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AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
among
SONICWALL, INC.,
PLUTO ACQUISITION CORP.,
PHOBOS CORPORATION
and
GMS CAPITAL PARTNERS, L.P. as
STOCKHOLDERS' REPRESENTATIVE
Dated as of October 16, 2000
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TABLE OF CONTENTS
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Page
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ARTICLE I THE MERGER................................................ 2
SECTION 1.01 The Merger........................................ 2
SECTION 1.02 Effective Time; Closing........................... 2
SECTION 1.03 Effect of the Merger.............................. 3
SECTION 1.04 Articles of Incorporation; Bylaws................. 3
SECTION 1.05 Directors and Officers............................ 3
ARTICLE II MERGER CONSIDERATION; EXCHANGE OF CERTIFICATES........... 3
SECTION 2.01 Merger Consideration.............................. 3
SECTION 2.02 Contingent Deferred Merger Consideration.......... 5
SECTION 2.03 Exchange of Certificates.......................... 7
SECTION 2.04 Stock Transfer Books.............................. 9
SECTION 2.05 Company Stock Options............................. 10
SECTION 2.06 Dissenting Shares................................. 10
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY........... 11
SECTION 3.01 Organization and Qualification.................... 11
SECTION 3.02 Articles of Incorporation and Bylaws.............. 11
SECTION 3.03 No Subsidiaries................................... 12
SECTION 3.04 Capitalization.................................... 12
SECTION 3.05 Authority Relative to This Agreement.............. 14
SECTION 3.06 No Conflict; Required Filings and Consents........ 14
SECTION 3.07 Permits; Compliance............................... 15
SECTION 3.08 Financial Statements.............................. 15
SECTION 3.09 Absence of Certain Changes or Events.............. 16
SECTION 3.10 Absence of Litigation............................. 16
SECTION 3.11 Employee Benefit Plans; Labor Matters............. 17
SECTION 3.12 Contracts......................................... 19
SECTION 3.13 Environmental Matters............................. 21
SECTION 3.14 Intellectual Property............................. 22
SECTION 3.15 Returns and Complaints............................ 23
SECTION 3.16 Taxes............................................. 23
SECTION 3.17 Vote Required..................................... 24
SECTION 3.18 Assets............................................ 24
SECTION 3.19 Owned Real Property............................... 25
SECTION 3.20 Certain Interests................................. 25
SECTION 3.21 Insurance Policies................................ 25
SECTION 3.22 Brokers........................................... 26
SECTION 3.23 State Takeover Statutes........................... 26
SECTION 3.24 Customers and Suppliers........................... 26
SECTION 3.25 Inventory......................................... 26
SECTION 3.26 Accounts Receivable, Bank Accounts................ 26
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SECTION 3.27 Powers of Attorney................................ 27
SECTION 3.28 Offers............................................ 27
SECTION 3.29 Warranties........................................ 27
SECTION 3.30 Books and Records................................. 27
SECTION 3.31 Tax Matters....................................... 27
SECTION 3.32 No Misstatements.................................. 27
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.. 28
SECTION 4.01 Organization and Qualification.................... 28
SECTION 4.02 Authority Relative to This Agreement.............. 28
SECTION 4.03 Capital Structure................................. 29
SECTION 4.04 No Conflict; Required Filings and Consents........ 29
SECTION 4.05 SEC Filings; Financial Statements................. 30
SECTION 4.06 Interim Operations of Merger Sub.................. 30
SECTION 4.07 Valid Issuance of Parent Shares................... 30
SECTION 4.08 Brokers........................................... 31
SECTION 4.09 No Parent Shareholder Vote........................ 31
SECTION 4.10 Permits........................................... 31
SECTION 4.11 Absence of Change................................. 31
SECTION 4.12 Absence of Litigation............................. 31
SECTION 4.13 Material Contracts................................ 31
ARTICLE V CONDUCT OF BUSINESSES PENDING THE MERGER.................. 32
SECTION 5.01 Conduct of Business by the Company and the
Subsidiaries Pending the Merger........................... 32
SECTION 5.02 Notification of Certain Matters................... 35
ARTICLE VI ADDITIONAL AGREEMENTS.................................... 35
SECTION 6.01 Stockholder Approval.............................. 35
SECTION 6.02 Access to Information; Confidentiality............ 36
SECTION 6.03 No Solicitation of Transactions................... 36
SECTION 6.04 Employee Benefits Matters......................... 37
SECTION 6.05 Further Action; Consents; Filings................. 38
SECTION 6.06 Plan of Reorganization............................ 40
SECTION 6.07 No Public Announcement............................ 40
SECTION 6.08 Expenses.......................................... 40
SECTION 6.09 Voting Agreements.................................. 40
SECTION 6.10 Indemnification of Officers and Directors......... 40
SECTION 6.11 Nasdaq National Market Listing.................... 41
SECTION 6.12 Registration on Form S-3.......................... 41
SECTION 6.13 Board Observation Rights.......................... 41
SECTION 6.14 Contingent Deferred Merger Consideration.......... 41
SECTION 6.15 No Requirement of Parent Shareholder Vote......... 41
ARTICLE VII CONDITIONS TO THE MERGER................................ 42
SECTION 7.01 Conditions to the Obligations of Each Party....... 42
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SECTION 7.02 Conditions to the Obligations of Parent and
Merger Sub................................................. 42
SECTION 7.03 Conditions to the Obligations of the Company...... 45
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER...................... 45
SECTION 8.01 Termination....................................... 45
SECTION 8.02 Effect of Termination............................. 46
SECTION 8.03 Amendment......................................... 46
SECTION 8.04 Waiver............................................ 46
ARTICLE IX INDEMNIFICATION.......................................... 47
SECTION 9.01 Survival of Representations and Warranties........ 47
SECTION 9.02 Indemnification by the Stockholders............... 47
SECTION 9.03 Indemnification Procedures........................ 48
SECTION 9.04 Stockholders' Representative...................... 49
ARTICLE X GENERAL PROVISIONS........................................ 50
SECTION 10.01 Notices.......................................... 50
SECTION 10.02 Certain Definitions.............................. 51
SECTION 10.03 Severability..................................... 56
SECTION 10.04 Assignment; Binding Effect; Benefit.............. 56
SECTION 10.05 Incorporation of Exhibits........................ 56
SECTION 10.06 Specific Performance............................. 56
SECTION 10.07 Governing Law; Forum............................. 56
SECTION 10.08 Time of The Essence.............................. 57
SECTION 10.09 Waiver of Jury Trial............................. 57
SECTION 10.10 Construction..................................... 57
SECTION 10.11 Further Assurances............................... 57
SECTION 10.12 Headings......................................... 57
SECTION 10.13 Counterparts..................................... 57
SECTION 10.14 Entire Agreement................................. 57
Exhibit A Form of Voting Agreement
Exhibit B Articles of Incorporation of Merger Sub
Exhibit C Bylaws of Merger Sub
Exhibit D Form of Escrow Agreement
Exhibit E Form of Company Counsel Legal Opinion
Exhibit F Form of Parent Special Counsel Legal Opinion
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AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of October
16, 2000 (this "Agreement"), among SONICWALL INC., a California corporation
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("Parent"), PLUTO ACQUISITION CORP., a Utah corporation and a wholly owned
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subsidiary of Parent ("Merger Sub"), PHOBOS CORPORATION, a Utah corporation (the
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"Company"), and GMS CAPITAL PARTNERS, L.P., a Delaware limited partnership, as
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Stockholders' Representative (as defined in Section 9.05 hereof).
W I T N E S S E T H
WHEREAS, upon the terms and subject to the conditions of this
Agreement and in accordance with the Utah Revised Business Corporation Act (the
"URBCA"), Parent and the Company will enter into a business combination
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transaction pursuant to which Merger Sub will merge with and into the Company
(the "Merger");
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WHEREAS, the Board of Directors of the Company has (i) determined that
the Merger is consistent with and in furtherance of the long-term business
strategy of the Company and fair to, and in the best interests of, the Company
and its stockholders, (ii) approved this Agreement, the Merger, and the other
transactions contemplated by this Agreement, and (iii) determined to unanimously
recommend that the stockholders of the Company adopt and approve the principal
terms of this Agreement and approve the Merger;
WHEREAS, the Boards of Directors of each of Parent and Merger Sub have
(i) determined that the Merger is consistent with and in furtherance of the
long-term business strategy of Parent and fair to, and in the best interests of,
Parent and its stockholders and (ii) approved this Agreement, the Merger, and
the other transactions contemplated by this Agreement;
WHEREAS, for federal income tax purposes, the Merger is intended to
qualify as a reorganization under the provisions of Section 368(a) of the United
States Internal Revenue Code of 1986, as amended (the "Code");
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WHEREAS, pursuant to the Merger, each outstanding share of the common
stock of the Company (the "Company Common Stock") and all outstanding options or
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other rights to acquire or receive shares of Company Common Stock shall be
converted into the right to receive shares of Parent's authorized common stock
("Parent Common Stock") and cash, at the rate determined in this Agreement, and
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Series A Preferred Stock of the Company (the "Company Series A Preferred
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Stock"), Series B Preferred Stock of the Company (the "Company Series B
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Preferred Stock") and Series C Preferred Stock of the Company (the "Company
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Series C Preferred Stock") shall be cancelled as described herein. The Company
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Series A Preferred Stock, the Company Series B Preferred Stock and the Company
Series C Preferred Stock are collectively referred to herein as the "Company
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Preferred Stock," and the Company Common Stock and the Company Preferred Stock
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are collectively referred to herein as the "Company Stock";
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WHEREAS, as a condition and inducement to Parent's and Merger Sub's
entering into this Agreement and incurring the obligations set forth herein,
concurrently with the execution and delivery of this Agreement, Parent is
entering into a voting agreement with substantially all of the stockholders of
Company (the "Stockholders"), dated the date hereof (a "Voting Agreement") and
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substantially in the form attached hereto as Exhibit A;
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WHEREAS, a portion of the Parent Common Stock otherwise issuable by
Parent in connection with the Merger shall be placed in escrow by Parent, the
release of which amount shall be contingent upon certain events and conditions,
all as set forth in this Agreement and the Escrow Agreement (as defined in
Section 2.03(b));
WHEREAS, up to $20,000,000 shall be reserved for payment upon the
achievement by the Surviving Corporation (as defined in Section 1.01) of certain
quarterly revenue targets;
WHEREAS, concurrently with the execution of this Agreement, and as a
condition and inducement to Parent's willingness to enter into this Agreement,
certain employees of the Company are entering into Employment Agreements (as
defined in Section 6.04(b)); and
WHEREAS, certain capitalized terms used in this Agreement are defined
in Section 10.02 of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Parent, Merger Sub and the Company hereby agree as follows:
ARTICLE I
THE MERGER
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SECTION 1.01 The Merger. Upon the terms and subject to the
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conditions set forth in Article VII, and in accordance with the URBCA, at the
Effective Time (as defined in Section 1.02), Merger Sub shall be merged with and
into the Company. As a result of the Merger, the separate corporate existence of
Merger Sub shall cease, and the Company shall continue as the surviving
corporation of the Merger (the "Surviving Corporation"), provided however, that
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in the event that the provisions of this Section 1.01 would preclude the Merger
from qualifying as a tax-free reorganization under the provisions of section
368(a) of the Code, then the Company shall be merged with and into Merger Sub,
the separate corporate existence of the Company shall cease, the Merger Sub
shall continue as the Surviving Corporation and the terms of this Agreement
shall be adjusted accordingly.
SECTION 1.02 Effective Time; Closing. As promptly as
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practicable following the satisfaction or, if permissible, waiver of the
conditions set forth in Article VII (or such other date as may be agreed by each
of the parties hereto), the parties hereto shall cause the Merger to be
consummated by filing the Articles of Merger with the Secretary of State of the
State of Utah. The term "Effective Time" means the date and time of such filing
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(or such later time as may be agreed by each of the parties hereto and specified
in the Articles of Merger). Immediately prior to the filing of the Certificate
of Merger, a closing (the "Closing") will be held
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at the offices of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
155 Constitution Drive, Menlo Park, California 94025 (or such other place as the
parties may agree). The date on which the Closing shall occur is referred to
herein as the "Closing Date."
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SECTION 1.03 Effect of the Merger. At the Effective Time, the
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effect of the Merger shall be as provided in the applicable provisions of the
URBCA. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time, all the property, rights, privileges, powers and franchises
of each of the Company and Merger Sub shall vest in the Surviving Corporation,
and all debts, liabilities, obligations, restrictions, disabilities and duties
of each of the Company and Merger Sub shall become the debts, liabilities,
obligations, restrictions, disabilities and duties of the Surviving Corporation.
SECTION 1.04 Articles of Incorporation; Bylaws.
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(a) At the Effective Time, the Articles of Incorporation of
Merger Sub, attached hereto as Exhibit B, shall be the Articles of Incorporation
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of the Surviving Corporation until thereafter amended as provided by law and
such Articles of Incorporation.
(b) At the Effective Time, the Bylaws of Merger Sub, as in
effect immediately prior to the Effective Time, attached hereto as Exhibit C,
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shall be the Bylaws of the Surviving Corporation until thereafter amended as
provided by law, the Articles of Incorporation of the Surviving Corporation and
such Bylaws.
SECTION 1.05 Directors and Officers. The directors of Merger
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Sub immediately prior to the Effective Time shall be the initial directors of
the Surviving Corporation, each to hold office in accordance with the Articles
of Incorporation and Bylaws of the Surviving Corporation, and the officers of
the Merger Sub immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified.
ARTICLE II
MERGER CONSIDERATION; EXCHANGE OF CERTIFICATES
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SECTION 2.01 Merger Consideration.
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(a) At the Effective Time, by virtue of the Merger and without
any action on the part of Parent, Merger Sub, the Company or the holders of any
of the following securities:
(i) each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than any shares of
Company Common Stock to be canceled pursuant to Section 2.01(a)(ii) and any
Dissenting Shares (as defined in Section 2.06)) shall be converted into the
right to receive the Common Stock Exchange Ratio (as defined in Section 2.01(b))
and the Pro Rata Cash Distribution (as defined in Section 2.01(b));
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(ii) each share of Company Common Stock held in the
treasury of the Company and each share of Company Common Stock owned by Parent
or any direct or indirect wholly owned subsidiary of Parent or of the Company
immediately prior to the Effective Time shall be cancelled and extinguished
without any conversion thereof and no payment or distribution shall be made with
respect thereto; and
(iii) each share of common stock, no par value, of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid and
nonassessable share of common stock, par value $0.0001 per share, of the
Surviving Corporation; and
(iv) each share of Company Preferred Stock issued and
outstanding immediately prior to the Effective Time shall be cancelled and
extinguished without any conversion thereof and no payment or distribution shall
be made with respect thereto.
(b) As used in this Agreement, the following terms have the
following meanings:
(i) "Aggregate Common Merger Consideration" means
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12,200,000 shares of Common Stock of Parent (the "Parent Shares").
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(ii) "Common Stock Exchange Ratio" means the number of
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Parent Shares determined by dividing (x) the amount equal to the Aggregate
Common Merger Consideration by (y) the Fully Diluted Common Shares Amount (as
defined below).
(iii) "Escrow Shares" means the number of Parent Shares
(rounded up to the next whole number) determined by multiplying the Aggregate
Common Merger Consideration (less the number of shares equal to the product of
(x) the number of Company Options times (y) the Common Stock Exchange Ratio) by
0.10.
(iv) "Fully Diluted Common Shares Amount" means a
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number of shares of Company Common Stock equal to the sum of (x) the number of
shares of Company Common Stock issued and outstanding immediately prior to the
Effective Time and (y) the number of shares of Company Common Stock issuable
upon exercise, conversion or exchange of all securities issued and outstanding
immediately prior to the Effective Time that are exercisable, convertible or
exchangeable for shares of Company Common Stock, including, without limitation,
the Company Options (as defined in Section 2.04 below), whether or not
exercisable and whether or not vested, in each case after giving effect to the
cancellations contemplated by Section 2.01(a)(ii) above.
(v) "Pro Rata Cash Distribution" means the amount of
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cash consideration per share determined by dividing (x) $30,000,000 plus the
amount of net proceeds received by the Company resulting from any Bridge B
Convertibles Notes issued by the Company on or after the date hereof and prior
to the Effective Time resulting in aggregate net proceeds of at least $5,000,000
("Financing Proceeds") less the amount of any cash consideration paid pursuant
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to Section 3 of the Option Assumption Agreements described in Section 6.04(c),
and less any principal amount outstanding at the Effective Time of Bridge B
Convertible Notes and less any expenses set forth on Schedule 6.08 that are
incurred by the
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Company by (y) the number of shares of Company Common Stock issued and
outstanding immediately prior to the Effective Time plus the number of shares of
Company Stock issuable upon exercise of warrants to purchase Company Stock
issued and outstanding immediately prior to the Effective Time.
(c) If, during the period between the date hereof and the
Effective Time, any change in the capital stock of Parent shall occur by reason
of reclassification, recapitalization, stock split or combination, exchange or
readjustment of shares, or any stock dividend thereon with a record date during
such period or any similar event, the Aggregate Common Merger Consideration, the
Common Exchange Ratio and the Escrow Shares shall be adjusted proportionately.
SECTION 2.02 Contingent Deferred Merger Consideration.
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(a) Aggregate Contingent Deferred Merger Consideration of up to
$20,000,000 in cash will be distributed to holders of Company Common Stock as of
the date of the Closing upon achievement of quarterly revenue targets in
accordance with Schedule 2.02(a) hereto; provided, however, that Parent, Merger
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Sub and the Company agree that any contingencies with respect to such Contingent
Deferred Merger Consideration shall be waived and the maximum amount of
Contingent Deferred Merger Consideration shall be immediately payable to such
holders of Company Common Stock upon a Change of Control Event (as defined in
Section 2.02(c) below) following the Closing.
(b) Each holder of Company Common Stock as of the date of the
Closing shall be entitled, without any action on the part of such holder, to
receive such holder's Pro Rata Contingent Distribution (as defined in Section
2.02(c) below) upon each payment of Contingent Deferred Merger Consideration to
be paid pursuant to Section 2.02(a).
(c) As used in this agreement, the following terms have the
following meanings:
(i) "Contingent Deferred Merger Consideration" means the
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amount of cash payable upon the achievement of quarterly revenue milestones as
set forth on Schedule 2.02(a) hereto less any contingent merger consideration
payable pursuant to Section 3 of the Option Assumption Agreements described in
Section 6.04(c).
(ii) "Change of Control Event" means the occurrence of any
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of the following: (a) a Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of Parent representing twenty percent (20%) or more of
the combined voting power of Parent's then outstanding securities; or (b)
individuals who at the Closing Date constitute the Board of Directors of Parent
and any new director, whose election to the Board or nomination for election to
the Board by the Parent's stockholders was approved by a vote of at least two-
thirds (2/3) of the directors then still in office who either were directors at
the Closing Date or whose election to the Board or nomination for election to
the Board by Parent's stockholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors at the
Closing Date or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority of the Board; or (c) the
stockholders of
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Parent approve (i) a merger or consolidation of Parent with any corporation or
other entity other than a merger or consolidation which would result in the
holders of the voting securities of Parent outstanding immediately prior thereto
holding immediately thereafter securities representing more than fifty percent
(50%) of the combined voting power of the voting securities of Parent or such
surviving entity outstanding immediately after such merger or consolidation (ii)
a plan of complete liquidation of Parent or an (iii) agreement for the sale or
disposition by Parent of all or substantially all of Parent's assets; provided,
however, that if such a merger, consolidation, plan of liquidation or sale of
substantially all assets is not consummated following such stockholder approval
and the transaction is abandoned, then the Change of Control shall be deemed not
to have occurred. Notwithstanding the foregoing, in no event shall a Change of
Control be deemed to occur as the result of the formation of a holding company.
(iii) "Pro Rata Contingent Distribution" equals (x) the amount
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of Contingent Deferred Merger Consideration divided by (y) the number of shares
of Company Common Stock issued and outstanding immediately prior to the
Effective Time.
(d) Within thirty (30) days after the end of each quarterly period
during which Contingent Deferred Merger Consideration can be earned, Parent
shall deliver to the Stockholders' Representative by overnight courier, return
receipt requested, accompanied by a statement of Revenues (as defined in
Schedule 2.02(a)) for such period and a statement of the amount of the
Contingent Deferred Merger Consideration payable as a result thereof, if any.
Parent shall concurrently deliver to the Exchange Agent written instructions
directing that such Contingent Deferred Merger Consideration be distributed as
provided herein. Stockholders' Representative and its representatives shall
have thirty (30) days thereafter to review and consider such statements and the
books and records which shall be maintained by Parent relating thereto, during
which thirty (30) day period, at the request of the Stockholders'
Representative, Parent and the Stockholders' Representative shall meet at
Parent's headquarters to discuss said statements. At the end of such thirty
(30) days period, Stockholder's Representative shall by written notice delivered
to Parent accept or object to such statements.
(e) If the Stockholders' Representative shall object to statements
provided pursuant to the immediately preceding paragraph, the parties shall
endeavor in good faith to resolve such objection within ten (10) business days
after notice of the objection is transmitted by the Stockholders' Representative
to Parent in writing. If the parties are unable to resolve such dispute within
such 10-business-day period, then the parties shall refer the dispute to a
nationally recognized independent accounting firm reasonably acceptable to the
Stockholders' Representative and Parent. Such accounting firm shall report to
the parties its resolution of the dispute within sixty (60) days thereafter and
the decision of said accounting firm shall be final and binding on the parties.
All of the fees and expenses of the independent accounting firm shall be paid by
the Parent unless the Revenues are equal to or less than stated in the statement
prepared by Parent, in which case they shall be collected by delivery to Parent
of Parent Shares held under the Escrow Agreement, which Parent Shares shall have
value, determined as provided in Section 9.02 hereof, equal to the amount of
such fees and expenses. If as the result of the resolution of any objections or
dispute it is determined or agreed that additional Contingent Deferred Merger
Consideration is distributable under this Section, Parent shall promptly deliver
to the Exchange Agent written instructions directing that such Contingent
Deferred Merger Consideration be distributed as provided herein.
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SECTION 2.03 Exchange of Certificates.
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(a) Exchange Procedures. From and after the Effective Time,
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Boston EquiServe or another bank or trust company to be designated by Parent
shall act as exchange agent (the "Exchange Agent") in effecting the exchange of
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the applicable Parent Shares for certificates which immediately prior to the
Effective Time represented outstanding shares of Company Stock ("Company Share
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Certificates") and which were converted into the right to receive the applicable
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Parent Shares pursuant to Section 2.01. As promptly as practicable after the
Effective Time, Parent and the Exchange Agent shall mail to each record holder
of Company Share Certificates a letter of transmittal (the "Letter of
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Transmittal") in a form approved by Parent and the Company and instructions for
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use in surrendering such Company Share Certificates and receiving Parent Shares
pursuant to Section 2.01 therefor. Promptly after the Effective Time, but in no
event later than 20 business days following the Effective Time, Parent shall
cause to be deposited in trust with the Exchange Agent the Parent Shares (and
cash in lieu of fractional shares pursuant to Section 2.03(e)) and the aggregate
Pro Rata Cash Distribution.
Upon the surrender of each Company Share Certificate for cancellation
to the Exchange Agent, together with a properly completed Letter of Transmittal
and such other documents as may reasonably be required by Parent:
(i) the holder of such Company Share Certificate shall
be entitled to receive in exchange therefor the applicable Parent Shares (and
cash in lieu of fractional shares pursuant to Section 2.03(e)) and the payment
of the Pro Rata Cash Distribution and, upon any payment of Contingent Deferred
Merger Consideration, such holder's Pro Rata Contingent Distribution; and
(ii) the Company Share Certificate so surrendered shall
forthwith be cancelled.
In the event of a transfer of ownership of shares of
Company Stock that is not registered in the transfer records of the Company, the
applicable Parent Shares, Pro Rata Cash Distribution and Pro Rata Contingent
Distribution may be issued to a person other than the person in whose name the
Company Share Certificate so surrendered is registered if the Company Share
Certificate representing such shares of Company Stock is presented to Parent,
accompanied by all documents required to evidence and effect such transfer and
evidence that (i) the shares are transferable and (ii) any applicable stock
transfer taxes have been paid.
Until surrendered as contemplated by this Article II,
each Company Share Certificate shall, subject to appraisal rights under Utah Law
and Section 2.06, be deemed at any time after the Effective Time to represent
only the right to receive upon surrender the applicable Parent Shares and Pro
Rata Cash Distribution with respect to the shares of Company Stock formerly
represented thereby to which such holder is entitled pursuant to Section 2.01,
cash in lieu of any fractional shares pursuant to Section 2.03(e), and any Pro
Rata Contingent Distribution payable to such holder pursuant to Section 2.02.
(b) Escrow Fund. Prior to or simultaneously with the
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Closing, the Stockholders' Representative and Parent shall enter into an escrow
agreement (the "Escrow
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Agreement") with an escrow agent selected by Parent and reasonably acceptable to
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the Stockholders' Representative (the "Escrow Agent") substantially in the form
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of Exhibit C hereto. Pursuant to the terms of the Escrow Agreement, at the
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Closing, Parent shall deposit one or more certificates representing, in the
aggregate, the Escrow Shares otherwise issuable into an escrow account, which
account is to be managed by the Escrow Agent (the "Escrow Account"). In
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connection with such deposit of the Escrow Shares with the Escrow Agreement and
as of the Effective Time, each holder of Company Stock will be deemed to have
received and deposited with the Escrow Agent each stockholder's pro rata
interest in the Escrow Shares as determined as of the Closing by reference to
such stockholder's ownership of shares of Common Stock (plus any additional
shares as may be issued upon any stock split, stock dividend or recapitalization
effected by Parent after the Effective Time with respect to shares constituting
the Escrow Account), without any act of any stockholder. Distributions of any
Escrow Shares from the Escrow Account shall be governed by the terms and
conditions of the Escrow Agreement (any Escrow Shares in the Escrow Account
being referred to as the "Escrow Fund"). The adoption of this Agreement and the
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approval of the Merger by the Company Stockholders shall constitute approval of
the Escrow Agreement and of all the arrangements relating thereto, including
without limitation the placement of the Escrow Shares in escrow and the
appointment of the Stockholders' Representative. No portion of the Escrow Fund
shall be contributed in respect of any Company Options or any warrant or other
security exercisable or convertible into Company Common Stock. No Parent Shares
contributed to the Escrow Fund shall be unvested or subject to any right of
repurchase, risk of forfeiture or other condition in favor of the Surviving
Corporation.
(c) Distributions with Respect to Unexchanged Parent Shares. No
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dividends or other distributions declared or made after the Effective Time with
respect to Parent Shares comprising part of the Aggregate Merger Consideration
with a record date after the Effective Time shall be paid to the holder of any
unsurrendered Company Share Certificate with respect to the Parent Shares
represented thereby until the holder of such Company Share Certificate shall
surrender such Company Share Certificate in accordance with this Section 2.03.
(d) No Further Rights in Company Stock. All Parent Shares
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issued upon conversion of shares of Company Stock in accordance with the terms
hereof (and any cash paid in lieu of fractional shares pursuant to Section
2.03(e)) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Stock.
(e) No Fractional Shares. No certificates or scrip representing
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fractional Parent Shares shall be issued upon the surrender for exchange of
Company Share Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any other rights of a stockholder of Parent.
Each holder of a fractional share interest shall be paid an amount in cash
(without interest) equal to the product obtained by multiplying (i) such
fractional share interest to which such holder (after taking into account all
fractional share interests then held by such holder) would otherwise be entitled
by the average of the closing sales price of a Parent Share as reported on the
Nasdaq National Market for each of the five consecutive trading days ending on
the trading day immediately preceding the Closing.
(f) No Liability. Neither Parent nor the Surviving Corporation
------------
shall be liable to any holder of shares of Company Stock for any such shares of
Company Stock (or
8
dividends or distributions with respect thereto) or cash properly and legally
delivered to a public official pursuant to any abandoned property, escheat or
similar law.
(g) Withholding Rights. Each of the Surviving Corporation and
------------------
Parent shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company Stock such
amounts as it is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by the Surviving Corporation or
Parent, as the case may be, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Company Stock in respect of which such deduction and withholding was made by the
Surviving Corporation or Parent, as the case may be.
(h) Market Standoff. Notwithstanding anything to the contrary
---------------
contained in this Agreement, no Parent Shares (or certificates therefor) shall
be issued in exchange for any Company Stock Certificates to any Stockholder and
no Pro Rata Cash Distribution or Pro Rata Contingent Distribution shall be paid
to any Stockholder until such Stockholder shall have delivered to Parent and the
Company a duly executed Voting Agreement.
(i) Lost Certificates. If any Company Share Certificate shall
-----------------
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming such Company Share Certificate to be lost, stolen or
destroyed and, if required by the Surviving Corporation, the posting by such
person of a bond, in such reasonable amount as the Surviving Corporation may
direct, as indemnity against any claim that may be made against it with respect
to such Company Share Certificate, Parent shall issue in exchange for such lost,
stolen or destroyed Company Share Certificate, the applicable Parent Shares (and
cash in lieu of fractional shares pursuant to Section 2.03(e)) to which such
person is entitled pursuant to the provisions of this Article II.
(j) Return of Parent Shares. Promptly following the end of the
-----------------------
fourth full calendar month after the Effective Time, the Exchange Agent shall
return to the Surviving Corporation all of the remaining Parent Shares and the
Exchange Agent's duties shall terminate. Thereafter, upon the surrender of a
Company Share Certificate to the Surviving Corporation and such other documents
as may reasonably be required by the Surviving Corporation, and subject to
applicable abandoned property, escheat and similar laws, the holder of such
Company Share Certificate shall be entitled to receive, in exchange therefor,
the applicable Parent Shares (and cash in lieu of fractional shares pursuant to
Section 2.03(e)) and Pro Rata Cash Distribution, without any interest thereon,
and in addition, shall be entitled to receive such holder's Pro Rata Contingent
Distribution to the extent any such distributions have been paid prior to such
surrender, without interest thereon, or are paid thereafter.
SECTION 2.04 Stock Transfer Books. At the Effective Time, the
--------------------
stock transfer books of the Company shall be closed and there shall be no
further registration of transfers of shares of Company Stock thereafter on the
records of the Company. From and after the Effective Time, the holders of
certificates representing shares of Company Stock outstanding immediately prior
to the Effective Time shall cease to have any rights with respect to such shares
of Company Stock, except as otherwise provided in this Agreement or by Law.
9
SECTION 2.05 Company Options. At the Effective Time, all
---------------
options to purchase Common Stock issued by the Company pursuant to its stock
option plans or otherwise ("Company Options") whether vested or unvested, shall
---------------
be assumed by Parent. Immediately after the Effective Time, each Company Option
outstanding immediately prior to the Effective Time shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Company Option immediately prior to the Effective Time,
such number of shares of Parent Common Stock as is equal to the number of shares
of Company Common Stock subject to the unexercised portion of such option
multiplied by the Exchange Ratio (rounded down to the nearest whole number). The
exercise price per share of each such assumed Company Option shall be equal to
the exercise price of such option immediately prior to the Effective Time
divided by the Company Exchange Ratio (rounded up to the nearest whole cent).
The term, vesting schedule, status as an "incentive stock option" under Section
422 of the Code, if applicable, and all of the other terms of the Company
Options shall otherwise remain unchanged. It is the intention of the parties
that the Options so assumed by Parent qualify following the Effective Time as
incentive stock options as defined in Section 422 of the Code to the extent such
Company Options qualified as incentive stock options prior to the Effective
Time. Within 30 calendar days after the Effective Time, Parent will issue to
each person who immediately prior to the Effective Time was a holder of a
Company Option, a document evidencing the foregoing assumption of such option by
Parent. Within 90 calendar days after the Effective Time, Parent shall file a
registration statement on Form S-8 (or any successor or other appropriate forms)
which will register the shares of Parent Shares subject to assumed Company
Options to the extent permitted by Federal securities laws and shall use its
commercially reasonable efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
options remain outstanding.
SECTION 2.06 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the
contrary, shares of Company Stock that are outstanding immediately prior to the
Effective Time and which are held by stockholders who have exercised and
perfected appraisal rights for such shares of Company Stock in accordance with
the URBCA (collectively, the "Dissenting Shares") shall not be converted into or
-----------------
represent the right to receive the applicable Parent Shares (or cash in lieu of
fraction shares ). Such stockholders shall be entitled to receive payment of the
appraised value of such shares of Company Common Stock held by them in
accordance with the URBCA, unless and until such stockholders fail to perfect or
withdraw or otherwise lose their appraisal rights under the URBCA. All
Dissenting Shares held by stockholders who shall have failed to perfect or who
effectively shall have withdrawn or lost their rights to appraisal of such
shares of Company Common Stock under the URBCA shall thereupon be deemed to have
been converted into and to have become exchangeable for, as of the Effective
Time, the right to receive the applicable Parent Shares (or cash in lieu of
fractional shares pursuant to Section 2.03(e)), without any interest thereon,
upon surrender, in the manner provided in Section 2.03, including the provision
of the Escrow Shares pursuant to Section 2.03(b) of the certificate or
certificates that formerly evidenced such shares of Company Common Stock.
(b) The Company shall give Parent (i) prompt notice of any
demands for appraisal received by the Company, withdrawals of such demands, and
any other related
10
instruments served pursuant to the URBCA and received by the Company and (ii)
the opportunity to participate in and be consulted regarding all negotiations
and proceedings with respect to demands for appraisal under the URBCA. The
Company shall not, except with the prior written consent of Parent, which
consent shall not be unreasonably withheld, make any payment with respect to any
demands for appraisal or offer to settle or settle any such demands.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The disclosure schedule delivered by the Company to Parent and Merger
Sub concurrently with the execution of this Agreement (the "Company Disclosure
------------------
Schedule") shall be arranged in paragraphs corresponding to the numbered and
--------
lettered paragraphs contained in this Article III. The Company has used its
good faith efforts to provide conspicuous cross-references for each description
of an exception that may relate to more than one representation contained in
Article III. If through oversight the Company has failed to cross-reference
properly, disclosure with respect to a specific section shall be deemed to be
disclosures with respect to other applicable sections. Except as set forth in
the Company Disclosure Schedule, which provides an exception to or otherwise
qualifies in reasonable detail and with specific Section references, the
representations or warranties of the Company specifically referred to therein,
the Company hereby represents and warrants to Parent and Merger Sub that:
SECTION 3.01 Organization and Qualification. The Company is a
------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Utah and has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as it is now
being conducted, except where the failure to be so organized, existing or in
good standing or to have such corporate power and authority have not had, and
could not reasonably be expected to have, individually or in the aggregate, a
Company Material Adverse Effect (as defined below). The Company is duly
qualified or licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failures to be so qualified or licensed
and in good standing that have not had, and could not reasonably be expected to
have, individually or in the aggregate, a Company Material Adverse Effect. The
term "Company Material Adverse Effect" means any change in or effect on the
-------------------------------
business of the Company that is materially adverse to the business, operations,
financial condition or results of operations of the Company taken as a whole,
except for any such changes or effects resulting from or in connection with (a)
any changes in general economic conditions, (b) any decline in the manner in
which businesses such as the Company are valued or any adverse changes in the
United States securities market, or (c) any changes related to the announcement
of the Merger or actions taken as a result of this Agreement.
SECTION 3.02 Articles of Incorporation and Bylaws. The Company
------------------------------------
has heretofore made available to Parent a complete and correct copy of (a) the
Articles of Incorporation and the Bylaws of the Company including all amendments
thereto, (b) the minute books containing consents, actions and meeting of the
stockholders of the Company and the Company's Board of Directors and any
committees thereof, and (c) the stock transfer books of
11
the Company setting forth all transfer of any capital stock of the Company. Such
Articles of Incorporation and Bylaws are in full force and effect. The Company
is not in violation of any of the provisions of its Articles of Incorporation or
Bylaws. The corporate minute books, stock certificate books, stock registers and
other corporate records of the Company are complete and accurate, and the
signatures appearing on all documents contained therein are the true or
facsimile signatures of the persons purported to have signed the same.
SECTION 3.03 No Subsidiaries. The Company does not own, of
---------------
record or beneficially, any direct or indirect equity or other interest, or any
right (contingent or otherwise) to acquire the same, nor control directly or
indirectly or have any direct or indirect equity participation interest, in any
corporation, partnership, or formal written joint venture, association or other
entity. The Company is not a member of (nor is any part of the Company's
business conducted through) any partnership, nor is the Company a participant in
any formal written joint venture.
SECTION 3.04 Capitalization.
--------------
(a) The authorized capital stock of the Company consists of
100,000,000 shares of Company Common Stock, warrants that upon exercise provide
for the issuance of no more than 255,621 shares of Company Stock, 4,000 shares
of Company Series A Preferred Stock, 8,000 shares of Company Series B Preferred
Stock, and 6,000 shares of Company Series C Preferred Stock. As of the date
hereof, (i) 9,235,791 shares of Company Common Stock are issued and outstanding,
all of which are validly issued, fully paid and nonassessable, (ii) no shares of
Company Common Stock are held in the treasury of the Company and (iii) 3,450,600
shares of Company Common Stock are reserved for future issuance pursuant to the
Company Options. As of the date of this Agreement, (A) 4,000 shares of Company
Series A Preferred Stock are issued and outstanding, (B) 6,750 shares of Company
Series B Preferred Stock are issued and outstanding, and (C) 6,000 shares of
Company Series C Preferred Stock are issued and outstanding. Each Share of
Company Preferred Stock is convertible into Company Common Stock as set forth in
the Articles of Incorporation of the Company. There are no other shares of
Company Preferred Stock outstanding. As of the date hereof, the outstanding
shares of Company Common Stock and Company Preferred Stock are owned as set
forth in Section 3.04(a) of the Company Disclosure Schedule. Section 3.04(a) of
the Company Disclosure Schedule lists all agreements that provide the Company
repurchase options to which any of such shares is subject.
(b) The Company has reserved (i) 1,500,000 shares of Company
Common Stock for issuance under its Incentive Stock Plan of which options to
purchase 949,000 shares are outstanding as of the date of this Agreement and
(ii) 4,000,000 shares of Company Common Stock for issuance under its 1999 Stock
Plan of which options to purchase 2,630,050 shares are outstanding as of the
date of this Agreement. Section 3.04(b) of the Company Disclosure Schedule
accurately sets forth with respect to each Company Option that is outstanding as
of the date of this Agreement: (i) the name of the holder of such Company Option
and the date of the option agreement relating to such Company Option; (ii) the
total number of shares of Company Common Stock with respect to which such
Company Option is immediately exercisable; (iii) the date on which such Company
Option was granted and the term of such Company Option; (iv) the vesting
schedule for such Company Option; (v) the exercise price per
12
share of Company Common Stock purchasable under such Company Option; and (vi)
whether such Company Option has been designated an "incentive stock options" as
defined in Section 422 of the Code. No Company Option will by its term require
an adjustment in connection with the Merger. Neither the consummation of
transactions contemplated by this Agreement, nor any action taken or to be taken
by Company in connection with such transactions will result in (vii) any
acceleration of vesting in favor of any optionee under any Company Option;
(viii) any additional benefits for any optionee under any Company Option; or
(ix) the inability of Parent after the Effective Time to exercise any right or
benefit held by Company prior to the Effective Time with respect to any Company
Option assumed by Parent, including, without limitation, the right to repurchase
an optionee's unvested shares on termination of such optionee's employment. The
assumption by Parent of Company Options in accordance with Section 2.04
hereunder will not (x) 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 (xi) constitute a breach of a stock option plan of Company
or any agreement entered into pursuant to such plan.
(c) Section 3.04(c) of the Company Disclosure Schedule sets
forth, with respect to each warrant issued to any Person: (a) the name of the
holder of such warrant;(b) the total number of shares of Company Common Stock
that are subject to such warrant;(c) the total number of shares of Company Stock
with respect to which such warrant is immediately exercisable; and (d) the term
of such warrant.
(d) Except as set forth in Sections 3.04(b) and 3.04(c) of the
Company Disclosure Schedule, there are no options, warrants or other rights,
agreements, arrangements or commitments of any character relating to the issued
or unissued capital stock of the Company or obligating the Company to issue or
sell any shares of capital stock of, or other equity interests in, the Company.
All shares of Company Common Stock subject to issuance as aforesaid, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, will be duly authorized, validly issued, fully paid and
nonassessable. There are no outstanding contractual obligations of the Company
to repurchase, redeem or otherwise acquire any shares of Company Stock. There
are no contractual obligations of the Company to provide funds to, or make any
investment (in the form of a loan, capital contribution or otherwise) to any
other Person. The holders of Company Options have been or will be given, or
shall have properly waived, any required notice of the Merger prior thereto.
(e) All of the securities sold or issued by the Company have
been sold or issued in compliance with the requirements of the federal
securities laws and any applicable state securities or "blue sky" laws
(f) Except as set forth in Section 3.04(f) of the Company
Disclosure Schedule, since September 30, 1996, the Company has not repurchased,
redeemed or otherwise reacquired any shares of capital stock or other securities
of the Company.
(g) An updated Section 3.04 of the Company Disclosure Schedule
reflecting changes in the capitalization of Company permitted by this Agreement
between the date hereof and the Effective Time shall be delivered by Company to
Parent on the Closing Date.
13
SECTION 3.05 Authority Relative to This Agreement.
------------------------------------
(a) The Company has all necessary corporate power and authority
to execute and deliver this Agreement, and subject to obtaining the necessary
approvals of the Company's stockholders, to perform its obligations hereunder
and to consummate the Merger and the other transactions contemplated by this
Agreement. The execution and delivery of this Agreement by the Company and the
consummation by the Company of the Merger and the other transactions
contemplated by this Agreement have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement or to consummate the Merger
and the other transactions contemplated by this Agreement (other than, with
respect to the Merger, the approval of this Agreement by the holders of the
requisite number of Company Common Stock, Company Series A Preferred Stock,
Company Series B Preferred Stock and Company Series Preferred C Stock, voting as
separate series, and the filing and recordation of appropriate merger documents
as required by the URBCA). This Agreement has been duly and validly executed and
delivered by the Company, and assuming the due authorization, execution and
delivery by Parent and Merger Sub, constitutes a legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to any applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally and subject, as
to enforceability, to general principles of equity.
(b) Without limiting the generality of the foregoing, the Board
of Directors of the Company, by unanimous written consent or at a meeting duly
called and held, has by the unanimous vote of all directors (i) determined that
the Merger is fair and in the best interest of the Company and its stockholders,
(ii) approved the Merger and this Agreement in accordance with the provisions of
the URBCA, and (iii) directed that this Agreement and the Merger be submitted to
the Company's stockholders for their approval and resolved to recommend that the
Company's stockholders vote in favor of the adoption and approval of this
Agreement and the Merger.
SECTION 3.06 No Conflict; Required Filings and Consents.
------------------------------------------
(a) The execution and delivery of this Agreement by the Company
does not, and the performance of this Agreement by the Company will not, (i)
conflict with or violate the Certificates of Incorporation or Bylaws of the
Company or any Subsidiary, (ii) assuming that all consents, approvals,
authorizations and other actions described in Section 3.06(b) have been obtained
and all filings and obligations described in Section 3.06(b) have been made,
conflict with or violate in any respect any foreign or domestic law, franchise,
permit, concession, license, statute, ordinance, rule, regulation, order,
judgment or decree ("Law") applicable to the Company or any Subsidiary or by
---
which any property or asset of the Company of any Subsidiary is bound or
affected, or (iii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a lien or other encumbrance on any property or
asset of the Company or any Subsidiary pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation, except, with respect to clause (iii), for any such
conflicts, violations, breaches, defaults, or other occurrences that could not
reasonably be
14
expected, individually or in the aggregate, to prevent or materially delay the
consummation of the transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement by the Company
does not, and the performance of this Agreement by the Company will not, require
any consent, approval, authorization, registration or permit of, or filing with
or notification to, any domestic or foreign governmental or regulatory authority
("Governmental Entity") on the part of the Company, except (i) for the pre-
-------------------
merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulations thereunder (the "HSR
---
Act"), (ii) for the filing and recordation of appropriate merger documents as
---
required by the URBCA, and (iii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications
could not reasonably be expected, individually or in the aggregate, to prevent
or materially delay the consummation of the transactions contemplated by this
Agreement.
SECTION 3.07 Permits; Compliance.
-------------------
(a) The Company and each Subsidiary is in possession of all
franchises, grants, authorizations, licenses, permits, easements, variances,
exceptions, consents, certificates, approvals and orders of any Governmental
Entity necessary for the Company and each Subsidiary to own, lease and operate
its properties or to carry on its business as it is now being conducted (the
"Company Permits"). All Company Permits are in full force and effect and
----------------
will remain so after the Closing and no suspension or cancellation of any of the
Company Permits is pending or, to the knowledge of the Company, threatened.
Neither the Company nor any Subsidiary has received any notice or other
communication from any Governmental Entity regarding (a) any actual or possible
violation of or failure to comply with any term or requirement of any Company
Permit, or (b) any actual or possible revocation, withdrawal, suspension,
cancellation, termination or modification or any Company Permit.
(b) The Company is not in conflict with, or in default or
violation of (i) any Law applicable to the Company or any Subsidiary (ii) any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary or any property
or asset of the Company or any Subsidiary is bound or affected, or (iii) any
Company Permits.
SECTION 3.08 Financial Statements.
--------------------
(a) True and complete copies of (i) the audited consolidated
balance sheet of the Company and the Subsidiaries as of December 31, 1997, 1998
and 1999, and the related audited statements of income, changes in stockholders'
equity and cash flows for the years then ended, together with all notes and
schedules related thereto (collectively referred to herein as the "Audited
-------
Financial Statements"), and (ii) the unaudited consolidated balance sheet of the
--------------------
Company and the Subsidiaries as of September 30, 2000 (the "Reference Balance
-----------------
Sheet"), and the related statements of income and cash flows of the Company for
------
the nine months then ended September 30, 2000 (collectively referred to herein
as the "Interim Financial Statements"), are attached to Section 3.08 of the
----------------------------
Company Disclosure Schedule. The Audited Financial
15
Statements and the Interim Financial Statements (including, in each case, any
notes thereto) were prepared in accordance with U.S. generally accepted
accounting principles ("U.S. GAAP") applied on a consistent basis throughout the
---------
periods indicated (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by U.S. GAAP) and each present
fairly, in all respects, the consolidated financial position of the Company as
of the respective dates thereof and for the respective periods indicated
therein, except as otherwise noted therein (subject, in the case of unaudited
statements, to normal and recurring year-end adjustments which were not and are
not expected, individually or in the aggregate, to be material).
(b) Except as set forth in Section 3.08 of the Company
Disclosure Schedule, the Company has not incurred any debts, liabilities or
obligations, whether accrued or fixed, absolute or contingent, matured or
unmatured or determined or determinable ("Liabilities") of the Company, other
-----------
than Liabilities (i) reflected or reserved against on the Reference Balance
Sheet and (ii) in an aggregate amount not exceeding $25,000 incurred since
September 30, 2000 in the ordinary course of the business, consistent with the
past practice of the Company. Except as set forth in Section 3.08 of the Company
Disclosure Schedule, reserves are reflected on the Reference Balance Sheet and
on the books of account and other financial records of the Company against all
Liabilities of the Company in amounts that have been established on a basis
consistent with the past practice of the Company and in accordance with U.S.
GAAP. Except as set forth in Section 3.08 of the Company Disclosure Schedule,
there are no outstanding warranty claims against the Company.
SECTION 3.09 Absence of Certain Changes or Events. Since
------------------------------------
September 30, 2000, except as contemplated by or as disclosed in this Agreement
or as set forth in Section 3.09 of the Company Disclosure Schedule, the Company
has conducted its business only in the ordinary course and in a manner
consistent with past practice and, since such date, (a) there has not been any
Company Material Adverse Effect and (b) the Company has not taken or legally
committed to take any of the actions specified in Sections 5.01(a) through
5.01(cc).
SECTION 3.10 Absence of Litigation. There is no litigation,
---------------------
suit, claim, action, proceeding or investigation pending (each a "Legal
-----
Proceeding") or, to the knowledge of the Company, threatened against the Company
-----------
or any Subsidiary, or any property or asset owned or used by the Company or any
Subsidiary or any Person whose liability the Company or any Subsidiary has or
may have assumed, either contractually or by operation of law, before any court,
arbitrator or Governmental Entity, which could reasonably be expected, if
resolved adversely to the Company, to (i) impair the operations of the Company
or any Subsidiary as currently conducted, including, without limitation, any
claim of infringement of any intellectual property right, (ii) result in losses
to the Company or any Subsidiary in excess of $50,000, (iii) impair the ability
of the Company or any Subsidiary to perform its obligations under this Agreement
or (iv) prevent delay or make illegal the consummation of the transactions
contemplated by this Agreement. To the Company's knowledge, no event has
occurred, and no claim, dispute or other condition or circumstance exists, that
could reasonably be expected to give rise to or serve as a basis for, the
commencement of any Legal Proceeding. Neither the Company, any Subsidiary, the
officers or directors thereof in their capacity as such, any property or assets
of the Company nor any Subsidiary is subject to any continuing order of, consent
decree, settlement agreement or other similar written agreement with, or, to the
knowledge of the
16
Company, continuing investigation by, any Governmental Entity, or any order,
writ, judgment, injunction, decree, determination or award of any court,
arbitrator or Governmental Entity.
SECTION 3.11 Employee Benefit Plans; Labor Matters.
-------------------------------------
(a) Schedule 3.11(a) of the Company Disclosure Schedule lists
(i) all employee benefit plans (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus,
-----
stock option, stock purchase, restricted stock, incentive, deferred
compensation, retiree medical or life insurance, supplemental retirement,
severance or other benefit plans, programs or arrangements, and all employment,
termination, severance or other contracts or agreements, whether legally
enforceable or not, to which the Company or any Subsidiary is a party, with
respect to which the Company or any Subsidiary has any obligation or which are
maintained, contributed to or sponsored by the Company or any Subsidiary for the
benefit of any current or former employee, officer or director of the Company or
any Subsidiary, (ii) each employee benefit plan for which the Company or any
Subsidiary could incur liability under Section 4069 of ERISA in the event such
plan has been or were to be terminated, (iii) any plan in respect of which the
Company or any Subsidiary could incur liability under Section 4212(c) of ERISA,
and (iv) any contracts, arrangements or understandings between the Company or
any Subsidiary and any employee of the Company or any Subsidiary including,
without limitation, any contracts, arrangements or understandings relating to a
sale of the Company (collectively, the "Plans").
-----
(b) Each Plan is in writing and the Company has furnished Parent
with a true and complete copy of each Plan and a true and complete copy of each
material document, if any, prepared in connection with each such Plan,
including, without limitation, (i) a copy of each trust or other funding
arrangement, (ii) each summary plan description and summary of material
modifications, (iii) the most recently filed Internal Revenue Service ("IRS")
---
Form 5500, (iv) the most recently received IRS determination letter for each
such Plan, (v) the most recently prepared actuarial report and financial
statement in connection with each such Plan, and (vi) any correspondence with
the IRS or the Department of Labor with respect to each such Plan. Except as
disclosed on Section 3.11(a) of the Company Disclosure Schedule, there are no
other employee benefit plans, programs, arrangements or agreements, whether
formal or informal, whether in writing or not, to which the Company or any
Subsidiary is a party, with respect to which the Company or any Subsidiary has
any obligation or which are maintained, contributed to or sponsored by the
Company or any Subsidiary for the benefit of any current or former employee,
consultant officer or director of the Company or any Subsidiary. Neither the
Company nor any Subsidiary has express or implied commitment, whether legally
enforceable or not, (x) to create, incur liability with respect to, or cause to
exist, any other employee benefit plan, program or arrangement, (y) to enter
into any contract or agreement to provide compensation or benefits to any
individual, or (z) to modify, change or terminate any Plan, other than with
respect to a modification, change or termination required by ERISA or the Code.
(c) None of the Plans is a multiemployer plan (within the
meaning of Section 3(37) or 4001(a)(3) of ERISA) (a "Multiemployer Plan") or a
------------------
single employer pension plan (within the meaning of Section 4001(a)(15) of
ERISA) for which the Company or any Subsidiary could incur liability under
Section 4063 or 4064 of ERISA (a "Multiple Employer Plan"). None of the Plans
----------------------
provides for or promises retiree medical, disability or life insurance
17
benefits to any current or former employee, officer or director of the Company
or any Subsidiary. Each of the Plans is subject only to the laws of the United
States or a political subdivision thereof.
(d) None of the Plans provides for the payment of separation,
severance, termination or similar benefits to any Person or obligates the
Company or any Subsidiary to pay separation, severance, termination or similar
benefits solely or partially as a result of any transaction contemplated by this
Agreement or as a result of a "change in control", within the meaning of such
term under Section 280G of the Code. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby, either
alone or together with another event, will (i) result in any payment (including,
without limitation, severance, unemployment compensation, golden parachute and
forgiveness of indebtedness) becoming due under any Plan, (ii) materially
increase any benefits otherwise payable under any Plan or other arrangement,
(iii) result in the acceleration of the time of payment, vesting or funding of
any benefits including, but not limited to the acceleration of the vesting and
exercisability of any Company Options, or (iv) affect any Plan's current
treatment under any Laws including any tax or social contribution law.
(e) Each Plan is now and always has been operated in accordance
with its terms and the requirements of all applicable laws, regulations and
rules promulgated thereunder including, without limitation, ERISA and the Code.
Each of the Company and each Subsidiary has performed all obligations required
to be performed by it under each Plan, and is not in any respect in default
under or in violation of, and has no knowledge of any default or violation by
any party to, any Plan. No action, claim or proceeding is pending or, to the
knowledge of the Company, threatened with respect to any Plan (other than claims
for benefits in the ordinary course) and no fact or event exists that could give
rise to any such action, claim or proceeding. Neither the Company nor any Person
that is a member of the same controlled group as the Company or under common
control with the Company within the meaning of Section 414 of the Code (each an
"ERISA Affiliate") is subject to any penalty or tax with respect to any Plan
---------------
under Section 402(i) of ERISA or Sections 4975 through 4980 of the Code.
(f) Each Plan that is intended to be qualified under Section
401(a) or Section 401(k) of the Code has received a timely favorable
determination letter from the IRS covering all of the provisions applicable to
the Plan for which determination letters are currently available that the Plan
is so qualified and each trust established in connection with any Plan that is
intended to be exempt from federal income taxation under Section 501(a) of the
Code has received a determination letter from the IRS that it is so exempt, and
no fact or event has occurred since the date of such determination letter or
letters from the IRS to adversely affect the qualified status of any such Plan
or the exempt status of any such trust.
(g) Neither the Company nor any Subsidiary has incurred any
liability under, arising out of or by operation of Title IV of ERISA (other than
liability for premiums to the Pension Benefit Guaranty Corporation arising in
the ordinary course), including, without limitation, any liability in connection
with (i) the termination or reorganization of any employee benefit plan subject
to Title IV of ERISA or (ii) the withdrawal from any Multiemployer Plan or
Multiple Employer Plan, and no fact or event exists that could give rise to any
such liability.
18
(h) All contributions, premiums or payments required to be made
or accrued with respect to any Plan have been made on or before their due dates.
All such contributions have been fully deducted for income tax purposes and no
such deduction has been challenged or disallowed by any Governmental Entity and
no fact or event exists that could give rise to any such challenge or
disallowance.
(i) Except as set forth in Section 3.11(i) of the Company
Disclosure Schedule, (i) neither the Company nor any Subsidiary is a party to
any collective bargaining agreement or other labor union contract applicable to
persons employed by the Company or any Subsidiary and currently there are no
organizational campaigns, petitions or other unionization activities seeking
recognition of a collective bargaining unit which could affect the Company or
any Subsidiary; (ii) there are no strikes, slowdowns or work stoppages pending,
or to the best knowledge of the Company, threatened between the Company or any
Subsidiary and any of its employees, and neither the Company nor any Subsidiary
has experienced any such strike, slowdown or work stoppage within the past three
years; (iii) there are no unfair labor practice complaints pending against the
Company or any Subsidiary before the National Labor Relations Board or any other
governmental authority or any current union representation questions involving
employees of the Company or any Subsidiary; (iv) the Company and each Subsidiary
is currently in compliance with all applicable laws relating to its employees,
including those related to wages, hours, worker classification, collective
bargaining and the payment and withholding of taxes and other sums as required
by the appropriate governmental authority and has withheld and paid to the
appropriate governmental authority or is holding for payment not yet due to such
governmental authority all amounts required to be withheld from employees of the
Company or any Subsidiary and is not liable for any arrears of wages, taxes,
penalties or other sums for failure to comply with any of the foregoing; (v) the
Company and each Subsidiary has paid in full to all employees or adequately
accrued in accordance with U.S. GAAP consistently applied all wages, salaries,
commissions, bonuses, benefits and other compensation due to or on behalf of
such employees; (vii) no claim with respect to payment of wages, salary or
overtime pay has been asserted or is now pending or to the knowledge of the
Company threatened with respect to any persons currently or formerly employed by
the Company or any Subsidiary; (viii) neither the Company nor any Subsidiary is
a party to, or otherwise bound by, any consent decree relating to employees or
employment practices; (ix) no violation of any occupational safety or health
standards has been asserted nor is any such proceeding pending or to the
knowledge of the Company threatened with respect to the Company or any
Subsidiary; and (x) no charge of discrimination in employment or employment
practices, including, without limitation, discrimination based on age, gender,
race, religion or other legally protected category, has been asserted nor is any
such action or proceeding pending or to the knowledge of the Company threatened
before the United States Equal Employment Opportunity Commission, or any other
governmental authority in any jurisdiction.
SECTION 3.12 Contracts.
---------
(a) Section 3.12 of the Company Disclosure Schedule lists each of
the following written or oral contracts and agreements of the Company and each
Subsidiary (such contracts and agreements being "Material Contracts"):
------------------
19
(i) each contract and agreement for the purchase of personal
property or to provide services to the Company that involves the payment of
$100,000 or more in any one-year period;
(ii) all broker, exclusive dealing or exclusivity, distributor,
dealer, manufacturer's representative, franchise, agency, or any other contract
that compensates any Person based on any sales by the Company or any Subsidiary
is a party or any other contract that compensates any Person based on any sales
by the Company or any Subsidiary that can in any case reasonably be expected to
result in payments of $100,000 or more in any one-year period;
(iii) all leases and subleases of real property;
(iv) all leases of personal property with lease payments greater
than $100,000 per year;
(v) all contracts and agreements relating to indebtedness (other
than trade indebtedness) of the Company or any Subsidiary, including, without
limitation, any contracts and agreements in which the Company or any Subsidiary
is a guarantor of indebtedness;
(vi) all contracts and agreements with any Governmental Entity to
which the Company or any Subsidiary is a party;
(vii) all contracts and agreements that limit or purport to limit the
ability of the Company or any Subsidiary to compete in any line of business,
with any Person, in any geographic area or during any period of time;
(viii) since January 1, 1998, all contracts relevant to the Company's
business that contain confidentiality requirements (including all nondisclosure
agreements);
(ix) all contracts and agreements between or among the Company or
any Subsidiary and any stockholder of the Company or any Subsidiary or any
affiliate of such Person;
(x) all contracts and agreements relating to the voting rights or
obligations of a stockholder of the Company or any Subsidiary;
(xi) all contracts to manufacture any products or components for any
third party, or to supply or distribute any products or components to any third
party involving a payment or payments of $100,000 in the aggregate in any one-
year period;
(xii) all contracts regarding the acquisition, issuance or transfer
of any securities and each contract affecting or dealing with any securities of
the Company or any Subsidiary, including, without limitation, any restricted
stock agreements or escrow agreements;
20
(xiii) all contracts providing for indemnification of any
officer, director, employee or agent;
(xiv) all contracts related to or regarding the performance of
consulting, advisory or other services or work of any type of any third party
involving the payment in any one-year period of at least $100,000;
(xv) all contracts involving payment of at least $100,000 that
have a term of more than sixty days and that may not be terminated by the
Company or any Subsidiary (without penalty) within 60 days after the delivery of
a termination notice by the Company or any Subsidiary;
(xvi) any agreement of the Company or any Subsidiary involving
the payment of at least $100,000 that is terminable upon or prohibits a change
of ownership or control of the Company; and
(xvii) all contracts and agreements, whether or not made in the
ordinary course of business, that contemplate an exchange of consideration with
an aggregate value greater than $50,000.
(b) Each Material Contract: (i) is valid and binding as to the
Company or Subsidiary, and to the knowledge of the Company, as to the other
parties thereto (subject in each case to the effect of any applicable
bankruptcy, reorganization, insolvency, moratorium or similar Laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity), and is in full force and effect, and (ii) upon
consummation of the transactions contemplated by this Agreement, shall continue
in full force and effect without penalty or other adverse consequence.
(c) The Company has delivered or made available to Parent accurate
and complete copies of all Material Contracts identified in Section 3.12 of the
Company Disclosure Schedule, including all amendments thereto. Section 3.12 of
the Company Disclosure Schedule provides an accurate description of the terms of
each Material Contract that is not in written form.
(d) Except as set forth in Section 3.12(d) of the Company Disclosure
Schedule, to the Company's knowledge, no event has occurred, and no circumstance
or condition exists, that (with or without notice or lapse of time) will or
could reasonable be expected to (i) result in a violation or breach of a
Material Contract, (ii) give any entity the right to declare a default or
exercise any remedy under any Material Contract, (iii) give any entity the right
to accelerate the maturity or performance of any Material Contract or (iv) give
any entity to the right to cancel, terminate or modify any Material Contract.
SECTION 3.13 Environmental Matters. The Company and each Subsidiary
(a) is in compliance in all material respects with all applicable Environmental
Laws, (b) holds all Environmental Permits material to the conduct of the
Company's or any Subsidiary's business and (c) is in compliance in all material
respects with their respective Environmental Permits. Neither the Company nor
any Subsidiary has received any written request for information or been notified
that it is a potentially responsible party under CERCLA
21
or any similar Law of any state, locality or any other jurisdiction. Neither the
Company nor any Subsidiary has entered into or agreed to any consent decree or
order or is subject to any judgment, decree or judicial order relating to
compliance with Environmental Laws, Environmental Permits or the investigation,
sampling, monitoring, treatment, remediation, removal or cleanup of Hazardous
Materials, and to the knowledge of the Company, no investigation, litigation or
other proceeding is pending or threatened with respect thereto.
SECTION 3.14 Intellectual Property.
---------------------
(a) Proprietary Rights.
------------------
(i) Company is the sole owner of all right, title and
interest in and to all the Company Proprietary Rights (as defined in Section
3.14(b) below) free and clear of all liens, encumbrances, claims, rights of use
and restrictions whatsoever. Any of the Company Proprietary Rights (as defined
in Section 3.14(b) below) which require the execution and filing with an
appropriate governmental agency, including without limitation the Patent and
Trademark Office, have been so indicated in Section 3.14(a)(i) of the Company
Disclosure Schedule. Any of the Company Proprietary Rights owned at any time by
any predecessor of Company or by any former employer of any employee or officer
of Company (collectively, "Former Owners") have been assigned in full to Company
by a presently valid and enforceable instrument. There are no outstanding
options, licenses or agreements of any kind relating to the Company Proprietary
Rights (other than for distribution of standard object code products in the
ordinary course of business) nor is Company a party to any options, licenses or
agreements of any kind with respect to the Proprietary Rights of any other
Person or entity which relates to the business of Company as conducted or as
proposed to be conducted.
(ii) The Company Proprietary Rights do not infringe upon
or conflict with any Proprietary Rights of any other Person, firm, corporation
or other entity. There is not pending or threatened any claim or litigation
contesting the right of Company to engage in its business or employ any of the
Company Proprietary Rights. No Former Owner owns or controls Proprietary Rights
that such Former Owner could exercise to prevent Company from exploiting the
Company Proprietary Rights that were assigned from such Former Owner to Company.
Company has taken reasonable security measures to protect the secrecy,
confidentiality, and value of all Company Proprietary Rights. Company has only
disclosed Company Proprietary Rights to third parties subject to valid, binding
and enforceable non-disclosure agreements that protect such disclosed Company
Proprietary Rights at least as much as Company protects Company Proprietary
Rights, and in no case permits less than reasonable protection. Company has not
disclosed any software source code to any third parties.
(iii) Any employee, consultant or other Person who, either
alone or in concert with others, developed, invented, discovered, derived,
programmed or designed any of the Company Proprietary Rights or any part
thereof, or who has knowledge of or access to information relating to it, has
been put on notice that the Company Proprietary Rights are proprietary to
Company and not to be divulged or misused, and has assigned or licensed all of
his or her rights relating to the Company Proprietary Rights to Company. No
employee of Company is in violation of any material term of any employment
contract, confidentiality, proprietary information or inventions agreement, or
any other contract or agreement relating to the
22
relationship of any such employee with Company or any previous employer, and all
such contracts or agreements with employees are in full force and effect and are
valid, binding and enforceable in accordance with their respective provisions.
The employees of Company are not obligated under any contract (including
licenses, covenants, or commitments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or administrative agency
that would conflict with their obligation to use their best efforts to promote
the interests of Company or that would conflict with the business of Company as
conducted or as proposed to be conducted.
(iv) There are no material contracts, commitments,
leases, permits, and other instruments (written or oral) binding upon Company
with respect to the Company Proprietary Rights except the contracts listed on
Section 3.14(a)(iv) of the Company Disclosure Schedule. Company has delivered to
Parent true and complete copies of all such items and any amendments thereto.
All of such contracts, commitments, leases, permits and instruments are in full
force and effect and are valid, binding and enforceable in accordance with their
respective provisions, and Company is not in material default nor has there
occurred an event or condition which, with the passage of time or giving of
notice (or both), would constitute a material default with respect to the
payment or performance of any obligation thereunder; and no claim of such a
material default has been asserted and there is no basis or alleged basis upon
which such a claim could be made. Company has not received any notice or notices
claiming any such material default or indicating the desire or intention of any
other party thereto to amend, modify, rescind or terminate the same.
(b) As used in this Agreement, "Proprietary Rights" shall mean
all rights, title and interests in and to inventions (whether or not
patentable), ideas, formulae, software (in source and object code form), process
engineering, art works, schematic drawings, processes, product plans, logos,
trademarks, trademark applications, service marks, copyrights, trade names,
trade secrets, know-how, technical information, patents, patent applications,
databases, employee lists and customer lists, and other intangible or
proprietary rights of any form or nature throughout the world, and "Company
Proprietary Rights" shall mean all Proprietary Rights necessary to conduct the
business of Company and each Subsidiary as conducted or as proposed to be
conducted.
SECTION 3.15 Returns and Complaints. The Company has received
----------------------
no material customer complaints concerning its products and/or services, nor has
it had any of its products returned by a purchaser thereof, other than minor,
nonrecurring warranty problems.
SECTION 3.16 Taxes.
-----
(a) (i) All returns and reports in respect of Taxes (as defined
herein) required to be filed with respect to the Company and each Subsidiary
have been timely filed; (ii) all Taxes required to be shown on such returns and
reports or otherwise due have been timely paid; (iii) all such returns and
reports are true, correct and complete in all respects; (iv) no adjustment
relating to such returns has been proposed by any Tax authority, and to the
knowledge of the Company, no basis exists for any such adjustment; (v) there are
no pending actions or proceedings; or, to the knowledge of the Company, actions
or nor have any such actions or proceedings been threatened in writing; (vi) no
consent under Section 341(f) of the
23
Code has been filed with respect to the Company or any Subsidiary; (vii) there
are no Tax liens on any assets of the Company or any Subsidiary; (viii) neither
the Company nor any Subsidiary or any affiliate is a party to any agreement or
arrangement that would result, separately or in the aggregate, in the actual or
deemed payment by the Company of any "excess parachute payments" within the
meaning of Section 280G of the Code (without regard to Section 280G(b)(4)); (ix)
neither the Company nor any Subsidiary is doing business in nor engaged in a
trade or business in any jurisdiction in which it has not filed any applicable
income or franchise tax return required to be filed by applicable Law; and (x)
no power of attorney is currently in force or has been granted with respect to
any matter relating to Taxes that could affect the Company or any Subsidiary.
(b) Neither the Company nor any Subsidiary is aware of any
agreement, plan or other circumstance that would prevent the Merger from
qualifying under Section 368(a) of the Code.
(c) As used in this Agreement, "Taxes" shall mean any and all
-----
taxes, fees, levies, duties, tariffs, imposts and other charges of any kind
(together with any and all interest, penalties, additions to tax and additional
amounts imposed with respect thereto) imposed by any government or taxing
authority, including, without limitation: taxes or other charges on or with
respect to income, franchises, windfall or other profits, gross receipts,
property, sales, use, capital stock, payroll, employment, social security,
workers' compensation, unemployment compensation or net worth; taxes or other
charges in the nature of excise, withholding, ad valorem, stamp, transfer,
value-added or gains taxes; license, registration or documentation fees; and
customs duties, tariffs or similar charges.
SECTION 3.17 Vote Required. The only votes of the holders of any
-------------
classes or series of capital stock of the Company necessary to approve and adopt
this Agreement, the Merger and the other transactions contemplated by this
Agreement are the affirmative votes of the holders of the requisite number of
Company Common Stock, Company Series A Preferred Stock, Company Series B
Preferred Stock and Company Series C Preferred Stock, voting as separate series.
SECTION 3.18 Assets. Except as set forth in Section 3.17 of the
------
Company Disclosure Schedule, the Company and each Subsidiary owns, leases or has
the legal right to use all of the properties and assets, including, without
limitation, real property and personal property (other than Intellectual
Property, which is covered by Section 3.14 hereof), used or intended to be used
in the conduct of the business of the Company or any Subsidiary or otherwise
owned, leased or used by the Company or any Subsidiary (all such properties and
assets being the "Assets"). Except as set forth in Section 3.17 of the Company
------
Disclosure Schedule, the Company or a Subsidiary has good and marketable title
to, or in the case of leased or subleased Assets, valid and subsisting leasehold
interests in, all the Assets, free and clear of all liens, pledges or
encumbrances except for (x) liens for current taxes not yet due and payable and
(y) liens that have arisen in the ordinary course of business and that do not
(in any case or in the aggregate) materially detract from the value of the
assets subject thereto or materially impair the operations of the Company and
the Subsidiaries. The equipment used in the operations of the business of the
company and each subsidiary is, taken as a whole, in good operating condition
and repair in all material respects, ordinary wear and tear excepted.
24
SECTION 3.19 Owned Real Property The Company and the Subsidiaries
-------------------
do not own any real property.
SECTION 3.20 Certain Interests.
-----------------
(a) No stockholders owning more than 5% of the Company any
affiliate of any such stockholder, any officer or director of the Company or any
Subsidiary, or to the knowledge of the Company, any immediate relative or spouse
(or immediate relative of such spouse) who resides with, or is a dependent of,
any such officer or director:
(i) has any direct or indirect financial interest in any
creditor, competitor, supplier, manufacturer, agent, representative, distributor
or customer of the Company or any Subsidiary; provided, however, that the
-------- -------
ownership of securities representing no more than 1% of the outstanding voting
power of any creditor, competitor, supplier, manufacturer, agent,
representative, distributor or customer, and which securities are listed on any
national securities exchange or actively traded in the national over-the-counter
market, shall not be deemed to be a "financial interest" as long as the Person
owning such securities has no other connection or relationship with such
competitor, supplier or customer, manufacturer, agent, representative,
distributor or customer of the Company;
(ii) owns, directly or indirectly, in whole or in part,
or has any other interest in any tangible or intangible property that the
Company or any Subsidiary uses in the conduct of its business (except for any
such ownership or interest resulting from the ownership of securities in a
public company);
(iii) has any claim or cause of action against the Company
or any Subsidiary; or
(iv) except as set forth in Section 3.20(a)(iv) of the
Company Disclosure Schedule, has outstanding any indebtedness to the Company or
any Subsidiary.
(b) Except as set forth in Section 3.20(b) of the Company
Disclosure Schedule, except for the payment of employee compensation in the
ordinary course of business, neither the Company nor any Subsidiary has any
liability or any other obligation of any nature to any stockholder of the
Company or any affiliate thereof or to any officer or director of the Company or
any Subsidiary, or to the knowledge of the Company, to any immediate relative or
spouse (or immediate relative of such spouse) of any such officer or director.
SECTION 3.21 Insurance Policies. Section 3.20 of the Company
------------------
Disclosure Schedule sets forth a true and complete list of all insurance
policies held by the Company or any Subsidiary and any claims thereunder. True
and complete copies of all such policies have been provided or made available by
the Company to Parent. All premiums due under such policies as of the date
hereof have been paid. Neither the Company nor any Subsidiary has failed to give
any notice or present any claim under any such policy in a timely fashion. Such
insurance to the date hereof has (i) been maintained in full force and effect
and (ii) not been canceled or changed, except to extend the maturity dates
thereof. Since December 31, 1999, neither the Company nor any Subsidiary has
received any notice or other communication regarding any actual or possible (a)
cancellation or termination of any insurance
25
policy, (b) refusal of any coverage or rejection of any claim under any
insurance policy, or (c) material adjustment in the amount of the premiums
payable with respect to any insurance policy.
SECTION 3.22 Brokers. Except as set forth in Section 3.22 of the
-------
Company Disclosure Schedule, no broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
origination, negotiation or execution of this Agreement, the Merger, the
transactions contemplated by this Agreement, or in connection with any financing
contemplated since January 1, 2000. The Company has heretofore furnished to
Parent a complete and correct copy of all agreements pursuant to which any such
firm would be entitled to any payment in connection with this Agreement, the
Merger or the transactions contemplated by this complete Agreement. The
Company's stockholders are responsible for any such fees payable by the Company.
SECTION 3.23 State Takeover Statutes. There are no restrictions
-----------------------
on business combinations contained in the URBCA that apply or will apply to the
Merger and the other transactions contemplated by this Agreement. To the
knowledge of the Company, no other state takeover statute is applicable to the
Merger or the other transactions contemplated by this Agreement.
SECTION 3.24 Customers and Suppliers. Section 3.24 of the Company
-----------------------
Disclosure Schedule contains a complete list of all customers that individually
accounted for more than 5% of the Company's consolidated gross revenues during
the fiscal year ended December 31, 1999 and the most recent fiscal quarter ended
September 30, 2000, and no material supplier of the Company nor any Subsidiary
has cancelled or otherwise terminated, prior to the expiration of the contract
term, or to the Company's knowledge, made any written threat to the Company or
any Subsidiary to cancel, reduce the supply or otherwise terminate its
relationship with the Company or any Subsidiary. Neither the Company nor any
Subsidiary has (i) breached (so as to provide a benefit to the Company that was
not intended by the parties) any agreement with, or (ii) engaged in any
fraudulent conduct with respect to, any customer or supplier of the Company or
any Subsidiary.
SECTION 3.25 Inventory. All inventory of the Company and the
---------
Subsidiaries, whether or not reflected on the Reference Balance Sheet, consists
of a quality and quantity usable and saleable in the ordinary course of
business, except for obsolete items and items of below-standard quality, all of
which have been written-off or written-down to net realizable value on the
Reference Balance Sheet. All inventories not written-off have been priced at the
lower of cost or market on a first-in, first-out basis. The quantities of each
type of inventory, whether raw materials, work-in-process or finished goods, are
not excessive in the present circumstances of the Company and the Subsidiaries.
SECTION 3.26 Accounts Receivable, Bank Accounts. All accounts
----------------------------------
receivable of the Company and the Subsidiaries reflected on the Reference
Balance Sheet are valid receivables subject to no setoffs or counterclaims and
are current and collectible (within 30 days after the date on which it first
became due and payable), net of the applicable reserve for bad debts on the
Reference Balance Sheet. All accounts receivable reflected in the financial or
accounting records of the Company and the Subsidiaries that have arisen since
the date of
26
Reference Balance Sheet are valid receivables subject to no setoffs or
counterclaims and are collectible (within 30 days after the date on which it
first became due and payable), net of a reserve for bad debts in an amount
proportionate to the reserve shown on the Reference Balance Sheet. Section 3.26
of the Company Disclosure Schedule describes each account maintained by or for
the benefit of the Company or any Subsidiary at any bank or other financial
institution
SECTION 3.27 Powers of Attorney. There are no outstanding powers
------------------
of attorney executed on behalf of the Company or any Subsidiary.
SECTION 3.28 Offers. The Company has suspended or terminated, and
------
had the legal right to terminate or suspend, all negotiations and discussions of
any acquisition, merger, consolidation or sale of all or substantially all of
the assets of Company and the Subsidiaries with parties other than Parent.
SECTION 3.29 Warranties. No product or service manufactured,
----------
sold, leased, licensed or delivered by the Company or any Subsidiary is subject
to any guaranty, warranty, right of return, right of credit or other indemnity
other than (i) the applicable standard terms and conditions of sale or lease of
the Company or the appropriate Subsidiary, which are set forth in Section 3.29
of the Company Disclosure Schedule and (ii) manufacturers' warranties for which
neither the Company nor any Subsidiary has any liability. Section 3.29 of the
Company Disclosure Schedule sets forth the aggregate expenses incurred by the
Company and the Subsidiaries in fulfilling their obligations under any guaranty,
warranty, right of return or indemnity provisions during each of the fiscal
years and the interim period covered by the Audited Financial Statements; and
neither the Company nor any Subsidiary knows of any reason why such expenses
should significantly increase as a percentage of sales in the future.
SECTION 3.30 Books and Records. The minute books and other
-----------------
similar records of the Company and the Subsidiaries contain complete and
accurate records in all material respects of all actions taken at any meetings
of the Company's stockholders, Board of Directors of any committee thereof, and
all written consents executed in lieu of any such meeting. The books and records
of the Company accurately reflect the assets, liabilities, business, financial
condition and results of operations of the Company and the Subsidiaries and have
been maintained in accordance with good business and bookkeeping practices.
SECTION 3.31 Tax Matters. To the knowledge of the Company,
-----------
neither the Company nor any Subsidiary has taken or agreed to take any action
that would prevent the Merger from constituting a reorganization qualifying
under Section 368(a) of the Code. The Company is not aware of any agreement,
plan or other circumstance that would prevent the Merger from qualifying as a
reorganization under Section 368(a) of the Code.
SECTION 3.32 No Misstatements. No representation or warranty made
----------------
by the Company in this Agreement, the Company Disclosure Schedule or any
certificate delivered or deliverable pursuant to the terms hereof, contains or
will contain, any untrue statement of a material fact, or omits, or will omit,
when taken as a whole, any material fact, necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading.
27
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
-------------------------------------------------------
Except as set forth in (i) the disclosure schedule delivered by
Parent and Merger Sub to the Company concurrently with the execution of this
Agreement (the "Parent Disclosure Schedule"), which provides an exception to or
--------------------------
otherwise qualifies in reasonable detail with specific Section references, the
representations or warranties of Parent and Merger Sub specifically referred to
therein, or (ii) in Parent SEC Reports (as defined in Section 4.05), Parent and
Merger Sub hereby jointly and severally represent and warrant to the Company
that:
SECTION 4.01 Organization and Qualification.
------------------------------
(a) Parent is a corporation duly incorporated, validly existing
and in good standing under the laws of California.
(b) Merger Sub is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Utah.
(c) Each of Parent and Merger Sub has all requisite corporate
power and authority to own, lease and operate its properties and to carry on its
business as it is now being conducted, except where the failure to be so
organized, existing or in good standing or to have such corporate power and
authority have not had, and could not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect (as defined
below). The Parent is duly qualified or licensed as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary, except for such failures to be
so qualified or licensed and in good standing that have not had, and could not
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect.
SECTION 4.02 Authority Relative to This Agreement. Each of Parent
------------------------------------
and Merger Sub has all necessary corporate power and authority to execute and
deliver this Agreement, and to perform its obligations hereunder and to
consummate the Merger and the other transactions contemplated by this Agreement.
The execution and delivery of this Agreement by each of Parent and Merger Sub
and the consummation by each of Parent and Merger Sub of the Merger and the
other transactions contemplated by this Agreement have been duly and validly
authorized by all necessary corporate action and no other corporate proceedings
on the part of Parent or Merger Sub are necessary to authorize this Agreement or
to consummate the Merger and the other transactions contemplated by this
Agreement (other than with respect to the Merger, the filing and recordation of
appropriate merger documents as required by the URBCA). This Agreement has been
duly and validly executed and delivered by each of Parent and Merger Sub, and
assuming the due authorization, execution and delivery by the Company,
constitutes a legal, valid and binding obligation of each of Parent and Merger
Sub, enforceable against each of Parent and Merger Sub in accordance with its
terms, subject to any applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally and subject, as
to enforceability, to general principles of equity.
28
SECTION 4.03 Capital Structure. As of September 30, 2000, the
-----------------
authorized capital stock of Parent consists of (a) 200,000,000 shares of Parent
Common Stock and (b)10,000,000 shares of Preferred Stock ("Parent Preferred
Stock"). As of September 30, 2000, (i) 52,530,934 shares of Parent Common Stock
were issued and outstanding, all of which are validly issued, fully paid and
non-assessable, (ii) no shares of Parent Preferred Stock were issued and
outstanding, and (iii) 6,951,643 shares of Parent Common Stock were reserved for
future issuance pursuant to outstanding options to purchase Parent Common Stock,
as described in Parent SEC Reports (as defined in Section 4.05). As of the date
hereof, no shares of Parent Preferred Stock are issued and outstanding. As of
the date hereof, except for outstanding options referred to in clause (iii)
above, there are no outstanding options or warrants, or agreements relating to
the issuance of capital stock of Parent or obligating Parent to issue or sell
any shares of its capital stock. The shares of Common Stock to be issued
pursuant to the Merger will be duly authorized, validly issued, fully paid, and
non-assessable, will not be subject to any preemptive or other statutory right
of stockholders, and will be free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof.
SECTION 4.04 No Conflict; Required Filings and Consents. (a) The
------------------------------------------
execution and delivery of this Agreement by each of Parent and Merger Sub does
not, and the performance of this Agreement by each of Parent and Merger Sub will
not, (i) conflict with or violate their respective organizational documents,
(ii) assuming that all consents, approvals, authorizations and other actions
described in Section 4.04(b) have been obtained and all filings and obligations
described in Section 4.04(b) have been made, conflict with or violate in any
material respect any Law applicable to Parent or Merger Sub or by which any
property or asset of Parent or Merger Sub is bound or affected, or (iii) result
in any breach of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any property or asset of Parent or
Merger Sub pursuant to, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation,
except, with respect to clause (iii), for any such conflicts, violations,
breaches, defaults, or other occurrences that could not reasonably be expected,
individually or in the aggregate, to prevent or materially delay the
consummation of the transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement by each of
Parent and Merger Sub does not, and the performance of this Agreement by each of
Parent and Merger Sub will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any Governmental Entity, except
(i) for pre-merger notification requirements of the HSR Act, (ii) for the filing
and recordation of appropriate merger documents as required by the URBCA, (iii)
any filings as may be required under applicable federal and state securities
laws, including, without limitation, qualification pursuant to Section 25121 of
the California General Corporations Law and the filing of a Notification of
Listing of Additional Shares with NASDAQ, and (iv) where the failure to obtain
such consents, approvals, authorizations or permits, or to make such filings or
notifications, could not reasonably be expected, individually or in the
aggregate, to prevent or materially delay the consummation of the transactions
contemplated by this Agreement.
29
SECTION 4.05 SEC Filings; Financial Statements.
---------------------------------
(a) Parent has filed all forms, reports and documents required
to be filed by it with the Securities and Exchange Commission (the "SEC") since
---
November 1999 through the date of this Agreement (collectively, the "Parent SEC
----------
Reports"). As of the respective dates they were filed, (i) the Parent SEC
-------
Reports were prepared, and all forms, reports and documents filed with the SEC
after the date of this Agreement and prior to the Effective Time will be
prepared, in all material respects in accordance with the requirements of the
Securities Act of 1933, as amended (together with the rules and regulations
promulgated thereunder, the "Securities Act"), or the Securities Exchange Act of
--------------
1934, as amended (together with the rules and regulations promulgated
thereunder, the "Exchange Act"), as the case may be, and (ii) the Parent SEC
------------
Reports, when read together, do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in
each case, any notes thereto) contained in the Parent SEC Reports and in any
form, report or document filed after the date of this Agreement and prior to the
Effective Time was, or will be, as the case may be, prepared in accordance with
U.S. GAAP accounting standards applied on a consistent basis throughout the
periods indicated (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by Form 8-K of the SEC) and each
presented or will present fairly, in all material respects, the consolidated
financial position of Parent and its consolidated subsidiaries as of the
respective dates thereof and for the respective periods indicated therein,
except as otherwise noted therein (subject, in the case of unaudited statements,
to normal and recurring year-end adjustments which were not and are not
expected, individually or in the aggregate, to have a Parent Material Adverse
Effect). The term "Parent Material Adverse Effect" means any change in or effect
------------------------------
on the business of Parent and its subsidiaries that is materially adverse to the
business, operations, condition (financial or otherwise), assets, liabilities,
or results of operations of Parent and its subsidiaries taken as a whole, except
for any such changes or effects resulting from or in connection with (A) any
changes in general economic conditions, (B) any decline in the price of Parent
Shares or any adverse changes in the United States securities market, or (C) the
announcement of the Merger or actions taken as a result of this Agreement.
SECTION 4.06 Interim Operations of Merger Sub. Merger Sub was
--------------------------------
formed by Parent solely for the purpose of engaging in the transactions
contemplated by this Agreement, has engaged in no other business activities and
has conducted its operations only as contemplated by this Agreement. Merger Sub
has no liabilities, and except for a subscription agreement pursuant to which
all of its authorized capital stock was issued to Parent, is not a party to any
agreement other than this Agreement and agreements with respect to the
appointment of registered agents and similar matters.
SECTION 4.07 Valid Issuance of Parent Shares. The shares of
-------------------------------
Parent to be issued pursuant to this Agreement will, when issued, be duly
authorized, validly issued, fully paid and non-assessable, and issued in
compliance with all applicable United States federal and state securities laws.
30
SECTION 4.08 Brokers. Except for Bear, Stearns & Co., Inc., no
-------
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Parent or Merger Sub.
SECTION 4.09 No Parent Shareholder Vote. Assuming the number of
--------------------------
shares of Parent Common Stock exchanged for Company Common Stock issued and
outstanding immediately prior to the Effective Time does not exceed 10,500,000
shares of Parent Common Stock, neither the Merger nor the transactions
contemplated by this Agreement shall trigger any requirement for a vote by
Parent shareholders.
SECTION 4.10 Permits. As of October 15, 2000, Parent is in
-------
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exceptions, consents, certificates, approvals and orders
of any Governmental Entity necessary for Parent to own, lease and operate its
properties or to carry on its business as it is now being conducted (the "Parent
------
Permits"). No suspension or cancellation of any of the Parent Permits is pending
-------
or, to the knowledge of Parent, threatened.
SECTION 4.11 Absence of Change. Since September 30, 2000, there
-----------------
has been no event the occurrence of which would give rise to a duty on the part
of Parent to file a Form 8-K where such form has not been filed.
SECTION 4.12 Absence of Litigation. As of October 15, 2000,
---------------------
there is no litigation, suit, claim, action, proceeding or investigation pending
(each a "Legal Proceeding") or, to the knowledge of Parent, threatened, or any
----------------
property or asset owned or used by the Parent or for which Parent has or may
have assumed, either contractually or by operation of law, liability before any
court, arbitrator or Governmental Entity, which could reasonably be expected, if
resolved adversely to Parent, to materially impair the operations of Parent. To
Parent's knowledge, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that could reasonably be expected to give rise
to or serve as a basis for, the commencement of any Legal Proceeding. Neither
Parent nor any property or assets of Parent is subject to any continuing order
of, consent decree, settlement agreement or other similar written agreement
with, or to the knowledge of Parent, continuing investigation by, any
Governmental Entity, or any order, writ, judgment, injunction, decree,
determination or award of any court, arbitrator or Governmental Entity.
SECTION 4.13 Material Contracts.
------------------
(a) Section 4.13 of the Parent Disclosure Schedule sets forth
each Material Contract of Parent (for the purposes of this Section 4.13, the
term Material Contract shall have the same meaning given to that term in Item
601(b)(10) of Regulation S-K of the Securities Act) required to be disclosed on
Parent's most recent annual report on Form 10-K and any Material Contracts
entered into by Parent since January 1, 2000. Each Material Contract is valid
and binding as to Parent, and to the knowledge of Parent, as to the other
parties thereto (subject in each case to the effect of any applicable
bankruptcy, reorganization, insolvency, moratorium or similar Laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity), and is in full force and effect, and upon consummation of
the
31
transactions contemplated by this Agreement, shall continue in full force and
effect without penalty or other adverse consequence.
(b) Except as set forth in Section 4.13 of the Parent Disclosure
Schedule, to Parent's knowledge, no event has occurred, and no circumstance or
condition exists, that (with or without notice or lapse of time) will or could
reasonable be expected to (i) result in a violation or breach of a Material
Contract, (ii) give any entity the right to declare a default or exercise any
remedy under any Material Contract, (iii) give any entity the right to
accelerate the maturity or performance of any Material Contract or (iv) give any
entity to the right to cancel, terminate or modify any Material Contract.
ARTICLE V
CONDUCT OF BUSINESSES PENDING THE MERGER
----------------------------------------
SECTION 5.01 Conduct of Business by the Company and the
------------------------------------------
Subsidiaries Pending the Merger. During the period from the date of this
-------------------------------
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, the Company agrees, and shall cause each Subsidiary,
(except to the extent that Parent shall otherwise consent in writing), to carry
on its business in the usual, regular and ordinary course in substantially the
same manner as previously conducted, to pay its debts and taxes when due
(subject to good faith disputes over such debts or taxes), to pay or perform
other obligations when due, and to the extent consistent with such business, use
all reasonable efforts consistent with past practices and policies to preserve
intact its present business organization, to keep available the services of its
present officers and key employees and consultants and to preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it, to the end that its goodwill and
ongoing businesses would be unimpaired at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence not in the ordinary course of
business of the Company.
By way of amplification and not limitation, except as
contemplated by this Agreement or as set forth in Section 5.01 of the Company
Disclosure Schedule, neither the Company nor any Subsidiary shall, between the
date of this Agreement and the Effective Time, directly or indirectly, do or
propose to do, any of the following without the prior written consent of Parent:
(a) amend or otherwise change its Articles of Incorporation or
Bylaws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, encumber, authorize
or propose the issuance, sale, pledge, disposition, grant or encumbrance of any
shares of its capital stock of any class, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of such capital
stock, or any other ownership interest (including, without limitation, any
phantom interest) of the Company or any Subsidiary, except pursuant to the terms
of options, warrants or preferred stock outstanding on the date of this
Agreement;
32
(c) sell, lease, license, pledge, grant, encumber or otherwise dispose of
any of its properties or assets which are material, individually or in the
aggregate, to its business, except in the ordinary course of business;
(d) declare, set aside, make or pay any dividend or other distribution
payable in cash, stock, property or otherwise, with respect to any of its
capital stock;
(e) split, combine, subdivide, redeem or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of capital stock of such party, or
purchase or otherwise acquire, directly or indirectly, any shares of its capital
stock except from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service by such party;
(f) acquire (including, without limitation, by merger, consolidation or
acquisition of stock or assets) any interest in any corporation, partnership,
other business organization or any division thereof or any assets thereof;
(g) institute or settle any Legal Proceeding;
(h) incur any indebtedness for borrowed money or issue any debt securities
or assume, guarantee or endorse, or otherwise as an accommodation become
responsible for, the obligations of any Person, or make any loans or advances;
(i) authorize any capital expenditure in excess of $50,000, individually
or in the aggregate;
(j) enter into any lease or contract for the purchase or sale of any
property, real or, for purchases in excess of $50,000 individually or in the
aggregate, personal;
(k) waive or release any material right or claim;
(l) increase the compensation payable or to become payable to its officers
or employees, or grant any severance or termination pay to, or enter into any
employment or severance agreement with, any director, officer or employee, or
establish, adopt, enter into or amend any collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of any
director, officer or employee;
(m) accelerate, amend or change the period of exercisability or the
vesting schedule of restricted stock or options granted under any employee stock
plan or agreement or authorize cash payments in exchange for any options granted
under any of such plan or agreement except as specifically required by the terms
of such plans or agreements in effect as of the date of this Agreement;
(n) take any action to cause, or fail to take any action to prevent, the
accelerated vesting and exercisability of the Company Options;
33
(o) extend any offers for the provision of services to potential
employees, consultants or independent contractors other than offers of
employment to potential employees lower than director-level that are "at will"
and do not provide for severance obligations;
(p) amend or terminate any Material Contract;
(q) enter into, amend or terminate any contract, agreement, commitment or
arrangement that, if fully performed, would not be permitted under this Section
5.01;
(r) other than in the ordinary course of business consistent with past
practice, enter into any licensing, distribution, OEM, sponsorship, advertising,
merchant program contracts, agreements or obligations, or other similar
contracts, agreements, or obligations, which may not be cancelled by the Company
upon notice of 30 days or less without penalties;
(s) enter into any contract or agreement material to the business, results
of operations or financial condition of the Company;
(t) take any action, other than reasonable and usual action in the
ordinary course of business and consistent with past practice, with respect to
accounting policies, principles or procedures;
(u) make or change any material Tax or accounting election, change any
annual accounting period, adopt or change any accounting method, file any
amended Return, enter into any closing agreement, settle any Tax claim or
assessment relating to the Company or any Subsidiary, surrender any right to
claim a refund of Taxes, consent to any extension or waiver of the limitation
period applicable to any Tax claim or assessment relating to the Company or any
Subsidiary, or take any other action or omit to take any action that would have
the effect of increasing the Tax liability of the Company or any Subsidiary or
Parent;
(v) (i) sell, assign, lease, terminate, abandon, transfer, permit to be
encumbered, otherwise dispose of or grant any security interest in any item of
Owned Intellectual Property or Licensed Intellectual Property, in whole or in
part, (ii) grant any license with respect to any Owned Intellectual Property,
other than the license of Company Software to customers of the Company or any
Subsidiary to whom the Company or any Subsidiary licenses such Company Software
in the ordinary course of business, (iii) develop, create or invent any
Intellectual Property jointly with any third party, or (iv) disclose, or allow
to be disclosed, any confidential Owned Intellectual Property, unless such Owned
Intellectual Property is subject to a confidentiality or non-disclosure covenant
protecting against disclosure thereof;
(w) make (or become obligated to make) any payments to any of the parties
set forth on Schedule 6.08 in the aggregate in excess of the Financing Proceeds;
(x) revalue any of its assets, including writing down the value of
inventory or writing off notes or accounts receivable;
34
(y) fail to maintain its equipment and other assets in good working
condition and repair according to the standards it has maintained up to the date
of this Agreement, subject only to ordinary wear and tear;
(z) take any action or fail to take any action that would cause there to
be a Company Material Adverse Effect;
(aa) permit any insurance policy naming it as a beneficiary or a loss
payable payee to be cancelled or terminated without notice to Parent and Merger
Sub;
(bb) write off as uncollectible, or establish any extraordinary reserve
with respect to, any account receivable or other indebtedness in excess of
$50,000 with respect to a single matter, or in excess of $50,000 in the
aggregate; or
(cc) take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (cc) above, or any action which is reasonably
likely to make any of the Company's representations or warranties contained in
this Agreement untrue or incorrect on the date made (to the extent so limited)
or as of the Effective Time.
SECTION 5.02 Notification of Certain Matters. Parent shall give prompt
-------------------------------
notice to the Company, and the Company shall give prompt notice to Parent, of
(i) the occurrence, or non-occurrence, of any event the occurrence, or non-
occurrence, of which would be likely to cause (x) any representation or warranty
contained in this Agreement to be untrue or inaccurate or (y) any covenant,
condition or agreement contained in this Agreement not to be complied with or
satisfied and (ii) any failure of Parent or the Company, as the case may be, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, however, that the delivery of any notice
-------- -------
pursuant to this Section 5.02 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
ARTICLE VI
ADDITIONAL AGREEMENTS
---------------------
SECTION 6.01 Stockholder Approval. The Company shall promptly, after the
--------------------
date of this Agreement and in accordance with applicable Law, the Company's
Articles of Incorporation and Bylaws, convene a meeting of its stockholders or
solicit written consents to obtain their approval and adoption of this
Agreement, the Merger and the transactions contemplated by this Agreement. The
Company shall ensure that the stockholders' meeting is called, noticed,
convened, held and conducted, and that all proxies solicited by the Company in
connection with the stockholders' meeting are solicited, or in the alternative,
that written consents are solicited, in compliance with applicable Law, the
Company's Articles of Incorporation and Bylaws, and all other applicable legal
requirements. The Company agrees to use it best efforts to take all action
necessary or advisable to secure the necessary votes required by applicable Law,
the Company's Articles of Incorporation and Bylaws to effect the Merger.
35
SECTION 6.02 Access to Information; Confidentiality.
--------------------------------------
(a) From the date of this Agreement to the Effective Time, the Company
shall: (i) provide to Parent (and its officers, directors, employees,
accountants, consultants, legal counsel, agents and other representatives,
collectively, "Representatives"), at reasonable times upon prior notice, access
---------------
to the directors, officers, employees, agents, properties, offices and other
facilities of the Company and the Subsidiaries and to the books and records
thereof and (ii) promptly furnish information concerning the business,
properties, contracts, assets, liabilities, personnel and other aspects of the
Company and the Subsidiaries as Parent or its Representatives may reasonably
request.
(b) From the date of this Agreement to the Effective Time, the Parent
shall provide to Company and its Representatives, at reasonable times upon prior
notice, access to the chief financial officer of Parent.
(c) The parties shall comply with, and shall cause their respective
Representatives to comply with, all of their respective obligations under the
Non-Disclosure Agreement dated October __, 2000, (the "Non-Disclosure
--------------
Agreement") between the Company and Parent.
---------
SECTION 6.03 No Solicitation of Transactions.
-------------------------------
(a) The Company will not, directly or indirectly, and will instruct its
officers, directors, employees, agents, advisors or other representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it) not to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing nonpublic information), or take any other action
to facilitate, any inquiries or the making of any proposal or offer (including,
without limitation, any proposal or offer to its stockholders) that constitutes,
or may reasonably be expected to lead to, any Competing Transaction (as defined
below), or enter into or maintain or continue discussions or negotiate with any
Person or entity in furtherance of such inquiries or to obtain a Competing
Transaction, or agree to or endorse any Competing Transaction, or authorize or
permit any of the officers, directors or employees of the Company, or any
investment banker, financial advisor, attorney, accountant or other
representative retained by the Company, to take any such action. The Company
will notify Parent immediately after receipt by the Company (or any of its
officers, directors, employees, agents, advisors or other representatives) of
any proposal for or inquiry respecting any Competing Transaction, or any request
for nonpublic information in connection with such proposal or inquiry or for
access to the properties, books or records of the Company by any Person or
entity that informs or has informed the Company that it is considering making or
has made such a proposal or inquiry. Such notice to Parent shall indicate in
reasonable detail the identity of the Person making such proposal or inquiry and
the terms and conditions of such proposal or inquiry. The Company immediately
shall cease and cause to be terminated all existing discussions or negotiations
with any parties conducted heretofore with respect to a Competing Transaction.
The Company agrees not to release any third party from, or waive any provision
of, any confidentiality or standstill agreement to which it is a party.
36
(b) A "Competing Transaction" means any of the following involving the
---------------------
Company or any Subsidiary (other than the Merger and the other transactions
contemplated by this Agreement): (i) a merger, consolidation, share exchange,
business combination or other similar transaction; (ii) any sale, lease,
exchange, transfer or other disposition of a material portion of the assets of
such party; (iii) a tender offer or exchange offer for 15% or more of the
outstanding voting securities of such party; or (iv) any solicitation in
opposition to approval by the stockholders of the Company of this Agreement and
the Merger.
SECTION 6.04 Employee Benefits Matters.
-------------------------
(a) All Company and each Subsidiary's employees shall continue on their
existing benefit plans until such time as, in Parent's sole discretion, an
orderly transition can be accomplished to employee benefit plans and programs
maintained by Merger Sub for its and its affiliates' employees in the United
States. Parent shall provide the Company's and Subsidiaries' employees with
health, welfare and other employee benefits that in the aggregate are
substantially equivalent to those provided to Parent's employees in similar
functions and positions. Pending such action, Parent shall maintain the
effectiveness of the Company's and Subsidiaries' benefit plans.
(b) Simultaneously with the execution of this Agreement, Parent has
entered into employment agreements (collectively, the "Employment Agreements",
---------------------
and individually, an "Employment Agreement") with the individuals set forth on
--------------------
Schedule 6.04(b) hereto.
(c) Simultaneously with the execution of this Agreement, Parent has
entered into option assumption agreements (collectively, the "Option Assumption
-----------------
Agreements", and individually, an "Option Assumption Agreement") with holders of
---------- ---------------------------
Company Options set forth on Schedule 6.04(b) hereto, which Option Assumption
Agreements shall provide for the waiver of any acceleration of vesting for
certain options in connection with the Merger, the restriction on sales of the
Parent Common Stock issuable upon exercise of the assumed Company Options, and
the payment of certain cash consideration. Prior to the Effective Time, the
Company shall take all reasonably best actions to ensure that all holders of
Company Options shall execute an Option Assumption Agreement.
(d) Prior to the Effective Date, Parent shall use reasonably best efforts
to enter into non-disclosure and invention assignment agreements (collectively,
the "Invention Assignment Agreements", and individually, an "Invention
------------------------------- ---------
Assignment Agreement") with the employees of the Company that will be employees
--------------------
of Parent following the Effective Date.
(e) Prior to the Effective Date, the Company shall take all necessary
actions to obtain the requisite stockholder approval under Section 280G(b)(5) of
the Code of any payments or benefits that could be considered "excess parachute
payments" within the meaning of Section 280G of the Code and shall require all
"disqualified individuals" within the meaning of Section 280G of the Code to
subject their existing benefits and payments to the stockholder approval
requirements of Section 280G(b)(5) of the Code, as contemplated in the Proposed
Treasury Regulations promulgated thereunder.
37
(f) The Company agrees to adopt resolutions to terminate its 401(k) plan
immediately prior to Closing, unless Parent, in its sole and absolute
discretion, agrees to sponsor and maintain such plans by providing the Company
with written notice of such election before the Effective Time. Unless Parent
provides such notice to the Company, Parent shall receive from the Company
evidence that the Company's Board of Directors has adopted resolutions to
terminate the 401(k) plan (the form and substance of which resolutions shall be
subject to the review and approval of Parent), effective as of the day
immediately preceding the Closing Date.
(g) The Company, and as applicable, its ERISA Affiliates, each agree to
terminate any and all group severance, separation or salary continuation plans,
programs or arrangements immediately prior to Closing. Parent shall receive from
the Company evidence that the plans, programs or arrangements of the Company,
and as applicable, each ERISA Affiliate, have been terminated pursuant to
resolutions of each such entity's Board of Directors (the form and substance of
which resolutions shall be subject to review and approval of Parent), effective
as of the day immediately preceding the Closing Date, but contingent on the
Closing.
SECTION 6.05 Further Action; Consents; Filings.
---------------------------------
(a) Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use its reasonable best efforts to (i) take or cause to be
taken, all appropriate action, and do or cause to be done all things necessary,
proper or advisable under applicable Law or otherwise to consummate and make
effective the Merger and the other transactions contemplated by this Agreement,
(ii) obtain from Governmental Entities any consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained or made by Parent or
the Company or any of their subsidiaries in connection with the authorization,
execution and delivery of this Agreement and the consummation of the Merger and
the other transactions contemplated by this Agreement, (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, including those required under the HSR Act and (iv)
make all necessary filings, and thereafter make any other required submissions,
with respect to this Agreement, the Merger and the other transactions
contemplated by this Agreement required under applicable Law. The parties hereto
shall cooperate with each other in connection with the making of all such
filings, including providing copies of all such documents to the nonfiling party
and its advisors prior to filing, and if requested, accepting all reasonable
additions, deletions or changes suggested in connection therewith.
(b) Each of Parent and the Company shall use all reasonable efforts to
resolve such objections, if any, as may be asserted by any Governmental Entity
with respect to the transactions contemplated by this Agreement under the HSR
Act, the Sherman Act, as amended, the Clayton Act, as amended, the Federal Trade
Commission Act, as amended, and any other federal, state or foreign statutes,
rules, regulations, orders or decrees that are designed to prohibit, restrict or
regulate actions having the purpose or effect of monopolization or restrain of
trade (collectively, "Antitrust Laws"). In connection therewith, if any
--------------
administrative or judicial action or proceeding is instituted (or threatened to
be instituted) challenging any transaction contemplated by this Agreement as
violative of any Antitrust Law, each of Parent and the Company shall cooperate
and use all reasonable efforts to contest and resist vigorously
38
any such action or proceeding and to have vacated, lifted, reversed, or
overturned any decree, judgment, injunction or other order, whether temporary,
preliminary or permanent (each an "Order"), that is in effect and that
-----
prohibits, prevents, or restricts consummation of the Merger or any such other
transactions contemplated by this agreement, unless by mutual agreement Parent
and the Company decide that litigation is not in their respective best
interests. The parties hereto will consult and cooperate with one another, and
consider in good faith the views of one another, in connection with any
analyses, appearances, presentations, memoranda, briefs, arguments, opinions and
proposals made or submitted by or on behalf of any party hereto in connection
with proceedings under or relating to any Antitrust Laws. Notwithstanding the
provisions of the immediately preceding sentence, it is expressly understood and
agreed that Parent shall have no obligation to litigate or contest any
administrative or judicial action or proceeding or any Antitrust Order beyond
December 31, 2000. Each of Parent and the Company shall use all reasonable
efforts to take such actions as may be required to cause the expiration of the
waiting periods under the HSR Act or other Antitrust Laws with respect to such
transactions as promptly as possible after the execution of this Agreement,
provided, however, that nothing contained herein shall require either party to
seek early termination of any such waiting period under the Antitrust Laws.
(c) Notwithstanding anything to the contrary in Section 6.05(a) or (b),
(i) neither Parent nor any of its subsidiaries shall be required to divest any
of their respective businesses, product lines or assets, or to take or agree to
take any other action or agree to any limitation that could reasonably be
expected to have a Parent Material Adverse Effect or of Parent combined with the
Surviving Corporation after the Effective Time and (ii) neither the Company nor
any Subsidiary shall be required to divest any of its respective businesses,
product lines or assets, or to take or agree to take any other action or agree
to any limitation that could reasonably be expected to have a Company Material
Adverse Effect.
(d) From the date of this Agreement until the earlier of the Effective
Time or the termination of this Agreement, each party shall promptly notify the
other party in writing of any pending, or to the knowledge of such party,
threatened, action, proceeding or investigation by any Governmental Entity or
any other Person (i) challenging or seeking material damages in connection with
this Agreement or the transactions contemplated hereunder or (ii) seeking to
restrain or prohibit the consummation of the Merger or the transactions
contemplated hereunder or otherwise limit the right of Parent or its
subsidiaries to own or operate all or any portion of the businesses or assets of
the Company.
39
SECTION 6.06 Plan of Reorganization. This Agreement is intended to
----------------------
constitute a "plan of reorganization" within the meaning of Section 1.368-2(g)
of the income tax regulations promulgated under the Code. From and after the
date of this Agreement and until the Effective Time, each party hereto shall use
its reasonable best efforts to cause the Merger to qualify, and will not take
any action, cause any action to be taken, fail to take any action or cause any
action to fail to be taken, which action or failure to act could prevent the
Merger from qualifying as a reorganization under the provisions of Section
368(a) of the Code, and following the Effective Time, neither the Surviving
Corporation, Parent nor any of their affiliates shall take any action, cause any
action to be taken, fail to take any action or cause any action to fail to be
taken, which action or failure to act could cause the Merger to fail to qualify
as a reorganization under Section 368(a) of the Code.
SECTION 6.07 No Public Announcement. The initial press release relating
----------------------
to this Agreement shall be a joint press release the text of which has been
agreed to by each of Parent and the Company. Thereafter, unless otherwise
required by applicable Law, the Company shall not issue any press release or
otherwise make any public statements without the prior written consent of
Parent.
SECTION 6.08 Expenses. If the Merger is consummated, all costs and
--------
expenses incurred in connection with this Agreement, the Merger and other
transactions contemplated by this Agreement (including, without limitation, the
fees and expenses of financial advisors, accountants and legal counsel) (i) if
incurred by Parent and Merger Sub, shall be paid by Parent, (ii) if incurred by
the Company and set forth in Schedule 6.08 shall be deducted from the Pro Rata
Cash Distribution pursuant to Section 2.01, and (iii) if incurred by the Company
and not set forth on Schedule 6.08 shall be paid by Parent. If the Merger is not
consummated, all such costs and expenses shall be paid by the party that
incurred them.
SECTION 6.09 Voting Agreements. The Company shall cause each Stockholder
-----------------
to execute and deliver to Parent, as promptly as practicable after the execution
of this Agreement, a Voting Agreement.
SECTION 6.10 Indemnification of Officers and Directors. (a) For six years
-----------------------------------------
from and after the Closing Date, Parent agrees to indemnify (including
advancement of expenses) and hold harmless all past and present officers and
directors of the Company to the same extent such Persons are indemnified as of
the date of this Agreement by the Company pursuant to the Company's Articles of
Incorporation or Bylaws, or pursuant to employment agreements or indemnification
agreements identified on the Company Disclosure Schedule or under applicable law
for acts or omissions which occurred at or prior to the Effective Time;
provided, however, that Parent shall not be required to indemnify outside
directors of the Company for breaches or alleged breaches of statutory fiduciary
duties of loyalty or care to the Company'stockholders. This indemnification
shall not apply to any claim by an Indemnitee pursuant to the terms of this
Agreement or any other transaction contemplated by this Agreement. This Section
6.10 shall survive the consummation of the Merger, and is intended to be for the
benefit of, and shall be enforceable by, the Indemnified Persons, their heirs
and personal representatives and shall be binding on Parent and the Surviving
Corporation.
40
(b) If Parent, the Surviving Corporation or any of its successors or
assigns (A) consolidates with or merges into any other Person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger, or (B) transfers or conveys all or substantially all of its properties
and assets to any Person, then, in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Parent or
the Surviving Corporation, as the case may be, shall assume the obligations set
forth in this Section 6.10.
SECTION 6.11 Nasdaq National Market Listing. Parent shall promptly prepare
------------------------------
and submit to the Nasdaq National Market a listing application covering the
Parent Shares to be issued in the Merger and pursuant to the Company Options,
and shall use its reasonable efforts to obtain, prior to the Effective Time,
approval for the listing of such Parent Shares, subject to official notice to
the Nasdaq National Market of issuance, and the Company shall cooperate with
Parent with respect to such listing.
SECTION 6.12 Registration on Form S-3. If the resale of the Parent Shares
------------------------
issued hereunder is not permitted under Rule 145 of the Securities Act (subject
to the applicable limitations contained therein) or is not otherwise permitted
without restriction under the Securities Act or any rules promulgated
thereunder, Parent shall register the resale of such Parent Shares pursuant to a
registration statement on Form S-3 within 90 days following the Effective Time
subject to the terms of Schedule 6.12 hereof; provided, however, that in the
event of a Board of Directors' determination (as such term is defined in
Schedule 6.12), Parent shall have the right to delay the effectiveness of such
registration for a period of up to 30 days.
SECTION 6.13 Board Observation Rights. Parent shall grant one
------------------------
representative of GMS Capital Partners the right to attend all meetings of
Parent's Board of Directors until July 31, 2001 in a non-voting observer
capacity, and in this respect, shall give such representative copies of all
notices, minutes, consents, and other materials that it provides to its
directors; provided, however, that such representative shall agree to hold in
-------- -------
confidence and trust and to act in a fiduciary manner with respect to all
information so provided; and provided further, that Parent reserves the right to
-------- -------
withhold any information and to exclude such representative from any meeting or
portion thereof if access to such information or attendance at such meeting
could adversely affect the attorney-client privilege between Parent and its
counsel or would result in disclosure of trade secrets to such representative or
if GMS Capital Partners or its representative is or owns a material interest in
a direct competitor of Parent.
SECTION 6.14 Contingent Deferred Merger Consideration. Following the
----------------------------------------
Effective Time, Parent shall not take any action that would materially prejudice
the Stockholders' ability to receive the full amount of the Contingent Deferred
Merger Consideration, provided however, that Parent shall in no way be limited
in its ability to make any decision with respect to Parent or Surviving
Corporation that, in the reasonable judgement of Parent (with the advice of
management of Surviving Corporation), is in the best interests of Parent and
Surviving Corporation, taken as a whole, without regard to the payment or
nonpayment of the Contingent Deferred Merger Consideration.
SECTION 6.15 No Requirement of Parent Shareholder Vote. Parent convenants
-----------------------------------------
that, prior to Effective Time, it shall not take any actions the intent or
effect of which
41
would be to allow Parent to elect not to consummate the Merger pursuant to
Section 7.02(m) hereof.
ARTICLE VII
CONDITIONS TO THE MERGER
------------------------
SECTION 7.01 Conditions to the Obligations of Each Party. The obligations
-------------------------------------------
of the Company, Parent and Merger Sub to consummate the Merger are subject to
the satisfaction or waiver (where permissible) of the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
--------------------
adopted by the requisite affirmative vote of the stockholders of the Company in
accordance with the URBCA and the Company's Articles of Incorporation;
(b) No Order. No Governmental Entity or court of competent jurisdiction
--------
located or having jurisdiction in the United States shall have enacted, issued,
promulgated, enforced or entered any Order which is then in effect and has the
effect of making the Merger illegal or otherwise prohibiting consummation of the
Merger; and
(c) HSR Act. Any waiting period (and any extension thereof) applicable to
-------
the consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) Tax Opinion. The Company's stockholders and the Parent shall have
-----------
received the opinion of Arthur Andersen LLP (or such other accounting or law
firm satisfactory to the Company and Parent) to the effect that the Merger will
qualify as a tax-free reorganization under the provisions of Section 368(a) of
the Code.
SECTION 7.02 Conditions to the Obligations of Parent and Merger Sub. The
------------------------------------------------------
obligations of Parent and Merger Sub to consummate the Merger are subject to the
satisfaction or waiver (where permissible) of the following additional
conditions:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties of the Company and the Subsidiaries contained in this Agreement that
are qualified as to materiality or Company Material Adverse Effect or any
similar standard or qualification, shall be true and correct in all respects,
and each of the representations and warranties of the Company and its
Subsidiaries contained in this Agreement that are not qualified as to
materiality or Company Material Adverse Effect or any similar standard or
qualification, shall be true and correct in all material respects, in each case
as of the Effective Time as though made on and as of the Effective Time, except
that those representations and warranties that address matters only as of a
particular date shall remain true and correct as of such date, and Parent shall
have received a certificate of the Chief Executive Officer of the Company to
such effect;
(b) Covenants. The Company shall have performed or complied in all
---------
material respects with all agreements and covenants required by this Agreement
to be performed or complied with by it on or prior to the Effective Time and
Parent shall have received a certificate of the Chief Executive Officer of the
Company to that effect;
42
(c) Approvals. Parent shall have received, each in form and substance
---------
reasonably satisfactory to Parent, (i) all required authorizations, consents,
orders and approvals of all Governmental Entities and officials, if any, and
(ii) all third party consents set forth in Sections 3.05 and 3.06 herein or on
the Company Disclosure Schedule;
(d) Dissenting Stockholders. Dissenting Shares shall comprise not more
-----------------------
than 1% of the Company Stock outstanding immediately prior to the Effective
Time;
(e) No Company Material Adverse Effect. No event or events shall have
----------------------------------
occurred which, individually or in the aggregate, have, or could reasonably be
expected to have, a Company Material Adverse Effect;
(f) Employment Agreements. The individuals set forth on Schedule 6.04(b)
---------------------
hereto remain employed by the Company and the Employment Agreements entered into
with such individuals remain in full force and effect at the Effective Time;
(g) No Restraints. there shall not be pending or threatened any suit,
-------------
action, investigation or proceeding to which a Governmental Entity is a party
(i) seeking to restrain or prohibit the consummation of the Merger or any of the
other transactions contemplated by this Agreement or seeking to obtain from
Parent or the Company any damages that are material or (ii) seeking to prohibit
or limit the ownership or operation by Parent or the Company of any portion of
their respective businesses or assets;
(h) Escrow Agreement. The Company and the Stockholders' Representative
----------------
shall have entered into the Escrow Agreement and the Escrow Agreement shall be
in full force and effect at the Effective Time;
(i) Termination of Employee Plans. The Company shall have provided Parent
-----------------------------
with evidence, reasonably satisfactory to Parent, as to the termination of the
Plans;
(j) Opinion of Company's Counsel. Parent shall have received the opinion
----------------------------
of Doepken Keevican & Weiss Professional Corporation, counsel to the Company, or
another counsel reasonably satisfactory to Parent substantially in the form
attached hereto as Exhibit E;
---------
(k) Secretary's Certificate. A certificate executed by the Secretary of
-----------------------
the Company attaching and certifying as to the Company's current Articles of
Incorporation and Bylaws and the resolutions of the Company's Board of Directors
and stockholders approving and adopting this Agreement and the transactions
relating thereto;
(l) No Parent Shareholder Vote. Neither the Merger nor the transactions
--------------------------
contemplated by this Agreement shall trigger any requirement for a vote by
Parent shareholders.
(m) FIRPTA Compliance. The Company shall have delivered to Parent a
-----------------
properly executed statement in a form reasonably acceptable to Parent for
purposes of satisfying Parent's obligations under Treasury Regulation 1.1445-
2(c)(3);
43
(n) Parachute Payments. Prior to the Effective Date, the Company
------------------
shall have taken all necessary actions to obtain the requisite stockholder
approval under Section 280G(b)(5) of the Code of any payments or benefits that
could be considered "excess parachute payments" within the meaning of Section
280G of the Code and shall require all "disqualified individuals" within the
meaning of Section 280G of the Code, to subject their existing benefits and
payments to the stockholder approval requirements of Section 280G(b)(5) of the
Code, as contemplated in the Proposed Treasury Regulations promulgated
thereunder;
(o) Employees. All of the individuals set forth on Schedule
---------
6.04(b) shall be employed by the Company;
(p) Approvals. All authorizations, consents (including the
---------
Material Consents), or approvals of, or notifications to any third party,
required by the Company's contracts, agreements or other obligations in
connection with the consummation of the Merger shall have occurred or been
obtained;
(q) Board and Officer Resignations. The Company shall have
------------------------------
received written letters of resignation from each of the current members of the
Board of Directors and Officers of the Company, in each case effective at the
Effective Time;
(r) Conversion of Company Preferred Stock. Each issued and
-------------------------------------
outstanding share of Company Preferred Stock shall have been converted on a one-
for-one basis into shares of Company Common Stock in accordance with Company's
Articles of Incorporation, and each holder thereof shall have waived prior
notice of the consummation of the Merger;
(s) Termination of Warrants. All outstanding warrants to
-----------------------
purchase Company Stock shall have been exercised or terminate by their terms as
of the Effective Time;
(t) Termination of Company Agreements. The Company's agreements
---------------------------------
on Schedule 7.02(t) shall have been terminated;
(u) Termination of 401(k) Plan. The Company shall have
--------------------------
terminated Company's 401(k) Plan effective at least one day prior to the Closing
Date and no further contributions shall have been made to the 401(k) Plan. The
Company shall have provided to Parent (i) executed resolutions of the board of
directors of the Company authorizing the termination and (ii) an executed
amendment to the 401(k) Plan sufficient to assure compliance with all applicable
requirements of the Code and regulations thereunder so that the tax-qualified
status of the 401(k) Plan will be maintained at the time of termination;
(v) Listing. The Parent Shares to be issued in the Merger shall
-------
have been approved for listing (subject to notice of issuance) on the Nasdaq
National Market; and
(w) Regulation D. The Parent Shares to be issued in the Merger
------------
shall be exempt from the registration requirements under the Securities Act.
44
SECTION 7.03 Conditions to the Obligations of the Company. The
--------------------------------------------
obligations of the Company to consummate the Merger are subject to the
satisfaction or waiver (where permissible) of the following additional
conditions:
(a) Accuracy of Representations. Each of the representations and
---------------------------
warranties of Parent and Merger Sub contained in Sections 4.01 through 4.13,
inclusive, of this Agreement shall be true and correct in all material respects,
in each case as of the Effective Time, as though made on and as of the Effective
Time, except that those representations and warranties which address matters
only as of a particular date shall remain true and correct as of such date, and
the Company shall have received a certificate of a duly authorized officer of
Parent to such effect;
(b) Performance of Covenants. Parent and Merger Sub shall have
------------------------
performed or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or prior to
the Effective Time, and the Company shall have received a certificate of a duly
authorized officer of Parent to that effect;
(c) No Material Adverse Effect. No event or events shall have
--------------------------
occurred which, individually or in the aggregate, have, or could reasonably be
expected to have, a Parent Material Adverse Effect.
(d) Board of Directors. As of the Effective Time, Ron Heinz
------------------
shall be appointed to Parent's Board of Directors.
(e) Opinion of Parent's Special Counsel. The Company shall have
-----------------------------------
received the opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, special counsel to Parent, or another counsel reasonably
satisfactory to the Company, substantially in the form attached hereto as
Exhibit F.
---------
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
SECTION 8.01 Termination. This Agreement may be terminated and
-----------
the Merger and the other transactions contemplated by this Agreement may be
abandoned at any time prior to the Effective Time, notwithstanding any requisite
approval and adoption of this Agreement and the transactions contemplated by
this Agreement, as follows:
(a) by mutual written consent duly authorized by the Boards of
Directors of each of Parent and the Company;
(b) by either Parent or the Company if the Effective Time shall
not have occurred on or before January 31, 2001; provided, however, that the
-------- -------
right to terminate this Agreement under this Section 8.01(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the Effective
Time to occur on or before January 31, 2001;
45
(c) there shall be any Order which is final and nonappealable
preventing the consummation of the Merger;
(d) by Parent upon a breach of any material representation,
warranty, covenant or agreement on the part of the Company set forth in this
Agreement, or if any representation or warranty of the Company shall have become
untrue, in either case such that the conditions set forth in Sections 7.02(a)
and 7.02(b) would not be satisfied ("Terminating Company Breach"); provided,
-------------------------- --------
however, that, if such Terminating Company Breach is curable by the Company
-------
through the exercise of its best efforts and for so long as the Company
continues to exercise such best efforts, Parent may not terminate this Agreement
under this Section 8.01(d) unless such breach is not cured within 30 days after
notice thereof is provided by Parent to the Company (but no cure period is
required for a breach which, by its nature, cannot be cured);
(e) by the Company upon a breach of any material representation,
warranty, covenant or agreement on the part of Parent and Merger Sub set forth
in this Agreement, or if any representation or warranty of Parent and Merger Sub
shall have become untrue, in either case such that the conditions set forth in
Sections 7.03(a) and 7.03(b) would not be satisfied ("Terminating Parent
------------------
Breach"); provided, however, that, if such Terminating Parent Breach is curable
------- -------- -------
by Parent and Merger Sub through the exercise of their respective best efforts
and for so long as Parent and Merger Sub continue to exercise such best efforts,
the Company may not terminate this Agreement under this Section 8.01(e) unless
such breach is not cured within 30 days after notice thereof is provided by the
Company to Parent (but no cure period is required for a breach which, by its
nature, cannot be cured); or
(f) by Company, in the event Parent executes a definitive
agreement that would result in a Change of Control Event of Parent.
SECTION 8.02 Effect of Termination. In the event of termination
---------------------
of this Agreement pursuant to Section 8.01, this Agreement shall forthwith
become void, there shall be no liability under this Agreement on the part of
Parent, Merger Sub or the Company or any of their respective officers or
directors, and all rights and obligations of each party hereto shall cease,
provided, however, that (i) Sections 6.02(b) and 6.08 and Articles VIII and IX
-------- -------
shall remain in full force and effect and survive any termination of this
Agreement and (ii) nothing herein shall relieve any party from liability for the
breach of any of its representations, warranties, covenants or agreements set
forth in this Agreement.
SECTION 8.03 Amendment. This Agreement may be amended by the
---------
parties hereto by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time. This Agreement may not be
amended except by an instrument in writing signed by the parties hereto.
SECTION 8.04 Waiver. At any time prior to the Effective Time,
------
any party hereto may (a) extend the time for the performance of any obligation
or other act of any other party hereto, (b) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto, and (c) waive compliance with any agreement or condition
contained herein. Any such extension or waiver shall be valid if set forth in
writing and signed by the party or parties to be bound thereby.
46
ARTICLE IX
INDEMNIFICATION
---------------
SECTION 9.01 Survival of Representations and Warranties. The
------------------------------------------
representations and warranties of the Company contained in this Agreement and
the Voting Agreements (collectively, the "Acquisition Documents") shall survive
---------------------
the Effective Time for a period of twelve (12) months. The Representations and
Warranties of Parent and Merger Sub do not survive the Effective Time and shall
terminate as of the Effective Time. Neither the period of survival nor the
liability of a party hereto with respect to such party's representations and
warranties shall be reduced by any investigation made at any time (whether
before or after the Effective Time) by or on behalf of another party hereto or
by any actual, implied or constructive knowledge or notice of any facts or
circumstances that any party may have as a result of any such investigation or
otherwise. If written notice of a claim has been given prior to the expiration
of the applicable representations and warranties by a party hereto to another
party hereto, then the relevant representations and warranties shall survive as
to such claim until such claim has been finally resolved.
SECTION 9.02 Indemnification by the Stockholders.
-----------------------------------
(a) After the Effective Time, Parent and its affiliates
(including, after the Effective Time, the Surviving Corporation), officers,
directors, employees, agents, successors and assigns (collectively, the "Parent
------
Indemnified Parties") shall be indemnified and held harmless by the
-------------------
Stockholders, jointly and severally, for any and all Liabilities, losses,
damages of any kind, diminution in value, claims, costs, expenses, fines, fees,
deficiencies, interest, awards, judgments, amounts paid in settlement and
penalties (including, without limitation, attorneys', consultants' and experts'
fees and expenses and other costs of defending, investigating or settling
claims) actually suffered or incurred by them (including, without limitation, in
connection with any action brought or otherwise initiated by any of them)
(hereinafter, a "Loss"), arising out of or resulting from:
----
(i) the breach of any representation or warranty (without
giving effect to any qualification as to materiality (or similar qualifications)
contained therein) made by the Company or such Stockholder in the Acquisition
Documents;
(ii) the breach of any covenant or agreement made by the
Company or such Stockholder in the Acquisition Documents;
(iii) Losses from breach of contract or other claims made by
any party alleging to have had a contractual or other right to acquire the
Company's capital stock or assets; or
(iv) the value of any tax deduction lost by the Company by
virtue of the application of Section 280G of the Code.
(b) Notwithstanding anything to the contrary contained in this
Agreement, except with respect to claims based on fraud:
47
(i) the maximum aggregate amount of indemnifiable Losses
arising out of or resulting from the causes enumerated in Section 9.02(a) that
may be recovered from the Stockholders shall not exceed 10% of the Aggregate
Merger Consideration; and
(ii) no indemnification payment by the Stockholders with
respect to any indemnifiable Loss otherwise payable under Section 9.02(a) and
arising out of or resulting from the causes enumerated in Section 9.02(a) shall
be payable until such time as all such indemnifiable Losses shall aggregate to
more than $250,000, after which time the Stockholders shall be liable in full
for all indemnifiable Losses in excess of $250,000, provided, however, that the
limitations set forth above in each of clauses (i) and (ii) shall not be
operative with respect to Losses arising from breaches of any of the Company
Basic Representations. As used herein, Company Basic Representations shall mean
the representations and warranties set forth in Sections 3.04 and 3.05.
SECTION 9.03 Indemnification Procedures.
--------------------------
(a) For purposes of this Section 9.03, a party against which
indemnification may be sought is referred to as the "Indemnifying Party" and the
-----------------
party which may be entitled to indemnification is referred to as the
"Indemnified Party".
-----------------
(c) The obligations and Liabilities of Indemnifying Parties
under this Article IX with respect to Losses arising from claims of any third
party which are subject to the indemnification provided for in this Article IX
("Third Party Claims") shall be governed by and contingent upon the following
------------------
additional terms and conditions: if an Indemnified Party shall receive notice of
any Third Party Claim, the Indemnified Party shall give all Indemnifying Parties
notice of such Third Party Claim within 90 days of the receipt by the
Indemnified Party of such notice; provided, however, that the failure to provide
-------- -------
such notice shall not release an Indemnifying Party from any of its obligations
under this Article IX except to the extent that such Indemnifying Party is
materially prejudiced by such failure. The notice of claim shall describe in
reasonable detail the facts known to the Indemnified Party giving rise to such
indemnification claim, and the amount or good faith estimate of the amount
arising therefrom.
(d) If the Indemnifying Party acknowledges in writing its
obligation to indemnify the Indemnified Party hereunder against any Losses that
may result from such Third Party Claim (and in the case where a Parent
Indemnified Party is the Indemnified Party, (i) Parent has reasonably determined
that losses which may be incurred as a result of the Third Party Claim do not
exceed individually, or when aggregated with all other losses subject to
indemnification under Section 9.02, the maximum aggregate amount of
indemnifiable losses set forth in such Section, (ii) the Third Party Claim
involves only money damages and does not seek an injunction or other equitable
remedy, (iii) settlement of or an adverse judgement with respect to the Third
Party Claim is not, in the good faith judgement of Parent, likely to establish a
precedential custom or practice adverse to the continuing business interests of
Parent or to increase the Tax liability of Parent or the Company), then the
Indemnifying Party shall be entitled to assume and control the defense of such
Third Party Claim at its expense and through counsel of its choice (such counsel
to be reasonably acceptable to Parent) if it gives notice of its intention to do
so to the Indemnified Party within ten days of the receipt of such notice from
the Indemnified Party; provided, however, if there exists or is reasonably
-------- -------
likely to exist a conflict of
48
interest that would make it inappropriate in the judgment of the Indemnified
Party, in its reasonable discretion, for the same counsel to represent both the
Indemnified Party and the Indemnifying Party, then the Indemnified Party shall
be entitled to retain its own counsel, in each jurisdiction for which the
Indemnified Party determines counsel is required, at the expense of the
Indemnifying Party. In the event that the Indemnifying Party exercises the right
to undertake any such defense against any such Third Party Claim as provided
above, the Indemnifying Party shall conduct the defense of the Third Party Claim
actively and diligently and the Indemnified Party shall cooperate with the
Indemnifying Party in such defense and make available to the Indemnifying Party,
at the Indemnifying Party's expense, all witnesses, pertinent records, materials
and information in the Indemnified Party's possession or under the Indemnified
Party's control relating thereto as is reasonably required by the Indemnifying
Party. Similarly, in the event the Indemnified Party is, directly or indirectly,
conducting the defense against any such Third Party Claim, the Indemnifying
Party shall cooperate with the Indemnified Party in such defense and make
available to the Indemnified Party, at the Indemnifying Party's expense, all
such witnesses, records, materials and information in the Indemnifying Party's
possession or under the Indemnifying Party's control relating thereto as is
reasonably required by the Indemnified Party. No such Third Party Claim may be
settled by any party conducting the defense against such claim without the prior
written consent of the other party; provided, however, if the Stockholders are
-------- -------
the Indemnifying Parties and are not entitled to assume the defense against such
Third Party Claim pursuant to this paragraph, the Parent Indemnified Party shall
have the right to consent to the entry of any judgement or enter into any
settlement with respect to the Third Party Claim in any manner it may deem
appropriate (and Parent need not consult with, or obtain any consent from, the
Stockholders or the Stockholders' Representative in connection therewith).
SECTION 9.04 Stockholders' Representative. GMS Capital
----------------------------
Partners, L.P. (such Person and any successor or successors being the
"Stockholders' Representative") shall act as the representative of the
----------------------------
Stockholders, and shall be authorized to act on behalf of the Stockholders and
to take any and all actions required or permitted to be taken by the
Stockholders' Representative under this Agreement or the Escrow Agreement, with
respect to any claims (including the settlement thereof) made by Parent or the
Stockholders for indemnification pursuant to this Article IX of the Agreement
and with respect to any actions to be taken by the Stockholders' Representative
pursuant to the terms of the Escrow Agreement. The Stockholders shall be bound
by all actions taken by the Stockholders' Representative in its capacity
thereof, except for any action that conflicts with the limitation set forth in
the final sentence of this Section 9.04. The Stockholders' Representative shall
promptly, and in any event within five business days, provide written notice to
the Stockholders of any action taken on their behalf by the Stockholders'
Representative pursuant to the authority delegated to the Stockholders'
Representative under this Section 9.04. The Stockholders' Representative shall
at all times act in his or her capacity as Stockholders' Representative in a
manner that the Stockholders' Representative believes to be in the best interest
of the Stockholders. Neither the Stockholders' Representative nor any of its
directors, officers, agents or employees shall be liable to any Person for any
error of judgment, or any action taken, suffered or omitted to be taken, under
this Agreement or the Escrow Agreement, except in the case of the Stockholders'
Representative's gross negligence, bad faith or willful misconduct. The
Stockholders' Representative may consult with legal counsel, independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken in good faith by it
49
in accordance with the advice of such counsel, accountants or experts. The
Stockholders' Representative shall not have any duty to ascertain or to inquire
as to the performance or observance of any of the terms, covenants or conditions
of this Agreement or the Escrow Agreement. As to any matters not expressly
provided for in this Agreement or the Escrow Agreement, the Stockholders'
Representative shall not be required to exercise any discretion or take any
action. Each Stockholder severally shall indemnify and hold harmless and
reimburse the Stockholders' Representative from and against such Stockholder's
ratable share of any and all liabilities, losses, damages, claims, costs or
expenses suffered or incurred by the Stockholders' Representative arising out of
or resulting from any action taken or omitted to be taken by the Stockholders'
Representative under this Agreement or the Escrow Agreement, other than such
liabilities, losses, damages, claims, costs or expenses arising out of or
resulting from the Stockholders' Representative's gross negligence, bad faith or
willful misconduct. Notwithstanding anything to the contrary herein or in the
Escrow Agreement, (a) the Stockholders' Representative is not authorized to, and
shall not, accept on behalf of any Stockholder any merger consideration to which
such Stockholder is entitled under this Agreement and (b) the Stockholders'
Representative shall not in any manner exercise, or seek to exercise, any voting
power whatsoever with respect to shares of capital stock of the Company or
Parent now or hereafter owned of record or beneficially by any Stockholder
unless the Stockholders' Representative is expressly authorized to do so in a
writing signed by such Stockholder. In all matters relating to this Article IX,
the Stockholders' Representative shall be the only party entitled to assert the
rights of the Stockholders, and the Stockholders' Representative shall perform
all of the obligations of the Stockholders hereunder. Parent shall be entitled
to rely on all statements, representations and decisions of the Stockholders'
Representative.
ARTICLE X
GENERAL PROVISIONS
------------------
SECTION 10.01 Notices. All notices, requests, claims, demands
-------
and other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in person, by
cable, telecopy, facsimile, telegram or telex or by registered or certified mail
(postage prepaid, return receipt requested) to the respective parties at the
following addresses (or at such other address for a party as shall be specified
in a notice given in accordance with this Section 10.01):
(a) if to Parent or Merger Sub:
SonicWall, Inc.
1160 Bordeaux Drive
Sunnyvale, CA 94089
Facsimile No.: (408) 962-1201
Attention: Zachary Abrams
50
with a copy to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
155 Constitution Drive
Menlo Park, California 94025
Facsimile No.: (650) 463-5449
Attention: Gregory K. Miller
(b) if to the Company:
Phobos Corporation
348 East 4500 South
Salt Lake City, Utah 84107
Facsimile No.: (408) 962-1201
Attention: Ron Heinz
with a copy to:
Doepken Keevican & Weiss
Professional Corporation
58/th/ Floor USX Tower
600 Grant Street
Pittsburgh, PA 15219
Facsimile No.: (412) 355-2609
Attention: Leo A. Keevican, Jr., Esq.
SECTION 10.02 Certain Definitions.
-------------------
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "affiliate" of a specified Person means a Person who
---------
directly or indirectly through one or more intermediaries controls, is
controlled by, or is under common control with such specified Person.
(ii) "beneficial owner" with respect to any shares means a
----------------
Person who shall be deemed to be the beneficial owner of such shares (i) which
such Person or any of its affiliates or associates (as such term is defined in
Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly or
indirectly, (ii) which such Person or any of its affiliates or associates has,
directly or indirectly, (A) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of consideration
rights, exchange rights, warrants or options, or otherwise, or (B) the right to
vote pursuant to any agreement, arrangement or understanding, or (iii) which are
beneficially owned, directly or indirectly, by any other Persons with whom such
Person or any of its affiliates or associates or Person with
51
whom such Person or any of its affiliates or associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of any shares.
(iii) "business day" means any day on which banks are not
------------
required or authorized to close in Sunnyvale, California.
(iv) "CERCLA" means the Comprehensive Environmental
------
Response, Compensation and Liability Act of 1980, as amended as of the date
hereof.
(v) "Company Software" means Software (A) material to the
----------------
operation of the business of the Company or any Subsidiary, including all
computer software and databases operated by the Company or any Subsidiary on its
web sites or used by the Company or any Subsidiary in connection with processing
customer orders, storing customer information, or storing or archiving data, and
(B) manufactured, distributed, sold, licensed or marketed by the Company or any
Subsidiary.
(vi) "control" (including the terms "controlled by" and
-------
"under common control with") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, as trustee or executor, by contract or credit arrangement or
otherwise.
(vii) "Environmental Laws" means any federal, state or
------------------
local statute, law, ordinance, regulation, rule, code or order of the United
States, or any other jurisdiction and any enforceable judicial or administrative
interpretation thereof, including any judicial or administrative order, consent
decree or judgment, relating to pollution or protection of the environment or
natural resources, including, without limitation, those relating to the use,
handling, transportation, treatment, storage, disposal, release or discharge of
Hazardous Materials, as in effect as of the date of this Agreement.
(viii) "Environmental Permits" means any permit, approval,
---------------------
identification number, license and other authorization required under any
applicable Environmental Law.
(ix) "Hazardous Materials" means (a) any petroleum,
-------------------
petroleum products, by-products or breakdown products, radioactive materials,
asbestos-containing materials or polychlorinated biphenyls or (b) any chemical,
material or substance defined or regulated as toxic or hazardous or as a
pollutant or contaminant or waste under any applicable Environmental Law.
(x) "Intellectual Property" means: (a) United States,
---------------------
foreign and international patents, patent applications and statutory invention
registrations, (b) trademarks, service marks, domain names, trade dress, logos,
and other source identifiers, including registrations and applications for
registration thereof, (c) copyrights, including registrations and applications
for registration thereof, (d) Software, (e) confidential and proprietary
information, including trade secrets and know-how, and (f) rights of privacy,
publicity and endorsement, and all other rights associated therewith in any
jurisdiction.
52
(xi) "knowledge of the Company" or "the Company's knowledge"
------------------------ -----------------------
means the knowledge of the directors and officers of the Company and such
knowledge that would be imputed to such Persons upon due investigation.
(xii) "Legal Proceedings" means a private or governmental
-----------------
action, suite, proceeding, claim, arbitration or investigation pending before
any agency, court, or tribunal, foreign or domestic.
(xiii) "Licensed Intellectual Property" means all Intellectual
------------------------------
Property licensed to the Company pursuant to the Licenses.
(xiv) "Licenses" mean (A) licenses of Intellectual Property by
--------
the Company or any Subsidiary to third parties, (B) licenses of Intellectual
Property by third parties to the Company or any Subsidiary, and (C) agreements
between the Company or any Subsidiary and third parties relating to the
development or use of Intellectual Property, the development or transmission of
data, or the use, modification, framing, linking advertisement, or other
practices with respect to Internet web sites.
(xv) "Owned Intellectual Property" means all Intellectual
---------------------------
Property owned by the Company or any Subsidiary.
(xvi) "Person" means an individual, corporation, partnership,
------
limited partnership, syndicate, person (including, without limitation, a
"person" as defined in Section 13(d)(3) of the Exchange Act), trust, association
or entity or government, political subdivision, agency or instrumentality of a
government.
(xvii) "Software" means computer software, programs and
-------
databases in any form, including Internet web sites, web content and links, all
versions, updates, corrections, enhancements, and modifications thereof, and all
related documentation.
(xviii) "subsidiary" or "subsidiaries" of any Person means any
---------- ------------
corporation, partnership, joint venture or other legal entity of which such
Person (either alone or through or together with any other subsidiary) owns,
directly or indirectly, more than 50% of the stock or other equity interests,
the holders of which are generally entitled to vote for the election of the
board of directors or other governing body of such corporation or other legal
entity.
(b) The following terms shall have the meanings defined for such
terms in the Sections of this Agreement set forth below:
Term Section
---- -------
Acquisition Documents.......................................... 9.01
affiliate...................................................... 10.02(a)
Aggregate Common Merger Consideration.......................... 2.01(b)
Agreement...................................................... Preamble
Antitrust Laws................................................. 3.16
Assets......................................................... 6.05(b)
Audited Financial Statements................................... 3.08(a)
beneficial owner............................................... 10.02(a)
53
Board of Directors' Determination.............................. Sch. 6.12
business day................................................... 10.02(a)
CERCLA......................................................... 10.02(a)
Change of Control Event........................................ 2.02(c)
Closing........................................................ 1.02
Closing Date................................................... 1.02
Code........................................................... Recitals
Common Stock Exchange Ratio.................................... 2.01(b)
Company........................................................ Preamble
Company Common Stock........................................... Recitals
Company Disclosure Schedule.................................... Article III
Company Material Adverse Effect................................ 3.01
Company Permits................................................ 3.07
Company Preferred Stock........................................ Recitals
Company Proprietary Rights..................................... 3.14(b)
Company Series A Preferred Stock............................... Recitals
Company Series B Preferred Stock............................... Recitals
Company Series C Preferred Stock............................... Recitals
Company Share Certificates..................................... 2.03(a)
Company Software............................................... 10.02(a)
Company Stock.................................................. Recitals
Company Options................................................ 2.05(a)
Company's knowledge............................................ 10.02(a)
Competing Transaction.......................................... 6.03(b)
Contingent Deferred Merger Consideration....................... 2.02(c)
control........................................................ 10.02(a)
Dissenting Shares.............................................. 2.06(a)
Effective Time................................................. 1.02
Employment Agreements.......................................... 6.04(b)
Environmental Laws............................................. 10.02(a)
Environmental Permits.......................................... 10.02(a)
ERISA.......................................................... 3.11(a)
ERISA Affiliate................................................ 3.11(e)
Escrow Account................................................. 2.03(b)
Escrow Agent................................................... 2.03(b)
Escrow Agreement............................................... 2.03(b)
Escrow Fund.................................................... 2.03(b)
Escrow Shares.................................................. 2.01(b)
Exchange Act................................................... 4.05
Exchange Agent................................................. 2.03(a)
Financing Proceeds............................................. 2.01(b)
Former Owners.................................................. 3.14(a)
Fully Diluted Common Shares Amount............................. 2.01(b)
Governmental Entity............................................ 3.06(b)
Hazardous Materials............................................ 10.02(a)
HSR Act........................................................ 3.06(b)
54
Indemnified Party.............................................. 9.03(a)
Indemnifying Party............................................. 9.03(a)
Intellectual Property.......................................... 10.02(a)
Interim Financial Statements................................... 3.08(a)
IRS............................................................ 3.11(b)
Invention Assignment Agreement................................. 6.04(d)
Law............................................................ 3.06(a)
Legal Proceeding............................................... 10.02(a)
Letter of Transmittal.......................................... 2.03(a)
Liabilities.................................................... 3.08(b)
Licensed Intellectual Property................................. 10.02(a)
Licenses....................................................... 10.02(a)
Loss........................................................... 9.02(a)
Material Contracts............................................. 3.12(a)
Merger......................................................... Recitals
Merger Sub..................................................... Preamble
Multiemployer Plan............................................. 3.11(c)
Multiple Employer Plan......................................... 3.11(c)
Non-Disclosure Agreement....................................... 6.03(b)
Option Assignment Agreement.................................... 6.04(c)
Order.......................................................... 7.01(b)
Owned Intellectual Property.................................... 10.02(a)
Parent......................................................... Preamble
Parent Common Stock............................................ Recitals
Parent Disclosure Schedule..................................... Article IV
Parent Indemnified Parties..................................... 9.02(a)
Parent Material Adverse Effect................................. 4.05(b)
Parent SEC Reports............................................. 4.05(a)
Parent Shares.................................................. 2.01(b)
Person......................................................... 10.02(a)
Plans.......................................................... 3.11(a)
Proprietary Rights............................................. 3.14(b)
Pro Rata Cash Distribution..................................... 2.01(b)
Pro Rata Contingent Distribution............................... 2.02(c)
Merger Sub..................................................... Preamble
Reference Balance Sheet........................................ 3.07(a)
Representatives................................................ 6.02(a)
Revenues....................................................... Sch. 2.02
SEC............................................................ 4.05(a)
Securities Act................................................. 4.05(a)
Software....................................................... 10.02(a)
Stockholders................................................... Recitals
Stockholders' Representative................................... 9.04
Subsidiary..................................................... 10.02(a)
Surviving Corporation.......................................... 1.01
Taxes.......................................................... 3.16(c)
55
Terminating Company Breach..................................... 8.01(d)
Terminating Parent Breach...................................... 8.01(e)
Third Party Claims............................................. 9.03(a)
URBCA.......................................................... Recitals
U.S. GAAP...................................................... 3.08(a)
Voting Agreement............................................... Recitals
SECTION 10.03 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of Law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated by this Agreement is not affected in
any manner materially adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
be consummated as originally contemplated to the fullest extent possible.
SECTION 10.04 Assignment; Binding Effect; Benefit. Neither this
-----------------------------------
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns. Notwithstanding
anything contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any Person other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
SECTION 10.05 Incorporation of Exhibits. The Company Disclosure
-------------------------
Schedule, the Parent Disclosure Schedule, the Schedules and all Exhibits
attached hereto and referred to herein are hereby incorporated herein and made a
part hereof for all purposes as if fully set forth herein.
SECTION 10.06 Specific Performance. The parties hereto agree that
--------------------
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 10.07 Governing Law; Forum. This Agreement shall be
--------------------
governed by, and construed in accordance with, the laws of the State of
California applicable to contracts executed in and to be performed in that state
and without regard to any applicable conflicts of law. Any controversy or claim
arising out of or relating to this Agreement or a breach hereof shall be finally
settled by arbitration in San Francisco, California, under the commercial rules
then in effect of the American Arbitration Association, and shall be determined
in accordance with the laws of the State of California, applicable to contracts
to be wholly performed therein.
56
SECTION 10.08 Time of the Essence. For purposes of this
-------------------
Agreement and the transactions contemplated by this Agreement, time is of the
essence.
SECTION 10.09 Waiver of Jury Trial. Each of the Parties
--------------------
hereto hereby irrevocably waives any and all right to trial by jury in any Legal
Proceeding arising out of or related to this Agreement or any of the
transactions contemplated hereby.
SECTION 10.10 Construction.
------------
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to
the effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words, "without
limitation."
(d) Except as otherwise indicated, all references in this
Agreement to "Sections", and "Schedules" and "Exhibits" are intended to refer to
Sections of this Agreement and Schedules and Exhibits to this Agreement.
SECTION 10.11 Further Assurances. Each party hereto shall
------------------
execute and cause to be delivered to each other party hereto such instruments
and other documents, and shall take such other actions, as such other party may
reasonably request (prior to, at or after the Closing) for the purpose of
carrying out or evidencing any of the transactions contemplated by this
Agreement.
SECTION 10.12 Headings. The descriptive headings contained in
--------
this Agreement are included for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement.
SECTION 10.13 Counterparts. This Agreement may be executed
------------
and delivered (including by facsimile transmission) in one or more counterparts,
and by the different parties hereto in separate counterparts, each of which when
executed and delivered shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
SECTION 10.14 Entire Agreement. This Agreement (including the
----------------
Exhibits, the Schedules, the Company Disclosure Schedule and the Parent
Disclosure Schedule) and the Non-Disclosure Agreement constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties with respect
thereto. No addition to or modification of any provision of this
57
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
58
IN WITNESS WHEREOF, each of Parent, Merger Sub, the Company and the
Stockholders' Representative has executed or has caused this Agreement to be
executed by its respective officers thereunto duly authorized as of the date
first written above.
SONICWALL, INC.
By: /s/ Sreekanth Ravi
---------------------------------------------
Name: Sreekanth Ravi
Title: President and Chief Executive Officer
PLUTO ACQUISITION CORP.
By: /s/ Michael J. Sheridan
---------------------------------------------
Name: Michael J. Sheridan
Title: President and Chief Executive Officer
PHOBOS CORPORATION
By: /s/ Ron Heinz
---------------------------------------------
Name: Ron Heinz
Title: President and Chief Executive Officer
GMS CAPITAL PARTNERS, L.P.
GMS CAPITAL GROUP, L.L.C
By: /s/ Joachim Gfoeller, Jr.
---------------------------------------------
Name: Joachim Gfoeller, Jr.
Title:
SIGNATURE PAGE TO
THE AGREEMENT AND PLAN OF MERGER AND REORGANTIZATION
59
Schedule 6.12
REGISTRATION RIGHTS PROVISIONS
1. The Parent shall:
(a) Furnish to each holder of Parent Shares registered under this
Agreement (a "Holder") such numbers of copies of a prospectus, in conformity
with the requirements of the Securities Act, and such other documents as they
may reasonably request in order to facilitate the disposition of the Parent
Shares owned by them (the "Registrable Shares").
(b) Use its best efforts to register and qualify the securities
covered by the registration statement under such Blue Sky or other securities
laws of such jurisdictions as shall be reasonably requested by any holder;
provided that the Parent shall not be required in connection therewith or as a
--------
condition thereto to qualify to do business, subject itself to taxation or to
file a general consent to service of process in any such state or jurisdiction.
(c) Notify each holder of Registrable Shares covered by the
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of 1933 (the "Securities Act")
of the happening of any event as a result of which the prospectus included in
the registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing, and at the request of such Holder, prepare and
furnish to such Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to purchasers of such Registrable Shares, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing.
(d) Cause all Registrable Shares registered to be listed on each
securities exchange on which similar securities issued by the Parent are then
listed.
(e) Provide a transfer agent and registrar for all Registrable Shares
registered hereunder and a CUSIP number for all such Registrable Shares, in each
case not later than the effective date of the registration.
(f) Maintain the effectiveness of the Registration Statement for a
period of at least one (1) year.
2. Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Parent to take any action pursuant to this attachment with
respect to the Registrable Shares of any selling Holder that such Holder shall
furnish to the Parent such information regarding itself, the Registrable Shares
held by it, and the intended method of disposition of such securities as shall
be required by the Securities Act to effect the registration of such Holder's
Registrable Shares.
3. Expenses of Registration. The Parent shall bear and pay all costs and
------------------------
expenses including, without limitation, all registration filing fees, printing
expenses, fees and expenses incurred in connection with complying with state
securities or blue sky laws (other than those which by law must be paid by the
selling shareholders), fees of the National Association of Securities Dealers,
Inc. and fees of transfer agents and registrars relating to such offering
incurred in connection with registrations, filings or qualifications except (a)
any underwriters' or brokers' commissions or discounts applicable to the
Registrable Shares to be sold by any Holder; (b) Blue Sky or state securities
laws fees which by law must be paid by selling Holder rather than the Parent,
(c) all fees or expenses expressly applicable to securities being sold by the
holder of Registrable Shares, and (d) fees or expenses of such Holder's
individual counsel (the Parent being responsible to pay the reasonable fees of
one counsel for the Holders).
4. Indemnification. In the event any Registrable Shares are included in a
---------------
registration statement under this Agreement:
(a) To the extent permitted by law, the Parent will indemnify and hold
harmless each Holder, if joining in a registration, and each of its directors,
officers and controlling persons and each underwriter within the meaning of the
Securities Act or the Securities Exchange Act of 1934 (the "Exchange Act")
(each, an "indemnified person") against any losses, claims, damages or
liabilities, joint or several, to which they may become subject under the
Securities Act, the Exchange Act, any other statute, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based on any untrue or alleged untrue statements of
any material fact contained in the registration statement, including any
preliminary prospectus or final prospectus, or any amendments or supplements
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading or arise out of any violation by the
Parent of any rule or regulation promulgated under the Securities Act or the
Exchange Act applicable to the Parent and relating to action or inaction
required of the Parent in connection with any the registration; and will
reimburse each such indemnified person for any reasonable legal or other
expenses incurred by them in connection with defending any such loss, claim,
damage, liability or action; provided that the indemnity agreement contained in
this Section shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Parent (which consent shall not be unreasonably withheld or
delayed) nor shall the Parent be liable in any such case for any such loss,
claim, damage, liability, action or expenses to the extent that they arise out
of or are based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in connection with the registration statement,
preliminary prospectus, final prospectus or amendments or supplements thereto,
in reliance upon and in conformity with written information furnished for use in
connection with the registration by any such indemnified person.
(b) To the extent permitted by law, each Holder, if joining in a
registration, will indemnify and hold harmless the Parent, each of its
directors, each of its officers who have signed the registration statement and
each person, if any, who controls the Parent within the meaning of the
Securities Act or the Exchange Act against any losses, claims, damages or
liabilities joint or several, to which the Parent or any such director, officer
or controlling person may become subject, under the Securities Act, the Exchange
Act, any other statute, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereto) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the registration
statement, including any preliminary prospectus or final prospectus, or any
amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that the registration
statement, preliminary or final prospectus, or amendments or supplements
thereto, in reliance upon and in conformity with written information furnished
by such Holder expressly for use in connection with the registration; and such
Holder will reimburse any reasonable legal or other expenses incurred by the
Parent or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided that the indemnity agreement contained in this Section shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of such Holder (which
consent shall not be unreasonably withheld or delayed).
(c) In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 6.6 for any legal expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so selected,
provided, however, that, if the defendants in any such action include both the
-------- -------
indemnified party and the indemnifying party and the indemnifying party shall
have reasonably concluded that (i) there may be reasonable defenses available to
the indemnified party which are different from or additional to those available
to the indemnifying party or (ii) the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified party shall have the right to select a separate counsel
and to assume such legal defenses and otherwise to participate in the defense of
such action, with the reasonable and actual expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
indemnified party under this Section 6.6 except to the extent (and only to the
extent) of any actual prejudice suffered by the indemnifying party.
(d) If the indemnification provided for in this Section is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage or expense referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. This
relative fault of the indemnifying party and of the indemnified party shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in an underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Parent and Holders under this Section shall
survive the completion of any offering of Registrable Shares in a registration
statement under this Agreement, and otherwise. No indemnifying party, in the
defense of any such claim or litigation, shall, except with the consent of each
indemnified party, consent to the entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
5. Reports Under Securities Law. Until two years following the Effective
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Time, the Parent shall:
(a) file with the SEC in a timely manner all reports and other
documents required of the Parent under the Exchange Act (at any time after it
has become subject to such reporting requirements); and
(b) furnish to each Holder upon request a written statement by the
Parent that it has compiled with the reporting requirements of the Securities
Act or the Exchange Act (at any time after it has become subject to such
reporting requirements), a copy of the most recent annual or quarterly report of
the Parent, and such other reports and documents so filed by the Parent as may
be reasonably requested in availing the Holder of any rule or regulation of the
SEC permitting the selling of any such securities without registration.
6. Stop Notice. Each Holder agrees that, upon receipt of any notice (a
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"Stop Notice") from the Parent that the Board of Directors of the Parent has
determined, in its good faith reasonable judgment, that the disposition of the
Shares pursuant to the registration statement would materially interfere with,
or require the premature disclosure of, any financing, acquisition or
reorganization involving the Parent or any of its subsidiaries, or otherwise
would require premature disclosure of any other material nonpublic information
as to which the Parent has a good faith, bona fide business purpose for
maintaining its confidentiality (the "Board of Directors' Determination"), such
Holder will immediately discontinue disposition of the Shares pursuant to the
registration statement until such Holder's receipt of a copy of a supplemented
or amended prospectus or written notice from the Parent that the reason for the
Board of Directors' `Determination has lapsed and, if so directed by the Parent,
such Holder shall deliver to the Parent (at the expense of the Parent) or
destroy (and deliver to the Parent a certificate of destruction) all copies in
its possession, of the prospectus covering the Shares current at the time of
receipt of the Stop Notice; provided, however, that any restriction on trading
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resulting from a Board of Directors' Determination shall be limited to a maximum
of thirty (30) consecutive days
and ninety (90) days in any 12-month period; and, provided further, that the
period set forth in Section 1 of this attachment shall be extended by one day
for each day that a Stop Notice remains in effect.
7. Assignment of Registration Rights. The right to cause the Company to
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register Registrable Shares pursuant to this Agreement may be assigned by any
Holder to a transferee or assignee of Registrable Shares; provided such transfer
is permitted under applicable securities laws. Notwithstanding the foregoing,
if the Company has registered Registrable Shares pursuant to a registration
statement which has been declared effective by the Commission and, thereafter, a
Holder purports to assign all or a portion of the Registrable Shares to any
other person, the assignee shall have the right to cause the registration
statement to be amended or supplemented to name such assignee as a selling
shareholder so long as (i) the filing of a supplement or post-effective
amendment is permitted by applicable law for such purpose and (ii) all costs and
expenses to the Company, including without limitation legal and accounting
expenses, incurred to so amend such registration statement shall be paid by the
assignee requesting such amendment (or shared on a pro rata basis to the extent
more than one assignee requests such amendment).
Agreement and Plan of Merger and Reorganization - SonicWALL Inc. and Phobos Corp.
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