EXHIBIT 2.1
AGREEMENT AND
PLAN OF REORGANIZATION
DATED MAY 31, 1996
BY AND BETWEEN
NETSOURCE INTERACTIVE
AND
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
TABLE OF CONTENTS
Page
1. Certain Definitions................................................... 1
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1.1 "Affiliate"..................................................... 1
1.2 "Code".......................................................... 1
1.3 "Commission".................................................... 2
1.4 "Dissenting Shares"............................................. 2
1.5 "Key Employees"................................................. 2
1.6 "MTC Exchanges"................................................. 2
1.7 "NetSource Common Stock"........................................ 2
1.8 "NetSource Products/Services"................................... 2
1.9 "NetSource Shares".............................................. 2
1.10 "NIT Common Stock".............................................. 2
1.11 "NIT Products/Services"......................................... 2
1.12 "Securities".................................................... 2
1.13 "Securities Act"................................................ 2
1.14 "Stockholders".................................................. 2
1.15 "Transaction Documents"......................................... 2
1.16 "Transphere Mergers"............................................ 2
2. Plan of Reorganization................................................ 2
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2.1 The Merger...................................................... 2
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2.2 Conversion of Shares and Substitution of Options................ 3
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2.3 Fractional Shares............................................... 3
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2.4 Escrow Agreement................................................ 4
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2.5 Appraisal Rights................................................ 4
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2.6 The Closing..................................................... 4
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2.7 Effective Time.................................................. 4
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2.8 Tax Free Reorganization......................................... 4
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2.9 Exemption from Registration; California Permit.................. 5
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3. Representations and Warranties of NetSource........................... 5
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3.1 Organization.................................................... 5
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3.2 Capitalization.................................................. 5
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3.3 Power, Authority and Validity................................... 6
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3.4 Financial Statements............................................ 6
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3.5 Tax Matters..................................................... 7
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3.6 Tax Free Reorganization......................................... 8
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3.7 Absence of Certain Changes or Events............................ 8
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3.8 Title and Related Matters....................................... 9
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3.9 Proprietary Rights.............................................. 9
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3.10 Employee Benefit Plans.......................................... 11
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3.11 Bank Accounts................................................... 11
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3.12 Contracts....................................................... 11
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3.13 Insider Transactions............................................ 12
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3.14 Insurance....................................................... 13
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3.15 Litigation...................................................... 13
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3.16 Permit Application; Information Statement....................... 13
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3.17 Governmental Authorizations and Regulations..................... 13
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3.18 Subsidiaries.................................................... 13
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3.19 Environmental Matters........................................... 13
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3.20 Corporate Documents............................................. 14
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3.21 No Brokers...................................................... 14
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3.22 Disclosure...................................................... 14
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4. Representations and Warranties of NIT................................. 14
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4.1 Organization.................................................... 15
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4.2 Capitalization.................................................. 15
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4.3 Power, Authority and Validity................................... 16
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4.4 Financial Statements............................................ 16
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4.5 Tax Matters..................................................... 16
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4.6 Tax Free Reorganization......................................... 17
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4.7 Absence of Certain Changes or Events............................ 17
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4.8 Title and Related Matters....................................... 18
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4.9 Proprietary Rights.............................................. 19
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4.10 Employee Benefit Plans.......................................... 20
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4.11 Bank Accounts................................................... 20
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4.12 Contracts....................................................... 20
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4.13 Insider Transactions............................................ 22
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4.14 Insurance....................................................... 22
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4.15 Litigation...................................................... 22
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4.16 Permit Application; Information Statement....................... 22
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4.17 Governmental Authorizations and Regulations..................... 22
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4.18 Subsidiaries.................................................... 22
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4.19 Environmental Matters........................................... 23
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4.20 Corporate Documents............................................. 23
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4.21 No Brokers...................................................... 24
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4.22 Disclosure...................................................... 24
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5. Preclosing Covenants of NetSource and NIT............................. 24
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5.1 Material Consents............................................... 24
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5.2 Transphere Mergers and MTC Exchanges............................ 24
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5.3 Employment Agreements, Other Commitments Terminated............. 24
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5.4 Voting Agreement and Irrevocable Proxies........................ 24
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5.5 Advice of Changes............................................... 25
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6. Mutual Covenants...................................................... 25
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6.1 Conduct of Business by NetSource................................ 25
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6.2 Stockholders' Tax Representations............................... 26
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6.3 Conduct of Business by NIT...................................... 26
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6.4 No Public Announcement.......................................... 27
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6.5 Other Negotiations.............................................. 27
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6.6 Due Diligence, Investigation, and Audits........................ 28
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6.7 Regulatory Filings; Consents; Reasonable Efforts................ 28
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6.8 Further Assurances.............................................. 28
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6.9 Preparation of Permit Application/Information Statement......... 28
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6.10 Meeting of Stockholders......................................... 29
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6.11 Pooling Accounting.............................................. 29
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6.12 Affiliate Pooling Agreements.................................... 29
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7. Closing Matters....................................................... 30
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7.1 Filing of Certificate of Merger................................. 30
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7.2 Exchange of Certificates........................................ 30
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7.3 Delivery of Documents........................................... 31
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8. Conditions to NetSource's Obligations................................. 31
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8.1 Accuracy of Representations and Warranties...................... 31
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8.2 Covenants....................................................... 31
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8.3 No Litigation................................................... 31
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ii
Table of Contents, continued
8.4 No Adverse Development.......................................... 31
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8.5 Authorizations.................................................. 31
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8.6 Government Consents; Fairness Hearing........................... 31
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8.8 Transphere Mergers and MTC Exchanges............................ 31
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8.9 NIT Financing................................................... 32
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8.10 Opinion of NIT's Counsel........................................ 32
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8.11 Pooling Letter..................................................
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8.12 Filing of Certificate of Merger................................. 32
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9. Conditions to NIT's Obligations....................................... 32
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9.1 Accuracy of Representations and Warranties...................... 32
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9.2 Covenants....................................................... 32
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9.3 No Litigation................................................... 32
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9.4 Authorizations.................................................. 32
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9.6 Government Consents; Fairness Hearing........................... 33
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9.7 Transphere Mergers and MTC Exchanges............................ 33
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9.8 Pooling Letter..................................................
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9.9 NIT Financing................................................... 33
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9.10 Opinion of NetSource's Counsel.................................. 33
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10. Termination of Agreement.............................................. 34
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10.1 Termination..................................................... 34
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10.2 Liability for Termination....................................... 34
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10.3 Certain Effects of Termination.................................. 34
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10.4 Remedies........................................................ 34
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10.5 Right to Damages................................................ 35
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11. Indemnification....................................................... 35
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11.1 Survival of Representations, Warranties, Covenants
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and Agreements................................................. 35
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11.2 Indemnification by NetSource.................................... 35
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11.3 Indemnification by NIT.......................................... 36
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11.4 Arbitration..................................................... 37
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11.5 Limitation on Indemnification................................... 38
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11.6 The Stockholders Representatives; Power of Attorney............. 38
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11.7 Escrow.......................................................... 38
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12. Miscellaneous......................................................... 39
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12.1 Governing Laws.................................................. 39
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12.2 Binding upon Successors and Assigns............................. 39
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12.3 Severability.................................................... 40
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12.4 Entire Agreement................................................ 40
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12.5 Counterparts.................................................... 40
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12.6 Expenses........................................................ 40
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12.7 Amendment and Waivers........................................... 40
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12.8 Survival of Agreements.......................................... 40
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12.9 No Waiver....................................................... 40
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12.10 Attorneys' Fees................................................. 40
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12.11 Notices......................................................... 40
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12.12 Time............................................................ 41
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12.13 Construction of Agreement....................................... 41
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iii
Table of Contents, continued
12.14 No Joint Venture................................................ 41
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12.15 Pronouns........................................................ 41
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12.16 Further Assurances.............................................. 41
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12.17 Absence of Third Party Beneficiary Rights....................... 41
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Exhibits and Schedules
Exhibit A Certificate of Merger
Exhibit B Employment Agreement
Exhibit C-1 Form of NetSource Voting Agreement and Irrevocable Proxy
Exhibit C-2 Form of NIT Voting Agreement and Irrevocable Proxy
Exhibit D-1 NetSource Affiliates Agreement
Exhibit D-2 NIT Affiliates Agreement
Exhibit E Form of Legal Opinion to be Delivered by Counsel to NetSource
Exhibit F Form of Legal Opinion to be Delivered by Counsel to NIT
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered
into this 31st day of May, 1996, by and between NetSource Interactive, a
Delaware corporation ("NetSource") and NetSource International
Telecommunications, Inc., a Delaware corporation ("NIT").
RECITAL
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WHEREAS, subject to and in accordance with the terms and conditions of
this Agreement and pursuant to the Certificate of Merger attached hereto as
Exhibit A ("Certificate of Merger"), the parties intend that NetSource will
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merge with and into NIT (the "Merger"), whereby all of the outstanding shares of
common stock of NetSource ("NetSource Common Stock") will be converted into
shares of common stock of NIT ("NIT Common Stock"), and all outstanding options
to purchase NetSource Common Stock will be exchanged for options to purchase NIT
Common Stock.
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a tax free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
WHEREAS, prior to the closing of the Merger, Transphere International,
Inc., a California corporation ("Transphere International"), Transphere
Interactive, Inc., a California corporation ("Transphere Interactive") intend to
merge into NetSource, such that Netsource shall have acquired all of the assets
and assumed all of the liabilities of each of Transphere International and
Transphere Interactive (the "Transphere Mergers").
WHEREAS, prior to the closing, the holders of securities in and rights
of MTC Telemanagement Corporation, a California corporation ("MTC
Telemanagement") that are, directly or indirectly, convertible into or
exchangeable or exercisable for MTC Telemangement securities (collectively, the
"MTC Telemangement Securities"), and the holders of securities in and rights of
MTC International, Inc., a Nevada corporation ("MTC International") that are,
directly or indirectly, convertible into or exchangeable or exercisable for MTC
International securities (collectively, the "MTC International Securities"),
shall have exchanged their MTC Telemanagement Securities and MTC International
Securities for NIT Common Stock or securities in and rights of NIT that are,
directly or indirectly, convertible into or exchangeable or exercisable for NIT
Common Stock (the "MTC Exchanges")
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the Merger.
AGREEMENT
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NOW, THEREFORE, in reliance on the foregoing recitals and in and for
the consideration and mutual covenants set forth herein, the parties agree as
follows:
1. Certain Definitions.
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1.1 "Affiliate" shall have the meaning set forth in the rules and
regulations promulgated by the Commission pursuant to the Securities Act.
1.2 "Code" shall mean the United States Internal Revenue Code
of 1986, as amended.
1.3 "Commission" shall mean the United States Securities and
Exchange Commission.
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1.4 "Dissenting Shares" shall mean those shares held by holders
who perfect their appraisal rights under the laws of Delaware and, to the extent
applicable, California with respect thereto.
1.5 "Key Employees" shall mean ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇.
1.6 "MTC Exchanges" shall have the meaning set forth in the
Recitals.
1.7 "NetSource Common Stock" shall mean shares of Common Stock
of NetSource.
1.8 "NetSource Products/Services" shall mean all versions and
implementations of any product which has been or is being marketed by NetSource,
Transphere International or Transphere Interactive or currently is under
development and all services which have been or are being marketed by NetSource,
Transphere International or Transphere Interactive or currently are under
development, and all patents, patent applications, trade secrets, copyrights,
trademarks, trade names and other proprietary rights related to such products or
services.
1.9 "NetSource Shares" shall mean the shares of NetSource capital
stock issued and outstanding at the effective time of the Merger, other than the
Dissenting Shares.
1.10 "NIT Common Stock" shall mean shares of Common Stock of
NIT.
1.11 "NIT Products/Services" shall mean all versions and
implementations of any product which has been or is being marketed by NIT, MTC
Telemanagement or MTC International or currently is under development and all
services which have been or are being marketed by NIT, MTC Telemanagement or MTC
International or currently are under development, and all patents, patent
applications, trade secrets, copyrights, trademarks, trade names and other
proprietary rights related to such products or services.
1.12 "Securities" shall mean the NetSource Shares, Dissenting
Shares and the NetSource Options.
1.13 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.14 "Stockholders" shall mean the holders of the outstanding
shares of NetSource Shares.
1.15 "Transaction Documents" shall mean all documents or
agreements attached as an exhibit or schedule hereto, and set forth on the Table
of Contents.
1.16 "Transphere Mergers" shall have the meaning set forth in
the Recitals.
2. Plan of Reorganization.
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2.1 The Merger. Subject to the terms and conditions of this
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Agreement and the Certificate of Merger, NetSource shall be merged with and into
NIT in accordance with the applicable provisions of the laws of the State of
Delaware, and with the terms and conditions of this Agreement and the
Certificate of Merger, so that:
(a) At the Effective Time (as defined in Section 2.7 below),
NetSource shall be merged with and into NIT. As a result of the Merger, the
separate corporate existence of NetSource shall cease and NIT shall continue as
the surviving corporation (sometimes referred to herein as the "Surviving
Corporation") and shall succeed to and assume all of the rights and obligations
of NIT in accordance with the laws of Delaware.
2
(b) The Certificate of Incorporation and Bylaws of NIT in
effect immediately prior to the Effective Time shall be the Certificate of
Incorporation and Bylaws, respectively, of the Surviving Corporation after the
Effective Time unless and until further amended as provided by law.
(c) Subject to the terms of this Agreement, the directors and
officers of NIT immediately prior to the Effective Time shall be the directors
and officers of the Surviving Corporation after the Effective Time. Such
directors and officers shall hold their position until the election and
qualification of their respective successors or until their tenure is otherwise
terminated in accordance with the Bylaws of the Surviving Corporation.
2.2 Conversion of Shares and Substitution of Options.
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(a) Each share of NetSource Common Stock, issued and
outstanding immediately prior to the Effective Time, will, by virtue of the
Merger and at the Effective Time, and without further action on the part of any
holder thereof, be converted into 0.0154534 share of fully paid and
nonassessable of NIT Common Stock (the "Exchange Ratio"). The shares of NIT
Common Stock issued pursuant hereto shall also be referred to as the "Merger
Consideration".
(b) Each option to purchase shares of NetSource Common Stock
("NetSource Option") that is outstanding immediately prior to the Effective Time
will, by virtue of the Merger and at the Effective Time, and without further
action on the part of any holder thereof, be assumed by NIT and converted into
an option (a "NIT Option") to purchase that number of shares of NIT Common Stock
determined by multiplying the number of shares of NetSource Common Stock
issuable upon exercise of such option by the Exchange Ratio (with the resulting
number of shares of NIT Common Stock rounded down to the nearest whole number).
The exercise price per share of NIT Common Stock purchasable under each such NIT
Option will be equal to the exercise price of the NetSource Option (per share of
NetSource Common Stock) divided by the Exchange Ratio (with the resulting amount
rounded up to the nearest whole cent). Continuous employment with NetSource,
whether occurring before or after the Effective Time, shall be credited to an
optionee for purposes of determining the number of shares subject to exercise,
vesting or repurchase after the Effective Time. It is the intention of the
parties that the assumption of NetSource Options shall meet the requirements of
Section 424(a) of the Code and that, therefore, the NetSource Options assumed by
NIT qualify following the Effective Time as incentive stock options as defined
in Section 422 of the Code ("incentive stock options") to the extent the
NetSource Options qualified as incentive stock options prior to the Effective
Time. After the Effective Time, NIT shall issue to each holder of an outstanding
NetSource Option a document evidencing the foregoing assumption by NIT. No
fractional shares of NIT Common Stock shall be issued in connection with
options. All fractional shares which would otherwise be issuable shall be
rounded down to the next full share. All of the other terms of each NIT Option
will remain the same as the corresponding assumed NetSource Option.
2.3 Fractional Shares. No fractional shares of NIT Common Stock
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will be issued in connection with the Merger, but in lieu thereof, holders of
NetSource Common Stock who would otherwise be entitled to receive a fraction of
a share of NIT Common Stock will receive from NIT, promptly after the Effective
Time, an agreed upon amount of cash equal to Eighty Dollars and Thirty Seven
Cents ($80.37) per share of NIT Common Stock, multiplied by the fraction of a
share of NIT Common Stock to which such holder would otherwise be entitled.
2.4 Escrow Agreement. At the Effective Time, certificates
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representing ten percent (10%) of the shares of the NIT Common Stock issued to
the holders of NetSource Common Stock in the Merger shall be deposited in
escrow, on a pro rata basis; and upon each exercise of the NIT Options that are
issued to holders of NetSource Options in the Merger, if such occurs between the
Effective Time and on or before the final escrow release date, NIT will deposit
in escrow ten percent (10%) of the shares of NIT Common Stock issuable upon such
exercise. The shares placed in the escrow pursuant to this Section 2.4 (the
"NetSource Escrow Shares") shall be held as collateral for the indemnification
obligations of NetSource under Section 11 and pursuant to the provisions of an
escrow agreement (the "Escrow
3
Agreement") to be entered into between the parties, with the terms of such
agreement to be mutually agreed upon, which terms shall not be inconsistent with
the terms set forth in this Agreement.
2.5 Appraisal Rights. If holders of NetSource Common Stock are
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entitled to appraisal rights in connection with the Merger, any Dissenting
Shares shall not be converted into a right to receive NIT Common Stock but shall
be converted into the right to receive such consideration as may be determined
to be due with respect to such Dissenting Shares pursuant to the laws of the
State of Delaware or, if applicable, the State of California. NetSource shall
give NIT prompt notice of any demand received by NetSource for appraisal of
NetSource capital stock, and the Representatives, as such term is defined in
Section herein, shall have the right to control all negotiations and
proceedings with respect to such demand, provided that NIT shall have the right
to participate in all such negotiations and proceedings. NetSource agrees that,
except with the prior written consent of NIT or as required under the Delaware
General Corporation Law (the "DGCL") or, if applicable, the General Corporation
Law of the State of California (the "CGCL"), it will not voluntarily make any
payment with respect to, or settle or offer to settle, any such demand for
appraisal. Each holder of Dissenting Shares ("Dissenting Stockholder") who,
pursuant to the provisions of the DGCL or, if applicable, the CGCL, becomes
entitled to payment of the value of shares of NetSource Common Stock shall
receive payment therefor (but only after the value therefor shall have been
agreed upon or finally determined pursuant to such provisions). In the event of
legal obligation, after the Effective Time of the Merger, to deliver a right to
receive NIT Common Stock to a holder of shares of NetSource capital stock who
shall have failed to make an effective demand for appraisal or shall have lost
his status as a Dissenting Stockholder, NIT shall deliver, upon surrender by
such Dissenting Stockholder of his certificate or certificates representing
shares of NetSource Common Stock, as applicable, the NIT Common Stock to which
such Dissenting Stockholder is then entitled under this Section and the
Certificate of Merger.
2.6 The Closing. Subject to termination of this Agreement as
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provided in Section below, the closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Pezzola & ▇▇▇▇▇▇,
Lake ▇▇▇▇▇▇▇ Plaza, 1999 ▇▇▇▇▇▇▇▇ Street, Oakland, California, as soon as
possible upon the satisfaction or waiver of all conditions set forth in Section
and Section hereof (the "Closing Date"), or such other time and place as is
mutually agreeable to the parties.
2.7 Effective Time. Simultaneously with the Closing, the
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Certificate of Merger shall be filed in the office of the Secretary of State of
the State of Delaware. The Merger shall become effective immediately upon the
filing of the Certificate of Merger with such office. The date and time of the
effectiveness of the Merger under the laws of Delaware is the "Effective Time."
2.8 Tax Free Reorganization. The parties intend to adopt this
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Agreement as a tax-free plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(1)(A) of the Code. Each party
agrees that it will not take or assert any position on any tax return, report or
otherwise which is inconsistent with the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code. The NIT Common
Stock issued in the Merger will be issued solely in exchange for the NetSource
Common Stock pursuant to this Agreement, and no other transaction other than the
Merger represents, provides for or is intended to be an adjustment to the
consideration paid for the NetSource Common Stock. Except for cash paid in lieu
of fractional shares or Dissenting Shares, no consideration that could
constitute "other property" within the meaning of Section 356 of the Code is
being paid by NIT for the NetSource Common Stock. In addition, NIT represents
now, and as of the Closing Date, that it presently intends to continue
NetSource's historic business or use a significant portion of NetSource's
business assets in a business.
2.9 Exemption from Registration; California Permit. The parties
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hereto expect that the NIT Common Stock to be issued in connection with the
Merger will be issued in a transaction exempt from registration under the
Securities Act, by reason of Section 3(a)(10) thereof, and that the NIT Common
Stock and NIT's assumption of the NetSource Options hereunder will be qualified
under the CGCL, pursuant to Section 25121 thereof, after a fairness hearing has
been held pursuant to the authority granted by Section 25142 of such law.
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3. Representations and Warranties of NetSource. Except as otherwise
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set forth in the "NetSource Disclosure Schedule" provided to NIT on the date
hereof, NetSource represents and warrants to NIT as set forth below. No fact or
circumstance disclosed to NIT shall constitute an exception to these
representations and warranties unless such fact or circumstance is set forth in
the NetSource Disclosure Schedule or such supplements thereto as may mutually be
agreed upon in writing by NetSource and NIT. NetSource, Transphere
International and Transphere Interactive are referred to herein collectively as
the "NetSource Entities".
3.1 Organization. Each of the NetSource Entities is a
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corporation duly organized, validly existing and in good standing under the laws
of the state of incorporation of such entity and has corporate power and
authority to carry on its business as it is now being conducted. Each of the
NetSource Entities is duly qualified or licensed to do business and in good
standing in each jurisdiction in which the nature of its business or properties
makes such qualification or licensing necessary except where the failure to be
so qualified would not have a material adverse effect on the operations, assets
or financial condition (a "Material Adverse Effect") of the NetSource Entities
considered as a whole. The NetSource Disclosure Schedule contains a true and
complete listing of the locations of all sales offices, manufacturing
facilities, and any other offices or facilities of the NetSource Entities and a
true and complete list of all states in which NetSource Entities maintain any
employees. The NetSource Entities Disclosure Schedule contains a true and
complete list of all states in which the each of the NetSource Entities is duly
qualified to transact business as a foreign corporation. True and complete
copies of each of the NetSource Entities' Articles of Incorporation and Bylaws,
as in effect on the date hereof and as to be in effect as of the Closing, have
been provided to NIT or its representatives.
3.2 Capitalization.
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(a) The authorized capital of NetSource will consist, prior
to the Closing but after the Transphere Mergers, of 20,000,000 shares of common
stock, of which 18,437,000 shares will be issued and outstanding.
(b) The NetSource Disclosure Schedule accurately describes
the vesting schedules associated with such NetSource Common Stock and each of
the NetSource Options.
(c) Except as set forth in the NetSource Disclosure Schedule,
NetSource does not have outstanding any preemptive or subscription rights,
options, warrants, rights to convert or exchange, capital stock equivalents, or
other rights to purchase or otherwise acquire any NetSource capital stock or
other securities.
(d) All of the issued and outstanding shares of NetSource
capital stock have been duly authorized, validly issued, are fully paid and
nonassessable, and such capital stock, and all warrants and options to purchase
capital stock of NetSource, have been issued in full compliance with all
applicable federal and state securities laws. None of NetSource's issued and
outstanding shares of capital stock, or options or rights to purchase capital
stock of NetSource, is subject to repurchase or redemption rights. All of
NetSource's options have been issued in accordance with its current stock option
plan and in accordance with all state securities laws.
(e) Except for any restrictions imposed by applicable state
and federal securities laws, there is no right of first refusal, option, or
other restriction on transfer applicable to any shares of NetSource's capital
stock.
(f) NetSource is not under any obligation to register under
the Securities Act any shares of its capital stock or any other of its
securities that might be issued in the future if the Merger were not
consummated.
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(g) NetSource is not a party or subject to any agreement or
understanding (and, to NetSource's actual knowledge, there is no agreement or
understanding between or among any persons) that affects or relates to the
voting or giving of written consent with respect to any security.
3.3 Power, Authority and Validity.
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(a) NetSource has the corporate power to enter into this
Agreement and the other Transaction Documents to which it is a party and to
carry out its obligations hereunder and thereunder. The execution and delivery
of this Agreement and the Transaction Documents and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by the
Board of Directors of NetSource and on the Closing Date, by the stockholders of
NetSource and no other corporate proceedings on the part of NetSource are
necessary to authorize this Agreement, the other Transaction Documents and the
transactions contemplated herein and therein. NetSource is not subject to or
obligated under any charter, bylaw or contract provision or any license,
franchise or permit, or subject to any order or decree, which would be breached
or violated by or in conflict with its executing and carrying out this Agreement
and the transactions contemplated hereunder and under the Transaction Documents.
Except for (i) the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware and appropriate documents with the relevant
authorities of other states in which NetSource is qualified to do business, and
(ii) filings under applicable securities laws, no consent of any person who is a
party to a contract which is material to NetSource's business, nor consent of
any governmental authority, is required to be obtained on the part of the
NetSource Entities to permit the transactions contemplated herein and to permit
NetSource to continue the business activities of each of the NetSource Entities
as previously conducted by each of the NetSource Entities without a Material
Adverse Effect. This Agreement is, and the other Transaction Documents when
executed and delivered by NetSource shall be, the valid and binding obligations
of NetSource, enforceable in accordance with their respective terms.
(b) The assumption by NIT of the NetSource Options in
accordance with Section will not (i) give the optionees additional benefits
which they did not have under their options prior to such assumption (after
taking into account the existing provisions of the options, such as their
respective exercise prices and vesting schedules) or (ii) constitute a breach of
the NetSource stock option plans or any agreement entered into pursuant to such
plans.
3.4 Financial Statements.
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(a) Each of the NetSource Entities has delivered to NIT
copies of each of the NetSource Entities' unaudited balance sheet as of March
31, 1996, and statements of operations, stockholders' equity and cash flow for
the three month period then-ended and the unaudited balance sheet as of December
31, 1995, and statements of operations, stockholder's equity and cash flow for
the twelve month period then ended (collectively, the "NetSource Financial
Statements").
(b) The NetSource Financial Statements are complete and in
accordance with the books and records of each of the NetSource Entities and
present fairly the financial position of each of the NetSource Entities as of
their historical dates. The NetSource Financial Statements have been prepared in
accordance with generally accepted accounting principles ("GAAP")(except for the
absence of footnotes) applied on a basis consistent with prior periods. Except
and to the extent reflected or reserved against in such balance sheets
(including the notes thereto), each of the NetSource Entities does not have, as
of the dates of such balance sheets, any liabilities or obligations (absolute or
contingent) of a nature required or customarily reflected in a balance sheet (or
the notes thereto) prepared in accordance with GAAP. The reserves, if any,
reflected on the NetSource Financial Statements are adequate in light of the
contingencies with respect to which they are made.
(c) Each of the NetSource Entities has no debt, liability, or
obligation of any nature, whether accrued, absolute, contingent, or otherwise,
and whether due or to become due, that is not reflected or reserved against in
the NetSource Financial Statements, except for those (i) that may have
6
been incurred after the date of the NetSource Financial Statements or (ii) that
are not required by GAAP to be included in a balance sheet or the notes thereto,
except that each of the NetSource Entities has not established any reserves with
respect to the costs and fees associated with this Agreement, the other
Transaction Documents, and the transactions contemplated hereby and thereby. All
material debts, liabilities, and obligations incurred after the date of the
NetSource Financial Statements were incurred in the ordinary course of business,
and are usual and normal in amount both individually and in the aggregate.
3.5 Tax Matters.
-----------
(a) Each of the NetSource Entities has fully and timely,
properly and accurately filed all tax returns and reports required to be filed
by it, including all federal, foreign, state and local tax returns and estimates
for all years and periods (and portions thereof) for which any such returns,
reports or estimates were due. All such returns, reports and estimates were
prepared in the manner required by applicable law. All income, sales, use,
occupation, property or other taxes or assessments due from each of the
NetSource Entities have been paid. There are no pending assessments, asserted
deficiencies or claims for additional taxes that have not been paid. The
reserves for taxes, if any, reflected on the NetSource Financial Statements are
adequate and there are no tax liens on any property or assets of each of the
NetSource Entities. There have been no audits or examinations of any tax returns
or reports by any applicable governmental agency. No state of facts exists or
has existed which would constitute grounds for the assessment of any penalty or
of any further tax liability beyond that shown on the respective tax reports,
returns or estimates. There are no outstanding agreements or waivers extending
the statutory period of limitation applicable to any federal, state or local
income tax return or report for any period.
(b) All taxes which each of the NetSource Entities has been
required to collect or withhold have been duly withheld or collected and, to the
extent required, have been paid to the proper taxing authority.
(c) Each of the NetSource Entities is not a party to any tax-
sharing agreement or similar arrangement with any other party.
(d) At no time have any of the NetSource Entities been
included in the federal consolidated income tax return of any affiliated group
of corporations.
(e) No payment which any of the NetSource Entities is obliged
to pay to any director, officer, employee or independent contractor pursuant to
the terms of an employment agreement, severance agreement or otherwise will
constitute an excess parachute payment as defined in Section 280G of the Code.
(f) Each of the NetSource Entities is not currently under any
contractual obligation to pay any tax obligations of, or with respect to any
transaction relating to, any other person or to indemnify any other person with
respect to any tax.
3.6 Tax Free Reorganization.
-----------------------
(a) Neither NetSource nor, to its actual knowledge, any
NetSource stockholder has taken or agreed to take any action that would prevent
the Merger from constituting a reorganization qualifying under the provisions of
Section 368(a) of the Code.
(b) To the actual knowledge of any of the NetSource Entities,
there is no plan or intention by any NetSource stockholder to sell, exchange or
otherwise dispose of more than fifty percent (50%) of the shares of NIT Common
Stock to be received in the Merger.
7
(c) NetSource is not an investment company as defined in
Sections 368(a)(2)(F)(iii) and (iv) of the Code.
3.7 Absence of Certain Changes or Events. Since March 31, 1996,
------------------------------------
each of the NetSource Entities has not:
(a) suffered any material adverse change in its financial
condition or in the operations of its business, nor any material adverse changes
in its balance sheet, (with the NetSource Financial Statements and any
subsequent balance sheet analyzed as if each had been prepared according to
GAAP), including but not limited to cash distributions or material decreases in
the net assets of each of the NetSource Entities;
(b) suffered any damage, destruction or loss, whether covered
by insurance or not, materially and adversely affecting its properties or
business;
(c) granted or agreed to make any increase in the
compensation payable or to become payable by it to its officers or employees,
except those occurring in the ordinary course of business;
(d) declared, set aside or paid any dividend or made any
other distribution on or in respect of the shares of its capital stock or
declared any direct or indirect redemption, retirement, purchase or other
acquisition by it of such shares;
(e) issued any shares of its capital stock or any warrants,
rights, options or entered into any commitment relating to its shares except for
the issuance of its pursuant to the exercise of outstanding options;
(f) made any change in the accounting methods or practices it
follows, whether for general financial or tax purposes, or any change in
depreciation or amortization policies or rates adopted therein;
(g) sold, leased, abandoned or otherwise disposed of any real
property or any machinery, equipment or other operating property other than in
the ordinary course of business;
(h) sold, assigned, transferred, licensed or otherwise
disposed of any patent, trademark, trade name, brand name, copyright (or pending
application for any patent, trademark or copyright) invention, work of
authorship, process, know-how, formula or trade secret or interest thereunder or
other intangible asset except in the ordinary course of its business;
(i) suffered any labor dispute;
(j) engaged in any activity or entered into any material
commitment or transaction (including without limitation any borrowing or capital
expenditure) other than in the ordinary course of business;
(k) incurred any liabilities except in the ordinary course of
business and consistent with past practice which would be required to be
disclosed in financial statements prepared in accordance with GAAP;
(l) permitted or allowed any of its property or assets to be
subjected to any mortgage, deed of trust, pledge, lien, security interest or
other encumbrance of any kind, except those permitted under Section 3.8 hereof,
other than any purchase money security interests incurred in the ordinary course
of business;
8
(m) made any capital expenditure or commitment for additions
to property, plant or equipment individually in excess of Twenty Thousand
Dollars ($20,000), or in the aggregate, in excess of Fifty Thousand Dollars
($50,000);
(n) paid, loaned or advanced any amount to, or sold,
transferred or leased any properties or assets to, or entered into any agreement
or arrangement with any of its Affiliates, officers, directors or stockholder or
any Affiliate or associate of any of the foregoing;
(o) made any amendment to or terminated any agreement which,
if not so amended or terminated, would be required to be disclosed on the
NetSource Disclosure Schedule; or
(p) agreed to take any action described in Sections 2.8, 3.6
or 3.7 or outside of its ordinary course of business or which would constitute a
breach of any of the representations contained in this Agreement.
3.8 Title and Related Matters. Each of the NetSource Entities has
-------------------------
good and marketable title to all the properties, interests in properties and
assets, real and personal, reflected in the NetSource Financial Statements or
acquired after the date of the NetSource Financial Statements (except
properties, interests in properties and assets sold or otherwise disposed of
since the date of the NetSource Financial Statements in the ordinary course of
business), free and clear of all mortgages, liens, pledges, charges or
encumbrances of any kind or character, except the lien of current taxes not yet
due and payable and except for liens which in the aggregate do not secure more
than Twenty Five Thousand Dollars ($25,000) in liabilities. The equipment of
each of the NetSource Entities used in the operation of its business is in good
operating condition and repair. All real or personal property leases to which
each of the NetSource Entities is a party are valid, binding, enforceable
obligations of each of the NetSource Entities effective in accordance with their
respective terms. There is not under any of such leases any existing material
default or event of default or event which, with notice or lapse of time or
both, would constitute a material default. The NetSource Disclosure Schedule
contains a description of all real and personal property leased or owned by each
of the NetSource Entities, identifying such property and, in the case of real
property, stating the monthly rental due, term of lease and square feet leased.
True and correct copies of each of the NetSource Entities' leases have been
provided to NIT or its representatives.
3.9 Proprietary Rights.
------------------
(a) Each of the NetSource Entities owns all right, title and
interest in and to, or valid licenses for use of, all patents, copyrights,
technology, software, software tools, know-how, processes, trade secrets,
trademarks, service marks, trade names and other proprietary rights used in or
necessary for the conduct of each of the NetSource Entities' business as
conducted to the date hereof or contemplated, including, without limitation, the
technology and all proprietary rights developed or discovered or used in
connection with or contained in the NetSource Products/Services, free and clear
of all liens, claims and encumbrances (including without limitation distribution
rights) (all of which are referred to as "NetSource Proprietary Rights") and
NetSource has the right to transfer all such rights to NIT as contemplated
hereby. The foregoing representation as it relates to NetSource Third Party
Technology (as hereinafter defined) is limited to each of the NetSource
Entities' interest pursuant to the NetSource Third Party Licenses (as
hereinafter defined), all of which are valid and enforceable and in full force
and effect and which grant each of the NetSource Entities such rights to the
NetSource Third Party Technology as are employed in or necessary to the business
of each of the NetSource Entities as conducted or proposed to be conducted. The
NetSource Disclosure Schedule contains an accurate and complete description of
(i) all patents, trademarks (with separate listings of registered and
unregistered trademarks), trade names, and registered copyrights in or related
to the NetSource Products/Services, all applications and registration statements
therefor, and a list of all licenses and other agreements relating thereto, and
(ii) a list of all licenses and other agreements with third parties (the
"NetSource Third Party Licenses") relating to any software, inventions,
technology, know-how, or processes that any of the NetSource Entities is
licensed or otherwise authorized by such third parties to use, market,
distribute or incorporate into products distributed by each of the NetSource
Entities (such software, inventions,
9
technology, know-how and processes are collectively referred to as the
"NetSource Third Party Technology"). Each of the NetSource Entities' trademark
or trade name registrations related to the NetSource Products/Services and all
of each of the NetSource Entities' copyrights in any of the NetSource
Products/Services are valid and in full force and effect; and consummation of
the transactions contemplated hereby will not alter or impair any such rights.
No claims have been asserted against any of the NetSource Entities (and each of
the NetSource Entities is not aware of any claims which are likely to be
asserted against it or which have been asserted against others) by any person
challenging each of the NetSource Entities's use, possession, manufacture, sale,
provision or distribution of the NetSource Products/Services under any patents,
trademarks, trade names, copyrights, trade secrets, software, technology, know-
how or processes utilized by each of the NetSource Entities (including, without
limitation, the NetSource Third Party Technology) or challenging or questioning
the validity or effectiveness of any license or agreement relating thereto
(including, without limitation, the NetSource Third Party Licenses). There is no
valid basis for any claim of the type specified in the immediately preceding
sentence which could in any material way relate to or interfere with the
currently planned continued enhancement and exploitation by each of the
NetSource Entities of any of the NetSource Products/Services. None of the
NetSource Products/Services nor the use or exploitation of any patents,
trademarks, trade names, copyrights, software, technology, know-how or processes
by each of the NetSource Entities in its current business infringes on the
rights of, constitutes misappropriation of, or in any way involves unfair
competition with respect to, any proprietary information or intangible property
right of any third person or entity, including without limitation any patent,
trade secret, copyright, trademark or trade name.
(b) To each of the NetSource Entities' actual knowledge, no
employee of such entity is in violation of any term of any employment contract,
patent disclosure agreement or any other contract or agreement relating to the
relationship of any such employee with that entity or, to each of the NetSource
Entities' actual knowledge, any other party because of the nature of the
business conducted by each of the NetSource Entities or proposed to be conducted
by the NetSource Entities.
(c) Each person presently or previously employed by each of
the NetSource Entities (including independent contractors, if any) with access
to confidential information has executed a confidentiality and non-disclosure
agreement pursuant to the form of agreement previously provided to NIT or its
representatives. Such confidentiality and non-disclosure agreements constitute
valid and binding obligations of each of the NetSource Entities and such person,
enforceable in accordance with their respective terms. To each of the NetSource
Entities' actual knowledge, neither the execution or delivery of such
agreements, nor the carrying on of their business as employees by such persons,
nor the conduct of their business as currently anticipated, will conflict with
or result in a breach of the terms, conditions or provisions of or constitute a
default under any contract, covenant or instrument under which any of such
persons is obligated.
(d) No product or service liability or warranty claims which
individually or in the aggregate could exceed Twenty Thousand Dollars ($20,000)
individually or Fifty Thousand ($50,000) in the aggregate have been communicated
to or threatened against the NetSource Entities nor, to the NetSource Entities'
actual knowledge, is there any specific situation, set of facts or occurrence
that provides a basis for such claim.
3.10 Employee Benefit Plans. There is no unfunded prior service
----------------------
cost with respect to any bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option, or other employee benefit or fringe
benefit plans, whether formal or informal, maintained by each of the NetSource
Entities. Each bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option, and other employee benefit or fringe
benefit plans, whether formal or informal, maintained by each of the NetSource
Entities conforms to all applicable requirements of the Employees Retirement
Income Security Act of 1974. The NetSource Disclosure Schedule lists and
describes all profit-sharing, bonus, incentive, deferred compensation, vacation,
severance pay, retirement, stock option, group insurance or other plans (whether
written or not) providing employee benefits.
10
3.11 Bank Accounts. The NetSource Disclosure Schedule sets forth
-------------
the names and locations of all banks, trusts, companies, savings and loan
associations, and other financial institutions at which each of the NetSource
Entities maintains accounts of any nature and the names of all persons
authorized to draw thereon or make withdrawals therefrom.
3.12 Contracts.
---------
(a) Each of the NetSource Entities has no agreements,
contracts or commitments that provide for the sale, licensing or distribution by
that entity of any of its products, services, inventions, technology, know-how,
trademarks or trade names except in the ordinary course of its business.
(b) Each of the NetSource Entities has no agreements,
contracts or commitments that call for fixed and/or contingent payments or
expenditures by or to that entity of more than Twenty Thousand Dollars
($20,000).
(c) Without limiting the provisions of Section 3.9 and except
for any agreements with NIT, each of the NetSource Entities has not granted to
any third party any exclusive rights of any kind with respect to any of the
NetSource Products/Services, including, without limitation, territorial
exclusivity or exclusivity with respect to particular versions, implementations
or translations of any of the NetSource Products/Services.
(d) There is no outstanding sales contract, commitment or
proposal of any of the NetSource Entities that is currently expected to result
in any loss to such entity (before allocation of overhead and administrative
costs) upon completion or performance thereof.
(e) Each of the NetSource Entities has no outstanding
agreements, contracts or commitments with officers, employees, agents,
consultants, advisors, salesmen, sales representatives, distributors or dealers
that are not cancelable by it on notice of not longer than thirty (30) days and
without liability, penalty or premium.
(f) Each of the NetSource Entities has no employment,
independent contractor or similar agreement, contract or commitment that is not
terminable on no more than thirty (30) days' notice without penalty or liability
of any type, including without limitation severance or termination pay.
(g) Each of the NetSource Entities has no currently effective
collective bargaining or union agreements, contracts or commitments.
(h) Each of the NetSource Entities is not restricted by
agreement from competing with any person or from carrying on its business
anywhere in the world.
(i) Each of the NetSource Entities has not guaranteed any
obligations of other persons or made any agreements to acquire or guarantee any
obligations of other persons.
(j) Each of the NetSource Entities has no outstanding loan or
advance to any person; nor is it party to any line of credit, standby financing,
revolving credit or other similar financing arrangement of any sort which would
permit the borrowing by such entity of any sum not reflected in the NetSource
Financial Statements.
(k) All material contracts, agreements and instruments to
which each of the NetSource Entities is a party are valid, binding, in full
force and effect, and enforceable by each of the NetSource Entities in
accordance with their respective terms. No such material contract, agreement or
instrument contains any material liquidated-damages, penalty or similar
provision. Each of the NetSource Entities has not received any notice from any
party to any such material contract, agreement or
11
instrument that such party intends to cancel, withdraw, modify or amend such
contract, agreement or arrangement.
(l) The NetSource Disclosure Schedule lists all material
agreements pursuant to which each of the NetSource Entities has agreed to supply
to any third party NetSource Products/Services.
(m) Each of the NetSource Entities is not in default under or
in breach or violation of, nor, to its actual knowledge, is there any valid
basis for any claim of default by such entity under, or breach or violation by
such entity of, any contract, commitment or restriction to which such entity is
a party or to which it or any of its properties is bound, where such defaults,
breaches, or violations would, in the aggregate, have a Material Adverse Effect
on the NetSource Entities. To each of the NetSource Entities' actual knowledge,
no other party is in default under or in breach or violation of, nor is there
any valid basis for any claim of default by any other party under or any breach
or violation by any other party of, any material contract, commitment, or
restriction to which each of the NetSource Entities is bound or by which any of
its properties is bound, where such defaults, breaches, or violations would, in
the aggregate, have a Material Adverse Effect on the NetSource Entities.
(n) All agreements, contracts and commitments (the "Material
Contracts") listed or described in the NetSource Disclosure Schedule pursuant to
this Section 3.12 are assumable, or will otherwise be the property of, the
Surviving Corporation following the Merger without further action by the
Surviving Corporation or NIT. If any of the Material Contracts are not assumable
by or will not be the property of, the Surviving Corporation following the
Merger, then NetSource has described in the NetSource Disclosure Schedule such
actions as is necessary for assumption of the Material Contract by the Surviving
Corporation.
(o) True and correct copies of each document or instrument
described in the NetSource Disclosure Schedule pursuant to this Section 3.12
have been made available to NIT or its representatives.
3.13 Insider Transactions. No Affiliate of each of the NetSource
--------------------
Entities has any interest in (i) any material equipment or other property, real
or personal, tangible or intangible, including, without limitation, any item of
intellectual property, used in connection with or pertaining to the business of
each of the NetSource Entities, or (ii) any creditor, supplier, customer, agent
or representative of each of the NetSource Entities; provided, however, that no
such Affiliate or other person shall be deemed to have such an interest solely
by virtue of the ownership of less than one percent (1%) of the outstanding
stock or debt securities of any publicly-held company, the stock or debt
securities of which are traded on a recognized stock exchange or quoted on the
National Association of Securities Dealers Automated Quotation System.
3.14 Insurance. The NetSource Disclosure Schedule contains a list
---------
of the principal policies of fire, liability and other forms of insurance held
by each of the NetSource Entities.
3.15 Litigation. There are no suits, actions or proceedings
----------
pending or, to each of the NetSource Entities' actual knowledge, threatened
against or affecting the NetSource Entities or which questions or challenges the
validity of this Agreement. There is no judgment, decree, injunction, rule or
order of any court, governmental department, commission, agency, instrumentality
or arbitrator outstanding against any of the NetSource Entities.
3.16 Permit Application; Information Statement. The information
-----------------------------------------
supplied by each of the NetSource Entities and which is included in the
application for issuance of a permit (the "Permit Application") pursuant to
Section 25121 of the California Corporate Securities Act of 1968, as amended
(the "California Law"), shall not, at the time the fairness hearing is held
pursuant to Section 25142 of the California Law and at the time the
qualification of such securities is effective under such Section 25122 of the
California Law, contain any untrue statement of a material fact or omit to state
any material fact
12
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The information supplied by each of the NetSource Entities for
inclusion in the information statement (the "Information Statement") to be sent
to the stockholders of NetSource in connection with the meeting of NetSource's
stockholders to consider this Agreement and the Merger (the "NetSource Common
Stockholders' Meeting") shall not, on the date the Information Statement is
first mailed to stockholders of NetSource, at the time of the NetSource Common
Stockholders' Meeting and at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it was made, is false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements made in the Information Statement not
false or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the NetSource Common Stockholders' Meetings which has become false
or misleading. If at any time prior to the Effective Time any event relating to
the NetSource Entities or any of their Affiliates, officers or directors should
be discovered by the NetSource Entities which should be set forth in an
amendment to the Permit Application or a supplement to the Information
Statement, the NetSource Entities shall promptly inform NIT thereof.
3.17 Governmental Authorizations and Regulations. All licenses,
-------------------------------------------
franchises, permits and other governmental authorizations held by each of the
NetSource Entities and material to its business are valid and sufficient for the
business presently carried on by each of the NetSource Entities. The business
of each of the NetSource Entities is not being conducted in violation of any
law, ordinance or regulation of any governmental entity, except for violations
which either singly or in the aggregate do not and will not have a Material
Adverse Effect on the NetSource Entities.
3.18 Subsidiaries. Each of the NetSource Entities has no
------------
subsidiaries. Each of the NetSource Entities does not own or control (directly
or indirectly) any capital stock, bonds or other securities of, and does not
have any proprietary interest in, any other corporation, general or limited
partnership, firm, association or business organization, entity or enterprise,
and each of the NetSource Entities does not control (directly or indirectly) the
management or policies of any other corporation, partnership, firm, association
or business organization, entity or enterprise.
3.19 Environmental Matters.
---------------------
(a) As of the date hereof, to the actual knowledge of each of
the NetSource Entities, no underground storage tanks are present under any
property that any of the NetSource Entities has at any time owned, operated,
occupied or leased. As of the date hereof except as set forth in the NetSource
Disclosure Schedule, no material amount of any substance that has been
designated by any governmental entity or by applicable federal, state or local
law to be radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, petroleum, urea-
formaldehyde and all substances listed as hazardous substances pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws (a "Hazardous Material"), excluding office,
janitorial and other immaterial supplies, are present, as a result of the
actions of the NetSource Entities or, to each of the NetSource Entities' actual
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water, that the NetSource Entities have at any time owned, operated,
occupied or leased.
(b) At no time has any of the NetSource Entities transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has any of the NetSource Entities disposed of, transported,
sold, or manufactured any product containing a Hazardous Material (collectively,
"Hazardous Materials Activities") in violation of any rule, regulation, treaty
or statute
13
promulgated by any governmental entity to prohibit, regulate or control
Hazardous Materials or any Hazardous Material Activities.
(c) Each of the NetSource Entities currently holds all
environmental approvals, permits, licenses, clearances and consents (the
"Environmental Permits") necessary for the conduct of its business as such
business is currently being conducted, the absence of which would be reasonably
likely to have a Material Adverse Effect on the NetSource Entities.
(d) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending or, to the actual knowledge of
each of the NetSource Entities, threatened concerning any Environmental Permit.
Each of the NetSource Entities is not aware of any fact or circumstance which
could involve it in any environmental litigation or impose upon it any
environmental liability which would be reasonably likely to have a Material
Adverse Effect on the NetSource Entities .
3.20 Corporate Documents. Each of the NetSource Entities has
-------------------
furnished to NIT for its examination: (i) copies of its Certificate or Articles
of Incorporation and Bylaws; (ii) its Minute Book containing all records
required to be set forth of all proceedings, consents, actions, and meetings of
the stockholders, the board of directors and any committees thereof; (iii) all
permits, orders, and consents issued by any regulatory agency with respect to
such entity, or any securities of such entity, and all applications for such
permits, orders, and consents; and (iv) its stock transfer books setting forth
all transfers of any capital stock. The corporate minute books, stock
certificate books, stock registers and other corporate records of each of the
NetSource Entities are complete and accurate in all material respects, and the
signatures appearing on all documents contained therein are the true signatures
of the persons purporting to have signed the same. All actions reflected in
such books and records were duly and validly taken in compliance with the laws
of the applicable jurisdiction.
3.21 No Brokers. None of the NetSource Entities nor any of their
----------
stockholders are obligated for the payment of fees or expenses of any broker or
finder in connection with the origin, negotiation or execution of this Agreement
or the Certificate of Merger or in connection with any transaction contemplated
hereby or thereby.
3.22 Disclosure. No statements by NetSource contained in this
----------
Agreement and the Exhibits and NetSource Disclosure Schedule attached hereto,
any other Transaction Document or any written statement or certificate furnished
or to be furnished pursuant hereto or in connection with the transactions
contemplated hereby and thereby (when read together) contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein not misleading in light
of the circumstances under which they were made.
4. Representations and Warranties of NIT. Except as otherwise set
-------------------------------------
forth in the "NIT Disclosure Schedule" provided to NIT on the date hereof, NIT
represents and warrants to NetSource as set forth below. No fact or
circumstance disclosed to NIT shall constitute an exception to these
representations and warranties unless such fact or circumstance is set forth in
the NIT Disclosure Schedule or such supplements thereto as may mutually be
agreed upon in writing by NIT and NetSource. NIT, MTC Telemanagement and MTC
International are referred to herein collectively as the "NIT Entities."
4.1 Organization. Each of the NIT Entities is a corporation duly
------------
organized, validly existing and in good standing under the laws of the state of
incorporation of such entity and has corporate power and authority to carry on
its business as it is now being conducted. Each of the NIT Entities is duly
qualified or licensed to do business and in good standing in each jurisdiction
in which the nature of its business or properties makes such qualification or
licensing necessary except where the failure to be so qualified would not have a
material adverse effect on the operations, assets or financial condition (a
"Material Adverse Effect") of the NIT Entities considered as a whole. The NIT
Disclosure Schedule contains a true and complete listing of the locations of all
sales offices, manufacturing facilities, and any
14
other offices or facilities of the NIT Entities and a true and complete list of
all states in which NIT Entities maintain any employees. The NIT Entities
Disclosure Schedule contains a true and complete list of all states in which the
each of the NIT Entities is duly qualified to transact business as a foreign
corporation. True and complete copies of each of the NIT Entities' Articles of
Incorporation and Bylaws, as in effect on the date hereof and as to be in effect
as of the Closing, have been provided to NIT or its representatives.
4.2 Capitalization.
--------------
(a) The authorized capital of NIT will consist, prior to the Closing
but after the MTC Exchanges, of 2,200,000 shares of common stock, of which
780,290 shares will be issued and outstanding.
(b) The NIT Disclosure Schedule accurately describes the vesting
schedules associated with such NIT Common Stock and each of the NIT Options.
(c) Except as set forth in the NIT Disclosure Schedule, NIT does not
have outstanding any preemptive or subscription rights, options, warrants,
rights to convert or exchange, capital stock equivalents, or other rights to
purchase or otherwise acquire any NIT capital stock or other securities.
(d) All of the issued and outstanding shares of NIT capital stock have
been duly authorized, validly issued, are fully paid and nonassessable, and such
capital stock, and all warrants and options to purchase capital stock of NIT,
have been issued in full compliance with all applicable federal and state
securities laws. None of NIT's issued and outstanding shares of capital stock,
or options or rights to purchase capital stock of NIT, is subject to repurchase
or redemption rights. All of NIT's options have been issued in accordance with
its current stock option plan and in accordance with all state securities laws.
(e) Except for any restrictions imposed by applicable state and
federal securities laws, there is no right of first refusal, option, or other
restriction on transfer applicable to any shares of NIT's capital stock.
(f) NIT is not under any obligation to register under the Securities
Act any shares of its capital stock or any other of its securities that might be
issued in the future if the Merger were not consummated.
(g) NIT is not a party or subject to any agreement or understanding
(and, to NIT's actual knowledge, there is no agreement or understanding between
or among any persons) that affects or relates to the voting or giving of written
consent with respect to any security.
4.3 Power, Authority and Validity. NIT has the corporate power to
-----------------------------
enter into this Agreement and the other Transaction Documents to which it is a
party and to carry out its obligations hereunder and thereunder. The execution
and delivery of this Agreement and the Transaction Documents and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by the Board of Directors of NIT and on the Closing Date, by the
stockholders of NIT and no other corporate proceedings on the part of NIT is
necessary to authorize this Agreement, the other Transaction Documents and the
transactions contemplated herein and therein. NIT is not subject to or
obligated under any charter, bylaw or contract provision or any license,
franchise or permit, or subject to any order or decree, which would be breached
or violated by or in conflict with its executing and carrying out this Agreement
and the transactions contemplated hereunder and under the Transaction Documents.
Except for (i) the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware and appropriate documents with the relevant
authorities of other states in which NIT is qualified to do business, and (ii)
filings under applicable securities laws, no consent of any person who is a
party to a contract which is material to NIT's business, nor consent of any
governmental authority, is required to be obtained on the part of each of the
NIT Entities to permit the transactions contemplated herein and to
15
permit NIT to continue the business activities of each of the NIT Entities as
previously conducted by each of the NIT Entities without a Material Adverse
Effect. This Agreement is, and the other Transaction Documents when executed and
delivered by NIT shall be, the valid and binding obligations of NIT, enforceable
in accordance with their respective terms.
4.4 Financial Statements.
--------------------
(a) Each of the NIT Entities has delivered to NIT copies of each of
the NIT Entities' unaudited balance sheet as of March 31, 1996, and statements
of operations, stockholders' equity and cash flow for the three month period
then-ended and the unaudited balance sheet as of December 31, 1995, and
statements of operations, stockholder's equity and cash flow for the twelve
month period then ended (collectively, the "NIT Financial Statements").
(b) The NIT Financial Statements are complete and in accordance with
the books and records of each of the NIT Entities and present fairly the
financial position of each of the NIT Entities as of their historical dates.
The NIT Financial Statements have been prepared in accordance with generally
accepted accounting principles ("GAAP")(except for the absence of footnotes)
applied on a basis consistent with prior periods. Except and to the extent
reflected or reserved against in such balance sheets (including the notes
thereto), each of the NIT Entities does not have, as of the dates of such
balance sheets, any liabilities or obligations (absolute or contingent) of a
nature required or customarily reflected in a balance sheet (or the notes
thereto) prepared in accordance with GAAP. The reserves, if any, reflected on
the NIT Financial Statements are adequate in light of the contingencies with
respect to which they are made.
(c) Each of the NIT Entities has no debt, liability, or obligation of
any nature, whether accrued, absolute, contingent, or otherwise, and whether due
or to become due, that is not reflected or reserved against in the NIT Financial
Statements, except for those (i) that may have been incurred after the date of
the NIT Financial Statements or (ii) that are not required by GAAP to be
included in a balance sheet or the notes thereto, except that each of the NIT
Entities has not established any reserves with respect to the costs and fees
associated with this Agreement, the other Transaction Documents, and the
transactions contemplated hereby and thereby. All material debts, liabilities,
and obligations incurred after the date of the NIT Financial Statements were
incurred in the ordinary course of business, and are usual and normal in amount
both individually and in the aggregate.
4.5 Tax Matters.
-----------
(a) Each of the NIT Entities has fully and timely, properly and
accurately filed all tax returns and reports required to be filed by it,
including all federal, foreign, state and local tax returns and estimates for
all years and periods (and portions thereof) for which any such returns, reports
or estimates were due. All such returns, reports and estimates were prepared in
the manner required by applicable law. All income, sales, use, occupation,
property or other taxes or assessments due from each of the NIT Entities have
been paid. There are no pending assessments, asserted deficiencies or claims
for additional taxes that have not been paid. The reserves for taxes, if any,
reflected on the NIT Financial Statements are adequate and there are no tax
liens on any property or assets of each of the NIT Entities. There have been no
audits or examinations of any tax returns or reports by any applicable
governmental agency. No state of facts exists or has existed which would
constitute grounds for the assessment of any penalty or of any further tax
liability beyond that shown on the respective tax reports, returns or estimates.
There are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any federal, state or local income tax return or report
for any period.
(b) All taxes which each of the NIT Entities has been required to
collect or withhold have been duly withheld or collected and, to the extent
required, have been paid to the proper taxing authority.
16
(c) Each of the NIT Entities is not a party to any tax-sharing
agreement or similar arrangement with any other party.
(d) At no time prior to the MTC Exchanges has any of the NIT Entities
been included in the federal consolidated income tax return of any affiliated
group of corporations.
(e) No payment which any of the NIT Entities is obliged to pay to any
director, officer, employee or independent contractor pursuant to the terms of
an employment agreement, severance agreement or otherwise will constitute an
excess parachute payment as defined in Section 280G of the Code.
(f) Each of the NIT Entities is not currently under any contractual
obligation to pay any tax obligations of, or with respect to any transaction
relating to, any other person or to indemnify any other person with respect to
any tax.
4.6 Tax Free Reorganization.
-----------------------
(a) Neither NIT nor, to its actual knowledge, any NIT stockholder has
taken or agreed to take any action that would prevent the Merger from
constituting a reorganization qualifying under the provisions of Section 368(a)
of the Code.
(b) NIT is not an investment company as defined in Sections
368(a)(2)(F)(iii) and (iv) of the Code.
4.7 Absence of Certain Changes or Events. Since March 31,
------------------------------------
1996, each of the NIT Entities has not:
(a) suffered any material adverse change in its financial condition or
in the operations of its business, nor any material adverse changes in its
balance sheet, (with the NIT Financial Statements and any subsequent balance
sheet analyzed as if each had been prepared according to GAAP), including but
not limited to cash distributions or material decreases in the net assets of
each of the NIT Entities;
(b) suffered any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting its properties or business;
(c) granted or agreed to make any increase in the compensation payable
or to become payable by it to its officers or employees, except those occurring
in the ordinary course of business;
(d) declared, set aside or paid any dividend or made any other
distribution on or in respect of the shares of its capital stock or declared any
direct or indirect redemption, retirement, purchase or other acquisition by it
of such shares;
(e) issued any shares of its capital stock or any warrants, rights,
options or entered into any commitment relating to its shares except for the
issuance of its pursuant to the exercise of outstanding options;
(f) made any change in the accounting methods or practices it follows,
whether for general financial or tax purposes, or any change in depreciation or
amortization policies or rates adopted therein;
(g) sold, leased, abandoned or otherwise disposed of any real property
or any machinery, equipment or other operating property other than in the
ordinary course of business;
17
(h) sold, assigned, transferred, licensed or otherwise disposed of any
patent, trademark, trade name, brand name, copyright (or pending application for
any patent, trademark or copyright) invention, work of authorship, process,
know-how, formula or trade secret or interest thereunder or other intangible
asset except in the ordinary course of its business;
(i) suffered any labor dispute;
(j) engaged in any activity or entered into any material commitment or
transaction (including without limitation any borrowing or capital expenditure)
other than in the ordinary course of business;
(k) incurred any liabilities except in the ordinary course of business
and consistent with past practice which would be required to be disclosed in
financial statements prepared in accordance with GAAP;
(l) permitted or allowed any of its property or assets to be subjected
to any mortgage, deed of trust, pledge, lien, security interest or other
encumbrance of any kind, except those permitted under Section 3.8 hereof, other
than any purchase money security interests incurred in the ordinary course of
business;
(m) made any capital expenditure or commitment for additions to
property, plant or equipment individually in excess of Fifty Thousand Dollars
($50,000);
(n) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets to, or entered into any agreement or arrangement
with any of its Affiliates, officers, directors or stockholder or any Affiliate
or associate of any of the foregoing;
(o) made any amendment to or terminated any agreement which, if not so
amended or terminated, would be required to be disclosed on the NIT Disclosure
Schedule; or
(p) agreed to take any action described in Sections 4.6 or 4.7 or
outside of its ordinary course of business or which would constitute a breach of
any of the representations contained in this Agreement.
4.8 Title and Related Matters. Each of the NIT Entities has good and
-------------------------
marketable title to all the properties, interests in properties and assets, real
and personal, reflected in the NIT Financial Statements or acquired after the
date of the NIT Financial Statements (except properties, interests in properties
and assets sold or otherwise disposed of since the date of the NIT Financial
Statements in the ordinary course of business), free and clear of all mortgages,
liens, pledges, charges or encumbrances of any kind or character, except the
lien of current taxes not yet due and payable and except for liens which in the
aggregate do not secure more than Fifty Thousand Dollars ($50,000) in
liabilities. The equipment of each of the NIT Entities used in the operation of
its business is in good operating condition and repair. All real or personal
property leases to which each of the NIT Entities is a party are valid, binding,
enforceable obligations of each of the NIT Entities effective in accordance with
their respective terms. There is not under any of such leases any existing
material default or event of default or event which, with notice or lapse of
time or both, would constitute a material default. The NIT Disclosure Schedule
contains a description of all real and personal property leased or owned by each
of the NIT Entities, identifying such property and, in the case of real
property, stating the monthly rental due, term of lease and square feet leased.
True and correct copies of each of the NIT Entities' leases have been provided
to NIT or its representatives.
4.9 Proprietary Rights.
------------------
(a) Each of the NIT Entities owns all right, title and interest in and
to, or valid licenses for use of, all patents, copyrights, technology, software,
software tools, know-how,
18
processes, trade secrets, trademarks, service marks, trade names and other
proprietary rights used in or necessary for the conduct of each of the NIT
Entities' business as conducted to the date hereof or contemplated, including,
without limitation, the technology and all proprietary rights developed or
discovered or used in connection with or contained in the NIT Products/Services,
free and clear of all liens, claims and encumbrances (including without
limitation distribution rights) (all of which are referred to as "NIT
Proprietary Rights") and NIT has the right to transfer all such rights to NIT as
contemplated hereby. The foregoing representation as it relates to NIT Third
Party Technology (as hereinafter defined) is limited to each of the NIT
Entities' interest pursuant to the NIT Third Party Licenses (as hereinafter
defined), all of which are valid and enforceable and in full force and effect
and which grant each of the NIT Entities such rights to the NIT Third Party
Technology as are employed in or necessary to the business of each of the NIT
Entities as conducted or proposed to be conducted. The NIT Disclosure Schedule
contains an accurate and complete description of (i) all patents, trademarks
(with separate listings of registered and unregistered trademarks), trade names,
and registered copyrights in or related to the NIT Products/Services, all
applications and registration statements therefor, and a list of all licenses
and other agreements relating thereto, and (ii) a list of all licenses and other
agreements with third parties (the "NIT Third Party Licenses") relating to any
software, inventions, technology, know-how, or processes that any of the NIT
Entities is licensed or otherwise authorized by such third parties to use,
market, distribute or incorporate into products distributed by each of the NIT
Entities (such software, inventions, technology, know-how and processes are
collectively referred to as the "NIT Third Party Technology"). Each of the NIT
Entities' trademark or trade name registrations related to the NIT
Products/Services and all of each of the NIT Entities' copyrights in any of the
NIT Products/Services are valid and in full force and effect; and consummation
of the transactions contemplated hereby will not alter or impair any such
rights. No claims have been asserted against any of the NIT Entities (and each
of the NIT Entities is not aware of any claims which are likely to be asserted
against it or which have been asserted against others) by any person challenging
each of the NIT Entities's use, possession, manufacture, sale, provision or
distribution of the NIT Products/Services under any patents, trademarks, trade
names, copyrights, trade secrets, software, technology, know-how or processes
utilized by each of the NIT Entities (including, without limitation, the NIT
Third Party Technology) or challenging or questioning the validity or
effectiveness of any license or agreement relating thereto (including, without
limitation, the NIT Third Party Licenses). There is no valid basis for any claim
of the type specified in the immediately preceding sentence which could in any
material way relate to or interfere with the currently planned continued
enhancement and exploitation by each of the NIT Entities of any of the NIT
Products/Services. None of the NIT Products/Services nor the use or exploitation
of any patents, trademarks, trade names, copyrights, software, technology, know-
how or processes by each of the NIT Entities in its current business infringes
on the rights of, constitutes misappropriation of, or in any way involves unfair
competition with respect to, any proprietary information or intangible property
right of any third person or entity, including without limitation any patent,
trade secret, copyright, trademark or trade name.
(b) To each of the NIT Entities' actual knowledge, no employee of such
entity is in violation of any term of any employment contract, patent disclosure
agreement or any other contract or agreement relating to the relationship of any
such employee with that entity or, to each of the NIT Entities' actual
knowledge, any other party because of the nature of the business conducted by
each of the NIT Entities or proposed to be conducted by the NIT Entities.
(c) Each person presently or previously employed by each of the NIT
Entities (including independent contractors, if any) with access to confidential
information has executed a confidentiality and non-disclosure agreement pursuant
to the form of agreement previously provided to NIT or its representatives.
Such confidentiality and non-disclosure agreements constitute valid and binding
obligations of each of the NIT Entities and such person, enforceable in
accordance with their respective terms. To each of the NIT Entities' actual
knowledge, neither the execution or delivery of such agreements, nor the
carrying on of their business as employees by such persons, nor the conduct of
their business as currently anticipated, will conflict with or result in a
breach of the terms, conditions or
19
provisions of or constitute a default under any contract, covenant or instrument
under which any of such persons is obligated.
(d) No product or service liability or warranty claims which
individually exceed Fifty Thousand Dollars ($50,000) or in the aggregate exceed
Two Hundred Fifty Thousand Dollars ($250,000) have been communicated to or
threatened against the NIT Entities nor, to the NIT Entities' actual knowledge,
is there any specific situation, set of facts or occurrence that provides a
basis for such claim.
4.10 Employee Benefit Plans. There is no unfunded prior service cost
----------------------
with respect to any bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option, or other employee benefit or fringe
benefit plans, whether formal or informal, maintained by each of the NIT
Entities. Each bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option, and other employee benefit or fringe
benefit plans, whether formal or informal, maintained by each of the NIT
Entities conforms to all applicable requirements of the Employees Retirement
Income Security Act of 1974. The NIT Disclosure Schedule lists and describes
all profit-sharing, bonus, incentive, deferred compensation, vacation, severance
pay, retirement, stock option, group insurance or other plans (whether written
or not) providing employee benefits.
4.11 Bank Accounts. The NIT Disclosure Schedule sets forth the names
-------------
and locations of all banks, trusts, companies, savings and loan associations,
and other financial institutions at which each of the NIT Entities maintains
accounts of any nature and the names of all persons authorized to draw thereon
or make withdrawals therefrom.
4.12 Contracts.
---------
(a) Each of the NIT Entities has no agreements, contracts or
commitments that provide for the sale, licensing or distribution by that entity
of any of its products, services, inventions, technology, know-how, trademarks
or trade names except in the ordinary course of its business.
(b) Each of the NIT Entities has no agreements, contracts or
commitments that call for fixed and/or contingent payments or expenditures by or
to that entity of more than Fifty Thousand Dollars ($50,000).
(c) Without limiting the provisions of Section 4.9 and except for any
agreements with NIT, each of the NIT Entities has not granted to any third party
any exclusive rights of any kind with respect to any of the NIT
Products/Services, including, without limitation, territorial exclusivity or
exclusivity with respect to particular versions, implementations or translations
of any of the NIT Products/Services.
(d) There is no outstanding sales contract, commitment or proposal of
any of the NIT Entities that is currently expected to result in any loss to such
entity (before allocation of overhead and administrative costs) upon completion
or performance thereof.
(e) Each of the NIT Entities has no outstanding agreements, contracts
or commitments with officers, employees, agents, consultants, advisors,
salesmen, sales representatives, distributors or dealers that are not cancelable
by it on notice of not longer than thirty (30) days and without liability,
penalty or premium.
(f) Each of the NIT Entities has no employment, independent contractor
or similar agreement, contract or commitment that is not terminable on no more
than thirty (30) days' notice without penalty or liability of any type,
including without limitation severance or termination pay.
(g) Each of the NIT Entities has no currently effective collective
bargaining or union agreements, contracts or commitments.
20
(h) Each of the NIT Entities is not restricted by agreement from
competing with any person or from carrying on its business anywhere in the
world.
(i) Each of the NIT Entities has not guaranteed any obligations of
other persons or made any agreements to acquire or guarantee any obligations of
other persons.
(j) Each of the NIT Entities has no outstanding loan or advance to
any person; nor is it party to any line of credit, standby financing, revolving
credit or other similar financing arrangement of any sort which would permit the
borrowing by such entity of any sum not reflected in the NIT Financial
Statements.
(k) All material contracts, agreements and instruments to which each
of the NIT Entities is a party are valid, binding, in full force and effect, and
enforceable by each of the NIT Entities in accordance with their respective
terms. No such material contract, agreement or instrument contains any material
liquidated-damages, penalty or similar provision. Each of the NIT Entities has
not received any notice from any party to any such material contract, agreement
or instrument that such party intends to cancel, withdraw, modify or amend such
contract, agreement or arrangement.
(l) The NIT Disclosure Schedule lists all material agreements
pursuant to which each of the NIT Entities has agreed to supply to any third
party NIT Products/Services.
(m) Each of the NIT Entities is not in default under or in breach or
violation of, nor, to its actual knowledge, is there any valid basis for any
claim of default by such entity under, or breach or violation by such
entity of, any contract, commitment or restriction to which such entity is a
party or to which it or any of its properties is bound, where such defaults,
breaches, or violations would, in the aggregate, have a Material Adverse Effect
on the NIT Entities. To each of the NIT Entities' actual knowledge, no other
party is in default under or in breach or violation of, nor is there any valid
basis for any claim of default by any other party under or any breach or
violation by any other party of, any material contract, commitment, or
restriction to which each of the NIT Entities is bound or by which any of its
properties is bound, where such defaults, breaches, or violations would, in the
aggregate, have a Material Adverse Effect on the NIT Entities.
(n) True and correct copies of each document or instrument described
in the NIT Disclosure Schedule pursuant to this Section 4.12 have been made
available to NetSource or its representatives.
4.13 Insider Transactions. No Affiliate of each of the NIT Entities
--------------------
has any interest in (i) any material equipment or other property, real or
personal, tangible or intangible, including, without limitation, any item of
intellectual property, used in connection with or pertaining to the business of
each of the NIT Entities, or (ii) any creditor, supplier, customer, agent or
representative of each of the NIT Entities; provided, however, that no such
Affiliate or other person shall be deemed to have such an interest solely by
virtue of the ownership of less than one percent (1%) of the outstanding stock
or debt securities of any publicly-held company, the stock or debt securities of
which are traded on a recognized stock exchange or quoted on the National
Association of Securities Dealers Automated Quotation System.
4.14 Insurance. The NIT Disclosure Schedule contains a list of the
---------
principal policies of fire, liability and other forms of insurance held by each
of the NIT Entities.
4.15 Litigation. There are no suits, actions or proceedings pending
----------
or, to each of the NIT Entities' actual knowledge, threatened against or
affecting the NIT Entities or which questions or challenges the validity of this
Agreement. There is no judgment, decree, injunction, rule or order of any
court, governmental department, commission, agency, instrumentality or
arbitrator outstanding against any of the NIT Entities.
21
4.16 Permit Application; Information Statement. The information
-----------------------------------------
supplied by each of the NIT Entities and which is included in the application
for issuance of a permit (the "Permit Application") pursuant to Section 25121 of
the California Corporate Securities Act of 1968, as amended (the "California
Law"), shall not, at the time the fairness hearing is held pursuant to Section
25142 of the California Law and at the time the qualification of such securities
is effective under such Section 25122 of the California Law, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The information
supplied by each of the NIT Entities for inclusion in the information statement
(the "Information Statement") to be sent to the stockholders of NIT in
connection with the meeting of NIT's stockholders to consider this Agreement and
the Merger (the "NIT Common Stockholders' Meeting") shall not, on the date the
Information Statement is first mailed to stockholders of NIT, at the time of the
NIT Common Stockholders' Meeting and at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
was made, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made in the
Information Statement not false or misleading; or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of proxies for the NIT Common Stockholders' Meetings
which has become false or misleading. If at any time prior to the Effective Time
any event relating to the NIT Entities or any of their Affiliates, officers or
directors should be discovered by the NIT Entities which should be set forth in
an amendment to the Permit Application or a supplement to the Information
Statement, the NIT Entities shall promptly inform NIT thereof.
4.17 Governmental Authorizations and Regulations. All licenses,
-------------------------------------------
franchises, permits and other governmental authorizations held by each of the
NIT Entities and material to its business are valid and sufficient for the
business presently carried on by each of the NIT Entities. The business of each
of the NIT Entities is not being conducted in violation of any law, ordinance or
regulation of any governmental entity, except for violations which either singly
or in the aggregate do not and will not have a Material Adverse Effect on the
NIT Entities.
4.18 Subsidiaries. Prior to the MTC Exchanges, each of the NIT
------------
Entities has no subsidiaries. Each of the NIT Entities does not own or control
(directly or indirectly) any capital stock, bonds or other securities of, and
does not have any proprietary interest in, any other corporation, general or
limited partnership, firm, association or business organization, entity or
enterprise, and each of the NIT Entities does not control (directly or
indirectly) the management or policies of any other corporation, partnership,
firm, association or business organization, entity or enterprise.
4.19 Environmental Matters.
---------------------
(a) As of the date hereof, to the actual knowledge of each of the
NIT Entities, no underground storage tanks are present under any property that
any of the NIT Entities has at any time owned, operated, occupied or leased. As
of the date hereof except as set forth in the NIT Disclosure Schedule, no
material amount of any substance that has been designated by any governmental
entity or by applicable federal, state or local law to be radioactive, toxic,
hazardous or otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all substances
listed as hazardous substances pursuant to the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, or defined as a
hazardous waste pursuant to the United States Resource Conservation and Recovery
Act of 1976, as amended, and the regulations promulgated pursuant to said laws
(a "Hazardous Material"), excluding office, janitorial and other immaterial
supplies, are present, as a result of the actions of the NIT Entities or, to
each of the NIT Entities' actual knowledge, as a result of any actions of any
third party or otherwise, in, on or under any property, including the land and
the improvements, ground water and surface water, that the NIT Entities have at
any time owned, operated, occupied or leased.
(b) At no time has any of the NIT Entities transported, stored,
used, manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in
22
violation of any law in effect on or before the Closing Date, nor has any of the
NIT Entities disposed of, transported, sold, or manufactured any product
containing a Hazardous Material (collectively, "Hazardous Materials Activities")
in violation of any rule, regulation, treaty or statute promulgated by any
governmental entity to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activities.
(c) Each of the NIT Entities currently holds all environmental
approvals, permits, licenses, clearances and consents (the "Environmental
Permits") necessary for the conduct of its business as such business is
currently being conducted, the absence of which would be reasonably likely to
have a Material Adverse Effect on the NIT Entities.
(d) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending or, to the actual knowledge of
each of the NIT Entities, threatened concerning any Environmental Permit. Each
of the NIT Entities is not aware of any fact or circumstance which could involve
it in any environmental litigation or impose upon it any environmental liability
which would be reasonably likely to have a Material Adverse Effect on the NIT
Entities.
4.20 Corporate Documents. Each of the NIT Entities has furnished to
-------------------
NIT for its examination: (i) copies of its Certificate or Articles of
Incorporation and Bylaws; (ii) its Minute Book containing all records required
to be set forth of all proceedings, consents, actions, and meetings of the
stockholders, the board of directors and any committees thereof; (iii) all
permits, orders, and consents issued by any regulatory agency with respect to
such entity, or any securities of such entity, and all applications for such
permits, orders, and consents; and (iv) its stock transfer books setting forth
all transfers of any capital stock. The corporate minute books, stock
certificate books, stock registers and other corporate records of each of the
NIT Entities are complete and accurate in all material respects, and the
signatures appearing on all documents contained therein are the true signatures
of the persons purporting to have signed the same. All actions reflected in such
books and records were duly and validly taken in compliance with the laws of the
applicable jurisdiction.
4.21 No Brokers. None of the NIT Entities nor any of their
----------
stockholders are obligated for the payment of fees or expenses of any broker or
finder in connection with the origin, negotiation or execution of this Agreement
or the Certificate of Merger or in connection with any transaction contemplated
hereby or thereby.
4.22 Disclosure. No statements by any of the NIT Entities contained
----------
in this Agreement and the Exhibits and NIT Disclosure Schedule attached hereto,
any other Transaction Document or any written statement or certificate furnished
or to be furnished pursuant hereto or in connection with the transactions
contemplated hereby and thereby (when read together) contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein not misleading in light
of the circumstances under which they were made.
5. Preclosing Covenants of NetSource and NIT.
-----------------------------------------
5.1 Material Consents. NetSource shall exert reasonable, good faith
-----------------
commercial efforts to obtain any and all consents necessary for the assumption
of the Material Contracts by the Surviving Corporation concurrent with the
Merger as described in the NetSource Disclosure Schedule (the "Material
Consents").
5.2 Transphere Mergers and MTC Exchanges.
------------------------------------
(a) On or prior to the Closing, NetSource, Transphere International
and Transphere Interactive shall have completed the Transphere Mergers and
NetSource shall have acquired all of the assets and assumed all of the
liabilities of each of Transphere International and Transphere Interactive.
23
(b) On or prior to the Closing, NIT, MTC Telemanagement and MTC
International shall have completed the MTC Exchanges such that holders of more
than ninety-five percent (95%) of the outstanding securities of each of MTC
Telemanagement and MTC International shall have exchanged such securities for
NIT Common Stock or securities convertible into or exercisable for NIT Common
Stock.
5.3 Employment Agreements, Other Commitments Terminated.
---------------------------------------------------
(a) Prior to the Closing, all employment agreements to which NetSource
is a party shall be reviewed by NetSource and NIT and, as agreed between them,
either terminated prior to the Closing or assumed by NIT as of the Closing with
such modifications as may be acceptable to NetSource, NIT and the employee party
to such agreement. As of the Closing, any obligation of NetSource to issue
options, stock or warrants to any employee or consultant of NetSource to whom
such options, stock or warrants have been offered or promised shall have been
fulfilled to the mutual satisfaction of NIT and NetSource.
(b) Simultaneously with the execution of this Agreement, the Key
Employees shall each enter into an Employment Agreement with NIT in the form
attached hereto as Exhibit B.
---------
5.4 Voting Agreement and Irrevocable Proxies.
----------------------------------------
(a) NetSource shall use its best efforts, on behalf of NIT and
pursuant to the request of NIT, to cause ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇ to
execute and deliver to NIT a voting agreement and irrevocable proxy,
substantially in the form attached hereto as Exhibit C-1, concurrently with the
-----------
execution of this Agreement.
(b) NIT shall use its best efforts, on behalf of NetSource and
pursuant to the request of NetSource, to cause ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ to execute
and deliver to NetSource a voting agreement and irrevocable proxy, substantially
in the form attached hereto as Exhibit C-2, concurrently with the execution of
-----------
this Agreement.
5.5 Advice of Changes.
-----------------
(a) NetSource will promptly advise NIT in writing (i) of any event
occurring subsequent to the date of this Agreement which would render any
representation or warranty of NetSource contained in this Agreement, if made on
or as of the date of such event or the Closing Date, untrue or inaccurate in any
material respect and (ii) of any material adverse change in NetSource's
business, taken as a whole.
(b) NIT will promptly advise NetSource in writing (i) of any event
occurring subsequent to the date of this Agreement which would render any
representation or warranty of NIT contained in this Agreement, if made on or as
of the date of such event or the Closing Date, untrue or inaccurate in any
material respect and (ii) of any material adverse change in NIT's business,
taken as a whole.
6. Mutual Covenants.
----------------
6.1 Conduct of Business by NetSource. Until the Closing, NetSource
--------------------------------
will continue to conduct its business and maintain its business relationships in
the ordinary and usual course and will not, without the prior written consent of
NIT:
(a) borrow any money which borrowings exceed in the aggregate Twenty
Thousand Dollars ($20,000) or incur or commit to incur any capital expenditures
in excess of Fifty Thousand Dollars ($50,000) in the aggregate;
24
(b) lease, license, sell, transfer or encumber or permit to be
encumbered any asset, intellectual property right or other property associated
with the business of NetSource (including sales or transfers to Affiliates of
NetSource), except for sales of inventory in the usual and ordinary course of
business;
(c) dispose of any of its assets, except in the regular and ordinary
course of business;
(d) enter into any lease or contract for the purchase or sale of any
property, real or personal except in the ordinary course of business;
(e) pay any bonus, increased salary, or special remuneration to any
officer or employee, including any amounts for accrued but unpaid salary or
bonuses (other than amounts not in excess of normal payments made on a regular
basis in prior periods);
(f) change accounting methods;
(g) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital, or redeem or otherwise acquire any of its
capital stock;
(h) amend or terminate any contract, agreement or license to which it
is a party except in the ordinary course of business;
(i) loan any amount to any person or entity, or guaranty or act as a
surety for any obligation;
(j) issue or sell any shares of its capital stock of any class or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to issue
shares of capital stock, other than stock options granted as part of existing
stock option program or pursuant to any recapitalization plan disclosed to and
approved by NIT in its discretion (a "Recapitalization Plan");
(k) split or combine the outstanding shares of its capital stock of
any class or enter into any recapitalization affecting the number of outstanding
shares of its capital stock of any class or affecting any other of its
securities;
(l) amend its Certificate of Incorporation or Bylaws except as
necessary to carry out a Recapitalization Plan;
(m) make or change any election, change any annual accounting period,
adopt or change any accounting method, file any amended tax return, enter into
any closing agreement, settle any tax claim or assessment, surrender any right
to claim refund of taxes, consent to any extension or waiver of the limitation
period applicable to any tax claim or assessment, or take any other action or
omit to take any action, if any such election, adoption, change, amendment,
agreement, settlement, surrender, consent or other action or omission would have
the effect of increasing the tax liability of NetSource;
(n) do anything that would cause there to be material adverse changes
in its Financial Statements (with such Financial Statements analyzed as if it
had been prepared according to GAAP, and including but not limited to cash
distributions or material decreases in the net assets of NetSource), except as
would occur in the ordinary course of NetSource's business, between the date of
the NetSource Financial Statements and the Closing Date; or
(o) agree to do any of the things described in the preceding clauses
Section 6.1(a) through (n).
25
6.2 Stockholders' Tax Representations. NetSource will use its best
---------------------------------
efforts to cause each NetSource stockholder holding at least one percent (1%) of
its shares to execute prior to the Closing a reasonable continuity of interest
representation concerning such stockholder's lack of plan or intention to sell,
exchange or otherwise dispose of shares of NIT Common Stock to be received in
the Merger.
6.3 Conduct of Business by NIT. Until the Closing, NIT will continue
--------------------------
to conduct its business and maintain its business relationships in the ordinary
and usual course and will not, without the prior written consent of NetSource:
(a) borrow any money which borrowings exceed in the aggregate Two
Hundred Fifty Thousand Dollars ($250,000), other than the Yorkton Financing
(defined in Section 8.10 below) or financing secured by accounts receivable
consistent with past practices, or incur or commit to incur any capital
expenditures in excess of Fifty Thousand Dollars ($50,000) in the aggregate;
(b) lease, license, sell, transfer or encumber or permit to be
encumbered any asset, intellectual property right or other property associated
with the business of NIT (including sales or transfers to Affiliates of NIT),
except for the license of its products to customers in the usual and ordinary
course of business;
(c) dispose of any of its assets in excess of $100,000, except
inventory in the regular and ordinary course of business;
(d) enter into any lease or contract for the purchase or sale of any
property, real or personal except in the ordinary course of business;
(e) pay any bonus, increased salary, or special remuneration to any
officer or employee, including any amounts for accrued but unpaid salary or
bonuses (other than amounts not in excess of normal payments made on a regular
basis), except for bonus payments to the Chief Operating Officer of NIT that
have been pre-approved by both of the Key Employees;
(f) change accounting methods;
(g) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital, or redeem or otherwise acquire any of its
capital stock, except for the repurchase of any unvested stock;
(h) amend or terminate any contract, agreement or license to which it
is a party except in the ordinary course of business;
(i) loan any amount to any person or entity, or guaranty or act as a
surety for any obligation;
(j) issue or sell any shares of its capital stock of any class or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to issue
shares of capital stock, other than stock options granted as part of an existing
or proposed stock option program or pursuant to any recapitalization plan
disclosed to and approved by NetSource in its discretion (a "Recapitalization
Plan");
(k) enter into any recapitalization affecting the number of
outstanding shares of its capital stock of any class or affecting any other of
its securities;
(l) amend its Certificate of Incorporation or Bylaws except as
necessary to carry out this Merger;
26
(m) make or change any election, change any annual accounting period,
adopt or change any accounting method, file any amended tax return, enter into
any closing agreement, settle any tax claim or assessment, surrender any right
to claim refund of taxes, consent to any extension or waiver of the limitation
period applicable to any tax claim or assessment, or take any other action or
omit to take any action, if any such election, adoption, change, amendment,
agreement, settlement, surrender, consent or other action or omission would have
the effect of increasing the tax liability of NIT or NetSource;
(n) do anything that would cause there to be material adverse changes
in its Financial Statements (with such Financial Statements analyzed as if it
had been prepared according to GAAP, and including but not limited to cash
distributions or material decreases in the net assets of NIT), except as would
occur in the ordinary course of NIT's business, between the date of the NIT
Financial Statements, and the Closing Date; or
(o) agree to do any of the things described in the preceding clauses
Section 6.3(a) through (n).
6.4 No Public Announcement. The parties shall make no public
----------------------
announcement concerning this Agreement, their discussions or any other memos,
letters or agreements between the parties relating to the Merger until such time
as they agree to the contents of a mutually satisfactory press release which
they intend to publicly-release on the date of this Agreement. Either of the
parties, but only after reasonable consultation with the other, may make
disclosure if required under applicable law.
6.5 Other Negotiations. Between the date hereof and the Closing, or
------------------
such earlier date as NIT and NetSource mutually agree to discontinue discussions
of the Merger (the "Expiration Date"), neither NIT nor NetSource will take any
action to solicit, initiate, seek, encourage or support any inquiry, proposal or
offer from, furnish any information to, or participate in any negotiations with,
any corporation, partnership, person or other entity or group (other than
discussions pursuant to this Agreement) regarding any acquisition, any merger or
consolidation with or involving NetSource, or any acquisition of any material
portion of the stock or assets. NetSource and NIT agree that any such
negotiations in progress as of the date hereof will be terminated or suspended
during such period.
6.6 Due Diligence, Investigation, and Audits. At such time prior to
----------------------------------------
the Closing as may be reasonably requested, each party shall make available to
the other party and the other party's employees, agents and representatives all
information concerning the operation, business and prospects of such party as
may be reasonably requested by the other party, including, without limitation,
making the working papers of such party's independent certified public
accountants available for inspection by the other party's independent certified
public accountants. Each party will cooperate with the other party for the
purpose of permitting the other party to discuss such party's business and
prospects with such party's customers, creditors, suppliers and other persons
having business dealings with such party, subject to reasonable confidentiality
obligations between the parties.
6.7 Regulatory Filings; Consents; Reasonable Efforts. Subject to the
------------------------------------------------
terms and conditions of this Agreement, NetSource and NIT shall use their
respective best efforts to (i) make all necessary filings with respect to the
Merger and this Agreement under the Securities Act, and applicable blue sky or
similar securities laws and shall use all reasonable efforts to obtain required
approvals and clearances with respect thereto and shall supply all additional
information requested in connection therewith; (ii) make merger notification or
other appropriate filings with federal, state or local governmental bodies or
applicable foreign governmental agencies and shall use all reasonable efforts to
obtain required approvals and clearances with respect thereto and shall supply
all additional information requested in connection therewith; (iii) obtain all
consents, waivers, approvals, authorizations and orders required in connection
with the authorization, execution and delivery of this Agreement and the
consummation of the Merger; and (iv) take, or cause to be taken, all appropriate
action, and do, or cause to be done, all things necessary, proper or advisable
to consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement.
27
6.8 Further Assurances. Prior to and following the Closing, each
------------------
party agrees to cooperate fully with the other parties and to execute such
further instruments, documents and agreements and to give such further written
assurances, as may be reasonably requested by any other party to better evidence
and reflect the transactions described herein and contemplated hereby and to
carry into effect the intents and purposes of this Agreement.
6.9 Preparation of Permit Application/Information Statement.
--------------------------------------------------------
(a) As soon as practicable after the execution of this Agreement,
NetSource and NIT shall each prepare, with the cooperation of the other, a
information statement for the stockholders of NetSource and NIT, respectively,
to approve this Agreement, the Certificate of Merger and the transactions
contemplated hereby and thereby. Such information statements shall be referred
to herein as the "Information Statements." Each of the Information Statements
shall constitute a disclosure document for the offer and issuance of the shares
of NIT Common Stock to be received by the holders of NetSource Common Stock in
the Merger. NIT and NetSource shall each use reasonable commercial efforts to
cause the Information Statements to comply with applicable federal and state
securities laws requirements. Each of NIT and NetSource agrees to provide
promptly to the other such information concerning its business and financial
statements and affairs as, in the reasonable judgment of the providing party or
its counsel, may be required or appropriate for inclusion in the Information
Statements, or in any amendments or supplements thereto, and to cause its
counsel and auditors to cooperate with the other's counsel and auditors in the
preparation of the Information Statements. NetSource will promptly advise NIT,
and NIT will promptly advise NetSource, in writing if at any time prior to the
Effective Time either NetSource or NIT shall obtain knowledge of any facts that
might make it necessary or appropriate to amend or supplement the Information
Statements in order to make the statements contained or incorporated by
reference therein not misleading or to comply with applicable law. The
Information Statements shall contain the recommendation of the Board of
Directors of NetSource and NIT that the NetSource and NIT shareholders,
respectively, approve the Merger and this Agreement and the conclusion of the
Board of Directors that the terms and conditions of the Merger are fair and
reasonable to the shareholders of NetSource and NIT, respectively. Anything to
the contrary contained herein notwithstanding, neither party shall include in
their respective Information Statement any information with respect to the other
party or its Affiliates, the form and content of which information shall not
have been approved by the other party prior to such inclusion.
(b) As soon as practicable after the execution of this Agreement,
NetSource and NIT shall prepare the Permit Application. NIT and NetSource shall
each use reasonable commercial efforts to cause the Permit Application to comply
with the requirements of applicable federal and state laws. Each of NIT and
NetSource agrees to provide promptly to the other such information concerning
its business and financial statements and affairs as, in the reasonable judgment
of the providing party or its counsel, may be required or appropriate for
inclusion in the Permit Application, or in any amendments or supplements
thereto, and to cause its counsel and auditors to cooperate with the other's
counsel and auditors in the preparation of the Permit Application. NetSource
will promptly advise NIT, and NIT will promptly advise NetSource, in writing if
at any time prior to the Effective Time either NetSource or NIT shall obtain
knowledge of any facts that might make it necessary or appropriate to amend or
supplement the Permit Application in order to make the statements contained or
incorporated by reference therein not misleading or to comply with applicable
law. Anything to the contrary contained herein notwithstanding, NIT shall not
include in the Permit Application any information with respect to NetSource or
its Affiliates, the form and content of which information shall not have been
approved by NetSource prior to such inclusion.
6.10 Meeting of Stockholders. NetSource and NIT shall promptly after
-----------------------
the date hereof take all action necessary in accordance with the laws of
Delaware and their respective Certificates of Incorporation and Bylaws to obtain
the approval of the NetSource and NIT stockholders of the Merger as soon as
possible after the issuance of a permit pursuant to Section 25121 of the
California Law. NetSource and NIT each shall use its best efforts to solicit
from their respective stockholders proxies in favor of the
28
Merger and shall take all other action necessary or advisable to secure the vote
or consent of their respective stockholders required to effect the Merger.
6.11 Pooling Accounting. NIT and NetSource shall each use best
-------------------
efforts to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. Each of NIT and NetSource shall use
its best efforts to cause its Affiliates, which in any event will include all
directors, executive officers and holders of at least 5% of outstanding voting
securities, not to take action that would adversely affect the ability of NIT to
account for the business combination to be effected by the merger as a pooling
of interest.
6.12 Affiliate Pooling Agreements.
-----------------------------
(a) NetSource shall use its best efforts to deliver or cause to be
delivered to NIT, concurrently with the execution of this Agreement (and in each
case prior to the Effective Time) from each of the Affiliates of NetSource, an
executed Affiliate Agreement in the form attached hereto as Exhibit D-1
------------
("NetSource Affiliate Agreement"). NIT shall be entitled to place appropriate
legends on the certificates evidencing any NIT Common Stock to be received by
such Affiliates of NetSource pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for NIT
Common Stock, consistent with the terms of such Affiliate Agreement.
(b) NIT shall use its best efforts to deliver to cause to be delivered
to NetSource, concurrently with the execution of this Agreement (and in each
case prior to the Effective Time) from each of the Affiliates of NIT, an
executed Affiliate Agreement in the form attached hereto as Exhibit D-2 ("NIT
-----------
Affiliate Agreement").
7. Closing Matters.
---------------
7.1 Filing of Certificate of Merger. On the date of the Closing, but
-------------------------------
not prior to the Closing, the Certificate of Merger shall be filed with the
offices of the Secretary of State of the State of Delaware and the merger of
NetSource with and into NIT shall be consummated.
7.2 Exchange of Certificates.
------------------------
(a) Exchange Agent. Prior to the Closing Date, NIT shall appoint
--------------
Pezzola & ▇▇▇▇▇▇, its legal counsel, to act as exchange agent (the "Exchange
Agent") in the Merger.
(b) NIT to Provide Stock. Promptly after the Effective Time of the
--------------------
Merger (but in no event later than ten (10) business days thereafter), NIT shall
make available for exchange in accordance with Section 2 and the Certificate of
Merger, through such reasonable procedures as NIT may adopt, the shares of NIT
Common Stock issuable pursuant to Section 2 and the Certificate of Merger in
exchange for outstanding shares of NetSource Common Stock (less the number of
shares of NIT Common Stock to be deposited in escrow pursuant to Section 2.4).
(c) Exchange Procedures. As soon as practicable after the Effective
-------------------
Time of the Merger (but no later than fifteen (15) days thereafter), the
Exchange Agent shall mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Time of the Merger
represented outstanding shares of NetSource Common Stock (the "Certificates"),
whose shares are being converted into NIT Common Stock pursuant to Section 2 and
the Merger Agreement, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and which
shall be in such form and have such other provisions as NIT may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for NIT Common Stock. Upon surrender of a Certificate
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by NIT together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive the number of shares of
NIT Common Stock to which such holder is entitled pursuant to Section 2 hereof
(less
29
the number of shares of NIT Common Stock to be deposited in escrow pursuant to
Section 2.4 ). The Certificate so surrendered shall immediately be canceled. NIT
shall make customary provisions for lost stock certificates. In the event of a
transfer of ownership of NetSource Common Stock that is not registered in the
transfer records of NetSource, the appropriate number of shares of NIT Common
Stock may be delivered to a transferee if the Certificate representing such
NetSource Common Stock is presented to the Exchange Agent and accompanied by all
documents required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 7.2 , each Certificate shall be deemed at any time
after the Effective Time of the Merger to represent the right to receive upon
such surrender the number of shares of NIT Common Stock as provided by this
Section and by the DGCL.
(d) No Further Ownership Rights in NetSource Common Stock. All NIT
-----------------------------------------------------
Common Stock delivered upon the surrender for exchange of shares of NetSource
Common Stock in accordance with the terms hereof shall be deemed to have been
delivered in full satisfaction of all rights pertaining to such shares of
NetSource Common Stock. There shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of the shares of NetSource
Common Stock that were outstanding immediately prior to the Effective Time of
the Merger. If, after the Effective Time of the Merger, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Section 7.2 .
7.3 Delivery of Documents. On or before the Closing, the parties
---------------------
shall deliver the documents, and shall perform the acts, which are set forth in
Section 8 and Section 9, as specified in such Sections, including delivery of
the counterpart signature pages of the Transaction Documents executed by
NetSource and/or NIT, as the case may be. All documents which NetSource shall
deliver or cause to be delivered shall be in form and substance reasonably
satisfactory to NIT. All documents which NIT shall deliver or cause to be
delivered shall be in form and substance reasonably satisfactory to NetSource.
8. Conditions to NetSource's Obligations. Unless otherwise provided
-------------------------------------
below, NetSource's obligations to close the transactions contemplated under this
Agreement are subject to the fulfillment or satisfaction by Closing of each of
the following conditions (any one or more of which may be waived by NetSource,
but only in a writing signed by NetSource):
8.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of NIT set forth in Section 4 shall be true in all material
respects on and as of the Closing with the same force and effect as if they had
been made at the Closing, and NetSource shall receive a certificate to such
effect executed by the President and Chief Executive Officer of NIT.
8.2 Covenants. NIT shall have performed and complied with all of its
---------
covenants contained in Sections 5 and 6 on or before the Closing, and NetSource
shall receive a certificate from NIT to such effect executed by the President
and Chief Executive Officer of NIT.
8.3 No Litigation. On and as of the Closing, no litigation or
-------------
proceeding shall be threatened or pending against NIT with the purpose or with
the probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement, and NetSource shall receive a
certificate to such effect executed by the President and Chief Executive Officer
of NIT.
8.4 No Adverse Development. There shall not have been any material
----------------------
adverse changes in the financial condition, results of operations, assets,
liabilities, business or prospects of NIT since the date of this Agreement, and
NetSource shall receive a certificate to such effect executed by the President
and Chief Executive Officer of NIT.
8.5 Authorizations. NetSource shall have received from NIT written
--------------
evidence that the execution, delivery and performance of NIT's obligations under
this Agreement and the Certificate of Merger have been duly and validly approved
and authorized by the Board of Directors of NIT and by the holders of the
outstanding shares of capital stock of NIT.
30
8.6 Government Consents; Fairness Hearing. There shall have been
-------------------------------------
obtained at or prior to the Closing such permits or authorizations, and there
shall have been taken such other action, as may be required by any regulatory
authority having jurisdiction over the parties and the subject matter and the
actions herein proposed to be taken. As of the Closing, a fairness hearing
shall have been conducted by the California Commissioner of Corporations
pursuant to Section 25142 of the CGCL.
8.7 Election of ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ shall have
-------------------------------
been elected as President of NIT and appointed to the Board of Directors of NIT.
8.8 Transphere Mergers and MTC Exchanges. The Transphere Mergers and
------------------------------------
MTC Exchanges described in Section 5.2 of this Agreement have been consummated.
8.9 NIT Financing. Prior to or concurrent with the Closing, NIT
-------------
shall have closed a financing pursuant to which NIT shall have received no less
than $10 million in exchange for convertible debt securities that are
convertible into NIT Common Stock in accordance in all material respects with
that certain commitment letter dated April 8, 1996 from Yorkton Securities to
MTC International (the "Yorkton Financing").
8.10 Opinion of NIT's Counsel. At the Closing, NetSource shall have
------------------------
received from counsel to NIT, an opinion dated the Closing Date in substantially
the form attached hereto as Exhibit E.
----------
8.11 Pooling Letter. NetSource and NIT shall have received a letter
--------------
from KPMG Peat Marwick, each dated the date of the Information Statements and
confirmed in writing at the Effective Time and addressed to NetSource and NIT,
stating that the business combination to be effected by the Merger will qualify
as a pooling of interests transaction under generally accepted accounting
principles.
8.12 Filing of Certificate of Merger. As of the Closing, the
-------------------------------
Certificate of Merger shall have been filed with the Secretary of State of the
State of Delaware.
8.13 Registration Rights Agreement. As of the Closing, NIT will have
-----------------------------
entered into registration rights agreements with all of the Stockholders and
holders of NetSource Options that provide that the NIT Common Stock, to the
extent such stock was not issued pursuant to Section 3(a)(10) of the Securities
Act of 1933, as amended, that they receive in the Merger or pursuant to Section
11.3 of this Agreement or, in the case of the holders of NetSource Options, that
they receive upon exercise of such options will, at the option of the
shareholder, be included in NIT-initiated registrations of NIT Common Stock,
subject to the right of NIT in an underwritten public offering to exclude all or
a portion of such stock should the underwriters determine that inclusion of such
shares would jeopardize the success of the offering; provided, however, that
none of the shares of such holders shall be excluded from the public offering
unless a pro rata portion (based on the number of shares of NIT Common Stock
held by such parties participating in the offering) of the shares of NIT Common
Stock acquired in the MTC Exchanges are also excluded from the offering. The
registration rights agreements will also provide that the Stockholders and the
holders of NetSource Options will not sell, transfer or otherwise dispose of NIT
Common Stock during the 180 day period following the effective date of the
initial public offering of NIT; provided that all directors and officers of NIT
and the holders of the NIT Common Stock acquired in the MTC Exchanges shall have
also agreed to and are performing in accordance with similar terms with NIT.
9. Conditions to NIT's Obligations. Unless otherwise provided below,
-------------------------------
the obligations of NIT are subject to the fulfillment or satisfaction by
Closing, of each of the following conditions (any one or more of which may be
waived by NIT, but only in a writing signed by NIT):
9.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of NetSource contained in Section 2 shall be true in all material
respects on and as of the Closing with the same force and effect as if they had
been made at the Closing, and NIT shall receive a certificate from NetSource to
such effect with respect to the representations and warranties of NetSource
executed by ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇.
31
9.2 Covenants. NetSource shall have performed and complied with all
---------
of its covenants contained in Sections 5 and 6 on or before the Closing, and NIT
shall receive a certificate from NetSource to such effect signed by ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇.
9.3 No Litigation. On and as of the Closing, no litigation or
-------------
proceeding shall be threatened or pending against NetSource for the purpose or
with the probable effect of enjoining or preventing the consummation of any of
the transactions contemplated by this Agreement, or and NIT shall receive a
certificate from NetSource to such effect signed by ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇
▇▇▇▇.
9.4 Authorizations. NIT shall have received from NetSource written
--------------
evidence that the execution, delivery and performance of this Agreement and the
Certificate of Merger have been duly and validly approved and authorized by its
Board of Directors and by the holders of at least ninety-five percent (95%) of
the outstanding shares of capital stock of NetSource. NIT shall have received a
certificate from NetSource to such effect signed by ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇
▇▇▇▇.
9.5 No Adverse Development. There shall not have been any material
----------------------
adverse changes in the financial condition, results of operations, assets,
liabilities, business or prospects of NetSource since the date of this
Agreement. NIT shall have received a certificate from NetSource to such effect
signed by ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇.
9.6 Government Consents; Fairness Hearing. There shall have been
-------------------------------------
obtained at or prior to the Closing such permits or authorizations, and there
shall have been taken such other action, as may be required by any regulatory
authority having jurisdiction over the parties and the subject matter and the
actions herein proposed to be taken. As of the Closing, a fairness hearing
shall have been conducted by the California Commissioner of Corporations
pursuant to Section 25142 of the CGCL.
9.7 Transphere Mergers and MTC Exchanges. The Transphere Mergers and
------------------------------------
MTC Exchanges described in Section 5.2 of this Agreement have been consummated.
9.8 Pooling Letter. NetSource and NIT shall have received a letter
--------------
from KPMG Peat Marwick, each dated the date of the Information Statements and
confirmed in writing at the Effective Time of the Merger and addressed to
NetSource and NIT, stating that the business combination to be effected by the
Merger will qualify as a pooling of interests transaction under generally
accepted accounting principles.
9.9 NIT Financing. Prior to or concurrent with the Closing, NIT
-------------
shall have closed a financing pursuant to which NIT shall have received no less
than $10 million in exchange for convertible debt securities that are
convertible into NIT Common Stock in accordance in all material respects with
that certain commitment letter dated April 8, 1996 from Yorkton Securities to
MTC International.
9.10 Opinion of NetSource's Counsel. At the Closing, NIT shall have
------------------------------
received from counsel to NetSource, an opinion dated the Closing Date in
substantially the form attached hereto as Exhibit F.
---------
9.11 Filing of Certificate of Merger. As of the Closing, the
-------------------------------
Certificate of Merger shall have been filed with the Secretary of State of the
State of Delaware.
9.12 Registration Rights Agreement. As of the Closing, NIT will have
-----------------------------
entered into registration rights agreements with all of the Stockholders and
holders of NetSource Options that provide that the NIT Common Stock, to the
extent such stock was not issued pursuant to Section 3(a)(10) of the Securities
Act of 1933, as amended, that they receive in the Merger or pursuant to Section
11.3 of this Agreement or, in the case of the holders of NetSource Options, that
they receive upon exercise of such options will, at the option of the
shareholder, be included in NIT-initiated registrations of NIT Common Stock,
subject to the right of NIT in an underwritten public offering to exclude all or
a portion of such stock should the underwriters determine that inclusion of such
shares would jeopardize the success of the
32
offering; provided, however, that none of the shares of such holders shall be
excluded from the public offering unless a pro rata portion (based on the number
of shares of NIT Common Stock held by such parties participating in the
offering) of the shares of NIT Common Stock acquired in the MTC Exchanges are
also excluded from the offering. The registration rights agreements will also
provide that the Stockholders and the holders of NetSource Options will not
sell, transfer or otherwise dispose of NIT Common Stock during the 180 day
period following the effective date of the initial public offering of NIT;
provided that all directors and officers of NIT and the holders of the NIT
Common Stock acquired in the MTC Exchanges shall have also agreed to and are
performing in accordance with similar terms with NIT.
10. Termination of Agreement.
------------------------
10.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing by the mutual written consent of each of the parties hereto.
This Agreement may also be terminated and abandoned:
(a) By NIT if any of the conditions precedent to NIT's obligations
pursuant to Section 9 shall not have been fulfilled at and as of the Closing.
(b) By NetSource if any of the conditions precedent to NetSource's
obligations pursuant to Section 8 above shall not have been fulfilled at and as
of the Closing.
(c) By either NetSource or NIT, if the Merger is not effected by
June 30, 1996.
Any termination of this Agreement under this Section 10.1 shall be
effected by the delivery of written notice of the terminating party to the other
parties hereto.
10.2 Liability for Termination. Any termination of this Agreement
-------------------------
pursuant to this Section 10 shall be without further obligation or liability
upon any party in favor of any other party hereto; provided, that if such
termination shall result from the willful failure of a party to carry out its
obligations under this Agreement, then such party shall be liable for losses
incurred by the other parties as set forth in Section 10.5. The provisions of
this Section 10.2 shall survive termination.
10.3 Certain Effects of Termination. In the event of the termination
------------------------------
of this Agreement by either NetSource or NIT as provided in Section 10.1 hereof:
(a) each party, if so requested by the other party, will (i) return
promptly every document (other than documents publicly available) furnished to
it by the other party (or any subsidiary, division, associate or affiliate of
such other party) in connection with the transactions contemplated hereby,
whether so obtained before or after the execution of this Agreement, and any
copies thereof which may have been made, and will cause its representatives and
any representatives of financial institutions and investors and others to whom
such documents were furnished promptly to return such documents and any copies
thereof any of them may have made, or (ii) destroy such documents and cause its
representatives and such other representatives to destroy such documents, and
such party shall deliver a certificate executed by its president or vice
president stating to such effect; and
(b) NetSource and NIT shall continue to abide by the provisions of the
Mutual Nondisclosure Agreement dated May 2, 1996 between NIT and NetSource.
This Section 10.3 shall survive any termination of this Agreement.
10.4 Remedies. No party shall be limited to the termination right
--------
granted in Section 10.1 hereto by reason of the nonfulfillment of any condition
to such party's closing obligations but may, in the alternative, elect to do one
of the following:
(a) proceed to close despite the nonfulfillment of any closing
condition, it being understood that consummation of the transactions
contemplated hereby shall be deemed a waiver
33
of any misrepresentation or breach of warranty or covenant and of any party's
rights and remedies with respect thereto to the extent that the other party
shall have actual knowledge of such misrepresentation or breach and the Closing
shall nonetheless take place; or
(b) decline to close, terminate this Agreement as provided in Section
10.1 hereof, and thereafter seek damages to the extent permitted in Section 10.5
hereof.
10.5 Right to Damages. If this Agreement is terminated pursuant to
----------------
Section 10.1 hereof, neither party hereto shall have any claim against the other
except if the circumstances giving rise to such termination were caused by the
other party's wilful failure to comply with a material covenant set forth
herein, in which event the following applies:
(a) If NetSource terminates this Agreement as a result of a wilful
breach by NIT of one or more of the covenants contained in Sections 5 or 7
hereof, NetSource and NIT each agrees that it would be impracticable and/or
extremely difficult to fix or establish the actual damages sustained by
NetSource, and that One Million Dollars ($1,000,000) (the "Damages") is a
reasonable approximation of such damages considering all of the circumstances
existing as of the date hereof. Accordingly, in the event NetSource terminates
this Agreement by reason of NIT's wilful breach of the covenants contained in
Sections 5 or 7 hereof, the Damages shall constitute and be deemed to be the
agreed and liquidated damages of NetSource and shall be paid by NIT to NetSource
as NetSource's sole and exclusive remedy.
(b) If NIT terminates this Agreement as a result of a wilful breach by
NetSource of one or more of the covenants contained in Sections 5,6 or 7 hereof,
NetSource and NIT each agrees that it would be impracticable and/or extremely
difficult to fix or establish the actual damages sustained by NIT, and that the
Damages is a reasonable approximation of such damages considering all of the
circumstances existing as of the date hereof. Accordingly, in the event NIT
terminates this Agreement by reason of NetSource's wilful breach of the
covenants contained in Sections 5,6 or 7 hereof, the Damages shall constitute
and be deemed to be the agreed and liquidated damages of NIT and shall be paid
by NetSource to NIT as NIT's sole and exclusive remedy.
11. Indemnification.
---------------
11.1 Survival of Representations, Warranties, Covenants and Agreements.
-----------------------------------------------------------------
(a) The representations, warranties, covenants and agreements of the
parties contained in Sections 3 and 4 of this Agreement or in any writing
delivered pursuant to such sections, to the extent that a breach or default in
any such representations, warranties, covenants or agreements is not as a result
of fraud, shall not terminate at, but rather shall survive, the Closing Date and
shall terminate on the earlier of (i) one (1) year after the Closing Date or
(ii) the date the first audit of NIT's financial statements, which includes the
results of operations of NetSource, has been completed and NIT has received a
signed opinion from its independent auditors certifying such financial
statements (the "Termination Date"); provided, however, that such
-------- -------
representations, warranties, covenants and agreements shall survive as to any
claim or demand made prior to their termination date until such claim or demand
is fully paid or otherwise resolved by the parties hereto in writing or by a
court of competent jurisdiction.
(b) The covenants and agreements of the parties contained in Sections
5 and 6, 7, 8 and 9 of this Agreement shall terminate at and shall not survive
the Closing Date, except for covenants that by their own terms apply after the
Closing Date.
34
11.2 Indemnification by NetSource.
----------------------------
(a) General.
-------
(i) NetSource shall, indemnify and hold harmless NIT, its
directors and officers, and each other person, if any, who controls NIT within
the meaning of the Securities Act ("Controlling Persons") in respect of any and
all claims, losses, damages, liabilities, demands, assessments, judgments, costs
and expenses (including, without limitation, settlement costs and any legal or
other expenses for investigating, bringing or defending any actions or
threatened actions) reasonably incurred by NIT, any of its directors, officers
or Controlling Persons in connection with any misrepresentation or breach of any
warranty made by NetSource in this Agreement or in any schedule, exhibit,
certificate or other instrument contemplated by this Agreement.
(ii) In no event shall the liability under this Section 11.2(a)
of NetSource exceed the amount of NetSource Escrow Shares.
(b) Claims for Indemnification.
--------------------------
(i) Whenever any claim shall arise for indemnification under this
Section 11.2, NIT shall describe such claim in a written notice ("Notice of
Claim") to the Representatives (as defined in Section 11.6 below) and, when
known, specify the facts constituting the basis for such claim and the amount or
an estimate of the amount of such claim. Each Notice of Claim shall (A) be
signed by a proper representative of NIT, (B) contain a description of the
claim, (C) specify the amount of such claim, and (D) state that, in the opinion
of the signer thereof, such Notice of Claim is valid under the terms of Section
11 hereof and is being given by NIT in good faith.
(ii) NIT shall give the Representatives prompt notice of any
claim for indemnification hereunder resulting from, or in connection with, any
claim or legal proceeding by a person who is not a party to this Agreement
("Third Party Claim") and, with respect to any Third Party Claim, NIT shall
undertake the defense thereof by representatives reasonably satisfactory to NIT
and the Representatives. NIT shall not have the right to settle or compromise or
enter into any binding agreement to settle or compromise, or consent to entry of
any judgment arising from, any such claim or proceeding in its sole discretion
without the prior written consent of the Representatives. The Representatives
shall have the right to participate in any such defense of a Third Party Claim
with advisory counsel of their own choosing at their own expense. In the event
NIT, within a reasonable time after notice of any Third Party Claim, fails to
defend, the Representatives shall have the right to undertake the defense,
compromise or settlement of such Third Party Claim on behalf of, and for the
account of, the Stockholders, at the expense and risk of the Stockholders to the
extent of their liability set forth in Section 11. The Representatives, without
NIT's written consent, shall not settle or compromise any such Third Party Claim
or consent to entry of any judgment that does not include, as an unconditional
term thereof, the giving by the claimant or the plaintiff to NIT and/or NIT's
subsidiary or subsidiaries, or affiliate or affiliates, as the case may be, an
unconditional release from all liability in respect of such Third Party Claim.
Notwithstanding any provision herein to the contrary, failure of NIT to give any
notice of any Third Party Claim required by this Section 11 shall not constitute
a waiver of NIT's right to indemnification or a defense to any claim by NIT
hereunder.
(c) Manner of Indemnification. All indemnification by NetSource
-------------------------
hereunder shall be effected by the transferring and assigning to NIT the
NetSource Escrow Shares having a value equal to the amount of the
indemnification liability, using an agreed upon value equal to $80.37 per share
of NIT Common Stock until either (i) the Termination Date, or (ii) the escrow is
exhausted, whichever occurs first.
11.3 Indemnification by NIT.
----------------------
(a) General.
-------
35
(i) NIT shall indemnify and hold harmless the Stockholders in
respect of any and all claims, losses, damages, liabilities, demands,
assessments, judgments, costs and expenses (including, without limitation,
settlement costs and any legal or other expenses for investigating, bringing or
defending any actions or threatened actions) reasonably incurred by the
Stockholders in connection with any misrepresentation or breach of any warranty
made by NIT in this Agreement or in any schedule, exhibit, certificate or other
instrument contemplated by this Agreement.
(ii) In no event shall the liability under Section 11.3(a)(i) of
NIT exceed the product of 2.2 multiplied by the aggregate value of the NetSource
Escrow Shares (calculated in accordance with the agreed upon value per share set
forth in Section 11.2(c)).
(b) Claims for Indemnification.
--------------------------
(i) Whenever any claim shall arise for indemnification under this
Section 11.3, the Representative shall describe such claim in a Notice of Claim
to NIT and, when known, specify the facts constituting the basis for such claim
and the amount or an estimate of the amount of such claim. Each Notice of Claim
shall (A) be signed by a Representative, (B) contain a description of the claim,
(C) specify the amount of such claim, and (D) state that, in the opinion of the
signer thereof, such Notice of Claim is valid under the terms of Section 11
hereof and is being given by the Representative in good faith.
(ii) The Representatives shall give NIT prompt notice of any
claim for indemnification hereunder resulting from, or in connection with, any
claim or Third Party Claim and, with respect to any Third Party Claim, the
Representatives shall undertake the defense thereof by representatives
reasonably satisfactory to NIT and the Representatives. The Representatives
shall not have the right to settle or compromise or enter into any binding
agreement to settle or compromise, or consent to entry of any judgment arising
from, any such claim or proceeding in its sole discretion without the prior
written consent of NIT. NIT shall have the right to participate in any such
defense of a Third Party Claim with advisory counsel of its own choosing at its
own expense. In the event the Representatives, within a reasonable time after
notice of any Third Party Claim, fail to defend, NIT shall have the right to
undertake the defense, compromise or settlement of such Third Party Claim on
behalf of, and for the account of, NIT, at the expense and risk of NIT to the
extent of their liability set forth in Section 11. NIT, without the
Representative's written consent, shall not settle or compromise any such Third
Party Claim or consent to entry of any judgment that does not include, as an
unconditional term thereof, the giving by the claimant or the plaintiff to the
Stockholders, or affiliate or affiliates, as the case may be, an unconditional
release from all liability in respect of such Third Party Claim. Notwithstanding
any provision herein to the contrary, failure of the Representatives to give any
notice of any Third Party Claim required by this Section 11 shall not constitute
a waiver of the Stockholders' right to indemnification or a defense to any claim
by the Stockholders hereunder.
(c) Manner of Indemnification. All indemnification by NIT hereunder
-------------------------
shall be effected by NIT issuing to the Stockholders, on a pro rata basis,
shares of NIT Common Stock having a value equal to the amount of the
indemnification liability, using an agreed upon value equal to $80.37 per share
of NIT Common Stock until either (i) the Termination Date, or (ii) shares of NIT
Common stock have been issued pursuant to this Section 11.3 having an aggregate
value equal to the product of 2.2 multiplied by the aggregate value of the
NetSource Escrow Shares (calculated in accordance with the agreed upon value per
share set forth in Section 11.2(c)), whichever occurs first.
11.4 Arbitration. If a party makes a good faith determination that a
-----------
breach (or potential breach) of any of the confidentiality, non-competition, or
intellectual property rights provisions of this Agreement by the other party (or
the Stockholders) may result in damages or consequences that will be immediate,
severe, and incapable of adequate redress after the fact, so that a temporary
restraining order or other immediate injunctive relief is necessary for a
realistic and adequate remedy, that party may seek immediate injunctive relief
without first seeking relief through arbitration. After the court has ruled on
the request for injunctive relief, the parties will thereafter proceed with
arbitration of
36
the dispute and stay the litigation pending arbitration. Subject to the
foregoing, any dispute arising out of this Agreement, or its performance or
breach, shall be resolved by binding arbitration conducted by JAMS/Endispute
under the JAMS/Endispute Rules for Complex Arbitration (the "JAMS Rules"). This
arbitration provision is expressly made pursuant to and shall be governed by the
Federal Arbitration Act, 9 U.S.C. Sections 1-14. The parties hereto agree that
pursuant to Section 9 of the Federal Arbitration Act, a judgment of the United
States District Courts for the Northern District of California shall be entered
upon the award made pursuant to the arbitration. A single arbitrator, who shall
have the authority to allocate the costs of any arbitration initiated under this
paragraph, shall be selected according to the JAMS Rules within ten (10) days of
the submission to JAMS/Endispute of the response to the statement of claim or
the date on which any such response is due, whichever is earlier. The arbitrator
shall conduct the arbitration in accordance with the Federal Rules of Evidence.
The arbitrator shall decide the amount and extent of pre-hearing discovery which
is appropriate. The arbitrator shall have the power to enter any award of
monetary and/or injunctive relief (including the power issue permanent
injunctive relief and also the power to reconsider any prior request for
immediate injunctive relief by either of the parties and any order as to
immediate injunctive relief previously granted or denied by a court in response
to a request therefor by either of the parties), including the power to render
an award as provided in Rule 43 of the JAMS Rules; provided, however, that the
-------- -------
arbitrator shall not have the power to award punitive damages under any
circumstances (whether styled as punitive, exemplary, or treble damages, or any
penalty or punitive type of damages) regardless of whether such damages may be
available under applicable law, the parties hereby waiving their rights to
recover any such damages. The arbitrator shall award the prevailing party its
costs and reasonable attorneys' fees, and the losing party shall bear the entire
cost of the arbitration, including the arbitrator's fees. All arbitration shall
be held in San Francisco, California. In addition to the above court, the
arbitration award may be enforced in any court having jurisdiction over the
parties and the subject matter of the arbitration. Notwithstanding the
foregoing, the parties irrevocably submit to the nonexclusive jurisdiction of
the state and federal courts situated where the respondent is domiciled or
resides as of the Effective Date in any action to enforce an arbitration award.
With respect to any request for immediate injunctive relief, that state and
federal courts in San Francisco, California, shall have nonexclusive
jurisdiction and venue over any such disputes.
11.5 Limitation on Indemnification. No indemnified party hereunder
-----------------------------
will be entitled to make a claim against any indemnifying party under Section
11.2 or 11.3 unless and until the aggregate amount of indemnifiable losses
exceeds One Hundred Thousand Dollars ($100,000) and then only to the extent of
the excess.
11.6 The Stockholders Representatives; Power of Attorney. The
---------------------------------------------------
Stockholders shall appoint ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ and ▇▇▇ ▇▇▇▇ as their true and
lawful attorneys-in-fact, agents and representatives (the "Representatives"),
with full power of substitution and resubstitution, to negotiate and sign all
amendments to this Agreement, and all other documents in connection with the
transactions contemplated by this Agreement. Should any Representative be
unable or unwilling to serve or to appoint his successor to serve in his stead,
and unless the Stockholders appoint a successor to serve in his stead, such
Stockholders shall be deemed to be represented by the remaining Representative
or the Board of Directors of NetSource should the remaining Representative be
unable or unwilling to serve in his capacity. All actions by the
Representatives shall be by majority vote.
11.7 Escrow.
------
(a) NetSource Escrow Shares shall be placed with an escrow agent,
satisfactory to NIT and the Representatives for a period beginning on the
Closing Date and ending on the Termination Date, to be disbursed solely upon the
joint signatures of NIT, NetSource and the Representatives, all as set forth
below. Disbursements from the escrow shall be made for the payment of amounts,
if any, to satisfy the indemnification rights of NIT pursuant to Section 11
hereof.
(b) The NetSource Escrow Shares shall be disbursed during the term
hereof at any time or from time to time, NIT may give the Representatives a
Notice of Claim. Such Notice of Claim must be for a specified amount.
37
(i) NetSource and/or the Representatives may give NIT a written
notice ("Notice of Objection") (A) attaching a copy of such Notice of Claim, (B)
stating that, in the good faith opinion of the Representatives, the claim
described in such Notice of Claim is invalid (either in whole or in specified
party) under the terms of Section 11 hereof, (C) giving the reasons for the
alleged invalidity, and (D) stating that, based on such alleged invalidity, the
Representatives object to the payment of any portion of the NetSource Escrow
Shares to the requesting party on account thereof. In the event that a Notice of
Objection alleges that a Notice of Claim is only partially invalid, each of
NetSource and the Representatives, within thirty (30) days of the receipt of
such Notice of Claim, agree to pay over to NIT that portion of the amounts
specified in such Notice of Claim as to which no objection is made. NetSource
and/or the Representatives are not required to agree to make any payments to NIT
in respect of a Notice of Claim that has been objected to in a Notice of
Objection given to NetSource and/or the Representatives as aforesaid except (X)
as provided in the immediately preceding sentence, or (Y) in accordance with an
order of any arbitration panel initiated by any of the parties hereto pursuant
to paragraph (v) below.
(ii) NIT, NetSource and the Representatives agree to submit to
final and binding arbitration any and all disputes NetSource and/or the
Representatives have specified in a Notice of Objection or NIT has specified in
a Notice of Claim to which the Representatives have not responded within thirty
(30) days of receipt of such Notice of Claim. Any such dispute subject to
arbitration in accordance with the JAMS Rules as provided in Section 11 hereof.
(c) The NIT Common Stock to be issued pursuant to this Section 11
shall be issued during the term hereof at any time, or from time to time, the
Representatives may give NIT a Notice of Claim. Such Notice of Claim must be
for a specified amount.
(i) NIT may give the Representatives a written notice ("Notice of
Objection") (A) attaching a copy of such Notice of Claim, (B) stating that, in
the good faith opinion of NIT, the claim described in such Notice of Claim is
invalid (either in whole or in specified party) under the terms of Section 11
hereof, (C) giving the reasons for the alleged invalidity, and (D) stating that,
based on such alleged invalidity, NIT objects to the payment of any portion of
the NIT Escrow Shares to the requesting party on account thereof. In the event
that a Notice of Objection alleges that a Notice of Claim is only partially
invalid, NIT, within thirty (30) days of the receipt of such Notice of Claim,
agrees to pay over to the Representatives that portion of the amounts specified
in such Notice of Claim as to which no objection is made. NIT is not required
to agree to make any payments to the Representatives in respect of a Notice of
Claim that has been objected to in a Notice of Objection given by NIT as
aforesaid except (X) as provided in the immediately preceding sentence, or (Y)
in accordance with an order of any arbitration panel initiated by any of the
parties hereto pursuant to paragraph (v) below.
(ii) The Representatives and NIT agree to submit to final and
binding arbitration any and all disputes NIT has specified in a Notice of
Objection or the Representatives have specified in a Notice of Claim to which
NIT has not responded within thirty (30) days of receipt of such Notice of
Claim. Any such dispute subject to arbitration in accordance with the JAMS Rules
as provided in Section 11 hereof.
(d) The escrow shall be terminated on the Termination Date; provided,
--------
however, that the escrow may continue beyond such date if the Representatives
-------
have asserted indemnification claims, and any such claims remain unsatisfied.
12. Miscellaneous.
-------------
12.1 Governing Laws. It is the intention of the parties hereto that
--------------
the internal laws of the State of California (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto.
38
12.2 Binding upon Successors and Assigns. Subject to, and unless
-----------------------------------
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure to
the benefit of, the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
12.3 Severability. If any provision of this Agreement, or the
------------
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
12.4 Entire Agreement. This Agreement, the exhibits hereto, the
----------------
documents referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or
oral, between the parties with respect hereto and thereto. The express terms
hereof control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
12.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
12.6 Expenses. Except as provided to the contrary herein, each party
--------
shall pay all of its own costs and expenses incurred with respect to the
negotiation, execution and delivery of this Agreement, the exhibits hereto, and
the other Transaction Documents.
12.7 Amendment and Waivers. Any term or provision of this Agreement
---------------------
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
12.8 Survival of Agreements. All covenants, agreements,
----------------------
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby notwithstanding any investigation of the parties hereto and shall
terminate on the date one year after the Closing Date.
12.9 No Waiver. The failure of any party to enforce any of the
---------
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
12.10 Attorneys' Fees. Should suit be brought to enforce or interpret
---------------
any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including without limitation, costs,
expenses and fees on any appeal). The prevailing party shall be the party
entitled to recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall not be
entitled to recover attorneys' fees. No sum for attorneys' fees shall be
counted in calculating the amount of a judgment for purposes of determining if a
party is entitled to recover costs or attorneys' fees.
12.11 Notices. Any notice provided for or permitted under this
-------
Agreement will be treated as having been given when (a) delivered personally,
(b) sent by confirmed telex or telecopy, (c) sent by commercial overnight
courier with written verification of receipt, or (d) mailed postage
39
prepaid by certified or registered mail, return receipt requested, to the party
to be notified, at the address set forth below, or at such other place of which
the other party has been notified in accordance with the provisions of this
Section 12.11.
NetSource Entities:
Transphere International, Inc.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
With copy to: ▇▇▇▇ ▇▇▇▇ ▇▇▇▇ & Freidenrich
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
NIT Entities: MTC Telemanagement Corporation
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: Legal Department
With copy to: Pezzola & ▇▇▇▇▇▇
Lake ▇▇▇▇▇▇▇ Plaza Bldg.
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇ ▇▇▇▇▇▇
Such notice will be treated as having been received upon actual receipt.
12.12 Time. Time is of the essence of this Agreement.
----
12.13 Construction of Agreement. This Agreement has been negotiated
-------------------------
by the respective parties hereto and their attorneys and the language hereof
shall not be construed for or against any party. The titles and headings herein
are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole.
12.14 No Joint Venture. Nothing contained in this Agreement shall be
----------------
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other. No party shall hold itself out as having any authority or
relationship in contravention of this Section 12.14.
12.15 Pronouns. All pronouns and any variations thereof shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person, persons, entity or entities may require.
12.16 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances, as may be reasonably requested by
any other party to better evidence and reflect the transactions described herein
and contemplated hereby and to carry into effect the intents and purposes of
this Agreement.
40
12.17 Absence of Third Party Beneficiary Rights. No provisions of this
-----------------------------------------
Agreement are intended, nor shall be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner of any party hereto or any other
person or entity except employees and stockholders of NetSource specifically
referred to herein, and, except as so provided, all provisions hereof shall be
personal solely between the parties to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
NETSOURCE INTERNATIONAL NETSOURCE INTERACTIVE
TELECOMMUNICATIONS, INC.
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
-------------------------- --------------------------
Title: CEO & President Title: President
----------------------- -----------------------
41
EXHIBIT A
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CERTIFICATE OF MERGER
42
EXHIBIT B
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FORM OF NON-COMPETE AND NON-SOLICITATION AGREEMENT
43
EXHIBIT C-1
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FORM OF VOTING AGREEMENT AND IRREVOCABLE PROXY
TO BE EXECUTED BY THE STOCKHOLDERS OF NetSource
44
EXHIBIT C-2
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FORM OF VOTING AGREEMENT AND IRREVOCABLE PROXY
TO BE EXECUTED BY THE STOCKHOLDERS OF NIT
45
EXHIBIT D-1
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NetSource AFFILIATES AGREEMENT
46
EXHIBIT D-2
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NIT AFFILIATES AGREEMENT
47
EXHIBIT E
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FORM OF LEGAL OPINION TO BE DELIVERED BY
COUNSEL TO NetSource
48
EXHIBIT F
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FORM OF LEGAL OPINION TO BE DELIVERED BY
COUNSEL TO NIT
49