliates, promoters or control persons, nor any
predecessor thereof, has been (a) the general partner or an executive officer of
any business with respect to which a petition for relief under the Bankruptcy
Code has been filed either at the time of the filing or within two years before
that time; (b) been convicted in a criminal proceeding or been the subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses); (c) been subject to any order, judgment or decree, subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his or its involvement in any type of business, securities or banking
activities; or (d) been found by a court of competent jurisdiction (in a civil
action) or the SEC to have violated a federal or state securities law, and the
judgment has not been reversed, suspended or vacated.
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SECTION 2.18 SEC INVESTIGATION. The staff of the SEC is in the process
of conducting a formal investigation involving Parent. The Formal Order of
Investigation indicates that the staff is investigating certain registration
statements filed by Parent in 2002 and 2003 by which shares of Parent Common
Stock were issued to consultants. The staff also appears to be investigating
whether officers, directors and others made misrepresentations in certain of
Parent's press releases regarding planned mergers and acquisitions that were
never consummated. The investigation is ongoing. The staff has not indicated
whether it will or will not recommend that the Commission file an enforcement
action against Parent, it officers or directors, or others. If the SEC brings an
action against Parent based on the registration statements it could result in a
civil injunctive order or administrative cease and desist order being entered
against Parent in addition to the imposition of a significant civil penalty. If
the Commission brings an action based on alleged material misrepresentations, it
could result in civil injunctions and civil penalties being assessed against
Parent or persons formerly or currently affiliated with it that are alleged to
have been involved in the misrepresentations.
SECTION 2.19 PRIVATE PLACEMENT MEMORANDUM. The Amended and Restated
Private Placement Memorandum (the "PPM") to be prepared by Parent in accordance
with Section 5.12 will not, at the time of the mailing of the PPM to the
Shareholders, at the time of the Shareholders Meeting or at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading; provided, however, that Parent makes no representation or warranty
with respect to (i) any information supplied by the Company for use in the PPM
or (ii) any information contained in the Proxy Statement to which the PPM will
be attached as an Appendix. If at any time prior to the Effective Time any event
with respect to Parent, its officers and directors or any of its subsidiaries
should occur which is required to be described in an amendment of, or a
supplement to, the PPM such event shall be so described. None of the information
that Parent or Mergerco will supply specifically for use in the Proxy Statement
will contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they will be made, not misleading.
SECTION 2.20 NO FINDER. Parent has not paid or become obligated to pay
any fee or commission to any broker, finder or intermediary for or on account of
the transactions contemplated by this Agreement.
SECTION 2.21 DISCLOSURE. No representation or warranty made by Parent
contained in this Agreement and no statement contained in any certificate, list,
exhibit or other instrument specified or referred to in this Agreement,
including, without limitation, the Parent Disclosure Schedules, contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements contained herein or therein, in light of circumstances
under which they were made, not misleading.
SECTION 2.22 PARENT DISCLOSURE SCHEDULES. Notwithstanding anything in
this Agreement to the contrary, (a) all information contained in the Schedules
delivered by Parent pursuant to ARTICLE II hereto (the "PARENT DISCLOSURE
SCHEDULES") is and for all purposes shall be deemed to constitute a part of
Parent's representations and warranties set forth in this ARTICLE II, (b) the
Parent Disclosure Schedules are incorporated in this Agreement by
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reference, and (c) disclosure by Parent in or on one Parent Disclosure Schedule
shall be deemed to be disclosure for all other purposes on any or all of the
other Parent Disclosure Schedules for which such disclosure may be relevant to
the extent that a reasonable person would understand that information disclosed
in such Schedule might reasonably apply to such other Schedule(s).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Mergerco as follows:
SECTION 3.1 ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of California.
The Company is duly qualified to transact business as a foreign corporation and
is in good standing in each of the jurisdictions listed in SCHEDULE 3.1, which
jurisdictions are the only ones in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified would not have a Material Adverse Effect on
the Company, and no other jurisdiction has demanded, requested or otherwise
indicated that the Company is required to so qualify. The Company has full
corporate power and authority to own or lease and to operate and use its
properties and assets and to carry on its business as now conducted. The Company
has delivered or otherwise made available to Parent true, correct and complete
copies of the Company's Articles of Incorporation, as in effect on the date
hereof, By-laws, as in effect on the date hereof, minute books and stock
transfer records. The Company is not in violation of any term or provision of
its charter, bylaws or other organizational document the consequences of which
would reasonably be expected to result in a Material Adverse Effect on the
Company.
SECTION 3.2 SUBSIDIARIES AND INVESTMENTS. The Company does not,
directly or indirectly, (i) own, of record or beneficially, or own or hold the
right to acquire, any outstanding voting or equity securities or other voting or
equity interests in any corporation, partnership, joint venture or other entity
or (ii) otherwise control any such corporation, partnership, joint venture or
other entity.
SECTION 3.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock
of the Company consists of (i) 10,000,000 shares of Common Stock, no par value
per share ("COMPANY COMMON STOCK"), 3,278,900 of which are duly and validly
issued and outstanding, fully paid and nonassessable, and none of which are held
by the Company as treasury shares, and (ii) 200,000 shares of preferred stock,
no par value per share (the "COMPANY PREFERRED Stock," together with the Company
Common Stock, the "COMPANY STOCK"), of which (A) 50,000 shares have been
designated Series A Preferred Stock, of which, as of the date hereof, 19,250
shares are issued and outstanding, (B) 15,000 shares have been designated Series
B Preferred Stock, of which, as of the date hereof, 12,000 shares are issued and
outstanding and (C) 100,000 shares have been designated Series C Preferred
Stock, of which, as of the date hereof, 20,227 shares are issued and
outstanding. All outstanding shares of Company Stock are validly issued, fully
paid and nonassessable. None of the issued and outstanding shares of Company
Stock has been issued in violation of the preemptive rights of any person or in
violation of applicable federal or state securities laws, except where any such
violation or violations, individually or in the aggregate, would not have a
Material Adverse Effect on the Company. SCHEDULE 3.3 sets forth a true and
complete
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list of the names of (i) each of the holders of record of the Company Stock and
the respective number of outstanding shares held of record by each such holder,
(ii) each of the holders of record of Company Stock Options, the respective
number of shares of Company Common Stock subject to each such Company Stock
Option and the exercise price applicable to such Company Stock Option and (iii)
each of the holders of record of Company Stock Purchase Warrants, the respective
number of shares of Company Stock subject to each such Company Stock Purchase
Warrant and the exercise price applicable to such Company Stock Purchase
Warrant. Except for this Agreement, the Merger Agreement and except as set forth
on SCHEDULE 3.3 hereof, there are no agreements, arrangements, warrants,
options, puts, calls, rights or other commitments, plans or understandings of
any character relating to the issuance, sale, purchase, redemption, conversion,
exchange, registration, voting, or transfer of any shares of Company Stock or
any other securities of the Company. Except as set forth on SCHEDULE 3.3 and
except pursuant to applicable laws, there are no restrictions, including but not
limited to self-imposed restrictions, on the retained earnings of the Company or
on the ability of the Company to declare and pay dividends.
All outstanding shares of Company Stock are held free and clear of all
Encumbrances created by the Company and, to the Knowledge of the Company, such
shares are beneficially owned by the holders listed on SCHEDULE 3.3 (and to the
Knowledge of the Company) free and clear of all Encumbrances (other than
restrictions under the Securities Act, and the rules and regulations thereunder,
and state securities laws).
SECTION 3.4 AUTHORIZATION. The Board of Directors of the Company has
declared the Merger advisable and has duly resolved to recommend that the Merger
and the Merger Agreement be approved by the Shareholders. The Company has full
corporate power and authority to enter into this Agreement and the Merger
Agreement and to consummate the transactions contemplated hereby and thereby and
to comply with the terms and provisions hereof and thereof, subject to the
conditions hereof and thereof. The execution, delivery and performance by the
Company of this Agreement and the Merger Agreement and the actions to be taken
by the Company contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of the Company, subject
to approval of the Merger and the Merger Agreement by the Shareholders. The
approval of the valuation of the Merger Consideration as required by Article
III, Section B(2)(b)(ii)(B) of the Company's Articles of Incorporation by the
affirmative vote of a majority of the votes that holders of the outstanding
shares of each series of Company Preferred Stock are entitled to cast (voting as
a single class on an as-if converted basis in accordance with the Company's
Articles of Incorporation) (the "SHAREHOLDER MERGER CONSIDERATION APPROVAL"),
the affirmative vote of a majority of the votes that holders of the outstanding
shares of Company Common Stock are entitled to cast (voting as a single class
with the holders of the Company Preferred Stock voting on an as-if converted
basis in accordance with the Company's Articles of Incorporation), the
affirmative vote of a majority of the votes that holders of the outstanding
shares of each series of Company Preferred Stock are entitled to cast (each
series of Company Preferred Stock voting separately as a class in accordance
with the Company's Articles of Incorporation) and the affirmative vote of a
majority of the votes that holders of the outstanding shares of Company
Preferred Stock are entitled to cast (voting as a single class on an as-if
converted basis in accordance with the Company's Articles of Incorporation), are
the only votes of the holders of any class or series of the Company's capital
stock necessary to approve the Merger Agreement and the transactions
contemplated thereby. Each of this Agreement and the Merger Agreement
constitutes the valid and binding
10
obligation of the Company, enforceable in accordance with its terms, subject to
(a) general principles of equity, regardless of whether enforcement is sought in
a proceeding in equity or at law, and (b) bankruptcy, reorganization,
insolvency, fraudulent conveyance, moratorium, receivership or other similar
laws relating to or affecting creditors' rights generally.
SECTION 3.5 NON-CONTRAVENTION. Except as set forth on SCHEDULE 3.5,
neither the execution or delivery of this Agreement or the Merger Agreement by
the Company nor the consummation of the transactions contemplated hereby or
thereby by the Company will (a) conflict with or result in the breach of any
term or provision of, or constitute a default under, the Articles of
Incorporation or Bylaws of the Company; (b) result in a default, or give rise to
any right of termination, cancellation or acceleration, under any provisions of
any material agreement (including, without limitation, any loan agreements or
promissory note), indenture or instrument to which the Company is a party or by
which the Company is bound; (c) result in the creation or imposition of any
Encumbrance on any of the property of the Company; (d) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company; or
(e) require on the part of the Company or the Shareholders, as of the date
hereof, the approval, consent, waiver, authorization or act of, or the making by
the Company of any declaration, filing or registration with, any third party or
any Governmental Body, except for the filing of a copy of the Merger Agreement
with the Secretary of State of the State of California and such other consents,
orders, authorizations, registrations, declarations and filings the failure of
which to be obtained or made would not, individually or in the aggregate, have a
Material Adverse Effect on the Company, materially impair the ability of the
Company to perform its obligations hereunder or prevent the consummation of any
of the transactions contemplated hereby.
SECTION 3.6 FINANCIAL STATEMENTS. SCHEDULE 3.6 contains (a) the
unaudited balance sheets of the Company as of December 31, 2003 and December 31,
2004 and the related statements of income, stockholder's equity and cash flows
for the years then ended, and the notes to such financial statements
(collectively, the "COMPANY'S ANNUAL FINANCIAL STATEMENTS") and (b) the
unaudited balance sheet of the Company for the period from January 1, 2005 to
the date hereof (the "BALANCE SHEET" together with the Company's Annual
Financial Statements, the "COMPANY'S FINANCIAL STATEMENTS").
Except as set forth on SCHEDULE 3.6, the Company's Financial
Statements have been prepared in accordance with GAAP applied on a consistent
basis except as may be noted therein, are true and correct and present fairly in
all material respects the financial condition and the results of operations and
cash flows of the Company at the dates and for the respective periods stated
therein. None of the Company's Financial Statements referred to in this Section
3.6 contains any material items of special or nonrecurring income except as
expressly specified therein.
SECTION 3.7 OPERATIONS SINCE BALANCE SHEET DATE.
(a) Except as set forth on SCHEDULE 3.7, during the
period from the Balance Sheet Date to the date hereof, inclusive, there has been
no damage, destruction, loss or claim made or filed against the Company (whether
or not covered by insurance) or condemnation or other taking which materially
adversely affects the Business or the results of operations, properties or
condition (financial or otherwise) of the Company.
11
(b) Since the Balance Sheet Date, except (i) as set forth
on SCHEDULE 3.7, (ii) for actions described below that would not result in a
Material Adverse Effect on the Company (other than subsections (i), (vii), (xi)
and (xv) which shall not be qualified by this subclause (ii)) and (iii) for
actions described below that would not cause any of the representations and
warranties contained in this ARTICLE III (other than this Section 3.7) to be
untrue in any material respect, the Company has not:
(i) issued, delivered or agreed (conditionally or
unconditionally) to issue or deliver, or granted any option, warrant or
other right to purchase, any of its capital stock or other equity
interest or any security convertible into its capital stock or other
equity interest;
(ii) paid any obligation or liability (absolute or
contingent) other than current liabilities reflected on the Balance
Sheet and current liabilities incurred since the Balance Sheet Date in
the ordinary course of business consistent with past practice;
(iii) undertaken or committed to undertake capital
expenditures exceeding $10,000 for any single project or related series
of projects;
(iv) made charitable donations in excess of $2,000 in the
aggregate;
(v) sold, leased, transferred or otherwise disposed of
(including any transfers from the Company to any of its Affiliates), or
mortgaged or pledged, or imposed or suffered to be imposed any
Encumbrance (other than Permitted Encumbrances) on, any of the assets
reflected on the Balance Sheet or any assets acquired after the Balance
Sheet Date, except for sales of inventory in the ordinary course of
business consistent with past practice;
(vi) canceled any debts owed to or claims held by the
Company (including the settlement of any claims or litigation) or
waived any rights of material value;
(vii) created, incurred, guaranteed or assumed any
indebtedness for borrowed money or entered into any capitalized leases;
(viii) accelerated collection of any note or account
receivable to a date prior to the date such collection would have
occurred in the ordinary course of business consistent with past
practice;
(ix) delayed payment of any account payable or other
liability of the Company beyond its due date or the date when such
liability would have been paid in the ordinary course of business
consistent with past practice;
(x) allowed the levels of raw materials, supplies,
work-in-process, finished goods or other materials included in its
inventory to vary in any material respect from levels customarily
maintained;
(xi) granted any bonus or other special compensation or
increased the compensation or benefits payable or to become payable to
any directors, officers or employees, or instituted any increase in or
otherwise amended any profit sharing, bonus, incentive, deferred
compensation, insurance, pension, retirement, medical,
12
hospital, disability, welfare or other employee benefit plan except for
increases required by law;
(xii) sold, assigned or transferred any patents,
trademarks, service marks, trade names, copyrights, Software (as
defined in Section 3.17) (except in the ordinary course of business
consistent with past practice), trade secrets or other similar
intangible assets, or disclosed any proprietary or confidential
information to any person or entity (other than Parent, its Affiliates
and agents);
(xiii) extended credit other than in the ordinary course of
business or permitted any change in credit practices or in the method
of maintaining books, accounts or business records;
(xiv) declared, set aside or paid any dividend or made any
other distribution (whether in cash, stock or other property) to any of
the Shareholders in respect of any Company Stock or other securities of
the Company;
(xv) purchased, redeemed, called for purchase or
redemption or otherwise acquired any shares of Company Stock or any
other securities of the Company;
(xvi) made any write-down of the value of any inventory or
write-offs as uncollectible of any notes or accounts receivable except
for write-downs and write-offs in the ordinary course of business and
consistent with past practice, none of which would reasonably be
expected to have a Material Adverse Effect on the Business or the
results of operations, properties or condition (financial or otherwise)
of the Company;
(xvii) except as otherwise contemplated herein, entered into
any transaction other than in the ordinary course of business or any
transaction (not involving purchases and sales of inventory) including
commitments for expenditures in excess of $10,000;
(xviii) made any changes in the accounting methods or
practices followed by the Company;
(xix) entered into or performed any transactions with any
of its Affiliates except for transactions in the ordinary course of
business and on terms no less favorable than those customarily enjoyed
by the Company;
(xx) agreed or committed to do or authorized any of the
foregoing; or
(xxi) prepared or filed any Tax Return inconsistent with
past practice or, on any such Tax Return taken any position, made any
election, or adopted any method that is inconsistent with positions
taken, elections made or methods used in preparing or filing similar
Tax Returns in prior periods (including, without limitation, positions,
elections or methods which would have the effect of deferring income to
periods ending after the Closing Date or accelerating deductions to
periods ending on or prior to the Closing Date).
13
SECTION 3.8 NO UNDISCLOSED LIABILITIES. Except as set forth on SCHEDULE
3.8, the Company is not subject to any obligation or liability of a kind
required to be included as a liability on the Balance Sheet under the method of
accounting described in Section 3.6 hereof (including, without limitation,
unasserted claims whether known or unknown), whether absolute, contingent,
accrued or otherwise, which is not shown or which is in excess of amounts shown
or reserved for on the Balance Sheet, other than liabilities reasonably incurred
in the ordinary course of business after the Balance Sheet Date, none of which,
individually or in the aggregate, would have a Material Adverse Effect on the
Company and none of which is a liability for breach of contract, breach of
warranty, tort, infringement or other lawsuit.
SECTION 3.9 TAXES.
(a) Except as set forth on SCHEDULE 3.9, (i) all Tax
Returns, required to be filed by or on behalf of the Company prior to the
Closing Date have been or will be timely filed, and such Tax Returns as so filed
are or will be complete and accurate in all material respects and disclose all
Taxes required to be paid for the periods covered thereby and all Taxes shown to
be due on such Tax Returns have been timely paid; (ii) no extension of time in
which to file any such Tax Returns is in effect or has been requested; (iii) all
Taxes for which the Company is liable relating to any period ending on or prior
to the Closing Date (or the portion of any Tax period ending on the Closing Date
and with respect to any Tax Period which begins before the Closing Date and ends
after the Closing Date) shall have been paid or, if not yet due and payable,
properly accrued for as of the Closing Date; (iv) all Taxes which the Company is
required by law to withhold or to collect for payment have been duly withheld
and collected, and have been paid or will be paid to the proper Governmental
Body; (v) there are no Tax liens (except for liens relating to current Taxes not
yet due) on any property of the Company and, to the Knowledge of the Company, no
basis exists for any such liens; (vi) the Tax Returns referred to in clause (i)
have been examined by the appropriate taxing authority or the period for
assessment of the Taxes in respect of which such Tax Returns were required to be
filed has expired; (vii) no audit of any kind has been conducted with respect to
any Tax Return by an appropriate Taxing authority; (viii) all deficiencies which
have been asserted as a result of any examination set forth on SCHEDULE 3.9
hereto have been fully paid or finally settled, and no issue has been raised in
any such examination which, by application of similar principles, reasonably
would be expected to result in assertion of a deficiency for any other year not
so examined; (ix) the Company has neither executed nor entered into a closing
agreement pursuant to Section 7121 of the Code, or any predecessor provision or
any similar provision of state, local or foreign law; (x) there are no
outstanding agreements or waivers extending the statutes of limitations with
respect to the assessment of any Tax and no such agreements or waivers have been
requested; (xi) the Company has not incurred any liability with respect to Taxes
based upon income, operations, purchases, sales, payroll, licenses,
compensation, business, capital stock or surplus, properties or assets except in
the ordinary course of business, or any liabilities for interest or penalties
with respect to the foregoing; (xii) there is no action, suit, investigation,
audit, claim or assessment pending or proposed or, to the Knowledge of the
Company, threatened with respect to Taxes of the Company and, to the Knowledge
of the Company, no basis exists therefor; (xiii) the accruals for Taxes
reflected on the Balance Sheet are adequate to cover any Tax liability of the
Company; (xiv) since the Balance Sheet Date, the Company has not and, to the
Knowledge of the Company, none of the Shareholders has taken any action not in
accordance with past practice that would have the effect of deferring any Tax
liability for the Company from any
14
taxable period ending on or before the Closing Date to any taxable period ending
after the Closing Date; and (xv) no claim has ever been made by a Taxing
Authority in a jurisdiction where the Company has never paid Taxes or filed Tax
Returns asserting that the Company is or may be subject to Taxes assessed by
such jurisdiction.
(b) No transaction contemplated by this Agreement is
subject to withholding under Section 1445 of the Code and no stock transfer
Taxes, sales Taxes, use Taxes, real estate transfer or gains Taxes, or other
similar Taxes will be imposed on the transactions contemplated by this
Agreement.
(c) As a result of the Merger, none of the Company, the
Surviving Corporation or Parent will be obligated to make a payment to an
individual employed by the Company that would be a "parachute payment" to a
"disqualified individual" as those terms are defined in Section 280G of the
Code, without regard to whether such payment is reasonable compensation for
personal services performed or to be performed in the future.
(d) For any Taxable period as to which the relevant
statute of limitations will not have expired as of the Closing Date, the Company
has not been a member of an affiliated group (as defined in Section 1504(a) of
the Code without regard to the limitations contained in Section 1504(b) of the
Code) or has filed Tax Returns with a group of corporations filing a combined,
consolidated or unitary income Tax Return.
(e) The Company has not and, to the Knowledge of the
Company, the Shareholders have not taken or failed to take any action which
action or failure would cause the Merger to fail to qualify as a reorganization
within the meaning of Section 368(a) of the Code.
SECTION 3.10 AVAILABILITY OF ASSETS AND LEGALITY OF USE. Except as set
forth on SCHEDULE 3.10, the assets owned or leased by the Company, or which the
Company is entitled to use under license or other agreements, constitute all the
assets used by the Company in the conduct of the Business (including, but not
limited to, all books, records, computers and computer programs and data
processing systems), and the tangible assets owned or leased by the Company are
in good condition (subject to normal wear and tear) and serviceable condition.
Except as set forth on SCHEDULE 3.10, to the Knowledge of the Company, (a) all
such assets and their uses conform to all applicable laws, regulations, rules,
ordinances, codes, licenses, franchises and permits (including, without
limitation, all electrical, building, zoning, environmental and occupational
safety and health Requirements of Law), and (b) no written notice of any
existing violation of any of such matters relating to such assets or their use
has been received by the Company or any of the Shareholders.
SECTION 3.11 GOVERNMENTAL PERMITS. To the Knowledge of the Company, the
Company owns, holds or possesses all governmental licenses, franchises, permits,
privileges, variances, immunities, approvals and other authorizations which are
necessary to entitle it to own, lease, operate and use its assets and properties
and to carry on and conduct the Business substantially as currently conducted
(herein collectively called "GOVERNMENTAL PERMITS"), except for such
Governmental Permits as to which the failure to so own, hold or possess would
not have a Material Adverse Effect on the Company. SCHEDULE 3.11 sets forth a
list and brief description of each such Governmental Permit.
15
To the Knowledge of the Company, the Company has fulfilled and
performed its respective obligations under each of such Governmental Permits,
and no event has occurred or condition or state of facts exists which
constitutes or, after notice or lapse of time or both, would constitute a breach
or default under any such Governmental Permit, or permits or, after notice or
lapse of time or both, would permit revocation or termination of any such
Governmental Permit, or which might adversely affect the right of the Company
under any such Governmental Permit. No notice of cancellation, of default or of
any dispute concerning any Governmental Permit, or of any event, condition or
state of facts described in the preceding sentence, has been received or is
known by the Company. Except as set forth on SCHEDULE 3.11, each of the
Governmental Permits is valid, subsisting and in full force and effect and will
continue in full force and effect after the Closing, in each case without (a)
the occurrence of any breach, default or forfeiture of rights thereunder or (b)
the consent, approval, or act of, or the making of any filing with, any
Governmental Body or other party.
SECTION 3.12 REAL PROPERTY. The Company does not own, and has never
owned, any real property or any option to acquire any real property.
SECTION 3.13 REAL PROPERTY LEASES. SCHEDULE 3.13 sets forth a list of
each lease or similar agreement under which the Company is lessee of, or holds
or operates, any real property owned by any third party. Except as set forth on
SCHEDULE 3.13, (i) there are no subleases, tenancies or other rights of
occupancy affecting all or any part of such leases, (ii) the Company has the
right to quiet enjoyment of the premises described in any lease identified on
such Schedule for the full term of each such lease or similar agreement (and any
renewal option related thereto) relating thereto, and (iii) the leasehold or
other interest of the Company therein is not subject or subordinate to any
Encumbrance held by persons claiming by, through or under the Company, except
for Permitted Encumbrances.
SECTION 3.14 CONDEMNATION. Neither the whole nor any part of any real
property listed on SCHEDULE 3.13 is subject to any pending suit for condemnation
or other taking by any public authority and, to the Knowledge of the Company, no
such condemnation or other taking is threatened.
SECTION 3.15 PERSONAL PROPERTY. SCHEDULE 3.15 contains a list as of the
date hereof of all machinery, equipment, vehicles, furniture and other personal
property owned by the Company having an original cost of $5,000 or more.
SECTION 3.16 PERSONAL PROPERTY LEASES. SCHEDULE 3.16 contains a list of
each lease or other agreement or right, whether written or oral, under which the
Company is lessee of, or holds or operates, any machinery, equipment, computer
hardware and related peripheral equipment, vehicle or other tangible personal
property owned by a third party.
SECTION 3.17 INTELLECTUAL PROPERTY.
(a) SCHEDULE 3.17 contains a list of:
(i) all United States and foreign patents and patent
applications and patent disclosures owned or controlled by the Company;
16
(ii) all United States and foreign copyrights, registered
or unregistered, copyrighted works and copyright registration
applications owned or controlled by the Company;
(iii) all computer software programs and software systems
(including, without limitation, all data, databases, compilations, tool
sets, related documentation and materials, whether in source code,
object code or human readable form and regardless of media), developed
by or for the Company or otherwise used in the Business ("SOFTWARE");
(iv) all United States, state and foreign trademarks,
service marks and trade names for which registrations have been issued
or applied for by the Company, and all other United States, state and
foreign trademarks, service marks and trade names owned or used by the
Company or in which the Company holds any right, license, sublicense or
interest;
(v) all agreements, commitments, contracts,
understandings, licenses, sublicenses, assignments and indemnities
which relate or pertain to any asset, property or right of the
character described in the preceding clause to which the Company is a
party;
(vi) all licenses, sublicenses or agreements which are
material to the Business and which relate or pertain to mailing lists,
know-how, trade secrets, disclosures or uses of ideas to which the
Company is a party, showing in each case the parties and the material
terms; and
(vii) all registered and unregistered assumed or fictitious
names under which the Company is conducting the Business or has within
the previous three years conducted the Business.
(b) All patents listed on SCHEDULE 3.17 as being owned,
controlled or used by the Company are valid and in force and all patent
applications of the Company listed therein are in good standing, all without
challenge of any kind, and, except as otherwise set forth on SCHEDULE 3.17, the
Company owns the entire right, title and interest in and to such patents and
patent applications, free and clear of all Encumbrances, except Permitted
Encumbrances. All of the registrations for trademarks, service marks, trade
names and copyrights listed on SCHEDULE 3.17 as being owned, controlled or used
by the Company are valid and in force and all applications for such
registrations are pending and in good standing, all without challenge of any
kind, and, except as otherwise set forth on SCHEDULE 3.17, the Company owns the
entire right, title and interest in and to all such trademarks, service marks,
trade names and copyrights so listed as well as the registrations and
applications for registration therefor, free and clear of all Encumbrances,
except Permitted Encumbrances. Correct and complete copies of all the patents
and patent applications and of all of the trademarks, service marks, trade names
and copyrights and registrations, applications or deposits therefor and all the
agreements, commitments, contracts, understandings, licenses, sublicenses,
assignments, and indemnities listed on SCHEDULE 3.17 have heretofore been
delivered or otherwise made available by the Company to Parent.
SECTION 3.18 ACCOUNTS RECEIVABLE; INVENTORIES.
17
(a) All accounts receivable of the Company have arisen
from bona fide transactions by the Company in the ordinary course of business
consistent with past practice and, to the Knowledge of the Company, are not
subject to counterclaims or setoffs. Except as set forth on SCHEDULE 3.18, no
such receivable has been outstanding for more than 90 days beyond its due date.
To the Knowledge of the Company, all of the accounts receivable reflected on the
Balance Sheet, taken as a whole, are good and collectible in the ordinary course
of business at the aggregate amounts recorded in respect thereof, net of any
applicable allowance for doubtful accounts, which allowances will be determined
on a basis consistent with the basis used in determining the allowances for
doubtful accounts reflected in the Balance Sheet.
(b) The inventories of the Company (including raw
materials, supplies, work-in-process, finished goods and other materials) are in
good and useable condition and (i) are reflected in the Balance Sheet in
accordance with generally accepted accounting principles and (ii) are reflected
in the books and records of the Company at the lower of average cost or market
value. The inventory obsolescence policies of the Company are appropriate for
the nature of the products sold and the marketing methods used by the Company,
and the reserve for inventory obsolescence contained in the Balance Sheet fairly
reflects the amount of obsolete inventory as of the Balance Sheet Date. The
Company has heretofore delivered to Parent a list of places where material
inventories of the Company are located.
SECTION 3.19 TITLE TO ASSETS. To the Knowledge of the Company, the
Company has good title to all of its assets reflected on the Balance Sheet as
being owned by it and all of the assets thereafter acquired by it (except to the
extent that such assets have been disposed of after the Balance Sheet Date in
the ordinary course of business consistent with past practice), free and clear
of all Encumbrances, except for Permitted Encumbrances and except as set forth
in SCHEDULE 3.19.
SECTION 3.20 EMPLOYEES. SCHEDULE 3.20 contains a list of the employees
of the Company as of the date hereof. As of the date hereof, all bonuses payable
to employees of the Company for services performed on or prior to the date
hereof have been paid in full, and there are no outstanding agreements,
understandings or commitments of the Company with respect to any bonuses or
increases in compensation.
SECTION 3.21 EMPLOYEE MATTERS. To the Knowledge of the Company, the
Company has complied in all material respects with all applicable laws, rules
and regulations which relate to wages, hours, discrimination in employment and
collective bargaining and to the operation of its business and is not liable for
any arrears of wages or any taxes or penalties for failure to comply with any of
the foregoing. The Company believes that the Company's relations with its
employees are satisfactory. Except as set forth in SCHEDULE 3. 21, the Company
is not a party to any collective bargaining agreement, the Company has complied
in all material respects with all collective bargaining agreements listed in
such Schedule and the Company is not a party to, and it is not affected by or,
to the Knowledge of the Company, threatened with, any dispute or controversy
with a union or with respect to unionization or collective bargaining involving
its employees. The Company is not materially affected by any dispute or
controversy with a union or with respect to unionization or collective
bargaining involving any supplier or customer of the Company. The Company is not
affected by any union organizing or election activities involving any employee
of the
18
Company and, to the Knowledge of the Company, no such activities are threatened
as of the date hereof.
SECTION 3.22 EMPLOYEE BENEFIT PLANS.
(a) The Company's 401(k) Plan, as referenced on SCHEDULE
3.22(A) (the "401(K) PLAN"), is the only "employee pension benefit plan" (as
such term is defined in Section 3(2) of ERISA) at any time maintained by the
Company or which provides or will provide benefits to present or prior employees
of the Company. The Company has at no time maintained any "employee welfare
benefit plan" (as such term is defined in Section 3(1) of ERISA) and neither has
provided nor will provide benefits to present or prior employees of the Company
pursuant to such a plan. In addition, set forth on SCHEDULE 3.22(A) is a true
and complete list of each stock ownership, stock purchase, stock option, phantom
stock, bonus, deferred compensation, incentive compensation, severance or
termination pay, change of control, death benefit or similar plan, agreement or
arrangement maintained by the Company (the "NON-ERISA COMMITMENTS"). The Company
has never maintained or been required to contribute to any "employee pension
benefit plan" subject to Section 302 or Title IV of ERISA or any "multiemployer
plan," as such term is defined in Section 3(37) of ERISA. The Company does not
have, and has never had, any ERISA Affiliate. Except as disclosed on SCHEDULE
3.22(A), true copies of the 401(k) Plan and each Non-ERISA Commitment, the
annual reports required to be filed under ERISA for the last two years with
respect to the 401(k) Plan, if any, and the financial statements for the most
recent two years for which such statements exist with respect to the 401(k) Plan
have been delivered or made available to Parent.
(b) Neither the Company nor, to the Knowledge of the
Company, any of the Shareholders, any other "disqualified person" (within the
meaning of Section 4975 of the Code) or any "party in interest" (within the
meaning of Section 3(14) of the Code) has engaged in any non-exempt prohibited
transaction (within the meaning of Section 4975 of the Code or Section 406 of
ERISA), nor, to the Knowledge of the Company, has any breach of fiduciary duty
occurred, with respect to the 401(k) Plan. Except as disclosed on SCHEDULE
3.22(B), the 401(k) Plan (i) has been administered in accordance with its terms
and (ii) complies in form, and has been maintained in accordance, with the
requirements of ERISA and, where applicable, the Code. Except as disclosed on
SCHEDULE 3.22(B), the Company has no obligations to provide health or life
insurance benefits to its former employees, except as specifically required by
law. Except as disclosed on SCHEDULE 3.22(B), the 401(k) Plan has received a
favorable determination letter from the Internal Revenue Service, and to the
Knowledge of the Company nothing has occurred and no condition exists that could
cause the loss of such qualification. All contributions or payments that are due
from the Company with respect to the 401(k) Plan and Non-ERISA Commitments have
been timely paid and any related insurance and third party administration
contracts remain in full force and effect. There is no pending or to the
Knowledge of the Company threatened claim in respect of the 401(k) Plan or any
Non-ERISA Commitments other than routine claims for benefits in the ordinary
course of business.
SECTION 3.23 CONTRACTS. Except as set forth on SCHEDULE 3.23 or any
other Schedule hereto, the Company is not a party to or bound by:
19
(a) any contract for the purchase, sale or lease of real
property or any option to purchase or sell real property;
(b) any indebtedness, obligation or liability for
borrowed money, or liability for the deferred purchase price of property in
excess of $10,000, or any instrument guaranteeing any indebtedness, obligation
or liability, or any obligation to incur any of the foregoing;
(c) any joint venture, partnership or other arrangement
involving a sharing of profits involving the Company;
(d) any agreement which is material to the Business and
which includes provisions regarding minimum volumes or volume discounts,
excluding outstanding price quotations;
(e) any agreement which is material to the Business and
pursuant to which a rebate, discount, bonus, commission or other payment with
respect to the sale of any product of the Company will be payable or required
after the Closing;
(f) any guarantee of the obligations of the Company's
customers, suppliers, officers, directors, employees or Affiliates or others;
(g) any consignment, distributor, dealer, manufacturer's
representative, sales agency, advertising representative or advertising or
public relations contract which is material to the Business;
(h) any agreement limiting the Company's ability to
engage in any business anywhere in the world;
(i) any contract which provides for, or relates to, any
non-competition or confidentiality arrangement with any Person, including any
current or former officer or employee of the Company;
(j) any contract or group of related contracts for
capital expenditures in excess of $10,000 for any single project or related
series of projects;
(k) any contract which involves payments or receipts by
the Company of more than $5,000; or
(l) any contract not made in the ordinary course of
business.
SECTION 3.24 STATUS OF CONTRACTS. Each of the leases, contracts and
other agreements listed on SCHEDULES 3.13, 3.16, 3.17, 3.22(a) and 3.23
(collectively, the "MATERIAL CONTRACTS"), constitutes a valid and binding
obligation of the Company and, to the Knowledge of the Company, the other
parties thereto, and is in full force and effect and each of the Material
Contracts (except as set forth in SCHEDULE 3.24 and except for those Material
Contracts which by their terms will expire prior to the Closing Date or will be
otherwise terminated prior to the Closing Date in accordance with the provisions
hereof) will continue in full force and effect after the Closing Date, in each
case without materially breaching the terms thereof or resulting in the
forfeiture or impairment of any rights thereunder and without
20
the consent, approval or act of, or the making of any filing with, any other
party. Except as set forth on SCHEDULE 3.24, the Company has fulfilled and
performed its obligations in all material respects under each of the Material
Contracts and the Company is not in, or, to the Knowledge of the Company,
alleged to be in, material breach or default under, nor is there or, to the
Knowledge of the Company, is there alleged to be any basis for termination of
any of the Material Contracts. To the Knowledge of the Company, no other party
to any of the Material Contracts has breached or defaulted thereunder. No event
has occurred and no condition or state of facts exists which, with the passage
of time or the giving of notice or both, would constitute such a default or
breach by the Company or, to the Knowledge of the Company, by any other party.
The Company is not currently renegotiating any of the Material Contracts or
paying liquidated damages in lieu of performance thereunder.
SECTION 3.25 NO VIOLATION, LITIGATION OR REGULATORY ACTION. Except as
set forth on SCHEDULE 3.25:
(a) To the Knowledge of the Company, the Company has
complied with all laws, regulations, rules, writs, injunctions, ordinances,
franchises, decrees, stipulations, awards or orders of any Governmental Body
which are applicable to the Company or its Business;
(b) No notice has been served upon the Company by any
Governmental Body or other person of any violation of any Requirements of Law or
calling attention to the necessity of any work, repairs, new construction,
installation or alteration of any real or personal property owned, leased or
used by the Company;
(c) There are no lawsuits, claims, suits, proceedings
pending or, to the Knowledge of the Company, threatened against the Company or
investigations pending regarding the Company nor, to the Knowledge of the
Company, is there any basis for any of the same, and there are no lawsuits,
suits or proceedings pending or contemplated in which the Company is the
plaintiff or claimant; and
(d) There is no action, suit or proceeding pending or, to
the Knowledge of the Company, threatened which questions the legality or
propriety of the transactions contemplated by this Agreement or the Merger
Agreement.
SECTION 3.26 INSURANCE. All fire and casualty, liability (general,
products and other liability), workers' compensation and other forms of
insurance and bonds maintained by the Company are set forth on SCHEDULE 3.26,
provide full and adequate coverage for all normal risks incident to the Business
and the respective properties and assets of the Company, and, to the Knowledge
of the Company, are in character and amount at least equivalent to that carried
by Persons engaged in similar businesses and subject to the same or similar
peril or hazards. The Company has made any and all payments required to maintain
such policies in full force and effect. The Company has not received notice of
default under any such policy, and has not received written notice or, to the
Knowledge of the Company, oral notice of any pending or threatened termination
or cancellation, coverage limitation or reduction or material premium increase
with respect to such policy.
SECTION 3.27 ENVIRONMENTAL PROTECTION. Except as set forth on SCHEDULE
3.27: to the Knowledge of the Company, (i) the Company has all permits and
licenses required under
21
all applicable federal, state or local statutes, laws, ordinances, codes, rules,
regulations, guidelines or any binding determinations of any Governmental Body
(including consent decrees and administrative orders) relating to protection of
the environment or public or worker health and safety (collectively,
"ENVIRONMENTAL LAWS") in connection with the operation of the Business, (ii) is
in compliance with such permits and licenses as well as with Environmental Laws,
(iii) has not received notice of any actual or alleged noncompliance and (iv)
there have been no past events, actions or practices which will prevent
continued compliance with permits, licenses and Environmental Laws in effect at
the Effective Time or which could form the basis for any claim, action or suit,
based on the Release or threatened Release of any Contaminant on, in or under or
from any Facility now or previously owned, operated or leased by the Company.
Except as set forth on SCHEDULE 3.27, the Company has not received any formal
notice, demand or claim, and there are no legal or administrative proceedings
pending or resolved in which it has been alleged that the Company is not in
compliance with Environmental Laws or that it is liable under Environmental Laws
in connection with any generation, treatment, storage, transportation or
disposal of any Contaminant. Except as set forth on SCHEDULE 3.27, to the
Knowledge of the Company, there have been no past events, actions, practices
which will prevent continued compliance with permits, licenses and Environmental
Laws in effect at the Effective Time, or which could form the basis for any
claim, action or suit, based on the Release or threatened Release of any
Contaminant, it being understood that awareness or notice of future
Environmental Laws of general application by environmental regulatory bodies
will not constitute a breach of this representation and warranty.
SECTION 3.28 CUSTOMERS AND SUPPLIERS. Set forth in SCHEDULE 3.28 hereto
is a list of names and addresses of the ten (10) largest customers and the ten
(10) largest vendors during each of the years ended December 31, 2003 and
December 31, 2004. Except as set forth in SCHEDULE 3.28, there exists no actual
or, to the Knowledge of the Company, threatened termination, cancellation or
limitation of, or any modification or change in, the business relationship of
the Company with any customer or group of customers or supplier or group of
suppliers listed in SCHEDULE 3.28, or whose purchases or sales individually or
in the aggregate are material to the operations of the Company's business.
SECTION 3.29 SHAREHOLDERS' ASSETS. None of the Shareholders owns,
directly or indirectly, any assets or properties relating to or used by the
Company in the Business.
SECTION 3.30 NO FINDER. The Company has not paid or become obligated to
pay any fee or commission to any broker, finder or intermediary for or on
account of the transactions contemplated by this Agreement.
SECTION 3.31 TRANSACTIONS WITH AFFILIATES. Except as set forth on
SCHEDULE 3.31, no officer, director or other Affiliate of the Company (including
spouses, children and other relatives of any of the foregoing) is a party to any
agreement, contract, arrangement or transaction with the Company or has any
interest in any property (real or personal or mixed, tangible or intangible)
owned or leased by the Company.
SECTION 3.32 INTENTIONALLY OMITTED.
22
SECTION 3.33 CONFIDENTIALITY AGREEMENTS. Each current employee and
officer of the Company has executed a Confidentiality and Nondisclosure
Agreement substantially in the form or forms previously presented or made
available to Parent.
SECTION 3.34 BANK ACCOUNTS; POWERS OF ATTORNEY; MINUTE BOOKS.
(a) SCHEDULE 3.34 sets forth a complete and correct list
of all bank accounts and safe deposit boxes of the Company and persons
authorized to sign or otherwise act with respect thereto as of the date hereof
and a complete and correct list of all persons holding a general or special
power of attorney granted by the Company.
(b) True and complete copies of the minute books of the
Company have been delivered to Parent. Such minute books contain true and
complete records of all meetings and other corporate action taken by the Board
of Directors and stockholders of the Company.
SECTION 3.35 PROXY STATEMENT. The Proxy Statement and related proxy
materials (collectively, the "PROXY STATEMENT") to be prepared by the Company in
accordance with Section 5.12 and used in connection with the Company's meeting
of Shareholders described in Section 5.12 at which the Merger Agreement and the
Merger will be considered for approval (the "SHAREHOLDERS MEETING") will, when
prepared by the Company and distributed to the Shareholders, comply in all
material respects with the provisions of the CGCL and will not, at the time of
the mailing of the Proxy Statement to the Shareholders, at the time of the
Shareholders Meeting or at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading; provided, however, that
the Company makes no representation or warranty with respect to any information
supplied by Parent for use in the Proxy Statement, including, without limitation
any information contained in the PPM, to be attached to the Proxy Statement as
an Appendix. If at any time prior to the Effective Time any event with respect
to the Company, its officers and directors or any of its subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Proxy Statement, such event shall be so described. None of the information
that the Company will supply specifically for use in the PPM will contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they will be made, not misleading.
SECTION 3.36 DISCLOSURE. No representation or warranty made by the
Company contained in this Agreement and no statement contained in any
certificate, list, exhibit or other instrument specified or referred to in this
Agreement, including, without limitation, the Company Disclosure Schedules,
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained herein or therein, in light of
circumstances under which they were made, not misleading.
SECTION 3.37 COMPANY DISCLOSURE SCHEDULES. Notwithstanding anything in
this Agreement to the contrary, (a) all information contained in the Schedules
delivered by the Company pursuant to ARTICLE III hereto (the "COMPANY DISCLOSURE
SCHEDULES") for all purposes is and shall be deemed to constitute a part of the
Company's representations and warranties set forth in this ARTICLE III, (b) the
Company Disclosure Schedules are incorporated in this Agreement by this
reference, and (c) disclosure by the Company in or on
23
one Company Disclosure Schedule shall be deemed to be disclosure for all other
purposes on any or all of the other Company Disclosure Schedules for which such
disclosure may be relevant to the extent that a reasonable person would
understand that information disclosed in such Schedule might reasonably apply to
such other Schedule(s).
ARTICLE IV
[INTENTIONALLY OMITTED]
ARTICLE V
ADDITIONAL AGREEMENTS OF THE PARTIES
SECTION 5.1 ORDINARY COURSE. The Company covenants that prior to the
Closing, without Parent's written consent, the Company shall not:
(a) take or authorize any of the actions set forth in
Section 3.7(b);
(b) issue or sell any shares of its capital stock of any
class, or issue or sell any securities convertible into, or options with respect
to, or warrants to purchase or rights to subscribe to, any shares of its capital
stock of any class, or make any commitment to issue or sell any such shares or
securities;
(c) directly or indirectly solicit or negotiate with
respect to any inquiries or proposals from any person relating to: (i) the
merger or consolidation of the Company with any person; (ii) the direct or
indirect acquisition by any person of any of the assets of the Company (other
than the sale of assets in the ordinary course of business consistent with past
practice, not otherwise prohibited by this Section 5.1); or (iii) the
acquisition of direct or indirect beneficial ownership or control of the Company
or any securities thereof by any person;
(d) prepare or file any Tax Return inconsistent with past
practice or, on any such Tax Return, take any position, make any election, or
adopt any method that is inconsistent with positions taken, elections made or
methods used in preparing or filing similar Tax Returns in prior periods
(including, without limitation, positions, elections or methods which would have
the effect of deferring income to periods ending after the Closing Date or
accelerating deductions to periods ending on or prior to the Closing Date); or
(e) agree or commit to do or authorize any of the
foregoing;
PROVIDED, THAT, if the Company provides written notice to Parent
(pursuant to the terms of Section 10.2) of its intent to take, authorize, agree
or commit to do or authorize any action prohibited by this Section 5.1, and
prior to obtaining Parent's consent as required by this Section 5.1, the Board
of Directors of the Company acting in good faith determines that the failure to
take, authorize, agree or commit to do or authorize such action will jeopardize
the existence of the Company, the taking, authorization, agreement or commitment
to do or authorize any such action by the Company shall not constitute a breach
of this Agreement giving rise to a claim for damages by Parent or Mergerco;
PROVIDED, FURTHER, that the foregoing proviso shall in no way operate as a
waiver by Parent of the requirements of Section 6.2 or limit or condition
Parent's right to terminate this Agreement pursuant to Section 9.1(c).
24
SECTION 5.2 ACCESS PRIOR TO CLOSING; CERTAIN NOTICES.
(a) Upon reasonable notice, Parent, the Company, each of
their respective subsidiaries and each of their respective directors, officers,
agents and employees shall afford to the other and the other's representatives
(including, without limitation, its independent public accountants, banks or
other lenders' representatives and attorneys) reasonable access during regular
business hours from the date hereof through the Closing to any and all of its
premises, properties, contracts, books, records, data and personnel or relating
to its operations and during such period each shall make available or furnish
promptly to the other (a) a copy of each report, schedule, registration
statement and other document filed or received by it pursuant to the
requirements of federal or state securities laws and (b) all other information
concerning its business, properties and personnel as the other may reasonably
request. No investigation by either of the parties or their respective
representatives shall affect or otherwise obviate or diminish the
representations, warranties, covenants, agreements or conditions to the
obligations of the other party set forth herein.
(b) The Company covenants that prior to the Closing the
Company will promptly notify Parent of any notice or any pending, threatened or
contemplated lawsuit, claim, suit, proceeding or Governmental Body investigation
which, if existing on the date hereof, would have been disclosable pursuant to
Section 3.25(b) or (c).
SECTION 5.3 REGULATORY AND OTHER AUTHORIZATIONS.
(a) Parent and the Company shall use commercially
reasonable efforts to secure before the Closing Date, each consent, approval or
waiver, in form and substance reasonably satisfactory to the Company or Parent,
required to be obtained to satisfy the conditions set forth in Section 6.1 and
Section 6.2 below; PROVIDED, THAT, none of the Company, Parent or Mergerco shall
have any obligation to pay any consideration in order to obtain any such
consents or approvals.
(b) During the period prior to the Closing Date, Parent
and the Company shall use commercially reasonable efforts to secure any consents
and approvals of any Governmental Body required to satisfy the conditions set
forth in Sections 6.1 and 6.2 below; PROVIDED, HOWEVER, that the Company shall
not make any agreement or understanding affecting its assets or the Business as
a condition for obtaining any such consents or approvals except with the prior
written consent of Parent.
SECTION 5.4 FURTHER ASSURANCES. At any time and from time to time at or
after the Closing, the parties agree to cooperate with each other, to execute
and deliver such other documents, instruments of transfer or assignment, files,
books and records and do all such further acts and things as may be reasonably
required to carry out the transactions contemplated hereby.
SECTION 5.5 COMPANY FINANCIAL STATEMENTS. The Company shall promptly
provide to Parent copies of any financial statements prepared with respect to
the Company as of a date or for a period subsequent to that reflected in the
Company's Financial Statements.
SECTION 5.6 DELIVERY OF DOCUMENTS. Subject to the satisfaction of the
conditions to their respective obligations contained in Article VI, the parties
shall cause the delivery of the
25
respective documents required to be delivered or caused to be delivered by them
pursuant to Article VII.
SECTION 5.7 EMPLOYEES. The Company hereby acknowledges that, after the
Closing, neither Parent nor the Surviving Corporation, has any obligation to
continue the employment of any of the employees of the Company; except for the
employment of ▇▇▇▇ ▇▇▇▇▇▇ pursuant to the ▇▇▇▇▇▇ Employment Agreement, ▇.▇.
▇▇▇▇▇▇ pursuant to the ▇▇▇▇▇▇ Employment Agreement and ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ pursuant
to the ▇▇▇▇▇▇▇ Employment Agreement.
SECTION 5.8 USE OF TRADE NAMES. Parent and Surviving Corporation and
their Affiliates shall, after the Effective Time, have the unlimited, exclusive,
royalty-free and perpetual right to use the name "Entelagent" and any other
names or tradenames used by the Company with respect to the Business.
SECTION 5.9 CONTINUED RELATIONSHIPS. After the date hereof and through
the Closing the Company shall use commercially reasonable efforts to preserve
intact the business of the Company and keep available the services of its
officers and employees and maintain good relationships with suppliers,
advertising and other customers and others having business relations with the
Company.
SECTION 5.10 PRESERVE ACCURACY OF REPRESENTATIONS AND WARRANTIES.
Between the date hereof and the Closing Date, each of the parties hereto shall
refrain from taking any action which would render any of its respective
representations or warranties contained in Article II or III of this Agreement
inaccurate as of the Closing Date. Each party shall promptly notify the other of
any action, suit or proceeding that has been instituted or threatened against
such party to restrain, prohibit or otherwise challenge the legality of any
transaction contemplated by this Agreement or the Merger Agreement.
SECTION 5.11 NOTIFICATION BY THE COMPANY OF CERTAIN MATTERS. The
Company shall promptly advise Parent in writing of (i) any change or event
having a Material Adverse Effect on the Company, (ii) any notice or other
communication from any third Person alleging that the consent of such third
Person is or may be required in connection with the transactions contemplated by
this Agreement, and (iii) any material default under any Material Contract or
event which, with notice or lapse of time or both, would become such a default
on or prior to the Effective Time and of which the Company has Knowledge.
SECTION 5.12 NECESSARY ACTIONS. Subject to the terms of this Agreement,
Parent, Mergerco and the Company shall use commercially reasonable efforts to
effect the Merger as promptly as possible after the date hereof. The Company
shall prepare ANNEX A hereto and shall use its best efforts to deliver ANNEX A
to Parent within 10 days after the date hereof, but in any event not later than
the date of delivery of the Proxy Statement to Parent and its counsel pursuant
to this Section 5.12. The Company shall prepare the Proxy Statement, which shall
include a recommendation in favor of the Merger by the Company's Board of
Directors, as promptly as possible after the date hereof and shall submit the
proposed Proxy Statement to Parent and its counsel not less than 10 days prior
to submitting the Proxy Statement to the Shareholders; PROVIDED, HOWEVER, that
the Company's Board of Directors may withdraw or modify, or propose to withdraw
or modify, in a manner adverse to Parent and/or Mergerco, such recommendation in
favor of the Merger if, after consultation with
26
independent legal counsel, the Company's Board of Directors determines in good
faith that such action is necessary to avoid a breach by the Board of Directors
of the Company of its fiduciary duties to the Shareholders under applicable
laws; PROVIDED, FURTHER, that notwithstanding such withdrawn recommendation, the
Company shall comply with all other requirements of this Section 5.12. The
Company covenants and agrees that at the time of mailing of the Proxy Statement
to the Shareholders, at the time of the Shareholders Meeting and at the
Effective Time the Proxy Statement, insofar as it contains information provided
by the Company, shall not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. Parent covenants and agrees that at the time of
mailing of the PPM to the Shareholders, at the time of the Shareholders Meeting
and at the Effective Time the PPM, insofar as it contains information provided
by Parent, shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The Company shall use commercially reasonable efforts to
hold the Shareholders Meeting within forty-five (45) days after the later of (a)
the date of this Agreement; (b) delivery by Parent of the PPM to each of the
Shareholders or (c) approval by Parent of the final form of the Proxy Statement.
The Proxy Statement and the submission thereof to the Shareholders, the Board of
Directors meeting approving this Agreement, the Merger Agreement, the Merger and
authorizing submission of the Merger for approval of Shareholders and the
Shareholders Meeting shall each comply in all material respects with the
requirements of the CGCL and the Company's Articles of Incorporation and By-laws
and all other applicable laws, including all applicable rules and regulations of
Governmental Bodies and all laws (including common laws) relating to the
fiduciary duties of the Company's Board of Directors.
SECTION 5.13 NO ASSURANCE OF PUBLIC OFFERING. The Company acknowledges
and agrees:
(a) that there exists no firm commitment, binding
agreement, or promise or other assurance of any kind, whether express or
implied, oral or written, that a public offering of the capital stock of Parent
will occur at a particular price or within a particular range of prices or occur
at all;
(b) that neither Parent, any of its subsidiaries, any of
their respective officers, directors, agents or representatives nor any
prospective underwriter shall have any liability to the Company, any Shareholder
or any other person or entity affiliated or associated with the Company for any
failure of a public offering of the capital stock of Parent to occur at a
particular price or within a particular range of prices or to occur at all; and
(c) that the decision of each Shareholder to vote in
favor of or consent to the proposed Merger has been or will be made independent
of, and without reliance upon, any statements, opinions or other communications,
or due diligence investigations which have been or will be made or performed by
any prospective underwriter or by Parent personnel, relative to Parent or any
possible public offering of the capital stock of Parent.
SECTION 5.14 REORGANIZATION. During the period from the date of this
Agreement through the Effective Time, unless the other parties hereto shall
otherwise agree in writing,
27
none of Parent, Mergerco, the Company or any of their respective subsidiaries
shall knowingly take or fail to take any action which action or failure would
cause the Merger to fail to qualify as a reorganization within the meaning of
Section 368(a) of the Code.
SECTION 5.15 INTENTIONALLY OMITTED.
SECTION 5.16 INDEBTEDNESS.
(a) The Company shall use commercially reasonable efforts
to restructure all monies lent or debts owed by the Company to any of its
employees, any Shareholder or third parties. All indebtedness of the Company as
of the date hereof is set forth on SCHEDULE 5.16(A) hereto. Parent and the
Company shall amend SCHEDULE 5.16(A) prior to the Closing to reflect all
indebtedness of the Company as of the date which is two business days prior to
the Closing.
(b) Subsequent to the consummation of the Phase I
Transaction, as defined in that certain Non Exclusive Engagement Agreement,
dated January 19, 2005, between Parent and ▇▇▇▇▇▇▇ & Company (UK) Ltd., Parent
shall pay and satisfy each of the liabilities and obligations of the Company as
set forth on SCHEDULE 5.16(B) hereto.
SECTION 5.17 INTENTIONALLY OMITTED.
SECTION 5.18 INTENTIONALLY OMITTED.
SECTION 5.19 INTENTIONALLY OMITTED.
SECTION 5.20 INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY.
For six (6) years from and after the Effective Time (or, in the case of matters
occurring at or prior to the Effective Time that have not been resolved prior to
the sixth anniversary of the Effective Time, until such matters are finally
resolved), Parent shall indemnify and hold harmless each individual who as of
the date hereof is a director or officer of the Company (an "INDEMNIFIED
PERSON") for and against all losses, expenses and liabilities that such person
incurs or may incur based upon or relating to facts, events and/or matters
existing or occurring prior to or at the Effective Time (including in connection
with the Merger or the consummation thereof), to the same extent as provided in
(or permitted by) the Company's Articles of Incorporation and/or Bylaws, in each
case, as in effect on the date of this Agreement; PROVIDED, HOWEVER, that Parent
shall not be required to indemnify or hold harmless any Indemnified Person in
connection with any proceeding (or portion thereof) to the extent (but only to
such extent) involving any claim initiated by any Indemnified Person (or any
spouse or member of such Indemnified Person's family, or a custodian, trustee
(including a trustee of a voting trust), executor or other fiduciary for the
account of such Indemnified Person's spouse or members of such Indemnified
Person's family, or a trust for such Indemnified Person's own self) unless such
proceeding is brought by such Indemnified Person solely to enforce rights under
this Section 5.20. As used herein, the word "family" shall include any spouse,
lineal ancestor or descendent, step-child, brother or sister. The Bylaws of the
Surviving Corporation shall contain provisions identical with respect to
indemnification to those set forth in Article VII, Section 1 of the Company's
Bylaws as in effect on the date of this Agreement and the Charter of the
Surviving Corporation shall contain provisions substantially similar in effect
with respect to indemnification as those set
28
forth in Article IV.B of the Articles of Incorporation of the Company as in
effect as of the date of this Agreement and such provisions shall not be
amended, repealed or otherwise modified for a period of six (6) years from the
Effective Time in any manner that would adversely affect any of the rights of
indemnification of persons covered thereby immediately before the Effective
Time. Subject to all of the foregoing provisions in this Section 5.20, from and
after the Effective Time, each person who as of the date of this Agreement is a
director and/or officer of the Company who becomes a director and/or officer of
Parent or any of its subsidiaries (including the Surviving Corporation) shall
(in addition to that which they are and shall be entitled pursuant to the
foregoing provisions of this Section) have indemnification rights (with respect
to their capacities as directors or officers of Parent or any of its
subsidiaries (including the Surviving Corporation) at or after the Effective
Time) to the extent provided in the Certificate of Incorporation or similar
governing documents of Parent and its subsidiaries (including the Surviving
Corporation), as in effect from time to time after the Effective Time.
SECTION 5.21 REGISTRATION RIGHTS AGREEMENT. At the Closing, Parent
shall execute and deliver the Registration Rights Agreement.
ARTICLE VI
CONDITIONS TO CLOSING
SECTION 6.1 THE COMPANY'S CONDITIONS TO CLOSE. The obligations of the
Company under this Agreement are subject to the satisfaction at or prior to the
Closing of each of the following conditions, but compliance with any or all of
such conditions may be waived (in whole or in part), in writing, by the Company,
to the extent permitted by applicable law:
(a) The representations and warranties of Parent
contained in this Agreement that are qualified as to materiality shall be true
and correct in all respects and the representations and warranties of Parent
contained in this Agreement that are not so qualified shall be true and correct
in all material respects on the date hereof and on the Closing Date, with the
same effect as though such representations and warranties had been made on and
as of the Closing Date (except to the extent that they expressly relate to an
earlier date); provided, THAT, the conditions set forth in this Section 6.1(a)
shall be deemed satisfied by Parent to the extent that any such inaccuracies
contained in any such representation or warranty of Parent do not, individually
or in the aggregate, adversely affect Parent or the properties, assets,
liabilities (fixed or otherwise) or condition (financial or otherwise) of Parent
and any of its subsidiaries, taken as a whole, in an amount in excess of
$200,000;
(b) Parent and Mergerco shall have performed and complied
in all material respects with all of the covenants and agreements contained in
this Agreement and satisfied in all material respects all of the conditions
required by this Agreement to be performed or complied with or satisfied by
Parent at or prior to the Closing;
(c) Parent and Mergerco shall have received all approvals
and actions of or by all Governmental Bodies, which are necessary to consummate
the transactions contemplated hereby;
29
(d) There shall not have occurred any change which would
have or would be likely to have a Material Adverse Effect with respect to Parent
or Mergerco;
(e) On the Closing Date, there shall be no Requirement of
Law, injunction, restraining order or decree of any nature of any court or
Governmental Body in effect that restrains or prohibits the consummation of the
transactions contemplated by this Agreement;
(f) No action, suit or proceeding shall have been
instituted by any person or entity, or threatened by any Governmental Body,
before a court or Governmental Body, to restrain or prevent the carrying out of
the transactions contemplated by this Agreement and the Merger Agreement;
(g) The valuation of the Merger Consideration shall have
been approved as required by Article III, Section B(2)(b)(ii)(B) of the
Company's Articles of Incorporation by the affirmative vote of a majority of the
votes that holders of the outstanding shares of each series of Company Preferred
Stock are entitled to cast (voting as a single class on an as-if converted basis
in accordance with the Company's Articles of Incorporation), or waived;
(h) The Merger and the Merger Agreement shall have been
duly approved by the affirmative vote of the holders of not less than a majority
of the shares of Company Common Stock outstanding and entitled to vote with
respect thereof (voting as a single class with the holders of Company Preferred
Stock voting on an as-if converted basis in accordance with the Company's
Articles of Incorporation), by the holders of the Company Preferred Stock with
each series voting separately as a class in accordance with the Company's
Articles of Incorporation and by the holders of the Company Preferred Stock with
each series voting as a single class on as as-if converted basis in accordance
with the Company's Articles of Incorporation;
(i) Parent shall have delivered the PPM to each
Shareholder;
(j) The Company shall be reasonably satisfied that the
Merger and the transactions contemplated thereby are exempt from the
registration requirements of the Securities Act under Section 4(2) of the
Securities Act pursuant to and in full compliance with the conditions of Rule
506 of Regulation D promulgated thereunder;
(k) The Company shall be reasonably satisfied that the
Merger and the transactions contemplated thereby are exempt from the
registration or qualification provisions of all state securities laws applicable
to the Merger and the transactions contemplated thereby;
(l) Parent and Mergerco shall have executed and delivered
to the respective Shareholder party thereto the ▇▇▇▇▇▇ Employment Agreement and
the ▇▇▇▇▇▇ Employment Agreement;
(m) The Merger Agreement shall be concurrently filed with
the Secretary of State of the State of California;
(n) Parent shall have executed and delivered to the
Shareholders signatory thereto the Registration Rights Agreement; and
30
(o) Parent shall have delivered to the Company a
certificate, in form and substance reasonably satisfactory to the Company, dated
as of the Closing Date, signed by Parent's chief executive officer and chief
financial officer, to the effect set forth in clauses (a) through (f),
inclusive, of this Section 6.1.
SECTION 6.2 PARENT'S CONDITIONS TO CLOSE. The obligations of Parent
under this Agreement are subject to the satisfaction at or prior to the Closing
of each of the following conditions, but compliance with any or all of any such
conditions may be waived (in whole or in part), in writing, by Parent, to the
extent permitted by applicable law:
(a) The representations and warranties of the Company
contained in this Agreement that are qualified as to materiality shall be true
and correct in all respects and the representations and warranties of the
Company contained in this Agreement that are not so qualified shall be true and
correct in all material respects on the date hereof and on the Closing Date with
the same effect as though such representations and warranties had been made on
and as of the Closing Date (except to the extent that they expressly relate to
an earlier date); PROVIDED, THAT, the conditions set forth in this Section
6.2(a) shall be deemed satisfied by the Company to the extent that any such
inaccuracies contained in any such representation or warranty of the Company do
not, individually or in the aggregate, adversely affect the Company or the
properties, assets, liabilities (fixed or otherwise) or condition (financial or
otherwise) of the Company in an amount in excess of $200,000;
(b) The Company shall have performed and complied in all
material respects with all the covenants and agreements contained in this
Agreement (other than Section 5.6) and satisfied in all material respects all
the conditions required by this Agreement to be performed or complied with or
satisfied by it at or prior to the Closing;
(c) The Company shall have received all approvals and
actions of or by all Governmental Bodies, which are necessary to consummate the
transactions contemplated hereby;
(d) On the Closing Date, there shall be no Requirement of
Law, injunction, restraining order or decree of any nature of any court or
Governmental Body in effect that restrains or prohibits the consummation of the
transactions contemplated by this Agreement or the Merger Agreement;
(e) No action, suit or proceeding shall have been
instituted by any person or entity, or threatened by any Governmental Body,
before a court or Governmental Body, to restrain or prevent the carrying out of
the transactions contemplated by this Agreement or that would, individually or
in the aggregate, reasonably be expected to have a Material Adverse Effect on
the Business or the results of operations, properties or condition (financial or
otherwise) of the Company;
(f) The valuation of the Merger Consideration shall have
been approved as required by Article III, Section B(2)(b)(ii)(B) of the
Company's Articles of Incorporation by the affirmative vote of a majority of the
votes that holders of the outstanding shares of each series of Company Preferred
Stock are entitled to cast (voting as a single class on an as-if converted basis
in accordance with the Company's Articles of Incorporation), or waived;
31
(g) The Merger and the Merger Agreement shall have been
duly approved by the affirmative vote of the holders of not less than a majority
of the shares of Company Common Stock outstanding and entitled to vote with
respect thereof (voting as a single class with the holders of Company Preferred
Stock voting on an as-if converted basis in accordance with the Company's
Articles of Incorporation), by the holders of the Company Preferred Stock with
each series voting separately as a class in accordance with the Company's
Articles of Incorporation and by the holders of the Company Preferred Stock with
each series voting as a single class on as as-if converted basis in accordance
with the Company's Articles of Incorporation;
(h) The Company shall have received all necessary
consents or approvals, in form and substance reasonably satisfactory to Parent,
to the transactions contemplated by this Agreement as specified in Schedules 3.5
and 3.24 hereto;
(i) Parent shall be reasonably satisfied that the Merger
and the transactions contemplated thereby are exempt from the registration
requirements of the Securities Act under Section 4(2) of the Securities Act
pursuant to and in full compliance with the conditions of Rule 506 of Regulation
D promulgated thereunder;
(j) Parent shall be reasonably satisfied that the Merger
and the transactions contemplated thereby are exempt from the registration or
qualification provisions of all state securities laws applicable to the Merger
and the transactions contemplated thereby;
(k) Since the Balance Sheet Date, there shall not have
occurred any change which has had or would reasonably be expected to result in a
Material Adverse Effect with respect to the Company;
(l) The Merger Agreement shall be concurrently filed with
the Secretary of State of the State of California;
(m) ▇▇▇▇ ▇▇▇▇▇▇ shall have entered into an Employment
Agreement, in the form of EXHIBIT D hereto (the "▇▇▇▇▇▇ EMPLOYMENT AGREEMENT")
and ▇.▇. ▇▇▇▇▇▇ shall have entered into an Employment Agreement, in the form of
EXHIBIT E hereto (the "▇▇▇▇▇▇ EMPLOYMENT AGREEMENT");
(n) The Shareholders signatory thereto shall have
executed and delivered to Parent the Registration Rights Agreement;
(o) Each holder of a Company Stock Option shall have
executed and delivered to the Company an Option Termination Agreement in the
form attached hereto as EXHIBIT B (the "EXECUTED OPTION TERMINATION Agreements")
and each holder of a Company Stock Purchase Warrant shall have executed and
delivered to the Company a Warrant Termination Agreement in the form attached
hereto as EXHIBIT C (the "EXECUTED WARRANT TERMINATION AGREEMENTS"); and
(p) The Company shall have delivered to Parent a
certificate, in form and substance reasonably satisfactory to Parent, dated as
of the Closing Date, signed by the Company's chief executive officer and chief
financial officer, to the effect set forth in clauses (a) through (h),
inclusive, and (k) of this Section 6.2.
32
ARTICLE VII
THE CLOSING
SECTION 7.1 DELIVERIES BY THE COMPANY. At the Closing, the Company
shall deliver the following to Parent:
(a) A certificate of good standing as of a recent date
from the Secretary of State of the State of California stating that the Company
is a validly existing corporation in good standing under the laws of California.
(b) Copies of duly adopted resolutions of the Board of
Directors of the Company and the Shareholders approving the Merger and the
execution, delivery and performance of this Agreement and the Merger Agreement
and the other agreements and instruments contemplated hereby and thereby,
certified by the Secretary of the Company;
(c) The duly executed Merger Agreement;
(d) The duly executed Employment Agreements;
(e) The duly executed Registration Rights Agreement;
(f) The certificate described in Section 6.2(p);
(g) A true and complete copy of the Articles of
Incorporation, as in effect on the Closing Date, of the Company, certified by
the Secretary of State of the State of California, and a true and complete copy
of the Bylaws, as in effect on the Closing Date, of the Company, certified by
the Secretary of the Company;
(h) The Executed Option Termination Agreements;
(i) The Executed Warrant Termination Agreements and
(j) Documentation to Parent's reasonable satisfaction
evidencing the termination of each of the Stock Purchase Warrants.
SECTION 7.2 PARENT'S DELIVERIES. At the Closing, Parent shall deliver
the following to the Company:
(a) Certificate of good standing as of a recent date from
the Secretary of State of the State of Delaware stating that Parent is a validly
existing corporation in good standing;
(b) Certificate of good standing as of a recent date from
the Secretary of State of the State of California stating that Mergerco is a
validly existing corporation in good standing;
(c) Copies of duly adopted resolutions of Parent's and
Mergerco's Boards of Directors approving the execution, delivery and performance
of this Agreement and the Merger Agreement and the other agreements and
instruments contemplated hereby and thereby, certified by the Secretary or an
Assistant Secretary of Parent or Mergerco;
33
(d) The duly executed Merger Agreement;
(e) The duly executed Employment Agreements;
(f) The duly executed Registration Rights Agreement;
(g) The certificate described in Section 6.1(o);
(h) A true and complete copy of the Certificate of
Incorporation as in effect on the Closing Date, of Parent, certified by the
Secretary of State of the State of Delaware, and a true and complete copy of the
Bylaws, in effect on the Closing Date, of Parent, certified by an authorized
officer or director of the Parent; and
(i) A true and complete copy of the Certificate of
Incorporation as in effect on the Closing Date, of Mergerco, certified by the
Secretary of State of the State of California, and a true and complete copy of
the Bylaws, in effect on the Closing Date, of Mergerco, certified by an
authorized officer or director of Parent.
ARTICLE VIII
[INTENTIONALLY OMITTED]
ARTICLE IX
TERMINATION
SECTION 9.1 TERMINATION. This Agreement shall be terminated
automatically in the event the Merger Agreement is terminated in accordance with
its terms. Anything contained in this Agreement to the contrary notwithstanding,
this Agreement may also be terminated at any time prior to the Closing Date:
(a) By the Company or Parent if the Closing shall not
have occurred on or before March 31, 2005 (or such later date as shall be
mutually agreed to in writing by the Company and Parent); provided that the
party seeking termination is not in default or breach of this Agreement;
(b) By the Company in the event of a material breach by
Parent of any of its representations, warranties, agreements or covenants
contained in this Agreement, which breach is not cured by Parent within 10 days
after written notice of such breach; PROVIDED, THAT, the Company shall have no
right to terminate pursuant to this Section 9.1(b) if any such breach or
breaches, individually or in the aggregate, do not deprive the Company of the
economic benefits of the transactions contemplated hereby in an amount in excess
of $200,000; or
(c) By Parent in the event of a material breach by the
Company of any of its respective representations, warranties, agreements and
covenants contained in this Agreement, which breach is not cured by the Company
with 10 days after written notice of such breach; PROVIDED, THAT, Parent shall
have no right to terminate pursuant to this Section 9.1(c) if any such breach or
breaches, individually or in the aggregate, do not deprive Parent
34
of the economic benefits of the transactions contemplated hereby in an amount in
excess of $200,000.
SECTION 9.2 EFFECT OF TERMINATION. In the event of the termination of
this Agreement pursuant to the preceding Section of this Agreement, all further
obligations of the parties under this Agreement and the Merger Agreement shall
be terminated without further liability of any party or its shareholders,
directors or officers to the other parties, provided (a) that this Section 9.2,
Section 10.1 and Section 10.13 shall survive any such termination and (b) that
nothing herein shall relieve any party from liability for its willful breach of
this Agreement or the Merger Agreement.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 EXPENSES.
(a) No later than two (2) business days prior to the
Closing, the Company shall provide to Parent a good faith written estimate of
the expenses and fees of counsel to the Company and the Company's accountants
incurred by the Company in connection with the preparation, negotiation and
execution of the Transaction Documents and consummation of the transactions
contemplated hereby and thereby (the "COMPANY EXPENSE REPORT"). Unless this
Agreement is terminated pursuant to ARTICLE IX, payment of the expenses and fees
set forth on the Company Expense Report shall be made by Parent at Closing.
(b) Except as otherwise provided herein, Parent shall
bear its own expenses and fees and commissions (including, but not limited to,
all compensation and expenses of counsel, consultants and accountants) incurred
in connection with its preparation, negotiation and execution of the Transaction
Documents and consummation of the transactions contemplated hereby or thereby.
SECTION 10.2 NOTICES. All notices required or permitted to be given
under this Agreement (and, unless otherwise expressly provided therein, under
any document delivered pursuant to this Agreement) shall be given in writing and
shall be deemed received (i) when personally delivered to the relevant party at
such party's address as set forth below, (ii) if sent by mail (which must be
certified or registered mail, postage prepaid) or overnight courier, when
received or rejected by the relevant party at such party's address indicated
below, or (iii) if sent by facsimile, when confirmation of delivery is received
by the sending party:
If to the Company prior to Closing, to:
Entelagent Software Corp.
▇▇▇ ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: J. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
35
If to Parent or Mergerco, to:
Patron Systems, Inc.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇, ▇▇, Chairman of the Board
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Each party hereto may change its address or facsimile number for purposes of
this Section 10.2 by providing notice to the other parties in accordance with
this Section 10.2.
SECTION 10.3 ASSIGNMENT. Prior to the Effective Time, this Agreement
may not be assigned, by operation of law or otherwise. Following the Effective
Time, any party may assign any of its rights hereunder, but no such assignment
shall relieve it of its obligations hereunder.
SECTION 10.4 INTERPRETATION. The article and section headings contained
in this Agreement are for reference purposes only and shall not in any way
affect the meaning or interpretation of this Agreement. Whenever the context may
require, any pronoun used herein shall include the corresponding masculine,
feminine or neuter forms.
SECTION 10.5 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument; and shall become
binding when two or more counterparts have been signed by each of the parties
hereto and delivered to each of Parent, Mergerco and the Company.
SECTION 10.6 AMENDMENT. This Agreement may not be amended, modified or
supplemented except by a writing signed by an authorized representative of each
of the parties hereto.
SECTION 10.7 ENTIRE AGREEMENT. The Merger Agreement (which is
incorporated herein in its entirety) and this Agreement (including the Schedules
and Exhibits attached hereto and the documents delivered pursuant hereto)
constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof.
SECTION 10.8 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and permitted assigns.
SECTION 10.9 SURVIVAL. The representations and warranties contained in
this Agreement or in any certificate or other writing delivered pursuant this
Agreement shall not survive the Effective Time or the termination of this
Agreement. This Section 10.9 shall not limit any covenant or agreement of the
parties contained in this Agreement which by its terms provides for performance
after the Effective Time. Except for the representations and warranties
contained in this Agreement, none of the Company, Parent or Mergerco has made
any representation or warranty, and, each of the Company, Parent and Mergerco
hereby acknowledges that no representations or warranties have been made by, and
it has not relied
36
on any representation or warranty made by, any of the parties hereto or any of
their respective representatives in respect of this Agreement and the
transactions contemplated hereby and the documents and instruments referred to
herein, notwithstanding the delivery or disclosure to such party or its
representatives of any documentation or other information in respect of any one
or more of the foregoing. The inclusion of any entry on any of the Company
Disclosure Schedules or the Parent Disclosure Schedules hereto shall not
constitute an admission by, or agreement of, the Company or Parent, as
applicable, that such matter is material to the Company or Parent, as
applicable.
SECTION 10.10 SEVERABILITY. Wherever possible, each provision hereof
shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision shall be ineffective in the jurisdiction involved to the
extent, but only to the extent, of such invalidity, illegality or
unenforceability without invalidating the remainder of such invalid, illegal or
unenforceable provision or provisions or any other provisions hereof, unless
such a construction would be unreasonable.
SECTION 10.11 THIRD PARTIES. Nothing contained in this Agreement or in
any instrument or document executed by any party in connection with the
transactions contemplated hereby shall create any rights in, or be deemed to
have been executed for the benefit of, any person or entity that is not a party
hereto or a successor or permitted assign of such a party.
SECTION 10.12 WAIVERS. Any term or provision of this Agreement may be
waived, or the time for its performance may be extended, by the party or parties
entitled to the benefit thereof. Any such waiver shall be validly and
sufficiently authorized for the purposes of this Agreement if, as to any party,
it is authorized in writing by an authorized representative of such party. The
failure of any party hereto to enforce at any time any provision of this
Agreement shall not be construed to be a waiver of such provision, nor in any
way to affect the validity of this Agreement or any part hereof or the right of
any party thereafter to enforce each and every such provision. No waiver of any
breach of this Agreement shall be held to constitute a waiver of any other or
subsequent breach.
SECTION 10.13 CONFIDENTIAL NATURE OF INFORMATION. Each party agrees
that it will treat in confidence all documents, materials and other information
which it shall have obtained regarding the other parties during the course of
the negotiations leading to the consummation of the transactions contemplated
hereby (whether obtained before or after the date of this Agreement), the
investigation provided for herein and the preparation of this Agreement and
other related documents, and, in the event the transactions contemplated hereby
shall not be consummated, each party will return to the other parties all copies
of nonpublic documents and materials which have been furnished in connection
therewith. Such documents, materials and information shall not be communicated
to any third Person (other than, in the case of Parent and Mergerco, to their
counsel, accountants, financial advisors, shareholders or lenders, and in the
case of the Company, to their counsel, accountants, shareholders or financial
advisors). No other party shall use any confidential information in any manner
whatsoever except solely for the purpose of evaluating the proposed Merger;
PROVIDED, HOWEVER, that after the Effective Time, Parent and the Surviving
Corporation may use or disclose any confidential information included in the
assets of the Company as of the Effective Time or otherwise reasonably related
to the assets or business of
37
the Company. The obligation of each party to treat such documents, materials and
other information in confidence shall not apply to any information which (i) is
or becomes available to such party from a source other than such party, (ii) is
or becomes available to the public other than as a result of disclosure by such
party or its agents, (iii) is required to be disclosed under applicable law or
judicial process, but only to the extent it must be disclosed, or (iv) such
party reasonably deems necessary to disclose to obtain any of the consents or
approvals contemplated hereby.
SECTION 10.14 GOVERNING LAW; ARBITRATION. This Agreement shall be
governed by and construed in accordance with the internal laws (as opposed to
the conflicts of law provisions) of the State of Delaware.
(a) Any dispute, controversy or claim arising out of or
relating to this Agreement or its breach, interpretation, termination or
validity, including any question whether a matter is subject to arbitration
hereunder, is referred to herein as a "DISPUTE."
(b) If the parties fail to settle any Dispute within 30
days after any party has given notice to the other parties hereto of the claimed
existence of a Dispute, the Dispute shall be resolved by a confidential, binding
arbitration. All such Disputes shall be arbitrated in Chicago, Illinois pursuant
to the arbitration rules and procedures of J.A.M.S. Endispute before an
arbitrator or arbitrators selected in the manner provided in such rules and
procedures, except that the "Final Offer (or Baseball)" Arbitration Option shall
not be used unless otherwise agreed in writing. As a condition to JAMS'
jurisdiction, the parties shall be entitled to conduct discovery pursuant to the
Federal Rules of Civil Procedure.
(c) Judgment upon any award rendered by the arbitrators
may be entered in any court having jurisdiction, and each party hereto consents
and submits to the jurisdiction of such court for purposes of such action. The
statute of limitations, estoppel, waiver, laches and similar doctrines, which
would otherwise be applicable in any action brought by a party, shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed to be the commencement of an action for those
purposes. The Federal Arbitration Act shall apply to the construction,
interpretation and enforcement of this arbitration provision. Each party shall
bear its own expenses (including, without limitation, the fees and expenses of
legal counsel and accountants) in connection with such arbitration, and Parent
and the Company shall each bear one-half of the arbitrators' fees and expenses,
provided that the arbitral award shall allocate such fees and expenses of
counsel, accountants, other advisors and arbitrators according to the relative
success of the contesting parties in the arbitration, as determined by the
arbitrators. The arbitrators shall award an amount equal to the actual monetary
damages suffered by each contesting party, which may include interest costs
incurred by such party and, in the case of the Surviving Corporation, actual
reductions in retail earnings before interest, taxes, depreciation and
amortization for the period in which they occur, but the arbitrators shall not
have the authority to award punitive damages.
SECTION 10.15 DEFINITIONS. In this Agreement, the following terms have
the meanings specified or referred to in this Section 10.15 and shall be equally
applicable to both the singular and plural forms.
"AFFILIATE" shall mean: any person or entity (a) that directly or
indirectly, through one or more intermediaries, controls or is controlled by, or
is under common control with, the
38
person or entity involved, including, without limitation, officers and
directors, (b) that directly or beneficially owns or holds 5% or more of any
equity interest in the person or entity involved, or (c) 5% or more of whose
voting securities (or in the case of a person which is not a corporation, 5% or
more of any equity interest) is owned directly or beneficially by the person or
entity involved. As used herein, the term "control" shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of a person or entity, whether through ownership of
securities, by contract or otherwise.
"AGREEMENT" has the meaning specified in the first paragraph of this
Agreement.
"BALANCE SHEET" has the meaning specified in Section 3.6(b).
"BALANCE SHEET DATE" means January 31, 2005.
"BANKRUPTCY CODE" means 11 U.S.C. ▇▇.▇▇. 101 ET SEQ.
"BUSINESS" means the businesses engaged in by the Company as of the
date of this Agreement.
"CGCL" has the meaning specified in Section 1.2.
"CLOSING" has the meaning specified in Section 1.3.
"CLOSING DATE" has the meaning specified in Section 1.3.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY'S ANNUAL FINANCIAL STATEMENTS" has the meaning specified in
Section 3.6(a).
"COMPANY COMMON STOCK" has the meaning specified in Section 3.3.
"COMPANY DISCLOSURE SCHEDULES" has the meaning specified in Section
3.37.
"COMPANY EXPENSE REPORT" has the meaning specified in Section 10.1(a).
"COMPANY'S FINANCIAL STATEMENTS" has the meaning specified in Section
3.6(b).
"COMPANY PREFERRED STOCK" has the meaning specified in Section 3.3.
"COMPANY STOCK" has the meaning specified in Section 3.3.
"COMPANY STOCK OPTIONS" has the meaning specified in Section 1.5(a).
"COMPANY STOCK PLAN" means the Company's 1997 Stock Option Plan, as
amended and approved by the Board of Directors of the Company.
"CONTAMINANT" means any waste, pollutant, hazardous substance, toxic
substance, hazardous waste, medical waste, special waste, asbestos, petroleum or
petroleum-derived
39
substance, radioactive material or waste, or any constituent of any such
substance or waste and including, without limitation, any substance which any
Governmental Body or lawful representative thereof requires to be controlled,
removed, monitored, encapsulated or remediated or otherwise addressed for the
purposes of protection of the environment or public or worker health and safety.
"DISPUTE" has the meaning specified in Section 10.14.
"DISSENTING SHAREHOLDER" has the meaning specified in Section 1.6.
"DISSENTING SHARES" has the meaning specified in Section 1.6.
"EFFECTIVE TIME" has the meaning specified in Section 1.2 of the Merger
Agreement.
"EMPLOYMENT AGREEMENTS" means the ▇▇▇▇▇▇ Employment Agreement, the
▇▇▇▇▇▇ Employment Agreement and the ▇▇▇▇▇▇▇ Employment Agreement, collectively.
"ENCUMBRANCE" means any lien, claim, charge, security interest,
mortgage, pledge, easement, conditional sale or other title retention agreement,
defect in title, covenant or other restriction of any kind.
"ENVIRONMENTAL LAWS" has the meaning specified in Section 3.27.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" means (a) any corporation which at, or at any time
before, the Closing Date is or was a member of the same controlled group of
corporations (within the meaning of Section 414(b) of the Code) as the Company
or any predecessor of the Company; (b) any partnership, trade or business
(whether or not incorporated) which at, or at any time before, the Closing Date
is or was under common control (within meaning of Section 414(c) of the Code)
with the Company; and (c) any entity, which at, or at any time before, the
Closing Date is or was a member of the same affiliated service group (within the
meaning of Section 414(m) of the Code) as either the Company or any predecessor
of the Company, any corporation described in clause (a) or any partnership,
trade or business described in clause (b).
"FACILITY" means any real or personal property, plant, building,
facility, structure, underground storage tank, or equipment or unit, or other
asset owned, used, leased or operated by the Company.
"GAAP" means generally accepted accounting principles in the United
States of America.
"▇▇▇▇▇▇ EMPLOYMENT AGREEMENT" has the meaning specified in Section
6.2(m).
"GOVERNMENTAL BODY" means any court, government (federal, state, local
or foreign), department, commission, board, bureau, agency, official or other
regulatory, administrative or governmental authority.
"GOVERNMENTAL PERMITS" has the meaning specified in Section 3.11.
40
"▇▇▇▇▇▇ EMPLOYMENT AGREEMENT" has the meaning specified in Section
6.2(m).
"INDEMNIFIED PERSON" has the meaning specified in Section 5.20.
"▇▇▇▇▇▇▇ EMPLOYMENT AGREEMENT" has the meaning specified in Section
6.2(m).
"KNOWLEDGE OF THE COMPANY" means, as a particular matter, the actual
knowledge of the following persons: ▇.▇. ▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇.
"KNOWLEDGE OF PARENT" means, as a particular matter, the actual
knowledge of the following persons: ▇▇▇▇▇▇ ▇. ▇▇▇, ▇▇.
"MATERIAL ADVERSE EFFECT" means any change or effect (or any
development that, insofar as can be reasonably foreseen, would result in any
change or effect) that is materially adverse to the assets, business, financial
condition, results of operations or prospects of the applicable Person or
Persons.
"MATERIAL CONTRACTS" has the meaning specified in Section 3.24.
"MERGER" has the meaning specified in the first recital to this
Agreement.
"MERGER AGREEMENT" has the meaning specified in the first recital of
this Agreement.
"MERGERCO" has the meaning specified in the first paragraph of this
Agreement.
"MERGER CONSIDERATION" has the meaning specified in Section 1.4.
"NON-ERISA COMMITMENTS" has the meaning specified in Section 3.22(a).
"PARENT" has the meaning specified in the first paragraph hereof.
"PARENT COMMON STOCK" has the meaning specified in Section 2.4.
"PARENT DISCLOSURE SCHEDULES" has the meaning specified in Section
2.22.
"PARENT STOCKHOLDERS" has the meaning specified in the second recital
of this Agreement.
"PARENT STOCK OPTIONS" has the meaning specified in Section 2.4.
"PERMITTED ENCUMBRANCES" means: (a) encumbrances for taxes or
assessments or other governmental charges which are not yet due and payable; (b)
materialmen's, merchants', carriers', worker's, repairer's, or other similar
Encumbrances arising in the ordinary course of business which are not yet due or
payable and; (c) purchase money security interests.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
Governmental Body.
"PPM" has the meaning specified in Section 2.19.
41
"PROXY STATEMENT" has the meaning specified in Section 3.35.
"REGISTRATION RIGHTS AGREEMENT" means the Amended and Restated
Registration Rights Agreement by and among Parent and the Shareholders signatory
thereto in the form attached hereto as EXHIBIT F.
"RELEASE" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the indoor or outdoor environment or into or out of any Facility of any
Contaminant, including the movement of Contaminants through or in the air, soil,
surface water, groundwater or Facility.
"REQUIREMENTS OF LAW" means any federal, state or local law, rule or
regulation, Governmental Permit or other binding determination of any
Governmental Body.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHAREHOLDER MERGER CONSIDERATION APPROVAL" has the meaning specified
in Section 3.4.
"SHAREHOLDERS" has the meaning specified in the Merger Agreement.
"SHAREHOLDERS MEETING" has the meaning specified in Section 3.35.
"SOFTWARE" has the meaning specified in Section 3.17(a)(iii).
"STOCK PURCHASE WARRANTS" has the meaning specified in Section 1.5(b).
"SURVIVING CORPORATION" has the meaning specified in Section 1.1 of the
Merger Agreement.
"TAX" (and, with correlative meaning, "TAXES" and "TAXABLE") means (a)
any federal, state, local or foreign income, gross receipts, windfall profits,
severance, property, production, sales, use, license, excise, franchise,
employment, payroll, withholding, alternative or add-on minimum, ad valorem,
transfer, value-added stamp or environmental tax, or any other tax, custom,
duty, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, addition to tax or additional
amount imposed by any Governmental Body; and (b) liability of the Company or any
of its subsidiaries for the payment of amounts with respect to payments of a
type described in clause (a) as a result of being a member of an affiliated,
consolidated, combined or unitary group, or as a result of any obligation of the
Company or any of its subsidiaries under any Tax sharing arrangement or Tax
indemnity arrangement.
"TAX RETURNS" means any return, report or similar statement required to
be filed with respect to any Taxes (including any attached schedules),
including, without limitation, any information return, claim for refund, amended
return or declaration of estimated Tax.
"TRANSACTION DOCUMENTS" has the meaning specified in Section 2.6.
*****
42
IN WITNESS WHEREOF, the parties hereto have executed or caused
this Agreement to be duly executed as of the date first above written.
PATRON SYSTEMS, INC.
By: /S/ ▇▇▇▇▇▇ ▇. ▇▇▇, ▇▇
------------------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇, ▇▇
Title: Chairman of the Board
ESC ACQUISITION, INC.
By: /S/ ▇▇▇▇▇ ▇▇▇▇▇▇▇
------------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Chief Executive Officer
ENTELAGENT SOFTWARE CORP.
By: /S/ J. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
------------------------------------
Name: J. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
Title: Chief Executive Officer
43
ANNEX
-----
A Shareholders' Consideration Table
EXHIBITS
--------
A Form of Agreement and Plan of Merger
B Form of Option Termination Agreement
C Form of Warrant Termination Agreement
D Form of ▇▇▇▇▇▇ Employment Agreement
E Form of ▇▇▇▇▇▇ Employment Agreement
F Form of Registration Rights Agreement
PARENT SCHEDULES
----------------
2.2 Subsidiaries and Investments
2.3 Operations
2.4 Capital Stock
2.7 Non-Contravention
2.12 Title to Assets
2.13 No Undisclosed Liabilities
2.14 No Violation, Litigation or Regulatory Action
2.15 Material Contracts
2.16 Transactions with Affiliates
5.16(b) Certain Company Obligations to be Paid or Satisfied
Post-Closing
COMPANY SCHEDULES
-----------------
3.1 Organization
3.3 Capital Stock; Shareholders
3.5 Non-Contravention
3.6 Financial Statements
3.7 Operations Since Balance Sheet Date
3.8 No Undisclosed Liabilities
3.9 Taxes
3.10 Availability of Assets and Legality of Use
3.11 Governmental Permits
3.13 Real Property Leases
3.15 Personal Property
3.16 Personal Property Leases
3.17 Intellectual Property
3.18 Accounts Receivable
3.19 Title to Assets
3.20 Employees
3.21 Employee Matters
3.22(a) Plans
3.22(b) ERISA Plans
3.23 Contracts
44
3.24 Status of Contracts
3.25 No Violation, Litigation or Regulatory Action
3.26 Insurance
3.27 Environmental Protection
3.28 Customers and Suppliers
3.31 Transactions with Affiliates
3.34 Bank Accounts
5.16(a) Indebtedness
45
ANNEX A - SHAREHOLDERS' CONSIDERATION TABLE
Allocated
Number
of Patron
REGISTERED SHAREHOLDERS Shares
------------------------------------------------- ----------
▇▇▇▇ ▇'▇▇▇▇▇▇
816,563
▇▇▇▇ ▇▇▇▇▇▇ 61,579
▇▇▇▇ ▇▇▇▇▇, ▇▇. 45,982
▇▇▇▇▇ ▇▇▇▇▇ & ▇▇▇▇▇ ▇▇▇ (joint tenants in common) 52,029
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ 39,254
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ 13,661
TAG 11,383
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ 8,277
▇▇▇▇ ▇▇▇▇▇▇ 8,195
▇▇▇ ▇▇▇▇▇ 6,146
▇▇▇▇ & ▇▇▇▇▇ ▇▇▇▇▇▇▇ 2,927
▇▇▇▇▇ ▇▇▇▇▇ 2,458
▇▇▇ ▇▇▇▇▇▇▇▇ 2,341
▇▇▇▇ ▇▇▇▇▇▇ 1,639
Omid Ghiami 1,024
▇▇▇▇▇ ▇▇▇▇▇▇▇ 1,024
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ 328
▇▇▇▇▇ Fargo ▇▇▇ ▇▇▇▇▇▇ 200,619
▇▇ ▇▇▇▇▇▇▇▇ 140,299
▇▇▇▇▇ ▇▇▇▇▇▇ 69,435
▇▇▇▇ & ▇▇▇▇▇ ▇▇▇▇▇▇▇ 30,695
▇▇▇▇▇▇ ▇'▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇ ▇. ▇'▇▇▇▇▇▇ 30,695
▇▇▇ ▇▇▇▇▇▇ 30,695
▇▇▇▇▇▇ ▇. D'▇▇▇▇▇▇ ▇▇. and ▇▇▇▇▇▇▇▇▇ ▇'▇▇▇▇▇▇ 15,347
▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ III 15,347
▇▇▇▇ ▇. ▇▇▇▇ 15,347
D. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ 15,347
▇▇▇▇▇▇▇ ▇'▇▇▇▇▇▇▇ 15,347
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇▇▇▇▇ 15,347
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇ 15,347
▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ ▇▇▇▇▇ 12,278
46
▇▇▇▇▇ ▇▇▇▇ 12,278
▇▇▇▇▇▇ ▇. ▇▇▇▇ 12,278
▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ ▇▇▇▇▇▇ 12,278
▇▇▇▇ ▇. ▇▇▇▇▇ 12,278
▇▇▇▇▇▇▇ ▇. ▇▇▇▇ 9,208
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ 9,208
▇▇▇▇▇▇ ▇. ▇'▇▇▇▇▇▇▇▇ and ▇▇▇▇▇ ▇. ▇'▇▇▇▇▇▇▇▇ 6,139
▇▇▇▇▇ ▇▇▇▇▇▇▇ 6,139
▇▇▇▇▇▇ ▇. ▇▇▇▇▇ 3,069
▇▇▇▇▇▇▇ ▇▇▇ ▇▇▇▇ 3,069
Ki ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ 3,069
▇▇▇▇▇▇▇ ▇ ▇'▇▇▇▇▇▇▇▇ and M. ▇▇▇▇▇▇▇ ▇'▇▇▇▇▇▇▇▇ 3,069
DICOM 751,933
▇▇▇▇▇▇ ▇▇▇▇▇ 112,791
Lightspeed Partners 75,983
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ 74,836
▇▇▇▇ ▇▇▇▇▇▇▇ 37,598
Dac Cao 37,598
▇▇▇▇ ▇▇▇▇▇▇▇▇ 37,598
Phil & ▇▇▇▇ ▇▇▇▇▇▇▇▇ (JTWROS) 37,598
▇▇▇▇ ▇▇▇▇ 37,538
▇▇▇▇▇▇ ▇. ▇'▇▇▇▇▇▇▇▇ and ▇▇▇▇▇ ▇. ▇'▇▇▇▇▇▇▇▇ 7,484
----------
GRAND TOTAL 3,000,000
==========
47