EXHIBIT 2.9
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 111
AND
DREAMMEDIA, INC.
DATED AS OF AUGUST 29, 1997
TABLE OF CONTENTS
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ARTICLE I - THE MERGER............................................................................................. 2
1.1 The Merger............................................................................................. 2
1.2 Effective Time......................................................................................... 2
1.3 Effect of the Merger................................................................................... 2
1.4 Certificate of Incorporation; Bylaws................................................................... 2
1.5 Directors and Officers................................................................................. 3
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.................................. 3
1.7 Surrender of Certificates.............................................................................. 5
1.8 No Further Ownership Rights in Company Common Stock.................................................... 6
1.9 Lost, Stolen or Destroyed Certificates................................................................. 6
1.10 Purchase Price Adjustments............................................................................. 6
1.11 Parent Common Stock.................................................................................... 9
1.12 Tax Consequences....................................................................................... 9
1.13 Taking of Necessary Action; Further Action............................................................. 9
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE PRINCIPAL SHAREHOLDERS................................................................ 10
2.1 Organization of the Company............................................................................ 10
2.2 Company Capital Structure.............................................................................. 10
2.3 Subsidiaries........................................................................................... 10
2.4 Authority.............................................................................................. 11
2.5 No Conflict............................................................................................ 11
2.6 Consents............................................................................................... 11
2.7 Company Financial Statements........................................................................... 11
2.8 No Undisclosed Liabilities............................................................................. 12
2.9 No Changes............................................................................................. 12
2.10 Tax Matters............................................................................................ 14
2.11 Restrictions on Business Activities.................................................................... 15
2.12 Title to Properties; Absence of Liens and Encumbrances;
Condition of Equipment................................................................................. 15
2.13 Intellectual Property.................................................................................. 16
2.14 Agreements, Contracts and Commitments.................................................................. 19
2.15 Interested Party Transactions.......................................................................... 21
2.16 Governmental Authorization............................................................................. 21
2.17 Litigation............................................................................................. 21
2.18 Accounts Receivable.................................................................................... 21
2.19 Minute Books........................................................................................... 21
2.20 Environmental Matters.................................................................................. 22
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2.21 Brokers' and Finders' Fees; Third Party Expenses....................................................... 22
2.22 Employee Benefit Plans and Compensation................................................................ 23
2.23 Insurance.............................................................................................. 25
2.24 Compliance with Laws................................................................................... 26
2.25 Third Party Consents................................................................................... 26
2.26 Warranties; Indemnities................................................................................ 26
2.27 Complete Copies of Materials........................................................................... 26
2.28 Representations Complete............................................................................... 26
2.29 Business Plan.......................................................................................... 26
2.30 Backlog Report......................................................................................... 26
2.31 Principal Shareholder Investment Representations and Warranties........................................ 26
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB..................................................... 28
3.1 Organization, Standing and Power....................................................................... 28
3.2 Authority; Consents.................................................................................... 28
3.3 Capital Structure...................................................................................... 28
3.4 Brokers' and Finders' Fees............................................................................. 29
3.5 No Changes............................................................................................. 29
3.6 Complete Copies of Materials........................................................................... 29
3.7 Parent Financial Statements............................................................................ 30
3.8 Litigation............................................................................................. 30
ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME................................................................... 30
4.1 Conduct of Business of the Company..................................................................... 30
4.2 No Solicitation........................................................................................ 32
ARTICLE V - ADDITIONAL AGREEMENTS.................................................................................. 33
5.1 Parent's Right of First Refusal........................................................................ 33
5.2 Market Standoff Agreement.............................................................................. 34
5.3 Restriction on Competition............................................................................. 35
5.4 Confidentiality........................................................................................ 36
5.5 Expenses............................................................................................... 36
5.6 Public Disclosure...................................................................................... 36
5.7 Post-Closing Employment of Company Employees........................................................... 36
5.8 Treatment of Affiliate Warrants........................................................................ 38
5.9 Access to Information.................................................................................. 39
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5.10 Public Disclosure...................................................................................... 39
5.11 Consents............................................................................................... 39
5.12 FIRPTA Compliance...................................................................................... 39
5.13 Best Efforts........................................................................................... 39
5.14 Notification of Certain Matters........................................................................ 39
5.15 Tax Returns............................................................................................ 40
5.16 Additional Documents and Further Assurances............................................................ 40
5.17 Section 368 Compliance................................................................................. 40
5.18 Parent Policies........................................................................................ 40
5.19 Similar Transactions................................................................................... 40
ARTICLE VI - CONDITIONS TO THE MERGER.............................................................................. 41
6.1 Conditions to Obligations of Each Party to Effect the Merger........................................... 41
6.2 Additional Conditions to Obligations of Company........................................................ 41
6.3 Additional Conditions to the Obligations of Parent and Sub............................................. 42
6.4 Satisfaction or Waiver of Conditions................................................................... 43
ARTICLE VII - SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW................................................... 43
7.1 Survival of Representations and Warranties............................................................. 43
7.2 Escrow Arrangements; Setoff............................................................................ 43
7.3 Indemnity.............................................................................................. 50
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER................................................................... 51
8.1 Termination............................................................................................ 51
8.2 Effect of Termination.................................................................................. 52
8.3 Amendment.............................................................................................. 52
8.4 Extension; Waiver...................................................................................... 52
ARTICLE IX - GENERAL PROVISIONS.................................................................................... 53
9.1 Notices................................................................................................ 53
9.2 Interpretation......................................................................................... 54
9.3 Counterparts........................................................................................... 54
9.4 Entire Agreement; Assignment........................................................................... 54
9.5 Severability........................................................................................... 54
9.6 Other Remedies......................................................................................... 54
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TABLE OF CONTENTS
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9.7 Governing Law.......................................................................................... 55
9.8 Rules of Construction.................................................................................. 55
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
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entered into as of August 29, 1997 (the "Effective Date"), among USWeb
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Corporation, a Utah corporation ("Parent"), USWeb Acquisition Corporation 111, a
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Delaware corporation and a wholly owned subsidiary of Parent ("Sub"),
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DreamMedia, Inc., a California corporation (the "Company"), and the individuals
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listed on Exhibit A attached hereto (such individuals being hereinafter referred
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to collectively as the "Principal Shareholders" and individually as a "Principal
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Shareholder").
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RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub believe
it is in the best interests of each company and their respective shareholders
that Parent acquire the Company through the statutory merger of the Company with
and into Sub (the "Merger") and, in furtherance thereof, have approved the
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Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of the Company shall be converted into the
right to receive shares of Common Stock of Parent.
C. Fifty Percent (50%) of the shares of Common Stock of Parent otherwise
payable in connection with the Merger shall be placed in a one-year escrow for
the purposes of (i) satisfying damages, losses, expenses and other similar
charges which result from breaches of representations, warranties or covenants
or (ii) making adjustments to the purchase price paid by the Parent.
D. The Company, the Principal Shareholders, Parent and Sub desire to make
certain representations, warranties, covenants and other agreements in
connection with the Merger.
E. The parties hereto desire that each employee of the Company prior to
the Merger shall be offered an opportunity of employment by the Parent or Sub
following the Merger. Each party understands and agrees that any such employee
or the Parent or Sub shall have the right to terminate any such employment at
any time.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
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subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the corporations
laws of the states of Delaware ("Delaware Law") and California (the "California
Law"), the Company shall be merged with and into the Sub, the separate corporate
existence of the Company shall cease and Sub shall continue as the surviving
corporation and as a wholly owned subsidiary of Parent. Sub as the surviving
corporation after the Merger is hereinafter sometimes referred to as the
"Surviving Corporation."
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1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
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to Section 8.1, the closing of the Merger (the "Closing") will take place as
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promptly as practicable, but no later than September 30, 1997, at the offices of
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇,
unless another place or time is agreed to in writing by Parent and the Company.
The date upon which the Closing actually occurs is herein referred to as the
"Closing Date." On the Closing Date, the parties hereto shall cause the Merger
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to be consummated by submitting for filing an Agreement and Plan of Merger (or
like instrument) with the Secretary of State of Delaware and the Secretary of
State of California (the "Merger Articles"), in accordance with the relevant
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provisions of applicable law (the later of the times of filing with the
Secretary of State of Delaware and the Secretary of State of California being
referred to herein as the "Effective Time"). Notwithstanding anything in the
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Agreement to the contrary, the parties hereto acknowledge and agree that the
Agreement shall be executed and delivered as of, and the Merger Articles shall
be filed on, one and the same date.
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
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shall be as provided in the applicable provisions of Delaware Law and California
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time, all the property, rights, privileges, powers and franchises
of the Company and Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
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(a) Unless otherwise determined by Parent prior to the Effective
Time, at the Effective Time, the Certificate of Incorporation of Sub shall be
the Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation.
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter amended.
1.5 Directors and Officers. The director(s) of Sub immediately prior to
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the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Sub
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
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The initial directors of the Surviving Corporation immediately following
the Effective Time shall be ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇
▇▇▇▇▇▇▇. The initial officers of the Surviving Corporation immediately
following the Effective Time shall be as follows:
Chief Executive Officer, President, ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
Chief Financial Officer, Secretary and
Treasurer
Vice President and General Manager ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
Vice President ▇▇▇ ▇▇▇▇▇▇
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
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(a) Exchange of Stock; Purchase Price Adjustments. As of the
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Effective Time of the Merger, each share of the Company's Common Stock, $_____
par value (the "Company Common Stock"), that is issued and outstanding
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immediately prior to the Effective Time (other than any dissenting shares under
applicable state law) shall, by virtue of the Merger and without any action on
the part of Sub, the Company, or the Company's shareholders (the "Company
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Shareholders"), be canceled and extinguished and each Company Shareholder shall
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have (i) the right to receive such Company Shareholder's pro rata portion (based
on such Company Shareholders' equity ownership in the Company as represented to
Parent by the Company) of that number of shares of the Parent's Common Stock,
par value $.001 per share (the "Parent Common Stock") equal to $____________
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(the "Original Purchase Price") divided by the Fair Value Per Share (as defined
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in Section 1.6(e) below) as of the Closing Date, subject to Section 7.2 hereof,
plus the contingent right to receive additional shares of Parent Common Stock
as provided in Section 1.10 of this Agreement (the "Purchase Price Adjustment").
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The Original Purchase Price and the Purchase Price Adjustment are hereinafter
collectively referred to as the "Merger Consideration."
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(b) Stock Options. The Company has no stock option, warrant or
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similar plans.
(c) Adjustments to Parent Common Stock. The number of shares of
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Parent Common Stock issuable hereunder shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Parent Common Stock or Company
Common Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Common Stock occurring after the date
hereof.
(d) Fractional Shares. No fractional share of Parent Common Stock
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shall be issued in the Merger, including the Purchase Price Adjustment pursuant
to Section 1.10 below, or pursuant to any stock option or stock bonus issued to
a Company employee that becomes an employee of Parent or Sub following the
Merger. In lieu thereof, the number of shares otherwise issued or issuable
shall be rounded to the nearest whole share, with one-half share or more being
rounded up.
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(e) Definitions.
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(i) Aggregate Common Number. The "Aggregate Common Number"
----------------------- -----------------------
shall mean the aggregate number of shares of Company Common Stock outstanding
immediately prior to the Effective Time.
(ii) Fair Value Per Share. The Fair Value Per Share of Parent's
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Common Stock, as of any particular date, shall mean, if the Parent's Common
Stock is then traded on an exchange or national quotation system, the average
closing price per share of Parent's Common Stock as traded on such exchange or
national quotation system during the 10 trading day period ending three business
days prior to the date of determination or, if not so traded, the fair market
value per share of such Parent's Common Stock as most recently determined by the
Parent's Board of Directors acting in good faith. The Fair Value Per Share on
the Closing Date shall be the dollar amount set forth in the Valuation Model (as
defined below) delivered on the Closing Date. Parent agrees that the Fair Value
Per Share at any time after the Closing Date shall be consistent with the fair
market value per share of Parent's Common Stock as determined by the Board of
Directors in connection with contemporaneous grants by parent of incentive stock
options to purchase shares of the Parent's Common Stock.
(iii) Escrow Amount; Escrow Agent. The "Escrow Amount" shall be
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equal to Fifty Percent (50%) of the number of shares of Parent Common Stock
constituting the Original Purchase Price. The Escrow Agent shall be the
secretary of the Parent, or his designee, so long as the Parent is a privately
held company. Thereafter, any transfer agent for the Parent's Common Stock may
be appointed Escrow Agent.
(iv) Exchange Ratio. The "Exchange Ratio" shall mean the
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quotient obtained by dividing (i) (X) the Original Purchase Price divided by (Y)
the Fair Value Per Share as of the Effective Date by (ii) the Aggregate Common
Number. For illustrative purposes only, if the Original Purchase Price were
$2,000,000, the Fair Value Per Share were $2.50 and the Aggregate Common Number
were 3,400,000, then the Exchange Ratio would be ($2,000,000 / $2.50) /
3,400,000 = .23529, so each share of Company Common Stock would be exchanged for
.23529 shares of Parent's Common Stock. If the facts were the same but the
Aggregate Common Number were 1,500, then the calculation would be ($2,000,000 /
$2.50) /1,500 = 533.33, so each share of Company Common Stock would be exchanged
for 533.33 shares of Parent's Common Stock.
1.7 Surrender of Certificates.
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(a) Exchange Agent. The Secretary of Parent or such other entity
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reasonably designated by Parent shall serve as exchange agent (the "Exchange
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Agent") in the Merger.
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(b) Parent to Provide Common Stock. Promptly after the Effective
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Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I the Original Purchase Price issuable pursuant to
Section 1.6(a) in exchange for outstanding shares of Company
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Common Stock; provided that, on behalf of the Company Shareholders, Parent shall
deposit the Escrow Amount into the Escrow Fund.
(c) Exchange Procedures. Promptly after the Effective Time, the
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Surviving Corporation shall cause to be mailed to each Company Shareholder (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates (the "Certificates") which
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immediately prior to the Effective Time represented outstanding shares of
Company Common Stock whose shares were converted into the right to receive the
Merger Consideration pursuant to Section 1.6, shall pass, only upon delivery of
the Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Parent, together
with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the Company Shareholder shall be
entitled to receive in exchange therefor a certificate representing the number
of shares issuable to such Company Shareholder as part of the Original Purchase
Price (less the number of shares of Parent Common Stock to be deposited in the
Escrow Fund (as defined in Article VII) on such holder's behalf pursuant to
Article VII hereof) and the Certificate so surrendered shall forthwith be
canceled. As soon as practicable after the Effective Time, and subject to and
in accordance with the provisions of Article VII hereof, Parent shall cause to
be distributed to the Escrow Agent (as defined in Article VII) a certificate or
certificates representing that number of shares of Parent Common Stock equal to
the Escrow Amount. Such consideration shall be beneficially owned by the
holders on whose behalf such consideration was deposited in the Escrow Fund and
shall be available to compensate Parent as provided in Article VII. Until
surrendered to the Exchange Agent, each outstanding Certificate that, prior to
the Effective Time, represented shares of Company Common Stock will be deemed
from and after the Effective Time, for all corporate purposes, other than the
payment of dividends and voting, to evidence only the right to receive Merger
Consideration pursuant to Section 1.6 hereof.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
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other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock issuable upon conversion of the shares of Company Common Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
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exchange will have paid to Sub or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered or have established to the satisfaction of Sub or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
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Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
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Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Company
capital stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Company capital stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
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shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Parent Common Stock
as may be required pursuant to Section 1.6(a); provided, however, that Parent
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificates to deliver a
bond in such sum as it may reasonably direct as indemnity against any claim that
may be made against Parent, Sub or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
1.10 Purchase Price Adjustments. The Original Purchase Price shall be
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subject to adjustment as follows:
(a) Six-Month Adjustment. At the close of business on the last
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business day of the sixth full month after the Closing Date (the "First
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Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
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the operation of the Parent's Valuation Model attached as Exhibit B (the
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"Valuation Model"). Parent shall then calculate the "First Adjustment to
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Purchase Price" as follows:
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FAPP = FADV - ▇▇▇▇
where FAPP is the First Adjustment to Purchase Price;
FADV is the "First Adjustment Date Value" as calculated on the First
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Adjustment Date using the Valuation Model; and
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▇▇▇▇ is the Original Purchase Price plus the Original Purchase Price
as defined in the Agreement and Plan of Reorganization dated the
Effective Date among Parent, Sub and KandH, Inc. (the "Other
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Agreement").
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(i) If FAPP is greater than zero, then the Parent shall pay to
the Company Shareholders promptly after the First Adjustment Date a number of
shares calculated as follows:
FSP = (FAPP / FVPSFAD) x .25 x (OPP/▇▇▇▇)
where FSP is the "First Shares Payment;"
FAPP is the First Adjustment to Purchase Price as calculated above;
FVPSFAD is the Fair Value Per Share of the Parent's Common Stock on
the First Adjustment Date;
OPP is the Original Purchase Price; and
▇▇▇▇ is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(ii) If FAPP is less than zero, then the Escrow Agent shall pay
to Parent from the Escrow Amount promptly after the First Adjustment Date a
number of shares calculated as follows:
FSP = (-FAPP / FVPSED) x (OPP/▇▇▇▇)
where FSP is the "First Shares Payment;"
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FAPP is the First Adjustment to Purchase Price as calculated above;
FVPSED is the "Fair Value Per Share of the Parent's Common Stock on
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the Effective Date;"
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OPP is the Original Purchase Price; and
▇▇▇▇ is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
If FAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the First Adjustment Date.
(b) Twelve-Month Adjustment. At the close of business on the last
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business day of the twelfth full month after the Closing Date (the "Second
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Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
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the Valuation Model. Parent shall then calculate the "Second Adjustment to
Purchase Price" as follows:
▇▇▇▇ = SADV - FADV
where ▇▇▇▇ is the "Second Adjustment to Purchase Price;"
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SADV is the "Second Adjustment Date Value" as calculated on the Second
----------------------------
Adjustment Date using the Valuation Model;
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FADV is the First Adjustment Date Value;
OPP is the Original Purchase Price; and
▇▇▇▇ is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(i) If ▇▇▇▇ is greater than zero, then the Parent shall pay to
the Company Shareholders promptly after the Second Adjustment Date a number of
shares calculated as follows:
SSP = (▇▇▇▇ / FVPSSAD) x .25 x (OPP/▇▇▇▇)
where SSP is the "Second Shares Payment";
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▇▇▇▇ is the Second Adjustment to Purchase Price as calculated above;
FVPSSAD is the "Fair Value Per Share of the Parent's Common Stock on
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the Second Adjustment Date;"
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OPP is the Original Purchase Price; and
▇▇▇▇ is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(ii) If ▇▇▇▇ is less than zero, then the Escrow Agent shall pay
to Parent from the Escrow Amount promptly after the Second Adjustment Date a
number of shares calculated as follows:
SSP = (-▇▇▇▇ / FVPSED) x (OPP/▇▇▇▇)
where SSP is the "Second Shares Payment;"
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▇▇▇▇ is the Second Adjustment to Purchase Price as calculated above;
FVPSED is the "Fair Value Per Share of the Parent's Common Stock on
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the Effective Date;"
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OPP is the Original Purchase Price; and
▇▇▇▇ is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(ii) If ▇▇▇▇ equals zero, no adjustment to the Original
Purchase Price shall be made for the Second Adjustment Date.
(c) Notwithstanding anything in Section 1.10 or Article VII to the
contrary, the parties to the Agreement hereby acknowledge and agree that, absent
fraud on the part of any of the Company Shareholders, in no event shall the
aggregate number of shares of Parent Common Stock deliverable under Sections
1.10(a)(ii) and 1.10(b)(ii) on account of one or more negative adjustments to
the Original Purchase Price in accordance with Section 1.10 exceed the Escrow
Fund. The parties to the Agreement hereby further agree that, notwithstanding
anything in the Agreement to the contrary, absent fraud on the part of the
Company Shareholders, recourse to the Escrow Fund in accordance with Section 7.2
of the Agreement shall be the sole and exclusive remedy of Parent, Sub and the
Surviving Corporation with respect to any adjustments to the Original Purchase
Price in
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accordance with Section 1.10. The foregoing is not intended to limit
Parent or Sub's remedies for breaches of representations and warranties under
this Agreement.
(d) Any dispute with the respect to Purchase Price Adjustments in
accordance with Section 1.10 of the Agreement shall be resolved through the
arbitration procedure set forth in Section 7.2(i).
1.11 Parent Common Stock. The shares of Parent Common Stock issued in
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connection with the Merger will not be registered under the Securities Act of
1933, as amended (the "Securities Act"). Such shares may not be transferred or
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resold thereafter, except in compliance with the terms of this Agreement and
following registration under the Securities Act or in reliance on an exemption
from registration under the Securities Act.
1.12 Tax Consequences. It is intended by the parties hereto that the
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Merger will constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Each party has
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consulted its own tax advisors with respect to the tax consequences of the
Merger.
1.13 Taking of Necessary Action; Further Action. If, at any time after the
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Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
The Company and the Principal Shareholders hereby, jointly and severally,
represent and warrant to Parent and Sub as of the Closing Date, subject to such
exceptions as are specifically disclosed in Exhibit C attached hereto
---------
(referencing the appropriate section and paragraph numbers), as follows:
2.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
California. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a material adverse effect on
the business, assets (including intangible assets), financial condition, results
of operations or prospects of the Company (hereinafter referred to as a
"Material Adverse Effect"). The Company has delivered a true and correct copy
------------------------
of its Articles of Incorporation and Bylaws, each as amended to date, to Parent.
-9-
Exhibit C lists the directors and officers of the Company. The operations now
---------
being conducted by the Company have not been conducted under any other name.
2.2 Company Capital Structure.
-------------------------
(a) The authorized capital stock of the Company consists of ______
shares of authorized Common Stock of which _____ shares are issued and
outstanding. There are no other classes or series of capital stock of the
Company of any kind outstanding or issuable. The Company Common Stock is held
by the persons, with the domicile addresses and in the amounts set forth on
Exhibit C. All outstanding shares of Company Common Stock are duly authorized,
---------
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is
bound.
(b) There are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party
or by which it is bound obligating the Company to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of the Company or obligating the
Company to grant, extend, accelerate the vesting of, change the price of,
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement.
2.3 Subsidiaries. The Company does not have any subsidiaries or
------------
affiliated companies and does not otherwise own any shares in the capital of or
any interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity. The Company
has never had any subsidiaries or affiliated companies and has never otherwise
owned shares in the capital of or any interest in or control, directly or
indirectly of, any other corporation, partnership association, joint venture or
other business entity.
2.4 Authority. Each of the Company and the Principal Shareholders has all
---------
requisite corporate power and authority to enter into this Agreement and all
other agreements required by this Agreement to be entered into by the Company or
such Principal Shareholder (the "Ancillary Agreements") and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of the Company and the Principal Shareholders, and no further action is required
on their part to authorize the Agreement and the Ancillary Agreements and the
transactions contemplated hereby and thereby. This Agreement and the Ancillary
Agreements have been duly executed and delivered by the Company and the
Principal Shareholders and, assuming the due authorization, execution and
delivery by the other parties hereto and thereto, constitute the valid and
binding obligations of the Company and the Principal Shareholders, enforceable
in accordance with their terms, subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and to rules of law
governing specific performance, injunctive relief or other equitable remedies.
-10-
2.5 No Conflict. The execution and delivery of this Agreement does not,
-----------
and the consummation of the transactions contemplated hereby and thereby will
not, conflict with, or result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision of
--------
the Articles of Incorporation and Bylaws the Company, (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise or license to which the Company or any of its properties or assets is
subject, or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or its properties or assets.
2.6 Consents. No consent, waiver, approval, order or authorization of,
--------
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
-------------------
third party, including a party to any agreement with the Company (so as not to
trigger any Conflict), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws thereby, and (ii) the filing of
the Agreement of Merger with the Secretary of State of Delaware and the
Secretary of State of the State of California.
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
unaudited balance sheet as of December 31, 1996, and the related unaudited
statements of income and cash flow for year then ended and the Company's
unaudited balance sheet of July 31, 1997, and the related unaudited statements
of income and cash flow for the seven (7) months then ended (collectively the
"Financials"). The Financials are correct in all material respects and have
----------
been prepared in accordance with United States generally accepted accounting
principles ("USGAAP") applied on a basis consistent throughout the periods
------
indicated and consistent with each other. The Financials present fairly in all
material respects the financial condition, operating results and cash flows of
the Company as of the dates and during the periods indicated therein, subject to
normal year-end adjustments, which will not be material in amount or
significance. The Company's unaudited Balance Sheet as of July 31, 1997 shall
be referred to as the "Balance Sheet."
-------------
2.8 No Undisclosed Liabilities. Except as set forth in Exhibit C, the
-------------------------- ---------
Company has no liability, indebtedness, obligation, expense, claim, deficiency,
guaranty or endorsement of any type, whether accrued, absolute, contingent,
matured, unmatured or other (whether or not required to be reflected in
financial statements in accordance with USGAAP), which individually or in the
aggregate (i) has not been reflected in the Balance Sheet, or (ii) has not
arisen in the ordinary course of business consistent with past practices since
July 31, 1997.
2.9 No Changes. Except as set forth in Exhibit C, since July 31, 1997,
---------- ---------
there has not been, occurred or arisen any:
-11-
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $25,000;
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such person;
(j) any agreement, contract, lease or commitment (each a "Company
-------
Agreement") or any extension or modification the terms of any Company Agreement
---------
which (i) involves the payment of greater than $25,000 per annum or which
extends for more than one year, (ii) involves any payment or obligation to any
affiliate of the Company other than in the ordinary course of business as
conducted on that date and consistent with past practices, or (iii) involves the
sale of any material assets;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company, or any creation of any security interest in such
assets or properties except in the ordinary course of business as conducted on
that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
-12-
(m) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against, or investigation of, the Company or its affairs;
(p) notice of any claim of ownership by a third party of the Company's
Intellectual Property (as defined in Section 2.13 below) or notice of
infringement by the Company of any third party's Intellectual Property rights;
(q) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
(r) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property (as defined in Section 2.13 below) to
the Company;
(s) any event or condition of any character that has or may have a
Material Adverse Effect on the Company; or
(t) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a) through
(s) (other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
2.10 Tax Matters.
-----------
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
------------------- ---
or, collectively, "Taxes," means (i) any and all federal, state, local and
-----
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
-13-
(b) Tax Returns and Audits. Except as set forth in Exhibit C:
---------------------- ---------
(i) The Company as of the Closing Date will have prepared and
timely filed or made a timely request for extension for all required federal,
state, local and foreign returns, estimates, information statements and reports
"Returns") relating to any and all Taxes concerning or attributable to the
---------
Company, or its operations and such Returns are true and correct and have been
completed in accordance with applicable law.
(ii) The Company as of the Closing Date (A) will have paid or
accrued all Taxes it is required to pay or accrue as shown on the Returns and
(B) will have withheld and timely remitted with respect to its employees all
income taxes and other Taxes required to be withheld and remitted.
(iii) The Company has not been delinquent in the payment of any Tax
nor is there any Tax deficiency outstanding, assessed or proposed against the
Company, nor has the Company executed any waiver of any statute of limitations
on or extending the period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of the Company,
is presently in progress, nor has the Company been notified of any request for
such an audit or other examination.
(v) The Company has no liabilities for unpaid federal, state,
local and foreign Taxes which have not been accrued or reserved against in
accordance with USGAAP on the Balance Sheet, whether asserted or unasserted,
contingent or otherwise.
(vi) The Company has made available to Parent or its legal
counsel, copies of all foreign, federal and state income and all state sales and
use Returns filed for all years as to which any applicable statute of
limitations has not expired.
(vii) There are no mortgage, pledge, security interest or lien or
other encumbrance (each a "Lien") of any sort on the assets of the Company the
relating to or attributable to Taxes other than Liens for taxes not yet due and
payable.
(viii) The Company Shareholders have no knowledge of any basis for
the assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on any material assets of the Company.
(ix) As of the Closing, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible by the Company as an expense under Sections 162, 280G or
404 of the Code.
-14-
(x) The Company is not a party to a tax sharing, indemnification
or allocation agreement nor does the Company owe any amount under any such
agreement.
(xi) The Company uses the accrual method of accounting for income
tax purposes and its tax basis in its assets for purposes of determining its
future amortization, depreciation and other federal income tax deductions is
accurately reflected on the Company's tax books and records.
2.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company or any Principal Shareholder is a party or otherwise binding
upon the Company which has or may have the effect of prohibiting or impairing
any business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company. The
Company has not entered into any agreement under which the Company is restricted
from providing services to customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
---------
(a) The Company does not own any real property, nor has it ever owned
any real property. Exhibit C sets forth a list of all real property currently
---------
leased by the Company the name of the lessor, the date of the lease and each
amendment thereto and, with respect to any current lease, the aggregate annual
rental and/or other fees payable under any such lease. All such current leases
are in full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in the Company
Financials or in Exhibit C and except for liens for taxes not yet due and
---------
payable and such imperfections of title and encumbrances, if any, which are not
material in character, amount or extent, and which do not detract from the
value, or interfere with the present use, of the property subject thereto or
affected thereby.
(c) Exhibit C lists all material items of equipment (the "Equipment")
--------- ---------
owned or leased by the Company and such Equipment is, taken as a whole, (i)
adequate for the conduct of the business of the Company as currently conducted
and (ii) in good operating condition, regularly and properly maintained, subject
to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of
any Liens, of all customer files and other customer information relating to
Company's current and former customers (the "Customer Information"). Other than
--------------------
normal rights of Company's customers to their
-15-
own information, no third party possesses any claims or rights with respect to
use of the Customer Information.
2.13 Intellectual Property.
---------------------
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following and all
---------------------
rights in, arising out of, or associated therewith: (i) all United States and
foreign patents and applications therefor and all reissues, divisions, renewals,
extensions, provisionals, continuations and continuations-in-part thereof; (ii)
all inventions (whether patentable or not), invention disclosures, improvements,
trade secrets, proprietary information, know how, technology, technical data and
customer lists, and all documentation relating to any of the foregoing; (iii)
all copyrights, copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world; (iv) all mask works,
mask work registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (v) all industrial designs and any
registrations and applications therefor throughout the world; (vi) all trade
names, logos, common law trademarks and service marks; trademark and service
▇▇▇▇ registrations and applications therefor throughout the world; (vii) all
databases and data collections and all rights therein throughout the world; and
(viii) all computer software including all source code, object code, firmware,
development tools, files, records and data, all media on which any of the
foregoing is recorded, and all documentation related to any of the foregoing
throughout the world.
"Intellectual Property of Company" shall mean any Intellectual
--------------------------------
Property that: (i) is owned by or exclusively licensed to the Company, or (ii)
which is necessary to the operation of the Company, including the design,
manufacture and use of the products or performance of the services of the
Company as it currently is operated or is reasonably anticipated to be operated
in the future, but shall specifically not include any rights in or to materials
created for clients as "work-made-for-hire" or which are subject to an exclusive
assignment or license in favor of clients of the Company.
(b) Exhibit C lists all of Company's United States and foreign: (i)
---------
patents, patent applications (including provisional applications); (ii)
registered trademarks, applications to register trademarks, intent-to-use
applications, or other registrations related to trademarks; (iii) registered
copyrights and applications for copyright registration; (iv) mask work
registrations and applications to register mask works; and (v) any other
Intellectual Property of Company that is the subject of an application,
certificate or registration filed with, issued by, or recorded by, any state,
government or other public legal authority (all of the foregoing, the
"Registered Intellectual Property").
---------------------------------
(c) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been made and all
necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or
-16-
other authorities in the United States or foreign jurisdictions, as the case may
be, for the purposes of maintaining such Registered Intellectual Property.
(d) The contracts, licenses and agreements listed in Exhibit C include
---------
all contracts, licenses and agreements, to which the Company is a party with
respect to any Intellectual Property with a value or cost in excess of $10,000,
other than "shrink wrap" and similar commercial end-user licenses.
(e) The contracts, licenses and agreements listed in Exhibit C are in
---------
full force and effect. The consummation of the transactions contemplated by
this Agreement will neither violate nor result in the breach, modification,
cancellation, termination, or suspension of the contracts, licenses and
agreements in Exhibit C. The Company is in compliance with, and has not
---------
breached any term of, the contracts, licenses and agreements listed in Exhibit
-------
C, and, to the knowledge of the Company and the Principal Shareholders, all
-
other parties to the contracts, licenses and agreements listed in Exhibit C are,
---------
in compliance with, and have not breached any term of, the contracts, licenses
and agreements. Following the Closing Date, Sub will be permitted to exercise
all of the Company's rights under the contracts, licenses and agreements listed
in Exhibit C without the payment of any additional amounts or consideration
---------
other than ongoing fees, royalties or payments which the Company would otherwise
be required to pay.
(f) Except as set forth in Exhibit C: (i) no person has any rights to
---------
use any of the Intellectual Property of the Company; and (ii) the Company has
not granted to any Person, or authorized any Person to retain, any rights in the
Intellectual Property of Company.
(g) Except as set forth in Exhibit C: (i) the Company owns and has
---------
good and exclusive title to each item of Intellectual Property listed in Exhibit
-------
C, free and clear of any Lien; and (ii) the Company owns, or has the right,
-
pursuant to a valid Contract to use or operate under, all other Intellectual
Property of the Company.
(h) The operation of the business of the Company as it currently is
conducted or is reasonably contemplated to be conducted, including its design,
development, manufacture and sale of its products (including with respect to
products currently under development) and provision of services, does not
infringe or misappropriate the Intellectual Property of any other person,
violate the rights of any person (including rights to privacy or publicity), or
constitute unfair competition.
(i) The Company has not received notice from any person that the
operation of the business of the Company, including its design, development,
manufacture and sale of its products (including with respect to products
currently under development) and provision of its services, infringes or
misappropriates the Intellectual Property of any person, violates the rights of
any person (including rights to privacy or publicity), or constitutes unfair
competition.
(j) The Company owns or has the right to use all Intellectual Property
necessary to the conduct of its business as it currently is conducted or is
reasonably contemplated to be conducted, including, without limitation, the
design, development, manufacture and sale of all
-17-
products currently manufactured or sold by the Company or under development by
the Company and the performance of all services provided or contemplated to be
provided by the Company.
(k) Exhibit C lists all contracts, licenses and agreements between the
---------
Company and any other person wherein or whereby the Company has agreed to, or
assumed, any obligation or duty to indemnify, hold harmless or otherwise assume
or incur any obligation or liability with respect to the infringement by the
Company or such other Person of the Intellectual Property rights of any other
person.
(l) Except as listed in Exhibit C, there are no contracts, licenses
---------
and agreements between the Company and any other person with respect to Company
Intellectual Property under which there is any dispute known to the Company or
the Principal Shareholders regarding the scope of such agreement, or performance
under such agreement including with respect to any payments to be made or
received by the Company thereunder.
(m) Except as listed in Exhibit C, to the knowledge of the Company and
---------
the Principal Shareholders, no person is infringing or misappropriating any of
the Intellectual Property of Company.
(n) Except as listed in Exhibit C, there are no claims asserted
---------
against the Company or against any customer of the Company, related to any
product or service of the Company.
(o) No Intellectual Property of Company or product or service of the
Company is subject to any outstanding decree, order, judgment, or stipulation
restricting in any manner the use or licensing thereof by the Company.
(p) The Company has, and enforces, a policy requiring each employee
and contractor to execute proprietary information and confidentiality agreements
substantially in the Company's standard forms and all current and former
employees and contractors of the Company have executed such an agreement.
(q) No (i) product, service or publication of the Company, (ii)
material published or distributed by the Company or (iii) conduct or statement
of Company, constitutes obscene material, a defamatory statement or material, or
violates any rights, including rights of publicity or privacy, of any person.
2.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth in Exhibit C, the Company does not have, or is
---------
not bound by:
(i) any collective bargaining agreement,
-18-
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property having a value individually
in excess of $25,000,
(viii) any agreement of indemnification or guaranty, other than
as set forth in agreements listed in Exhibit C,
---------
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any person,
(x) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000,
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of
materials involving $25,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development
agreement, or
-19-
(xvi) any other agreement, contract or commitment that involves
$25,000 or more or is not cancelable without penalty within thirty (30) days.
(b) The Company has not breached, violated or defaulted under, or
received notice that it has breached, violated or defaulted under, any of the
terms or conditions of any agreement, contract, license or commitment to which
it is a party, by which it benefits or by which it is bound (any such agreement,
contract, license or commitment, a "Contract"), nor is the Company or any
--------
Principal Shareholder aware of any event that would constitute such a breach,
violation or default with the lapse of time, giving of notice or both. Each
Contract is in full force and effect and, except as otherwise disclosed in
Exhibit C, is not subject to any default thereunder by any party obligated to
---------
the Company pursuant thereto. The Company has obtained, or will obtain prior to
the Closing Date, all necessary consents, waivers and approvals of parties to
any Contract as are required thereunder in connection with the Merger so that
all such Contracts will remain in effect without modification after the Closing.
2.15 Interested Party Transactions. No officer, director or Principal
-----------------------------
Shareholder of the Company (nor any ancestor, sibling, descendant or spouse of
any of such persons, or any trust, partnership or corporation in which any of
such persons has or has had an interest), has, directly or indirectly, (i) an
interest in any entity which furnished or sold, or furnishes or sells, services
or products that the Company furnishes or sells, or proposes to furnish or sell,
or (ii) any interest in any entity that purchases from or sells or furnishes to,
the Company, any goods or services or (iii) a beneficial interest in any
Contract; provided, that ownership of no more than one per cent (1%) of the
outstanding voting stock of a publicly traded corporation shall not be deemed an
"interest in any entity" for purposes of this Section 2.15.
2.16 Governmental Authorization. Exhibit C accurately lists each consent,
-------------------------- ---------
license, permit, grant or other authorization issued to the Company by a
governmental entity (i) pursuant to which the Company currently operates or
holds any interest in any of its properties or (ii) which is required for the
operation of its business or the holding of any such interest (herein
collectively called "Company Authorizations"). The Company Authorizations are
----------------------
in full force and effect and constitute all Company Authorizations required to
permit the Company to operate or conduct its business or hold any interest in
its properties or assets.
2.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Company's or the Principal Shareholders' knowledge
threatened, against the Company, its proper ties or any of its officers or
directors, nor, to the knowledge of the Principal Shareholders, is there any
reasonable basis therefor. There is no investigation pending or, to the
Company's or Principal Shareholders' knowledge threatened, against the Company,
its properties or any of its officers or directors (nor, to the best knowledge
of the Principal Shareholders, is there any reasonable basis therefor) by or
before any governmental entity. No governmental entity has at any time
challenged or questioned the legal right of the Company to manufacture, offer or
sell any of its products or services in the present manner or style thereof.
-20-
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of August 29, 1997 ("Accounts Receivable") along
-------------------
with the number of days elapsed since such invoice.
(b) All Accounts Receivable of the Company arose in the ordinary
course of business, are carried at values determined in accordance with USGAAP
consistently applied and are collectible except to the extent of reserves
therefor set forth in the Balance Sheet. No person has any Lien on any of such
Accounts Receivable and no request or agreement for deduction or discount has
been made with respect to any of such Accounts Receivable.
2.19 Minute Books. The minutes of the Company made available to counsel
------------
for Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of the
Company and its shareholders or actions by written consent since the time of
incorporation of the Company.
2.20 Environmental Matters.
---------------------
(a) Hazardous Material. The Company has not: (i) operated any
------------------
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PBS, asbestos, petroleum, and urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous Material"), but excluding office and janitorial supplies properly and
------------------
safely maintained. No Hazardous Materials are present as a result of the
deliberate actions of the Company or, to the Company's or Principal
Shareholders' knowledge, as a result of any actions of any third party or
otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company has at
any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not
------------------------------
transported, stored, used, manufactured, disposed of, released or exposed its
employees or others to Hazardous Materials in violation of any law in effect on
or before the Closing Date, nor has either the Company disposed of, transported,
sold, or manufactured any product containing a Hazardous Material (any or all of
the foregoing being collectively referred to as "Hazardous Materials
-------------------
Activities") in violation of any rule, regulation, treaty or statute promulgated
----------
by any Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. The Company currently holds all environmental
-------
approvals, permits, licenses, clearances and consents (the "Environmental
-------------
Permits") necessary for the conduct of the
-------
-21-
Company's Hazardous Material Activities and other businesses of the Company as
such activities and businesses are currently being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Principal Shareholders' knowledge, threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of the Company.
The Principal Shareholders are not aware of any fact or circumstance which could
involve the Company in any environmental litigation or impose upon the Company
any environmental liability.
2.21 Brokers' and Finders' Fees; Third Party Expenses. Except as set
------------------------------------------------
forth in Exhibit C, the Company has not incurred, nor will it incur, directly or
---------
indirectly, any liability for brokers' or finders' fees or agents' commissions
or any similar charges in connection with the Agreement or any transaction
contemplated hereby. Exhibit C sets forth the principal terms and conditions of
---------
any agreement, written or oral, with respect to such fees. Exhibit C sets forth
---------
the Company's current reasonable estimate of all third party expenses expected
to be incurred by the Company in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
2.22 Employee Benefit Plans and Compensation.
---------------------------------------
(a) For purposes of this Section 2.22, the following terms shall
have the meanings set forth below:
(i) "Employee Plan" shall refer to any plan, program, policy,
-------------
practice, contract, agreement or other arrangement providing for bonuses,
severance, termination pay, performance awards, stock or stock-related awards,
fringe benefits or other employee benefits of any kind, whether formal or
informal, funded or unfunded and whether or not legally binding, including
without limitation, any plan which is or has been maintained, contributed to, or
required to be contributed to, by the Company for the benefit of any "Employee"
(as defined below), and pursuant to which the Company has or may have any
material liability, contingent or otherwise; and
(ii) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of the Company.
(iii) "Employee Agreement" shall refer to each employment,
------------------
severance, consulting or similar agreement or contract between the Company and
any Employee;
(b) Schedule. Exhibit C contains an accurate and complete list of
-------- ---------
each Company Employee Plan and each Employee Agreement, together with a schedule
of all liabilities, whether or not accrued, under each such Company Employee
Plan. The Company does not have any plan or commitment, whether legally binding
or not, to establish any new Company Employee Plan or Employee Agreement, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement
-22-
to the requirements of any applicable law, in each case as previously disclosed
to Parent in writing, or as required by this Agreement), or to enter into any
Company Employee Plan or Employee Agreement, nor does it have any intention or
commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent: (i) correct and
---------
complete copies of all documents embodying each Employee Plan and each Employee
Agreement including all amendments thereto and copies of all forms of agreement
and enrollment used therewith; (ii) the most recent annual actuarial valuations,
if any, prepared for each Employee Plan; (iii) the three most recent annual
reports (Series 5500 and all schedules thereto), if any, required under ERISA or
the Code in connection with each Company Employee Plan or related trust; (iv)
the most recent summary plan description together with the most recent summary
of material modifications, if any, required under ERISA with respect to each
Company Employee Plan; (v) all IRS determination letters and rulings relating to
Company Employee Plans and copies of all applications and correspondence to or
from the IRS or the Department of Labor ("DOL") with respect to any Company
---
Employee Plan; (vi) if the Employee Plan is funded, the most recent annual and
periodic accounting of Employee Plan assets; and (vii) all communications
material to any Employee or Employees relating to any Employee Plan and any
proposed Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any liability to the
Company.
(d) Employee Plan Compliance. (i) The Company have performed all
------------------------
obligations required to be performed by them under each Employee Plan and each
Employee Plan has been established and maintained in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including ERISA and the Code; (ii) no "prohibited transaction,"
within the meaning of Section 4975 of the Code or Section 406 of ERISA, has
occurred with respect to any Company Employee Plan; (iii) there are no actions,
suits or claims pending, or, to the knowledge of the Company or the Principal
Shareholders threatened or anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (iv) each
Employee Plan can be amended, terminated or otherwise discontinued after the
Closing Date in accordance with its terms, without liability to the Company,
Parent or Sub (other than ordinary administration expenses typically incurred in
a termination event); (v) there are no inquiries or proceedings pending or, to
the knowledge of the Company or any Principal Shareholders threatened by the IRS
or DOL with respect to any Company Employee Plan; and (vi) the Company is not
subject to any penalty or tax with respect to any Company Employee Plan under
Section 402(i) of ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to
-------------------
or been requested to contribute to any Multiemployer Plan.
-23-
(g) No Post-Employment Obligations. Except as set forth in Exhibit
------------------------------ -------
C, no Company Employee Plan provides, or has any liability to provide, life
-
insurance, medical or other employee benefits to any Employee upon his or her
retirement or termination of employment for any reason, except as may be
required by statute, and the Company has not represented, promised or contracted
(whether in oral or written form) to any Employee (either individually or to
Employees as a group) that such Employee(s) would be provided with life
insurance, medical or other employee welfare benefits upon their retirement or
termination of employment, except to the extent required by statute.
(h) Continuing Liabilities. No Employee Plan provides, or has any
----------------------
liability to provide, life insurance, medical or other employee benefits to any
Employee upon his or her retirement or termination of employment for any reason,
except as may be required by statute, and the Company has not represented,
promised or contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
(i) No Conflicts. The execution of this Agreement and the
------------
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Employee Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) Employment Matters. The Company (i) is in compliance with all
------------------
applicable laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours, in each case,
with respect to Employees; (ii) has withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to
Employees; (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing; and (iv) is not liable
for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits for Employees (other than routine payments to
be made in the normal course of business and consistent with past practice).
(k) Labor. No work stoppage or labor strike against the Company is
-----
pending, or to the knowledge of the Company and the Principal Shareholders,
threatened. The Company is not involved in or threatened with any labor
dispute, grievance, or litigation relating to labor, safety, discrimination, or
harassment matters involving any Employee, including, without limitation,
charges of unfair labor practices, discrimination, or harassment complaints,
which, if adversely determined, would, individually or in the aggregate, result
in liability to the Company, Parent or Sub. The Company has not engaged in any
unfair labor practices which could, individually or in the aggregate, directly
or indirectly result in a liability to the Company, Parent or Sub. The Company
is not presently, or has in the past, been a party to, or bound by, any
collective bargaining agreement or
-24-
union contract with respect to Employees and no collective bargaining agreement
is being negotiated by the Company.
2.23 Insurance. Exhibit C lists all insurance policies and fidelity
--------- ---------
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company. There is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company are otherwise in compliance with the terms of such policies
and bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company and the Principal Shareholders have no knowledge of any
threatened termination of, or premium increase with respect to, any of such
policies.
2.24 Compliance with Laws. The Company has complied with, are not in
--------------------
violation of, and have not received any notices of violation with respect to,
any foreign, federal, state or local statute, law or regulation.
2.25 Third Party Consents. Except as set forth in Exhibit C, no consent
-------------------- ---------
or approval is needed from any third party in order to effect the Merger or any
of the transactions contemplated by this Agreement.
2.26 Warranties; Indemnities. Exhibit C sets forth a summary of all
----------------------- ---------
warranties and indemnities relating to products sold or services rendered by the
Company, and no warranty or indemnity has been given by the Company which
differs therefrom in any respect. Exhibit C also indicates all warranty and
---------
indemnity claims in excess of $25,000 made against the Company.
2.27 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.28 Representations Complete. None of the representations or warranties
------------------------
made by the Company or the Principal Shareholders (as modified by the Exhibit
-------
C), nor any statement made in Exhibit C or any certificate furnished by the
- ---------
Company or the Principal Shareholders pursuant to this Agreement, or furnished
in or in connection with documents mailed or delivered to the Company
Shareholders in connection with soliciting their consent to this Agreement and
the Merger, contains or will contain at the Closing, any untrue statement of a
material fact, or omits or will omit at the Closing to state any material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which made, not misleading.
2.29 Business Plan. The Company has provided to Parent a current,
-------------
accurate and detailed business plan for the Company's planned operations during
the twelve months following the Closing Date which includes, without limitation,
a description of the Company's capital requirements, staffing needs, and a pro
forma income statement. The business plan is attached to Exhibit C hereto. No
---------
representation is made as to whether business prospects, financial projections
or future events
-25-
described or alluded to in the business plan will actually occur or be realized.
However, the Company and each of its Principal Shareholders reasonably believe
that the current projections and prospects described in the Company-prepared
business plan are reasonable under the circumstances.
2.30 Backlog Report. The Company has provided to Parent a detailed and
--------------
accurate list of all orders booked but not yet completed, giving the status of
each order as of a recent date. The backlog report is attached to Exhibit C
---------
hereto.
2.31 Principal Shareholder Investment Representations and Warranties.
---------------------------------------------------------------
Each of the Principal Shareholders represents and warrants to the Parent as
follows:
(a) Experience. The Principal Shareholder is able to assess the
----------
technology, markets, management and strategy of the Parent and to fend for
itself in transactions such as the one contemplated by this Agreement, has such
knowledge and experience in financial and business matters that the Principal
Shareholder is capable of evaluating the merits and risks inherent in holding
stock of the Parent, and has the ability to bear the economic risks of the
investment.
(b) Investment. The Principal Shareholder accepts the shares of the
----------
Parent Common Stock as investment for the Principal Shareholder's own account
and not with the view to, or for resale in connection with, any distribution
thereof. The Principal Shareholder understands that the Parent Common Stock has
not been registered under the Securities Act by reason of a specific exemption
from the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
The Principal Shareholder further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to any third person with respect to any of the Parent Common
Stock. The Principal Shareholder understands and acknowledges that the
provision of Parent Common Stock pursuant to this Agreement will not be
registered under the Securities Act on the ground that the issuance of
securities hereunder is exempt from the registration requirements of the
Securities Act.
(c) Rule 144. The Principal Shareholder acknowledges that the
--------
Parent Common Stock must be held indefinitely unless subsequently registered
under the Securities Act or an exemption from such registration is available.
The Principal Shareholder is aware of the provisions of Rule 144 promulgated
under the Securities Act which permit limited resale of shares purchased in a
private placement subject to the satisfaction of certain conditions. The
Principal Shareholder covenants that, in the absence of an effective
registration statement covering the stock in question, the Principal Shareholder
will sell, transfer, or otherwise dispose of the Parent Common Stock only in a
manner consistent with the Principal Shareholder's representations and covenants
set forth herein. In connection therewith, the Principal Shareholder
acknowledges that the Parent will make a notation on its stock books regarding
the restrictions on transfers set forth in this Article and will transfer
securities on the books of the Parent only to the extent not inconsistent
therewith.
-26-
(d) No Public Market. The Principal Shareholder understands that no
----------------
public market now exists for any of the securities issued by the Parent, and
that no public market may ever exist for such securities.
(e) Access to Data. The Principal Shareholder has received and
--------------
reviewed information about the Parent and has had an opportunity to review and
discuss the Parent's business, management and financial affairs with its
management. The Principal Shareholder understands that such discussions, as
well as any written information issued by the Parent, were intended to describe
the aspects of the Parent's business and prospects which the Parent believes to
be material, but were not necessarily a thorough or exhaustive description.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company and the Principal
Shareholders as of the Closing Date as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Utah. Sub is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. Each of Parent and Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of Parent and Sub to consummate the transactions
contemplated hereby.
3.2 Authority; Consents. Parent and Sub have all requisite corporate
-------------------
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Sub. This
Agreement has been duly executed and delivered by Parent and Sub and constitutes
the valid and binding obligations of Parent and Sub, enforceable in accordance
with its terms, except as such enforceability may be limited by principles of
public policy and subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies. The
execution and delivery of this Agreement by Parent and Sub does not, and, as of
the Closing, the consummation of the transactions contemplated hereby and
thereby will not, Conflict with (i) any provision of the respective Articles of
Incorporation or Bylaws of Parent or Sub or (ii) any agreement or instrument,
permit, judgment, statute, law, rule or regulation applicable to Parent or Sub.
No consent, waiver, approval, or registration, declaration or filing with, any
Governmental Entity or any third party is required by or with respect to any of
the Parent or Sub in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
-27-
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 100,000,000 shares of
Common Stock, $.001 par value, of which 28,850,214 shares were issued and
outstanding as of August 28, 1997, and 38,188,501 shares of Preferred Stock,
$.001 par value, of which 18,678,500 shares are designated Series A Preferred
Stock, 18,518,500 of which are issued and outstanding, and 9,310,001 shares are
designated Series B Preferred Stock, all of which are issued and outstanding.
All such shares have been duly authorized, and 10,200,000 shares are designated
Series C Preferred Stock, 8,454,580 of which are issued and outstanding. All
such shares have been duly authorized, and all such issued and outstanding
shares have been validly issued, are fully paid and nonassessable and are free
of any liens or encumbrances other than any liens or encumbrances created by or
imposed upon the holders thereof. Parent has also reserved (i) 3,900,000 shares
of Common Stock for issuance to employees and consultants pursuant to Parent's
1996 Stock Option Plan and the 1996 Equity Compensation Plan, (ii) 160,000
shares of Series A Preferred Stock for issuance upon the exercise of outstanding
warrants to purchase Series A Preferred Stock, (iii) 1,000,000 shares of Common
Stock for issuance upon the exercise of warrants issued or outstanding warrants
to purchase issuable pursuant to the Company's Affiliate Warrant Program, (iv)
24,000,000 shares of Common Stock for issuance under the Company's 1997
Acquisition Stock Option Plan, (v) 2,113,647 shares of Series C Preferred Stock
for issuance upon exercise of warrants to purchase Series C Preferred Stock, and
(vi) a sufficient number of shares for issuance upon conversion of the Preferred
Stock currently outstanding. There are no other options, warrants, calls,
rights, commitments or agreements of any character to which Parent is a party or
by which it is bound obligating Parent to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of Parent or obligating Parent to grant, extend or
enter into any such option, warrant, call, right, commitment or agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid and non-assessable.
3.4 Brokers' and Finders' Fees. The Parent has not incurred, nor will it
--------------------------
incur, directly or indirectly, any liability for brokers' or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.5 No Changes. Except as otherwise disclosed in this Agreement, the
----------
information contained in the disclosure package delivered to the Company on
August ____, 1997, including the Confidential Offering Memorandum dated February
1997, relating to Parent's Series C Preferred Stock offering (i) was true and
correct as of the respective dates of the documents contained therein, (ii)
accurately described Parent's business, operating results, financial condition,
and, to the Parent's knowledge, prospects as of the respective dates of the
documents contained therein, (iii) contained no untrue statement of a material
fact as of the respective dates of the documents contained therein, or (iv)
omitted no material fact necessary to make the statements contained therein, in
light of the circumstances under which made in such document, not misleading as
of the respective dates of the documents contained therein. None of the
representations made by Parent as of the Closing Date, or any certificate or
Exhibit furnished by Parent pursuant to this Agreement, contains any untrue
-28-
statement of a material fact, or omits to state any material fact necessary in
order to make the statements contained therein, in light of the circumstances
under which made, not misleading.
3.6 Complete Copies of Materials. Parent has delivered or made available
----------------------------
true and complete copies of each document (or summaries of same) that has been
requested by the Company, the Principal Shareholders, or their respective
counsel other than documents (or summaries thereof) that the Parent has
represented to be confidential.
3.7 Parent Financial Statements. Attachment 1 to the Schedule of
---------------------------
Exceptions is Parent's unaudited consolidated balance sheet of July 31, 1997,
and the related unaudited statements of income and cash flow for the seven (7)
months then ended ("Parent Unaudited Financials"). The Parent Unaudited
Financials are correct in all material respects and have been prepared in
accordance with USGAAP applied on a basis consistent throughout the periods
indicated and consistent with each other. The Parent Unaudited Financials
present fairly in all material respects the financial condition, operating
results and cash flows of Parent and its subsidiaries as of the dates and during
the periods indicated therein, subject to normal year-end adjustments, which
will not be material in amount or significance.
3.8 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to Parent's knowledge threatened, against Parent or any of its
subsidiaries, or any of its or their properties, the negative outcome of which
could reasonably be expected to result in a material adverse affect on Parent.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date
----------------------------------
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay debts and Taxes when due, to pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practice and policies to preserve intact
the Company's present business organization, keep available the services of
present officers and key employees and preserve relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of business of the Company, and any material event involving the
Company. Except as expressly contemplated by this Agreement, the Company shall
not, without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business or any commitment or transaction of the type described in
Section 2.9 hereof;
-29-
(b) Transfer to any person or entity any rights to the Intellectual
Property of the Company;
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in Exhibit C;
---------
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities;
(h) Cause or permit any amendments to its Articles of Incorporation
or Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to its business;
(j) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business and consistent
with past practices;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(l) Grant any loans to others or purchase debt securities of others
or amend the terms of any outstanding loan agreement, except in the ordinary
course of business and consistent with past practices;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to standard
written agreements outstanding on the date hereof;
-30-
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Take any action which could jeopardize the tax-free
reorganization hereunder;
(q) Pay, discharge or satisfy, in an amount in excess of $10,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Financial Statements (or the
notes thereto);
(r) Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance or joint marketing arrangement
or agreement; or
(t) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (s) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the date
---------------
of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Principal Shareholders will (nor will
the Company permit any of the Company's officers, directors, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than Parent and its designees: (a)
solicit, conduct discussions with or engage in negotiations with any person,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (b) provide information with
respect to it to any person, other than Parent, relating to the possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets, (c) enter into an agreement with any person, other than Parent,
providing for the acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise) or any material portion of
its or their capital stock or assets or (d) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its or their capital stock or assets by
any person, other than by Parent. In addition to the foregoing, if the Company
or any Principal Shareholder receives prior to the Effective Time or the
termination of
-31-
this Agreement any offer or proposal relating to any of the above, the Company
or the Principal Shareholders, as applicable shall immediately notify Parent
thereof, including information as to the identity of the offeror or the party
making any such offer or proposal and the specific terms of such offer or
proposal, as the case may be, and such other information related thereto as
Parent may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Parent's Right of First Refusal.
-------------------------------
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to this Agreement (the "Shares") may be sold or otherwise transferred
------
(including transfer by gift or operation of law), or any Shares held by a
transferee (either being sometimes referred to herein as the "Holder") may be
------
sold, the Parent or its assignee(s) shall have a right of first refusal to
purchase such Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
----------------------
(b) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Parent a written notice (the "Notice") stating: (i) the Holder's
------
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
-------------------
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
-------------
at the Offered Price to the Parent or its assignee(s).
(c) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Parent or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (d)
below.
(d) Purchase Price. The purchase price ("Parent Purchase Price")
-------------- ---------------------
for the Shares purchased by the Parent or its assignee(s) under this Section
shall be the Offered Price. If the Offered Price includes consideration other
than cash, the Parent may match such non-cash consideration with such other cash
or non-cash consideration as shall be determined by the Board of Directors of
the Parent in good faith.
(e) Payment. Payment of the Parent Purchase Price shall be made, at
-------
the option of the Parent or its assignee(s), in cash (by check), by wire
transfer, by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the Parent (or, in the case of repurchase by an assignee, to the
assignee), or by any combination thereof within 30 days after receipt of the
Notice or in the manner and at the times set forth in the Notice.
-32-
(f) Holder's Right to Transfer. If all of the Shares proposed in
--------------------------
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Parent or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are not
transferred to the Proposed Transferee within such period, a new Notice shall be
given to the Parent, and the Parent or its assignees shall again be offered the
Right of First Refusal before any Shares held by the Holder may be sold or
otherwise transferred.
(g) Exception for Certain Family Transfers. Anything to the
--------------------------------------
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Holder's lifetime or on the Holder's death by will or
intestacy to the Holder's immediate family or a trust for the benefit of the
Holder's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
----------------
antecedent, brother or sister. In such case, the transferee or other recipient
shall receive and hold the Shares so transferred subject to the provisions of
this Section, and there shall be no further transfer of such Shares except in
accordance with the terms of this Section.
(h) Termination of Right of First Refusal. The Right of First
-------------------------------------
Refusal shall terminate as to any Shares 90 days after the first sale of Common
Stock of the Parent to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended.
5.2 Market Standoff Agreement. Each Company Shareholder hereby agrees
-------------------------
that if so requested by the Parent or any representative of the underwriters in
connection with any registration of the offering of any Shares of the Parent
under the Securities Act, such Company Shareholder shall not sell or otherwise
transfer, pledge, hypothecate or otherwise decrease his market risk or
beneficial ownership in any Shares or other securities of the Parent during the
180-day period following the date of the final Prospectus contained in a
registration statement of the Parent filed under the Securities Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Parent to become effective under the Securities Act which
includes securities to be sold on behalf of the Parent to the general public in
an underwritten public offering under the Securities Act. The Parent may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such 180-day period.
5.3 Restriction on Competition.
--------------------------
(a) Restricted Activities. For a period of three (3) years
---------------------
beginning on the Closing Date, no Principal Shareholder shall:
-33-
(i) engage in, including as an employee, consultant or
otherwise, or own any interest (except as a passive investor of less than five
percent (5%) of total debt and equity) in any business or other activity that
would compete with the Parent's; or
(ii) divert or attempt to divert any existing or prospective
business or customers of the Parent (including any affiliates of the Parent) to
any other person or entity, by direct or indirect inducement or otherwise, or do
or perform, directly or indirectly, any other act injurious or prejudicial to
the goodwill associated with the Parent or its affiliates; or
(iii) solicit any person for employment who is at that time
already employed by Parent or any of its affiliates, or otherwise directly or
indirectly induce or seek to induce such person to leave his or her employment.
(b) Scope of Restriction.
--------------------
(i) This Section shall apply in the Standard Metropolitan
Statistical Area where the Company is located.
(ii) In the event that any other provision of this Section 5.3
or the application of any such provision shall be held to be prohibited or
unenforceable in any jurisdiction, such provision shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability. The remaining provisions of this covenant to refrain from
competition shall remain in full force and effect, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. The parties shall use
their best efforts to replace the provision that is contrary to law with a legal
one approximating to the extent possible the original intent of the parties.
(iii) In the event that a Principal Shareholder, who also is a
New Employee, is terminated from employment by Parent without cause at any time
within three (3) years of the Closing Date, then the term of the restrictions
imposed by this Section 5.3 shall be reduced to six (6) months and that
terminated Principal Shareholder/New Employee shall receive severance benefits
from Parent equal to six (6) months salary and employee benefits; provided, that
--------
neither the term of such restrictions on such Principal Shareholder/New Employee
nor the Parent's obligations to pay such severance benefits shall extend beyond
the third anniversary date of the Closing Date. For the purposes solely of this
Agreement, "cause" for a Principal Shareholder's termination shall exist at any
-----
time upon the occurrence of any of the following events:
1. acts of dishonesty by the Principal Shareholder;
2. gross negligence or willful malfeasance by the Principal
Shareholder in the performance of his duties;
3. the Principal Shareholder's conviction of a crime relating to
his character or employment by Parent;
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4. physical or mental disability of the Principal Shareholder which
prevents performance of his duties for a consecutive period of
at least 120 days, or at least 150 days in a period of 200 days;
or
5. death of the Principal Shareholder.
5.4 Confidentiality. Each of the parties hereto hereby agrees to keep
---------------
such information or knowledge obtained pursuant to the negotiation and execution
of this Agreement, or the effectuation of the transactions contemplated hereby,
confidential; provided, however, that the foregoing shall not apply to
information or knowledge which (a) a party can demonstrate was already lawfully
in its possession prior to the disclosure thereof by the other party, (b) is or
becomes generally known to the public and did not become so known through any
violation of law or this Agreement by the non-disclosing party, (c) is later
lawfully acquired by such party from other sources, (d) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general disclosure or (e) which is disclosed in the
course of any litigation between any of the parties hereto; it being understood
that the parties may disclose relevant information and knowledge to their
respective employees and agents on a need to know basis, provided that the
parties cause such employees and agents to treat such information and knowledge
confidentially.
5.5 Expenses. Whether or not the Acquisition is consummated, all fees
--------
and expenses incurred in connection with the Acquisition including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
5.6 Public Disclosure. Unless otherwise required by law or any
-----------------
applicable rule of a stock exchange or quotation system upon which a parties'
securities are listed, prior to the Closing Date, no disclosure (whether or not
in response to an inquiry) of the subject matter of this Agreement shall be made
by the Company or the Principal Shareholders unless approved by Parent prior to
release, provided that such approval shall not be unreasonably withheld, subject
to Parent's and the Company's or the Principal Shareholders' obligation to
comply with applicable securities laws.
5.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate each employee of Company on and as of
the Closing Date, effective as of close of business on the Closing Date. Parent
will hire on the Closing Date, effective as of the close of business on the
Closing Date, on an "at will" basis and subject to Parent's terms, conditions
and policies of employment, if any, each of those persons who are employed by
Company and are terminated by Company on the Closing Date pursuant to the
foregoing sentence. Nothing contained in this Section is intended or shall be
deemed to (a) require Parent to employ such persons for any fixed or pre-
determined time after the Closing, or (b) confer upon any employee of Company,
past, present, or future, any rights of employment of any nature, it being
understood and agreed that the provisions of this Section are intended to set
forth an agreement among Parent and Company, and are not intended to benefit any
persons not party to this Agreement, including such
-35-
employees. Parent and Company hereby agree to adopt the alternate procedure of
Rev. Proc. 96-60 for purposes of employer payroll withholding.
(b) In connection with hiring the Company's employees (the "New
---
Employees") as set forth in Section 5.7(a) above, Parent shall grant to the New
---------
Employees incentive stock options to purchase Parent Common Stock in an
aggregate number equal to the number of shares paid as the Original Purchase
Price. Such incentive stock options shall be issued to the New Employees, and
in the amounts, requested by the Company in writing at the Closing. The
exercise price of each option shall be the fair market value of the Common Stock
subject to such option on the Closing Date as determined in good faith and
authorized by the Board of Directors of the Parent. Such options shall not be
exercisable at the date of grant, but shall become exercisable as to one-thirty-
sixth (1/36) of the shares subject to such option each month after the effective
date of this Agreement, provided, however, that no option shall become
exercisable with respect to any shares at any time following the date that the
New Employee to whom the option was granted ceases to be an employee or
consultant of the Parent (an "Employee Termination"), and provided further that
--------------------
the term of any such option shall expire if not exercised, and to the extent not
exercisable, ninety (90) days after the date of the Employee Termination.
Accordingly, any New Employee who receives an option must exercise it (but only
to the extent then exercisable), if at all, within ninety (90) days after an
Employee Termination. Notwithstanding the foregoing, in the event of any
Employee Termination due to the death or disability of the New Employee, the New
Employee or his estate shall have twelve (12) months to exercise the option to
the extent it was exercisable on the date of the Employee Termination;
thereafter, the option shall terminate as to any unexercised portion. New
Employee acknowledges that New Employee may be taxed under the Code on the
difference between the fair market value of shares purchased pursuant to any
exercised option less the exercise price paid on the date of any such exercise
and that the Parent may withhold any applicable taxes from New Employee's
regular pay or, if insufficient, that New Employee will make any required
withholding payment to the Parent. New Employee also acknowledges that there
may be state or local tax due upon exercise of the option, and that any such tax
is the obligation of the New Employee and not the Parent. The terms of the
options as described in this paragraph are subject to the definitive form of
option agreement attached hereto as Exhibit D.
---------
(c) Also in connection with hiring the New Employees, Parent agrees
to issue to each of them a bonus payable in Parent Common Stock equal to the
aggregate exercise price of the options described in Section 5.7(b) above. Such
bonus shall be, as to each New Employee, for such number of shares of Parent
Common Stock as shall be equal, on the date paid, and in the good faith judgment
of the Parent's Board of Directors, to the aggregate exercise price of the
exercisable portion of the option granted to the New Employee described in the
foregoing paragraph. The bonus payment described in this paragraph shall be made
to such New Employee on the earlier of: (i) in the event that the New Employee's
employment by Parent or any wholly owned subsidiary of Parent terminates before
the date three years subsequent to the date of this Agreement, on the date of
such termination (but only that number of shares required pursuant to this
paragraph), (ii) if the Parent shall have a class of equity securities that has
been publicly traded on a national exchange or quotation system for at least 180
days and the New Employee exercises or has previously exercised options granted
to such
-36-
New Employee in accordance with Section 5.7(b), then on such date as such New
Employee may request with respect to the bonus payment for such exercised
options and (iii) in the event that on the date three years subsequent to the
date of this Agreement the Parent shall not have a class of equity securities
that has been publicly traded on a national securities exchange or quotation
system for at least 180 days, then on the first business day after the date
three years subsequent to the date of this Agreement that the Parent shall have
a class of equity securities that has been publicly traded on a national
securities exchange or quotation system for 180 days. New Employee acknowledges
that there may be federal, state or local tax due upon receipt of the bonus,
that Parent may withhold any applicable taxes from New Employee's regular pay
or, if insufficient, that New Employee will make any required withholding
payment to Parent, and that any such tax is the obligation of the New Employee
and not the Parent.
(d) In addition to the stock option (the "Original Option") and
---------------
stock bonus grants described in subsections (b) and (c) of this Section, in the
event that any additional shares of Parent's Common Stock are issued pursuant to
the Purchase Price Adjustment provisions of Section 1.10, an additional option,
in form and substance substantially similar to the Original Option (but with an
exercise price determined based on the date of issuance) (the "Additional
----------
Option"), and an additional stock bonus commitment (the "Additional Stock
------ ----------------
Bonus") proportionate to the Additional Option, in form and substance
-----
substantially similar to that described in paragraph (c) of this Section, shall
be issued by the Parent to any then-remaining employee of Parent or Sub who
received an Original Option. The number of shares subject to any such
Additional Option shall be calculated by taking the number of shares issued
pursuant to such Purchase Price Adjustment provisions multiplied by three (3)
and then determining the individual recipients' pro rata share based on the
number of shares subject to each recipient's Original Option compared to the
number of shares subject to the total of Original Options granted to then
remaining employees. For each recipient, the number of shares granted in the
Additional Stock Bonus shall be proportionate to the Additional Option. Any
such Additional Options and Additional Stock Bonuses shall be granted at the
next regularly scheduled meeting of the Parent's board of directors following
the date of any Purchase Price Adjustment pursuant to Section 1.10.
5.8 Treatment of Affiliate Warrants. To the extent that any affiliate of
-------------------------------
the Company has received or has the right to receive any warrants under Parent's
Affiliate Warrant Program, the warrants received or to be received thereunder
shall remain in full force and effect and, to the extent required to make
calculations of shares issuable under such warrants, Parent shall estimate in
good faith the business measures of the Surviving Corporation as necessary to
such calculations, with the intent of preserving the economic value of such
warrants to the holders thereof following the completion of the acquisition
contemplated hereby.
5.9 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. No information or knowledge obtained in any
-37-
investigation pursuant to this Section 5.9 shall affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
5.10 Public Disclosure. Unless otherwise required by law, prior to the
-----------------
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent and the Company prior to release, provided that such approval
shall not be unreasonably withheld.
5.11 Consents. The Company shall use its best efforts to obtain the
--------
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Exhibit C) so as to preserve all rights of, and benefits to, the
---------
Company thereunder.
5.12 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
-----------------
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.13 Best Efforts. Subject to the terms and conditions provided in this
------------
Agreement, each of the parties hereto shall use its best efforts to take
promptly, or cause to be taken, all actions, and to do promptly, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its affiliates
or of the Company or its affiliates, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock.
5.14 Notification of Certain Matters. The Company shall give prompt
-------------------------------
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company or the
Principal Shareholders and Parent, respectively, contained in this Agreement to
be untrue or inaccurate at or prior to the Effective Time and (ii) any failure
of the Company or Parent, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.14 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.15 Tax Returns. The Principal Shareholders shall prepare or cause to be
-----------
prepared and file or cause to be filed all income Tax Returns for the Company
for all periods ending on or prior to the Closing Date which are filed after the
Closing Date. Such returns shall be prepared in accordance
-38-
with applicable law and past practices consistently applied. The Principal
Shareholders shall permit Parent to review and comment on each such Tax Return
prior to filing. The Principal Shareholders shall reimburse the Company for any
income Taxes of the Company with respect to all periods or portions thereof
ending on or prior to the Closing Date. Such reimbursement shall not include
taxes of the Company Shareholders payable with respect to income of the Company.
5.16 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.17 Section 368 Compliance. From and after the Effective Time, neither
----------------------
Parent, Sub, or the Company shall take any action that will cause the Merger not
to be treated as a reorganization within the meaning of Section 368 of the Code.
5.18 Parent Policies. The Company and Principal Shareholders acknowledge
---------------
that Parent has implemented policies regarding the operation of subsidiary
entities such as the Company will be following the Merger. The Company and
Principal Shareholders acknowledge and agree that such policies, or any such
amended or replacement policies that are reasonably similar in scope, nature or
effect, are anticipated to be in place following the Merger, and the Company and
Principal Shareholders hereby indicate their intention to act in substantial
compliance with all such policies. Such policies shall not provide for Parent
overhead allocations from Parent to Company or Sub, unless otherwise agreed in
advance by the parties.
5.19 Similar Transactions. Each party understands and agrees that the
--------------------
Parent may acquire other entities that are in a business similar to that of the
Company. In the event that, prior to the Second Adjustment Date, Parent
acquires another entity similar to the Company based on a valuation model
substantially more favorable to the equity owners of such entity after taking
into account the similarities and differences of the businesses, then the
valuation of the Company at the First Adjustment Date and the Second Adjustment
Date shall be recalculated to take into account such more favorable valuation
model and the First Adjustment to Purchase Price and Second Adjustment to
Purchase Price shall be recalculated promptly on such more favorable basis. Any
additional shares due to the Company Shareholders upon such recalculation shall
be issued promptly to the Company Shareholders.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
-39-
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal.
(b) Litigation. There shall be no action, suit, claim or proceeding
----------
of any nature pending, or overtly threatened, against the Parent, Sub or the
Company, their respective properties or any of their officers or directors,
arising out of, or in any way connected with, the Merger or the other
transactions contemplated by the terms of this Agreement.
6.2 Additional Conditions to Obligations of Company. The obligations of
-----------------------------------------------
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Certificate of the Parent. Company shall have been provided
-------------------------
with a certificate executed on behalf of the Parent by its President to the
effect that, as of the Effective Time:
(i) all representations and warranties made by the Parent and
Sub in this Agreement are true and correct in all material respects;
(ii) all covenants and obligations of this Agreement to be
performed by the Parent on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or
------
not asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or the business, assets
(including intangible assets), financial condition or results of operations of
the Parent, taken as a whole.
(d) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
financial condition, results of operations of the Parent, taken as a whole since
December 31, 1996.
-40-
(e) Side Agreement. The Side Agreement shall have been executed and
--------------
delivered by all of the parties thereto.
6.3 Additional Conditions to the Obligations of Parent and Sub. The
----------------------------------------------------------
obligations of Parent and Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Company and the Principal Shareholders in this Agreement
shall be true and correct in all material respects on and as of the Effective
Time as though such representations and warranties were made on and as of the
Effective Time and the Company shall have performed and complied in all material
respects with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) Certificate of the Company and Principal Shareholders. Parent
-----------------------------------------------------
shall have been provided with a certificate executed by the Principal
Shareholders and executed on behalf of the Company by its Chief Executive
Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company and
the Principal Shareholders in this Agreement are true and correct in all
material respects; and
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a Material
Adverse Effect.
(d) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in Exhibit C shall have been obtained.
---------
(e) Shareholder Certificate. Each of the Company Shareholders shall
-----------------------
have executed and delivered to Parent a Shareholder Certificate in the form
attached hereto as Exhibit E.
---------
(f) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
results of operations, liabilities (contingent or accrued), financial condition
or prospects of the Company since December 31, 1996.
(g) Company Shareholder Approval. Each of the Company Shareholders
----------------------------
shall have approved this Agreement and the Merger and the transactions
contemplated thereby, and no Company Shareholder shall have exercised, or have
any continuing right to exercise, appraisal, dissenters' or similar rights by
virtue of the Merger.
-41-
6.4 Satisfaction or Waiver of Conditions. Execution and delivery of this
------------------------------------
Agreement on the Closing Date by each party to the Agreement shall be deemed for
all purposes under the Agreement to be a written acknowledgment on the part of
such party that all conditions to the obligations of such party to effect the
Closing have been satisfied or irrevocably waived by such party.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's and
------------------------------------------
the Principal Shareholders' representations and warranties in this Agreement or
in any instrument delivered pursuant hereto shall terminate on the third
anniversary of the Effective Time; provided, however, that the representations
and warranties relating or pertaining to any Tax or Returns related to such Tax
set forth in Section 2.10 hereof or relating to environmental laws or matters
set forth in Section 2.20 hereof, shall survive until ninety (90) days following
the expiration of all applicable statutes of limitations, or extensions thereof,
governing each Tax or Returns related to such Tax or environmental laws or
matters. All of the Parent's and Sub's representations and warranties contained
herein or in any instrument delivered pursuant to this Agreement shall terminate
at the Effective Time.
7.2 Escrow Arrangements; Setoff.
---------------------------
(a) Escrow Fund; Setoff from Purchase Price Adjustments. As partial
---------------------------------------------------
security for the indemnity provided for in Section 7.3 and the Purchase Price
Adjustments provided for in Section 1.10, (i) at the Effective Time, the Company
Shareholders will be deemed to have received and deposited with the Escrow Agent
(as defined in Section 1.6(e)(iii) above) the Escrow Amount (plus any additional
shares that may be issued upon any stock split, stock dividend or
recapitalization effected by Parent after the Effective Time) without any act of
any Company Shareholder. On and after the Effective Time, the Escrow Amount
shall form an escrow fund (the "Escrow Fund") to be governed by the terms set
-----------
forth herein at Parent's cost and expense. The Escrow Agent may execute this
Agreement following the date hereof and prior to the Effective Time, and such
later execution, if so executed after the date hereof, shall not affect the
binding nature of this Agreement as of the date hereof between the other
signatories hereto. The portion of the Escrow Amount contributed on behalf of
each Company Shareholder shall be the pro rata amount calculated pursuant to
Section 1.6(a) of this Agreement. In addition to seeking indemnification under
Section 7.3 from the Escrow Fund and setting off amounts from the Purchase Price
Adjustment, Parent may, in its discretion, seek indemnification for Losses
directly from the Principal Shareholders, but only after first proceeding
against the Escrow Fund so long as it exists and is not subject to other claims.
Parent may not receive any shares from the Escrow Fund (other than as a Purchase
Price Adjustment) unless Officer's Certificates (as defined in subsection (d)
below) identifying losses, the aggregate of which exceed 2% of the Original
Purchase Price, have been delivered to the Shareholder Representative (as
defined below) and the Escrow Agent as provided in paragraph (d) below. The
Company
-42-
Shareholders shall not have any right of contribution from the Company with
respect to any Loss claimed after the Effective Time by Parent or Sub.
(b) Escrow Period; Distribution upon Termination of Escrow Periods.
--------------------------------------------------------------
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Pacific Time, on the date of the first anniversary of the Effective Time (the
"Escrow Period"); provided that the Escrow Period shall not terminate with
-------------
respect to such amount (or some portion thereof) if in the reasonable judgment
of Parent, subject to the objection of the Shareholder Representative and the
subsequent arbitration of the matter in the manner provided in this Section 7.2,
such amount (or some portion thereof) together with the aggregate amount
remaining in the Escrow Fund is necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate delivered to the Escrow Agent prior to
termination of such Escrow Period with respect to facts and circumstances
existing prior to the termination of such Escrow Period. As soon as all such
claims have been resolved, the Escrow Agent shall deliver to the Company
Shareholders the remaining portion of the Escrow Fund not required to satisfy
such claims. Deliveries of Escrow Amounts to the Company Shareholders pursuant
to this Section 7.2(b) shall be made in proportion to their respective original
contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
-------------------------
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and shall
hold and dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity
securities issued or distributed by Parent (including shares issued upon a stock
split) ("New Shares") in respect of Parent Common Stock in the Escrow Fund which
----------
have not been released from the Escrow Fund shall be added to the Escrow Fund
and become a part thereof. New Shares issued in respect of shares of Parent
Common Stock which have been released from the Escrow Fund shall not be added to
the Escrow Fund but shall be distributed to the record holders thereof. Cash
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the record holders thereof.
(iii) Each Company Shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such Company Shareholder (and on any voting securities added to the Escrow Fund
in respect of such shares of Parent Common Stock).
(d) Claims Upon Escrow Fund. Upon receipt by the Escrow Agent at any
-----------------------
time on or before the last day of the Escrow Period of a certificate signed by
any officer of Parent (an "Officer's Certificate"): (A) stating that Parent has
---------------------
paid or accrued Losses, and (B) specifying in reasonable detail the individual
items of Losses included in the amount so stated, the date each such item was
paid or accrued, or the basis for such anticipated liability, and the nature of
the
-43-
misrepresentation, breach of warranty or covenant to which such item is related,
the Escrow Agent shall, subject to the provisions of Section 7.2(e) hereof,
deliver to Parent out of the Escrow Fund, as promptly as practicable, cash or
shares of Parent Common Stock (at the election of Parent) held in the Escrow
Fund in an amount equal to such Losses.
(e) Objections to Claims. At the time of delivery of any Officer's
--------------------
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Shareholder Representative and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent shall
have received written authorization from the Shareholder Representative to make
such delivery. After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of the Escrow Amount from the Escrow Fund in
accordance with Section 7.2(d) hereof, provided that no such payment or delivery
may be made if the Shareholder Representative shall object in a written
statement to the claim made in the Officer's Certificate, and such statement
shall have been delivered to the Escrow Agent prior to the expiration of such
thirty (30) day period.
(f) Indemnification and Setoff Claims. In the event Parent shall have
---------------------------------
incurred any Losses for which Parent wishes to seek indemnification directly
from the Company Shareholders out of the Escrow Fund pursuant to this Section
7.2, Parent shall deliver to the Shareholder Representative an Officer's
Certificate: (A) stating that Parent has paid or accrued Losses and (B)
specifying in reasonable detail the individual items of Losses included in the
amount so stated, the date each such item was paid or accrued, or the basis for
such anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant to which such item is related.
(g) Actions Against Principal Shareholders. In the event that Parent
--------------------------------------
has elected to pursue indemnity directly from the Principal Shareholders, the
Principal Shareholders shall promptly, and in no event later than 30 days after
delivery of the Officer's Certificate, wire transfer to Parent the amount of
such Loss, unless the Company or the Principal Shareholders, as the case may be,
contest such claim by following the procedures set forth in Section 7.2(i).
(h) Valuation of Parent Common Stock. For the purposes of determining
--------------------------------
the number of shares of Parent Common Stock to be delivered to Parent out of the
Escrow Fund as indemnity pursuant to Section 7.3 hereof, the shares of Parent
Common Stock shall be valued at (i) if the Parent's Common Stock shall be
publicly traded, a price equal to the average closing price of the Parent Common
Stock in trading on the relevant stock exchange or quotation system during the
ten business day period ending three days prior to the date of the Officer's
Certificate stating the claim with respect to which such shares are delivered,
and (ii) if the Parents' Common Stock is not so publicly traded, the fair market
value per share as determined by the Parent's board of directors in good faith
on the date closest to the date of the Officer's Certificate.
(i) Resolution of Conflicts; Arbitration.
------------------------------------
(i) In case the Shareholder Representative shall object in
writing to any claim or claims made in any Officer's Certificate within thirty
(30) days after delivery of such
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Officer's Certificate, the Shareholder Representative and Parent shall attempt
in good faith to agree upon the rights of the respective parties with respect to
each of such claims. If the Shareholder Representative and Parent should so
agree, a memorandum setting forth such agreement shall be prepared and signed by
both parties. If any claim against the Escrow Fund was sought, such memorandum
shall be furnished to the Escrow Agent and the Escrow Agent shall be entitled to
rely on any such memorandum and make payment out of the Escrow Fund in
accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation (or in any event after 60 days from the date of the Officer's
Certificate), either Parent or the Shareholder Representative may demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in either such event the matter shall be settled by arbitration conducted by
three arbitrators. Parent and the Shareholder Representative shall each select
one arbitrator, and the two arbitrators so selected shall select a third
arbitrator. The arbitrators shall set a limited time period and establish
procedures designed to reduce the cost and time for discovery while allowing the
parties an opportunity, adequate in the sole judgment of the arbitrators, to
discover relevant information from the opposing parties about the subject matter
of the dispute. The arbitrators shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions, including attorneys'
fees and costs, to the same extent as a court of law or equity, should the
arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement. Notwithstanding anything in
Section 7.2(e) hereof, the Escrow Agent shall be entitled to act in accordance
with such decision and make or withhold payments out of the Escrow Fund in
accordance therewith. Such decision shall be written and shall be supported by
written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa ▇▇▇▇▇ County, California under the rules then in effect of the American
Arbitration Association. The arbitrators shall determine how all expenses
relating to the arbitration shall be paid, including without limitation, the
respective expenses of each party, the fees of each arbitrator and the
administrative fee of the American Arbitration Association.
(j) Third-Party Claims. In the event Parent becomes aware of a third-
------------------
party claim which Parent believes may result in Losses, Parent shall notify the
Shareholder Representative of such claim, and the Shareholder Representative
shall be entitled, at the Company Shareholders' expense, to participate in any
defense of such claim. Parent shall have the right in its sole discretion to
settle any such claim; provided, however, that except with the consent of the
Shareholder Representative, no settlement of any such claim with third-party
claimants shall be determinative of the amount of any claim pursuant to this
Section 7.2. In the event that the Shareholder Representative has consented to
any such settlement, the Company Shareholders shall have no standing to object
under any provision
-45-
of this Section 7.2 to the amount of any claim by Parent against the Escrow Fund
with respect to such settlement.
(k) Shareholder Representative.
--------------------------
(i) In the event that the Merger is approved, effective upon
such vote, and without further act of any shareholder, ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ shall
be appointed as agent and attorney-in-fact (the "Shareholder Representative")
for each Company Shareholder, for and on behalf of the Company Shareholders, to
give and receive notices and communications, to authorize delivery to Parent of
payments from the Escrow Fund in satisfaction of claims by Parent, to object to
such deliveries, to agree to, negotiate, enter into settlements and compromises
of, and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of the Shareholder Representative for the
accomplishment of the foregoing. Such agency may be changed by the shareholders
of the Company from time to time upon not less than thirty (30) days prior
written notice to Parent; provided that the Shareholder Representative may not
be removed unless a majority-in-interest of the Company Shareholders agree to
such removal and to the identity of the substituted agent. No bond shall be
required of the Shareholder Representative, and the Shareholder Representative
shall not receive compensation for services as such. Notices or communications
to or from the Shareholder Representative shall constitute notice to or from
each of the Company Shareholders or their permitted transferees.
(ii) The Shareholder Representative shall not be liable for any
act done or omitted hereunder as Shareholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Company Shareholders
shall severally indemnify the Shareholder Representative and hold him or her
harmless against any loss, liability or expense incurred without negligence or
bad faith on the part of the Shareholder Representative and arising out of or in
connection with the acceptance or administration of the Shareholders
Representative's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Shareholder Representative.
(l) Actions of the Shareholder Representative. A decision, act,
-----------------------------------------
consent or instruction of the Shareholder Representative shall constitute a
decision of all the Company Shareholders and shall be final, binding and
conclusive upon each of such Company Shareholder, and the Escrow Agent and
Parent may rely upon any such decision, act, consent or instruction of the
Shareholder Representative as being the decision, act, consent or instruction of
each and every such Company Shareholder. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the Shareholder
Representative.
(m) Escrow Agent's Duties.
---------------------
(i) The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth herein, and as set
forth in any additional written escrow instructions
-46-
which the Escrow Agent may receive after the date of this Agreement which are
signed by an officer of Parent and the Shareholder Representative, and may rely
and shall be protected in relying or refraining from acting on any instrument
reasonably believed to be genuine and to have been signed or presented by the
proper party or parties. The Escrow Agent shall not be liable for any act done
or omitted hereunder as Escrow Agent while acting in good faith and in the
exercise of reasonable judgment, and any act done or omitted pursuant to the
advice of counsel shall be conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties hereto or by any
other person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree of any court, the Escrow Agent shall not be liable to any of the
parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of
any rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow
Agent shall not be liable to any party for damages, losses, or expenses, except
for gross negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure to
act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith believe
to be genuine, nor will the Escrow Agent be liable or responsible for forgeries,
fraud, impersonations, or determining the scope of any representative authority.
In addition, the Escrow Agent may consult with the legal counsel in connection
with Escrow Agent's duties under this Agreement and shall be fully protected in
any act taken, suffered, or permitted by such Escrow Agent in good faith in
accordance with the advice of counsel. The Escrow Agent is not responsible for
determining and verifying the authority of any person acting or purporting to
act on behalf of any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow Agent
may hold all documents and the Escrow Amount and may wait for settlement of any
such controversy by final appropriate legal proceedings or other means as, in
the Escrow Agent's
-47-
discretion, the Escrow Agent may be required, despite what may be set forth
elsewhere in this Agreement. In such event, the Escrow Agent will not be liable
for damage.
Furthermore, the Escrow Agent may at its option, file an
action of interpleader, in arbitration or otherwise, as the circumstances may
require, requiring the Parties to answer and litigate any claims and rights
among themselves. The Escrow Agent is authorized to deposit with the clerk of
the court all documents and shares of Parent Common Stock held in escrow, except
all cost, expenses, charges and reasonable attorney fees incurred by the Escrow
Agent due to the interpleader action and which the parties jointly and severally
agree to pay. Upon initiating such action, the Escrow Agent shall be fully
released and discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(vii) The parties and their respective successors and assigns
agree jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated costs of
in-house counsel and disbursements that may be imposed on the Escrow Agent or
incurred by the Escrow Agent in connection with the performance of the Escrow
Agent's duties under this Agreement, including but not limited to any litigation
arising from this Agreement or involving its subject matter other than arising
out of its gross negligence or willful misconduct.
(viii) The Escrow Agent may resign at any time upon giving at
least thirty (30) days written notice to the parties to this Agreement;
provided, however, that no such resignation shall become effective until the
appointment of a successor escrow agent which shall be accomplished as follows:
the parties shall use their best efforts to agree on a successor escrow agent
within thirty (30) days after receiving such notice. If Parent and the
Shareholder Representative fail to agree upon a successor escrow agent within
such time, the Escrow Agent shall have the right to appoint a successor escrow
agent authorized to do business in the State of California. The successor escrow
agent shall execute and deliver an instrument accepting such appointment and it
shall, without further acts, be vested with all the estates, properties, rights,
powers, and duties of the predecessor Escrow Agent as if originally named as
Escrow Agent. Thereafter, the Escrow Agent shall be discharged from any further
duties and liability under this Agreement.
(n) Fees. All fees of the Escrow Agent for performance of its duties
----
hereunder shall be paid by Parent in accordance with the standard fee schedule
of the Escrow Agent. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties hereto
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, including allocated costs of in-house counsel, and
expenses occasioned by such default, delay, controversy or litigation. The
Parent promises to pay these sums upon demand.
-48-
7.3 Indemnity.
---------
(a) The Principal Shareholders hereby agree to indemnify and hold
Parent and its subsidiaries, directors, officers and agents harmless against and
in respect of any loss, cost, expense, claim, liability, deficiency, judgment or
damage (hereinafter, individually, a "Loss"; and collectively, "Losses")
---- ------
incurred by Parent, its subsidiaries, officers, directors and agents (i) as a
result of any inaccuracy in or breach of a representation or warranty of the
Company or the Principal Shareholders contained in this Agreement or any failure
by the Company or any Principal Shareholder to perform or comply with any
covenant contained in this Agreement and (ii) by reason of the failure of the
Company and the Principal Shareholders to perform their obligations hereunder.
(b) Parent hereby agrees to indemnify and hold the Company and its
subsidiaries, directors, officers and agents harmless against and in respect of
any Loss incurred by the Company, its subsidiaries, officers, directors and
agents (i) as a result of any inaccuracy in or breach of a representation or
warranty of Parent contained in this Agreement or any failure by Parent to
perform or comply with any covenant contained in this Agreement and (ii) by
reason of the failure of Parent to perform its obligations hereunder.
(c) Expiration of Indemnification. The indemnification obligations
-----------------------------
under this Section 7.3 shall terminate at 5:00 p.m., Pacific Time on the third
anniversary of the Effective Date, but shall not terminate as to any Loss (or a
potential claim by an appropriate party) asserted in good faith prior to such
date; provided, however, that the representations and warranties with respect to
Taxes (Section 2.10) and environmental laws (Section 2.20) shall survive until
the expiration of the applicable statute of limitations, if any.
(d) Procedure for Indemnification. In the event that either party
-----------------------------
shall incur or suffer any Losses in respect of which indemnification may be
sought by such party pursuant to the provisions of this Article, the indemnified
party shall assert a claim for indemnification by written notice (an
"Indemnification Notice") to the Parent, or the Surviving Corporation and the
-----------------------
Shareholder Representative, as the case may be, briefly stating the nature and
basis of such claim. In the case of Losses arising by reason of any third-party
claim, the Indemnification Notice shall be given within 25 days of the filing or
other written assertion of any such claim against Parent, but the failure of
Parent to give the Indemnification Notice within such time period shall not
relieve the Company and the Principal Shareholders of any liability that the
Company and the Principal Shareholders may have to Parent except to the extent
that the Company and the Principal Shareholders are actually prejudiced thereby;
provided, however, that any such notice shall be given no later than the date of
the expiration of the applicable indemnification obligation of the Company and
the Principal Shareholders as set forth in Section 7.3(c) above. The
indemnified party shall provide the other party on request all information and
documentation reasonably necessary to support and verify any Losses which the
indemnified party believes give rise to a claim for indemnification hereunder
and shall give reasonable access to all books, records and personnel in the
possession or under the control of that party which would have bearing on such
claim.
-49-
(e) Arbitration. Any controversy involving a claim by an indemnified
-----------
party pursuant to this Section 7.3 shall be finally settled by arbitration in
Santa ▇▇▇▇▇ County, California in accordance with the then current Commercial
Arbitration Rules of the American Arbitration Association; and judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Such arbitration shall be conducted by an arbitrator chosen by mutual
agreement of Parent and the Company and the Principal Shareholders. Failing
such agreement, the arbitration shall be conducted by three independent
arbitrators, none of whom shall have any competitive interest with Parent or the
Company and the Principal Shareholders. Parent shall choose one such
arbitrator, the Company and the Principal Shareholders shall choose one such
arbitrator, and such two arbitrators shall mutually select a third arbitrator.
Any decision of two such arbitrators shall be binding on Parent and the Company
and the Principal Shareholders. Each party shall pay its own costs and expenses
(including counsel fees) of any such arbitration except that the arbitrator can
compel one party to pay all or a portion of the other party's costs and
expenses.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this Agreement
-----------
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by November 1, 1997; (ii) there shall be a final nonappealable order of
a federal or state court in effect preventing consummation of the Merger; or
(iii) there shall be any statute, rule, regulation or order enacted, promulgated
or issued or deemed applicable to the Merger by any governmental entity that
would make consummation of the Merger illegal;
(c) by Parent or the Company if there shall be any action taken, or
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would: (i) prohibit
Parent's or Sub's ownership or operation of any portion of the business of the
Company or (ii) compel Parent or the Company to dispose of or hold separate all
or a portion of the business or assets of the Sub or Parent as a result of the
Merger;
(d) by Parent if it is not in material breach of its obligations
under this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company or the Principal Shareholders and such breach has not been cured within
ten (10) calendar days after written notice to the Company (provided that, no
cure period shall be required for a breach which by its nature cannot be cured);
(e) by the Company if neither it nor the Principal Shareholders are
in material breach of their respective obligations under this Agreement and
there has been a material breach of
-50-
any representation, warranty, covenant or agreement contained in this Agreement
on the part of Parent or Sub and such breach has not been cured within ten (10)
calendar days after written notice to Parent (provided that, no cure period
shall be required for a breach which by its nature cannot be cured); or
(f) by Parent, Sub, Company, or Principal Shareholders if an event
having a Material Adverse Effect on the Company shall have occurred after the
date of this Agreement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Sub or the Company,
or their respective officers, directors or shareholders, provided that each
party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.4 and 5.5 and
Article IX of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after
---------
the Company Shareholders approve this Agreement, this Agreement may be amended
by the parties hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent
-----------------
and Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
-51-
(a) if to Parent or Sub, to:
USWeb Corporation
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: Chief Financial Officer
Telecopy No.: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to:
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇, Professional Corporation
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇ ▇▇▇▇▇▇, Esq.
Telecopy No.: (▇▇▇) ▇▇▇-▇▇▇▇
(b) if to Company or to a Principal Shareholder to:
Attention:
Telecopy No.:
with a copy to:
▇▇▇▇▇, ▇▇▇▇ & ▇▇▇▇▇
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇▇▇▇
Telecopy No.: (▇▇▇) ▇▇▇-▇▇▇▇
9.2 Interpretation. The words "include," "includes" and "including" when
--------------
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
-52-
9.4 Entire Agreement; Assignment. This Agreement, and Exhibits hereto and
----------------------------
the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided, except that Parent and
Sub may assign their respective rights and delegate their respective obligations
hereunder to their respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforce able, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy. Parent shall be compensated for ordinary
decreases in the calculated value of the Company pursuant to the provisions of
Section 1.10 and may not duplicate its compensation by means of a claimed breach
of a representation, warranty or covenant.
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Santa ▇▇▇▇▇ County, State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
-53-
IN WITNESS WHEREOF, Parent, Sub, the Company and the Principal Shareholders
have caused this Agreement to be signed by their duly authorized respective
officers, all as of the date first written above.
DREAMMEDIA, INC. USWEB CORPORATION
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ By: /s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
-------------------------------- -----------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, President ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief Executive
Officer
ESCROW AGENT USWEB ACQUISITION CORPORATION 111
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇ By: /s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
-------------------------------- -----------------------------------
▇▇▇▇▇ ▇▇▇▇▇, President ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, President
PRINCIPAL SHAREHOLDERS
/s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
--------------------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
-54-
INDEX IF EXHIBITS
EXHIBIT DESCRIPTION
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Exhibit A Principal Shareholders
Exhibit B Valuation Model
Exhibit C Schedule of Exceptions
Exhibit D Option Agreement
Exhibit E Form of Shareholder Certificate
EXHIBIT A
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Principal Shareholders
Name Number of Shares*
---------------------------------- --------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ 1,000
----------------------------
*On an as fully converted to Common Stock, fully diluted basis.
EXHIBIT B
---------
Valuation Model
EXHIBIT C
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Schedule of Exceptions
EXHIBIT D
---------
Form of Option Agreement
EXHIBIT E
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Form of Shareholder Certificate