Page 7 of 7 Pages
EXHIBIT 7.1 -- Agreement and Plan of Reorganization
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AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
ALLOY ONLINE, INC.,
ALLOY ACQUISITION SUB, INC.,
▇▇▇▇▇ MARKETING, INC., AND
SWI HOLDINGS, LLC
Dated as of July 17, 2000
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TABLE OF CONTENTS
ARTICLE I .................................................................... 2
1.1 The Merger ...................................................... 2
1.2 The Effective Time of the Merger ................................ 2
1.3 Effect of Merger ................................................ 2
1.4 Charter and By-Laws of Surviving Corporation .................... 2
1.5 Taking of Necessary Action ...................................... 3
1.6 Tax-Free Reorganization ......................................... 3
1.7 Closing ......................................................... 3
ARTICLE II ................................................................... 3
2.1 Total Consideration; Effect on Capital Stock .................... 3
(a) Capital Stock of Acquisition Sub ....................... 4
(b) Cancellation of Certain Shares of Company Stock ........ 5
(c) Conversion and Exchange Ratio for Company Stock ........ 5
(d) Adjustments for Capital Changes ........................ 8
2.2 Escrow Deposit; Exchange of Certificates ........................ 8
(a) Indemnity Escrow Agreement ............................. 8
(b) Escrow Deposit ......................................... 8
(c) Procedure for Exchange ................................. 9
(d) Fractional Shares ...................................... 9
(e) No Further Ownership Rights in Company Stock ........... 9
(f) No Liability ........................................... 9
(g) Lost, Stolen or Destroyed Company Certificates ......... 9
2.3 Conversion of the Company Employee Options; Other Securities ....10
2.4 Authorization of the Merger, this Agreement, the Certificate of
Merger, the Indemnity Escrow Agreement and the Indemnity Escrow
Agent ...........................................................10
2.5 Transfer Taxes ..................................................10
ARTICLE III .................................................................10
3.1 Representations and Warranties of the Company ...................10
(a) Organization; Good Standing; Qualification and Power ...11
(b) Subsidiaries; Equity Investments .......................11
(c) Capital Stock; Securities ..............................11
(d) Authority ..............................................13
i
(e) Financial Information ..................................14
(f) Absence of Changes .....................................14
(g) Tax Matters ............................................16
(h) Title to Assets; Equipment; Real Property ..............17
(i) Proprietary Assets .....................................18
(j) Licensed Software ......................................19
(k) Contracts, Agreements, Etc .............................19
(l) Compliance with Legal Requirements .....................20
(m) Governmental Authorizations ............................20
(n) Litigation, Etc ........................................20
(o) Accounts and Notes Payable .............................21
(p) Environmental Matters ..................................21
(q) Labor Relations; Employees .............................22
(r) Employee Benefit Plans .................................23
(s) Insurance ..............................................23
(t) Non-Contravention; Consents ............................23
(u) Brokers ................................................24
(v) Customers; Mailing Lists ...............................24
(w) Minute Books ...........................................25
(x) Business Generally .....................................25
(y) Board Approval .........................................26
(z) Vote Required ..........................................26
(aa) Information Supplied ...................................26
(bb) Section 3.1(bb) ........................................26
(cc) Operation of Business ..................................26
(dd) Disclosure .............................................26
3.2 Several Representations and Warranties of the Stockholders ......26
(a) Title; Absence of Certain Agreements ...................26
(b) Organization, Good Standing and Power ..................27
(c) Brokers ................................................28
(d) Accuracy of Representations and Warranties of the
Company ................................................28
(e) Representation by Legal Counsel ........................28
3.3 Representations and Warranties of Parent and Acquisition Sub ....28
ii
(a) Organization; Good Standing; Qualification and Power ...28
(b) Capital Stock ..........................................28
(c) Authority ..............................................29
(d) SEC Documents ..........................................29
ARTICLE IV ...................................................................30
4.1 Related Agreements ..............................................30
(a) Affiliate Agreements ...................................30
(b) Indemnity Escrow Agreement .............................31
(c) SWI Distribution Agreement .............................31
(d) Non-Competition Agreements .............................31
(e) Registration Rights Agreements .........................31
(f) Release Agreements .....................................31
ARTICLE V ....................................................................31
5.1 Access to Records and Properties of Each Party; Confidentiality .32
5.2 Operation of Business of the Company ............................32
5.3 Negotiation With Others .........................................32
5.4 [Omitted] .......................................................33
5.5 Preparation of Filings ..........................................33
5.6 Advice of Changes ...............................................33
5.7 Approval ........................................................33
5.8 Legal Conditions to Merger ......................................34
5.9 Consents ........................................................34
5.10 Efforts to Consummate ...........................................34
5.11 Notice of Prospective Breach ....................................35
5.12 Public Announcements ............................................35
5.13 Support of Merger by Officers and Directors .....................35
5.14 Support of Merger by Stockholder ................................35
5.15 Key Employees ...................................................35
5.16 Financial Statements ............................................35
5.17 Indemnification of Directors and Officers .......................35
5.18 Registration Obligation .........................................36
5.19 Stock Exchange Listing ..........................................36
ARTICLE VI ...................................................................36
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6.1 Conditions to Each Party's Obligations ..........................36
(a) Stockholder Approval; Certificate of Merger ............36
(b) Approvals ..............................................37
(c) Legal Action ...........................................37
(d) Legislation ............................................37
6.2 Conditions to Obligations of Parent and Acquisition Sub .........37
(a) Representations and Warranties of the Company and the
Stockholder ............................................37
(b) Performance of Obligations of the Company and the
Stockholder ............................................37
(c) Authorization of Merger ................................37
(d) Opinion of the Company's Counsel .......................37
(e) Consents and Approvals .................................38
(f) Government Consents, Authorizations, Etc ...............38
(g) Related Agreements .....................................38
(h) Absence of Material Adverse Change .....................38
(i) SWI Distribution .......................................38
(k) Resignation of Directors and Officers ..................38
(l) Company Option Plans ...................................39
(l) Stockholder Members Investment Representation ..........39
(m) Employment Offers ............Error! Bookmark not defined.
(n) Delivery of Closing Financial Certificate ..............39
(o) Employment .............................................39
(p) Additional Documents ...................................39
(q) Term Debt and Notes ....................................40
(r) Profit Sharing Plan ....................................41
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6.3 Conditions to Obligations of the Company ........................41
(a) Representations and Warranties of Parent ...............41
(b) Performance of Obligations of Parent and Acquisition
Sub ....................................................41
(c) Related Agreements .....................................41
(d) Stock Certificates .....................................41
(e) Stockholder Approval ...................................41
(f) Absence of Material Adverse Change .....................41
(g) Loan Amendment .........................................42
(h) Additional Documents ...................................42
(i) CIBC Fee ...............................................42
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ARTICLE VII ..................................................................42
7.1 Certain Information Required by the Code ........................42
7.2 Restriction on Transfer .........................................42
7.3 Confidentiality .................................................44
7.4 Profit Sharing Plan/IRS .........................................45
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ARTICLE VIII .................................................................46
8.1 Definitions .....................................................46
(a) "Affiliate .............................................46
(b) "Event of Indemnification ..............................46
(c) "Indemnified Persons ...................................47
(d) "Indemnifying Persons ..................................47
(e) "Losses ................................................48
8.2 Indemnification Generally .......................................48
8.3 Assertion of Claims .............................................49
8.4 Notice and Defense of Third Party Claims ........................49
8.5 Survival of Representations and Warranties ......................50
8.6 Potential Additional Adjustment .................................50
ARTICLE IX ...................................................................52
9.1 Termination .....................................................52
9.2 Effect of Termination ...........................................53
9.3 Specific Performance ............................................53
ARTICLE X ....................................................................53
10.1 Expenses ........................................................53
10.2 Entire Agreement ................................................53
10.3 Interpretation ..................................................54
10.4 Knowledge Definition ............................................54
10.5 Notices .........................................................54
10.6 Counterparts ....................................................55
10.7 Governing Law ...................................................55
10.8 Benefits of Agreement ...........................................55
10.9 Pronouns ........................................................56
10.10 Amendment, Modification and Waiver ..............................56
10.11 No Third Party Beneficiaries ....................................56
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10.12 Consents ........................................................56
10.13 Interpretation ..................................................56
10.14 No Joint Venture ................................................56
ANNEXES AND SCHEDULES
Company Disclosure Schedule
Schedule 4.1(d) Persons Signing Non-Competition Agreements
Schedule 4.1(g) Persons Signing Release Agreements
Schedule 6.2(n) Closing Financial Certificate
Schedule 6.2(q)(i) Term Debt
Schedule 6.2(q)(ii) Notes
EXHIBITS
Exhibit A Form of Certificate of Merger
Exhibit B Form of Indemnity Escrow Agreement
Exhibit C Form of Lock-Up Agreement
Exhibit D Form of Distributor Agreement
Exhibit E Form of Non-Competition Agreement
Exhibit F Form of Registration Rights Agreement
Exhibit G Form of Release Agreement
Exhibit H Form of Warrant
Exhibit I Form of Opinion of Company Counsel
Exhibit J Form of Certificates
Exhibit K Form of Assignment and Assumption Agreement
Exhibit L Form of Contribution Agreement
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AGREEMENT AND PLAN OF REORGANIZATION dated as of July 17, 2000, among ALLOY
ONLINE, INC., a Delaware corporation ("Parent"), ALLOY ACQUISITION SUB, INC., a
Delaware corporation and wholly-owned subsidiary of Parent ("Acquisition Sub"),
▇▇▇▇▇ MARKETING, INC., a Delaware corporation (the "Company"), and SWI Holdings,
LLC, a Delaware limited liability company and the sole stockholder of the
Company (the "Stockholder").
WHEREAS, the Boards of Directors of each of Parent, Acquisition Sub and the
Company have determined that it is in the best interests of their respective
stockholders for Parent to acquire the Company upon the terms and subject to the
conditions set forth herein;
WHEREAS, in furtherance of such acquisition, the Boards of Directors of each
of Parent, Acquisition Sub and the Company have duly approved and adopted this
Agreement and Plan of Reorganization (this "Agreement"), the Certificate of
Merger in substantially the form of Exhibit A attached hereto (the "Certificate
of Merger") and the proposed merger of Acquisition Sub with and into the Company
in accordance with this Agreement, the Certificate of Merger and the Delaware
General Corporation Law (the "DGCL"), whereby, among other things, immediately
after the distribution by the Company to the Stockholder of all of the issued
and outstanding capital stock of Skateboard World Industries, Inc., a California
corporation ("SWI"), all of the outstanding capital stock of which is owned by
the Company, the issued and outstanding shares of (i) Common Stock, par value
$.01, of the Company (the "Company Common Stock"), (ii) Series A Preferred
Stock, par value $.01, of the Company (the "Series A Preferred Stock"), and
(iii) Series B Preferred Stock, par value $.01, (the "Series B Preferred Stock,"
and together with the Company Common Stock and Series A Preferred Stock, the
"Company Stock"), will be exchanged and converted into shares of common stock,
$.01 par value, of Parent (the "Parent Common Stock") and warrants to purchase
shares of Parent Common Stock, all in the manner set forth in Article II hereof
and in the Certificate of Merger, upon the terms and subject to the conditions
set forth in this Agreement and the Certificate of Merger.
WHEREAS, as a condition to the willingness of, and as an inducement to,
Parent and Acquisition Sub to enter into this Agreement, contemporaneously with
the execution and delivery of this Agreement, the Company, the Stockholder and
certain other parties are entering into or agreeing to enter into the Related
Agreements (as defined herein);
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual benefits to be derived from
this Agreement and the Certificate of Merger and the representations,
warranties, covenants, agreements, conditions and promises contained herein and
therein, the parties hereby agree as follows:
ARTICLE I
GENERAL
1.1 The Merger. In accordance with the provisions of this Agreement, the
Certificate of Merger and the DGCL, Acquisition Sub shall, immediately after the
distribution by the Company to the Stockholder of all of the issued and
outstanding capital stock of SWI (the "SWI Distribution"), be merged with and
into the Company (the "Merger"), which at and after the Effective Time shall be,
and is sometimes herein referred to as, the ("Surviving Corporation.")
Acquisition Sub and the Company are sometimes referred to as the ("Constituent
Corporations.")
1.2 The Effective Time of the Merger. Subject to the provisions of this
Agreement, on the Closing Date, the Certificate of Merger shall be executed and
verified by each of the Constituent Corporations and delivered to and filed with
the Secretary of State of the State of Delaware in the manner provided in the
DGCL. The Merger shall become effective (the "Constituent Corporations") (i)
upon the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware or (ii) at such time thereafter as is provided in the
Certificate of Merger.
1.3 Effect of Merger. At the Effective Time the separate existence of
Acquisition Sub shall cease and Acquisition Sub shall be merged with and into
the Surviving Corporation, and the Surviving Corporation shall succeed, without
other transfer, to all rights and property of each of the Constituent
Corporations and shall be subject to all the debts and liabilities of the
Constituent Corporations in the same manner as if the Surviving Corporation had
itself incurred them, and be subject to all the restrictions, disabilities and
duties of each of the Constituent Corporations as provided in the DGCL.
1.4 Charter and By-Laws of Surviving Corporation. From and after the
Effective Time, (i) the Charter of the Company shall be amended so that Article
IV of the Company's Certificate of Incorporation shall read in its entirety as
follows: "The total number of shares of all classes of stock which the
corporation shall have authority to issue is 100, all of which shall consist of
common stock, $.01 par value per share," and as so amended, shall be the Charter
of the Surviving Corporation, unless and until altered, amended or repealed as
provided in the DGCL, (ii) the by-laws of Acquisition Sub shall be the by-laws
of the Surviving Corporation, unless and until altered, amended or repealed as
provided in the DGCL, the Charter or such by-laws, (iii) the directors of
Acquisition Sub shall be the directors of the Surviving Corporation, unless and
until removed, or until their respective terms of office shall have expired, in
accordance with the DGCL, the Charter and the by-laws of the Surviving
Corporation, as applicable and (iv) the officers of the Acquisition Sub shall be
the officers of the Surviving Corporation, unless and until removed, or until
their terms of office shall have expired, in accordance with the DGCL, the
Charter and the by-laws of the Surviving Corporation, as applicable, except that
the parties currently contemplate that ▇▇▇▇ ▇▇▇▇▇▇▇ will serve as President of
the Surviving Corporation following the Closing.
1.5 Taking of Necessary Action. Prior to the Effective Time, the parties
hereto shall do or cause to be done all such acts and things as may be necessary
or appropriate in order to effectuate the Merger as expeditiously as reasonably
practicable, in accordance with this Agreement, the Certificate of Merger and
the DGCL, including, without limitation, consummating the SWI Distribution.
1.6 Tax-Free Reorganization. For Federal income tax purposes, the parties
intend that the Merger be treated as a tax-free reorganization within the
meaning of Section 368(a) of the Code. Except for cash paid in lieu of
fractional shares and the Warrant, no consideration that could constitute "other
property" within the meaning of Section 356 of the Code is being transferred by
Parent for the Company Stock in the Merger. The parties shall not take a
position on any tax return or take any action inconsistent with this Section 1.6
unless otherwise required by a taxing authority.
1.7 Closing. Unless this Agreement shall have been terminated and the
transactions contemplated by this Agreement abandoned pursuant to the provisions
of Article IX, and subject to the provisions of Article V, the closing of the
Merger (the "Closing") will take place at 10:00 a.m. (Eastern time) on a date
(the "Closing Date") to be mutually agreed upon by the parties, which date shall
be not later than the third Business Day after all the conditions set forth in
Article VI shall have been satisfied (or waived in accordance with Section
10.10, to the extent the same may be waived), unless another date is agreed to
in writing by the parties. The Closing shall take place at the offices of ▇▇▇▇▇▇
Godward LLP, ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇ unless
another place is agreed to in writing by the parties. As used herein, the term
("Business Day") shall mean any day other than a Saturday, Sunday or day on
which banks are permitted to close in the City and State of New York.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Total Consideration; Effect on Capital Stock. The entire consideration
(the "Aggregate Consideration") payable by Parent with respect to all
outstanding shares of Company Stock (the "Outstanding Shares") and for all
options (whether vested or unvested), warrants, rights, calls, commitments or
agreements of any character to which the Company is a party or by which it is
bound calling for the issuance of shares of Company Stock or any securities
convertible into or exercisable or exchangeable for, or representing the right
to purchase or otherwise receive, directly or indirectly, any such capital
stock, or other arrangement to acquire, at any time or under any circumstance,
Company Stock or other capital stock or other securities of the Company (the
"Convertible Securities;" and the Outstanding Shares and the Convertible
Securities being sometimes herein collectively referred to as the ("Fully
Diluted Company Shares") shall be an aggregate of (i) the number of shares of
Parent Common Stock (subject to adjustment as hereinafter provided) (the "Total
Parent Share Amount") as is obtained by dividing (A) $34,550,000 by (B)
$11.05208, which is the average closing price of a share of Parent Common Stock
on the NASDAQ for the thirty (30) most recent trading days ending on June 2,
2000 (the "Stipulated Price") and (ii) a warrant in the form attached hereto as
Exhibit H issued by Parent to purchase additional shares of Parent Common Stock,
at an exercise price of $0.01 per share (the "Warrant"), in an aggregate amount,
if any (the "Total Warrant Share Amount"), equal to the quotient of (a) the
Minimum Value (as defined below) divided by (b) the average closing sale price
of the Parent Common Stock as quoted on the NASDAQ National Market System for
the thirty (30) trading days ending on the first annual anniversary of the
Closing Date, which Warrant shall be exercisable, if at all, only during the
period beginning on the date that is first annual anniversary of the Closing
Date and ending on the date that is fifteen (15) months following the Closing
Date. The Minimum Value shall be determined as follows: On the date that is the
first monthly anniversary date of the Closing Date, and on each subsequent
monthly anniversary date thereafter up to and including the first annual
anniversary date, Parent shall calculate a monthly balance (each, a "Monthly
Balance"), which shall be equal to (a) the average closing sale price of the
Parent Common Stock as quoted on the NASDAQ National Market System for each of
the trading days in such monthly period multiplied by (b) the quotient of (i)
number of Merger Shares (as defined below) issued to the Stockholder on the
Closing Date, divided by (ii) 12, which quotient shall initially be 260,509, and
which quotient shall be increased by 1/12 of the Additional Merger Shares upon
determination of the Final Revised Amount pursuant to Section 8.6 below. The
Parent shall deliver a copy of such calculation to the registered Warrant
holder. Promptly after the first annual anniversary date of the Closing Date,
Parent shall calculate the "Minimum Value," which shall be equal to $21,000,000
less the sum of the twelve (12) Monthly Balances, and shall deliver a copy of
such calculation to the registered Warrant holder; provided, that if the sum of
the Monthly Balances exceeds at the first anniversary of the Closing Date,
$21,000,000, then the Warrant shall be deemed to have expired unexercised and to
have no further force or effect. Notwithstanding anything contained herein to
the contrary, however, if the exercise of all or any portion of the Warrant
would require Parent to obtain the approval of its stockholders prior to issuing
and listing on the primary trading market for the Parent Common Stock the shares
of Parent Common Stock to be issued upon the exercise of such Warrant, Parent
may elect, upon notice to the Warrant holder given at any time prior to the
fifth (5th) Business Day after the first anniversary of the Closing Date, to
redeem all or a portion of the Warrant for a cash amount, equal in the
aggregate, to all or a portion of the Minimum Value, as applicable, provided
that no such redemption would disqualify the Merger from treatment as a tax free
"reorganization" under the Code. Any such redemption shall be consummated in the
manner set forth in the Warrant.
For purposes of the calculation of the exchange ratio for Company Stock
under Section 2.1(c) hereof, it is assumed that the number of Fully Diluted
Company Shares is 12,349,039, which number shall be confirmed or updated at the
Closing and reflected in the certificate of the Chief Executive Officer of the
Company that is being provided to Parent and Acquisition Sub pursuant to Section
6.2(a) (the "Fully Diluted Company Share Amount"). At the Effective Time,
subject and pursuant to the terms and conditions of this Agreement and the
Certificate of Merger, by virtue of the Merger and without any action on the
part of the Constituent Corporations or the holders of the capital stock of the
Constituent Corporations:
(a) Capital Stock of Acquisition Sub. Each issued and outstanding share of
common stock, $.01 par value per share, of Acquisition Sub shall be converted
into one share of common stock, $.01 par value per share, of the Surviving
Corporation.
(b) Cancellation of Certain Shares of Company Stock. Each share of Company
Stock that is (A) owned by the Company as treasury stock, (B) authorized but
unissued, (C) owned by any subsidiary of the Company or (D) owned by Parent or
any subsidiary of Parent, shall be canceled and no Parent Common Stock or other
consideration shall be delivered in exchange therefor. As used herein,
"subsidiary" means any corporation, partnership, joint venture, limited
liability company or other legal entity of which the Company, the Surviving
Corporation, Parent or such other person, as the case may be, (either alone or
through or together with any other subsidiary) owns, directly or indirectly,
more than 50% of the stock or other equity interests the holders of which are
generally entitled to vote for the election of the board of directors or other
governing body of such corporate or other legal entity.
(c) Conversion and Exchange Ratio for Company Stock.
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(i) Definitions:
"Fully Diluted Company Common Share Amount" shall mean the Fully
Diluted Company Share Amount less the number of shares of Series A
Preferred Stock and Series B Preferred Stock issued and
outstanding as of the Effective Time.
"Parent Share Common Amount" shall mean the amount determined by
subtracting the Parent Share Series A Amount and the Parent Share
Series B Amount from the Total Parent Share Amount.
"Parent Share Series A Amount" shall mean the amount determined by
dividing the Series A Liquidating Amount (as defined in the
Company's Charter) by the Stipulated Price.
"Parent Share Series B Amount" shall mean the amount determined by
dividing the Series B Liquidating Amount (as defined in the
Company's Charter) by the Stipulated Price.
"Share Exchange Ratio" shall mean the Common Exchange Ratio, the
Series A Exchange Ratio and the Series B Exchange Ratio.
"Warrant Share Common Amount" shall mean the amount determined by
multiplying the Total Warrant Share Amount by an amount determined
by dividing the Parent Share Common Amount by the Total Parent
Share Amount.
"Warrant Share Series A Amount" shall mean the amount determined
by multiplying the Total Warrant Share Amount by an amount
determined by dividing the Parent Share Series A Amount by the
Total Parent Share Amount.
"Warrant Share Series B Amount" shall mean the amount determined
by multiplying the Total Warrant Share Amount by an amount
determined by dividing the Parent Share Series B Amount by the
Total Parent Share Amount.
(ii) Subject to Section 2.2, each share of Company Common Stock issued
and outstanding at the Effective Time (other than shares canceled
pursuant to Section 2.1(b), if any), including all accrued and
unpaid dividends thereon, shall be exchanged and converted
automatically into the right to receive (1) a fraction (the
"Common Share Exchange Ratio") of a validly issued, fully paid and
non-assessable share of Parent Common Stock, determined by
dividing (i) the Parent Share Common Amount by (ii) the Fully
Diluted Company Common Share Amount and (2) a Warrant to purchase
such number of shares, if any, (the "Common Warrant Exchange
Ratio," and with the Common Share Exchange Ratio, the "Common
Exchange Ratio") of a validly issued, fully paid and
non-assessable share of Parent Common Stock, determined by
dividing (i) the Warrant Share Common Amount by (ii) the Fully
Diluted Company Common Share Amount.
(iii) Subject to Section 2.2, each share of Series A Preferred Stock
issued and outstanding at the Effective Time (other than shares
canceled pursuant to Section 2.1(b), if any), shall be exchanged
and converted automatically into the right to receive (1) a
fraction (the "Series A Share Exchange Ratio") of a validly
issued, fully paid and non-assessable share of Parent Common
Stock, determined by dividing (i) the Parent Share Series A Amount
by (ii) the number of shares of Series A Preferred Stock issued
and outstanding as of the Effective Time and (2) a Warrant to
purchase a fraction (the "Series A Warrant Exchange Ratio," and
with the Common Share Exchange Ratio, the "Series A Exchange
Ratio") of a validly issued, fully paid and non-assessable share
of Parent Common Stock, determined by dividing (i) the Warrant
Share Series A Amount by (ii) the number of shares of Series A
Preferred Stock issued and outstanding as of the Effective Time.
(iv) Subject to Section 2.2, each share of Series B Preferred Stock
issued and outstanding at the Effective Time (other than shares
canceled pursuant to Section 2.1(b), if any), shall be exchanged
and converted automatically into the right to receive (1) a
fraction (the "Series B Share Exchange Ratio") of a validly
issued, fully paid and non-assessable share of Parent Common
Stock, determined by dividing (i) the Parent Share Series B Amount
by (ii) the number of shares of Series B Preferred Stock issued
and outstanding as of the Effective Time and (2) a Warrant to
purchase a fraction (the "Series B Warrant Exchange Ratio," and
with the Common Share Exchange Ratio, the "Series B Exchange
Ratio") of a validly issued, fully paid and non-assessable share
of Parent Common Stock, determined by dividing (i) the Warrant
Share Series B Amount by (ii) the
number of shares of Series B Preferred Stock issued and
outstanding as of the Effective Time.
(v) As of the Effective Time, all shares of Company Stock shall no
longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate
representing any such shares shall cease to have any rights with
respect thereto, except the right to receive Parent Common Stock,
Warrants and any cash in lieu of fractional shares of Parent
Common Stock to be issued or paid in consideration therefore upon
surrender of such certificate in accordance with Section 2.2
hereof.
(vi) The shares of Parent Common Stock to be issued upon the exchange
and conversion of Company Stock in accordance with this Section
2.1(c) shall sometimes be hereinafter collectively referred to as
the "Merger Shares," and together with the Warrant to be issued
upon the exchange and conversion of Company Stock in accordance
with this Section 2.1(c) shall sometimes be hereinafter
collectively referred to as the "Merger Consideration." The
parties acknowledge that the Merger Consideration is based upon
presumed Net Working Capital amount of the Company at Closing
equal to $1,771,000 ("Presumed Company Net Working Capital"),
which is the amount of Net Working Capital (as defined below)
shown on Phase Three's February 29, 2000 audited financial
statement (exclusive of any and all liabilities arising out of or
in connection with the SWI Distribution (the "SWI Distribution
Liability"). Notwithstanding the foregoing, if on the Closing
Date, the Estimated Company Net Working Capital (as defined in
Section 6.2 below) is:
(A) less than the Presumed Company Net Working Capital, then
the amount of the Term Debt to be assumed by SWI in
connection with the SWI Distribution shall be increased by
an amount equal to the Working Capital Difference (as
defined below), and, if the amount of the Retained Debt is
less than the Working Capital Difference, then the Total
Parent Share Amount shall be reduced by an amount equal to
the Negative Net Working Capital Adjustment Factor (as
defined below). The Merger Consideration shall be reduced as
set forth above, if applicable, by the reduction in the
Total Parent Share Amount.
(B) more than the Presumed Company Net Working Capital, then
the Total Parent Share Amount shall be increased by an
amount equal to the Positive Net Working Capital Factor (as
defined below). The Merger Consideration shall be increased
as set forth above, if applicable, by the increase in the
Total Parent Share Amount. The additional number of shares
of Parent Common Stock required to increase the Merger
Consideration as set forth above, if applicable, shall be
referred to as the "Additional
Merger Shares". If applicable, Parent shall cause to be
deposited with the Indemnity Escrow Agent (as defined in
Sections 2.2(a) below) a certificate representing the
Additional Merger Shares.
(C) "Net Working Capital" shall mean current assets (w) less
current liabilities, not including cash overdraft and income
taxes payable - due to Parent. "Working Capital Difference"
shall mean the difference, if any, between the Presumed
Company Net Working Capital and the Estimated Company Net
Working Capital. If the Working Capital Difference is
negative, then "Negative Net Working Capital Adjustment
Factor" shall mean the nearest whole number obtained by
dividing (y) the difference between the Working Capital
Difference and the amount of the Retained Debt (as defined
in Section 6.2(q)(i) below) by (z) the Stipulated Price. If
the Working Capital Difference is positive then "Positive
Net Working Capital Adjustment Factor" shall mean the
nearest whole number obtained by dividing the Working
Capital Difference by the Stipulated Price.
(d) Adjustments for Capital Changes. If, prior to the Effective Time, Parent
or the Company recapitalizes through a subdivision of its outstanding shares
into a greater number of shares, or a combination of its outstanding shares into
a lesser number of shares, or reorganizes, reclassifies or otherwise changes its
outstanding shares into the same or a different number of shares or other
classes, or declares a dividend on its outstanding shares payable in shares of
its capital stock or securities convertible into shares of its capital stock,
then the Exchange Ratio will be adjusted appropriately so as to maintain the
relative proportionate interests of the holders of shares of Company Stock and
the holders of shares of Parent Common Stock.
2.2 Escrow Deposit; Exchange of Certificates.
(a) Indemnity Escrow Agreement. At the Closing, the parties shall enter into
an escrow agreement to be dated as of the Effective Time among the Stockholder,
Parent and a mutually agreeable escrow agent (the "Indemnity Escrow Agent")
substantially in the form of Exhibit B hereto (the "Indemnity Escrow
Agreement"), pursuant to which, among other things the Stockholder, in
accordance with the terms of this Agreement, shall secure its indemnification
obligations pursuant to Article VIII hereof.
(b) Escrow Deposit. Upon receipt by Parent at or after the Effective Time
from the stockholder of Company Certificate(s), together with the items referred
to in Sections 2.2(c)(ii) and (iii) below with respect thereto, Parent shall
cause to be deposited with the Indemnity Escrow Agent certificates and the
Stockholder, by its execution and delivery of this Agreement and/or its approval
of the Merger, hereby authorizes and directs Parent to make such deposit on its
behalf, representing, (i) initially 403,090 shares of Parent Common Stock, as
such amount may be adjusted pursuant to Section 4(b) of the Escrow Agreement,
which shall be equal to the sum of (A) ten percent (10%) of the aggregate number
of Merger Shares being issued in the Merger, as such number may be adjusted
pursuant to Section 8.6 hereof, and (B) 90,481 shares
of Parent Common Stock, the number of shares of Parent Common Stock that could
be purchased for $1,000,000 at the Stipulated Price (collectively, the
"Indemnity Escrow Shares"), and (ii) the Additional Merger Shares, if
applicable. All calculations to determine the number of Merger Shares to be
delivered into escrow as aforesaid shall be rounded up to the nearest whole
share.
(c) Procedure for Exchange. Following the Effective Time, Parent shall
deliver to the Stockholder in exchange for a certificate or certificates which
immediately prior to the Effective Time represented all of the issued and
outstanding shares of Company Stock (each, a "Company Certificate") (1) a
certificate (the "Parent Certificate") representing that number of Merger Shares
that the Stockholder has the right to receive pursuant to Section 2.1 with
respect to such Company Certificates, less the Indemnity Escrow Shares and the
additional Merger Shares, if applicable, and (2) the Warrant, after receipt by
Parent of (i) such Company Certificates for cancellation, together with such
other documents as may be reasonably required by Parent, and the Company
Certificates so surrendered shall forthwith be cancelled. Until surrendered as
contemplated by this Section 2.2, each Company Certificate shall be deemed, on
and after the Effective Time, to represent only the right to receive upon such
surrender, Parent Certificates representing Merger Shares (subject to all escrow
requirements contained in this Agreement) and a portion of the Warrant as
contemplated by Section 2.1(c), without interest. All Indemnity Escrow Shares
shall be held by, and distributed in accordance with, the terms and provisions
of the Indemnity Escrow Agreement.
(d) Fractional Shares. No fractional shares of Parent Common Stock shall be
issued in connection with the Merger. Any fractional interests will be
aggregated so that the total number of Merger Shares the Stockholder receives
will be rounded to the nearest whole number of shares of Parent Common Stock.
(e) No Further Ownership Rights in Company Stock. All Merger Shares issued
upon the surrender for exchange of shares of Company Stock in accordance with
the terms of this Article II shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Company Stock. If, after
the Effective Time, any Company Certificate is presented to the Surviving
Corporation, such Company Certificate shall be canceled and exchanged as
provided in this Article II.
(f) No Liability. Neither Parent, Acquisition Sub nor the Company shall be
liable to any holder of shares of Company Stock or Parent Common Stock, as the
case may be, for Merger Shares (or dividends or distributions with respect
thereto) to be issued in exchange for Company Stock pursuant to this Section
2.2, if, on or after the expiration of six months following the Effective Time,
such shares are delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(g) Lost, Stolen or Destroyed Company Certificates. If any Company
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit to that effect by the Stockholder and the posting by such person of a
bond in such amount as Parent may reasonably direct as indemnity against any
claim that may be made against it with respect to such Company Certificate,
Parent will issue in exchange for such lost, stolen or destroyed Company
Certificate
the Merger Shares and cash in lieu of fractional shares deliverable in respect
thereof pursuant to this Agreement.
2.3 Conversion of the Company Employee Options; Other Securities.
------------------------------------------------------------
(a) At the Effective Time, each of Phase Three, Inc., a California
corporation ("Phase Three"), and the Company's then outstanding employee and
consultant stock options (collectively, the "Company Options") shall be
exercised in full, and if not exercised shall be terminated as of the Effective
Time (including the incentive stock options and non-qualified options issued
under the Company's 1999 Equity Incentive Plan (the "Company Option Plan").
(b) The Company shall promptly take all actions necessary to ensure that
following the Effective Time no holder of the Company Options or rights pursuant
to, nor any participant in, the Company Option Plan or any other plan, program
or arrangement providing for the issuance or grant of any interest in respect of
the capital stock of the Company and any subsidiary of the Company will have any
right thereunder to acquire equity securities, or any right to payment in
respect of the equity securities, of the Company, any such subsidiary or the
Surviving Corporation.
2.4 Authorization of the Merger, this Agreement, the Certificate of Merger,
the Indemnity Escrow Agreement and the Indemnity Escrow Agent. The approval of
the Merger by the Stockholder, as required by the DGCL and as contemplated by
this Agreement, shall constitute approval and ratification by the Stockholder of
the (i) Merger, as required by the DGCL, (ii) provisions of this Agreement and
the Certificate of Merger and (iii) designation of the Indemnity Escrow Agent
and the approval and ratification by the Stockholder of the terms and provisions
of the Indemnity Escrow Agreement.
2.5 Transfer Taxes. Any transfer taxes, stamp duties, transfer fees,
registration fees, recordation expenses, escrow fees or other similar taxes,
fees, charges or expenses ("Transfer Taxes", incurred by Company, Parent,
Acquisition Sub, or any other party in connection with the transfer of the
Company shares to Acquisition Sub or in connection with any of the other
transactions contemplated by this Agreement shall be borne and paid exclusively
by Parent, except for the SWI Distribution Liability, if any.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. The Company represents
and warrants to Parent and Acquisition Sub that, except as disclosed in the
disclosure schedule dated the date hereof, certified by the Chief Executive
Officer of the Company and delivered by the Company to Parent and Acquisition
Sub simultaneously herewith (the "Company Disclosure Schedule"):
(a) Organization; Good Standing; Qualification and Power. The Company (i) is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, (ii) has all requisite corporate power and
authority to own, lease and operate its properties and assets and to carry on
its business as now being conducted, to enter into this Agreement, the Agreement
of Merger and the Related Agreements (as defined below) to which the Company is
a party, to perform its obligations hereunder and thereunder, and to consummate
the transactions contemplated hereby and thereby and (iii) is qualified and in
good standing to do business as a foreign corporation and is in good standing
under the laws of the jurisdictions where the failure to be so qualified and in
good standing likely would have a material adverse effect on the business,
financial condition or results of operations of the Company, taken as a whole (a
"Company Material Adverse Effect"). The Company has delivered to Parent true and
complete copies of the Charter and by-laws of the Company, in each case as
amended to the date hereof. As used herein, "Charter" shall mean, with respect
to any corporation, those instruments that at the time constitute its corporate
charter as filed or recorded under the general corporation law of the
jurisdiction of its incorporation, including the articles or certificate of
incorporation or organization, and any amendments thereto, as the same may have
been restated, and any amendments thereto (including any articles or
certificates of merger or consolidation, certificate of correction or
certificates of designation or similar instruments which effect any such
amendment) which became effective after the most recent such restatement.
(b) Subsidiaries; Equity Investments. Each of Phase Three and SWI (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California, (ii) has all requisite corporate power and authority
to own, lease and operate its properties and assets and to carry on its business
as now being conducted, and (iii) is qualified and in good standing to do
business as a foreign corporation and is in good standing under the laws of the
jurisdictions where the failure to be so qualified and in good standing likely
would have a Company Material Adverse Effect or, with respect to Phase Three, a
material adverse effect on the business, financial condition or results of
operations of Phase Three (a "Phase Three Material Adverse Effect"). The Company
has delivered to Parent true and complete copies of the Charter and by-laws of
each of Phase Three and SWI in each case as amended to the date hereof. The
Company owns all of the issued and outstanding capital stock of Phase Three.
Except for Phase Three and SWI and as disclosed in Section 3.1(b) of the Company
Disclosure Schedule, the Company has never had, nor does it currently have, any
subsidiaries, nor has it ever owned, nor does it currently own, any capital
stock or other proprietary interest, directly or indirectly, in any corporation,
association, trust, partnership, joint venture or other entity. Except for the
Company Options and the Company Warrants, there are no options, warrants,
rights, calls, commitments or agreements of any character to which the Company,
Phase Three or SWI is a party or by which any of them is bound calling for the
issuance of shares of capital stock of the Company, Phase Three or SWI or any
securities convertible into or exercisable or exchangeable for, or representing
the right to purchase or otherwise receive, any such capital stock, or other
arrangement to acquire, at any time or under any circumstance, capital stock of
the Company, Phase Three or SWI or any such other securities.
(c) Capital Stock; Securities.
(i) The authorized capital stock of the Company consists of (A)
25,000,000 shares of Company Common Stock, of which 12,173,999
shares are issued and outstanding, (B) 89,040 shares of Series A
Preferred Stock, of which 89,040 shares are issued and outstanding,
and (C) 86,000 shares of Series B Preferred Stock, of which 86,000
shares are issued and outstanding. The Company has reserved (A)
1,253,427 shares of Company Common Stock for issuance upon the
exercise of Company Options, (B) no shares of Company Common Stock
for issuance upon conversion of the Series A Preferred Stock, and
(C) no shares of Company Common Stock for issuance upon conversion
of the Series B Preferred Stock. Each share of Series A Preferred
Stock is not convertible into Company Common Stock. Each share of
Series B Preferred Stock is not convertible into Company Common
Stock. All outstanding shares of Company Stock are duly authorized,
validly issued and outstanding, fully paid and non-assessable and
not subject to preemptive rights created by statute, the Charter or
by-laws of the Company or any agreement to which the Company is a
party or by which it is bound. Section 3.1(c) of the Company
Disclosure Schedule sets forth a true and complete list of the
holders of record shares of Company Stock and the number of such
shares owned of record and beneficially by each such holder.
Section 3.1(c) of the Company Disclosure Schedule sets forth a true
and complete list of the Company Options, outstanding as of the
date hereof, including the name of each holder thereof, the number
of shares of Company Common Stock subject to each such Company
Option, the per share exercise price for each such Company Option,
the grant date of each such Company Option and whether each such
Company Option was intended at the time of issuance to be an
incentive stock option or a non-qualified stock option. All
outstanding shares of Company Common Stock and Company Preferred
Stock and all outstanding Company Options were issued in compliance
with applicable federal and state securities laws. An updated
Schedule 3.1(c) reflecting changes permitted by this Agreement in
the capitalization of Company between the date hereof and the
Effective Time shall be delivered by Company to Parent on the
Closing Date. The holders of the Company Stock, Company Options
have been or will be properly given, or shall have properly waived,
any required notice prior to the Merger, and all rights under the
Company Options and Company Warrants will be terminated at or prior
to the Effective Time.
(ii) The authorized capital stock of Phase Three consists of 1000 shares
of common stock, $.01 par value per share of which 1000 shares are
issued and outstanding and all of which are owned by the Company.
There are no outstanding options, rights or warrants to purchase
any capital stock of Phase Three. All outstanding shares of Phase
Three common stock are duly authorized, validly issued and
outstanding, fully paid and non-assessable and not subject to
preemptive rights created by statute, the Charter or by-laws of
Phase Three or any agreement to which the
Company or Phase Three is a party or by which it is bound. All
outstanding shares of Phase Three common stock were issued in
compliance with applicable federal and state securities laws.
(iii)The authorized capital stock of SWI consists of 100 shares of
common stock, $.01 par value per share of which 1 share is issued
and outstanding and is owned by the Company. There are no
outstanding options, rights or warrants to purchase any capital
stock of SWI. The outstanding share of SWI common stock is duly
authorized, validly issued and outstanding, fully paid and
non-assessable and not subject to preemptive rights created by
statute, the Charter or by-laws of SWI or any agreement to which
the Company or SWI is a party or by which it is bound. The
outstanding share of SWI stock was issued in compliance with
applicable federal and state securities laws.
(iv) Except as set forth in this Section 3.1(c), there is no:(i)
outstanding subscription, option, call, warrant or right to acquire
any shares of the capital stock or other securities of the Company,
Phase Three or SWI; (ii) outstanding security, instrument or
obligation that is or will become convertible into or exchangeable
for any shares of the capital stock or other securities of the
Company, Phase Three or SWI; or (iii) written or oral contract,
subcontract, lease, instrument, note, option, purchase order,
license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature (a "Contract")
under which the Company, Phase Three or SWI is or will become
obligated to sell or otherwise issue any shares of its capital
stock or any other securities.
(v) All Company Options have been issued in accordance with the terms
of the Company Option plans and pursuant to the standard forms of
option agreement previously provided to Parent or its
representatives. No other contracts related to the Company Options
and no provisions or material terms exist with respect to the
Company Options other than those set forth in the Company Option
plan and the Company Option agreements with the Company Option
holders as identified on Schedule 3.1(c).
(d) Authority. The execution, delivery and performance by the Company of
this Agreement, the Agreement of Merger and the Related Agreements to which it
is a party and the consummation of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary corporate action
on the part of the Company; and this Agreement and the Related Agreements to
which it is a party have been, and the Agreement of Merger when executed and
delivered by the Company will be, duly and validly executed and delivered by the
Company, and this Agreement, the Agreement of Merger and the Related Agreements
to which it is a party are the valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
(e) Financial Information.
(i) The Company has previously delivered to Parent the following
financial statements (collectively, the "Company Financial
Statements"):
(A) the unaudited consolidated and consolidating balance sheet of the
Company as at May 31, 2000 (the "Company Interim Balance Sheet")
and the related statements of income for the three-month period
then ended, prepared by the Company (the "Company Interim Financial
Statements"); and
(B) draft audited consolidated and consolidating balance sheet of the
Company as at February 29, 2000 (the "Company Balance Sheet"; and
the date thereof being the "Company Balance Sheet Date"), and the
related audited statements of income, cash flow and shareholders'
equity for the year then ended (including complete footnotes
thereto), certified by Ernst & Young LLP, the Company's independent
public accountants (the "Company Accountants"), and accompanied by
a copy of such auditor's report.
(ii) The Company Financial Statements (A) are in accordance with the
books and records of the Company, (B) fairly present the
consolidated financial condition of the Company, Phase Three and
SWI as at the respective dates indicated and the results of
operations of the Company, Phase Three and SWI for the respective
periods indicated and (C), except as set forth on Schedule
3.1(e)(ii) have been prepared in accordance with generally accepted
accounting principles consistently applied ("GAAP"), except as
indicated therein and, in the case of the Company Interim Financial
Statements, for the absence of complete footnote disclosure as
required by GAAP and subject, in the case of the Company Interim
Financial Statements, to changes resulting from normal year-end
audit adjustments, which adjustments shall not in any event result
in a material adverse change to any item of revenue or expense.
(f) Absence of Changes. Except as disclosed in Section 3.1(f) of the Company
Disclosure Schedule, between the Company Balance Sheet Date and the date of this
Agreement, each the Company, Phase Three and SWI has been operating in the
ordinary course and has not:
(i) sold or transferred any material portion of its assets or any
material portion of the interests in such portion, except in the
ordinary course of business (except that no representation is made
as to SWI);
(ii) incurred any damage, destruction or loss, (whether or not covered
by insurance) having or which could have a Company Material Adverse
Effect or a Phase Three Material Adverse Effect;
(iii)declared, set aside or paid any dividend or other distribution of
assets with respect to any shares of capital stock of the Company,
Phase Three or SWI or, directly or indirectly, redeemed, purchased
or otherwise acquired any such shares of the Company or Phase
Three;
(iv) made any material change in the nature of its business or
operations;
(v) entered into any material transaction except in the ordinary course
of business (except that no representation is made as to SWI);
(vi) incurred any liabilities other than in the ordinary course of
business (except that no representation is made as to SWI);
(vii)terminated or indicated any intention to not renew any material
Contract (as defined herein) between the Company and/or Phase Three
and any other person, except in the ordinary course of business;
(viii) terminated the employment of any officer or key employee of the
Company or Phase Three or became aware of the express intent by any
officer or key employee of the Company or Phase Three to resign or
terminate employment;
(ix) learned of any labor dispute or union organizing campaign against
the Company or Phase Three;
(x) commenced any litigation or other action, or learned of any
commencement of litigation or other action against the Company,
Phase Three or SWI which may result in any liability against the
Company or Phase Three;
(xi) amended or modified the Company's or Phase Three's Charter or
by-laws;
(xii)effected any increase in or modification of compensation payable
or to become payable to (A) any director or officer of the Company
or Phase Three or (B) any employee of the Company, or Phase Three
other than in the ordinary course of business, or the entering into
of any employment contract with any officer or employee;
(xiii) effected any increase in or modification or acceleration of any
benefits payable or to become payable under any bonus, pension,
severance, insurance or other benefit plan, payment or arrangement
(including, but not limited to, the granting of stock options,
restricted stock awards or stock appreciation rights) made to, for
or with any director, officer, employee, consultant or agent of the
Company or Phase Three; or
(xiv)suffered any adverse change with respect to its business or
financial condition which has had or likely will have a Company
Material Adverse Effect, or a Phase Three Material Adverse Effect.
(g) Tax Matters. The Company, Phase Three and SWI and each other corporation
(if any) included in any consolidated or combined tax return in which the
Company has been included (i) have filed and will file, in a timely and proper
manner, consistent with applicable laws, all Federal, state and local Tax
returns and Tax reports required to be filed by them through the Closing Date
(the "Company Returns") with the appropriate governmental agencies in all
jurisdictions in which Company Returns are required to be filed and have timely
paid or will timely pay all amounts shown thereon to be due; (ii) pay all Taxes
of the Company (or such other corporation) required to have been paid by the
Company (or such other corporation) on or before the Closing Date; and (iii)
currently are not the beneficiary of an extension of time within which to file
any Tax return or Tax report. All such Company Returns were and will be correct
and complete in all material respects at the time of filing. All Taxes of the
Company, Phase Three and SWI attributable to all taxable periods ending on or
before the dates of the Audited Balance Sheet and the Company Interim Balance
Sheet, respectively, to the extent not required to have been previously paid,
have been adequately provided for on the Company Balance Sheet and the Company
Interim Balance Sheet (as appropriate) and the Company, Phase Three and SWI will
not accrue any Tax liability from the date of the Company Balance Sheet up to
and including the Closing Date, other than a Tax liability accrued in the
ordinary course of business and any Tax liability incurred in connection with
the SWI Distribution. Except as set forth on Section 3.1(g) of the Company
Disclosure Schedule, neither the Company, Phase Three nor SWI has been notified
in writing by the Internal Revenue Service or any state, local or foreign taxing
authority that any issues have been raised (and are currently pending) in
connection with any Company Return, and no waivers of statutes of limitations
have been given with respect to the Company, Phase Three or SWI that are still
in effect. Except as contested in good faith and disclosed in Section 3.1(g) of
the Company Disclosure Schedule, any deficiencies asserted or assessments
(including interest and penalties) made as a result of any examination by the
Internal Revenue Service or by any other taxing authorities of any Company
Return have been fully paid or are adequately provided for on the Company
Balance Sheet and the Company Interim Balance Sheet (as appropriate) and neither
the Company, Phase Three nor SWI has received notification that any proposed
additional Taxes have been asserted. Neither the Company, Phase Three nor SWI
(i) has made an election to be treated as a "consenting corporation" under
Section 341(f) of the Code, (ii) is a "personal holding company" within the
meaning of Section 542 of the Code and (iii) has been a United States real
property holding corporation within the meaning of Section 897(c) of the Code
during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
Neither the Company, Phase Three nor SWI has agreed to, nor is it required to,
make any adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise. Neither the Company, Phase Three nor SWI will
incur a Tax Liability resulting from the Company, Phase Three or SWI ceasing to
be a member of a consolidated or combined group that had previously filed
consolidated, combined or unitary Tax returns. Each granted option that was
designated as an "incentive stock option" on the applicable books and records of
the Company qualified as an "incentive stock option" within the meaning of the
Section 422 of the Code on the date in which such option was granted.
As used in this Agreement, "Tax" means any of the Taxes and "Taxes" means,
with respect to any entity, (A) all income taxes (including any tax on or based
upon net income, gross income, income as specially defined, earnings, profits or
selected items of income, earnings or profits) and all gross receipts, sales,
use, ad valorem, transfer, franchise, license, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, property or windfall profits
taxes, alternative or add-on minimum taxes, customs duties and other taxes,
fees, assessments or charges of any kind whatsoever, together with all interest
and penalties, additions to tax and other additional amounts imposed by any
taxing authority (domestic or foreign) on such entity and (B) any liability for
the payment of any amount of the type described in the immediately preceding
clause (A) as a result of being a "transferee" (within the meaning of Section
6901 of the Code or any other applicable law) of another entity or a member of
an affiliated or combined group.
(h) Title to Assets; Equipment; Real Property.
(i) Each of the Company and Phase Three owns, and has good, valid and
marketable title to the assets purported to be owned by them and
which are material to the Company or Phase Three or to the conduct
of their business in a manner substantially similar to business
operations or each as of the date of this Agreement. Except as set
forth in 3.1(h) of the Company Disclosure Schedule, such assets are
owned by the Company or Phase Three free and clear of any
Encumbrances, except for (x) any lien for current taxes not yet due
and payable and (y) liens that have arisen in the ordinary course
of business and that do not materially detract from the value of
the assets subject thereto or materially impair the operations of
the Company or Phase Three. The material items of equipment and
other tangible assets owned by or leased to the Company are
adequate for the uses to which they are being put and are in good
condition and repair (ordinary wear and tear excepted). The assets,
properties and interests in properties of the Company to be owned,
leased or licensed by the Surviving Corporation at the Effective
Time shall include all assets, properties and interests in
properties (real, personal and mixed, tangible and intangible) and
all rights, leases, licenses and other agreements necessary to
enable the Surviving Corporation to carry on the business of the
Company as presently conducted by the Company. The assets,
properties and interests in properties of Phase Three to be owned,
leased or licensed by Phase Three at the Effective Time shall
include all assets, properties and interests in properties (real,
personal and mixed, tangible and intangible) and all rights,
leases, licenses and other agreements necessary to enable Phase
Three to carry on the business of Phase Three as presently
conducted. The SWI Distribution will not result in the distribution
of any material assets of either the Company or Phase Three
necessary for each to conduct its business after the Effective Time
as presently conducted.
(ii) Neither the Company nor Phase Three owns any real property or any
material interest in real property, except for the leaseholds
created under the real property leases (the "Leases") included in
Part 3.1(h) of the Company Disclosure Schedule (the "Leased Real
Property"). The Company has provided true and complete copies of
each Lease to Parent Each of the Leases are in full force and
effect and constitute valid and binding obligations of the Company
or Phase Three, as applicable. The Company has made available to
Parent true and complete copies of all Leases. Except as set forth
in Section 3.1(h) of the Company Disclosure Schedule, all
improvements included in the Leased Real Property are in good
operating condition and repair in all material respects (ordinary
wear and tear excepted) and there does not exist any condition
which interferes with the economic value or use of such property
and improvements. As used herein, the term "Encumbrances" shall
mean and include any lien, pledge, hypothecation, charge, mortgage,
security interest, easement or other encumbrance or cloud on title.
(i) Proprietary Assets.
(i) The Company and Phase Three each have a valid right to use and
exploit the Company Proprietary Assets and Phase Three Propriety
Assets. Except as set forth in Section 3.1(i) of the Company
Disclosure Schedule, neither the Company nor Phase Three has
developed jointly with any other Person any Company Proprietary
Assets or Phase Three Proprietary Assets with respect to which such
other Person has any rights. Except as set forth in Part 3.1(i) of
the Company Disclosure Schedule, as of the date of this Agreement,
there is no Company Contract pursuant to which any Person has any
right (whether or not currently exercisable) to use, license or
otherwise exploit any Company Proprietary Assets or Phase Three
Proprietary Assets. Set forth in Section 3.1(i) of the Company
Disclosure Schedule is a true and complete list of all URLs,
Trademarks and other Intellectual Property or rights thereto which
are owned by either the Company or Phase Three.
(ii) The Company and Phase Three has taken reasonable measures and
precautions to protect and maintain the confidentiality, secrecy
and value of the Company and Phase Three Proprietary Assets (except
Company and Phase Three Proprietary Assets whose value would be
unimpaired by public disclosure).
(iii)To the knowledge of the Company: (i) all patents, trademarks,
service marks and copyrights that are registered with any
governmental body and held by the Company or Phase Three are valid
and subsisting; (ii) none of the Company or Phase Three Proprietary
Assets infringes any Proprietary Asset owned or used by any other
Person.
(iv) Neither the Company nor Phase Three has (i) licensed any of the
Company or Phase Three Proprietary Assets to any Person on an
exclusive basis, or (ii) entered into any covenant not to compete
or Contract limiting its ability to exploit fully any material
Company or Phase Three Proprietary Assets.
(v) Section 3.1(i) of the Company Disclosure Schedule sets forth, for
the Proprietary Assets owned by the Company or Phase Three, a
complete and accurate list of all United States and foreign (a)
patents; (b) trademarks (including Internet domain registrations
and unregistered Trademarks); (c) copyrights (including
unregistered copyrights); (d) tradenames or servicemarks; and (e)
computer software.
(vi) As used herein, the term "Proprietary Asset" shall mean any patent,
patent application, trademark (whether registered or unregistered),
trademark application, trade name, fictitious business name,
service ▇▇▇▇ (whether registered or unregistered), service ▇▇▇▇
application, copyright (whether registered or unregistered),
copyright application, maskwork, maskwork application, trade
secret, know-how, computer software, computer program, source code,
algorithm, invention, proprietary product, technology, proprietary
right or other intellectual property right or intangible asset.
(j) Licensed Software.
(i) Section 3.1(j) of the Company Disclosure Schedule sets forth a true
and complete list of all material software programs and
applications licensed by the Company or Phase Three from any third
party (the "Licensed Software") used by the Company or Phase Three
in the operation of its business.
(ii) The Licensed Software is validly held and used by the Company
and/or Phase Three, as applicable and may be used by the Company
and/or Phase Three pursuant to the applicable license agreement
with respect thereto without the consent of or notice to any third
party.
(k) Contracts, Agreements, Etc.
(i) Section 3.1(k) identifies each Contract in which any of the Company
or Phase Three is a party, except for any Excluded Contract.
(ii) The Company has furnished to Parent true and complete copies of all
Contracts listed in Section 3.1(k) of the Company Disclosure
Schedule and (x) each such Contract (A) is the legal, valid and
binding obligation of the Company and/or Phase Three, as
applicable, and, to the best knowledge of the Company, the legal,
valid and binding obligation of each
other party thereto, in each case enforceable in accordance with
its terms subject to (i) laws of general application relating to
bankruptcy, insolvency and the relief of debtors, and (ii) rules of
law governing specific performance, injunctive relief and other
equitable remedies, (B) is in full force and effect and (y) neither
the Company nor Phase Three, to the best knowledge of the Company,
except as set forth in Section 3.1(k) of the Company Disclosure
Schedule, the other party or parties thereto, are in default under
any Contract in any material respect.
(iii)For purposes of this Section 3.1(k) the term "Excluded Contract"
shall mean any Contract that:
(A) (i) the Company or Phase Three has entered in the
ordinary course of business; and
(ii) Does not contemplate or involve the payment of cash
or other consideration in an amount in excess of $25,000.
(l) Compliance with Legal Requirements. Except as disclosed in Section
3.1(l) of the Company Disclosure Schedule, each of the Company, Phase Three and
SWI is in compliance in all material respects with applicable Federal, state,
local, municipal, foreign laws, ordinances, regulations and orders ("Legal
Requirements"). Except as disclosed in Section 3.1(l) of the Company Disclosure
Schedule, the Company has not received at any time since January 1, 1997 any
notice or other written communication from any Governmental Authority regarding
any actual or possible violation of, or failure to comply with, any Legal
Requirement.
(m) Governmental Authorizations. Each of the Company, Phase Three and SWI
has all material Federal, state, local and foreign governmental licenses,
consents, approvals, authorizations, permits, orders, decrees and other
compliance agreements necessary in the conduct of its business as presently
conducted (collectively, "Governmental Authorizations"). Such Governmental
Authorizations are valid and in full force and effect. Each of the Company,
Phase Three and SWI is in compliance in all material respects with the terms and
requirements of such Governmental Authorizations. Neither the Company, Phase
Three nor SWI as received at any time since the Audited Balance Sheet Date any
written notice or other written communication from any Governmental Authority
regarding (a) any actual or possible violation of or failure to comply with any
term or requirement of any material Governmental Authorization or (b) any actual
or possible revocation, withdrawal, suspension, cancellation, termination or
modification of any material Governmental Authorization. None of such
Governmental Authorizations shall be affected in any material respect by the
Merger or the transactions contemplated hereby.
(n) Litigation, Etc. Except as set forth in Section 3.1(n) of the Company
Disclosure Schedule, there are no (i) actions, suits, claims or legal or
administrative or arbitration proceedings (collectively, "Actions"), pending, or
to the best knowledge of the Company, any investigations pending or threatened
against the Company, Phase Three or SWI or any Actions threatened against the
Company, Phase Three or SWI, in any event whether at law or in equity,
or before or by any Federal, state, municipal, foreign or other governmental
court, department, commission, board, bureau, agency or instrumentality
("Governmental Authority"), (ii) judgments, decrees, injunctions or orders of
any Governmental Authority or arbitrator against the Company, Phase Three or
SWI, or (iii) disputes with customers or vendors who are material to the
operation of the Company's or Phase Three's business in the ordinary course. The
Company has delivered to Parent all material documents and correspondence
relating to such matters referred to in Section 3.1(n) of the Company Disclosure
Schedule.
(o) Accounts and Notes Payable. Except as set forth in Section 3.1(o) of the
Company Disclosure Schedule, all accounts payable and notes payable in excess of
$25,000 by the Company and Phase Three to third parties as of the date hereof
arose, and as of the Closing will have arisen, in the ordinary course of
business, and, except as set forth in Section 3.1(o) of the Company Disclosure
Schedule, there is no such account payable or note payable delinquent in its
payment, except those contested in good faith and already disclosed in Section
3.1(o) of the Company Disclosure Schedule.
(p) Environmental Matters. Each of the Company, Phase Three and SWI has
complied with and is in compliance with all federal, state, local and foreign
laws, statutes (civil and criminal), common laws, ordinances, codes,
regulations, rules, notices, permits, judgments, requirements, standards,
guidelines, judicial and administrative orders and decrees applicable to it and
its properties, assets, operations and businesses relating to pollution, worker
and public health and safety, and/or environmental protection (collectively
"Environmental Laws"), including without limitation Environmental Laws relating
to air, water, land and the generation, release, storage, use, handling,
transportation, treatment, discharge, disposal or other handling of Wastes,
Hazardous Wastes and Hazardous Substances (as such terms are currently defined
in any applicable Environmental Law), except to the extent that noncompliance
with any Environmental Law, either singly or in the aggregate, does not and
would not have a Company Material Adverse Effect or a Phase Three Material
Adverse Effect; (ii) Each of the Company, Phase Three and SWI has obtained and
adhered to all necessary material permits and other approvals necessary to
treat, transport, store, dispose of and otherwise handle Wastes, Hazardous
Wastes and Hazardous Substances and has reported, to the extent required by all
Environmental Laws, all past and present sites owned and operated by the
Company, Phase Three and/or SWI where Hazardous Wastes or Hazardous Substances
have been treated, stored, disposed of or otherwise handled, except to the
extent that a failure to do so, either singly or in the aggregate, does not and
would not have a Company Material Adverse Effect or a Phase Three Material
Adverse Effect; (iii) there have been no emissions, spills, discharges, releases
or threats of releases (as defined in Environmental Laws) at, from, in or on any
property owned, leased or operated by Company, Phase Three and/or SWI except as
permitted by Environmental Laws or where such emissions, spills, discharges, and
releases do not and could not have a Company Material Adverse Effect or a Phase
Three Material Adverse Effect; (iv) the Company, Phase Three and SWI know of no
on-site or off-site location to which any of them has transported or disposed of
Wastes, Hazardous Wastes and/or Hazardous Substances or arranged for the
transportation of Hazardous Wastes and Hazardous Substances, which site is the
subject of any federal, state, local or foreign enforcement action or any other
investigation which could lead to any claim against Company, Phase Three, the
Surviving Corporation or Parent for any clean-up cost, remedial work, damage to
natural resources or personal injury, including without limitation any claim
under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (CERCLA); and (v) none of the Company, Phase Three or SWI has nor will
have any liability in connection with any release of any Hazardous Waste or
Hazardous Substance into the environment, except to the extent that such
liability does not and would not have a Company Material Adverse Effect or a
Phase Three Material Adverse. For purposes hereof, the term Environmental Laws
includes, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 ▇.▇.▇.▇▇. 9601 et seq., the Resource
Conservation and Recovery Act, 42 ▇.▇.▇.▇▇. 6901 et seq., the Federal Water
Pollution Control Act, 33 ▇.▇.▇.▇▇. 1251 et seq., the Clean Air Act, 42
U.S.C.ss.1857 et seq., the Occupational Safety and Health Act of 1970, 29
▇.▇.▇.▇▇. 651 et seq., and the Toxic Substances Control Act, 15 U.S.C. ss. 2601
et seq.
(q) Labor Relations; Employees.
(i) The Company employs a total of approximately 20 employees, and
Phase Three employs a total of approximately 220 employees. Except
as set forth in Section 3.1(q) of the Company Disclosure Schedule,
(A) neither the Company, Phase Three nor SWI is delinquent in
payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services
performed by them to date or amounts required to be reimbursed to
such employees, (B) upon termination of the employment of any such
employees, neither the Company, any subsidiary, Parent, Acquisition
Sub nor the Surviving Corporation will by reason of anything done
prior to the Closing be liable to any of such employees for
so-called "severance pay" or any other payments, (C) there is no
unfair labor practice complaint against the Company pending before
the National Labor Relations Board or any comparable Governmental
Authority, and none of the Company's or any subsidiary's employment
policies or practices is currently being audited or investigated by
any federal, state or local government agency, (D) there is no
labor strike, dispute, claim, charge, lawsuit, proceeding, labor
slowdown or stoppage pending or threatened against or involving the
Company, Phase Three or SWI, (E) no labor union has taken any
action with respect to organizing the employees of the Company,
Phase Three or SWI, (F) neither any grievance nor any arbitration
proceeding arising out of or under collective bargaining agreements
is pending and no claim therefor has been asserted against the
Company, Phase Three or SWI, and (G) no employee has informed any
officer of the Company or Phase Three that such employee will
terminate his or her employment or engagement with the Company,
Phase Three or the Surviving Corporation. To the best knowledge of
the Company, neither the Company nor any employee of the Company,
Phase Three or SWI is in violation of any term of any employment
contract, patent disclosure agreement or any other contract or
agreement relating to the relationship of such employee with the
Company, Phase Three or SWI or any other party because of the
nature of the business conducted or proposed to be conducted by the
Company, Phase Three or SWI. All
individuals considered by the Company, Phase Three or SWI to be
independent contractors are, and could only be reasonably
considered to be, in fact "independent contractors" and are not
"employees" or "Common law employees" for tax, benefits, wage,
labor or any other legal purpose.
(r) Employee Benefit Plans.
(i) With respect to each employee benefit plan, program, arrangement
and contract (including, without limitation, any "employee benefit
plan" as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) maintained or
contributed to by the Company (each, a "Plan"), (i) each Plan that
is intended to be qualified under Section 401(a) of the Code has
received a favorable determination from the IRS covering the
provisions of the Tax Reform Act of 1986 stating that such Plan is
so qualified and the Company is unaware of any event that would
cause such determination letter to be revoked, (ii) each Plan has
been operated in accordance with its terms and the requirements of
applicable law in all material respects and (iii) none of the
Company, Phase Three nor SWI has incurred any material liability
under Title IV of ERISA in connection with any Plan.
(s) Insurance. The Company and Phase Three maintain insurance coverage that
is customary among entities of similar size engaged in similar lines of business
as the Company and Phase Three. All material policies of insurance are in full
force and effect and all premiums with respect thereto are currently paid and,
to the best knowledge of the Company, no basis exists for termination of any
thereof on the part of the insurer. The amounts of coverage under such policies
of insurance are adequate for the assets and properties of the Company and Phase
Three. To the best knowledge of the Company, neither the Company nor Phase Three
has, since its inception, been denied or had revoked or rescinded any policy of
insurance.
(t) Non-Contravention; Consents. Neither (1) the execution, delivery or
performance of this Agreement, the Agreement of Merger and the Related
Agreements, nor (2) the consummation of the Merger or any of the other
transactions contemplated by this Agreement or the Related Agreements, will
directly or indirectly (with or without notice or lapse of time):
(i) contravene, conflict with or result in a violation of any of the
provisions of the Charter or bylaws of the Company, Phase Three or
SWI;
(ii) contravene, conflict with or result in a violation in any material
respect of, any Legal Requirement or any order, writ, injunction,
judgment or decree to which the Company or Phase Three is subject
or bound, or pursuant to which any material assets owned or used by
the Company or Phase Three is subject or bound or result in the
creation of any Encumbrance on any material asset of the Company or
Phase Three;
(iii)contravene, conflict with or result in a violation of any of the
terms or requirements of any Governmental Authorization issued,
granted given or otherwise made available by or under the authority
of any Governmental Authority, that is held by the Company or Phase
Three or that otherwise relates to the business of the Company or
Phase Three or to any material assets owned or used by the Company
or Phase Three; or
(iv) contravene, conflict with or result in a violation or breach of, or
result in a default under, any provision of any material Contract.
Except as may be required by the DGCL or under the HSR Act, the Company is
not or will not be required to make any filing with or give any notice to, or to
obtain any consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement, the Agreement of Merger or the
Related Agreements or (y) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, except where the failure to take
such actions will not have a Company Material Adverse Effect or Phase Three
Material Adverse Effect or a material adverse effect on the ability of the
Company to consummate the transactions contemplated hereby or by the Related
Agreements.
(u) Brokers. The Company has not, nor have any of its officers, directors,
securityholders or employees, employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby other than the $450,000 due and
payable by the Company to CIBC World Markets upon the effectiveness of the
Merger (the "CIBC Fee").
(v) Customers; Mailing Lists.
(i) Section 3.1(v)(i) of the Company Disclosure Schedule sets forth a
true and complete list of the material customers of the Company and
Phase Three which during the period from March 31, 1999 to the date
hereof purchased in the aggregate products or services from the
Company or Phase Three valued at $50,000 or higher and generally
specifies the products and/or services supplied to each of such
customers. To the best knowledge of the Company or Phase Three,
each of the Company and Phase Three has a good, ongoing
relationship with each of such customers and none of such customers
has reduced, or expressed any intention of reducing, the dollar
amount of its business with the Company or Phase Three or
terminated, or expressed to the Company or Phase Three any
intention of terminating, its business relationship with the
Company or Phase Three.
(ii) Except as set forth on Section 3.1(v)(ii) of the Company Disclosure
Schedule, all mailing lists, in any media maintained by the Company
and/or Phase Three, of all customers who have purchased the
Company's or Phase Three's products, including without limitation,
through Phase Three's catalogs (the "Mailing Lists") are owed by
the Company or Phase
Three, as applicable, and (A) are able to be copied to a magnetic
tape form in readable format, (B) contain all names and addresses
of customers who have in the past purchased a product from the
Company or Phase Three and can be sorted to indicate which
customers have purchased products (1) within 12 months prior to the
Closing Date, (2) 12-24 months prior to the Closing Date, (3) 24-36
months prior to the Closing Date, and (4) more than 36 months prior
to the Closing Date; and (C) include a detailed transaction
listing, with original source data including names and addresses,
of people who have inquired about the Company's or Phase Three's
catalogs during the 60 days prior to the Closing Date even though
they may not have yet purchased and products of the Company or
Phase Three. The Company's and Phase Three's use of the Mailing
Lists does not infringe on or violate the intellectual property
rights or privacy rights of any Person, and in not in violation of
any Legal Requirement. Except as set forth on Section 3.1(v)(ii) of
the Company Disclosure Schedule, there is no limitation on the
right of the Company to transfer any of the Mailing Lists. The
Company's and Phase Three's house files contain the names and
addresses of not less than 239,000 domestic customers who have
purchased the Company's or Phase Three's products since May 15,
1999. The Mailing Lists contain (1) not less than 239,000 domestic
customers and prospective customers who have purchased and
requested the Company's or Phase Three's products within 13 months
prior to the Closing Date, and (2) not less than 110,000 domestic
customers and prospective customers who have purchased and
requested the Company's or Phase Three's products within 14-25
months prior to the Closing Date.
(iii)Section 3.1(v)(iii) of the Company Disclosure Schedule sets forth
a summary description of each promotional mailing by the Company or
Phase Three utilizing the Mailing Lists since July 1, 1999 and,
with respect to each such mailing, the approximate number of
customers on the Mailing Lists to whom such promotional materials
were sent.
(w) Minute Books. Except as disclosed in Section 3.1(w) of the Company
Disclosure Schedule, the minute books of the Company and Phase Three provided to
Parent for review contain a complete summary of all meetings of and actions by
their respective directors and stockholders the time of its incorporation to the
date of such review and reflect all actions referred to in such minutes
accurately in all material respects.
(x) Business Generally. There have been no events or transactions, or
information which has come to the attention of the Company or any officer,
director or Key Employee thereof that could reasonably be expected to have a
Company Material Adverse Effect or a Phase Three Material Adverse Effect, and to
the Company's best knowledge, neither the Company nor Phase Three is obligated
under any contract or agreement or subject to any Charter or other corporate
restriction which could have a Company Material Adverse Effect.
(y) Board Approval. The Board of Directors of the Company has unanimously
(i) approved this Agreement, the Merger and each of the Related Agreements to
which the Company is a party and the transactions contemplated hereby and
thereby, (ii) determined that the Merger is in the best interests of the
stockholders of the Company and is on terms that are fair to such stockholders
of the Company and (iii) recommended that the stockholders of the Company
approve the Merger in accordance with the Agreement of Merger and the DGCL.
(z) Vote Required. The affirmative vote of at least (i) a majority of the
outstanding shares of Company Common Stock, (ii) 75% of the Series A Preferred
Stock voting separately as a class, and (iii) 75% Series B Preferred Stock
voting separately as a class, approving this Agreement, the Merger and the
Agreement of Merger are the only votes of the holders of any class or series of
the Company's capital stock necessary to approve this Agreement, the Merger and
the Agreement of Merger and the transactions contemplated hereby and thereby.
(aa) Information Supplied. To the best knowledge of the Company, none of the
information supplied or to be supplied by the Company or the Stockholder for
inclusion or incorporation by reference in the Stockholders' Materials will, at
the dates mailed to the Stockholder and at the Effective Time of the Stockholder
Action, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(bb) Section 3.1(bb) of the Company Disclosure Schedule contains a true and
complete list of all Persons who, to the knowledge of the Company, may be deemed
to be Affiliates of the Company, including, without limitation, all directors
and executive officers of the Company.
(cc) Operation of Business. With respect to the business of the Company and
Phase Three, as of the Closing Date, the Company and Phase Three, as applicable,
shall have paid all refunds due and issued all credits due relating to or
arising out of orders, merchandise returns, allowances, cancellations and
overpayments processed and due in the ordinary course of business since the
Company Balance Sheet Date. For purposes of this Agreement, a transaction shall
be deemed processed when it is entered into the mail order computer system of
the Company or Phase Three, as applicable.
(dd) Disclosure. To the best knowledge of the Company, neither Section 3.1
of this Agreement nor any financial statement, certificate, exhibit or
disclosure schedule attached hereto contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements or facts contained herein and therein
not misleading in light of the circumstances under which they were made.
3.2 Representations and Warranties of the Stockholder. The Stockholder
represents and warrants to Parent, Acquisition Sub and the Company as follows:
(a) Title; Absence of Certain Agreements. The Stockholder is the lawful and
record and beneficial owner of, and has good and marketable title to all of the
outstanding shares
of Company Stock, with the full power and authority to vote such Company Stock
and transfer and otherwise dispose of such Company Stock, and any and all rights
and benefits incident to the ownership thereof free and clear of all
Encumbrances, and there are no agreements or understandings between the
Stockholder and the Company and/or any other person with respect to the voting,
sale or other disposition of Company Stock or any other matter relating to
Company Stock.
(b) Organization, Good Standing and Power. Stockholder is duly organized or
formed and validly existing under the laws of the jurisdiction of its
incorporation or formation and has the corporate or other organizational power
and authority under such laws to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
(i) Authority - General. Stockholder has full and absolute power and
authority to enter into this Agreement and each Related Agreement
being executed and delivered by the Stockholder simultaneously
herewith and this Agreement and each Related Agreement to which
such Stockholder is a party, and has been duly authorized by all
requisite action on the part of the Stockholder; and this Agreement
and each Related Agreement to which the Stockholder is a party has
been duly executed and delivered by the Stockholder, and is the
valid and binding obligation of the Stockholder, enforceable
against the Stockholder in accordance with its terms. Neither the
execution, delivery and performance of this Agreement and each
Related Agreement to which the Stockholder is a party, nor the
consummation of the transactions contemplated hereby or thereby nor
compliance by the Stockholder with any of the provisions hereof or
thereof will (i) (A) conflict with, (B) result in any violations
of, (C) cause a default under (with or without due notice, lapse of
time or both), (D) give rise to any right of termination,
amendment, cancellation or acceleration of any obligation contained
in or the loss of any material benefit under or (E) result in the
creation of any Encumbrance upon or against any assets, rights or
property of the Company (or against any Company Stock, Parent
capital stock or common stock of the Surviving Corporation), under
any term, condition or provision of (x) any agreement or instrument
to which the Stockholder is a party, or by which the Stockholder or
any of his or its properties, assets or rights may be bound, (y)
any law, statute, rule, regulation, order, writ, injunction,
decree, permit, concession, license or franchise of any
Governmental Authority applicable to the Stockholder or any of his
or its properties, assets or rights or (z) the Stockholder's
limited liability company agreement, as amended through the date
hereof, which conflict, breach, default or violation or other event
would prevent the consummation of the transactions contemplated by
this Agreement, the Agreement of Merger or any Related Agreement to
which the Stockholder is a party. Except as set forth in Section
3.2(c) of the Company Disclosure Schedule (which, if so disclosed
shall have been effectively made or obtained (as the case may be)
on or
prior to the Closing, unless otherwise waived by Parent) no permit,
authorization, consent or approval of or by, or any notification of
or filing with, any Governmental Authority or other person is
required in connection with the execution, delivery and performance
by such Stockholder of this Agreement, each Related Agreement to
which such Stockholder is a party or the consummation by such
Stockholder of the transactions contemplated hereby or thereby.
(c) Brokers. Stockholder does not have, nor have any of its officers,
directors, members or employees (if any) employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated hereby.
(d) Accuracy of Representations and Warranties of the Company. To the best
knowledge of the Stockholder, the representations and warranties of the Company
set forth in Section 3.1 are true, correct and complete in all material respects
and the Company is not in breach or violation thereof.
(e) Representation by Legal Counsel. The Stockholder has been advised by
legal counsel in connection with the negotiation, execution and delivery of this
Agreement, the Agreement of Merger and the Related Agreements and the
performance of the transactions contemplated hereby an thereby.
3.3 Representations and Warranties of Parent and Acquisition Sub. Parent and
Acquisition Sub represent and warrant to the Company as follows:
(a) Organization; Good Standing; Qualification and Power. Each of Parent and
Acquisition Sub (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and the State of Delaware,
respectively, and (ii) has all requisite corporate power and authority to own,
lease and operate its properties and assets and to carry on its business as now
being conducted, to enter into this Agreement and each of the Related Agreements
to which it is a party, to perform its obligations hereunder and thereunder and
to consummate the transactions contemplated hereby and thereby. Parent has
delivered to the Company true and complete copies of the Charter and by-laws of
each of Parent and Acquisition Sub
(b) Capital Stock. Parent's Quarterly Report on Form 10-Q filed with the SEC
with respect to the fiscal quarter ended April 30, 2000 (the "Form 10-Q"), sets
forth a true and complete description of the authorized and outstanding shares
of capital stock of Parent as of such date. Parent has duly authorized and
reserved for issuance the Merger Shares, and, when issued in accordance with the
terms of Article II, the Merger Shares will be validly issued, fully paid and
nonassessable and free of preemptive rights (other than any Parent Rights which
may be issued). There exist a sufficient number of authorized but unissued
shares of Parent Common Stock to allow for the exercise in full of the Assumed
Options and the Warrants. Parent owns all the outstanding shares of capital
stock of Acquisition Sub, and all of such shares are validly issued, fully paid
and nonassessable and not subject to preemptive rights.
(c) Authority. The execution, delivery and performance by Parent of this
Agreement and each of the Related Agreements to which it is a party and the
execution, delivery and performance of this Agreement and the Agreement of
Merger by Acquisition Sub and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of Parent and Acquisition Sub, respectively. This Agreement and each
of the Related Agreements to which Parent is a party are valid and binding
obligations of Parent, enforceable against Parent in accordance with their
respective terms; and this Agreement and the Agreement of Merger are the valid
and binding obligations of Acquisition Sub, enforceable against Acquisition Sub
in accordance with their respective terms. Neither the execution, delivery and
performance by Parent of this Agreement and the Related Agreements to which
Parent is a party, the execution, delivery and performance of this Agreement and
the Agreement of Merger by Acquisition Sub, nor the consummation of the
transactions contemplated hereby or thereby, will in any material respect (A)
conflict with, (B) result in any material violations of, (C) cause a material
default under (with or without due notice, lapse of time or both), (D) give rise
to any material right of termination, amendment, cancellation or acceleration of
any obligation contained in or the loss of any material benefit under, (E)
result in the creation of any material Encumbrance on or against any assets,
rights or property of Parent or Acquisition Sub, as the case may be, under any
term, condition or provision of (x) any material instrument or agreement to
which Parent or Acquisition Sub is a party, or by which Parent or Acquisition
Sub or any of their respective properties, assets or rights may be bound, (y)
any material law, statute, rule, regulation, order, writ, injunction, decree,
permit, concession, license or franchise of any Governmental Authority
applicable to Parent or Acquisition Sub or any of their respective properties,
assets or rights or (z) Parent's or Acquisition Sub's Charter or by-laws, as
amended through the date hereof, respectively, in each case, which conflict,
breach, default or violation or other event would prevent the consummation of
the transactions contemplated by this Agreement, the Agreement of Merger or any
Related Agreement to which Parent or Acquisition Sub is a party. Except as
contemplated by this Agreement, no permit, authorization, consent or approval of
or by, or any notification of or filing with, any Governmental Authority or
other person is required in connection with the execution, delivery and
performance by Parent or Acquisition Sub of this Agreement, the Agreement of
Merger (in the case of Acquisition Sub) or the Related Agreements to which they
are a party or the consummation of the transactions contemplated hereby or
thereby, other than (i) the filing with the SEC of such reports and information
under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations promulgated by the SEC thereunder, as may be
required in connection with this Agreement and the transactions contemplated
hereby, (ii) the filing of such documents with, and the obtaining of such orders
from, various state securities and blue-sky authorities as are required in
connection with the transactions contemplated hereby, (iii) the filing of the
Agreement of Merger with the Secretary of State of the State of Delaware and
(iv) such other consents, waivers, authorizations, filings, approvals and
registrations which if not obtained or made would materially impair the ability
of Parent or Acquisition Sub to consummate the transactions contemplated by this
Agreement, including, without limitation, the Merger (each of the actions
reflected in clauses (i), (ii) and (iii) to be taken by Parent).
(d)SEC Documents.
(i) Parent has furnished or made available to the Company a correct and
complete copy of Parent's Annual Report on Form 10-K filed with the
SEC with respect to the fiscal year ended January 31, 2000 and the
Form 10-Q and each report, schedule, registration statement and
definitive proxy statement filed by Parent with the SEC on or after
the date of filing of the Form 10-Q which are all the documents
(other than preliminary material) that Parent was required to file
(or otherwise did file) with the SEC in accordance with Sections
13, 14 and 15(d) of the Exchange Act on or after the date of filing
with the SEC of the Form 10-Q (collectively, the "Parent SEC
Documents"). As of their respective filing dates, or in the case of
registration statements, their respective effective times, none of
the Parent SEC Documents (including all exhibits and schedules
thereto and documents incorporated by reference therein) contained
any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under
which they were made, not misleading, and the Parent SEC Documents
complied when filed, or in the case of registration statements, as
of their respective effective times, in all material respects with
the then applicable requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations
promulgated by the SEC thereunder.
(ii) The financial statements (including the notes thereto) of Parent
included in the Form 10-Q for the fiscal quarter then ended,
complied as to form in all material respects with the then
applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, were prepared in
accordance with GAAP during the periods involved (except as may
have been indicated in the notes thereto) and fairly present the
financial position of Parent as at the dates thereof and the
results of their operations, stockholders' equity and cash flows
for the period then ended.
ARTICLE IV
RELATED AGREEMENTS
4.1 Related Agreements. Simultaneous with the execution and delivery of this
Agreement, the following agreements (such agreements, together with the
Indemnity Escrow Agreement (which are not being executed or delivered until the
Closing), being herein collectively referred to as the "Related Agreements") are
being executed and delivered by the respective parties thereto:
(a) Affiliate Agreements. The Stockholder is entering into an Investment
Representation and Lock-Up Agreement with Parent, effective as of the Effective
Time (the "Lock-Up Agreement"), in the form of Exhibit C attached hereto,
providing, among other
matters, that the Stockholder and its transferees shall not transfer their
shares of Company Stock following the Effective Time except as provided therein
and including a representation as to such person's intentions with respect
thereto. Parent and Acquisition Sub shall be entitled to place legends on the
certificates evidencing any Parent Common Stock to be received by the
Stockholder and its transferees pursuant to the terms of this Agreement and the
Certificate of Merger, and to issue appropriate stop transfer instructions to
the transfer agent for Parent Common Stock, consistent with the terms of the
Lock-Up Agreement, whether or not the Lock-Up Agreement is actually delivered to
Parent.
(b) Indemnity Escrow Agreement. Each of Parent, the Stockholder and the
Escrow Agent are entering into the Escrow Agreement.
(c) Distributor Agreement. SWI, Parent and the Stockholder shall enter into
a Distributor Agreement, in the form of Exhibit D attached hereto, pursuant to
which, among other matters, the parties thereto shall covenant and agree that,
for a period of three (3) years after the Effective Time, the price paid by
Parent and its subsidiaries to SWI and its affiliates, subsidiaries, successors
and assigns (the "SWI Parties") for inventory or merchandise for resale shall be
no less favorable to Parent and its subsidiaries than the then lowest current
price charged by the SWI Parties to third parties in similar classes of trade
(i.e., equivalent distribution channels) for such inventory or merchandise.
(d) Non-Competition Agreements. Each of the persons listed on Schedule
4.1(d) hereto is entering into an agreement with Parent, to be effective as of
the Effective Time, in the form of Exhibit E attached hereto (the
"Non-Competition Agreements"), providing for, among other things, restrictions
upon such person from competing with the business of Parent, Phase Three and the
Surviving Corporation.
(e) Registration Rights Agreements. The Stockholder and Parent are entering
into a Registration Rights Agreement effective as of the Effective Time, in the
form of Exhibit F attached hereto (collectively, the "Registration Rights
Agreements"), providing for registration rights with respect to the Merger
Shares.
(f) Release Agreements. The Stockholder and each person listed on Schedule
4.1(g) is entering into a Release Agreement, effective as of the Effective Time,
in the form of Exhibit G attached hereto (the "Release Agreements"), providing
for, among other things, release of the Company, Parent and Parent's affiliates
from any and all claims, known and unknown, that such person may have against
the Company through the Effective Time.
(g) Assignment and Assumption Agreement. Parent and SWI are entering into an
Assignment and Assumption Agreement, substantially in the form attached hereto
as Exhibit K.
ARTICLE V
CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME;
ADDITIONAL AGREEMENTS
5.1 Access to Records and Properties of Each Party; Confidentiality. From
and after the date hereof until the Effective Time or the earlier termination of
this Agreement pursuant to Section 9.1 hereof (the "Executory Period"), the
Company and the Stockholder shall permit Parent and its consultants and
professional advisors to conduct, and assist Parent and its consultants and
professional advisors in the conduct of, a full and complete investigation of
the Company's and Phase Three' business and technology including, without
limitation, a market and competitive products and technology analysis and a
review of such of the Company's and Phase Three' books and records, contracts,
technology, intellectual property, inventory, equipment, technical materials,
customer records and other assets as the Parent may reasonably request, as well
as, reasonable, non-disruptive access to, and communications with, current and
former employees of the Company and Phase Three (the "Investigation"). The
Investigation shall be conducted during normal business hours. All such
information shall be subject to the confidentiality agreements currently
existing between the parties; the Investigation shall not give Parent the right
to use any disclosed or discovered information beyond the scope of these
provisions or agreements.
5.2 Operation of Business of the Company. During the Executory Period, the
Company shall operate its business, and the businesses of Phase Three and SWI,
as now operated and only in the normal and ordinary course and, consistent with
such operation, will use its best efforts to preserve intact its business and
assets, to keep available the services of its officers and employees and to
maintain satisfactory relationships with persons having business dealings with
it. Without limiting the generality of the foregoing and except as set forth in
Schedule 5.2 hereto, during the Executory Period, the Company shall not, without
the prior written consent of Parent, take or cause to occur any of the actions
or transactions described in Section 3.1(f)(iii) through (xiii).
5.3 Negotiation With Others. During the Executory Period, the Company shall
not (and the Company shall not permit the Company's employees, directors,
officers, advisors, consultants or agents to), and the Stockholder shall not
(and the Stockholder shall not permit the Stockholder's managers, members,
employees, directors, officers, advisors, consultants or agents to), directly or
indirectly: (i) solicit, initiate or engage in any discussions or negotiations
with, whether or not initiated by the Company or the Stockholder, or provide any
information to, or take any other action with the intent to facilitate the
efforts of, any third party relating to any possible agreement (whether binding
or in principle) or other arrangement involving (1) the acquisition of the
Company or Phase Three (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise); (2) any financing of, or investment in,
including the purchase of any capital stock in, the Company or Phase Three; (3)
the sale, license, disposition or encumbrance of any substantial portion of the
assets of the Company or Phase Three; or (4) any action or agreement that would
otherwise be inconsistent with the terms of this Agreement, the Certificate of
Merger or the Related Agreements or that would prohibit the performance of the
Company's or the Stockholder's obligations under this Agreement, the Certificate
of Merger or the Related Agreements (each, a "Prohibited Transaction"); or (ii)
authorize or consummate a Prohibited Transaction. In addition, upon execution
and delivery of this Agreement, the Company and the Stockholder shall: (i)
terminate any and all discussions, if any, it or they may be having regarding a
Prohibited Transaction; and (ii) immediately notify Parent in writing if it or
they thereafter receive any inquiries or offers from any person or entity
regarding a Prohibited
Transaction, which notice shall contain the identity of such person or entity,
the nature of the Prohibited Transaction proposed and the material terms of the
proposal.
5.4 [Intentionally Omitted]
5.5 Preparation of Filings. The parties acknowledge that Parent and the
Company have, on June 15, 2000, made the filings required to be made pursuant to
the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act of ▇▇▇▇ (▇▇▇ "▇▇▇ ▇▇▇▇▇▇") in
connection with the transactions contemplated hereby. As promptly as practicable
after the date of this Agreement, Parent and the Company shall properly prepare
and file any filings required under the Exchange Act, the Securities Act or any
other Federal or state laws, and Parent shall properly prepare and file any
filings required under state securities or "blue sky" laws, in each case
relating to the Merger and the transactions contemplated by this Agreement
(collectively, the "Filings"). The Company shall promptly furnish Parent with
all information concerning the Company and the Stockholder as may be reasonably
requested by Parent in connection with any action contemplated by this Section
5.5. The Parent and the Company will notify the other promptly of the receipt of
any comments from any government officials for amendments or supplements to the
HSR Filing or any other Filing or for additional information and will supply the
other with copies of all correspondence between such party or any of its
representatives, on the one hand, and any government officials, on the other
hand, with respect to the Merge, the HSR Filing or any other Filing. Except as
may be prohibited by any Legal Requirement or any Governmental Authority, the
Parent and the Company shall promptly provide the other (or its counsel) with
copies of all filings made by such party with any Governmental Authority in
connection with this Agreement and the transactions contemplated hereby and
thereby. The Filings shall comply in all material respects with all applicable
requirements of law. Whenever any event occurs which should be set forth in an
amendment or supplement to the HSR Filing or any other Filing, Parent or the
Company, as the case may be, shall promptly inform the other party of such
occurrence and cooperate in filing with any government officials, such amendment
or supplement.
5.6 Advice of Changes. During the Executory Period, the Company and Parent
shall promptly advise the other to the extent there is knowledge of any change,
event or circumstance having, or which, insofar as can reasonably be foreseen,
could have a Company Material Adverse Effect or a Phase Three Material Adverse
Effect or a material adverse effect on the business and financial position of
Parent or which could reasonably be expected to affect the truth of their
respective representations, warranties, covenants or agreements herein provided,
however that no such notification shall affect in any material respect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
5.7 Approval. The Company shall (a) take or cause to be taken all such other
action as may be required by the DGCL and any other applicable law in connection
with the Merger and this Agreement, in each case as promptly as reasonably
possible and (b) reasonably cooperate with and assist Parent and its
representatives in taking any such actions as may reasonably be required to
consummate the Merger, including obtaining the consent and approval of any third
parties or governmental agencies. The Stockholder shall prepare and distribute
to its members and managers any written notice and other materials relating to
the approval of the
SWI Distribution, the Contribution Agreement (as defined in Section 6.2(i)
below), the Merger, this Agreement and the transactions contemplated hereby and
thereby, in accordance with the Charter and By-laws of the Company, the DGCL and
any other Federal and state laws relating to the SWI Distribution or the Merger
or any other transaction relating to or contemplated by this Agreement or the
Contribution Agreement (collectively, the "Members' Materials"); provided,
however, that to the extent the Company is provided with reasonable advance
notice of a request for review, Parent and its counsel shall have the
opportunity to review all Members' Materials prior to delivery to the members of
the Stockholder, and provided further, that if any event occurs that is required
to be set forth in an amendment or supplement to any Members' Materials, the
Company shall promptly inform Parent thereof (or, if such event relates solely
to Parent, Parent shall promptly inform the Company thereof), and the Company
shall promptly prepare an amendment or supplement in form and substance
reasonably satisfactory to Parent in accordance with the Charter and by-laws of
the Company, the DGCL and any other Federal or state laws.
5.8 Legal Conditions to Merger. Each party hereto shall take all reasonable
actions necessary to comply promptly with all legal requirements that may be
imposed on such party with respect to the Merger and will take all reasonable
actions necessary to cooperate with and furnish information to the other party
or parties, as the case may be, in connection with any such requirements imposed
upon such other party or parties in connection with the Merger. Each party
hereto shall use their best efforts (a) to obtain (and will take all reasonable
actions necessary to promptly cooperate with the other party or parties in
obtaining) any consent, authorization, order or approval of, or any exemption
by, any Governmental Authority, or other third party, required to be obtained or
made by such party (or by the other party or parties) in connection with the
Merger or the taking of any action contemplated by this Agreement, (b) to
defend, lift, rescind or mitigate the effect of any lawsuit, order, injunction
or other action adversely affecting the ability of such party to consummate the
transactions contemplated hereby and (c) to fulfill all conditions precedent
applicable to such party pursuant to this Agreement.
5.9 Consents. Each party hereto shall use its best efforts, and the other
parties shall reasonably cooperate with such efforts, to obtain any consents and
approvals of, or effect the notification of or filing with, each person or
authority, whether private or governmental, whose consent or approval is
required in order to permit the consummation of the Merger and the transactions
contemplated hereby and to enable the Surviving Corporation to conduct and
operate the businesses of the Company and Phase Three substantially as presently
conducted and as proposed to be conducted.
5.10 Efforts to Consummate. Subject to the terms and conditions herein
provided, the parties hereto shall use their best efforts to do or cause to be
done all such acts and things as may be necessary, proper or advisable,
consistent with all applicable laws and regulations, to consummate and make
effective the transactions contemplated hereby and to satisfy or cause to be
satisfied all conditions precedent that are set forth in Article VI as soon as
reasonably practicable, provided, however, that neither Parent nor any of its
affiliates shall be under any obligation (x) to make proposals, execute or carry
out agreements or submit to orders providing for the sale or other disposition
or holding separate (through the establishment of a trust or otherwise) of any
assets or categories of assets of Parent, any of its affiliates, the Company or
the
holding separate of the Company Stock or (y) imposing or seeking to impose any
limitation on the ability of Parent or any of its subsidiaries or affiliates to
acquire, hold or exercise full rights of ownership of the shares Company Stock.
5.11 Notice of Prospective Breach. Each party hereto shall immediately
notify the other parties in writing upon the occurrence of any act, event,
circumstance or thing that is reasonably likely to cause or result in a
representation or warranty hereunder to be untrue at the Closing, the failure of
a closing condition to be achieved at the Closing, or any other breach or
violation hereof or default hereunder.
5.12 Public Announcements. The parties hereto agree that subject to the
public disclosure and other legal obligations of Parent and regulatory
obligations to which each may be subject, they shall advise and confer prior to
the issuance (and provide copies to the other party prior to issuance) of any
public announcement or reports or statements with respect to the Merger;
provided, however, that neither party nor any of its affiliates or
representatives will issue any report, statement or release pertaining to this
Agreement or any transaction contemplated hereby, without the prior written
consent of the other party, such consent not to be unreasonably withheld;
further provided, however, that the provisions of the foregoing proviso shall in
no way prevent or prohibit Parent from taking any action in order to comply with
any provisions of the Exchange Act or any other legal public disclosure or
regulatory obligations of Parent.
5.13 Support of Merger by Officers and Directors. Each party hereto shall
use its or his best efforts to cause all of its officers and directors to
support the Merger and to take all actions and execute all documents reasonably
requested by the other parties hereto to carry out the intent of the parties
with respect to the transactions contemplated hereby.
5.14 Support of Merger by Stockholder. The Stockholder hereby agrees to use
its best efforts to cause the Company to duly observe and perform its
obligations under this Agreement.
5.15 [Intentionally Omitted]
5.16 Financial Statements. The Company will provide Parent at or prior to
the Effective Time with draft audited consolidated balance sheets of the Company
and related draft audited consolidated statements of income, cash flow and
shareholders' equity as of and for the most recently completed fiscal year of
the Company (the "Draft Financials"); provided that no later than fifteen (15)
days following the Closing Date the Company will provide Parent with final
audited consolidated balance sheets of the Company and related final audited
consolidated statements of income, cash flow and shareholders' equity as of and
for the most recently completed fiscal year of the Company that will not
materially differ from the Draft Financials.
5.17 Indemnification of Directors and Officers.
(a) For six years from and after the Effective Time, Parent shall, and shall
cause the Surviving Corporation to, indemnify and hold harmless all past and
present officers and directors of the Company to the same extent such Persons
are indemnified as of the date of this Agreement
by the Company pursuant to the Company Charter and the Company Bylaws for acts
or omissions occurring at or prior to the Effective Time.
(b) This Section 5.17 shall survive the closing of all the transactions
contemplated hereby, is intended to benefit the indemnified parties under
Section 5.17 and their respective heirs and personal representatives (each of
which shall be entitled to enforce this Section 5.17 against the Parent and the
Surviving Corporation, as the case may be, as a third-party beneficiary hereof).
5.18 Registration Obligation. Not later than 30 days after the Closing Date,
Parent shall prepare and file with the SEC a registration statement (the
"Registration Statement") on Form S-3, or any other filing form which Parent
shall deem appropriate, with respect to the sale of the shares of Merger Shares
to be held by any Stockholder or a member of the Stockholder immediately
following the Effective Time (the "Affiliate Shares"). Parent shall take all
reasonable steps necessary to ensure that the Registration Statement does not,
as of its effective date, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading. Parent shall use its best efforts to have
the Registration Statement declared effective as soon as practicable after the
Closing Date and shall keep the Registration Statement effective subject to
appropriate "blackout" periods and until the earlier of (i) eighteen (18) months
after its effective date, (ii) all Merger Shares have been sold thereunder, or
(iii) all Merger Shares may be sold without registration under the 1933 Act.
5.19 Stock Exchange Listing. Parent shall use all commercially reasonable
efforts to have authorized for quotation on Nasdaq National Market, upon
official notice of issuance, the Merger Shares and shares of Parent Common
Stock, if any, issuable upon exercise of the Warrant.
5.20 Assumption of Tax Liability. The Surviving Company shall assume the
obligation for the accumulated tax liability of the Company, other than the SWI
Distribution Liability, if any, for the period from March 1, 2000 through the
Closing Date.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligations. The obligations of each party to
perform this Agreement and to effect the Merger are subject to the satisfaction
of the following conditions, at or prior to the Closing unless waived (to the
extent such conditions can be waived) by all parties hereto:
(a) Stockholder Approval; Certificate of Merger. This Agreement and the
Merger shall have been duly and validly approved and adopted by the Stockholder
of the Company in accordance with the DGCL and the Company's Charter and
By-laws.
(b) Approvals. All authorizations, consents, orders or approvals of, or
declarations or filings with or expiration of waiting periods imposed by any
Governmental Authority necessary for the consummation of the transactions
contemplated hereby shall have been obtained or made or shall have occurred.
(c) Legal Action. No temporary restraining order, preliminary injunction or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any Federal or state court or other Governmental
Authority and remain in effect.
(d) Legislation. No Federal, state, local or foreign statute, rule or
regulation shall have been enacted which prohibits the consummation of the
transactions contemplated by this Agreement or any of the conditions to the
consummation of such transactions.
6.2 Conditions to Obligations of Parent and Acquisition Sub. The obligations
of Parent to perform this Agreement and of Acquisition Sub to perform this
Agreement and effect the Merger, at or prior to the Closing are subject to the
satisfaction of the following conditions unless waived (to the extent such
conditions can be waived) by Parent and Acquisition Sub:
(a) Representations and Warranties of the Company and the Stockholder. The
representations and warranties of the Company and the Stockholder set forth in
Section 3.1 and 3.2 hereof shall be true and correct in all material respects
(except for any representation or warranty that by its term is qualified by
materiality, in which case it shall be true and correct in all respects) as of
the Closing Date (excluding any representation or warranty that refers
specifically to the date of this Agreement, "the date hereof" or any other date
other than the Closing Date) as though made on and as of the Closing Date, and
Parent and Acquisition Sub shall have received certificates signed by the Chief
Executive Officer or President of the Company and the Stockholder to that
effect.
(b) Performance of Obligations of the Company and the Stockholder. The
Company and the Stockholder shall have performed in all material respects the
obligations required to be performed by it and them, respectively, under this
Agreement prior to or as of the Closing Date, and Parent and Acquisition Sub
shall have received a certificate signed by the Chief Executive Officer on
behalf of the Company and the Stockholder, respectively, to that effect.
(c) Authorization of Merger. All actions necessary to authorize the
execution, delivery and performance of this Agreement, the Certificate of Merger
and the Related Agreements by the Company and the consummation of the Merger and
the other transactions contemplated hereby and thereby shall have been duly and
validly taken by the Board of Directors of the Company, and the Company and the
Stockholder shall have full power and right to effect the Merger on the terms
provided herein.
(d) Opinion of the Company's Counsel. Parent and Acquisition Sub shall have
received an opinion dated the Closing Date of ▇▇▇▇▇▇ Godward LLP, counsel to the
Company, substantially in form attached hereto as Exhibit I.
(e) Consents and Approvals. Parent and Acquisition Sub shall have received
duly executed copies of all consents and approvals contemplated by this
Agreement or the Company Disclosure Schedule, in form and substance satisfactory
to Parent and Acquisition Sub.
(f) Government Consents, Authorizations, Etc. All consents, authorizations,
orders or approvals of, and filings or registrations with, any Governmental
Authority which are required for the consummation by the Company of the
transactions contemplated hereby and thereby shall have been obtained or made.
(g) Related Agreements. Each of the Related Agreements shall be in full
force and effect as of the Effective Time and become effective in accordance
with the respective terms thereof and the actions required to be taken
thereunder by the parties thereto immediately prior to the Effective Time shall
have been taken, and each person or entity who or which is required or
contemplated by the parties hereto to be a party to any Related Agreement who or
which did not theretofore enter into such Related Agreement shall execute and
deliver such Related Agreement. In addition, the Designated Persons that hold
shares of Company Stock representing, in the aggregate, and when combined with
the aggregate number of shares of Company Stock then held by the Designated
Persons, not less than ninety-five percent (95%) of the outstanding shares of
Company Stock, shall have entered into Lock-Up Agreements with Parent.
(h) Absence of Material Adverse Change. There shall have been no change
having a Company Material Adverse Effect or a Phase Three Material Adverse
Effect prior to the Closing provided, however, that for purposes of determining
whether there shall have been a Company Material Adverse Effect or a Phase Three
Material Adverse Effect, (i) any adverse change resulting from or relating to
general business or economic conditions shall be disregarded (ii) any adverse
changes resulting from or relating to conditions generally affecting the
industry in which the Company competes shall be disregarded (iii) any adverse
change resulting from or relating to the announcement or pendency of the Merger
or any of the other transactions contemplated by this Agreement shall be
disregarded, and (iv) any adverse changes resulting from or relating to the
taking of any action contemplated by this Agreement shall be disregarded.
(i) SWI Distribution/Contribution Agreement. The Stockholder and each of its
members shall have entered into a Contribution Agreement (the "Contribution
Agreement"), substantially in the form of Exhibit L attached hereto, pursuant to
which, among other matters, the members of Stockholder (representing all of the
former stockholders of the Company) (i) shall have transferred all of their
shares of Company Stock to the Stockholder in exchange for membership interests
in the Stockholder, (ii) shall have consented to the termination of the
Stockholder Agreement dated August 19, 1999 by and among the Company and the
parties thereto, and (iii) waived any rights of first refusal with respect to
such shares of Company Stock, including any such rights under Article XIV of the
Company's Bylaws. The SWI Distribution and the transactions contemplated by the
Contribution Agreement shall have been consummated in a manner reasonably
satisfactory to Parent.
(j)Resignation of Directors and Officers. The directors and officers of the
Company and Phase Three immediately prior to the Effective Time shall have
resigned as
directors and officers of the Surviving Corporation and Phase Three effective as
of the Effective Time; except that, it is currently contemplated that ▇▇▇▇
▇▇▇▇▇▇▇ shall serve as President of the Surviving Corporation after the
consummation of the Merger. The employment of each of ▇▇▇▇ ▇. ▇▇▇▇▇▇▇, ▇▇▇▇▇
▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ with the Company shall have been terminated on
terms satisfactory to Parent, provided that such termination shall include,
without limitation, the termination of (i) the employment agreement entered into
by ▇▇▇▇▇ ▇▇▇▇▇▇▇ and SWI as of October 22, 1998 and assumed by the Company
effective August 13, 1999, and (ii) the Employment Agreement by the Company and
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ shall have been terminated on terms satisfactory to Parent. That
certain Severance Agreement between the Company and ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ and the
Company and all of the Company's obligations thereunder shall have been assumed
by SWI and ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ shall have consented to such assumption in a manner
satisfactory to Parent.
(k) Company Option Plans. The Company shall have taken all corporate and
Stockholder action to terminate the Company Option Plans and all of the Company
Options shall have been exercised in full or terminated.
(l) Stockholder Members Investment Representations. Each of the members of
the Stockholder shall, as part of the Contribution Agreement, have delivered to
the Stockholder a representation, in a form reasonably satisfactory to Parent,
that such member is an accredited investor, as such term is used under the
Securities Act of 1933, as amended, and the rules and regulations thereunder.
(m) [Intentionally Omitted]
(n) Delivery of Closing Financial Certificate. Parent and Acquisition Sub
shall have received a certificate in the form attached hereto as Schedule 6.2(n)
(the "Closing Financial Certificate"), dated as of the Closing Date, prepared by
the Company, setting forth an estimate of the Net Working Capital of the Company
as of the Closing Date equal to $3,339,000 (the "Estimated Company Net Working
Capital"), which is the estimated amount of Net Working Capital of the Company
as of the Closing Date. For the purposes of the Closing Financial Certifcate,
the estimated accumulated tax liability of the Company, other than the SWI
Distribution Liability, if any, for the period from March 1, 2000 through the
Closing Date shall be $400,000 (the "Estimated 2000 FY Tax Liability"). The
parties acknowledge and agree that for the purposes of determining Estimated
Company Net Working Capital and Actual Company Net Working Capital (defined
below), the liabilities of the Company shall not include (i) net cash advances
made to Phase Three by its then current parent prior to February 29, 2000; (ii)
income taxes accrued subsequent to February 29, 2000; and (iii) the CIBC Fee.
(o) Employment. As of the Closing Date, the Company shall employee a
sufficient number of employees to operate in the ordinary course the business of
the Company, as determined by Parent in good faith.
(p) Additional Documents. The Parent and Acquisition Sub shall have received
the following documents:
(i) from Phase Three a certificate of good standing of Phase Three
issued by the Secretary of State of the State of California dated within 7
business days of the Closing Date;
(ii) from the Company (1) a certificate of good standing of the Company
issued by the Secretary of State of the State of Delaware dated within 7
business days of the Closing Date, (2) a certificate as to the Company's due
qualification and license to do business issued by the Secretary of State of the
State of California dated within 7 business days of the Closing Date and (3)
certificates signed by the President and Secretary of the Company in the form
attached hereto as Exhibit J.
(iii) from the Stockholder (1) a certificate of full force and effect of
the Stockholder issued by the Secretary of State of the State of Delaware dated
within 7 business days of the Closing Date, and (2) certificates signed by the
President and Secretary of the Stockholder in the form attached hereto as
Exhibit J.
(q) Term Debt and Notes.
(i) The Amendment to Loan and Security Agreement (the "Loan Amendment")
shall have been entered into by and among Stockholder, CCS, Parent, SWI, Fleet
Capital Corporation ("Fleet"), First Source Financial LLP ("First Source") and
certain other parties thereto, pursuant to which, among other matters, SWI or
the Stockholder shall have fully assumed all of the then outstanding principal
amount and interest of any debt outstanding and payable by the Company, Phase
Three, SWI or any of their Affiliates to Fleet and First Source (the "Term
Debt"), including, but not limited to, the debt referred to in the documents set
forth in Schedule 6.2(q)(i) attached hereto, in excess of $10,000,000 in
aggregate principal amount (the "Retained Debt").
(ii) SWI and/or the Stockholder shall have fully assumed all of the then
outstanding principal and interest of any debt outstanding and payable by the
Company, Phase Three, SWI or any of their Affiliates pursuant to any promissory
notes executed by SWI, Phase Three or the Company in favor of any member of the
Stockholder or any other Affiliate of SWI, Phase Three, the Company or the
Stockholder immediately prior to the Effective Time (the "Notes"), including,
but not limited to, the promissory notes set forth on Schedule 6.2(q)(ii)
attached hereto.
(iii) SWI and/or Stockholder shall have fully assumed the Term Debt and
the Notes. The Company and Phase Three shall not have any obligations or
liabilities under the Term Debt, the Notes or any of the documents set forth on
Schedule 6.2(q)(i) or Schedule 6.2(q)(ii). The Company and Phase Three shall
have been removed as a promissor, guarantor and/or party under any documents
relating to the Term Debt and the Notes, including, without limitation, any of
the documents set forth on Schedule 6.2(q)(i) or Schedule 6.2(q)(ii). The Phase
Three stock certificate(s) that had been held by Fleet to secure the Term Debt
shall have been delivered to Parent. No Encumbrances shall be on, in place or
exist with regard to any of the assets of the Company or Phase Three in
connection with the Term Debt.
(r) Profit Sharing Plan Prior to the Closing Date, the Central Coast
Surfboards, Inc. Profit Sharing Plan (the "Profit Sharing Plan") shall be
terminated and accounts of participants shall be 100% vested, in accordance with
applicable law and the provisions of the Profit Sharing Plan.
6.3 Conditions to Obligations of the Company. The obligations of the Company
to perform this Agreement and the Certificate of Merger are subject to the
satisfaction of the following conditions unless waived (to the extent such
conditions can be waived) by the Company:
(a) Representations and Warranties of Parent. The representations and
warranties of Parent and Acquisition Sub set forth in Section 3.3 hereof shall
be true and correct in all material respects (except for any representation or
warranty that by its terms is qualified by materiality, in which case it shall
be true and correct in all respects) as of the Closing Date (excluding any
representation or warranty that refers specifically to "the date of this
Agreement, "the date hereof" or any other date other than the Closing Date) as
though made on and as of the Closing Date, and the Company shall have received a
certificate signed by the Chief Executive Officer or President of Parent and the
President of Acquisition Sub to that effect.
(b) Performance of Obligations of Parent and Acquisition Sub. Parent and
Acquisition Sub shall have performed in all material respects their respective
obligations required to be performed by them under this Agreement and the
Certificate of Merger prior to or as of the Closing Date and the Company shall
have received a certificate signed by the Senior Vice President of Parent and
President of Acquisition Sub to that effect.
(c) Related Agreements. Parent shall have executed and delivered the Related
Agreements to which it is a party and all other agreements to which Parent is to
be party pursuant to the terms of Section 4.1 and each such agreement shall be
in full force and effect in accordance with its terms.
(d) Stock Certificates. Parent shall have delivered a letter to its transfer
agent directing the transfer agent to deliver the Merger Shares to the
Stockholder and Escrow Agent, as applicable.
(e) Stockholder Approval. This Agreement and the Merger shall have been
approved by the affirmative vote of at least (i) a majority of the outstanding
shares of Company Common Stock, and (ii) seventy-five percent (75%) of the
Series A Preferred Stock and Series B Preferred Stock, each voting separately as
a class.
(f) Absence of Material Adverse Change. There shall have been no change
having a Parent Material Adverse Effect prior to the Closing provided, however,
that for purposes of determining whether there shall have been a Parent Material
Adverse Effect (i) any adverse change resulting from or relating to general
business or economic conditions shall be disregarded (ii) any adverse change
resulting from or relating to conditions generally affecting the industry in
which the Parent competes shall be disregarded (iii) any adverse change
resulting from or relating to the announcement or pendency of the Merger or any
of the other transactions
contemplated by this Agreement shall be disregarded, and (iv) any adverse change
resulting from or relating to the taking of any action contemplated by this
Agreement shall be disregarded.
(g) Loan Amendment. Parent shall have, pursuant to the terms of the Loan
Amendment, paid-off $10,000,000 of the Term Debt.
(h) Additional Documents. The Stockholder shall have received the following
documents from Parent or Acquisition Sub, as the case may be:
(i) certificates of good standing of Parent and Acquisition Sub,
respectively, issued by the Secretary of State of the State of Delaware dated
within 7 business days of the Closing Date, and
(ii) certificates signed by the President and Secretary of Parent and
Acquisition Sub, respectively, in the form attached hereto as Exhibit J.
(i) CIBC Fee. Parent shall have paid the CIBC Fee.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Certain Information Required by the Code. Each holder of Company Stock
or Company Options who holds ten percent (10%) or more (by value) of the
interests in the Company immediately prior to the Merger, within the meaning of
Section 1060(e) of the Code, and who, in connection with the Merger, enters into
a Non-Competition Agreement or other agreement with the Company or the Surviving
Corporation (or is related to any person who enters into any such contract or
agreement, within the meaning of Section 267(b) or Section 707(b)(1) of the
Code) shall furnish Parent with any information required pursuant to Section
1060(e) of the Code at such time and in such manner as Parent may request in
order to comply with Section 1060(e) and any regulations promulgated thereunder.
7.2 Restriction on Transfer.
-----------------------
(a) The shares of Parent Common Stock to be issued to the Stockholder
pursuant to the Merger and any shares of capital stock or other securities
received with respect thereto (collectively, the "Restricted Securities") shall
not be sold, transferred, assigned, pledged, encumbered or otherwise disposed of
(each, a "Transfer") except upon the conditions specified in this Section 7.2
and except for the pledge of such shares in connection with the Term Debt
assumed by SWI, which conditions are intended to insure compliance with the
provisions of the Securities Act. The Stockholder shall observe and comply with
the Securities Act and the rules and regulations promulgated by the SEC
thereunder as now in effect or hereafter enacted or promulgated, and as from
time to time amended, in connection with any Transfer of Restricted Securities
beneficially owned by the stockholder.
(b) Each certificate representing Restricted Securities issued to the
Stockholder and each certificate for such securities issued to subsequent
transferees of any such certificate shall (unless otherwise permitted by the
provisions of Sections 7.2(c) and 7.2(d) hereof) be stamped or otherwise
imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY"
LAWS. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM. ADDITIONALLY, THE TRANSFER OF THESE
SECURITIES IS SUBJECT TO THE CONDITIONS SPECIFIED IN SECTION 7.2 OF THE
AGREEMENT AND PLAN OF REORGANIZATION DATED AS OF _______, 2000 AMONG
ALLOY ONLINE, INC., ALLOY ACQUISITION SUB, INC., ▇▇▇▇▇ MARKETING, INC.
AND THE OTHER SIGNATORIES THERETO AND NO TRANSFER OF THESE SECURITIES
SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED.
UPON THE FULFILLMENT OF CERTAIN OF SUCH CONDITIONS, ALLOY ONLINE INC.
HAS AGREED TO DELIVER TO THE HOLDER HEREOF AN ALLOY ONLINE INC.
CERTIFICATE, NOT BEARING THIS LEGEND, FOR THE SECURITIES REPRESENTED
HEREBY REGISTERED IN THE NAME OF THE HOLDER HEREOF. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF ALLOY ONLINE
INC."
(c) Upon approval of the Merger by the Stockholder as contemplated hereby,
the Stockholder is deemed to agree (and by execution and delivery of this
Agreement and the Lock-Up Agreement the Stockholder confirms its agreement)
that, prior to any Transfer of Restricted Securities to give written notice to
Parent of Stockholder's intention to effect such Transfer and to comply in all
other respects with the provisions of this Section 7.2. Each such notice shall
describe the manner and circumstances of the proposed Transfer and, if
reasonably requested by Parent, shall be accompanied by the written opinion,
addressed to Parent, of counsel for the holder of such Restricted Securities,
stating that in the opinion of such counsel (which opinion and counsel shall be
reasonably satisfactory to Parent) such proposed transfer does not involve a
transaction requiring registration or qualification of such Restricted
Securities under the Securities Act or the securities or "blue-sky" laws of any
relevant state of the United States. The holder thereof shall thereupon be
entitled to Transfer such Restricted Securities in accordance with the terms of
the notice delivered by it to Parent. Notwithstanding anything contained herein
to the contrary, no opinion shall be required for a distribution of shares from
Stockholder to its members. Each certificate or other instrument evidencing the
securities issued upon the Transfer
of any such Restricted Securities (and each certificate or other instrument
evidencing any un-transferred balance of such Restricted Securities) shall bear
the legend set forth in Section 7.2(b) unless (x) in such opinion of counsel of
Parent registration of any future Transfer is not required by the applicable
provisions of the Securities Act or (y) Parent shall have waived the requirement
of such legends. No holder of any Restricted Securities shall Transfer any
Restricted Securities until such opinion of counsel has been given (unless
waived by Parent or unless such opinion is not required in accordance with the
provisions of this Section 7.2(c)).
(d) Notwithstanding the foregoing provisions of this Section 7.2, the
restrictions imposed by this Section 7.2 upon the transferability of Restricted
Securities shall cease and terminate when (i) any such shares are sold or
otherwise disposed of pursuant to an effective registration statement under the
Securities Act or as otherwise contemplated by Section 7.2(c) and, pursuant to
Section 7.2(c), the securities so transferred are not required to bear the
legend set forth in Section 7.2(b) or (ii) the holder of such Restricted
Securities has met the requirements for Transfer of such Restricted Securities
pursuant to subparagraph (k) of Rule 144. Whenever the restrictions imposed by
this Section 7.2 shall terminate, as herein provided, the holder of Restricted
Securities as to which such restrictions have terminated shall be entitled to
receive from Parent, without expense, a new certificate not bearing the
restrictive legend set forth in Section 7.2(b) and not containing any other
reference to the restrictions imposed by this Section 7.2.
(e) To enforce the restrictions set forth in this Section 7.2, the
Stockholder understands and agrees that Parent, at its discretion, may cause
stop transfer orders to be placed with its transfer agent with respect to
certificates for Restricted Securities owned by the Stockholder but not as to
certificates for such shares of Parent Common Stock as to which the legend set
forth in paragraph (b) of this Section 7.2 is no longer required because one or
more of the conditions set forth in Section 7.2(d) shall have been satisfied, in
the event of a proposed transfer in violation or breach of this Section 7.2 or
that is or may otherwise be unlawful.
7.3 Confidentiality.
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(a) The Stockholder acknowledges and recognizes that the Company Subject
Business (as defined below) has been conducted or is currently planned to be
conducted by the Company and Phase Three, and further acknowledges and
recognizes the highly competitive nature of the industry in which the Company
Subject Business is involved and that, accordingly, in consideration of the
premises contained herein, the consideration to be received hereunder and the
direct and indirect benefits to the Stockholder of the transactions contemplated
hereby, and in consideration of and as an inducement to Parent and Acquisition
Sub to enter into to this Agreement and to consummate the transactions
contemplated hereby, from and after the Effective Time, the Stockholder shall
not (and shall cause each of their respective affiliates and subsidiaries, and
the officers, directors, employees, equityholders, advisors and agents of them
and their affiliates and subsidiaries not to) use or disclose to any person, any
Company Confidential Information or the terms and conditions of this Agreement,
for any reason or purpose whatsoever, nor shall it or they make use of any of
the Company Confidential Information for its own purposes or for the benefit of
any Person except (i) in order to facilitate the fulfillment of such party's
obligations hereunder, (ii) to Parent and the Surviving
Corporation, (iii) as required by law or judicial process, (iv) as required to
fulfill legal and regulatory obligations, if any, or (v) to such party's
attorneys, accountants, other advisors, officers, employees, directors and
equityholders, as applicable, provided that such third party agrees to be bound
by the confidentiality provisions hereof. For purposes of this Agreement,
"Company Confidential Information" shall mean Intellectual Property Rights of
the Company, Phase Three, the Surviving Corporation or Parent or its affiliates
and all information of a proprietary nature relating to the Company, Phase
Three, the Surviving Corporation or Parent or its affiliates or the Company
Subject Business (other than information that is in the public domain at the
time of receipt thereof by the Company or otherwise becomes public other than as
a result of the breach by the Company or the Stockholder of its agreement
hereunder or is rightfully received from a third party without any obligation of
confidentiality to Parent or the Company or is independently developed by the
Company) and the terms and conditions of this Agreement. As used herein, the
term "Company Subject Business" shall mean (i) the business of the Company or
Phase Three and (ii) the business of Parent or any of its affiliates.
(b) The Parent and Acquisition Sub acknowledge and recognize that the SWI
Business (as defined below) has been conducted or is currently planned to be
conducted by SWI, and further acknowledge and recognize the highly competitive
nature of the industry in which the SWI Business is involved and that,
accordingly, in consideration of the premises contained herein, the
consideration to be received hereunder and the direct and indirect benefits to
the Parent and Acquisition Sub of the transactions contemplated hereby, and in
consideration of and as an inducement to Stockholder to enter into to this
Agreement and to consummate the transactions contemplated hereby, from and after
the Effective Time, the Stockholder shall not (and shall cause each of their
respective affiliates and subsidiaries, and the officers, directors, employees,
equityholders, advisors and agents of them and their affiliates and subsidiaries
not to) use or disclose to any person, any SWI Confidential Information or the
terms and conditions of this Agreement, for any reason or purpose whatsoever,
nor shall it or they make use of any of the SWI Confidential Information for its
own purposes or for the benefit of any person except (i) in order to facilitate
the fulfillment of such party's obligations hereunder, (ii) to SWI or the
Stockholder, (iii) as required by law or judicial process, (iv) as required to
fulfill legal and regulatory obligations, if any, or (v) to such party's
attorneys, accountants, other advisors, officers, employees, directors and
equityholders, as applicable, provided that such third party agrees to be bound
by the confidentiality provisions hereof. For purposes of this Agreement, "SWI
Confidential Information" shall mean Intellectual Property Rights of SWI or the
Stockholder, or its affiliates and all information of a proprietary nature
relating to SWI or Stockholder or its affiliates or the SWI Business (other than
information that is in the public domain at the time of receipt thereof by SWI
or the Stockholder or otherwise becomes public other than as a result of the
breach by Parent or Acquisition Sub of its agreement hereunder or is rightfully
received from a third party without any obligation of confidentiality to SWI or
the Stockholder or is independently developed by the Parent or Acquisition Sub)
and the terms and conditions of this Agreement. As used herein, the term "SWI
Business" shall mean the business of the Stockholder or SWI or any of its
affiliates.
7.4 Profit Sharing Plan/IRS. As soon as reasonably practicable following,
but in no event later than 90 days following, the Closing Date, the Stockholder
shall file or shall cause to be filed with the Internal Revenue Service ("IRS")
a request for a favorable determination upon
termination of the Profit Sharing Plan, in accordance with such rules and
regulations governing such filings. The Stockholder shall take such actions as
the IRS may require to obtain such a determination and shall provide to
Acquisition Sub copies of the filing, and all correspondence to and from the IRS
with respect to such filing, including, without limitation, a copy of the
favorable determination letter ultimately issued by the IRS in response to such
filing
ARTICLE VIII
INDEMNIFICATION
8.1 Definitions. As used in this Agreement, the following terms shall have
the following meanings:
(a) "Affiliate" as to any person means any entity, directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with such person.
(b) "Event of Indemnification" shall mean the following:
(i) with respect to Parent, Acquisition Sub and the Surviving
Corporation (a "Parent Event of Indemnification"),
(1) the breach or misrepresentation of any representation or
warranty contained in Section 3.1 or 3.2 of this Agreement, the Company
Disclosure Schedule, or any Exhibit or Schedule hereto;
(2) the breach or misrepresentation of any agreement or covenant of
the Company or the Stockholder contained in this Agreement or in the
Company Disclosure Schedule, any Exhibit hereto or any document
delivered in connection herewith;
(3) any claim, demand, liability or obligation of any nature
whatsoever, which arose or was incurred on or before the Closing Date,
or which was based on events occurring on or before the Closing Date, or
which was based on products sold or services performed by the Company,
Phase Three, SWI, or the stockholders of the Company on or before the
Closing Date, notwithstanding that the date on which the claim, demand,
liability or obligation may arise or become manifest is after the
Closing Date, other than liabilities or obligations of the Company or
Phase Three arising after the Closing Date under contracts and
agreements entered into prior to the Closing Date that are disclosed on
the Company Disclosure Schedule; or
(4) any claim, demand, liability or obligation sustained or
suffered by the Company, Phase Three, Parent or the Surviving
Corporation, or any of them, arising from or in connection with (A) the
action of the Stockholder required to
approve the transactions contemplated by this Agreement, the
Contribution Agreement and the Related Agreements, or (B) any assertion
of impropriety by the Stockholder of the Company against the Company,
Phase Three, Parent or the Surviving Corporation, or any of them, with
respect to any actions or transactions of or involving the Company or
Phase Three prior to or at the Effective Time (including without
limitation, the actions and transactions contemplated by this Agreement,
the Certificate of Merger and the Related Agreements); provided that an
Event of Indemnification shall not include (x) liabilities set forth on
the Company Financial Statements, (y) liabilities set forth on Schedule
3.1(f), or (z) liabilities accrued in the ordinary course of business
after the date of the Company Balance Sheet other than any such
liabilities under this subsection (z) that should have been disclosed on
the Company Disclosure Schedule but were not.
(ii) with respect to the Stockholder (a "Stockholder Event of
Indemnification"),
(1) the breach or misrepresentation by Parent or Acquisition Sub of
any representation or warranty contained in Section 3.3 of this
Agreement or any Exhibit or Schedule hereto; or
(2) the breach or misrepresentation of any agreement or covenant of
Parent or Acquisition Sub contained in this Agreement, any Exhibit
hereto or any document delivered in connection herewith.
(c) "Indemnified Persons" shall mean and include:
(i) with respect to a Parent Event of Indemnification, Parent,
Acquisition Sub and the Surviving Corporation and their respective
Affiliates, successors and assigns, and the respective officers and
directors of each of the foregoing; or
(ii) with respect to a Stockholder Event of Indemnification, Stockholder
and its respective Affiliates, successors and assigns, and the respective
officers and directors of each of the foregoing.
(d) "Indemnifying Persons" shall mean and include:
(i) with respect to a Parent Event of Indemnification, prior to the
Closing, the Company, the Stockholder and each of its or his respective
successors, assigns, heirs and legal representatives and estates, as the
case may be and (B) on and after the Closing, the Stockholder and its or his
respective successors, assigns, heirs and legal representatives and estates,
as the case may be (the "Stockholder Indemnifying Parties"); or
(ii) with respect to a Stockholder Event of Indemnification, Parent and
Acquisition Sub and each of its or his respective successors, assigns, heirs
and legal representatives and estates, as the case may be (the "Parent
Indemnifying Parties").
(e) "Losses" shall mean any and all losses, demands, actions or causes of
action, suits, proceedings, investigations, arbitrations, claims assessments,
shortages, damages, liabilities (contingent or otherwise), payments,
obligations, expenses (including reasonable attorneys' and accountants' fees),
assessments, Taxes (including interest or penalties thereon) sustained, suffered
or incurred by any Indemnified Person arising from or in connection with any
such matter that is the subject of indemnification under Section 8.2 hereof.
8.2 Indemnification Generally.
(a) The Indemnifying Persons shall indemnify the Indemnified Persons from
and against any and all Losses arising from or in connection with any Event of
Indemnification.
(b) Any Losses arising from a Parent Event of Indemnification shall be paid
from the Escrow Fund (as defined in the Indemnity Escrow Agreement), provided
that the indemnification obligations of the Stockholder after the Closing shall
be limited to the amounts deposited in the Escrow Fund; and (other than in
connection with Fraud Claims, Tax, Title or Environmental Claims, or SWI
Distribution Liability Claims (each as defined below)). To the extent
applicable, a Parent Event of Indemnification shall be effected in accordance
with the terms and conditions of the Indemnity Escrow Agreement.
(c) The indemnification obligations of the Parent Indemnifying Parties shall
be limited to $10,000,000.
(d) No payment for Losses shall be made until the aggregate amount of Losses
incurred by an Indemnified Person exceeds $250,000 after which point the
Indemnifying Persons shall indemnify the Indemnified Persons for all accrued
Losses, including the first $250,000 of such Losses.
(e) Notwithstanding any of the foregoing, nothing contained in this Section
8.2 shall in any way limit, impair, modify or otherwise affect the rights of the
Indemnified Persons (including rights available under the Securities Act or the
Exchange Act) nor shall there be any limitation of liability of Indemnifying
Persons in connection with any of such rights of the Indemnified Persons (A) to
bring any claim, demand, suit or cause of action otherwise available to the
Indemnified Persons based upon (i) an allegation or allegations that the Company
and/or the Indemnifying Persons, or any of them, had an intent to defraud or
made a willful, intentional or reckless misrepresentation or willful omission of
a material fact in connection with this Agreement, the Certificate of Merger or
the Related Agreements and the transactions contemplated hereby or thereby
("Fraud Claims"), (ii) any alleged breach of any of the representations or
warranties contained in Sections 3.1(c), 3.1(g), 3.1(p) or 3.2(a) (a "Title, Tax
or Environmental Claim"), or (iii) the SWI Distribution Liability ("SWI
Distribution Liability Claims") or (B) to enforce any judgment of a court of
competent jurisdiction which finds or determines that the Company and/or the
Indemnifying Persons, or any of them, had an intent to defraud or made a willful
misrepresentation or omission of a material fact in connection with this
Agreement or the Certificate of Merger and the transactions contemplated hereby
or thereby. Notwithstanding the foregoing or anything to the contrary in this
Agreement, the indemnification obligations of the Stockholder Indemnifying
Parties after Closing pursuant to
this Section 8.2(e) shall be limited to an aggregate total of $10,000,000,
including the amounts deposited in the Escrow Fund.
8.3 Assertion of Claims. No claim shall be brought under Section 8.2 hereof
unless the Indemnified Persons, or any of them, at any time prior to the
applicable Survival Date, give the Stockholder (a) written notice of the
existence of any such claim, specifying the nature and basis of such claim and
the amount thereof, to the extent known or (b) written notice pursuant to
Section 8.4 of any third party claim, the existence of which might give rise to
such a claim but the failure so to provide such notice to the Stockholder will
not relieve the Indemnifying Persons from any liability which they may have to
the Indemnified Persons under this Agreement or otherwise (unless and only to
the extent that such failure results in the loss or compromise of any rights or
defenses of the Indemnifying Persons and they were not otherwise aware of such
action or claim). Upon the giving of such written notice as aforesaid, the
Indemnified Persons, or any of them, shall have the right to commence legal
proceedings prior or subsequent to the Survival Date for the enforcement of
their rights under Section 8.2 hereof.
8.4 Notice and Defense of Third Party Claims. Losses resulting from the
assertion of liability by third parties (each, a "Third Party Claim") shall be
subject to the following terms and conditions:
(a) The Indemnified Persons shall promptly give written notice to the
Stockholder of any Third Party Claim that might give rise to any Loss by the
Indemnified Persons, stating the nature and basis of such Third Party Claim, and
the amount thereof to the extent known. Such notice shall be accompanied by
copies of all relevant documentation with respect to such Third Party Claim,
including, without limitation, any summons, complaint or other pleading that may
have been served, any written demand or any other document or instrument.
Notwithstanding the foregoing, the failure to provide notice as aforesaid to the
Stockholder will not relieve the Indemnifying Persons from any liability which
they may have to the Indemnified Persons under this Agreement or otherwise
(unless and only to the extent that such failure directly results in the loss or
compromise of any rights or defenses of the Indemnifying Person and they were
not otherwise aware of such action or claim).
(b) The Indemnified Persons shall defend any Third Party Claims with counsel
of their own choosing, and shall act reasonably and in accordance with their
good faith business judgment in handling such Third Party Claims. The
Indemnifying Persons shall be entitled, at their expense, to participate in the
defense of any Third Party Claims. The Stockholder and the Indemnifying Persons,
on the one hand, and the Indemnified Persons, on the other hand, shall make
available to each other and their counsel and accountants all books and records
and information relating to any Third Party Claims, keep each other fully
apprised as to the details and progress of all proceedings relating thereto and
render to each other such assistance as may be reasonably required to ensure the
proper and adequate defense of any and all Third Party Claims. The Indemnified
Persons shall have the right to settle, adjust or compromise such Third Party
Claims with the consent of the Indemnifying Persons, such consent not to be
unreasonably withheld; provided, however, that any such settlement, adjustment
or compromise shall include full and complete waivers and releases (documented
in writing) of all applicable Third Party Claims.
8.5 Survival of Representations and Warranties. Subject to the further
provisions of this Section 8.5, the representations and warranties of the
parties hereto shall survive the Effective Time until the date that is fifteen
(15) months after the Closing Date; provided, however, that the representations
and warranties contained in Sections 3.1(a), (b), (c), (g), and (p), and 3.2(a),
(b), (c) and (d), Fraud Claims and SWI Distribution Liability Claims shall
survive in accordance with the applicable statute of limitations related to such
representations and warranties, such Fraud Claims or such SWI Distribution
Liability Claims. For convenience of reference, the date upon which any
representation and warranty contained herein shall terminate is referred to
herein as the "Survival Date." Anything contained herein to the contrary
notwithstanding, the representations and warranties of the Company contained in
this Agreement (including, without limitation, the Company Disclosure Schedule)
(i) are being given by the Company on behalf of the stockholders of the Company
and for the purpose of binding the stockholders of the Company to the terms and
provisions of this Article VIII and the Indemnification Escrow Agreement, and as
an inducement to Parent and Acquisition Sub to enter into this Agreement and to
approve the Merger (and the Company acknowledges that Parent and Acquisition Sub
have expressly relied thereon) and (ii) are solely for the benefit of the
Indemnified Persons and each of them. Accordingly, no third party (including,
without limitation, the stockholders of the Company or anyone acting on behalf
of any thereof) other than the Indemnified Persons, and each of them, shall be a
third party or other beneficiary of such representations and warranties and no
such third party shall have any rights of contribution against the Company or
the Surviving Corporation with respect to such representations or warranties or
any matter subject to or resulting in indemnification by such third party under
this Article VIII or otherwise.
8.6 Potential Additional Adjustment.
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(a) Notwithstanding the above indemnification, the parties acknowledge
and agree that as promptly as practicable following the Effective Time, the
Parent shall cause the Surviving Company, with the assistance of Ernst & Young,
to prepare an audited,to the extent acceptable to Ernst & Young on commercially
reasonable terms, balance sheet of the Company as at the Closing Date (the
"Audited Closing Date Balance Sheet"). The Audited Closing Date Balance Sheet
shall include the figure for accumulated tax liability of the Company, other
than the SWI Distribution Liability, if any, for the period from March 1, 2000
through the Closing Date (the "Actual 2000 FY Tax Liability"). The parties agree
that during the preparation of the Audited Closing Date Balance Sheet, ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ LLP will be provided with (i) regular updates as to the status of the
preparation, and (ii) copies of all documentation relevant to the preparation,
including copies of documentation that ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP may reasonably
request. The Audited Closing Date Balance Sheet shall promptly be delivered to
Parent and the Stockholder upon completion. The parties acknowledge and agree
that for the purposes of determining Estimated Company Net Working Capital and
Actual Company Net Working Capital (defined below), the liabilities of the
Company shall not include (i) net cash advances made to Phase Three by its then
current parent prior to February 29, 2000; (ii) income taxes accrued subsequent
to February 29, 2000; and (iii) the CIBC Fee. "Actual Company Net Working
Capital" shall mean the Net Working Capital of the Company as of the Closing
Date set forth in the Audited Closing Date Balance Sheet, less (i) the Estimated
2000 FY Tax Liability
if the Actual 2000 FY Tax Liability is less than or equal to the Estimated 2000
FY Tax Liability, or (ii) the Actual 2000 FY Tax Liability, if the Actual 2000
FY Tax Liability is greater than the Estimated 2000 FY Tax Liability.
(b) If the Actual Company Net Working Capital is equal to the Estimated
Company Net Working Capital, the Stockholder shall, promptly after receiving
written notice of such determination, deliver a written notice to the Indemnity
Escrow Agent (with a copy to Parent) instructing the Indemnity Escrow Agent to
distribute any Additional Merger Shares to the Stockholder.
(c) If the Actual Company Net Working Capital is greater or lower than
the Estimated Company Net Working Capital, the Stockholder shall deliver a
written notice (the "Financial Adjustment Notice") to Parent setting forth the
Actual Company Net Working Capital (hereinafter sometimes referred to as the
"Revised Amount").
(d) Either Parent or the Stockholder (the "Disputing Party") shall have
30 days from the delivery or receipt, as the case may be, of the Financial
Adjustment Notice to deliver to the other (the "Receiving Party") a written
notice (the "Final Adjustment Dispute Notice") stating the Disputing Party
disputes such Financial Adjustment Notice. If the Receiving Party has received
the Final Adjustment Notice Dispute within such 30-day period, then the
Receiving Party and the Disputing Party shall mutually agree on an independent
accounting firm to review the Closing Financial Certificate and the Financial
Adjustment Notice (and related information). If the Receiving Party and the
Disputing Party cannot agree on an independent accounting firm, Ernst & Young
shall select such independent accounting firm. The determination of such
independent accounting firm of the final Actual Company Net Working Capital (the
"Final Revised Amount") shall be final and binding on the parties hereto. If the
Receiving Party does not receive the Final Adjustment Dispute Notice within the
30-day period described above, the Revised Amount shall be final and binding on
the parties hereto and shall be referred to as the "Final Revised Amount". The
costs, if any, of the independent accounting firm shall be borne by the
Disputing Party if the difference between the Revised Amount and the Final
Revised Amount is greater than the difference between the Estimated Company Net
Working Capital and the Final Revised Amount, by the Receiving Party if vice
versa, or equally by the Disputing Party and the Receiving Party if the
difference is equidistant.
(e) If the Final Revised Amount is less than the Presumed Company Net
Working Capital and the Estimated Company Net Working Capital, Stockholder
shall, promptly after receiving written notice of the determination of the Final
Revised Amount, deliver (i) a written notice to the Indemnity Escrow Agent (with
a copy to Parent) instructing the Indemnity Escrow Agent to distribute the
Additional Merger Shares to the Stockholder, and (ii) a written notice to Parent
specifying (A) the Net Working Capital Adjustment Factor that would have been
applicable pursuant to Section 2.1(c) had the Final Revised Amount been
reflected on the Closing Financial Certificate, and (B) the additional shares of
Parent Common Stock that would have been deducted from the Total Parent Share
Amount had the Final Revised Amount been used in the calculations pursuant to
Section 2.1(c) (the "Additional Adjustment Shares"). Promptly after delivering
the written notice described in the foregoing sentence, the Stockholder shall
distribute to Parent a number of Merger Shares equal to the number of Additional
Adjustment Shares. The Stockholder hereby covenants, until the determination of
the Final Revised Amount and for a reasonable time thereafter to allow Parent to
send the notice specified in (ii) above, to retain possession of and not to
transfer to its members or any other party a sufficient number of Merger Shares
to comply with this Section 8.6(e). Notwithstanding the foregoing, Parent shall
have the right to have all or any portion of the Additional Adjustment Shares
distributed to Parent from the Indemnity Escrow Fund.
(f) If the Final Revised Amount is greater than Estimated Company Net
Working Capital, (i) the Stockholder shall, after receiving written notice of
the determination of the Final Revised Amount, promptly deliver a written notice
to the Indemnity Escrow Agent (with a copy to Parent) instructing the Indemnity
Escrow Agent to distribute any Additional Merger Shares to Parent, and (ii), as
soon as practicable thereafter, Parent shall distribute to the Stockholder a
certificate(s) representing the Supplementary Additional Merger Shares (as
defined below). "Supplementary Additional Merger Shares" shall mean an
additional number of shares of Parent Common Stock, if any, calculated by
dividing the Working Capital Surplus (as defined below) by the Stipulated Price
and rounding such quotient to the nearest whole number. "Working Capital
Surplus" shall mean the amount, if any, by which the Final Revised Amount
exceeds the Estimated Company Net Working Capital.
(g) If the Final Revised Amount is greater than or equal to the Presumed
Company Net Working Capital but less the Estimated Company Net Working Capital,
the Stockholder shall, promptly after receiving written notice of such
determination, deliver a written notice to the Indemnity Escrow Agent (with a
copy to Parent) instructing the Indemnity Escrow Agent to distribute (i) to
Parent, the Surplus Additional Merger Shares (as defined below), and (ii) to
Stockholder, the remaining Additional Merger Shares less the Surplus Additional
Merger Shares. "Working Capital Shortfall" shall mean the Estimated Company Net
Working Capital less the Final Revised Amount. "Surplus Additional Merger
Shares" shall mean the quotient obtained by dividing the Working Capital
Shortfall by the Stipulated Price.
ARTICLE IX
TERMINATION; AMENDMENT, MODIFICATION AND WAIVER
9.1 Termination. This Agreement may be terminated, and the Merger abandoned,
notwithstanding the approval by Parent, Acquisition Sub and the Company of this
Agreement, at any time prior to the Effective Time, by:
(a) the written mutual consent of Parent, Acquisition Sub and the Company;
or
(b) either Parent or Company, if the conditions set forth in Section 6.1
hereof shall not have been met by July 20, 2000, except if such conditions have
not been met solely as a result of the action or inaction of the party seeking
to terminate; or
(c) Parent and Acquisition Sub, if the conditions set forth in Section 6.2
hereof shall not have been met, and the Company if the conditions set forth in
Section 6.3 hereof shall not
have been met, in either case by July 20, 2000, except if such conditions have
not been met solely as a result of the action or inaction of the party seeking
to terminate.
Any termination pursuant to this Section 9.1 shall be effected by written
notice from the party or parties so terminating to the other parties hereto.
9.2 Effect of Termination. Except as provided in this Section 9.2, in the
event of the termination of this Agreement pursuant to Section 9.1, this
Agreement shall be of no further force or effect, except for Sections 5.12, this
Section 9.2 and Article X, each of which shall survive the termination of this
Agreement; provided, however, that the liability of any party for any breach by
such party of the representations, warranties, covenants or agreements of such
party set forth in this Agreement occurring prior to the termination of this
Agreement shall survive the termination of this Agreement.
9.3 Specific Performance. The transactions contemplated by this Agreement,
including the Merger, are unique transactions and any failure on the part of the
Company and the Stockholders to complete the transactions contemplated by this
Agreement, including the Merger, on the terms of this Agreement will not be
fully compensable in damages and the breach or threatened breach of the
provisions of this Agreement would cause Parent irreparable harm. Accordingly,
in addition to and not in limitation of any other remedies available to Parent
for a breach or threatened breach of this Agreement, Parent will be entitled to
specific performance of this Agreement upon any breach by the Company or the
Stockholders, and to an injunction restraining any such party from such breach
or threatened breach.
ARTICLE X
MISCELLANEOUS
10.1 Expenses. As used in this Agreement, "Transaction Costs" shall mean,
with respect to any party, all actual, out-of-pocket expenses incurred by such
party to third parties, in connection with this Agreement, the Merger and all
other transactions provided for herein and therein; but shall not in any event
include general overhead; the time spent by employees of such party internally;
postage, telephone, telecopy, photocopy and delivery expenses; permit and filing
fees; and other non-material expenses that are incidental to the ordinary course
of business. Each party hereto shall bear its own fees and expenses in
connection with the transactions contemplated hereby; provided, however, that if
the Merger shall be consummated, (a) Parent and Acquisition Sub shall bear all
Transaction Costs of Parent and Acquisition Sub and (b) the Stockholder shall
bear all Transaction Costs of the Company, whether or not such fees and expenses
have been paid by the Company or the Stockholder on or before the Closing Date
and whether or not such fees and expenses are reflected in the Company
Disclosure Schedule or the Schedule of Expenses (such Transaction Costs of the
Company being herein collectively referred to as the "Company Expenses").
10.2 Entire Agreement. This Agreement (including the Company Disclosure
Schedule and the Exhibits attached hereto) and the other writings referred to
herein contain the entire agreement among the parties hereto with respect to the
transactions contemplated hereby
and supersede all prior agreements or understandings, written or oral, among the
parties with respect thereto.
10.3 Interpretation. Descriptive headings are for convenience only and shall
not control or affect the meaning or construction of any provision of this
Agreement. The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without limitation."
The word "herein" and similar references mean, except where a specific Section
or Article reference is expressly indicated, the entire Agreement rather than
any specific Section or Article. The table of contents and the headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
10.4 Knowledge Definition. As used in Article III hereof, the term
"knowledge" and like phrases shall mean actual knowledge after due inquiry as to
the matters that such phrase qualifies. In connection therewith, the knowledge
of any officer, director, or Key Employees of the Company shall be imputed to be
the knowledge of the Company.
10.5 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by nationally-recognized overnight courier or by registered or certified
mail, postage prepaid, return receipt requested, or by electronic mail with a
copy thereof to be delivered by mail (as aforesaid) within 24 hours of such
electronic mail, or by telecopier, with confirmation as provided above addressed
as follows:
(i) if to Parent or Acquisition Sub, to:
Alloy Online, Inc.
▇▇▇ ▇. ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
E-Mail: ▇▇▇▇@▇▇▇▇▇.▇▇▇
Telecopier: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
with a copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇.
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇
E-Mail: ▇▇▇▇▇@▇▇▇▇▇.▇▇▇
Telecopier: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇
(ii) if to the Company or the Stockholder, to:
SWI Holdings, LLC
▇▇▇ ▇. ▇▇▇▇ ▇▇▇▇▇▇
▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
E-Mail: ▇▇▇▇@▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇
Telecopier: ▇▇▇-▇▇▇-▇▇▇▇
Attention: ▇▇▇▇ ▇▇▇▇▇▇▇, Chief Financial Officer
with a copy to:
▇▇▇▇▇▇ Godward, LLP
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
E-Mail: ▇▇▇▇▇▇▇▇▇▇@▇▇▇▇▇▇.▇▇▇
Telecopier: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All such notices
or communications shall be deemed to be received (a) in the case of personal
delivery, on the date of such delivery, (b) in the case of nationally-recognized
overnight courier, on the next business day after the date when sent, (c) in the
case of facsimile transmission or telecopier or electronic mail, upon confirmed
receipt, and (d) in the case of mailing, on the third business day following the
date on which the piece of mail containing such communication was posted.
10.6 Counterparts. This Agreement may be executed in any number of
counterparts by original or facsimile signature, each such counterpart shall be
an original instrument, and all such counterparts together shall constitute one
and the same agreement.
10.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without reference to its
conflicts of laws provisions.
10.8 Benefits of Agreement. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. This Agreement shall not be
assignable by any party hereto without the consent of the other parties hereto;
provided, however, that anything contained herein to the contrary
notwithstanding, Acquisition Sub may assign and delegate any or all of its
rights and obligations hereunder to any other direct or indirect wholly-owned
subsidiary of Parent; provided further, however, that any of the rights granted
to and obligations of Parent under this Agreement (other than the payment of the
Aggregate Consideration) may also be exercised or performed by any entity
controlled by or under common control with Parent (each, a "Parent Affiliate");
provided that such Parent Affiliate agrees to be bound by all of the applicable
provisions hereof governing such exercise or performance and that the Company
and Stockholders promptly receive written notice of any such exercise or
performance, provided that in any such instance Parent remains ultimately liable
for the performance of its obligations hereunder.
10.9 Pronouns. As used herein, all pronouns shall include the masculine,
feminine, neuter, singular and plural thereof whenever the context and facts
require such construction.
10.10 Amendment, Modification and Waiver. This Agreement shall not be
altered or otherwise amended except pursuant to (a) an instrument in writing
signed by Parent and the Company, if Article VIII is not affected by such
alteration or amendment and (b) an instrument in writing signed by (i) Parent,
(ii) the Company and (iii) the Stockholder; provided, however, that any party to
this Agreement may waive in writing any obligation owed to it by any other party
under this Agreement. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
10.11 No Third Party Beneficiaries. Except as set forth in Section 5.17
above, nothing expressed or implied in this Agreement is intended to confer, nor
shall anything herein confer, upon any person other than the parties and the
respective successors or assigns of the parties, any rights, remedies,
obligations or liabilities whatsoever.
10.12 Consents. Except as otherwise expressly provided in this Agreement,
any consent or approval of Parent requested or permitted hereunder may be given
or withheld in Parent's sole discretion.
10.13 Interpretation. This Agreement has been negotiated between the parties
and will not be deemed to be drafted by, or the product of, any party. As such,
this Agreement will not be interpreted in favor of, or against, any party.
10.14 No Joint Venture. No party hereto shall make any warranties or
representations, or assume or create any obligations, on the other party's
behalf except as may be expressly permitted hereunder or in writing by such
other party. Each party hereto shall be solely responsible for the actions of
all its respective employees, agents and representatives.
[Remainder of this page intentionally left blank]
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement and
Plan of Reorganization to be executed on its behalf as of the day and year first
above written.
ALLOY ONLINE, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
--------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: Chief Executive Officer
ALLOY ACQUISITION SUB, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
--------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: President
▇▇▇▇▇ MARKETING, INC.
By: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
--------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Chief Executive Officer
SWI HOLDINGS, LLC
By: ▇▇▇▇▇ ▇▇▇▇▇
--------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇
Title: Managing Member
Index of Defined Terms
Acquisition Sub................................................................7
Actions.......................................................................27
Estimated Company Net Working Capital.........................................46
Additional Adjustment Shares..................................................57
Affiliate.....................................................................52
Affiliate Shares..............................................................42
Aggregate Consideration........................................................9
Agreement......................................................................7
Business Day...................................................................9
CERCLA........................................................................28
Certificate of Merger..........................................................7
Closing........................................................................9
Closing Date...................................................................9
Closing Financial Certificate.................................................46
Code...........................................................................7
Common Exchange Ratio.........................................................12
Common Share Exchange Ratio...................................................12
Common Warrant Exchange Ratio.................................................12
Company........................................................................7
Company Accountants...........................................................20
Company Balance Sheet.........................................................20
Company Balance Sheet Date....................................................20
Company Certificate...........................................................15
Company Common Stock...........................................................7
Company Confidential Information..............................................51
Company Disclosure Schedule...................................................17
Company Expenses..............................................................59
Company Financial Statements..................................................20
Company Interim Balance Sheet.................................................20
Company Interim Financial Statements..........................................20
Company Material Adverse Effect...............................................17
Company Option Plan...........................................................16
Company Options...............................................................16
Company Stock..................................................................7
Company Subject Business......................................................51
Constituent Corporations.......................................................8
Contract......................................................................19
Convertible Securities.........................................................9
DGCL...........................................................................7
Draft Financials..............................................................42
Employment Agreements.........................................................42
Encumbrances..................................................................24
Environmental Laws............................................................27
ERISA.........................................................................29
Event of Indemnification......................................................52
Exchange Act..................................................................36
Excluded Contract.............................................................26
Executory Period..............................................................38
Filings.......................................................................39
Financial Adjustment Notice...................................................57
Form 10-Q.....................................................................35
Fully Diluted Company Common Share Amount.....................................11
Fully Diluted Company Share Amount............................................10
Fully Diluted Company Shares...................................................9
GAAP..........................................................................20
Governmental Authority........................................................27
Governmental Authorizations...................................................26
HSR Filing....................................................................39
Indemnified Persons...........................................................53
Indemnifying Persons..........................................................53
Indemnity Escrow Agent........................................................14
Indemnity Escrow Agreement....................................................14
Indemnity Escrow Shares.......................................................15
Investigation.................................................................38
Key Employees.................................................................42
Leased Real Property..........................................................24
Leases........................................................................24
Legal Requirements............................................................26
Licensed Software.............................................................25
Lock-Up Agreement.............................................................37
Losses........................................................................54
Mailing Lists.................................................................31
Members' Materials............................................................40
Merger.........................................................................8
Merger Consideration..........................................................13
Merger Shares.................................................................13
Minimum Value.................................................................10
Monthly Balance...............................................................10
Net Working Capital Adjustment Factor.........................................14
Notes.........................................................................47
Outstanding Shares.............................................................9
Parent Affiliate..............................................................61
Parent Certificate............................................................15
Parent Common Stock............................................................7
Parent Event of Indemnification...............................................52
Parent Indemnifying Parties...................................................54
Parent SEC Documents..........................................................36
Parent Share Common Amount....................................................11
Parent Share Series A Amount..................................................11
Parent Share Series B Amount..................................................11
Phase Three...................................................................16
Phase Three Material Adverse Effect...........................................17
Plan..........................................................................29
Presumed Company Net Working Capital..........................................13
Prohibited Transaction........................................................39
Proprietary Asset.............................................................25
Registration Rights Agreements................................................38
Registration Statement........................................................42
Related Agreements............................................................37
Release Agreements............................................................38
Retained Debt.................................................................46
Revised Amount................................................................57
Series A Exchange Ratio.......................................................12
Series A Preferred Stock.......................................................7
Series A Share Exchange Ratio.................................................12
Series A Warrant Exchange Ratio...............................................12
Series B Exchange Ratio.......................................................12
Series B Preferred Stock.......................................................7
Series B Share Exchange Ratio.................................................12
Series B Warrant Exchange Ratio...............................................12
Share Exchange Ratio..........................................................11
Stipulated Price...............................................................9
Stockholder....................................................................7
Stockholder Event of Indemnification..........................................53
Survival Date.................................................................56
Surviving Corporation..........................................................8
SWI Business..................................................................51
SWI Confidential Information..................................................51
SWI Distribution...............................................................8
SWI Parties...................................................................37
Tax...........................................................................23
Taxes.........................................................................23
Term Debt.....................................................................46
Third Party Claim.............................................................55
Total Parent Share Amount......................................................9
Total Warrant Share Amount....................................................10
Transfer Taxes................................................................16
Warrant.......................................................................10
Warrant Share Common Amount...................................................11
Warrant Share Series A Amount.................................................11
Warrant Share Series B Amount.................................................11
Working Capital Difference....................................................14
ALL EXHIBITS TO THE AGREEMENT AND PLAN OF REORGANIZATION NOT ATTACHED
EXHIBIT A
Form of Certificate of Merger
EXHIBIT B
Form of Indemnity Escrow Agreement
EXHIBIT C
Form of Company Lock-Up Agreement
EXHIBIT D
Form of Contribution Agreement
EXHIBIT E
Form of Non-Competition Agreement
EXHIBIT F
Form of Registration Rights Agreement
EXHIBIT G
Form of Release Agreement
EXHIBIT H
Form of Warrant
EXHIBIT I
Form of Opinion of Company Counsel
EXHIBIT J
Form of Certificates
EXHIBIT K
Form of Assignment and Assumption Agreement
EXHIBIT L
Form of Contribution Agreement