EXHIBIT 10.3
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STOCK EXCHANGE AGREEMENT
BY AND AMONG
U.S. INTERNET PROVIDERS, INC.,
(ACQUIRER)
▇▇▇.▇▇▇, CORP.
(COMPANY)
AND
THE SHAREHOLDERS OF COMPANY
(COLLECTIVELY, TRANSFERORS)
DATED AS OF DECEMBER 18, 1998
TABLE OF CONTENTS
PAGE
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ARTICLE I
DEFINITIONS
1.1 DEFINITIONS........................................................... 1
ARTICLE II
THE EXCHANGE OF SHARES
2.1 BASIC TRANSACTION..................................................... 8
2.2 TRANSFER CONSIDERATION................................................ 8
2.3 NET WORTH ADJUSTMENT.................................................. 9
2.4 EARNED PAYOUT AMOUNT.................................................. 9
2.5 THE CLOSING........................................................... 10
2.6 DELIVERIES AT THE CLOSING............................................. 10
2.7 TRANSFERORS' REPRESENTATIVE........................................... 10
2.8 ESCROW ARRANGEMENTS................................................... 11
ARTICLE III REPRESENTATIONS AND WARRANTIES RELATING TO THE TRANSFERORS
3.1 AUTHORIZATION OF TRANSACTION.......................................... 12
3.2 NONCONTRAVENTION...................................................... 12
3.3 BROKER'S FEES......................................................... 12
3.4 INVESTMENT............................................................ 13
3.5 COMPANY SHARES........................................................ 13
3.6 DISCLOSURE............................................................ 13
ARTICLE IV REPRESENTATIONS AND WARRANTIES RELATING TO COMPANY
4.1 ORGANIZATION, QUALIFICATION, AND CORPORATE POWER...................... 13
4.2 CAPITALIZATION........................................................ 14
4.3 NONCONTRAVENTION...................................................... 14
4.4 SUBSIDIARIES.......................................................... 14
4.5 FINANCIAL STATEMENTS.................................................. 14
4.6 EVENTS SUBSEQUENT TO THE MOST RECENT FISCAL YEAR END.................. 15
4.7 UNDISCLOSED LIABILITIES............................................... 15
4.8 TAX MATTERS........................................................... 15
4.9 TANGIBLE ASSETS....................................................... 17
4.10 OWNED REAL PROPERTY................................................... 17
4.11 INTELLECTUAL PROPERTY................................................. 17
4.12 CONTRACTS............................................................. 18
4.13 NOTES AND ACCOUNTS RECEIVABLE......................................... 19
4.14 INSURANCE............................................................. 20
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4.15 LITIGATION............................................................ 20
4.16 EMPLOYEES............................................................. 21
4.17 EMPLOYEE BENEFITS..................................................... 21
4.18 GUARANTIES............................................................ 21
4.19 LEGAL COMPLIANCE...................................................... 21
4.20 CERTAIN BUSINESS RELATIONSHIPS WITH COMPANY........................... 22
4.21 BROKERS' FEES......................................................... 22
4.22 SYSTEMS............................................................... 22
4.23 SUBSCRIBERS........................................................... 22
4.24 DISCLOSURE............................................................ 23
ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACQUIRER
5.1 ORGANIZATION OF THE ACQUIRER.......................................... 23
5.2 AUTHORIZATION OF TRANSACTION.......................................... 23
5.3 BROKERS' FEES......................................................... 23
5.4 ACQUIRER'S CAPITALIZATION............................................. 23
5.5 DISCLOSURE............................................................ 24
ARTICLE VI PRE-CLOSING COVENANTS
6.1 GENERAL............................................................... 24
6.2 NOTICES AND CONSENTS.................................................. 24
6.3 OPERATION OF BUSINESS PRIOR TO THE EFFECTIVE TIME OF THE CLOSING...... 24
6.4 PRESERVATION OF BUSINESS.............................................. 25
6.5 ACCESS................................................................ 25
6.6 NOTICE OF DEVELOPMENTS................................................ 25
6.7 EXCLUSIVITY........................................................... 26
6.9 TERMINATION OF BANK FACILITIES........................................ 26
6.10 LANDLORDS' CONSENTS................................................... 26
6.11 TAX MATTERS........................................................... 26
6.11 AUDITS................................................................ 27
6.12 LIMITATION ON CAPITAL LEASES.......................................... 27
6.13 DISCLOSURE SCHEDULES.................................................. 28
6.14 RETIREMENT OF COMPANY INDEBTEDNESS.................................... 28
ARTICLE VII POST-CLOSING COVENANTS
7.1 GENERAL............................................................... 28
7.2 TRANSITION............................................................ 28
7.3 COVENANT NOT TO COMPETE............................................... 28
7.4 REORGANIZATION INTENT................................................. 29
7.5 CONDUCT FROM CLOSING UNTIL THE END OF THE EARNED PAYOUT PERIOD........ 29
ARTICLE VIII CONDITIONS TO OBLIGATIONS TO CLOSE
8.1 CONDITIONS TO OBLIGATIONS OF THE ACQUIRER............................. 29
8.2 CONDITIONS TO OBLIGATIONS OF THE TRANSFERORS.......................... 31
ARTICLE IX REMEDIES FOR BREACHES OF THIS AGREEMENT
9.1 INDEMNIFICATION OF THE ACQUIRER....................................... 33
9.2 DEFENSE OF THIRD PARTY CLAIMS......................................... 33
9.3 PROCEDURE FOR CLAIMS.................................................. 34
9.4 TAX AUDITS, ETC....................................................... 35
9.5 INDEMNIFICATION OF TRANSFERORS........................................ 35
9.6 LIMITS ON INDEMNIFICATION............................................. 35
ARTICLE X TERMINATION
10.1 TERMINATION OF AGREEMENT.............................................. 36
10.2 EFFECT OF TERMINATION................................................. 36
ARTICLE XI MISCELLANEOUS
11.1 PRESS RELEASES AND ANNOUNCEMENTS...................................... 37
11.2 NO THIRD-PARTY BENEFICIARIES.......................................... 37
11.3 ENTIRE AGREEMENT...................................................... 37
11.4 SUCCESSION AND ASSIGNMENT............................................. 37
11.5 FACSIMILE/COUNTERPARTS................................................ 37
11.6 NOTICES............................................................... 37
11.7 DISPUTE RESOLUTIONS................................................... 39
11.8 GOVERNING LAW......................................................... 39
11.9 AMENDMENTS AND WAIVERS................................................ 39
11.10 SEVERABILITY.......................................................... 40
11.11 EXPENSES.............................................................. 40
11.12 CONSTRUCTION.......................................................... 40
11.13 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES..................... 40
11.14 SPECIFIC PERFORMANCE.................................................. 40
11.15 CONFIDENTIALITY....................................................... 41
LIST OF EXHIBITS AND ANNEXES
EXHIBITS
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Exhibit A Form of Escrow Agreement
Exhibit B Company's Financial Statements
Exhibit C-1 Officer/Transferors' Certificate
Exhibit C-2 Secretary's Certificate
Exhibit D Form of Equity Subscription Agreement
Exhibit E Form of Employment Agreement
Exhibit F Joinder to the Registration Rights Agreement
ANNEXES
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Annex I Determination of Earned Payout Amount
Annex II Determination of Stock Portion of Transfer Consideration
Annex III [Intentionally Deleted]
Annex IV Allocation Summary
Annex V List of Company Employees to Receive Acquirer Options
DISCLOSURES SCHEDULES
Schedule 4.1 Officers and Directors
Schedule 4.2 Capitalization
Schedule 4.6 Materials Events
Schedule 4.7 Material Liabilities
Schedule 4.8 Tax Matters
Schedule 4.11 Intellectual Property
Schedule 4.12 Contracts
Schedule 4.14 Insurance
Schedule 4.15 Litigation
Schedule 4.20 Affiliate Relationships
Schedule 4.22 Systems
Schedule 4.23 Subscribers
The Exhibits and Schedules to this Stock Exchange Agreement are not included
with this Registration Statement on Form S-1. The Registrant will provide these
Exhibits and Schedules upon the request of the Securities and Exchange
Commission.
EXECUTION COPY
STOCK EXCHANGE AGREEMENT
This STOCK EXCHANGE AGREEMENT ("AGREEMENT") is entered into as of the
18th day of December, 1998, by and among U.S. INTERNET PROVIDERS, INC., a
Delaware corporation (the "ACQUIRER"), ▇▇▇.▇▇▇, Corp., a California corporation
("COMPANY"), and the SHAREHOLDERS OF COMPANY listed on the signature page hereof
(collectively, the "TRANSFERORS"). The Acquirer and the Transferors are
referred to herein individually as a "PARTY" and collectively as the "PARTIES."
RECITALS
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A. The Transferors in the aggregate own all of the outstanding
capital stock of Company a corporation engaged in the business of providing
internet access and services, web hosting and other internet related services
and support (the "BUSINESS").
B. This Agreement contemplates a transaction in which the
Transferors will exchange their respective shares of capital stock of Target for
the right to receive the Transfer Consideration (as hereinafter identified).
C. This Agreement further contemplates that the aforementioned
transaction will occur in conjunction with certain related transactions,
consisting of the IPO (as defined hereinafter) and the transfer of certain other
businesses by their owners to the Acquirer (the "RELATED TRANSACTIONS"), and the
Parties intend that the receipt of Acquirer's Shares (as defined hereinafter) by
the Transferors and by the parties involved in the Related Transactions will be
tax-free under Section 351 of the Code (as defined).
AGREEMENT
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NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS.
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"ACQUIRER" has the meaning set forth in the preface above.
"ACQUIRER'S COMMON STOCK" means the Acquirer's common stock, par value
$.001 per share.
"ACQUIRER'S SHARES" means the shares of the Acquirer's Common Stock
which are issued to the Transferors pursuant to this Agreement.
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"ADVERSE CONSEQUENCES" means all damages from complaints, actions,
suits, proceedings, hearings, investigations, claims, demands, judgments,
orders, decrees, stipulations, and injunctions, and all other damages, dues,
penalties, fines, costs, amounts paid in settlement, liabilities, obligations,
taxes, liens, losses, expenses, and fees, including all reasonable attorneys'
fees and court costs.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
"AFFILIATED GROUP" means any affiliated group within the meaning of
Code Sec. 1504 (or any similar group defined under a similar provision of state,
local or foreign law).
"ALLOCATION SUMMARY" means the summary of Transferors and their
respective allocation of the Transfer Consideration attached hereto as Annex IV.
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"BASIS" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms the reasonable basis for any
specified consequence.
"CASH PORTION OF THE EARNOUT" has the meaning set forth in Section 2.4
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below.
"CASH PORTION OF THE TRANSFER CONSIDERATION" has the meaning set forth
in Section 2.2 below.
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"CLOSING" has the meaning set forth in Section 2.5 below.
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"CLOSING DATE" has the meaning set forth in Section 2.5 below.
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"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning set forth in the preface above.
"COMPANY INDEBTEDNESS" means the outstanding balance as of the Closing
Date on the Promissory Note made by Company and dated September 30, 1998 in the
original principal amount of $1,075,000 made payable to ▇▇▇▇ ▇▇▇▇▇▇▇▇.
"COMPANY SHARES" means all outstanding shares of the common stock, no
par value, of Company.
"CONFIDENTIAL INFORMATION" means all confidential information and
trade secrets of the Acquirer or Company including, without limitation, the
identity, lists or descriptions of any customers, referral sources or
organizations; financial statements, cost reports or other financial
information; contract proposals, or bidding information; business plans and
training and operations methods and manuals; personnel records; fee structure;
and management systems, policies or procedures, including related forms and
manuals; provided, that the Confidential Information shall not include
information which (a) was or becomes generally available to the public other
than as a result of a its disclosure by the receiving party, (b) was or becomes
available to the receiving
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party on a non-confidential basis from a source other than the Acquirer or its
advisors without breach of this Agreement provided that such source is not known
to such receiving party to be bound by a confidentiality agreement or otherwise
prohibited from transmitting the information to receiving party by a
contractual, legal or fiduciary obligation known to such receiving party, (c)
was within receiving party's possession prior to its being furnished to such
receiving party by or on behalf of the Acquirer without breach of this
Agreement, provided that the source of such information was not bound by a
confidentiality agreement with the Acquirer or Company or otherwise prohibited
from transmitting the information to the receiving party by a contractual, legal
or fiduciary obligation, or (iv) which is required to be and actually is
disclosed by operation of law.
"CONTROLLED GROUP OF CORPORATIONS" has the meaning set forth in Code
Sec. 1563.
"DISCLOSURE SCHEDULES" means the informational schedules relating to
the Transferors and Company as attached hereto.
"E&Y" shall mean Ernst & Young, L.L.P.
"EARNED PAYOUT AMOUNT" has the meaning set forth in Section 2.4 below.
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"EARNED PAYOUT PERIOD" means the period from September 30, 1998
through September 30, 1999.
"EARNOUT SHARES" has the meaning set forth in Section 2.4.
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"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any Multiemployer Plan), or (d) Employee Welfare Benefit Plan or
Material fringe benefit plan or program.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA
Sec. 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA
Sec. 3(1).
"EQUITABLE EXCEPTIONS" shall have the meaning set forth in Section 3.1
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below.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW AGENT" means First Union National Bank, N.A.
"ESCROW AGREEMENT" means the Escrow Agreement to be executed by and
among the Transferors, the Acquirer and the Escrow Agent in the form of Exhibit
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A attached hereto.
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"ESCROW PERIOD" has the meaning specified in Section 2.8.
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"ESCROW SUM" has the meaning specified in Section 2.8.
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"FINANCIAL STATEMENTS" has the meaning set forth in Section 4.5 below.
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"FUNDED INDEBTEDNESS" means all (a) indebtedness of Company for
borrowed money or other interest-bearing indebtedness (excluding the Company
Indebtedness); (b) obligations of Company to pay the deferred purchase or
acquisition price for goods or services, other than trade accounts payable or
accrued expenses in the ordinary course of business on no more than 90 day
payment terms; (c) indebtedness of others guaranteed by Company or secured by an
encumbrance on Company's property; and (d) indebtedness of Company under
extended credit terms of more than 60 days from vendors to Company.
"GAAP" means generally accepted accounting principles, consistently
applied, as in effect from time to time.
"GROSS REVENUES" means the gross revenue of Company as normally
calculated on the Financial Statements as calculated in accordance with GAAP on
the accrual basis of accounting.
"INDEMNIFIED PARTIES" has the meaning set forth in Section 9.1 below.
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"INTELLECTUAL PROPERTY" means all (a) trademarks, service marks, trade
dress, logos, trade names, and corporate names and registrations and
applications for registration thereof, (b) copyrights and registrations and
applications for registration thereof, (c) computer software, data, and
documentation, (d) trade secrets and confidential business information
(including formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data,
copyrightable works, financial, marketing, and business data, pricing and cost
information, business and marketing plans, and customer and supplier lists and
information, (e) other proprietary rights, and (f) copies and tangible
embodiments thereof (in whatever form or medium).
"IPO" means the first underwritten public offering of the Acquirer's
Common Stock pursuant to an effective registration statement under the
Securities Act that will result in an aggregate post-IPO market capitalization
of the Acquirer of at least $100 million (determined by multiplying the
outstanding shares of the Acquirer's Common Stock by the IPO offering price).
"KNOWLEDGE" means, (a) with respect to each Transferor, information
which is actually known by such Transferor and (b) with respect to the Acquirer
or Company, actual knowledge of the officers of such Party and the employees of
such party with responsibility for the matters in question or which a prudent
person in the position of such officers and employees would reasonably be deemed
to know.
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"LIABILITY" means any liability, debt, obligation, amount or sum due
(whether known or unknown, whether absolute or contingent, whether liquidated or
unliquidated, and whether due or to become due) including any liability for
Taxes.
"MAJORITY CO-TRANSFERORS" shall mean a majority of the transferors,
based on the revenue run rate of such transferors, of all businesses acquired by
the Acquirer in connection with the IPO.
"MATERIAL" means an event or matter that causes any representation or
warranty contained in this Agreement to be inaccurate, incorrect or false. An
event or matter will not be deemed to be "Material," to have a "Material" change
in or in respect of, to have a "Material" adverse effect or to cause a Party to
be "Materially" affected unless the loss that may reasonably be expected to
occur to the respective Party with respect to such event or matter, when taken
together with all other related losses that may reasonably be expected to occur
to such Party as a result of any such events or matters, would exceed $100,000
in the aggregate or unless such event or matter constitutes a criminal violation
of law. For purposes of this definition, the word "loss" shall mean any and all
direct or indirect payments, obligations, assessments, losses, losses of income,
liabilities, costs and expenses paid or incurred, or diminution in value or
reduction in benefits or rights of any kind or character (whether or not known
or asserted before the date of this Agreement, fixed or unfixed, conditional or
unconditional, ▇▇▇▇▇▇ or inchoate, liquidated or unliquidated, secured or
unsecured, accrued, absolute, contingent or otherwise) including without
limitation, penalties, interest on any amount payable to a third party as a
result of the foregoing, and any reasonable legal or other expenses incurred in
connection with defending any demands, claims, actions or causes of action that,
if adversely determined, would result in losses, and all amounts paid in
settlement of claims or actions; provided, however, that losses shall be net of
any insurance proceeds entitled to be received from a nonaffiliated insurance
company on account of such loss (after taking into account any cost incurred in
obtaining such proceeds or any increases in insurance premiums as a direct
result thereof). A Subscriber Contract or Agreement is "Material" if during
either calendar year 1998 such Subscriber Contract or Agreement produced or is
expected to produce $50,000 of Gross Revenues.
"NET WORTH OF COMPANY" means the total assets of Company less the
total liabilities of Company (other than Funded Indebtedness) including any
costs of conversion from a cash basis to an accrual method of accounting,
determined in accordance with GAAP, consistently applied and on the accrual
method of accounting. In calculating the total assets of Company, no material
increase in the intangible assets of Company since September 30, 1998 shall be
included in calculating the Net Worth of Company without the written consent of
the Acquirer.
"ORDINARY COURSE OF BUSINESS" an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if: (a) such
action is consistent with the past practices of such Person and is taken in the
ordinary course of the normal day-to-day operations of such Person; (b) such
action is not required to be authorized by the board of directors of such Person
(or by any Person or group of Persons exercising similar authority); and (c)
such action is similar in nature and magnitude to actions customarily taken,
without any authorization by the board of directors (or by any Person or group
of Persons exercising similar authority), in the
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ordinary course of the normal day-to-day operations of other Persons that are in
the same line of business as such Person.
"OUTAGE" means any loss of service to any System of the Business,
including but not limited to network access, e-mail, web, news or other
services.
"PARTY" has the meaning set forth in the preface above.
"PERSON" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement to be entered into prior to or contemporaneous with the Closing by and
among the Acquirer and the stockholders of the Acquirer, which Registration
Rights Agreement shall be consistent with the terms of the Letter of Intent
entered into by and between Acquirer and Company, dated November 25, 1998.
"REGISTRATION STATEMENT" means the Acquirer's registration statement
on Form S-1 once filed with and deemed effective by the SEC in connection with
the IPO.
"RELATED TRANSACTIONS" has the meaning set forth in the Recitals.
"REPORTABLE EVENT" has the meaning set forth in ERISA Sec. 4043.
"SEC" means the U.S. Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY INTEREST" means any mortgage, pledge, security interest,
encumbrance, charge, or other lien, other than (a) mechanic's, materialmen's and
similar liens, (b) liens for Taxes not yet due and payable (or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings), (c)
liens arising under workers' compensation, unemployment insurance, social
security, retirement, and similar legislation, (d) liens arising in connection
with sales of foreign receivables, (e) liens on goods in transit incurred
pursuant to documentary letters of credit, (f) purchase money liens and liens
securing rental payments under capital lease arrangements, and (g) other liens
arising in the Ordinary Course of Business and not incurred in connection with
the borrowing of money.
"STUB PERIOD BALANCE SHEET" means the balance sheet included in the
Stub Period Financial Statements.
"STUB PERIOD END" means September 30, 1998.
"STOCK PORTION OF THE EARNOUT" has the meaning set forth in Section
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2.4 below.
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"STOCK PORTION OF THE TRANSFER CONSIDERATION" has the meaning set
forth in Section 2.2 below.
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"STUB PERIOD FINANCIAL STATEMENTS" means the Financial Statements for
and as of the Stub Period End.
"SUBSCRIBER" means any customers of Company who (a) are currently
connected to and receiving internet related services from Company's Systems; (b)
are being charged or have pre-paid the Company standard rates (which rates are
set forth on Schedule 4.23) pursuant to Company's standard form contracts
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previously provided to the Acquirer; (c) have paid such stated rates in full for
at least one full month; (d) are not two or more months delinquent in the
payment of any invoice from Company; (e) have not, in the preceding two months,
been given a waiver or forgiveness of service charges, except as otherwise noted
herein or in the Disclosure Schedule; (f) have not received any inducement to
become connected to Company's Systems or to receive or pay for services (other
than pursuant to the Company's customary marketing practices); and (g) have not
notified Company of their intention to cancel service.
"SUBSCRIBER CONTRACT OR AGREEMENT" means any agreement whereby Company
provides services to a Subscriber.
"SUBSIDIARY" means any corporation with respect to which another
specified corporation has the power to vote or direct the voting of sufficient
securities to elect a majority of the directors.
"SYSTEMS" means the infrastructure used to provide internet access and
related services, including network components, communications facilities,
servers, services and service platforms (including for e-mail, news, DNS, web,
authentication and other services), power plants, data processing platforms, MIS
systems, office automation systems and internal LAN network management systems.
"TAX" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental, customs duties, capital stock,
franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty or addition thereto.
"TAX RETURN" means any federal, foreign, state and local governmental
tax return, declaration, report, claim for refund, or information return or
statement relating to Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
"TRANSFER CONSIDERATION" has the meaning set forth in Section 2.2
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below.
"TRANSFERORS" has the meaning set forth in the preface above.
"TRANSFERORS' REPRESENTATIVE" has the meaning set forth in the Section
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2.7 below.
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ARTICLE II
THE EXCHANGE OF SHARES
2.1 BASIC TRANSACTION. On and subject to the terms and conditions of
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this Agreement, the Acquirer agrees to exchange with the Transferors, and each
Transferor agrees to exchange with the Acquirer, all of the Company Shares for
the consideration specified below in this Section 2.
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2.2 TRANSFER CONSIDERATION.
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(A) GENERALLY. The Transfer Consideration exchanged for the Company
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Shares shall be composed of (i) the Cash Portion of the Transfer Consideration;
(ii) the Stock Portion of the Transfer Consideration and (iii) the Earned Payout
Amount (as defined below).
(B) TRANSFER CONSIDERATION ADJUSTMENTS. The Acquirer agrees to pay
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to the Transferors in the aggregate the sum of (i) $10,000,000 in cash, to be
adjusted dollar for dollar upward or downward by the amount outstanding Funded
Indebtedness is more or less than the amount set forth on the Stub Period
Balance Sheet; and downward by (A) the payments made by Company to retire the
Company Indebtedness as described in Section 6.14 below, and (B) the Net Worth
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adjustment, if any, made pursuant to Section 2.3 below (the "CASH PORTION OF THE
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TRANSFER CONSIDERATION"); (ii) $10,000,000 worth of Acquirer's Shares, to be
adjusted dollar for dollar downward by the Net Worth adjustment, if any, made
pursuant to Section 2.3 below, consisting of an aggregate number of shares of
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Acquirer's Common Stock pursuant to Annex II and as set forth in the Allocation
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Summary attached as Annex IV (the "STOCK PORTION OF THE TRANSFER
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CONSIDERATION"); and (iii) the Earned Payout Amount as determined pursuant to
Section 2.4 below, in exchange for the Company Shares to be purchased by the
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Acquirer pursuant to the terms hereof.
(C) ESCROW PAYMENTS. At the Closing Date, (i) five percent (5%) of
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the Cash Portion of the Transfer Consideration will be paid in cash by wire
transfer of funds to the Escrow Agent and (ii) ten percent (10%) of the Stock
Portion of the Transfer Consideration in the form of Acquirer's Shares valued as
of the Closing Date shall be delivered to the Escrow Agent by the Acquirer to
collectively be held in escrow pursuant to Section 2.15 for satisfaction of the
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Transferors' indemnification obligations specified in Article IX.
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(D) PAYMENT. The balance of the Cash Portion of the Transfer
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Consideration shall be paid by the Acquirer to the Transferors at the Closing by
delivery of cash by wire transfer of funds in the amounts set forth on the
Allocation Summary. The balance of the Stock Portion of the Transfer
Consideration shall be issued by the Acquirer to the Transferors at the Closing
by the delivery of Acquirer's Shares in the amounts set forth on the Allocation
Summary next to such Transferor's name. The sum of the Cash Portion of the
Transfer Consideration, the Stock Portion of the Transfer Consideration and the
Earned Payout Amount shall be referred to as the "TRANSFER CONSIDERATION." Each
of (i) the Cash Portion of the Transfer Consideration, (ii) the Stock Portion of
the Transfer Consideration and (iii) Earned Payout Amount of the Transfer
Consideration shall be allocated among the Transferors in dollar amounts set
forth on the Allocation Summary. Cash
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will be paid in lieu of any fractional shares which would otherwise be issued in
accordance with this Agreement.
2.3 NET WORTH ADJUSTMENT. The Cash Portion of the Transfer Consideration
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shall be adjusted downward on a dollar-for-dollar basis by the amount by which
the Net Worth of Company is less than negative $1,747,565 as of the Closing
Date. The Net Worth adjustment shall be evenly divided between the Cash Portion
of the Transfer Consideration and the Stock Portion of the Transfer
Consideration. The Net Worth of Company shall be determined by E&Y in good faith
within two business days prior to the Closing Date.
2.4 EARNED PAYOUT AMOUNT.
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(A) In addition to the Cash Portion of the Transfer Consideration and
the Stock Portion of the Transfer Consideration, the Acquirer agrees to pay to
the Transferors, if earned, an earned payout amount (the "EARNED PAYOUT AMOUNT")
determined pursuant to the terms, conditions and calculations set forth on Annex
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I attached hereto.
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(B) The Earned Payout Amount shall be payable, at the option of the
Acquirer, in either (i) cash (the "CASH PORTION OF THE EARNOUT") or (ii)
Acquirer's Shares (the "STOCK PORTION OF THE EARNOUT"), or a combination
thereof. The aggregate number of Acquirer's Shares, if any, (the "EARNOUT
SHARES") to be issued as the Stock Portion of the Earnout shall be equal to (A)
the aggregate value in dollars of the Stock Portion of the Earnout divided by
(B) (1) the average of the closing prices of the Acquirer's Common Stock over
the ten trading days immediately proceeding September 30, 1999, in the event
Acquirer's Common Stock is traded on an exchange or over-the-counter market, or
(2) the price, not less than book value, determined in good faith and in such a
reasonable manner as prescribed by a majority of the Acquirer's directors who
are not officers of the Acquirer, in the event Acquirer's Common Stock is not
traded on an exchange or over-the-counter market.
(C) The Cash Portion of the Earnout, if any, shall be payable in cash
by the Acquirer to the Transferors by wire transfer or other delivery of
immediately available funds to an account or accounts designated by the
Transferors. The Earnout Shares, if any, shall be payable by the delivery of the
certificates representing the Acquirer's Shares.
The Earned Payout Amount shall be determined by E&Y in accordance with the
terms of this Agreement and Annex I hereto and shall be based on an income
-------
statement of the Company prepared by E&Y for the 12 months ended September 30,
1999. The Earned Payout Amount shall be paid as soon as the amount has been
calculated by E&Y and such final calculation delivered to the Acquirers by E&Y
but in no event later than January 15, 2000.
A portion of the Earned Payout Amount, determined by E&Y in accordance with
Treasury Regulation section 1.483-4 and based on an interest rate of 4.33
percent per annum, shall be treated as interest for federal and state income tax
purposes. The parties agree that the interest portion of the Earned Payout
Amount shall be treated as paid entirely out of the Cash Portion of the Earnout
and that no part of the Stock Portion of the Earnout shall be treated as a
payment of interest unless
-9-
the interest portion of the Earned Payout Amount exceeds the Cash Portion of the
Earnout (and then only to the extent of such excess).
2.5 THE CLOSING. The closing of the transactions contemplated by this
-----------
Agreement (the "CLOSING") shall take place at the offices of ▇▇▇▇▇ & ▇▇▇▇▇▇▇,
LLP in Washington, D.C. commencing at 9:00 a.m. local time simultaneously with
the closing of the IPO and the other Related Transactions or such other date as
the Acquirer and the Transferors may mutually determine (the "CLOSING DATE").
2.6 DELIVERIES AT THE CLOSING. At the Closing, (a) the Transferors will
-------------------------
deliver to the Acquirer the various certificates, instruments, and documents
referred to in Section 8.1 below, (b) the Acquirer will deliver to the
-----------
Transferors (as applicable) the various certificates, instruments, and documents
referred to in Section 8.2 below, (c) each of the Transferors will deliver to
-----------
the Acquirer stock certificates representing all of its Company Shares, endorsed
in blank or accompanied by duly executed assignment documents and (d) the
Acquirer will deliver to the Transferors the consideration specified in Section
-------
2.2 above as may be adjusted pursuant to Sections 2.3 and 2.4 above and Section
--- ------------ --- -------
2.8 below.
---
2.7 TRANSFERORS' REPRESENTATIVE.
---------------------------
(A) In order to administer efficiently (i) the implementation of the
Agreement by the Transferors, (ii) the waiver of any condition to the
obligations of the Transferors to consummate the transactions contemplated
hereby and (iii) the settlement of any dispute with respect to the Agreement,
the Transferors hereby designate ▇▇▇▇ ▇▇▇▇▇▇▇ as their representative (the
"TRANSFERORS' REPRESENTATIVE").
(B) The Transferors hereby authorize the Transferors' Representative
(i) to take all action necessary in connection with the implementation of the
Agreement on behalf of the Transferors, the waiver of any condition to the
obligations of the Transferors to consummate the transactions contemplated
hereby, or the settlement of any dispute, (ii) to give and receive all notices
required to be given under the Agreement and (iii) to take any and all
additional action as is contemplated to be taken by or on behalf of the
Transferors by the terms of this Agreement.
(C) In the event that the Transferors' Representative dies, becomes
legally incapacitated or resigns from such position, ▇▇▇▇ ▇▇▇▇▇▇▇▇ shall fill
such vacancy and shall be deemed to be the Transferors' Representative for all
purposes of this Agreement; however, no change in the Transferors'
Representative shall be effective until the Acquirer is given notice of it by
the Transferors.
(D) All decisions and actions by the Transferors' Representative
shall be binding upon all of the Transferors, and no individual Transferor shall
have the right to object, dissent, protest or otherwise contest the same, in the
absence of fraud, gross negligence or willful misconduct of the Transferors'
Representative.
(E) By their execution of this Agreement, the Transferors agree that:
(i) the Acquirer shall be able to rely conclusively on the instructions and
decisions of the Transferors'
-10-
Representative as to any actions required or permitted to be taken by the
Transferors or the Transferors' Representative hereunder, and no party hereunder
shall have any cause of action against the Acquirer for any action taken by the
Acquirer in reliance upon the instructions or decisions of the Transferors'
Representative; (ii) all actions, decisions and instructions of the Transferors'
Representative shall be conclusive and binding upon all of the Transferors; no
Transferor shall have any cause of action against the Acquirer or Company for
any action taken or omitted to be taken, decision made or omitted to be made or
any instruction given or omitted to be given by the Transferors' Representative;
and no Transferor shall have any cause of action against the Transferors'
Representative for any action taken, decision made or instruction given by the
Transferors' Representative under this Agreement, except for fraud, gross
negligence or willful breach of this Agreement by the Transferors'
Representative; (iii) the Transferors' Representative shall be deemed to fulfill
any fiduciary obligation to the Transferors so long as no Transferor is
adversely affected by any action or failure to act of the Transferors'
Representative in a disproportionate measure compared to any other Transferor;
(iv) remedies available at law for any breach of the provisions of this Section
are inadequate; therefore, the Acquirer shall be entitled to temporary and
permanent injunctive relief without the necessity of proving damages if the
Acquirer brings an action to enforce the provisions of this Section; (v) the
provisions of this Section are independent and severable, shall constitute an
irrevocable power of attorney, coupled with an interest and surviving death,
granted by the Transferors to the Transferors' Representative and shall be
binding upon the executors, heirs, legal representatives and successors of each
Transferor; and (vi) all fees and expenses incurred by the Transferors'
Representative shall be paid by the Transferors.
2.8 ESCROW ARRANGEMENTS. Pursuant to the Escrow Agreement to be entered
-------------------
into among the Transferors, the Acquirer and the Escrow Agent (a) five percent
(5%) of the Cash Portion of the Transfer Consideration (the "CASH ESCROW") in
immediately available funds and (ii) ten percent (10%) of the Stock Portion of
the Transfer Consideration in the form of Acquirer's Shares (the "STOCK ESCROW")
shall be delivered to the Escrow Agent at Closing. Such monies and securities
(which, together with all interest accrued thereon which may be due to the party
to whom such funds are ultimately paid in accordance with the terms of the
Escrow Agreement, is hereinafter referred to as the "ESCROW SUM") shall be held
pursuant to the terms of the Escrow Agreement for payment from such Escrow Sum
of the amounts, if any, owing by the Transferors to the Acquirer pursuant to the
indemnification provisions of Article IX below, together with accrued interest
----------
thereon. Pursuant to the terms of the Escrow Agreement, the Cash Escrow shall
be used first, and the Stock Escrow shall be used second, to satisfy any such
owed amounts. At the conclusion of the period ending on the first anniversary
of the Closing Date (such period being referred to herein as the "ESCROW
PERIOD"), such remaining portion of the Escrow Sum not theretofore paid to the
Acquirer in accordance with the terms of the Escrow Agreement or subject to a
pending claim under the Escrow Agreement and this Agreement shall be disbursed
to the Transferors together with any interest, dividends or other amounts
received by the Escrow Agent with respect to the Escrow Sum. The Transferors
and the Acquirer agree that each will execute and deliver such reasonable
instruments and documents as are furnished by any other party to enable such
furnishing party to receive those portions of the Escrow Sum to which the
furnishing party is entitled under the provisions of the Escrow Agreement and
this Agreement.
-11-
ARTICLE III
REPRESENTATIONS AND WARRANTIES
RELATING TO THE TRANSFERORS
Each Transferor individually represents and warrants to the Acquirer
as follows as of the date of this Agreement and as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this Article III):
-----------
3.1 AUTHORIZATION OF TRANSACTION. Each Transferor has full power and
----------------------------
authority to execute and deliver this Agreement and to perform his obligations
hereunder and this Agreement has been duly executed and delivered by the
Transferor. This Agreement constitutes the valid and legally binding obligation
of each Transferor, enforceable in accordance with its terms and conditions,
except that (a) such enforceability may be subject to bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws, decisions or
equitable principles now or hereafter in effect relating to or affecting the
enforcement of creditors' rights or debtors' obligations generally or non-
competition arrangements, and to general equity principles, and (b) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought (the terms of clause (a) and (b) are
sometimes collectively referred to as the "EQUITABLE EXCEPTIONS"). The
Transferors need not give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement (other than
as provided for elsewhere in this Agreement or as identified by specific
reference in the Disclosure Schedule).
3.2 NONCONTRAVENTION. Neither the execution and the delivery of this
----------------
Agreement by the Transferors, nor the consummation of the transactions
contemplated hereby by the Transferors, will (a) violate any statute,
regulation, rule, judgment, order, decree, stipulation, injunction, charge, or
other restriction of any government, governmental agency, or court to which the
Transferors are subject or (b) conflict with, result in a breach of, constitute
a default under, result in the acceleration of, create in any part the right to
accelerate, terminate, modify, or cancel, or require any notice under any
contract, lease, sublease, license, sublicense, franchise, permit, indenture,
agreement or mortgage for borrowed money, instrument of indebtedness, Security
Interest, or other arrangement to which the Transferors are a party or by which
they are bound or to which any of their assets is subject.
3.3 BROKER'S FEES. The Transferors have no Liability or obligation to pay
-------------
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which the Acquirer could become
liable or obligated.
3.4 INVESTMENT. The Transferors are not acquiring the Acquirer's Shares
----------
with a view to or for sale in connection with any distribution thereof within
the meaning of the Securities Act.
3.5 COMPANY SHARES. Each Transferor holds of record and owns beneficially
--------------
the number of Company Shares set forth next to his or her name on Schedule 4.2,
------------
and except as set
-12-
forth in Schedule 4.2, such Company Shares are free and clear of any
------------
restrictions on transfer (other than any restrictions under the Securities Act
and state securities laws), Taxes, Security Interests, options, warrants,
rights, contracts, calls, commitments, equities, and, to the Knowledge of the
Transferors, claims and demands. Except as set forth in Schedule 4.2, the
------------
Transferors are not a party to (or have otherwise waived all rights under) any
option, warrant, right, contract, call, put, or other agreement or commitment
providing for the disposition or acquisition of any capital stock of Company
(other than this Agreement). The Transferors are not a party to (or have
terminated) any voting trust, proxy, or other agreement or understanding with
respect to the voting of any capital stock of Company.
3.6 DISCLOSURE. To the Knowledge of the Transferors, the representations
----------
and warranties contained in this Article III do not contain any untrue statement
-----------
of a fact or omit to state any Material fact necessary in order to make the
statements and information contained in this Article III not misleading.
-----------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES RELATING TO COMPANY
The Transferors and Company severally represent and warrant to the
Acquirer that, subject to the specific qualifications and limitations set forth
herein, the statements contained in this Article IV are correct and complete as
----------
of the date of this Agreement and will be correct and complete as of the Closing
Date (as though made then and as though the Closing Date were substituted for
the date of this Agreement throughout this Article IV).
----------
4.1 ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. Company is a
------------------------------------------------
corporation duly organized, validly existing, and is duly authorized to conduct
business and is in good standing under the laws of the jurisdiction of its
incorporation, and in any other jurisdiction in which the failure to qualify
would have a Material adverse effect on the financial condition of Company.
Company has full corporate power and authority to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it.
Schedule 4.1 lists the directors and officers of Company. The Transferors have
------------
delivered to the Acquirer correct and complete copies of the charter and bylaws
of Company (as amended to date). The minute books containing the records of
meetings and/or resolutions of the stockholders, the board of directors, and any
committees of the board of directors, the stock certificate books and the stock
record books of Company are correct and complete in all Material respects.
Company is not in default under or in violation of any provision of its charter
or bylaws.
4.2 CAPITALIZATION. The entire authorized capital stock of Company
--------------
consists of 10,000,000 shares of common stock, no par value, of which 4,708,947
are issued and outstanding, 0 are subject to issuance pursuant to vested
options, 0 are subject to issuance pursuant to unvested options and 0 are
reserved for issuance pursuant to future option grants. All of the issued and
outstanding Company Shares have been duly authorized, are validly issued, fully
paid, and nonassessable, and are held of record by the Transferors. There are
no outstanding or authorized options, warrants, rights, contracts, calls, puts,
rights to subscribe, conversion rights, or other agreements or commitments to
which Company is a party or which
-13-
are binding upon Company providing for the issuance, disposition, or acquisition
of any of its capital stock. There are no outstanding or authorized stock
appreciation, phantom stock, or similar rights with respect to Company. There
are no voting trusts, proxies, or any other agreements or understandings with
respect to the voting of the capital stock of Company.
4.3 NONCONTRAVENTION. Neither the execution and the delivery of this
----------------
Agreement, nor the consummation of the transactions contemplated hereby, will
(a) violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any government, governmental agency,
or court to which Company is subject or any provision of the charter or bylaws
of Company, except to the extent any such violation does not or could not result
in a Material adverse effect on Company, or (b) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, or, to the
Knowledge of the Transferors, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any contract, lease,
sublease, license, sublicense, franchise, permit, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, Security Interest, or
other arrangement to which Company is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets). Company does not need to give any notice to,
make any filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order for the Parties to consummate the
transactions contemplated by this Agreement.
4.4 SUBSIDIARIES. Company has no Subsidiaries.
------------
4.5 FINANCIAL STATEMENTS. Attached hereto as Exhibit B are the Company's
-------------------- ---------
financial statements (collectively the "FINANCIAL STATEMENTS") for its three
most recent fiscal years and an unaudited consolidated balance sheet and
statement of income, changes in stockholder's equity, and cash flow as of and
for the 9 month period ended September 30, 1998 for Company (the "STUB PERIOD
END"). The Financial Statements have been prepared in accordance with standards
described on Exhibit B applied on a consistent basis throughout the periods
---------
covered thereby, are correct and complete, fairly present the financial
condition of Company as of such dates, and are consistent with the books and
records of Company (which books and records are correct and complete in all
Material respects), subject, in the case of the Stub Period Financial
Statements, to normal adjustments upon audit.
4.6 EVENTS SUBSEQUENT TO THE STUB PERIOD END. Since the Stub Period End,
----------------------------------------
there has not been any Material adverse change in the assets, Liabilities,
business, financial condition, operations, or results of operations of Company.
Without limiting the generality of the foregoing since that date except as set
forth on Schedule 4.6 :
------------
(A) Company has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration in the
Ordinary Course of Business;
(B) Company has not entered into any Material contract, lease,
sublease, license or sublicense (or series or related contracts, leases,
subleases, licenses and sublicenses) outside the Ordinary Course of Business;
-14-
(C) Company has not made any capital expenditure (or series of
related capital expenditures) involving more than $200,000 in the aggregate, or
outside the Ordinary Course of Business;
(D) Company has not entered into any written or binding oral
employment contract, or collective bargaining agreement, or modified the terms
of any such existing contract or agreement with any of its full-time salaried
staff employees other than in the Ordinary Course of Business;
(E) Company has not granted any dividends or any increase outside the
Ordinary Course of Business in the base compensation of any of its directors,
officers, and employees, nor has Company made any payments or promises or
commitments to make any other payments (other than salary and reimbursement of
customary expenses) to any of such Persons, including without limitation bonuses
other than in the Ordinary Course of Business; and
(F) Company has not adopted any (i) bonus, (ii) profit-sharing, (iii)
incentive compensation, (iv) pension, (v) retirement, (vi) medical,
hospitalization, life, or other insurance, (vii) severance or (viii) other plan,
contract or commitment for any of its directors, officers, and employees, or
modified or terminated any existing plan, contract or commitment.
4.7 UNDISCLOSED LIABILITIES. Except as set forth on Schedule 4.7, Company
----------------------- ------------
does not have any Liability (and to the Knowledge of Transferors and Company
there is no Basis for any present or future charge, complaint, action, suit,
proceeding, hearing, investigation, claim, or demand against Company giving rise
to any Liability) which is individually in excess of $50,000, except for (a)
Liabilities set forth on the face of the Stub Period 1998 Balance Sheet, (b)
Liabilities described on Schedule 4.7 and (c) Liabilities which have arisen
------------
after the Stub Period End in the Ordinary Course of Business (none of which
relates to any breach of contract, breach of warranty, tort, infringement, or
violation of law or arose out of any charge, complaint, action, suit,
proceedings, hearing, investigation, claim, or demand).
4.8 TAX MATTERS. Except as set forth on Schedule 4.8:
----------- ------------
(A) Company has filed all Tax Returns that it was required to file
except where the failure to file Tax Returns would not have a Material adverse
effect on the financial condition of the Company. All such Tax Returns were
correct and complete in all Material respects. All Taxes owed by Company
(whether or not shown on any Tax Return) based on operations through the Stub
Period End have been paid or accrued on the Stub Period Balance Sheet except
where the failure to pay taxes would not have a Material adverse effect on the
financial condition of the Company. Company currently is not the beneficiary of
any extension of time within which to file any Tax Return. To the Knowledge of
the Company and the Transferors, no claim has ever been made by any taxing
authority in a jurisdiction where Company does not file Tax Returns that it is
or may be subject to taxation by that jurisdiction. To the Knowledge of the
Company and the Transferors, there are no Security Interests on any of the
assets of Company that arose in connection with any failure (or alleged failure)
to pay any Tax, other than for Taxes that are not yet due which are accrued for
since December 31, 1997.
-15-
(B) To the Knowledge of Transferors and Company, Company has withheld
and paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, creditor, independent contractor, or
other third party and Company has properly reflected the status of all employees
and independent contractors in connection therewith as required by applicable
Tax law and the Fair Labor Standards Act of 1938, as amended, and the rules and
regulations promulgated thereunder.
(C) Company has not received any written notice that any taxing
authority intends to assess any additional Taxes for any period for which Tax
Returns have been filed, and no Transferor, and no officer of Company with
responsibility for Tax matters has Knowledge of any claim for such additional
Taxes could be made. There is no dispute or claim concerning any Tax Liability
of Company either (i) claimed or raised by any authority in writing or (ii) as
to which the Transferors or the officers of Company responsible for Tax matters
of Company have Knowledge based upon personal contact with any agent of such
authority. Schedule 4.8 lists all federal, state, local, and foreign income Tax
------------
Returns filed with respect to Company for taxable periods ended on or after
December 31, 1995 indicates those Tax Returns that have been audited, and
indicates those Tax Returns that currently are the subject of audit. The
Transferors have delivered to the Acquirer correct and complete copies of all
federal income Tax Returns filed, examination reports received, and statements
of deficiencies assessed against or agreed to, by Company since December 31,
1995. Company has not waived any statute of limitations in respect of Taxes
which waiver is currently in effect. Company is not a party to any "closing
agreement," as described in Section 7121 of the Code or any corresponding
provision of state or local Tax law, and there are no Tax rulings or requests
for Tax rulings with respect to Company.
(D) Company has not filed a consent under Code Sec. 341(f) concerning
collapsible corporations. Company has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that could obligate it
to make any payments that, under any circumstances, will not be deductible to
Company under Code Sec. 280G. Company is not and has never been a United States
real property holding corporation within the meaning of Code Sec. 897(c)(2).
Company has disclosed on its federal income Tax Returns all positions taken
therein that, to the Knowledge of Company or the Transferors, could give rise to
a substantial understatement of federal income Tax within the meaning of Code
Sec. 6662. Company is not a party to any Tax allocation or sharing agreement.
Company has never been (nor has any Liability for unpaid Taxes because it once
was) a member of an Affiliated Group filing a consolidated federal income Tax
Return and has never incurred any Liability for the Taxes of any Person under
Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or foreign
law). Company has never incurred any liability for Taxes of any Person as a
transferee or successor, by contract, or otherwise.
4.9 TANGIBLE ASSETS. Company owns or leases substantially all tangible
---------------
assets necessary for the conduct of its businesses as presently conducted and as
presently proposed to be conducted prior to Closing. To the Knowledge of the
Transferors, each such tangible asset is free from Material defects (patent and
latent), has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used.
-16-
4.10 OWNED REAL PROPERTY. Company does not own nor does it have any
-------------------
interest in any real property or improvements thereon (other than the leases
disclosed in Schedule 4.12, and the leasehold improvements relating to the same)
-------------
nor does Company have any options, agreements or contracts under which it has
the right or obligation to acquire any interest in any real property or
improvements (other than as disclosed in Schedule 4.12)
-------------
4.11 INTELLECTUAL PROPERTY.
---------------------
(A) Attached hereto as Schedule 4.11 is a list and brief description
-------------
of all Material Intellectual Property owned or utilized by Company. Company has
furnished the Acquirer with copies of all Material license agreements to which
Company is a party, either as licenser or licensee, with respect to any
Intellectual Property. Company has good title to or the right to use all the
Intellectual Property and all inventions, processes, designs, formulae, trade
secrets and know-how necessary for the conduct of the Company's business, in its
business as presently conducted or currently proposed to be conducted prior to
Closing and, to the Knowledge of the Transferors and Company, Company is not
infringing on any Intellectual Property right of others, and neither Company nor
Transferors have Knowledge of any infringement by others of any such rights
owned by Company.
(B) All licenses set forth on Schedule 4.11 are valid and binding
-------------
obligations of Company, and to the Knowledge of the Transferors and Company, of
the other parties thereto, and enforceable against Company, and to the Knowledge
of the Transferors and Company, the other parties thereto in accordance with
their respective terms, except for the Equitable Exceptions. Company owns and
possesses all right, title and interest in and to, or has the right to use
pursuant to a valid license, all Intellectual Property necessary for the
operation of the business of Company as presently conducted.
(C) The Transferors and Company have taken all reasonably necessary
measures to protect and maintain the rights of Company in its Intellectual
Property. Each piece of Intellectual Property used by Company is used with the
authorization of every other claimant thereto and the execution, delivery and
performance of this Agreement will not impair such use.
(D) The Transferors have also delivered to the Acquirer correct and
complete samples or copies of all trademarks, service marks, trade names,
copyrights, patents, registrations and, as relate to the foregoing, pending
effective or disputed applications, licenses, agreements, and permissions (as
amended to date) held by Company, and have made available to the Acquirer
correct and complete copies of all other written documentation evidencing
ownership and prosecution (if applicable) of each such item. With respect to
each item of Material Intellectual Property used in, or otherwise necessary for
the conduct of, the business of Company as heretofore conducted: (i) the
identified owner possesses all right, title, and interest in and to the item;
(ii) the item is not subject to any outstanding judgment, order, decree,
stipulation, injunction, or charge; (iii) no charge, complaint, action, suit,
proceeding, hearing, investigation is pending or, to the Knowledge of any of the
Transferors or officers (and employees with responsibility for Intellectual
Property matters) of Company, is threatened which challenges the legality,
validity, enforceability, use, or ownership of the item; and (iv) Company has
not agreed to indemnify any person or entity
-17-
for or against any interference, infringement, misappropriation, or other
conflict with respect to the item.
(E) The Company believes, and it has no information to the contrary,
that it has taken and is taking all reasonable steps to assure that all of its
proprietary hardware and proprietary computer software that is used by the
Company to provide services to its customers or used otherwise in its business
(the "COMPANY PRODUCTS") will be year 2000 compliant. As used in this Agreement
"year 2000 compliant" shall mean that the Company Products will perform and will
continue to perform in accordance with specifications and the agreements under
which they are licensed or used to provide services to the Company's customers
regardless of the year of the date data encountered by such products, provided,
that such data falls within the period ending in the year 2060; provided,
further, that (i) all date data received for use by the Company Products are
accurate and in formats defined by the Company Products from time to time, and
(ii) all date data generated by the Company Products are accepted in formats
defined by the Company Products from time to time. Notwithstanding the
foregoing, Company makes no representation or warranty respecting user defined
fields that contain dates, or as to the functionality of the Company Products in
circumstances where data received from any third party system are invalid,
incorrect or otherwise corrupt.
4.12 CONTRACTS. Except as disclosed on Schedule 4.12, Company is not a
--------- -------------
party to or bound by, and none of the assets of Company are covered by or
subject to the following contracts, agreements, Subscriber Contracts or
Agreements (whether written or oral):
(A) any written agreement (or group of related written agreements)
for the lease of real or personal property from or to third parties providing
for lease payments in excess of $50,000 per annum;
(B) any Material equipment or supplier agreement;
(C) except as disclosed in (a) or (b) above, any written agreement
(or group of related written agreement) under which it has created, incurred,
assumed, or guaranteed (or may create, incur, assume, or guarantee) indebtedness
(including capitalized lease obligations) involving more than $50,000 or under
which it has imposed (or may impose) a Security Interest on any of its assets,
tangible or intangible;
(D) any Material Subscriber Contract;
(E) any formal or informal partnering arrangement with any merchant
or service or web content provider;
(F) any agreement with any local exchange carrier, competitive local
exchange carrier, competitive access provider or other telecommunications
carrier that requires payments in excess of $120,000 per annum;
(G) any peering, transit or other agreement with any internet service
provider, online company or similar entity that requires payments in excess of
$120,000 per annum; or
-18-
(H) any written arrangement requiring confidentiality or
noncompetition other than agreements with customers, employees or subcontractors
in the Ordinary Course of Business;
(I) any other written arrangement (or group of related written
arrangements) either involving more than $50,000 per annum or not entered into
in the Ordinary Course of Business.
The Transferors have delivered to the Acquirer or made available for
review by the Acquirer a correct and complete copy of each written arrangement
listed in Schedule 4.12 (as amended to date). With respect to each written
-------------
arrangement so listed, and except as otherwise provided in Section 4.3: (a) the
-----------
written arrangement is legal, valid, binding, enforceable, and in full force and
effect with respect to Company, subject to Equitable Exceptions; (b) the written
arrangement will continue to be legal, valid, binding, enforceable and in full
force and effect on identical terms immediately following the Closing, subject
to Equitable Exceptions; (c) To the Knowledge of the Transferors, Company is
not, nor is any other party, in breach or default, and no event has occurred
which to the Knowledge of the Transferors with notice or lapse of time would
constitute a breach or default or permit termination, modification, or
acceleration, under the written arrangement; and (d) Company has not, nor to the
Knowledge of the Transferors has any other party, repudiated any provision of
the written arrangement. To the Knowledge of Transferors and Company, Company is
not a party to any oral contract, agreement, or other arrangement which, if
reduced to written form, would be required to be listed in Schedule 4.12 under
-------------
the terms of this Section 4.12. No unfilled Subscriber Contract or Agreement
------------
obligating Company to perform services will result in a Material loss to Company
upon completion of performance. Except as set forth in Schedule 4.12, Company
-------------
has not been notified in writing that any of its Subscribers intend either to
dispute charges under or to terminate early a Material Subscriber Contract or
Agreement.
4.13 NOTES AND ACCOUNTS RECEIVABLE. All notes and accounts receivable of
-----------------------------
Company are reflected properly on its books and records, are valid receivables
and to the Knowledge of the Transferors and Company are subject to no Material
setoffs or counterclaims, are presently current and collectible, and will be
collected in accordance with their terms at their recorded amounts, subject only
to the reserve for bad debts set forth on the face of the Stub Period Balance
Sheet (rather than in any notes thereto) as adjusted for the passage of time
through the Closing Date in accordance with the past custom and practice of
Company.
4.14 INSURANCE.
---------
(A) Schedule 4.14 sets forth the following information with respect
-------------
to each insurance policy (including policies providing property, casualty,
liability, and workers' compensation coverage and bond and surety arrangements)
to which Company has been a party, a named insured, or otherwise the beneficiary
of coverage at any time within the past two (2) years: the name address and
telephone number of the agent; the name of the insurer, the name of the
policyholder, and the name of each covered insured; the policy number and the
period of coverage; the scope and amount (including a description of how
deductibles and ceilings are
-19-
calculated and operate) of coverage; and a description of any material
retroactive premium adjustments or other loss sharing arrangements.
(B) With respect to each insurance policy listed on Schedule 4.14 and
-----------------
except as noted on Schedule 4.14: (i) the policy is legal, valid, binding, and
--------------------------------
enforceable and was or is in full force and effect on the dates indicated; (ii)
the policy will continue to be legal, valid, binding, and enforceable and was or
is in full force and effect on identical terms immediately following the Closing
Date when such policy is in effect prior to the Closing Date; (iii) Company is
not in breach or default (including with respect to the payment of premiums or
the giving of notices), and to the Knowledge of the Transferors and Company, no
event has occurred which, with notice or the lapse of time, would constitute
such a breach or default or permit termination, modification, or acceleration
under the policy; and (iv) Company has not and to the Knowledge of the
Transferors and Company, no other party to the policy has repudiated any
provision thereof. To the Knowledge of the Transferors and Company, since its
inception Company has been covered by insurance in scope and amount customary
and reasonable for the businesses in which it has engaged during the
aforementioned period. Except as set forth in Schedule 4.14, Company currently
-------------
has no and has never had any self-insurance arrangements.
4.15 LITIGATION. Schedule 4.15 sets forth each instance in which Company
---------- -------------
(a) is subject to any unsatisfied judgment, order, decree, stipulation,
injunction, or charge or (b) has received written notice that it is a party or,
to the Knowledge of the Transferors and directors and officers of Company, is
threatened to be made a party to any charge, complaint, action, suit,
proceeding, hearing, or investigation of or in any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator. Except as specifically described on Schedule 4.15, no
-------------
matter listed thereon could reasonably be expected, individually, to result in a
Material adverse effect to Company. Neither the Transferors nor any of the
directors or the officers of Company has Knowledge that any such charge,
complaint, action, suit, proceeding, hearing, or investigation may be brought or
threatened against Company.
4.16 EMPLOYEES. To the Knowledge of the Transferors and Company, no
---------
salaried employee or any salaried group of employees has any plans to terminate
employment with Company. To the Knowledge of the Transferors and Company,
Company has not committed any unfair labor practice.
4.17 EMPLOYEE BENEFITS. Except as set forth in Schedule 4.17, Company has
-----------------
no Employee Benefit Plans that Company maintains or to which Company contributes
for the benefit of any current or former employee of Company and Company has
never been a party to any Employee Benefit Plan.
4.18 GUARANTIES. Company is not a guarantor nor is it otherwise liable for
----------
any Liability or obligation (including indebtedness) of any other person other
than such potential liabilities to which Company is subject based on the acts or
omissions of its employees, subcontractors and other agents performing services
for Company in the Ordinary Course of Business (of which Company has no
Knowledge of any claim for actual liability therefor).
-20-
4.19 LEGAL COMPLIANCE. Except as it would not, individually or in the
----------------
aggregate, have a Material adverse effect:
(A) To the Knowledge of the Transferors and Company, Company has
complied in all Material respects with all laws (including rules and regulations
thereunder) of federal, state, local, and foreign governments (and all agencies
thereof), including without limitation, all environmental and employee health
and safety laws. No written charge, complaint, action, suit, proceeding,
hearing, investigation, claim, demand, or notice has been filed or commenced
against Company which is currently pending and alleges any failure to comply
with any such law or regulation.
(B) To the Knowledge of the Transferors and Company, Company has
complied with all applicable laws (including rules and regulations thereunder)
relating to the employment of labor employee civil rights, hiring of engaging
non-United States citizens, and equal employment opportunities.
(C) Company has not made or agreed to make any contribution, payment,
or gift of funds or property to any governmental official, employee, or agent
where either the contribution, payment, or gift or the purpose thereof was
illegal under the laws of any federal, state, local, or foreign jurisdiction;
(D) To the Knowledge of the Transferors and Company, Company has
filed in a timely manner all reports, documents, and other materials it was
required to file (and the information contained therein was correct and complete
in all Material respects) under all applicable laws (including rules and
regulations thereunder).
(E) Company has possession of all records and documents it was
required to retain under all applicable laws (including rules and regulations
thereunder).
4.20 CERTAIN BUSINESS RELATIONSHIPS WITH COMPANY. Except as set forth in
-------------------------------------------
Schedule 4.20, neither the Transferors nor Affiliates of Company has been
-------------
involved in any business arrangement or relationship with Company within the
past twelve (12) months other than service relationships in the Ordinary Course
of Business, and neither the Transferors nor their Affiliates owns any material
property or right, tangible or intangible, which is used in the business of
Company.
4.21 BROKERS' FEES. Company does not have any Liability or obligation to
-------------
pay any fees or commissions to any broker, finder, or similar representative
with respect to the transactions contemplated by this Agreement.
4.22 SYSTEMS. Except as set forth on Schedule 4.22 and with such other
------- -------------
exceptions as will not, individually or in the aggregate, have a Material
adverse effect, (i) all of the Systems services and platform servers are
running, or peaking, at no higher than 85% of sustained capacity, (ii) all of
the Systems' services are replicated in a redundant manner across available
platform servers as reasonable and customary in the internet provider industry,
(iii) all remote physical points of presence ("POPS") are secure, conform to
equipment manufacturers'
-21-
recommended environmental parameters, and contain an uninterrupted power supply
with a battery back-up of at least 30 minutes, (iv) the average daily Subscriber
blockage rate for dial-in Subscribers is no greater than 1.0% of Subscriber
attempts across the overall network infrastructure, (v) the configuration
diagrams provided to the Acquirer reasonably represent the redundant network
facilities between major backbone locations, and between remote physical POPs
and major network concentration points, (vi) the existing power plant at
Company's main location is equipped with an uninterrupted power supply with a
battery back-up of at least 60 minutes, (vii) all deployed dial-in modem, modem
shelf and corresponding technology conform to applicable industry standards
necessary to support Subscriber traffic at a rate of 56Kbps or above, (viii) all
Systems owned, leased by, or licensed to or by Company are year 2000 compliant,
(ix) Company utilizes a DHCP, or other dynamic, IP address allocation scheme
that conforms to industry standards, and (x) Company has access to the quantity
of IP addresses sufficient to support Company's Subscriber base as currently
existing and as currently contemplated to exist as of January 1, 2000.
4.23 SUBSCRIBERS. Schedule 4.23 sets forth (a) the number or Subscribers
----------- -------------
served by Company by type of business (i.e., segregated by the following
categories, if applicable to Company: (i) dial-up, (ii) dedicated access, (iii)
web hosting, and (iv) other businesses as of September 30, 1998 and Company's
standard rates for such Subscribers for each type of business; (b) for the
period commencing January 1, 1997, Company's monthly churn rate (consisting of
(i) cancellations of month-to-month service and/or long-term subscription or
service contracts prior to expiration (ii) terminations of any such contracts,
and (iii) non-renewal of any such contracts upon expiration) by business type
during each full calendar month prior to the date hereof; and (c) as of
September 30, 1998, detail as to the amount of prepaid subscription or service
contracts and the amount of unearned revenue for all Subscriber contracts with a
remaining term of (i) less than or equal to 90 days, (ii) greater than 90 days
and less than or equal to one year, (iii) greater than one year and less than or
equal to two years, (iv) greater than two years and less than or equal to three
years and (v) greater than three years.
4.24 DISCLOSURE. To the Knowledge of the Company, the representations and
----------
warranties contained in this Article IV as amended, modified and/or supplemented
----------
by the Disclosure Schedules do not contain any untrue statement of a fact or
omit to state any Material fact necessary in order to make the statements and
information contained in this Article IV not misleading.
----------
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIRER
The Acquirer represents and warrants to the Transferors the statements
contained in this Article V are correct and complete as of the date of this
---------
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Article V):
---------
5.1 ORGANIZATION OF THE ACQUIRER. The Acquirer is a corporation duly
----------------------------
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation.
-22-
5.2 AUTHORIZATION OF TRANSACTION. The Acquirer has full power and
----------------------------
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder and this Agreement has
been duly executed and delivered by the Acquirer. This Agreement constitutes the
valid and legally binding obligation of the Acquirer, enforceable in accordance
with its terms and conditions except for Equitable Exceptions. The Acquirer does
not need to give any notice to, make any filing with, nor obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement (other than
as provided for in Article II of this Agreement).
----------
5.3 BROKERS' FEES. The Acquirer has no Liability or obligation to pay any
-------------
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which the Transferors could
become liable or obligated.
5.4 ACQUIRER'S CAPITALIZATION. The authorized capital stock of the
-------------------------
Acquirer consists of (a) 100,000,000 shares of common stock, and (b) 10,000,000
shares of preferred stock. The issued and outstanding shares of and the holders
of record of the Acquirer's Common Stock shall be as set forth in the
Registration Statement, copies of which shall be delivered to Company and the
Transferors, and as of the date hereof, there are no issued and outstanding
shares of preferred stock. All of the Acquirer's issued and outstanding common
stock have been duly authorized, are validly issued, fully paid, and
nonassessable.
5.5 DISCLOSURE. The representations and warranties contained in this
----------
Article V and in the Registration Statement on Form S-1 as amended from time to
---------
time and as filed with the SEC by Acquirer, do not contain any untrue statement
of a fact or omit to state any Material fact necessary in order to make the
statements in Article V and the Registration Statement, respectively, not
---------
misleading.
ARTICLE VI
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing or the earlier termination of this
Agreement:
6.1 GENERAL. Each of the Parties will use its reasonable efforts to take
-------
all actions and to do all things necessary, proper, or advisable to consummate
and make effective the transactions contemplated by this Agreement (including
satisfying the closing conditions set forth in Article IX below).
----------
6.2 NOTICES AND CONSENTS. Each of the Parties will give any notices to
--------------------
third parties, and will use best efforts to obtain third party consents, that
the other Party may reasonably request in connection with matters disclosed or
required to be disclosed on the Disclosure Schedules. Each of the Parties will
take any additional action (and the Transferors will cause Company to take any
additional action) that may be necessary, proper, or advisable in connection
with any other notices to, filings with, and authorizations, consents, and
approvals of
-23-
governments, governmental agencies, and third parties that he, she or it may be
required to give, make, or obtain.
6.3 OPERATION OF BUSINESS PRIOR TO THE EFFECTIVE TIME OF THE CLOSING.
----------------------------------------------------------------
Except as contemplated hereby, or as may be incidental to or in furtherance of
the transactions contemplated hereby, or as may have been set forth herein or in
the Disclosure Schedules, Company will not (and the Transferors will not cause
or permit Company to) engage in any practice, take any action, embark on any
course of inaction, or enter into any transaction outside the Ordinary Course of
Business, without the prior written consent of Acquirer, which consent shall not
be unreasonably withheld if such action is being undertaken in good faith
consistent with prior prudent business practices of Company. Without limiting
the generality of the foregoing, from the date hereof to the effective time of
the Closing:
(A) Company will not adopt or propose any change in its articles of
incorporation or bylaws;
(B) Company will not merge or consolidate with any other Person or
acquire a Material amount of assets of any other Person;
(C) Company will not sell, lease, license or otherwise dispose of any
Material assets or property except (i) pursuant to existing contracts or
commitments and (ii) in the Ordinary Course of Business;
(D) except as otherwise provided for in this Agreement, Company will
not issue, sell, purchase, repurchase, redeem or otherwise acquire any Company
securities;
(E) except with the prior written consent of the Acquirer, Company
shall not make any Tax election that would have a Material adverse effect on
Company;
(F) Company will timely file all Tax Returns due on or before the
effective time of Closing and pay (or reserve for) all Taxes due and payable
with respect to such periods;
(G) Company will not do any of the items described in Section 4.6;
-----------
and
(H) Company will not agree or commitment to do any of the foregoing.
6.4 PRESERVATION OF BUSINESS. Except as contemplated hereby, or as may be
------------------------
incidental to or in furtherance of the transactions contemplated hereby, or as
may have been set forth herein or in the Schedules, the Transferors will cause
Company to use reasonable commercial efforts to keep its business and properties
substantially intact, including its present operations, physical facilities
(except for the planned relocation of Company facilities as set forth on
Schedule 6.4), working conditions, and relationships with lessors, licensers,
------------
suppliers, Subscribers, any other customers, and employees.
6.5 ACCESS.
------
-24-
(A) Only in the event that neither the Acquirer nor the Transferors
exercise their right to terminate this Agreement as provided in Article X
---------
herein, the Transferors will cause Company to permit the Acquirer's
representatives access at reasonable times, and in a manner so as not to
interfere with the normal business operations of Company, to the headquarters of
Company and to all books, records, contracts, Tax records, and documents of or
pertaining to Company; provided, however, that the Acquirer shall direct all
requests for information and material only through the Transferors'
Representative, unless otherwise agreed to by the Acquirer and the Transferors'
Representative in writing.
(B) The Acquirer shall proceed to arrange with the Transferors a
mutually agreeable time and place at which the Acquirer may conduct interviews
with key employees and/or customers of Company mutually agreed to by the
Acquirer and the Transferors' Representative.
6.6 NOTICE OF DEVELOPMENTS. Company will give prompt written notice to the
----------------------
Acquirer of any Material development affecting the assets, Liabilities,
business, financial condition, operations, or results of operations, including
but not limited to (a) any development affecting the ability of Company to
consummate the transactions contemplated by this Agreement, (b) any Outage
effecting the more than 1% of all Subscribers lasting for 3 hours or more or (c)
any loss of any Material Subscriber or any material equipment or other supplier
to the Company. No disclosure by any Party pursuant to this Section 6.6 shall
-----------
be deemed to amend or supplement the Disclosure Schedules or to prevent or cure
any misrepresentation, breach of warranty, and/or breach of covenant.
6.7 EXCLUSIVITY. The Transferors will not (and the Transferors will not
-----------
cause or permit Company to) (a) solicit, initiate, or encourage the submission
of any proposal or offer from any person relating to any (i) liquidation,
dissolution, or recapitalization of Company, (ii) merger or consolidation of
Company, (iii) acquisition or purchase of securities or assets of Company or
(iv) similar transaction or business combination involving Company, or (b)
participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any person to do or seek any of the
foregoing. The Transferors will notify the Acquirer immediately if in the
reasonable view of the Transferors any entity or person makes a formal or
otherwise serious proposal, offer, inquiry, or contact with respect to any of
the foregoing and shall provide the identity of such entity or person as well as
any other relevant details regarding the contact.
6.8 TERMINATION OF BANK FACILITIES. The Transferors shall (or shall
------------------------------
cause Company to) assist Acquirer in arranging the retirement of all of
Company's outstanding bank indebtedness and to fully, completely and
unconditionally obtain the release of all Security Interests related thereto.
6.9 LANDLORDS' CONSENTS. The Transferors shall use its best efforts to
-------------------
cause Company, with the assistance of the Acquirer, on or before the Closing
Date to obtain from its landlords (to the extent required under the pertinent
premises lease) written consent to the
-25-
assignment of all leases being assumed by the Acquirer, which assignments are
deemed to have resulted from the transactions contemplated by this Agreement.
6.10 TAX MATTERS.
------------
(A) TAX RETURNS. The Transferors shall cause Company to file with
-----------
the appropriate governmental authorities all Tax returns required to be filed by
it for any taxable period ending prior to the Closing Date and Transferors
and/or Company shall remit any Taxes due in respect of such Tax returns. In
addition, the Transferors shall cause KPMG Peat Marwick to prepare a short
period tax return for Company covering the period January 1, 1998 through the
Closing Date. The cost of preparation of such short period tax return shall be
paid for by the Transferors.
(B) INDEMNITY. The Transferors shall be liable for, and shall
---------
indemnify and hold Acquirer and Company harmless against, any Taxes or other
costs attributable solely to (i) a failure on the part of any of the Transferors
to take all actions required of them under Section 6.10 for periods prior to
------------
the Closing Date.
(C) COOPERATION ON TAX MATTERS
--------------------------
(i) Acquirer, Company and Transferors shall cooperate fully,
as and to the extent reasonably requested by the other party, in connection with
the filing of Tax returns pursuant to this section and any audit, litigation or
other proceeding with respect to Taxes. Such cooperation shall include the
retention and (upon the other party's request) the provision of records and
information which are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. Company and Transferors agree (A) to retain all books and records
with respect to Tax matters pertinent to Company relating to any taxable period
beginning before the Closing Date until the expiration of the statute of
limitations (and, to the extent notified by Acquirer any extensions thereof) of
the respective taxable periods, and to abide by all record retention agreements
entered into with any taxing authority, and (B) to give the other party
reasonable written notice prior to transferring, destroying or discarding of any
such books and records and, if the other party so requests, Company or
Transferors, as the case may be, shall allow the other party to take possession
of such books and records.
(ii) Acquirer, and the Transferors and Company further agree,
upon request, to use their best efforts to obtain any certificate or other
document from any governmental authority or any other Person as may be necessary
to mitigate, reduce or eliminate any Tax that could be imposed (including, but
not limited to, with respect to the transactions contemplated hereby).
(iii) Acquirer, the Transferors and Company further agree, upon
request, to provide the other party with all information that either party may
be required to report pursuant to Section 6043 of the Code and all Treasury
Department Regulations promulgated thereunder.
-26-
6.11 AUDITS. The Transferors shall cooperate and use their best efforts to
------
deliver, or cause to be delivered, to Acquirer the unqualified and unmodified
audit report of E&Y on the balance sheets of Company as of September 30, 1998,
December 31, 1997 and December 31, 1996, and December 31, 1995 for periods and
consolidated audited statements of operations and cash flows of Company for the
fiscal years then ended, which report shall be without limitation as to the
scope of the audit; provided, however, Acquirer shall be solely responsible for
payment of any expenses related to the preparation of such report. Transferors
and any of the officers or directors of Company, in their capacities as officers
and directors of Company, shall provide all management letters, reports or
representations reasonably requested by such auditors in connection with such
audits, and in connection with audits of Company for the years ended December
31, 1997 and December 31, 1996 and December 31, 1995 and for the nine month
period ending September 30, 1998.
6.12 LIMITATION ON CAPITAL LEASES. Company shall not enter into capital
----------------------------
leases that would cause the aggregate obligations payable by Company under
capital leases to exceed the amount set forth on the Stub Period Balance Sheet
without the prior consent of Acquirer.
6.13 DISCLOSURE SCHEDULES. Company covenants that within 7 days after the
--------------------
date hereof, it will provide Acquirer with disclosure schedules relating to
Articles III and IV of this Agreement in form and substance reasonably
-------------------
satisfactory to Acquirer.
6.14 RETIREMENT OF COMPANY INDEBTEDNESS. Company shall have provided for
----------------------------------
the retirement at Closing of the Company Indebtedness. The amounts payable for
the retirement of the Company Indebtedness will be funded by a reduction of the
Cash Portion of the Transfer Consideration pursuant to Section 2.2, which
-----------
amount will be paid at Closing by the Acquirer on behalf of Company to the
holder of the Company Indebtedness.
ARTICLE VII
POST-CLOSING COVENANTS
7.1 GENERAL. In case at any time after the Closing any further action is
-------
necessary or desirable to carry out the purposes of this Agreement, each of the
Parties will take such further action (including the execution and delivery of
such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor under Article IX
----------
below). The Transferors acknowledge and agree that from and after the Closing
the Acquirer will be entitled to possession of all documents, books, records,
agreements, and financial data of any sort relating to Company; provided that
the Transferors shall be entitled to access to the documents, books, records,
agreements and financial data at reasonable times and with advance notice to the
Acquirer, and Transferors may retain any copies of the foregoing as shall be
necessary to comply with applicable tax and other laws, regulations and
ordinances.
7.2 TRANSITION. The Transferors will not take any action that primarily
----------
is designed or intended to have the effect of discouraging any lessor, licenser,
Subscriber, supplier, or other business associate of Company from maintaining
the same business relationships with Company
-27-
after the Closing for a period of twenty-four (24) months thereafter as it
maintained with Company prior to the Closing.
7.3 COVENANT NOT TO COMPETE. Except as otherwise permitted by the terms
-----------------------
of a specific employment agreement entered into in conjunction with this
Agreement, for a period of three (3) years from and after the Closing Date, all
Transferors employed by Company as of the date of this Agreement will not,
directly or indirectly, as principal, agent, trustee or through the agency of
any corporation, partnership, association or agent or agency, (i) own, manage,
control, participate in, consult with, render services for, or in any manner
engage in any activity or business competing with Company in the State of
California, (ii) service or solicit from Company any Subscriber or other
customer of Company, (iii) request or advise any Subscriber or other customer of
Company to withdraw, curtail or cancel such subscriber's or others customer's
business with Company, or (iv) solicit for employment any full-time salaried
management position employee employed by Company at the time of such
solicitation; provided, however, that no owner of less than five percent (5%) of
the outstanding stock of any publicly traded corporation shall be deemed to
engage solely by reason thereof in any of that corporation's businesses. For
purposes of this Agreement, the Parties have agreed to allocate $50,000 of the
Transfer Consideration to the covenant not to compete contained in this Section
-------
7.5, which shall be allocated to the Transferors in proportion to their
---
respective stock ownership.
7.4 REORGANIZATION INTENT. The Parties agree that this transaction will
---------------------
occur in conjunction with the Related Transactions, and the Parties intend that
the receipt of the Acquirer's Shares by the Transferors and by the parties
involved in the Related Transactions will be tax-free under Section 351 of the
Code.
7.5 CONDUCT FROM CLOSING UNTIL THE END OF THE EARNED PAYOUT PERIOD.
--------------------------------------------------------------
During the period from Closing until the end of the Earned Payout Period, the
Acquirer agrees that it will not (a) unreasonably require that the business of
Company be operated substantially different as it was prior to the Closing Date
except in so far as the prior practices of Company were imprudent or
unreasonable or its productivity efficiency and profitability can be improved
and increased through economies of scale, the Acquirer's experience or
otherwise; (b) unreasonably change (i) the prices charged for Company's
services, (ii) the level of compensation of Company's full-time corporate
employees or (iii) the level of Company's general and administrative expenses,
unless the prior business practices were unreasonable or imprudent and/or unless
the changes are reasonably necessary to support the growth of Company's
business.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS TO CLOSE
8.1 CONDITIONS TO OBLIGATIONS OF THE ACQUIRER. The obligation of the
-----------------------------------------
Acquirer to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction or waiver of the following conditions:
(A) COVENANTS, REPRESENTATIONS AND WARRANTIES. The representations
-----------------------------------------
and warranties of the Transferors and Company set forth in Articles III and IV
above shall be true and correct in all material respects at and as of the
Closing Date and the Transferors shall have
-28-
performed and complied with all of their covenants hereunder in all material
respects through the Closing;
(B) CONSENTS. The Transferors, Company and Acquirer will have
--------
procured all third party consents and given all notices required in connection
with this Agreement and the transactions contemplated hereby, including without
limitation all action necessary in connection with and/or the receipt of any
notices to, filings with, and authorizations, consents and approvals of
governments, governmental agencies, and third parties as set forth herein or in
the Disclosure Schedules including any filing required under the ▇▇▇▇-▇▇▇▇▇-
▇▇▇▇▇▇ Act;
(C) RESIGNATIONS. The Acquirer shall have received the
------------
resignations, effective as of the Closing, of each director of Company prior to
the Closing.
(D) DOCUMENTS TO BE DELIVERED BY THE TRANSFERORS. The following
--------------------------------------------
documents shall be delivered at Closing by the Transferors:
(i) Certificates. The Transferors and Company shall have
------------
delivered to the Acquirer an Officers/Transferors Certificate and a Secretary's
Certificate substantially in the form of the certificates respectively attached
as Exhibit C-1 and C-2 hereto.
----------- ---
(ii) Escrow Agreement. The Acquirer shall have received
----------------
from the Transferors an executed Escrow Agreement in the form and substance set
forth as Exhibit A attached hereto.
---------
(iii) Employment Agreements. The Acquirer shall have
---------------------
received from ▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇▇▇ an executed employment agreement in
the form and substance attached hereto as Exhibit E.
---------
(iv) Registration Rights Agreement Joinder. The Acquirer
-------------------------------------
shall have received from each Transferor an executed joinder to the Registration
Rights Agreement in the form and substance set forth as Exhibit F attached
---------
hereto;
(v) Subscription Agreement Joinder. The Transferors shall
------------------------------
have caused each party receiving Acquirer's Shares under this Agreement to
execute an Equity Subscription Agreement in the form of Exhibit D hereto;
---------
(vi) Opinion of Counsel. The Acquirer shall have received
------------------
from the Transferors and Company an opinion of counsel in form and substance
reasonably satisfactory to Acquirer.
(E) FINANCIAL CONDITION. Each of the following shall be true and
-------------------
complete as of the Closing Date:
(i) the Acquirer shall be satisfied that the Net Worth of
Company on the Closing Date equaled or exceeded negative $1,747,565 or an
appropriate adjustment shall have been made to the Transfer Consideration as
provided in Section 2.3;
-----------
-29-
(ii) all liens and Security Interests securing debts of Company
which have been paid in full prior to or at the Closing shall have been fully
released of record to the reasonable satisfaction of the Acquirer and all
Uniform Commercial Code financing statements covering such debts shall have been
terminated;
(iii) no unsatisfied liens for the failure to pay Taxes of any
nature whatsoever shall exist against Company, or against or in any way
affecting any Company Share;
(iv) the Transferors shall and Company shall cause all of
Company's officers, directors and/or key employees of Company to repay in full
all debts and other obligations, if any, owed to Company, concurrently with or
within 2 days;
(F) DUE DILIGENCE COMPLETED. The Acquirer shall be satisfied with
-----------------------
the results of its continuing legal, financial and business due diligence
investigations of Company, all of which shall be final and completed to the
Acquirer's satisfaction prior to Closing; provided, however, Acquirer shall use
best efforts to notify Company of any dissatisfactions with its due diligence
investigations of Company as soon as reasonably practicable, but in no event
later than 20 days prior to the Closing Date and, provided, further, that in no
event shall any dissatisfaction with the due diligence investigations of Company
cause Acquirer not to be satisfied with such investigations unless such
investigations uncover previously undisclosed events or matters that would have
a Material adverse effect on the financial condition of Company;
(G) MATERIAL ADVERSE CHANGE. No Material adverse change shall have
-----------------------
occurred in Company's Business;
(H) IPO. The Acquirer shall have received from Company the Financial
---
Statements and such Financial Statements must, in the opinion of the Acquirer's
independent public accountants, be suitable or readily adaptable for
incorporation in the Registration Statement, and any prospectus and annual and
periodic reports to be filed by the Acquirer with the SEC relating to the IPO
and the Registration Statement filed by the Acquirer with the SEC in connection
with the IPO shall have become effective and there shall be no other impediments
to the closing of the IPO; and
(I) COMPANY SHARES. The Transferors shall deliver the certificates
--------------
representing the Company Shares to the Acquirer and the acquisition by the
Acquirer of the Company Shares shall represent one hundred percent (100%) of the
issued and outstanding capital stock of the Company and all of such Company
Shares shall be free and clear of any Security Interests or other liens, claims
or encumbrances of any nature whatsoever.
The Acquirer may waive any condition specified in this Section 8.1
-----------
if it executes a writing so stating at or prior to the Closing.
8.2 CONDITIONS TO OBLIGATIONS OF THE TRANSFERORS. The obligations of the
--------------------------------------------
Transferors to consummate the transactions to be performed by them in connection
with the Closing is subject to satisfaction of the following conditions:
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(A) COVENANTS, REPRESENTATIONS AND WARRANTIES. The representations
-----------------------------------------
and warranties of the Acquirer set forth in Article V above shall be true and
---------
correct in all material respects at and as of the Closing Date and the Acquirer
shall have performed and complied with all of its covenants hereunder in all
material respects through the Closing;
(B) CONSENTS. The Acquirer will have procured all third party
--------
consents needed by the Acquirer and given all notices required in connection
with this Agreement and the transactions contemplated hereby, including without
limitation all action necessary in connection with and/or the receipt of any
notices to, filings with, and authorizations, consents and approvals of
governments, governmental agencies, and third parties as set forth herein or in
the Disclosure Schedules including any filing required under the ▇▇▇▇-▇▇▇▇▇-
▇▇▇▇▇▇ Act;
(C) MINIMUM IPO PRICE. The Registration Statement filed by the
-----------------
Acquirer with the SEC in connection with the IPO shall have become effective and
there shall be no other impediments to the closing of the IPO. Notwithstanding
the foregoing, the provisions of this Section 8.2(d) may be waived by the
--------------
Majority Co-Transferors in the event that the following conditions have been
attained: (i) Acquirer is able to fund the Cash Portion of the Transfer
Consideration through a private equity investment in the capital stock of the
Acquirer or through borrowed money; (ii) the Transferors receive the Stock
Portion of the Transfer Consideration on a basis reasonably equivalent to what
they would have received in an IPO; (iii) the Transferors will receive the right
to obtain liquidity for the Stock Portion of the Transfer Consideration within a
reasonably short period of years following the Closing; and (iv) following the
Closing, the Acquirer will have access to cash or availability under debt
facilities or equity financing commitments sufficient to enable it to provide a
reasonable amount of financing for working capital, equipment upgrades and
future acquisitions for the Company and the other subsidiaries of the Acquirer.
(D) RETIREMENT OF COMPANY INDEBTEDNESS. The Acquirer, to the
----------------------------------
extent of the reduction in the Cash Portion of the Transfer Consideration in
Section 2.2 shall have provided funding to Company sufficient to fund the
-----------
payments required to retire the Company Indebtedness.
(E) DOCUMENTS TO BE DELIVERED BY THE ACQUIRER. The following
-----------------------------------------
documents shall be delivered at the Closing by Acquirer.
(i) Certificates. The Acquirer shall have delivered to the
------------
Transferors an Officer's and Secretary's Certificate substantially in the form
of the Officer's and Secretary's Certificates attached as Exhibits C-1 and C-2
--------------------
hereto.
(ii) Escrow Agreement. The Transferors shall have received
----------------
from the Acquirer an executed Escrow Agreement in the form and substance set
forth as Exhibit A attached hereto.
---------
(iii) Subscription Agreement Joinder. The Acquirer shall
------------------------------
execute and deliver an Equity Subscription Agreement in the form of Exhibit D
---------
hereto, with each of the Transferors acquiring Acquirer Shares.
-31-
(iv) Employment Agreements. ▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇▇▇
---------------------
shall have received from Company an executed Employment Agreement, in the form
and substance attached hereto as Exhibit E;
---------
(v) Registration Rights Agreement Joinder. Each Transferor
-------------------------------------
shall have received from the Acquirer an executed joinder to the Registration
Rights Agreement in the form and substance set forth as Exhibit F attached
---------
hereto; and
(vi) Options. The Acquirer shall have issued options for
-------
the purchase of up to 121,000 shares of the Acquirer's Common Stock to the
employees of Company listed on Annex V which shall be delivered to Acquirer no
-------
later than ten business days prior to Closing.
(vii) Stock Certificates. The Transferors shall receive at the
------------------
Closing the Acquirer's Shares representing the Stock Portion of the Transfer
Consideration in the names and amounts listed on Annex IV attached hereto. The
--------
Escrow Agent shall receive stock certificates required pursuant to Section
2.2(c) hereof and the Escrow Agreement.
ARTICLE IX
REMEDIES FOR BREACHES OF THIS AGREEMENT
9.1 INDEMNIFICATION OF THE ACQUIRER Except as provided in and subject
-------------------------------
to Section 9.6, the Transferors agree to indemnify and hold harmless the
-----------
Acquirer, each officer and director of the Acquirer and any successor thereof
(collectively, the "INDEMNIFIED PARTIES") from and against any and all Adverse
Consequences, which any of the Indemnified Parties may sustain, or to which any
of the Indemnified Parties may be subjected, arising out of (a) any
misrepresentation, breach or default by the Transferors or Company of or under
any of the representations, warranties, covenants, agreements or other
provisions of this Agreement or any agreement or document executed in connection
herewith and (b) the Transferors or Company's tortuous acts or omissions to act
prior to Closing for which Company did not carry liability insurance for itself
as the insured party sufficient to satisfy such claim or liability, whether or
not such acts or omissions to act result in a breach or violation of any
representation or warranty.
9.2 DEFENSE OF THIRD PARTY CLAIMS. If any legal proceeding shall be
-----------------------------
instituted, or any claim or demand made, by any third party against any
Indemnified Parties in respect of which the Transferors may be liable hereunder
(and such determination shall be made without regard to the limitations set
forth in Section 9.6), such Indemnified Party shall give prompt written notice
-----------
thereof to the Transferors and, except as otherwise provided in Section 9.4
-----------
below, the Transferors shall have the right to defend any litigation, action,
suit, demand, or claim for which such Indemnified Party may seek indemnification
with counsel satisfactory to the Transferors; provided, however, that the
Transferors may not settle any such litigation, action, suit, demand, or claim
without the prior written consent of the Acquirer, which shall not be
unreasonably withheld. Notwithstanding the foregoing, if in the reasonable
judgment of the Acquirer, such litigation, action, suit, demand or claim, or the
resolution thereof, would have a (a) Material adverse effect on the Acquirer or
the Company or (b) the Transferors have a conflict of interest in defending such
action on Acquirer's or Company's behalf, at the Acquirer's election, the
Acquirer may defend itself and in either of such instances the Transferors shall
be
-32-
liable for all expenses reasonably incurred in connection therewith (including,
without limitation, settlement payments and reasonable attorney's fees);
provided, however, that the Acquirer may not settle any such litigation, action,
suit, demand, or claim without the prior written consent of the Transferors,
which shall not be unreasonably withheld. If neither (a) nor (b) are applicable
but the Acquirer desires to participate in the defense of an action the
Transferors are defending because in the Acquirer's reasonable judgment the
outcome of such action could have an ongoing effect on the Acquirer (or its
successors), the Acquirer may participate but at its own expense. In the event
the Transferors fail or refuse to defend any legal proceeding they are required
to defend under this Article IX within a reasonable length of time, the
----------
Indemnified Parties shall be entitled to assume the defense thereof, and the
Transferors shall be liable to repay the Indemnified Parties for all expenses
reasonably incurred in connection with said defense (including, without
limitation, settlement payments and reasonable attorney's fees). If the
Transferors do not or refuse to assume the defense of any litigation, action,
suit, demand, or claim in any legal proceeding they are required to defend under
this Article IX, the Indemnified Parties shall have the absolute right, at the
----------
Transferor's expense, to control the defense of and to settle, in their sole
discretion and without the consent of the Transferors, such litigation, action,
suit, demand, or claim, but the Transferors shall be entitled, at their own
expense, to participate in such litigation, action, suit, demand, or claim, and
if the Transferors elect to participate in such litigation the Indemnified
Parties shall consult with the Transferors prior to settling such litigation.
The Party controlling any defense pursuant to this Section 9.2 shall deliver, or
-----------
cause to be delivered to the other Party, copies of all correspondence,
pleadings, motions, briefs appeals or other written statements relating to or
submitted in connection with the defense of any such litigation, action, suit,
demand, or claim, and timely notices of any hearing or other court proceeding
relating to such litigation, action, suit, demand, or claim.
9.3 PROCEDURE FOR CLAIMS.
--------------------
(A) ESCROW CLAIMS. If any claim for indemnification is made by an
-------------
Indemnified Party pursuant to this Article IX such Indemnified Party shall apply
----------
to the Escrow Agent for reimbursement of such claim in accordance with the
provisions of the Escrow Agreement. The Escrow Sum is intended to be the
exclusive source of funds in the event the Indemnified Parties have
indemnification claims hereunder.
(B) OTHER CLAIMS. If pursuant to this Article IX any claim for
------------ ----------
indemnification is made by the Transferors, the Indemnified Party or the
Acquirer, as the case may be (in either instance, the "CLAIMANT"), shall send
written notice to the other person (by certified mail, return receipt requested
or by personal service as provided in Section 11.7 hereof) setting forth in
------------
reasonable detail a description of the facts upon which the claim is based and a
reasonable estimate of the amount of the claim (a "CLAIM", with the notice
thereof referred to as the "CLAIM NOTICE"). The person against whom the Claim is
brought (the "RESPONDENT") shall have fifteen (15) calendar days from receipt of
the Claim Notice to respond to such Claim. Such response shall be in writing and
shall (i) set forth in reasonable detail the Respondent's objection to the Claim
and the basis for such objection, or (ii) the efforts undertaken or to be
undertaken by the Respondent to cure the Claim. In the event the Respondent
fails to respond to the Claim Notice in the manner set forth above within such
15-day period, the Respondent shall be deemed to have conceded the Claim in
-33-
full. In the event the Parties are unable to resolve the Claim within thirty
(30) calendar days from the date of receipt of the Claim Notice, the Claim shall
be submitted to arbitration in accordance with Section 11.8 below.
-------------
9.4 TAX AUDITS, ETC. In the event of an audit of a Tax Return of the
---------------
Company with respect to which an Indemnified Party might be entitled to
indemnification pursuant to this Article IX, the Acquirer shall have the right
----------
to control any and all such audits which may result in the assessment of
additional Taxes against the Company and any and all subsequent proceedings in
connection therewith, including appeals (subject to the prior written consent of
the Transferors, which shall not unreasonably be withheld and subject to the
right of the Transferors to have their accountants and attorneys consult with
the Acquirer on such audits or procedures at the Transferors' expense);
provided, however, that the Transferors and the Acquirer shall jointly control,
and shall cooperate with each other in connection with, any and all such audits
which may result in the assessment of additional Taxes against both the
Transferors and the Company. The Transferors shall cooperate fully in all
matters relating to any such audit or other Tax proceeding (including according
access to all records pertaining thereto), and will execute and file any and all
consents, powers of attorney, and other documents as shall be reasonably
necessary in connection therewith. If additional Taxes are payable by the
Company as a result of any such audit or other proceeding, the Transferors shall
be responsible for and shall promptly pay all Taxes, interest, and penalties for
which any of the Indemnified Parties shall be entitled to indemnification.
9.5 INDEMNIFICATION OF TRANSFERORS. The Acquirer agrees to indemnify and
------------------------------
hold harmless the Transferors and Company and each officer, director,
stockholder or affiliate of Company, from and against any Adverse Consequence
arising out of any misrepresentation, breach or default by the Acquirer of or
under any of the covenants, representations, warranties, agreements or other
provisions of this Agreement or any agreement or document executed in connection
herewith.
9.6 LIMITS ON INDEMNIFICATION. All Adverse Consequence sought by any
-------------------------
Party hereunder shall be net of any insurance proceeds received by, or made
available to, such Party with respect to such claim (less the present value of
any premium increases occurring as a result of such claim). Except for any
claims for breach of the representations, warranties and covenants of the
Transferors under Sections 3.5 and 4.2 hereof (pursuant to which the right to
------------ ---
make claims for indemnification under this Article IX shall survive the Closing
----------
Date indefinitely), the right to make claims for indemnification provided under
this Article IX shall expire on the first anniversary of the Closing Date
----------
(except for claims made prior to such date which shall continue after such date
until finally resolved). The Transferor shall not be obligated to pay any
amounts for indemnification under this Article IX until the aggregate
----------
indemnification obligation sought by the Acquirer hereunder exceeds $150,000,
whereupon the Transferors shall be liable for all amounts for which
indemnification may be sought back to the first dollar up to a maximum
indemnification by Transferors equal to the Escrow Sum. The Acquirer shall not
be obligated to pay any amounts for indemnification under this Article IX until
----------
the aggregate indemnification obligation sought by the Transferors hereunder
exceeds $150,000, whereupon the Acquirer shall be liable for all amounts for
which indemnification may be sought back to the first dollar. For
-34-
purposes of Section 9.1 or 9.5, any requirement in any representation or
----------- ---
warranty that an event or fact be Material or have a Material adverse effect, as
appropriate, in order for such event or fact to constitute a misrepresentation
or breach of such representation or warranty shall be ignored. Notwithstanding
the foregoing, in no event shall the aggregate liability of the Acquirer to the
Transferors exceed the Transfer Consideration received by such Transferor.
However nothing in this Article IX shall limit the Acquirer or the Transferors
in exercising or securing any remedies provided by applicable statutory or
common law with respect to the conduct of the Transferors or the Acquirer in
connection with this Agreement or in the amount of damages that it can recover
from the other in the event that the Acquirer successfully proves intentional
fraud or intentional fraudulent conduct in connection with this Agreement. The
amount of all Adverse Consequences paid by the Transferors shall be deemed to be
a reduction of the Transfer Consideration paid by Acquirer under this Agreement.
ARTICLE X
TERMINATION
10.1 TERMINATION OF AGREEMENT. The Parties may terminate this Agreement
------------------------
as provided below:
(A) the Acquirer and the Transferors may terminate this Agreement by
mutual written consent at any time prior to the Closing;
(B) the Acquirer may terminate this Agreement by giving written
notice to the Transferors at any time prior to the Closing in the event the
Transferors are in breach of any representation, warranty, or covenant contained
in this Agreement in any Material respect and such breach has not been cured
within ten (10) days of receipt of written notice thereof, and the Transferors
may terminate this Agreement by giving written notice to the Acquirer at any
time prior to the Closing in the event the Acquirer is in breach of any
representation, warranty, or covenant contained in this Agreement in any
Material respect and such breach has not been cured within ten (10) days of
receipt of written notice thereof; or
(C) this Agreement will terminate if the Closing shall not have
occurred on or before June 30, 1999.
10.2 EFFECT OF TERMINATION. Each party's right of termination under
---------------------
Section 10.1 is in addition to any other rights it may have under this Agreement
------------
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 10.1, all
------------
further obligations of the parties under this Agreement will terminate, except
that the obligations of Section 11.2 will survive; provided, however, that if
------------
this Agreement is terminated by a party because of the breach of the Agreement
by the other party or because of one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
ARTICLE XI
MISCELLANEOUS
-35-
11.1 PRESS RELEASES AND ANNOUNCEMENTS. Except as may be required by
--------------------------------
applicable securities laws or stock exchange requirements, no Party shall issue
any press release or public announcement relating to the subject matter of this
Agreement prior to, at or about the Closing without the prior written approval
of the Acquirer and the Transferors, which written approval will not be
unreasonably withheld by each party; provided, however, that any Party may make
any public disclosure it believes in good faith is required by law or regulation
(in which case the disclosing Party will advise the other Parties prior to
making the disclosure).
11.2 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
----------------------------
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns.
11.3 ENTIRE AGREEMENT. This Agreement shall not confer any rights or
----------------
remedies upon any person other than the Parties and their respective successors
and permitted assigns. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, that may have related in any way to the subject matter hereof.
11.4 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon
-------------------------
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of his, her or its rights, interests, or obligations hereunder without the
prior written approval of the Acquirer and the Transferors; provided, however,
that the Acquirer may assign (i) any or all of its rights and interests
hereunder to a wholly-owned Subsidiary of Acquirer (in any or all of which cases
the Acquirer nonetheless shall remain liable and responsible for the performance
of all of its respective obligations hereunder) or (ii) any or all of rights of
the Agreement to any lender providing debt financing to the Acquirer or its
Affiliates (in any or all of which cases the Acquirer nonetheless shall remain
liable and responsible for the performance of all of its respective obligations
hereunder).
11.5 FACSIMILE/COUNTERPARTS. This Agreement may be executed in one or
----------------------
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. A facsimile, telecopy or
other reproduction of this Agreement may be executed by one or more parties
hereto, and an executed copy of this Agreement may be delivered by one or more
parties hereto by facsimile or similar instantaneous electronic transmission
device pursuant to which the signature of or on behalf of such party can be
seen, and such execution and delivery shall be considered valid, binding and
effective for all purposes. At the request of any Party hereto, all parties
hereto agree to execute an original of this Agreement as well as any facsimile,
telecopy or other reproduction hereof.
11.6 NOTICES. All notices or other communications hereunder will be in
-------
writing and shall be delivered by hand, facsimile or sent, postage prepaid, by
registered or certified mail or reputable overnight courier service (and shall
be deemed given when so delivered by hand or facsimile, or, if mailed, five days
after mailing (one business day in the case of overnight courier)) addressed to
the intended recipient as set forth below:
-36-
If to Company or the Transferors:
Company, Inc. and/or the Transferors' Representative
▇▇▇.▇▇▇, Corp.
▇▇▇ ▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn.: ▇▇▇▇ ▇▇▇▇▇▇▇, President
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇.▇▇▇▇
with a copy to:
▇▇▇▇▇▇ & ▇▇▇▇▇, LLP
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn.: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Acquirer:
U.S. Internet Providers, Inc.
c/o Unison Partners, LP
▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn.: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to:
▇▇▇▇▇ & ▇▇▇▇▇▇▇ L.L.P.
▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇
Attn.: ▇. ▇▇▇▇▇ ▇▇▇▇ and
▇▇▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Tel: (▇▇▇) ▇▇▇-▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other parties notice in the manner herein set forth.
11.7 DISPUTE RESOLUTIONS. THE PARTIES AGREE TO SUBMIT TO ARBITRATION,
-------------------
IN ACCORDANCE WITH THESE PROVISIONS, ANY DISPUTED CLAIM OR CONTROVERSY ARISING
FROM
-37-
OR RELATED TO THE ALLEGED BREACH OF THIS AGREEMENT OR ANY DISPUTED
INDEMNIFICATION CLAIM MADE PURSUANT TO THIS ARTICLE XI. THE PARTIES FURTHER
----------
AGREE THAT THE ARBITRATION PROCESS AGREED UPON HEREIN SHALL BE THE EXCLUSIVE
MEANS FOR RESOLVING ALL DISPUTES MADE SUBJECT TO ARBITRATION HEREIN, BUT THAT NO
ARBITRATOR SHALL HAVE AUTHORITY TO EXPAND THE SCOPE OF THESE ARBITRATION
PROVISIONS. ANY ARBITRATION HEREUNDER SHALL BE CONDUCTED UNDER THE COMMERCIAL
ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION (AAA). EITHER PARTY
MAY INVOKE ARBITRATION PROCEDURES HEREIN BY WRITTEN NOTICE FOR ARBITRATION
CONTAINING A STATEMENT OF THE MATTER TO BE ARBITRATED. THE PARTIES SHALL THEN
HAVE FOURTEEN (14) DAYS IN WHICH THEY MAY IDENTIFY A MUTUALLY AGREEABLE, NEUTRAL
ARBITRATOR. AFTER THE FOURTEEN (14) DAY PERIOD HAS EXPIRED, THE PARTIES SHALL
PREPARE AND SUBMIT TO THE AAA A JOINT SUBMISSION, WITH EACH PARTY TO CONTRIBUTE
HALF OF THE APPROPRIATE ADMINISTRATIVE FEE. IN THE EVENT THE PARTIES CANNOT
AGREE UPON A NEUTRAL ARBITRATOR WITHIN FOURTEEN (14) DAYS AFTER WRITTEN NOTICE
FOR ARBITRATION IS RECEIVED, THEIR JOINT SUBMISSION TO THE AAA SHALL REQUEST
ARBITRATORS WHO ARE PRACTICING ATTORNEYS WITH PROFESSIONAL EXPERIENCE IN THE
FIELD OF CORPORATE LAW, AND THE PARTIES SHALL ATTEMPT TO SELECT AN ARBITRATOR
FROM THE PANEL ACCORDING TO AAA PROCEDURES. UNLESS OTHERWISE AGREED BY THE
PARTIES, THE ARBITRATION HEARING SHALL TAKE PLACE IN THE WASHINGTON, D.C.
METROPOLITAN AREA, AT A PLACE DESIGNATED BY THE AAA. ALL ARBITRATION PROCEDURES
HEREUNDER SHALL BE CONFIDENTIAL. EACH PARTY SHALL BE RESPONSIBLE FOR ITS COSTS
INCURRED IN ANY ARBITRATION, AND THE ARBITRATOR SHALL NOT HAVE AUTHORITY TO
INCLUDE ALL OR ANY PORTION OF SAID COSTS IN AN AWARD REGARDLESS OF WHICH PARTY
PREVAILS. THE ARBITRATOR MAY INCLUDE EQUITABLE RELIEF. ANY ARBITRATION AWARDED
SHALL BE ACCOMPANIED BY A WRITTEN STATEMENT CONTAINING A SUMMARY OF THE ISSUES
IN CONTROVERSY, A DESCRIPTION OF THE AWARD, AND AN EXPLANATION OF THE REASONS
FOR THE AWARD.
11.8 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
-------------
AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO ANY
CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF
DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS
OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE.
11.9 AMENDMENTS AND WAIVERS. No amendment of any provision of this
----------------------
Agreement shall be valid unless the same shall be in writing and signed by the
Acquirer and the Transferors. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
11.10 SEVERABILITY. Any term or provision of this Agreement that is
------------
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
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competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
11.11 EXPENSES. Each of the Parties and Company will bear his, her or
--------
its own costs and expenses (including legal fees and expenses and investment
banking fees) incurred in connection with this Agreement and the transactions
contemplated hereby. The Transferors acknowledge and agree that Company has not
borne or will bear any of the Transferors' costs and expenses (including any
legal fees and expenses) in connection with this Agreement or any of the
transactions contemplated hereby.
11.12 CONSTRUCTION. The language used in this Agreement will be deemed
------------
to be the language chosen by the Parties to express their mutual intent, and no
rule of strict construction shall be applied against any Party. Any reference to
any federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise. The Parties intend that each representation, warranty, and
covenant contained herein shall have independent significance. If any Party has
breached any representation, warranty, or covenant relating to the same subject
matter as any other representation, warranty or covenant (regardless of the
relative levels of specificity) which the Party has not breached, it shall not
detract from or mitigate the fact that the Party is in breach of the first
representation, warranty, or covenant.
11.13 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
-------------------------------------------------
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
11.14 SPECIFIC PERFORMANCE. Each of the Parties acknowledges and agrees
--------------------
that the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the Parties agrees that
the other Parties shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having jurisdiction over the
Parties and the matter, in addition to any other remedy to which they may be
entitled, at law or in equity.
11.15 CONFIDENTIALITY. Each Party to this Agreement shall, and shall
---------------
cause their respective Subsidiaries, Affiliates, officers, directors, employees,
accountants, counsel, financial advisors and other representatives and agents,
to treat and hold as such all of the Confidential Information, refrain from
disclosing or using any of the Confidential Information except in connection
with this Agreement and the transactions contemplated hereby for a period of
three (3) years from the date hereof, and except as otherwise permitted
hereunder or as may be required by law, deliver promptly or destroy, all
tangible embodiments (and all copies) of the
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Confidential Information concerning the other party upon the other Party's
request. In the event that any Party is requested or required (by request for
information or documents in any legal proceeding, interrogatory, subpoena, civil
investigative demand, or similar legal process) to disclose any Confidential
Information concerning another Party, such Party will notify the other Party
promptly of the request or requirement so that the other Party may seek an
appropriate protective order or waive compliance with the provisions of this
Section 11.15. If, in the absence of a protective order or the receipt of a
-------------
waiver hereunder, a party is compelled to disclose any Confidential Information
or else stand liable for contempt, then such party may disclose the Confidential
Information; provided, however, that such party shall use its reasonable efforts
to obtain, at the reasonable request of the party to which the Confidential
Information pertains, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as such party shall reasonably designate.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
ACQUIRER:
U.S. INTERNET PROVIDERS, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
-------------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
-----------------------------
Title: President
-----------------------------
COMPANY:
▇▇▇.▇▇▇, Corp..
By: /s/ ▇▇▇▇ ▇▇▇▇▇▇▇
-------------------------------------
Name: ▇▇▇▇ ▇▇▇▇▇▇▇
Title: President
TRANSFERORS:
/s/ ▇▇▇▇ ▇▇▇▇▇▇▇
------------------------------------------
▇▇▇▇ ▇▇▇▇▇▇▇
/s/ ▇▇▇▇ ▇▇▇▇▇▇▇▇
------------------------------------------
▇▇▇▇ ▇▇▇▇▇▇▇▇
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