{"id":43768,"date":"2015-09-17T11:25:58","date_gmt":"2015-09-17T16:25:58","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/contracts\/uncategorized\/the-well-membership-interest-purchase-agreement-salon-internet.html"},"modified":"2015-09-17T11:25:58","modified_gmt":"2015-09-17T16:25:58","slug":"the-well-membership-interest-purchase-agreement-salon-internet","status":"publish","type":"corporate_contracts","link":"https:\/\/corporate.findlaw.com\/contracts\/planning\/the-well-membership-interest-purchase-agreement-salon-internet.html","title":{"rendered":"The Well Membership Interest Purchase Agreement – Salon Internet Inc., Whole Earth Lectronic Link and Bruce R. Katz"},"content":{"rendered":"\n MEMBERSHIP INTEREST PURCHASE AGREEMENT\n --------------------------------------\n\n THIS MEMBERSHIP INTEREST PURCHASE AGREEMENT (this \"Agreement\") is dated as\nof March 29, 1999 between SALON INTERNET, INC., a California corporation (the\n\"Buyer\"), and WHOLE EARTH LECTRONIC LINK, INC., a California corporation (\"Whole\nEarth\"), and Bruce R. Katz (\"Katz,\" and together with Whole Earth, the\n\"Sellers\").\n\n R E C I T A L S\n ---------------\n\n A. The Sellers own directly, beneficially and of record, 100% of the\nissued and outstanding membership interests (the \"Units\") of The WELL, a\nCalifornia limited liability company (the \"Company\").\n\n B. The Buyer desires to acquire the Units from the Sellers, and the\nSellers desire to sell the Units to the Buyer, all upon the terms and subject to\nthe conditions set forth in this Agreement.\n\n A G R E E M E N T\n -----------------\n\n NOW, THEREFORE, in consideration of the foregoing and the mutual covenants\ncontained in this Agreement and for other valuable consideration the Buyer and\nthe Sellers agree as follows:\n\n ARTICLE ONE\n\n\n TERMS OF THE TRANSACTION\n\nSECTION 1.1. SALE AND PURCHASE.\n ----------------- \n\n The Sellers, on the Closing Date (as defined in Section 1.4 below), shall\nsell to the Buyer the number of Units set forth opposite each Seller's name\nbelow:\n\n Name Units\n ---- -----\n\n Whole Earth: 1,500,000\n\n Katz: 10,000\n\nSECTION 1.2. PURCHASE PRICE.\n -------------- \n\n Subject to adjustment as set forth in Section 1.3 hereof, the Buyer, on the\nClosing Date, shall deliver to the Sellers, in payment of the purchase price\n(the \"Purchase Price\") for the Units, certificates representing an aggregate of\n684,412 shares (the \"Shares\") of Series C Preferred Stock of Seller (the \"Series\nC Preferred Stock\"), payable as follows: to Whole Earth 611,891 Shares, to Katz\n4,079 Shares, and deposited with U.S. Bank, as escrow agent (the \"Escrow\nAgent\"), 68,442 Shares (the \"Escrow Amount\"). The Escrow Amount shall be held in\nescrow in accordance with the terms of this Agreement and the escrow agreement\nto be entered into among the Escrow Agent, Buyer and Sellers in the form\nattached as Exhibit A hereto (the \"Escrow Agreement\").\n --------- \n\n 1\n\n \nSECTION 1.3. PURCHASE PRICE ADJUSTMENTS.\n ---------------------------\n\n (a) On the Closing Date, the Sellers shall deliver a balance sheet, which\nconforms to the requirements of Section 2.7(b) hereof, as of a date no earlier\nthan three business days before the Closing Date (the \"Closing Balance Sheet\").\nIn the event that the Company's total members' equity as of the date of the\nClosing Balance Sheet is less than the Company's total members' equity as of the\nBalance Sheet Date (as defined in Section 2.7(a) hereof), then the Purchase\nPrice shall be reduced by the number of shares of Series C Preferred Stock which\nis equal to the quotient of (i) the difference between the Company's total\nmembers' equity as of the Balance Sheet Date and the Company's total members'\nequity as of the date of the Closing Balance Sheet, divided by (ii) $2.63 per\nshare, rounded to the nearest whole share (the \"Adjusted Purchase Price\"). In\nthe event of any adjustment pursuant to this Section 1.3, the Escrow Amount and\nthe number of Shares to be received by each Seller shall be reduced\nproportionately.\n\n (b) In the event that the Buyer does not effectuate, (1) prior to an\nunderwritten registered initial public offering of Buyer Common Stock, (2) prior\nto a merger or consolidation of the Buyer in which the Buyer shall not survive\nand in which the shareholders of the Buyer do not own a majority of the Buyer's\noutstanding stock following such merger or consolidation, (3) prior to the sale\nof all or substantially all of the assets of the Buyer, or (4) within ninety\n(90) days of the Closing Date, a stock split, stock dividend or similar event of\nrecapitalization exclusively with respect to its outstanding shares of Series C\nPreferred Stock in connection with the issuance of additional shares of Series C\nPreferred Stock (the \"Financing Shares\") in an equity financing to raise at\nleast $5,000,000 in working capital (a \"Recapitalization Event\") so that,\nfollowing such Recapitalization Event, each holder of Series C Preferred Stock\nprior to such Recapitalization Event holds at least 1.35 times the number of\nshares of Series C Preferred Stock following such Recapitalization Event (having\na liquidation price and conversion price equal to the liquidation price and\nconversion price of the Financing Shares), then the Purchase Price (or Adjusted\nPurchase Price, as the case may be) shall be increased by 76,044 shares of\nSeries C Preferred Stock (the \"Additional Shares\"). The Company shall issue the\nAdditional Shares to the Sellers and Escrow Agent in the same proportion as set\nforth in Section 1.2 hereof.\n\nSECTION 1.4. THE CLOSING.\n ----------- \n\n The closing of the purchase and sale of the Shares (the \"Closing\") shall be\nheld at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue,\nPalo Alto, CA 94301, or at such other place as the parties may agree upon, on\nMarch 25, 1999, or on such other date as the parties may agree upon.\n\nSECTION 1.5. FURTHER ASSURANCES.\n ------------------ \n\n The Buyer and the Sellers, at their sole cost and expense, will do such\nfurther acts and execute and deliver such further documents regarding their\nobligations hereunder as may be required solely for the purpose of accomplishing\nthe purposes of this Agreement.\n\n 2\n\n \n ARTICLE TWO\n\n\n REPRESENTATIONS AND WARRANTIES OF THE SELLERS\n\n Each of the Sellers, jointly and severally, represents and warrants to the\nBuyer (except as set forth on the Schedule of Exceptions attached hereto as\nExhibit B (the \"Sellers' Schedule of Exceptions\"), which exceptions shall be\n--------- \ndeemed to be representations and warranties as if made hereunder) as follows:\n\nSECTION 2.1. POWER AND CAPACITY.\n ------------------ \n\n Whole Earth is a corporation duly organized, validly existing and in good\nstanding under the laws of the State of California. Such Seller has all\nrequisite power and legal capacity to execute and deliver this Agreement, to\nperform Seller's obligations hereunder and to consummate the transactions\ncontemplated hereby. This Agreement has been duly authorized, executed and\ndelivered by such Seller, constitutes the valid and binding agreement of such\nSeller and is enforceable against such Seller in accordance with its terms.\nThis Agreement has been duly authorized by the members of the Company.\n\n\nSECTION 2.2. THE UNITS.\n ----------\n\n Each Seller is the beneficial and record owner of the number of Units set\nforth opposite such Seller's name in Section 1.1. The Units are held by the\nSellers as record owners thereof, free and clear of all liens, charges,\nencumbrances, equities and claims whatsoever (other than encumbrances created by\nthis Agreement) and are not subject to any restriction with respect to their\ntransferability (other than restrictions on transfer under applicable federal\nand state securities laws). No third party has grounds for any claims against\nthe Units, the Company or the Sellers with respect to the transactions\ncontemplated hereby.\n\nSECTION 2.3. CONFLICTING INSTRUMENTS; CONSENTS.\n --------------------------------- \n\n (a) The execution and delivery by each Seller of this Agreement does not,\nand the consummation of the transactions contemplated hereby will not, violate\nany provision of the articles of organization or the operating agreement of the\nCompany (or the articles of incorporation or bylaws of Whole Earth), or result\nin the creation of any lien, security interest, charge or encumbrance upon the\nUnits (other than encumbrances created by this Agreement) or any of the assets\nor properties of the Company under, conflict with or result in a breach of,\ncreate an event of default (or event that, with the giving of notice or lapse of\ntime or both, would constitute an event of default) under, or give any third\nparty the right to accelerate any obligation under, any order, award, judgment\nor decree to which the Company is a party or by which the Company or any assets\nor properties of the Company are bound or any Company Contract (as defined in\nSection 2.13).\n\n (b) The execution and delivery by each Seller of this Agreement does not,\nand the consummation of the transactions contemplated hereby will not, result in\na violation of, or require any authorization, approval, consent or other action\nby, or registration, declaration or filing with or notice to, any court or\nadministrative or governmental body pursuant to, any statute, law, rule,\n\n 3\n\n \nregulation or ordinance applicable to the Company or such Seller. There is no\npending action, suit, proceeding or, to the knowledge of such Seller,\ninvestigation before or by any court or governmental body or agency to restrain\nor prevent the consummation of the transactions contemplated by this Agreement.\n\nSECTION 2.4. ORGANIZATION AND AUTHORITY.\n -------------------------- \n\n (a) The Company is a limited liability company duly organized, validly\nexisting and in good standing under the laws of the State of California. The\nCompany has all requisite power and authority to own or lease and operate its\nproperties and assets and to carry on its business as now conducted.\n\n (b) The articles of organization and the operating agreement and all\namendments thereto, and the minute books and membership unit transfer records of\nthe Company furnished to the Buyer for review are accurate and complete.\n\nSECTION 2.5. SUBSIDIARIES.\n ------------ \n\n The Company does not own, either directly or indirectly, any capital stock\nor other equity interests of any corporation, partnership, limited liability\ncompany, joint venture or other entity.\n\nSECTION 2.6. CAPITALIZATION.\n -------------- \n\n The Company has 1,510,000 Units issued and outstanding, all of which have\nbeen duly authorized and validly issued, are fully paid and non-assessable and\nwere issued by the Company in compliance with all applicable federal and state\nsecurities laws, rules and regulations. There is no outstanding or authorized\noption, subscription, warrant, call, right, commitment or other agreement of any\ncharacter obligating the Company to sell or issue any additional membership\ninterests or any other securities convertible into or exercisable for or\nevidencing the right to subscribe for any membership interests.\n\nSECTION 2.7. FINANCIAL STATEMENTS.\n -------------------- \n\n (a) The Sellers have furnished the Buyer with copies of the audited\nfinancial statements of the Company for the fiscal year ended December 31, 1998,\nincluding a balance sheet as at December 31, 1998 (the \"Balance Sheet\" and such\ndate, the \"Balance Sheet Date\"), and the related statement of income for the\ntwelve-month period then ended (collectively, the \"Financial Statements\").\n\n (b) The Financial Statements: (i) are correct and complete in all material\nrespects and have been prepared in accordance with the books and records of the\nCompany; (ii) have been prepared in accordance with generally accepted\naccounting principles (\"GAAP\"); (iii) reflect and provide adequate reserves in\nrespect of all known liabilities of the Company as of such date; and (iv)\npresent fairly the financial condition of the Company at such date and the\nresults of its operations for the fiscal period then ended. The Company\nmaintains a standard system of accounting established and administered in\naccordance with GAAP.\n\n 4\n\n \nSECTION 2.8. REAL PROPERTY.\n ------------- \n\n The Company does not own any real property. Section 2.8 of the Sellers'\n ----------- \nSchedule of Exceptions lists a description of each lease of real property under\nwhich the Company is a sub-lessee (the \"Leased Property\") and, to the knowledge\nof such Seller, holds valid leasehold interest free and clear of any liens,\nclaims or encumbrances created by the Company. No breach or event of default on\nthe part of the Company and no event that, with the giving of notice or lapse of\ntime or both, would constitute such breach or event of default, has occurred and\nis continuing unremedied that could reasonably be expected to have a material\nadverse affect on the business, prospects, condition, affairs or operations of\nthe Company or on its properties or assets (a \"Company Material Adverse\nEffect\").\n\nSECTION 2.9. PERSONAL PROPERTY AND INTELLECTUAL PROPERTY.\n ------------------------------------------- \n\n (a) Except as described in subsection (b) hereof, the Company owns all\npersonal property reflected on the Balance Sheet and all personal property\nacquired by the Company since the date of the Balance Sheet (except such\npersonal property as has been disposed of in the ordinary course of business),\nfree and clear of any liens, security interests, charges or encumbrances created\nby the Company (\"Liens\"), except for (i) Liens for property taxes not yet due\nand payable and (ii) Liens that, either individually or in the aggregate, could\nnot reasonably be expected to have a Company Material Adverse Effect.\n\n\n (b) The Company owns and possesses or is licensed under all patents, patent\napplications, licenses, trademarks, trade names, brand names, trade secrets,\ninventions and copyrights employed in the operation of its business as now\nconducted and as proposed to be conducted by the Company, with no infringement\nof or conflict with the rights of others respecting any of the same. To the\nknowledge of such Seller, the operation of the Company's business as now\nconducted or as proposed to be conducted by the Company does not infringe any\npatent, copyright, trade secret or other proprietary rights of any third\nparties. There are no outstanding options, licenses, or agreements of any kind\nrelating to the foregoing, nor is the Company bound by or a party to any\noptions, licenses or agreements of any kind with respect to patents, patent\napplications, licenses, trademarks, trade names, brand names, inventions,\nproprietary rights and copyrights of any other person or entity. The Company is\nnot obligated to make any payments by way of royalties, fees or otherwise to any\nowner, licensor of, or other claimant to any patent, trademark, trade name,\ncopyright or other intangible asset, with respect to the use thereof or in\nconnection with the conduct of its business, or otherwise. The Company has not\nreceived any communications alleging that it has violated or, by conducting its\nbusiness as proposed by the Company, would violate any of the patents,\ntrademarks, service marks, trade names, copyrights or trade secrets or other\nproprietary rights of any other person or entity, nor is such Seller aware of\nany basis for the foregoing. There are no agreements, understandings,\ninstruments, contracts, judgments, orders, writs or decrees to which the Company\nis a party or by which it is bound which involve indemnification by the Company\nwith respect to infringements of proprietary rights.\n\n 5\n\n \nSECTION 2.10. EMPLOYEE AND LABOR MATTERS.\n -------------------------- \n\n (a) Set forth in Section 2.10 of the Sellers' Schedule of Exceptions is a\n ------------ \ntrue and complete list of: (i) the name of each person employed by the Company,\nthe title or job classification of each such person and the current rate of\ncompensation of each such person; (ii) the name of each person, if any, holding\ntax or other powers of attorney from the Company and a summary of the terms\nthereof; and (iii) the name of each director and officer of the Company.\n\n (b) Set forth in Section 2.10 of the Sellers' Schedule of Exceptions is a\n ------------ \ntrue and complete list of each current employment contract and consulting\nagreement entered into by the Company, or by which the Company is bound, and\neach deferred compensation, bonus, incentive compensation, savings, severance or\ntermination pay agreement or plan and any other employee benefit plan,\nagreement, arrangement or commitment, whether formal or informal, not required\nto be listed in Section 2.11 of the Sellers' Schedule of Exceptions, maintained,\n ------------ \nentered into or contributed to by the Company for the benefit of any current or\nformer director, officer or employee of the Company (the \"Non-ERISA Plans\").\nThe Sellers have delivered to the Buyer true and correct copies of each such\nNon-ERISA Plan. The Company is not in default under any such Non-ERISA Plan.\n\n (c) The Company is not a party to any contract or collective bargaining\nagreement with any labor organization.\n\n (d) All obligations of the Company for unemployment compensation benefits,\npension benefits, salaries, wages, bonuses, sick leave, vacation and other forms\nof compensation payable to the officers, directors and other employees and\nindependent contractors of the Company through the Balance Sheet Date have been\npaid or adequate accruals therefore have been made in the Balance Sheet.\n\n (e) There is no controversy pending between the Company and any of its\nemployees that, individually or in the aggregate, could reasonably be expected\nto have a Company Material Adverse Effect, and no complaint is pending against\nthe Company before the National Labor Relations Board or any state or local\nagency.\n\n (f) Each employee of the Company has executed an agreement regarding\nconfidentiality and proprietary information, the form of which has been provided\nto special counsel to the Buyer. To the knowledge of such Seller, none of the\nCompany's employees is in violation thereof. To the knowledge of such Seller,\nthe employees of the Company are not obligated under any contract (including\nlicenses, covenants or commitments of any nature) or other agreement, or subject\nto any judgment, decree or order of any court or administrative agency, that\nwould interfere with the use of his or her best efforts to promote the interests\nof the Company or that would conflict with the Company's business as conducted\nor as proposed to be conducted by the Company or that would prevent any such\nemployee from assigning inventions to the Company. Neither the execution nor\ndelivery of this Agreement, nor the carrying on of the Company's business as\nproposed to be conducted by the Company, will conflict with or result in a\nbreach of the terms, conditions or provisions of, or constitute a default under,\nany contract, covenant or instrument under which any of\n\n 6\n\n \nsuch employees is now obligated. The Company and such Seller do not believe\nthat it is or will be necessary for the Company to utilize any inventions of any\nof its employees made prior to their employment by the Company.\n\nSECTION 2.11. ERISA PLANS.\n ----------- \n\n (a) Set forth in Section 2.11 of the Sellers' Schedule of Exceptions is a\n ------------ \ncomplete list of each employee benefit plan as defined in Section 3(3) of the\nEmployee Retirement Income Security Act of 1974 (\"ERISA\") (collectively referred\nto as the \"ERISA Plans\") established, maintained or contributed to by the\nCompany or any ERISA Affiliate or to which the Company or any ERISA Affiliate\nhas an obligation to contribute amounts. As used herein, the term \"ERISA\nAffiliate\" means a corporation which is a member of a controlled group of\ncorporations with the Company within the meaning of Section 414(b) of the\nInternal Revenue Code of 1986 (the \"Code\"), a trade or business (including a\nsole proprietorship, partnership, trust, estate or corporation) which is under\ncommon control with the Company within the meaning of Section 414(c) of the\nCode, or a member of an affiliated service group with the Company within the\nmeaning of Section 414(m) or Section 414(o) of the Code.\n\n (b) Full payment has been made of all amounts that the Company is required\nunder applicable law or any ERISA Plan to have paid as contributions to or\nbenefits under any ERISA Plan as of the last day of the most recent fiscal year\nof such ERISA Plan ended prior to the date hereof. The Company has made\nadequate provision in accordance with GAAP for liabilities to meet current\ncontributions or benefit payments.\n\n (c) A favorable determination has been issued by the IRS with respect to\nthe qualified status of each of the ERISA Plans intended to be qualified under\nSection 401(a) of the Code, and with respect to the tax exempt status under\nSection 501(a) of the Code of any trust through which such ERISA Plans are\nfunded and any trust or other entity established with respect to an ERISA Plan\nand intended to be qualified as a tax exempt organization under Section 501(c)\nof the Code. Nothing has occurred since the date of each such determination or\nrecognition letter that would adversely affect such qualification or exemption.\n\nSECTION 2.12. COMPLIANCE AND LITIGATION.\n ------------------------- \n\n (a) The Company has complied with all applicable federal, state, local or\nother governmental statutes, regulations, orders and restrictions in respect of\nthe conduct of the Company's business and ownership of its properties, except\nfor such failures to comply as, individually or in the aggregate, could not\nreasonably be expected to have a Company Material Adverse Effect. The Company\nhas all federal, state and local franchises, licenses, permits and other\ngovernmental approvals necessary for the conduct of the Company's business and\nthe ownership of its properties, except for such franchises, license, permits or\ngovernmental approvals as, individually or in the aggregate, could not\nreasonably be expected to have a Company Material Adverse Effect.\n\n (b) There is no action, proceeding or investigation pending, or, to the\nknowledge of such Seller, threatened, against the Company or its officers,\ndirectors or members, or to the knowledge of such Seller, against employees of\nthe Company (or, to the knowledge of such Seller, any basis \n\n 7\n\n \ntherefor or threat thereof): (1) which could reasonably be expected to result,\neither individually or in the aggregate, in (a) any material adverse change in\nthe business, prospects, conditions, affairs or operations of the Company or in\nany of its properties or assets, or (b) any material impairment of the right or\nability of the Company to carry on its business as now conducted or as proposed\nto be conducted by the Company, or (c) any material liability on the part of the\nCompany; or (2) which questions the validity of this Agreement, or any action\ntaken or to be taken in connection herewith, including in each case, without\nlimitation, actions pending or threatened involving the prior employment of any\nof the Company's employees, the use in connection with the Company's business of\nany information or techniques allegedly proprietary to any of the former\nemployers of such employees or their obligations under any agreements with prior\nemployers. The Company is not a party to or subject to the provisions of any\norder, writ, injunction, judgment or decree of any court or government agency or\ninstrumentality. There is no action, suit, proceeding or investigation by the\nCompany currently pending or which the Company currently intends to initiate.\n\nSECTION 2.13. MATERIAL CONTRACTS.\n ------------------ \n\n (a) Set forth in Section 2.13 of the Sellers' Schedule of Exceptions is a\n ------------ \nlist of any of the following written or oral agreements or arrangements to which\nthe Company is a party: (i) consulting agreements for the employment of any\nofficer, employee or other person on a full-time, part-time or consulting basis;\n(ii) loans, credit agreements or other agreements relating to the borrowing or\nlending of money by the Company; or (iii) licensing, development, joint venture\nor similar agreements relating to intellectual property under which the Company\nis the licensor or licensee or is entitled to receive or required to pay\nroyalties; or (iv) agreements calling for annual payments in excess of Ten\nThousand Dollars ($10,000).\n\n (b) The Company is not in breach of or in default under its material\nobligations under any of the agreements or arrangements set forth in Section\n -------\n2.13 of the Sellers' Schedule of Exceptions (collectively, the \"Company\n---- \nContracts\"), and no event has occurred that, with the giving of notice or lapse\nof time or both, would constitute such a breach or default, which, individually\nor in the aggregate, could reasonably be expected to have a Company Material\nAdverse Effect. The Sellers have furnished the Buyer with a true and complete\ncopy of all written Company Contracts and with accurate descriptions of all oral\nCompany Contracts.\n\nSECTION 2.14. CONDUCT OF BUSINESS.\n ------------------- \n\n Since the Balance Sheet Date the Company has conducted its business in the\nordinary course, has maintained its assets and properties in at least as good\norder and condition as existed on the Balance Sheet Date (other than wear as may\nbe accounted for by normal use) and as is necessary to continue to conduct it\nbusiness and has not:\n\n (a) incurred any obligation or liability (absolute, accrued, contingent or\nother), except in the ordinary course of business or in connection with the\nperformance of this Agreement, none of which individually or in the aggregate\ncould reasonably be expected to have a Company Material Adverse Effect;\n\n 8\n\n \n (b) discharged or satisfied any lien or encumbrance, or paid or satisfied\nany obligation or liability (absolute, accrued, contingent or other), other than\nliabilities reflected on the Balance Sheet or incurred since the Balance Sheet\nDate in the ordinary course of business;\n\n (c) mortgaged, pledged or subjected to any lien or encumbrance any of the\nassets or properties of the Company;\n\n (d) sold, assigned or transferred any assets or property, or canceled any\ndebt or claim or waived any right under any Company Contract, other than in the\nordinary course of business;\n\n (e) made any capital expenditures in excess of $10,000 in each instance;\n\n (f) made any loan to, or incurred any indebtedness from, any director,\nofficer or member, declared, set aside or paid to any member any distribution in\nrespect of its membership interests, or redeemed or repurchased any of its\nmembership interests;\n\n (g) paid any commission, salary or bonus to any director, officer or\nmember, other than the payment of wages or salaries or other amounts owed in the\nordinary course of business;\n\n (h) experienced any damage, destruction or loss (whether or not covered by\ninsurance) affecting the assets, properties or business which could reasonably\nbe expected to have a Company Material Adverse Effect;\n\n (i) reclassified or changed in any manner the outstanding membership\ninterests of the Company or issued or agreed to issue any membership interest in\nthe Company; or\n\n (j) incurred any material adverse change in its financial condition or\nassets.\n\nSECTION 2.15. TAX MATTERS.\n ----------- \n\n (a) The Company has timely filed, or will have timely filed, all tax\nreturns and tax reports required to be filed by it prior to the Closing Date\nunder applicable federal, state and local tax laws and has timely paid all\ntaxes, assessments, fees and other governmental charges for periods prior to the\nClosing Date shown due on such tax returns.\n\n (b) The Company does not have any tax liability for periods ending on or\nprior to the Balance Sheet Date for which an adequate tax reserve has not been\nestablished on the Balance Sheet. Without limiting the foregoing, the books and\nrecords of the Company include adequate provision for all taxes, assessments,\nfees and other governmental charges that have been or may in the future be\nassessed against the Company for all periods ending prior to the Closing Date,\nand the Company is not, and will not be as of the Closing Date, liable for\ntaxes, assessments, fees and other governmental charges for which the Company\nhas not made adequate provision in its books and records.\n\n (c) Set forth in Section 2.15 of the Sellers' Schedule of Exceptions is a\n ------------ \ntrue and complete list of tax returns filed by the Company pursuant to\napplicable federal, state or local tax laws that have been examined or audited\nby the IRS or other appropriate taxing authority during the preceding \n\n 9\n\n \nseven years. All deficiencies proposed as a result of such examinations or\naudits have been paid or finally settled or are being challenged in good faith\nby appropriate proceedings. The results of any settlement and the necessary\nadjustments resulting therefrom properly are reflected in the Balance Sheet.\nThere is no tax examination or audit of the Company by any taxing authority\ncurrently pending. There is no outstanding agreement or waiver made by or on\nbehalf of the Company for the extension of time for any applicable statute of\nlimitations and the Company has not requested any extension of time in which to\nfile any tax return.\n\nSECTION 2.16. ABSENCE OF UNDISCLOSED LIABILITIES.\n ---------------------------------- \n\n The Company does not have any indebtedness or liability, whether accrued,\nfixed or contingent, other than (a) liabilities reflected in the Balance Sheet,\n(b) liabilities incurred in the ordinary course of business of the Company\nconsistent with past practice subsequent to the Balance Sheet Date, none of\nwhich, individual or in the aggregate, could reasonably be expected to have a\nCompany Material Adverse Effect, (c) liabilities to be reflected in the Closing\nBalance Sheet and (d) liabilities set forth in the Sellers' Schedule of\nExceptions.\n\nSECTION 2.17. INSURANCE.\n --------- \n\n The Company has in full force and effect fire and casualty insurance\npolicies, and insurance against other hazards, risks and liabilities to persons\nand property to the extent and in the manner customary for companies in similar\nbusinesses similarly situated. Set forth in Section 2.17 of the Sellers'\n ------------ \nSchedule of Exceptions is a true and complete list and description of all\npolicies of property, casualty, general business and other insurance covering\nfor the Company. There is no claim, action, suit or proceeding arising out of\nor based upon any of such policies of insurance, and to the knowledge of such\nSeller no basis for any such claim, action, suit or proceeding exists.\n\nSECTION 2.18. BANK ACCOUNTS.\n ------------- \n\n Set forth in Section 2.18 of the Sellers' Schedule of Exceptions is a true\n ------------ \nand complete list of all bank accounts of the Company, including the name and\naddress of each bank, the account numbers and the authorized signatories.\n\nSECTION 2.19. TRANSACTIONS WITH RELATED PARTIES.\n --------------------------------- \n\n Set forth in Section 2.19 of the Sellers' Schedule of Exceptions is a true\n ------------ \nand complete list or description of all notes, advances or accounts (other than\ncommission, salary, bonus reimbursements and other payments made by the Company\nin the normal course of business) receivable or payable by the Company from or\nto any director, officer, employee or member of the Company or any of their\naffiliates, as well as all agreements or arrangements under which the Company\nreceives goods or services from any such persons. Since the Balance Sheet Date,\nthe Company has not incurred any obligation or liability to, or become a\ncreditor of any unit holder or former unit holder of the Company or any relative\nor affiliate of any unit holder or former unit holder of the Company.\n\n 10\n\n \nSECTION 2.20 INVESTMENT INTENT.\n\n The Shares and, the Shares of Common Stock issuable upon conversion thereof\nare being acquired for the Seller's account, for investment and not with a view\nto, or resale in connection with, any distribution or public offering thereof\nwithin the meaning of the Securities Act of 1933, as amended or California law.\n\nSECTION 2.21. BROKERS AND FINDERS.\n ------------------- \n\n Neither the Sellers nor the Company has retained any broker or finder in\nconnection with the transactions contemplated by this Agreement.\n\nSECTION 2.22 DISCLOSURE.\n ---------- \n\n No representation or warranty by the Sellers in this Agreement, or in any\ndocument or certificate furnished or to be furnished to the Buyer pursuant\nhereto or in connection with the transactions contemplated hereby, when taken\ntogether, contains or will contain any untrue statement of a material fact or\nomits or will omit to state a material fact necessary to make the statements\nmade herein and therein, in the light of the circumstances under which they were\nmade, not misleading. The Company has fully provided the Buyer with all the\ninformation which the Buyer has requested for deciding whether to purchase the\nUnits.\n\n ARTICLE THREE\n\n\n REPRESENTATIONS AND WARRANTIES OF THE BUYER\n\n The Buyer represents, warrants and covenants to each of the Sellers (except\nas set forth on the Schedule of Exceptions attached hereto as Exhibit C (the\n --------- \n\"Buyer's Schedule of Exceptions\"), which exceptions shall be deemed to be\nrepresentations and warranties as if made hereunder) as follows:\n\nSECTION 3.1. ORGANIZATION AND STANDING.\n ------------------------- \n\n The Buyer is a corporation duly organized, validly existing and in good\nstanding under the laws of the State of California and has all requisite\ncorporate power and authority to carry on its business as now conducted and as\nproposed to be conducted. The Buyer is qualified or licensed to do business as\na foreign corporation in all jurisdictions where such qualification or licensing\nis required, except where the failure to so qualify could reasonably be expected\nto have a material adverse effect on the business, prospects, condition, affairs\nor operations of the Buyer or on its properties or assets (a \"Buyer Material\nAdverse Effect\").\n\nSECTION 3.2. CORPORATE POWER.\n --------------- \n\n The Buyer has now, or will have at the Closing Date, all requisite\ncorporate power necessary for the authorization, execution and delivery of this\nAgreement. This Agreement is a\n\n 11\n\n \nvalid and binding obligation of the Company enforceable in accordance with its\nterms, except as the same may be limited by bankruptcy, insolvency, moratorium,\nand other laws of general application affecting the enforcement of creditors'\nrights.\n\nSECTION 3.3. SUBSIDIARIES.\n ------------ \n\n The Buyer does not control, directly or indirectly, any other corporation,\nassociation or business entity.\n\nSECTION 3.4. CAPITALIZATION.\n -------------- \n\n The authorized capital stock of the Buyer is 25,000,000 shares of Common\nStock and 20,435,000 shares of Preferred Stock, of which 5,017,500 have been\ndesignated Series A Preferred Stock, 5,017,500 have been designated Series A-1\nPreferred Stock, 2,200,000 have been designated Series B Preferred Stock,\n2,200,000 have been designated Series B-1 Preferred Stock, 3,000,000 have been\ndesignated Series C Preferred Stock and 3,000,000 have been designated Series C-\n1 Preferred Stock. There are issued and outstanding 791,667 shares of the\nBuyer's Common Stock, 5,000,000 shares of Series A Preferred Stock, no shares of\nSeries A-1 Preferred Stock, 1,898,733 shares of Series B Preferred Stock, no\nshares of Series B-1 Preferred Stock, 1,330,798 shares of Series C Preferred\nStock and no shares of Series C-1 Preferred Stock. The holders of record of the\npresently issued and outstanding Common Stock, options to purchase Common Stock,\nSeries A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock\nimmediately prior to the Closing are as set forth in Section 3.4 of the Buyer's\n ----------- \nSchedule of Exceptions (\"Shareholder and Optionholder List\"). All such issued\nand outstanding shares have been duly authorized and validly issued, are fully\npaid and nonassessable, and were issued in compliance with all applicable state\nand federal laws concerning the issuance of securities. The holders of any and\nall rights, options, warrants or conversion rights to purchase or acquire from\nthe Buyer any of its capital stock, along with the number of shares of capital\nstock issuable upon exercise of such rights, are set forth in Section 3.4 of the\n ----------- \nBuyer's Schedule of Exceptions. The Buyer has reserved at least 5,017,500\nshares of Common Stock for issuance upon conversion of the Series A and Series\nA-1 Preferred Stock, 2,200,000 shares of Common Stock for issuance upon\nconversion of the Series B and Series B-1 Preferred Stock, 3,000,000 shares of\nCommon Stock for issuance upon conversion of the Series C and Series C-1\nPreferred Stock, and 3,750,000 shares of Common Stock for future issuance to\nemployees, consultants, officers or directors upon exercise of options granted\nor to be granted under stock or other option plans or arrangements approved by\nthe Buyer's Board of Directors. Except for such rights, there are no\noutstanding rights, options, warrants, conversion rights or agreements for the\npurchase or acquisition from the Buyer of any shares of its capital stock. The\nBuyer is not a party or subject to any agreement or understanding between any\npersons or entities, which affects or relates to the voting or giving of written\nconsents with respect to any securities.\n\nSECTION 3.5. AUTHORIZATION.\n ------------- \n\n (a) Corporate Action. All corporate action on the part of the Buyer, its\n ---------------- \nofficers, directors and stockholders necessary for the issuance of the Shares\nand the issuance of the\n\n 12\n\n \nCommon Stock issuable upon conversion of the Shares and the authorization,\nexecution and performance of the Buyer's obligations hereunder. The Buyer has\nduly reserved an aggregate of at least 684,412 shares of Common Stock for\nissuance upon conversion of the Shares.\n\n (b) Valid Issuance. The Shares, when issued in compliance with the\n -------------- \nprovisions of this Agreement, and the shares of Common Stock issued upon\nconversion of the Shares, when issued in accordance with the provisions of the\nArticles of Incorporation, as amended to date (the \"Buyer's Articles\"), will be\nvalidly issued, fully paid and nonassessable and will be free of any liens or\nencumbrances created by the Buyer; provided, however, that all such shares may\n -------- ------- \nbe subject to restrictions on transfer under state and\/or federal securities\nlaws, and as may be required by future changes in such laws. The rights,\npreferences, privileges and restrictions of the Shares are as set forth in the\nBuyer's Articles.\n\nSECTION 3.6. NO PREEMPTIVE RIGHTS.\n -------------------- \n\n No person has any right of first refusal or any preemptive rights in\nconnection with the issuance of the Shares or the issuance of the Common Stock\nupon conversion of the Shares.\n\nSECTION 3.7. PATENTS, TRADEMARKS, ETC.\n ------------------------ \n\n The Buyer owns and possesses or is licensed under all patents, patent\napplications, licenses, trademarks, trade names, brand names, trade secrets,\ninventions and copyrights employed in the operation of its business as now\nconducted and as proposed to be conducted, with no infringement of or conflict\nwith the rights of others respecting any of the same. To the knowledge of the\nBuyer, the operation of the Buyer's business as now conducted or as proposed to\nbe conducted does not infringe any patent, copyright, trade secret or other\nproprietary rights of any third parties. There are no outstanding options,\nlicenses, or agreements of any kind relating to the foregoing, nor is the Buyer\nbound by or a party to any options, licenses or agreements of any kind with\nrespect to patents, patent applications, licenses, trademarks, trade names,\nbrand names, inventions, proprietary rights and copyrights of any other person\nor entity. The Buyer is not obligated to make any payments by way of royalties,\nfees or otherwise to any owner, licensor of, or other claimant to any patent,\ntrademark, trade name, copyright or other intangible asset, with respect to the\nuse thereof or in connection with the conduct of its business, or otherwise.\nThe Buyer has not received any communications alleging that it has violated or,\nby conducting its business as proposed, would violate any of the patents,\ntrademarks, service marks, trade names, copyrights or trade secrets or other\nproprietary rights of any other person or entity, nor is the Buyer aware of any\nbasis for the foregoing. There are no agreements, understandings, instruments,\ncontracts, judgments, orders, writs or decrees to which the Buyer is a party or\nby which it is bound which involve indemnification by the Buyer with respect to\ninfringements of proprietary rights.\n\nSECTION 3.8. COMPLIANCE WITH OTHER INSTRUMENTS.\n --------------------------------- \n\n The Buyer is not in violation of any term of the Buyer's Articles or the\nBuyer's bylaws, as amended to date (the \"Buyer's Bylaws\"), nor is the Buyer in\nviolation of or in default in any material respect under the terms of any\nmortgage, indenture, contract, agreement, instrument, \n\n 13\n\n \njudgment or decree, the violation of which could reasonably be expected to have\na Buyer Material Adverse Effect on the Buyer, and to the knowledge of the Buyer,\nis not in violation of any order, statute, rule or regulation applicable to the\nBuyer, the violation of which could reasonably be expected to have a Buyer\nMaterial Adverse Effect. The execution, delivery and performance of and\ncompliance with this Agreement, and the issuance of the Shares will not (a)\nresult in any such violation, or (b) be in conflict with or constitute a default\nunder any such term, or (c) result in the creation of any mortgage, pledge,\nlien, encumbrance or charge upon any of the properties or assets of the Buyer\npursuant to any such term. To the knowledge of the Buyer, there is no such term\nor any such order, statute, rule or regulation which adversely affects, or in\nthe future which could reasonably be expected to have a Buyer Material Adverse\nEffect.\n\nSECTION 3.9. PROPRIETARY AGREEMENTS; EMPLOYEES.\n --------------------------------- \n\n Each employee of the Buyer has executed an agreement regarding\nconfidentiality and proprietary information. To the knowledge of the Buyer,\nnone of its employees is in violation thereof, and the Buyer will use its best\nefforts to prevent such violations. To the knowledge of the Buyer, the\nemployees of the Buyer are not obligated under any contract (including licenses,\ncovenants or commitments of any nature) or other agreement, or subject to any\njudgment, decree or order of any court or administrative agency, that would\ninterfere with the use of his or her best efforts to promote the interests of\nthe Buyer or that would conflict with the Buyer's business as conducted or as\nproposed to be conducted or that would prevent any such employee from assigning\ninventions to the Buyer. Neither the execution nor delivery of this Agreement,\nnor the carrying on of the Buyer's business as proposed, will conflict with or\nresult in a breach of the terms, conditions or provisions of, or constitute a\ndefault under, any contract, covenant or instrument under which any of such\nemployees is now obligated. The Buyer does not believe that it is or will be\nnecessary for the Buyer to utilize any inventions of any of its employees made\nprior to their employment by the Buyer.\n\nSECTION 3.10. LITIGATION, ETC.\n --------------- \n\n There is no action, proceeding or investigation pending, or, to the\nknowledge of the Buyer, threatened, against the Buyer or its officers, directors\nor shareholders, or to the knowledge of the Buyer, against employees of the\nBuyer (or, to the knowledge of the Buyer, any basis therefor or threat thereof):\n(1) which could reasonably be expected to result, either individually or in the\naggregate, in (a) any material adverse change in the business, prospects,\nconditions, affairs or operations of the Buyer or in any of its properties or\nassets, or (b) any material impairment of the right or ability of the Buyer to\ncarry on its business as now conducted or as proposed to be conducted, or (c)\nany material liability on the part of the Buyer; or (2) which questions the\nvalidity of this Agreement, or any action taken or to be taken in connection\nherewith, including in each case, without limitation, actions pending or\nthreatened involving the prior employment of any of the Buyer's employees, the\nuse in connection with the Buyer's business of any information or techniques\nallegedly proprietary to any of the former employers of such employees or their\nobligations under any agreements with prior employers. The Buyer is\n\n 14\n\n \nnot a party to or subject to the provisions of any order, writ, injunction,\njudgment or decree of any court or government agency or instrumentality. There\nis no action, suit, proceeding or investigation by the Buyer currently pending\nor which the Buyer currently intends to initiate.\n\nSECTION 3.11. GOVERNMENTAL CONSENT.\n -------------------- \n\n Except for the filing of a Notice of Transaction pursuant to Section\n25102(f) of the California Corporations Code, no consent, approval or\nauthorization of or designation, declaration or filing with any governmental\nauthority on the part of the Buyer is required in connection with: (a) the valid\nexecution and delivery of this Agreement; or (b) the issuance of the Shares or\nthe issuance of the shares of Common Stock issuable upon conversion of the\nShares.\n\nSECTION 3.12. OFFERING.\n -------- \n\n In reliance on the representations and warranties of the Purchasers in\nSection 2 hereof, the offer, sale and issuance of the Shares in conformity with\nthe terms of this Agreement will not result in a violation of the requirements\nof Section 5 of the Securities Act of 1933, as amended (the \"Securities Act\") or\nthe qualification or registration requirements of applicable blue sky laws.\n\nSECTION 3.13. TAXES.\n ----- \n\n The Buyer has filed all tax returns that are required to have been filed\nwith appropriate federal, state, county and local governmental agencies or\ninstrumentalities, except where the failure to do so, when taken together with\nall other such failures, would not have a material adverse effect upon the\nBuyer. The Buyer has not elected pursuant to the Code to be treated as a\nSubchapter S corporation or a collapsible corporation pursuant to Section 341(f)\nor Section 1362(a) of the Code, nor has it made any other elections pursuant to\nthe Code (other than elections which relate solely to methods of accounting,\ndepreciation or amortization) which could reasonably be expected to have a Buyer\nMaterial Adverse Effect. The Buyer has paid or established reserves for all\nincome, franchise and other taxes, assessments, governmental charges, penalties,\ninterest and fines due and payable by it on or before the Closing.\n\nSECTION 3.14. TITLE.\n ----- \n\n The Buyer owns its property and assets free and clear of all liens,\nmortgages, loans or encumbrances except liens for current taxes, and such\nencumbrances and liens which arise in the ordinary course of business and do not\nmaterially impair the Buyer's ownership or use of such property or assets. With\nrespect to the property and assets leased by the Buyer, the Buyer is in\ncompliance with such leases and, to the knowledge of the Buyer, holds valid\nleasehold interests free and clear of any liens, claims or encumbrances.\n\n 15\n\n \nSECTION 3.15. MATERIAL CONTRACTS AND COMMITMENTS.\n ---------------------------------- \n\n All of the contracts, mortgages, indentures, agreements, instruments and\ntransactions to which the Buyer is a party or by which it is bound (including\npurchase orders to the Buyer or placed by the Buyer) which involve obligations\nof, or payments to, the Buyer in excess of Twenty-Five Thousand Dollars\n($25,000) and all agreements between the Buyer and its officers, directors,\nconsultants and employees are set forth in Section 3.15 of the Buyer's Schedule\n ------------ \nof Exceptions (the \"Buyer Contracts\"). All of the Buyer Contracts are valid,\nbinding and in full force and effect in all material respects and enforceable by\nthe Buyer in accordance with their respective terms in all material respects,\nsubject to the effect of applicable bankruptcy, insolvency, reorganization,\nmoratorium or other laws of general application relating to or affecting\nenforcement of creditors' rights and rules or laws concerning equitable\nremedies. The Buyer is not in material default under any of such contracts.\n\nSECTION 3.16. FINANCIAL STATEMENTS.\n -------------------- \n\n The Buyer has delivered to the Sellers the unaudited balance sheets and\nrelated statements of operation as of December 31, 1998 and for the nine month\nperiod then ended (the \"Buyer's Financial Statements\"). The Buyer's Financial\nStatements are in accordance with the books and records of the Buyer, are\ncomplete and correct, and fairly and accurately present the financial condition\nand operating results of the Buyer for the periods indicated therein, all in\nconformity with \"GAAP\", except that the unaudited Buyer's Financial Statements\ndo not contain footnotes or reflect the interperiod adjustments required by\nGAAP. As of December 31, 1998, the Buyer did not have any liabilities,\nabsolute, contingent, or otherwise, which in accordance with GAAP are required\nto be disclosed or reserved for other than as set forth in the Buyer's Financial\nStatements. Other than a reduction in cash and cash equivalents in the ordinary\ncourse of business, since December 31, 1998, there has been no material adverse\nchange in the Buyer's financial condition or assets. The Buyer maintains and\nwill continue to maintain a standard system of accounting established and\nadministered in accordance with GAAP.\n\nSECTION 3.17. ABSENCE OF CHANGES.\n ------------------ \n\n Since December 31, 1998, (a) the Buyer has not entered into any transaction\nwhich was not in the ordinary course of business, (b) there has been no material\nadverse change in the condition (financial or otherwise) of the business,\nproperty, assets or liabilities of the Buyer other than changes in the ordinary\ncourse of its business, none of which, individually or in the aggregate, has\nbeen materially adverse, (c) there has been no damage to, destruction of or loss\nof physical property (whether or not covered by insurance) materially adversely\naffecting the assets, prospects, financial condition, operating results,\nbusiness or operations of the Buyer, (d) the Buyer has not declared or paid any\ndividend or made any distribution on its stock, or redeemed, purchased or\notherwise acquired any of its stock, (e) the Buyer has not materially changed\nany compensation arrangement or agreement with any of its key employees or\nexecutive officers, or materially changed the rate of pay of its employees as a\ngroup, (f) the Buyer has not changed or amended any material contract by which\nthe Buyer or any of its assets are bound or subject, except as contemplated by\nthis Agreement, (g) there has been no resignation or termination of \n\n 16\n\n \nemployment of any key officer or employee of the Buyer and the Buyer does not\nknow of any impending resignation or termination of employment of any such\nofficer or employee that if consummated could reasonably be expected to have a\nBuyer Material Adverse Effect, (h) there has been no change, except in the\nordinary course of business, in the material contingent obligations of the Buyer\n(nor in any contingent obligation of the Buyer regarding any director,\nstockholder or key employee or officer of the Buyer) by way of guaranty,\nendorsement, indemnity, warranty or otherwise, (i) there have been no loans made\nby the Buyer to any of its employees, officers or directors other than travel\nadvances and other advances made in the ordinary course of business, (j) there\nhas been no waiver by the Buyer of a valuable right or of a material debt owing\nto it, and (k) there has not been any satisfaction or discharge of any lien,\nclaims or encumbrance or any payment of any obligation by the Buyer, except in\nthe ordinary course of business and which could not be reasonably expected to\nhave a Buyer Material Adverse Effect.\n\nSECTION 3.18. OUTSTANDING INDEBTEDNESS.\n ------------------------ \n\n The Buyer has no indebtedness for borrowed money which it has directly or\nindirectly created, incurred, assumed or guaranteed, or with respect to which it\nhas otherwise become liable, directly or indirectly.\n\nSECTION 3.19. CERTAIN TRANSACTIONS.\n -------------------- \n\n The Buyer is not indebted, directly or indirectly, to any of its employees,\nofficers, directors or stockholders or to their spouses or children, in any\namount whatsoever; and none of said employees, officers, directors,\nstockholders, or any member of their immediate families, are indebted to the\nBuyer or have any direct or indirect ownership interest in any firm or\ncorporation with which the Buyer is affiliated or with which the Buyer has a\nbusiness relationship. No such employee, officer, director, stockholder, or any\nmember of their immediate families, is, directly or indirectly, interested in\nany material contract with the Buyer. The Buyer is not guarantor or indemnitor\nof any indebtedness of any other person, firm or corporation.\n\nSECTION 3.20. EMPLOYEE BENEFIT PLANS.\n ---------------------- \n\n The Buyer does not have any \"employee benefit plan\" as defined in the\nEmployee Retirement Income Security Act of 1974, as amended.\n\nSECTION 3.21. ENVIRONMENTAL AND SAFETY LAWS.\n ----------------------------- \n\n To the knowledge of the Buyer, the Buyer is not in violation of any\napplicable statute, law, or regulation relating to the environment or\noccupational health and safety. To the knowledge of the Buyer, no material\nexpenditures are or will be required in order to comply with any such existing\nstatute, law, or regulation.\n\n 17\n\n \nSECTION 3.22. INSURANCE.\n --------- \n\n The Buyer has in full force and effect fire and casualty insurance\npolicies, and insurance against other hazards, risks and liabilities to persons\nand property to the extent and in the manner customary for companies in similar\nbusinesses similarly situated.\n\nSECTION 3.23. LABOR AGREEMENTS AND ACTIONS.\n ---------------------------- \n\n The Buyer is not aware that any officer or key employee intends to\nterminate his or her employment with the Buyer, nor does the Buyer have a\npresent intention to terminate the employment of any of the foregoing. Subject\nto general principles related to wrongful termination of employees, the\nemployment of each officer and employee of the Buyer is terminable at the will\nof the Buyer.\n\nSECTION 3.24. BROKERS AND FINDERS.\n ------------------- \n\n The Buyer has not retained any broker or finder in connection with the\ntransactions contemplated by this Agreement.\n\nSECTION 3.25. REGISTRATION RIGHTS.\n ------------------- \n\n Other than as granted pursuant to that certain Second Amended and Restated\nRights Agreement dated September 18, 1998, between Buyer and certain investors\nin Buyer (the \"Rights Agreement\") the Buyer has not granted or agreed to grant\nany right to register (as that term is defined in the Rights Agreement)\nsecurities, including piggyback registration rights, to any person or entity.\n\nSECTION 3.26. CORPORATE DOCUMENTS; MINUTE BOOKS.\n --------------------------------- \n\n Except for amendments necessary to satisfy representations and warranties\nor conditions contained herein (the form of which amendments has been approved\nby Purchaser), the Bylaws of the Buyer are in the form previously provided to\nthe Sellers. The minute books of the Buyer previously provided to the Sellers\ncontain a complete summary of all meetings of directors and stockholders since\nthe time of incorporation of the Buyer.\n\nSECTION 3.27. DISCLOSURE.\n ---------- \n\n No representation or warranty by the Buyer in this Agreement, or in any\ndocument or certificate furnished or to be furnished to the Sellers pursuant\nhereto or in connection with the transactions contemplated hereby, when taken\ntogether, contains or will contain any untrue statement of a material fact or\nomits or will omit to state a material fact necessary to make the statements\nmade herein and therein, in the light of the circumstances under which they were\nmade, not misleading. The Buyer has fully provided the Seller with all the\ninformation which the Seller has requested for deciding whether to purchase the\nShares.\n\n 18\n\n \n ARTICLE FOUR\n\n\n MUTUAL COVENANTS\n\nSECTION 4.1. ACCESS; COOPERATION RE TAXES.\n ---------------------------- \n\n From the date hereof through the Closing Date, the parties hereto will give\none another and their respective financial advisors, legal counsel, independent\naccountants and other representatives reasonable access during normal business\nhours to all properties, documents, contracts, employees and records of the\nCompany or Buyer, as the case may be, and will furnish one another with copies\nof such documents and with such information with respect to the Company or the\nBuyer, as the case may be, any such party may reasonably request from time to\ntime. Sellers shall be entitled to all losses or other income tax credits\nattributable to the Company's operations during the period from January 1, 1999\nthrough the Closing Date. After the Closing Date, the Buyer will give Sellers\nand their financial advisors, legal counsel, independent accountants and other\nrepresentatives reasonable access during normal business hours to such records\nof the Company, and will furnish Sellers with copies of such documents and with\nsuch information with respect to the Company as Sellers may reasonably request\nin order for Sellers to complete tax returns for the period from January 1, 1999\nthrough the Closing Date.\n\nSECTION 4.2. THIRD PARTY CONSENTS.\n -------------------- \n\n From the date hereof through the Closing Date, each party hereto will use\nreasonable commercial efforts to obtain or cause to be obtained all consents,\napprovals and authorizations that are necessary under applicable law or the\nContracts to be obtained by such party in connection with the consummation of\nthe transactions contemplated by this Agreement; provided, however, that neither\n -------- ------- \nthe Sellers nor the Company shall be required to pay or provide any monetary or\nother consideration in kind for any such consents, approvals and authorizations\nunder the Contracts.\n\nSECTION 4.3. NOTICE OF DEFAULT.\n ----------------- \n\n From the date hereof through the Closing Date, each party will take all\nactions reasonably necessary to render accurate as of the Closing Date their\nrepresentations and warranties contained herein and to perform or cause to be\nsatisfied each covenant or condition to be performed or satisfied as\ncontemplated by this Agreement. Each party hereto will promptly give notice to\nthe other parties of the occurrence of any event known to such party of that\nresults in a breach of any representation or warranty by such party or the\nfailure of such party to comply with any covenant, condition or agreement\ncontained herein. From the date hereof through the Closing Date, each party\nhereto will promptly disclose to the other parties all information that comes to\nsuch party's attention that, to such party's knowledge, is material to an\nunderstanding of the assets, properties, business, financial condition or\nresults of operations of the Company or Buyer, as the case may be.\n\n 19\n\n \nSECTION 4.4. OTHER AGREEMENTS.\n ---------------- \n\n On the Closing Date, the Sellers shall become parties to, and shall have\nall the rights and benefits of a Preferred Holder under the Rights Agreement\nwith respect to the Shares, which shall be considered part of the Series C\nShares for purposes of the Rights Agreement.\n\n ARTICLE FIVE\n\n\n CONDUCT OF BUSINESS\n\nSECTION 5.1. COVENANTS OF THE COMPANY.\n ------------------------ \n\n During the period from the date of this Agreement and continuing until the\nearlier of the termination of this Agreement or the Closing Date, the Sellers\nagree (except to the extent that the Buyer shall otherwise consent in writing),\nto cause the Company to carry on its business in the usual, regular and ordinary\ncourse in substantially the same manner as previously conducted, to pay its\ndebts and taxes when due, , to pay or perform its other obligations when due\n(subject in all cases to good faith disputes), and, to the extent consistent\nwith such business, to use all reasonable efforts consistent with past practices\nand policies to (i) preserve intact its present business organization, (ii) keep\navailable the services of its present officers and key employees and (iii)\npreserve its relationships with customers, suppliers, distributors, licensors,\nlicensees and others having business dealings with it. The Sellers shall\npromptly notify the Buyer of any event or occurrence not in the ordinary course\nof business of the Company where such event or occurrence would result in a\nbreach of any covenant of the Company set forth in this Agreement or cause any\nrepresentation or warranty of the Sellers set forth in this Agreement to be\nuntrue as of the date of, or giving effect to, such event or occurrence. Except\nas expressly contemplated by this Agreement, the Sellers shall not allow the\nCompany to, without the prior written consent of the Buyer:\n\n (a) Grant any options under any employee plan of the Seller, accelerate,\namend or change the period of exercisability under any outstanding options, or\nauthorize cash payments in exchange for any options granted under any of such\nplans except as required by the terms of such plans or any related agreements in\neffect as of the date of this Agreement;\n\n (b) Transfer or license to any person or entity or otherwise extend, amend\nor modify any rights to the Company's intellectual property rights other than in\nthe ordinary course of business consistent with past practices;\n\n (c) Make any distributions (whether in cash or other property) in respect\nof any of its securities;\n\n (d) Acquire or agree to acquire by merging or consolidating with, or by\npurchasing a substantial equity interest in or substantial portion of the assets\nof, or by any other manner, any business or any corporation, partnership or\nother business organization or division, or otherwise acquire or agree to\nacquire any assets other than acquisitions involving aggregate consideration of\nnot more than Ten Thousand Dollars ($10,000);\n\n 20\n\n \n (e) Sell, lease, license or otherwise dispose of any of its properties or\nassets which are material, individually or in the aggregate, to the business of\nthe Company;\n\n (f) Take any action to (i) increase or agree to increase the compensation\npayable or to become payable to its officers or employees, (ii) grant any\nadditional severance or termination pay to, or enter into any employment or\nseverance agreements with, officers, (iii) grant any severance or termination\npay to, or enter into any employment or severance agreement, with any non-\nofficer employee, except in accordance with past practices, (iv) enter into any\ncollective bargaining agreement, or (v) establish, adopt, enter into or amend in\nany material respect any bonus, profit sharing, thrift, compensation, pension,\nretirement, deferred compensation, employment, termination, severance or other\nplan, trust, fund, policy or arrangement for the benefit of any members,\nofficers or employees;\n\n (g) Revalue any of its assets, including writing down the value of\ninventory or writing off notes or accounts receivable other than in the ordinary\ncourse of business;\n\n (h) Incur any indebtedness for borrowed money or guarantee any such\nindebtedness or issue or sell any debt securities or warrants or rights to\nacquire any debt securities or guarantee any debt securities of others, other\nthan indebtedness incurred under outstanding lines of credit consistent with\npast practice;\n\n (i) Amend or propose to amend its Articles of Organization or operating\nagreement, except as contemplated by this Agreement;\n\n (j) Incur or commit to incur any individual capital expenditure other than\nthe existing commitments set forth on Exhibit B;\n --------- \n\n (k) Enter into or commit to enter into any data or marketing agreement\ninvolving any revenue guarantees or revenue-sharing arrangements;\n\n (l) Amend or terminate any Company Contract , except in the ordinary course\nof business;\n\n (m) Waive or release any material right or claim, except in the ordinary\ncourse of business;\n\n (n) Initiate any litigation or arbitration proceeding; or\n\n (o) Take or agree to take, in writing or otherwise, any of the actions\ndescribed in Sections (a) through (n) above, or any action which is reasonably\nlikely to make any of the Sellers' representations or warranties contained in\nthis Agreement untrue or incorrect in any material respect (without regard to\nany materially qualifications contained therein) on the date made (to the extent\nso limited) or as of the Closing Date.\n\n 21\n\n \nSECTION 5.2. NO SOLICITATION BY SELLERS.\n -------------------------- \n\n During the period from the date of this Agreement until the earlier of the\ntermination of this Agreement or the Closing Date, the Sellers and the Company\nshall not, directly or indirectly, through any officer, director, employee,\nrepresentative or agent, (i) solicit, initiate, or encourage any inquiries or\nproposals that constitute, or could reasonably be expected to lead to, a\nproposal or offer for a merger, consolidation, business combination, sale of\nsubstantial assets, sale of shares of capital stock or similar transactions\ninvolving the Company, other than the transactions contemplated by this\nAgreement (any of the foregoing inquiries or proposals being referred to in this\nAgreement as a \"Company Acquisition Proposal\"), (ii) engage in negotiations or\ndiscussions concerning, or provide any non-public information to any person or\nentity relating to, any Company Acquisition Proposal, or (iii) agree to, approve\nor recommend any Company Acquisition Proposal.\n\n ARTICLE SIX\n\n INDEMNIFICATION\n\nSECTION 6.1. INDEMNIFICATION OBLIGATION.\n -------------------------- \n\n (a) Subject to the limitations set forth in Section 6.2, the Sellers (for\nthe purposes of this Section 5.1(a) the \"Seller Indemnifying Parties\") shall\nindemnify and hold harmless the Company, the Buyer and their affiliates\n(collectively, the \"Buyer Indemnified Parties\") in respect of any and all\nclaims, actions, causes of action, arbitrations, proceedings, losses, damages,\nliabilities and expenses (including, without limitation, settlement costs,\nreasonable attorneys' fees and any other out-of-pocket costs of investigation),\nincurred by the Buyer Indemnified Parties in connection with each and all of the\nfollowing:\n\n (i) Any breach of any representation or warranty of the Sellers\ncontained herein or in any instrument delivered at the Closing by the Sellers;\n\n (ii) Any breach of any covenant, agreement or obligation of the\nSellers contained herein or in any instrument delivered at the Closing by the\nSellers; and\n\n (iii) Any and all liabilities and obligations of the Company of any\nnature, whether known or unknown, arising from or as a result of the operation\nof the Company's business prior to the Closing, other than liabilities referred\nto in Section 2.16 of this Agreement.\n\n (b) The Buyer shall indemnify and hold harmless the Sellers and their\naffiliates (collectively, the \"Seller Indemnified Parties\") in respect of any\nand all claims, actions, causes of action, arbitrations, proceedings, losses,\ndamages, liabilities and expenses (including, without limitation, settlement\ncosts, reasonable attorneys' fees and any other out-of-pocket costs of\ninvestigation), incurred by the Seller Indemnified Parties in connection with\neach and all of the following:\n\n 22\n\n \n (i) any breach of any representation or warranty of the Buyer\ncontained herein or in any instrument delivered at the Closing by the Buyer;\n\n (ii) any breach of any covenant, agreement or obligation of the Buyer\ncontained herein or in any instrument delivered at the Closing by the Buyer; and\n\n (iii) all liabilities and obligations of the Company of any nature,\nwhether known or unknown, arising from or as a result of the operation of the\nCompany's business after the Closing.\n\nSECTION 6.2. LIMITATIONS.\n ----------- \n\n (a) The Buyer Indemnified Parties shall not be permitted to enforce any\nclaim for indemnification pursuant to this Agreement until the aggregate of all\nBuyer Indemnified Parties' claims for indemnification exceed the amount of\n$25,000 (the \"Buyer Threshold Amount\"). Once claims in excess of the Buyer\nThreshold Amount have been asserted by the Buyer Indemnified Parties, the total\namount of the claims, including the Buyer Threshold Amount, may be pursued or\nrecovered against the Sellers; provided, however, that the maximum liability of\n -------- ------- \nthe Sellers for indemnification pursuant to this Agreement shall in no event\nexceed the Escrow Amount.\n\n (b) The Seller Indemnified Parties shall not be permitted to enforce any\nclaim for indemnification pursuant to Sections 6.1(b)(i) and (ii) of this\nAgreement until the aggregate of all Seller Indemnified Parties' claims for\nindemnification pursuant to such sections exceed the amount of $25,000 (the\n\"Seller Threshold Amount\"). Once claims in excess of the Seller Threshold\nAmount have been asserted by the Seller Indemnified Parties, the total amount of\nthe claims pursuant to such sections, including the Seller Threshold Amount, may\nbe pursued or recovered against the Buyer; provided, however, that the maximum\n -------- ------- \nliability of the Buyer for indemnification pursuant to Sections 6.1(b)(i) and\n(ii) of this Agreement shall in no event exceed Two Hundred Thousand Dollars\n($200,000). Nothing in this Section 6.2(b) shall limit the Seller Indemnified\nParties' claims for indemnification pursuant to Section 6.1(b)(iii).\n\n (c) Claims for indemnification made under this Agreement may be made during\nthe period from the Closing Date until the first anniversary of the Closing\nDate; provided, however, that claims pursuant to Section 6.1(b)(iii) may be made\n -------- ------- \nat any time after the Closing Date.\n\n (d) The provisions of this Article Six shall be the exclusive rights and\nremedies of the Buyer and Seller.\n\nSECTION 6.3. NOTICE OF CLAIMS.\n ---------------- \n\n Whenever any claim shall arise for indemnification, the indemnified parties\nshall promptly notify the indemnifying parties in writing of the claim and, when\nknown, the facts constituting the basis for such claim and the amount or\nestimate of the amount of the liability arising from such claim; provided,\n -------- \nhowever, that failure of the indemnified parties to timely give such notice\n------- \nshall not be a defense to the liability of the indemnifying parties for such\nclaim, but the indemnifying parties\n\n 23\n\n \nmay recover from the indemnified parties any actual damages arising from the\nindemnified parties' failure to give such timely notice. A copy of any notice\nof claims by a Buyer Indemnified Party shall be concurrently delivered by such\nBuyer Indemnified Party to the Escrow Agent.\n\nSECTION 6.4. MANNER OF DEFENSE OF THIRD PARTY CLAIMS.\n --------------------------------------- \n\n In connection with any claim giving rise to indemnity hereunder resulting\nfrom or arising out of any claim or legal proceeding by a person other than the\nindemnified parties, the indemnifying parties at their sole cost and expense,\nmay, upon written notice to the indemnified parties assume the defense of any\nsuch claim or legal proceeding. If the indemnifying parties assume the defense\nof any such claim or legal proceeding, the indemnifying parties shall select\ncounsel reasonably acceptable to the indemnified parties to conduct the defense\nof such claims or legal proceedings and, at their sole cost and expense, shall\ntake all steps necessary in the defense or settlement thereof. The indemnifying\nparties shall not consent to a settlement of, or the entry of any judgment\narising from, any such claim or legal proceeding, without the prior written\nconsent of the indemnified parties, unless the indemnifying parties admit in\nwriting their liability to hold the indemnified parties harmless from and\nagainst any losses, damages, expenses and liabilities arising out of such\nsettlement. The indemnified parties shall be entitled to participate in (but\nnot control) the defense of any such action, with their own counsel and at their\nown expense. If the indemnifying parties do not assume the defense of any such\nclaim or litigation resulting therefrom in accordance with the terms hereof, the\nindemnified parties may defend against such claim or litigation in such manner\nas they may deem appropriate, including, but not limited to, settling such claim\nor litigation, after giving notice of the same to the indemnifying parties on\nsuch terms as the indemnified parties may deem appropriate. The indemnifying\nparties shall be entitled to participate in the defense of any action by the\nindemnified parties, which participation shall be limited to contributing\ninformation to the defense and being advised of its status. In any action by\nthe indemnified parties seeking indemnification from the indemnifying parties in\naccordance with the provisions of this Section, the indemnifying parties shall\nnot be entitled to question the manner in which the indemnified parties defended\nsuch claim or litigation or the amount of or nature of any such settlement.\n\nSECTION 6.5. MANNER OF INDEMNIFICATION FOR INDEMNIFYING PARTY CLAIMS.\n ------------------------------------------------------- \n\n Within thirty (30) days of receipt of notice by the indemnifying parties of\na claim by the indemnified parties (or such longer period not to exceed sixty\n(60) days as may be required to investigate such claim), including, without\nlimitation, a claim for damages, settlement and attorneys fees or costs not\nassumed or paid by the indemnified parties under Section 6.4, the indemnifying\nparties shall either satisfy such claim by the payment of cash (or, at the\noption of Sellers, Shares out of the Escrow Amount) to the indemnified parties\nfor the full amount of such claim or notify the indemnifying parties in writing\nthat it contests such claim (a copy of any notice of contest by Sellers shall be\nconcurrently delivered by Sellers to the Escrow Agent). If the indemnifying\nparties fail to satisfy such claim or provide such written notice of contest,\nthe claim shall be deemed contested. If the parties, acting in good faith,\ncannot reach an agreement within ninety (90) days after notice was first given\nby the indemnifying parties hereunder, then such parties may seek any remedy\navailable to them at law or equity.\n\n 24\n\n \nSECTION 6.6. DISPOSITION OF ESCROW AMOUNT.\n -----------------------------\n\nThe obligations of Sellers pursuant to this Article Six shall may be satisfied,\nat the option of Sellers, by the payment of cash or Shares out of the Escrow\nAmount; provided, however, that the maximum liability of the Sellers for\n -------- ------- \nindemnification pursuant to this Agreement shall in no event exceed the Escrow\nAmount. No later than twelve months after the Closing, the Escrow Agreement\nshall instruct the Escrow Agent to pay over to Sellers the Escrow Amount then\nbeing held pursuant to the Escrow Agreement, unless at such time there is\npending against Sellers one or more indemnifiable claims, in which case that\nportion of the Escrow Amount equal to the aggregate amount of indemnifiable\nclaims shall continue to be held by the Escrow Agent in accordance with this\nAgreement and the Escrow Agreement and the remainder shall be paid over to\nSellers. If and to the extent that, from time to time pursuant to the\nprovisions of this Agreement, it is determined in accordance with this Article\nSix that Buyer is entitled to indemnification, the Escrow Agreement shall\ninstruct the Escrow Agent to pay over to the Buyer the Escrow Amount, or portion\nthereof, necessary to satisfy, to the extent possible, such claim or claims.\n\n ARTICLE SEVEN\n\n CONDITIONS TO THE BUYER'S OBLIGATIONS\n\n The obligations of the Buyer hereunder shall be subject to the\nsatisfaction, as of the Closing Date, of the following conditions (any of which\nmay be waived in writing, in whole or in part, by the Buyer):\n\nSECTION 7.1. REPRESENTATIONS AND WARRANTIES; COVENANTS.\n ----------------------------------------- \n\n The representations and warranties of the Sellers contained in this\nAgreement shall be true and correct in all respects as of the Closing Date as if\nmade on the Closing Date. The Sellers shall have duly performed and satisfied\nall covenants and agreements required by this Agreement to be performed or\nsatisfied by the Sellers at or prior to the Closing Date. The Buyer shall have\nbeen furnished with certificates of the Sellers, dated the Closing Date,\ncertifying the fulfillment of the foregoing conditions.\n\nSECTION 7.2. CERTAIN DOCUMENTS.\n ----------------- \n\n The Sellers shall have furnished the Buyer with the following documents:\n\n (a) the articles of organization of the Company, as amended to date, duly\ncertified by the Secretary of State of the State of California as of the most\nrecent practical date;\n\n (b) certificates as to the good standing of the Company and payment of all\ntaxes as of the most recent practical date, executed by the Secretary of State\nof the State of California;\n\n (c) the operating agreement of the Company, duly certified by the Secretary\nof the Company as being in full force and effect on the Closing Date;\n\n 25\n\n \n (d) resignations, effective on the Closing Date, of all directors and\nofficers of the Company;\n\n (e) originals or copies of all consents, approvals and authorizations that\nare necessary under applicable law or the Company Contracts to be obtained by\nthe Sellers or the Company in connection with the consummation of the\ntransactions contemplated by this Agreement;\n\n (f) the Closing Balance Sheet, certified by the Sellers as being true and\ncorrect in all material respects as of the Closing Date; and\n\n (g) such other documents relating to the Company as the Buyer may\nreasonably request.\n\nSECTION 7.3. LEGAL MATTERS.\n ------------- \n\n All legal matters, and the form and substance of all documents to be\ndelivered by the Sellers to the Buyer at the Closing, shall be satisfactory to\ncounsel for the Buyer.\n\nSECTION 7.4. LEGAL PROCEEDINGS.\n ----------------- \n\n No action, suit, claim, proceeding, inquiry or investigation by or before\nany federal, state, local or other governmental court, arbitrator or agency\nshall have been initiated or, to the knowledge of the Buyer, threatened, seeking\nto prevent or enjoin the transactions contemplated by this Agreement.\n\nSECTION 7.5. COMPANY EMPLOYEES.\n ----------------- \n\n Gail Williams shall have executed an offer letter with the Company in\nsubstantially the form attached hereto as Exhibit D.\n --------- \n\nSECTION 7.6. LEGAL OPINION.\n ------------- \n\n The Buyer shall have received an opinion of legal counsel to the Sellers in\nthe form and substance attached hereto as Exhibit E.\n --------- \n\nSECTION 7.7 SUBLEASE.\n -------- \n\n The Company shall have entered into a written sublease for its current\nfacility in form and substance reasonably acceptable to the Buyer.\n\nSECTION 7.8 AMENDMENT TO ARTICLES OF INCORPORATION.\n -------------------------------------- \n\n The Buyer shall have amended its Articles of Incorporation to increase the\nnumber of authorized shares of Series C Preferred Stock and Series C-1 Preferred\nStock each to 3,000,000.\n\n 26\n\n \n ARTICLE EIGHT\n\n CONDITIONS TO THE SELLERS' OBLIGATIONS\n\n The obligations of the Sellers hereunder shall be subject to the\nsatisfaction, as of the Closing Date, of the following conditions (any of which\nmay be waived in writing, in whole or in part, by the Sellers):\n\nSECTION 8.1. REPRESENTATIONS AND WARRANTIES; COVENANTS.\n ----------------------------------------- \n\n The representations and warranties of the Buyer contained in this Agreement\nshall be true and correct in all material respects (without regard to any\nmateriality qualifications contained therein) as of the Closing Date as if made\non the Closing Date. The Buyer shall have duly performed and satisfied all\ncovenants and agreements required by this Agreement to be performed or satisfied\nby the Buyer at or prior to the Closing Date. The Sellers shall have been\nfurnished with a certificate of the Buyer, dated the Closing Date, certifying\nthe fulfillment of the foregoing conditions.\n\nSECTION 8.2. CERTAIN DOCUMENTS.\n ----------------- \n\n The Buyer shall have furnished the Sellers with the following documents or\ncertificates:\n\n (a) the articles of incorporation of the Buyer as amended to date, duly\ncertified by the Secretary of State of the State of California as of the most\nrecent practical date;\n\n (b) certificates as to the good standing of the Buyer and payment of all\ntaxes as of the most recent practical date, executed by the Secretary of State\nof the State of California;\n\n (c) the bylaws of Buyer, duly certified by the Secretary of Buyer as being\nin full force and effect on the Closing Date;\n\n (d) copies of the resolutions of the Board of Directors approving the\ntransactions contemplated by this Agreement, including, without limitation, the\nauthorization and issuance of the Shares;\n\n (e) originals or copies of all consents, approvals and authorizations that\nare necessary under applicable law or the Buyer Contracts to be obtained by the\nBuyer in connection with the consummation of the transactions contemplated by\nthis Agreement;\n\n (f) such other documents relating to the Buyer as the Sellers may\nreasonably request; and\n\n (g) certificates in the respective names of the Sellers evidencing the\nShares.\n\nSECTION 8.3. LEGAL MATTERS.\n ------------- \n\n All legal matters, and the form and substance of all documents to be\ndelivered by the Buyer to the Sellers at the Closing, shall be satisfactory to\ncounsel for the Sellers.\n\n 27\n\n \nSECTION 8.4. LEGAL PROCEEDINGS.\n ----------------- \n\n No action, suit, claim, proceeding, inquiry or investigation by or before\nany federal, state, local or other governmental court, arbitrator or agency\nshall have been initiated or, to the knowledge of the Sellers, threatened,\nseeking to prevent or enjoin the transactions contemplated by this Agreement.\n\nSECTION 8.5. LEGAL OPINION.\n ------------- \n\n The Sellers shall have received an opinion of legal counsel to the Buyer in\nthe form and substance attached hereto as Exhibit F.\n --------- \n\nSECTION 8.6. EMPLOYEES.\n ----------\n\n Buyer shall have offered employment to all current employees of the Company\nas of the Closing. All Company employees who have accepted employment by the\nBuyer will be eligible for participation in Buyer's health, life, and disability\ninsurance programs, in accordance with the existing terms and conditions of such\nprograms, and be given year-for-year credit for years of service with the\nCompany, and retain all accrued vacation time or pay and sick time, through the\nClosing Date.\n\n ARTICLE NINE\n\n MISCELLANEOUS\n\nSECTION 9.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS.\n ---------------------------------------------------------------- \n\n The representations and warranties of the Sellers made in this Agreement\n(including the Schedules) or any certificate, instrument or other document\ndelivered in connection herewith shall survive the Closing Date for a period of\none year.\n\nSECTION 9.2. PUBLICITY.\n\n \n Neither party will make any public announcement regarding the subject\nmatter of this Agreement without the prior written consent of the other party.\n\nSECTION 9.3 Expenses.\n -------- \n\n In the event the Closing is completed, the expenses incurred by the Company\nwill be borne by the Sellers, except that the following expenses relating to the\ntransaction will be accrued by the Company and become post-closing obligations\nof the surviving company to be paid on the Closing Date: the accounting and\nlegal fees and expenses of the Company in an amount not to exceed Seventy-Five\n($75,000) Dollars. In the event the Closing does not take place, each party\nshall pay its own expenses in connection with the preparation and performance of\nthis Agreement and the\n\n 28\n\n \nconsummation of the transactions contemplated hereby, including without\nlimitation all fees and expenses of investment bankers, financial advisors,\nlegal counsel, independent accountants and actuaries.\n\nSECTION 9.4. GOVERNING LAW.\n ------------- \n\n This Agreement shall be governed by and construed and enforced in\naccordance with the internal, substantive laws of the State of California,\nwithout giving effect to the conflict of laws rules thereof.\n\nSECTION 9.5. NOTICES.\n ------- \n\n All notices, consents, requests, instructions, approvals and other\ncommunications provided for herein shall be deemed validly given, made or served\nif in writing and delivered personally or sent by certified mail, postage\nprepaid, or by overnight courier, or by telex, telecopier or telegraph, charges\nprepaid:\n\n (a) if to the Buyer, addressed to:\n\n Salon Internet, Inc.\n 706 Mission Street, 2nd Floor\n San Francisco, CA 94103\n Attention: Chief Executive Officer\n Telephone:\n Telecopier:\n\n with a copy to:\n\n Gray Cary Ware & Freidenrich LLP\n 400 Hamilton Ave.\n Palo Alto, CA 94301\n Attention: Tom Furlong\n Telephone: (650)833-2359\n Telecopier: (650)327-3699\n\n (b) if to the Sellers, addressed to:\n\n c\/o Rosewood Stone Group\n 2320 Marinship Way, Suite 240\n Sausalito, California 94965-2812\n Attention: Claudia Stroud\n Telephone: (415) 331-4400\n Telecopier: (415) 331-4481\n\n 29\n\n \n with a copy to:\n\n Gibson, Dunn & Crutcher LLP\n One Montgomery Street, Telesis Tower\n San Francisco, California 94104-4505\n Attention: Douglas Smith\n Telephone: (415) 393-8200\n Telecopier: (415) 986-5309\n\nor such other address as shall be furnished in writing by any party to the\nothers.\n\nSECTION 9.6. JURISDICTION; AGENT FOR SERVICE.\n ------------------------------- \n\n Legal proceedings commenced by the Sellers or the Buyer arising out of any\nof the transactions or obligations contemplated by this Agreement shall be\nbrought exclusively in the federal courts, or in the absence of federal\njurisdiction in state courts, in either case in the State of California. The\nBuyer and the Sellers irrevocably and unconditionally submit to the jurisdiction\nof such courts and agree to take any and all future action necessary to submit\nto the jurisdiction of such courts. The Buyer and the Sellers irrevocably waive\nany objection that they now have or hereafter may have to the laying of venue of\nany suit, action or proceeding brought in any such court and further irrevocably\nwaive any claim that any such suit, action or proceeding brought in any such\ncourt has been brought in an inconvenient forum. Final judgment against the\nSellers or the Buyer in any such suit shall be conclusive and may be enforced in\nother jurisdictions by suit on the judgment, a certified or true copy of which\nshall be conclusive evidence of the fact and the amount of any indebtedness or\nliability of the Sellers or the Buyer therein described, or by appropriate\nproceedings under any applicable treaty or otherwise.\n\nSECTION 9.7. ENTIRE AGREEMENT.\n ---------------- \n\n This Agreement represents the entire agreement between the parties and\nsupersedes and cancels any prior oral or written agreement, letter of intent or\nunderstanding related to the subject matter hereof.\n\nSECTION 9.8. BINDING EFFECT.\n -------------- \n\n This Agreement shall be binding upon and shall inure to the benefit of the\nparties hereto and their respective successors and assigns, and no other person\nshall acquire or have any right under or by virtue of this Agreement.\n\nSECTION 9.9. AMENDMENTS; WAIVERS.\n ------------------- \n\n No provision of this Agreement may be terminated, amended, supplemented,\nwaived or modified other than by an instrument in writing signed by the party\nagainst whom the enforcement of the termination, amendment, supplement, waiver\nor modification is sought.\n\n 30\n\n \nSECTION 9.10. COUNTERPARTS.\n ------------ \n\n This Agreement may be executed in one or more counterparts, each of which\nshall be deemed to be an original and all of which together shall be deemed to\nbe one and the same instrument, and shall become effective when one or more\ncounterparts have been signed by each of the parties.\n\nSECTION 9.11. SEVERABILITY.\n ------------ \n\n In the event any provision, or portion thereof, of this Agreement is held\nby a court having proper jurisdiction to be unenforceable in any jurisdiction,\nthen such portion or provision shall be deemed to be severable as to such\njurisdiction (but, to the extent permitted by law, not elsewhere) and shall not\naffect the remainder of this Agreement, which shall continue in full force and\neffect. If any provision of this Agreement is held to be so broad as to be\nunenforceable, such provision shall be interpreted to be only so broad as is\nnecessary for it to be enforceable.\n\nSECTION 9.12. KNOWLEDGE.\n ----------\n\n For the purposes of this Agreement, the phrase (i) \"to the knowledge of\nsuch Seller\" shall mean the actual knowledge, after due inquiry within the\nCompany, of any of the Sellers or the Company's directors and executive\nofficers, and (ii) \"to the knowledge of the Buyer\" shall mean the actual\nknowledge, after due inquiry within the Buyer, of any of the Buyer's executive\nofficers.\n\n (The remainder of this page has been left blank intentionally.)\n\n 31\n\n \n IN WITNESS WHEREOF, this Agreement has been duly executed by the parties\nhereto as of the day and year first above written.\n\n BUYER:\n\n SALON INTERNET, INC.\n\n\n\n By: \/s\/ Authorized Officer\n ------------------------------\n Name: Authorized Officer\n Title:\n\n SELLERS:\n\n WHOLE EARTH LECTRONIC LINK, INC.\n\n\n\n By: \/s\/ Authorized Officer\n -------------------------------\n Name: Authorized Officer\n Title:\n\n\n \/s\/ Bruce R. Katz\n -----------------------------------\n BRUCE R. KATZ\n\n 32\n\n \n EXHIBIT A\n ---------\n\n Form of Escrow Agreement\n\n \n EXHIBIT B\n ---------\n\n SELLERS' SCHEDULE OF EXCEPTIONS\n\n \n2.3(a) Discussions 1.5 license from Well Engaged 2\/25\/99\n\n Sublease, effective as of March 22, 1999, for approximately 424 sf of\n office space at 2320 Marinship Way, Sausalito, California; from Well\n Engaged LLC\n\n Certain commercial shrinkwrap licenses held by the Company may, by their\n terms, limit the transfer of the license in connection with a change in\n control. (see Schedule 2.9)\n\n2.4(b) The Company does not maintain membership unit transfer records, except\n for Exhibit A to the Operating Agreement.\n\n2.8 Sublease, effective as of March 22, 1999, for approximately 424 sf of\n office space at 2320 Marinship Way, Sausalito, California; from Well\n Engaged LLC\n\n2.9 (b) Intellectual Property\n\nReprint permissions:\n\n6\/1\/98 to Cliff Figallo to use a webpage in his book Hosting Web Communities\n -----------------------\n1\/28\/98 to Lucent Books to use a webpage in the book The Internet\n ------------\n4\/16\/97 to Course Technology to use several web pages in the books,\n The World Wide Web Featuring Netscape Communicator 4 Software and\n ---------------------------- --------------------------------- \n The World Wide Web Featuring Internet Explorer 4 by Barker+Barker\n ------------------------------------------------ \n9\/4\/96 to Harry Henderson to use several web pages in his book\n2\/28\/96 to Owen Seitel to use the Members' Agreement as part of\n a seminar \"Doing Business on the Internet\"\n4\/24\/95 to IDG Books to use a logo and webpage in its book Creating Cool\n -------------\n Web Pages with HTML\n -------------------\n5\/15\/95 to the U.S. Distance Learning Association to use portions of\n user manual for their online documentation 7\/12\/95 to Mary Carter\/Black\n Point Group to use a quote in the book Electronic Highway Robbery\n --------------------------\n10\/20\/98 email to Mary Eisenhart regarding an acknowledgment for use of the\n common-law mark, \"yoyow\". (You own your own words.) Mary has\n acknowledged the foregoing pursuant to an email to the Company, but it\n has not been put in a final agreement.\n\n 1\n\n \nCopyrights - The Company does not hold copyright to\n individual postings by subscribers. As per general Internet\n publishing principles, the individuals hold the rights to their\n postings.\n\nTrademarks -\n\nAssignment dated March 10, 1999 from Whole Earth Lectronic Link to The WELL\nLLC, assigning the U.S. registered service mark.\nAssignment dated March 10, 1999 from Whole Earth Lectronic Link to The WELL\nLLC, assigning the foreign registered service marks and pending service mark\napplications.\n\nDomain names -\n\n2\/23\/99 The Company requested Network Solutions to correct the domain name\nrecords for well.org and well.sf.ca.us, which are still registered under the\nname of Whole Earth Lectronic Link. This request is still pending with Network\nSolutions.\n\n6\/4\/98 Network Solutions advised the Company that it placed the domain name\n\"thewell.net\" on hold after the Company disputed a third-party registration.\n\n12\/14\/98 The registrant of the domain name welll.com (note three l's) has agreed\nin email to sign over that url to the Company. Final documentation is pending.\n\nWhole Earth Network, Inc. continues to use the domain name well.net in the\nprovision of web services to former Whole Earth Lectronic Link customers. The\nAsset Purchase Agreement by which Link and others sold Whole Earth Networks LLC\nto GST\/Whole Earth Network, Inc. (dated 3\/12\/98) provides that such use will be\nterminated within a reasonable time. The Company has not requested Whole Earth\nNetwork to do so.\n\nTechnology licenses -\n\n Picospan license from Whole Earth Lectronic Link 7\/1\/97\n Discussions 1.5 license from Well Engaged 2\/25\/99\n sendmail (freeware)\n mail.local (freeware)\n qpopper (freeware\n imapd (freeware)\n comsat (freeware)\n Berkeley Mail (freeware)\n fetchmail (freeware)\n pine (freeware)\n ipine (freeware)\n mail (freeware)\n elm (freeware)\n Zmail licensed from vendor\n\n 2\n\n \n Netscape Communications and Commerce Servers (shrinkwrap license)\n ImageClub Clip Art licensed from Adobe (shrinkwrap)\n NcFTPD licensed from vendor (shrinkwrap)\n Solaris 2.5.1, licensed from Sun (shrinkwrap)\n Unix version of PGP licensed from vendor (shrinkwrap)\n PC version of PGP (shareware)\n Access Watch license\n Cybercash provided as part of Colocation Services Agreement (ISP)\n RBASE licensed from Microrim\n Filemaker licensed from vendor (shrinkwrap)\n Desktop applications such as MsWord, Excel licensed from vendor \n (shrinkwrap)\n\n Indemnifications:\n Colocation Services Agreement with Whole Earth Networks\n \n Reference is made to Section 2.12(b) of this Schedule of Exceptions\n\n Year 2000. The Company is currently working to resolve the potential impact\n of the Year 2000 on the processing of date-sensitive information by the\n Company's computerized information systems. Based on preliminary\n information, costs of addressing potential corrections are not currently\n expected to have material adverse impact on the Company's financial\n position, results of operations, or cash flows in future periods. However,\n if the Company, its customers or vendors are unable to resolve such\n processing issues in a timely manner, it could result in material financial\n risk.\n\n2.10 (a)\nEmployee List\n \n<\/pre>\n
\n\n LAST FIRST TITLE DOH SALARY
\n
\n Branstetter Katherine Helpdesk 10\/08\/97 $13.00\/hr
\n Dyer-Bennett Cynthia Asst. Conference Manager 11\/23\/98 $15.87\/hr
\n Gray Thomas Customer Service\/Billing Rep 06\/08\/98 $13.50\/hr
\n Hanson Pete Programmer 01\/16\/94 $48,630.00
\n Mara Janis Marketing Director 07\/01\/98 $33,000.00
\n Siino Anthony Helpdesk\/Technical Assistant 10\/06\/97 $15.00\/hr
\n Williams Gail Executive Director 12\/16\/91 $65,000.00
\n<\/c><\/c><\/c><\/c><\/s><\/caption>\n<\/table>\n 3<\/p>\n
Officers: Bruce R. Katz, Chairman
\n Gail Williams, Executive Director
\n John Hallett, Chief Financial Officer
\n Claudia Stroud, Secretary<\/p>\n
Directors: Bruce Katz
\n Kevin Kelly
\n Claudia Stroud<\/p>\n
ADP has a Limited Power of Attorney to file employment tax returns and make
\ndeposits electronically, in connection with the Company’s payroll processing<\/p>\n
2.10 (b)<\/p>\n
Offer letter to Katherine Branstetter dated 10\/2\/98
\n Offer letter to Cynthia Dyer-Bennett dated 11\/11\/98
\n Offer letter to Thomas Gray dated 5\/29\/98
\n Offer letter to Janis Mara dated 7\/1\/98
\n Offer letter to Anthony Siino dated 5\/15\/98
\n Offer letter to Pete Hanson dated 3\/16\/99<\/p>\n
Whole Earth has entered into a letter agreement with Gail Williams, on
\n 9\/20\/98, as amended on March 15, 1999, which provides for the payment of
\n cash or other consideration upon the sale of the Company. Pursuant to the
\n letter agreement, Ms. Williams will be entitled to receive 10,456 of the
\n Shares issuable to Whole Earth under the Agreement.<\/p>\n
Certain former employees and directors were promised lifetime complimentary
\n accounts on The WELL. Gail Williams is the only current employee who has
\n been promised a lifetime account. The total comprises 40 accounts, of which
\n 12 are held by Sellers.<\/p>\n
Current employees receive a free Internet connectivity account during the
\n term of their employment. They also receive a free Well account for
\n themselves and for one guest. If they leave the company in good standing,
\n they are allowed to maintain one complimentary Well account for a period of
\n time depending upon their length of service to the company (i.e. six months
\n comp for 1 year of service, 1 year comp for 2 years of service, and 1 year
\n for each additional year of service thereafter)<\/p>\n
Volunteer hosts receive complimentary accounts, some of which include
\n Internet connectivity.<\/p>\n
Consulting agreement dated 12\/16\/98 with Neil Harkins, pursuant to which he
\n provides <\/p>\n
4<\/p>\n
part-time system administration services at the rate of $50 per hour.<\/p>\n
\n\n BENEFITS TYPE GROUP NUMBER
\n CARRIER
\n
\n HIPC Medical 2009689
\n Delta Dental Dental 000162 0003
\n Vision Service Plan Vision 12017037 01
\n Reliance Standard Life Life GL 2880 001
\n UNUM Disability 513000 003
\n<\/c><\/c><\/s><\/caption>\n<\/table>\nNote that, except for the HIPC plan, these benefit policies are not
\nassignable to purchaser.<\/p>\n
2.10 (d) No accruals are booked for sick leave or unemployment benefits.<\/p>\n
2.11(a) Rosewood Stone Group, Inc. and Related Companies
\n Profit-Sharing 401(k) Plan (as amended)<\/p>\n
Note that Seller has only requested copy of the IRS determination letter
\nrelating to this Plan.<\/p>\n
2.12(a) The applicability to the Internet of existing laws in various
\njurisdictions governing issues such as property ownership, sales and other
\ntaxes, libel and personal privacy is uncertain and make take years to resolve.
\nFor example, tax authorities in a number of states are currently reviewing the
\nappropriate tax treatment of companies engaged in online commerce, and new state
\ntax regulations may subject the Company to additional state sales and income
\ntaxes. Any such new legislation or regulations, the application of laws and
\nregulations from jurisdictions whose laws do not currently apply to the
\nCompany’s business, or the application of existing laws and regulations to the
\nInternet and commercial online services could have a material adverse effect on
\nthe Company’s business, operating results, and financial condition.<\/p>\n
2.12 (b) 4\/6\/98 letter from MCI alleging “spam” originating from the Company’s
\n servers; we informed MCI by telephone on 4\/10\/98 that we would
\n cooperate with any investigation 5\/6\/98 letter to Postal Inspector
\n regarding customer complaint and refund 6\/25\/98 email in response to
\n email from NSKinsella alleging that a subscriber was libelling his
\n client, advising that the Company’s policy is that it is not
\n responsible for such matters and that such dispute should be resolved
\n between such parties.<\/p>\n
8\/9\/97 email from subscriber regarding alleged libel.<\/p>\n
The Company from time to time receives communications from subscribers or third
\nparties alleging libel, defamation, harassment, intellectual property
\ninfringement, or other claims. Like other Internet companies, the Company’s
\npolicy is that it is not responsible for such matters and the disputes should be
\nresolved between the parties. Without limiting the foregoing, in the event <\/p>\n
5<\/p>\n
of intellectual property infringement claims, the Company has in the past
\nattempted to contact the alleged infringer and ask that the infringing material
\nbe removed.<\/p>\n
Prior to the Company’s formation in July 1997, its operations were conducted
\nthrough Whole Earth Lectronic Link, Inc. Whole Earth received communications
\nsimilar to the foregoing from time to time.<\/p>\n
2.13(a)<\/p>\n
Colocation Services Agreement with GST\/Whole Earth Network dated 2\/26\/98
\nBilling and Services Agreement among The WELL, Whole Earth Lectronic Link, and
\n GST\/Whole Earth Network dated 2\/18\/98
\nAgreement between Public Conference Hosts and The WELL
\nMembers’ Agreement (with individual subscribers)
\nProprietary Rights Assignment dated as of 7\/1\/97 from Whole Earth Lectronic
\nLink, Inc.
\nConsulting agreement dated 9\/25\/96 with Jennifer Long (work is completed but
\n ongoing obligation to maintain a link to her website)
\nConsulting agreement dated 12\/16\/98 with Neil Harkins
\nSun Microsystems Support Agreement (effective 7\/16\/98 to 7\/15\/99)
\nPaymentech Merchant Agreement dated 2\/12\/98
\nNational Writers Union letter agreement dated 1\/15\/99
\nSirius Connections letter agreement dated 11\/5\/98
\nThe Writer’s Club letter agreement dated 10\/15\/98
\nSublease agreement with Well Engaged (described above)
\nConsent to Sublease agreement dated March 17, 1999
\nClient Account Agreement and Authorization to Debit with ADP dated 8\/8\/97<\/p>\n
Technology licenses –<\/p>\n
Picospan license from Whole Earth Lectronic Link 7\/1\/97
\n Discussions 1.5 license from Well Engaged 2\/25\/99
\n sendmail (freeware)
\n mail.local (freeware)
\n qpopper (freeware
\n imapd (freeware)
\n comsat (freeware)
\n Berkeley Mail (freeware)
\n fetchmail (freeware)
\n pine (freeware)
\n ipine (freeware)
\n mail (freeware)
\n elm (freeware)
\n Zmail licensed from vendor
\n Netscape Communications and Commerce Servers (shrink wrap license)
\n ImageClub Clip Art licensed from Adobe (shrinkwrap)<\/p>\n
6<\/p>\n
NcFTPD licensed from vendor (shrinkwrap)
\n Solaris 2.5.1, licensed from Sun (shrink wrap)
\n Unix version of PGP licensed from vendor (shrinkwrap)
\n PC version of PGP (shareware)
\n Access Watch license
\n RBASE licensed from Microrim
\n Filemaker licensed from vendor (shrinkwrap)
\n Desktop applications such as MsWord, Excel licensed from vendor
\n (shrinkwrap)<\/p>\n
Offer letters –
\n Offer letter to Katherine Branstetter dated 10\/2\/98
\n Offer letter to Cynthia Dyer-Bennett dated 11\/11\/98
\n Offer letter to Thomas Gray dated 5\/29\/98
\n Offer letter to Janis Mara dated 7\/1\/98
\n Offer letter to Anthony Siino dated 5\/15\/98
\n Offer letter to Pete Hanson dated 3\/16\/99<\/p>\n
Certain former employees and directors were promised lifetime complimentary
\n accounts on The WELL. Gail Williams and Pete Hanson are current employee
\n who are entitled to lifetime accounts. The total comprises 40 accounts, of
\n which 12 are Sellers’.<\/p>\n
2.14 Since the Balance Sheet Date (12\/31\/98)<\/p>\n
2\/22\/99 Engaged Price Waterhouse Coopers to conduct an audit of 1997-98
\n 2\/22\/99 Engaged Pisenti&Brinker, CPA’s, to provide assistance in the
\n audit Sublease, effective as of March 22, 1999, for approximately 424 sf of
\n office space at 2320 Marinship Way, Sausalito, California; from Well
\n Engaged LLC; and
\n Consent to Sublease Agreement dated March 17, 1999
\n Signed standard form offer letter with Pete Hanson March 16, 1999
\n Will terminate Amazon.com Associates Agreement dated 9\/29\/98 immediately
\n prior to Closing.<\/p>\n
2.15(a) It is anticipated that extensions of time to file 1998 income tax
\n return (federal and state) will be applied for on April 15, 1999.<\/p>\n
2.15(b) County property taxes are not accrued; the forms are due on April 1,
\n 1999 and payment is not due until August 1, 1999.<\/p>\n
2.15(c) None<\/p>\n
2.17 *Atlantic Mutual Insurance Co., Policy No. 486-30-45-31
\n Commercial Package covering Property, General Liability, Commercial
\n Crime, with $5M Umbrella Liability
\n *E-Risk Services, LLC Policy No. 90000175, for Employment Practices
\n Liability
\n 7<\/p>\n
*Republic Indemnity, Policy No. 031870-03, covering Worker’s
\n Compensation
\n *Lloyd’s of London, Policy No. MC45735, Professional Liability policy<\/p>\n
*Note: These policies are not assignable to Purchaser.<\/p>\n
State of Washington Unemployment Insurance Business ID#601-816-790
\n State of Colorado Unemployment Insurance Account No. 476306.00-8
\n State of California EDD Account No. 432-5719-5<\/p>\n
2.18 West America Bank
\n checking account no. 0506-358175
\n One Harbor Drive
\n Sausalito CA 94965
\n Signatories: John Hallett, Claudia Stroud<\/p>\n
2.19 Interco liabilities as of 3\/25\/99<\/p>\n
Account receivable from Whole Earth Lectronic Link
\n under the Billing + Services Agreement $16,130<\/p>\n
Account payable to Well Engaged
\n for rent (net of misc charges) $ 3,780<\/p>\n
Account payable to Rosewood Stone Group
\n for insurance from inception $ 290<\/p>\n
Colocation Services Agreement with GST\/Whole Earth Network, Inc.* dated
\n 2\/26\/98 Billing and Services Agreement among The WELL, Whole Earth
\n Lectronic Link, and
\n GST\/Whole Earth Network, Inc.* dated 2\/18\/98
\n Picospan license from Whole Earth Lectronic Link 7\/1\/97
\n Discussions 1.5 license from Well Engaged 2\/25\/99
\n Sublease, effective as of March 22, 1999, for approximately 424 sf of
\n office space at
\n 2320 Marinship Way, Sausalito, California; from Well Engaged LLC<\/p>\n
8<\/p>\n
EXHIBIT C
\n ———<\/p>\n
Buyer’s Schedule of Exceptions<\/p>\n
Pursuant to Article Three of that certain Membership Interest Purchase
\nAgreement dated March ___, 1999 (the “Agreement”) between Salon Internet, Inc.
\n(the “Company”) and Whole Earth Lectronic Link, Inc. (“Whole Earth”) and Bruce
\nR. Katz (“Katz,” together with Whole Earth, the “Sellers”), the Buyer hereby
\ndelivers this Schedule of Exceptions (the “Schedule”). The section numbers in
\nthis Schedule correspond to the section numbers in the Agreement. Any
\ninformation disclosed under any section in this Schedule is deemed to be
\ndisclosed and incorporated in any other section of this Schedule where such
\ndisclosure would be appropriate. Capitalized terms used in this Schedule,
\nunless otherwise specified, have the meanings given them in the Agreement.<\/p>\n
Section 3.1
\n———–<\/p>\n
The Company currently is qualified to do business in California, Massachusetts
\nand New York. The Company employs one person working out of an office which is
\nnot leased by the Company in Washington, D.C. The Company employs ten people in
\nNew York City and leases office space in the building known as 1500 Broadway, in
\nthe Borough of Manhattan, City, County and State of New York.<\/p>\n
Section 3.4
\n———–<\/p>\n
The Company’s Shareholder and Optionholder List is attached hereto.
\n——————————————————————-<\/p>\n
The Company has issued warrants to purchase (1) 17,500 shares of Series A
\nPreferred Stock, 23,734 shares of Series B Preferred Stock and up to 19,365
\nshares of Series C Preferred Stock to Imperial Bank, (2) 158,228 shares of
\nSeries B Preferred Stock to America Online (“AOL”) and (3) up to 282,320, 62,738
\nand 94,106 shares of Common Stock to each of Adobe Ventures II, L.P., ASCII
\nVentures, L.P. and H&Q Salon Investors, L.P., respectively.<\/p>\n
Pursuant to his employment agreement with the Company, Michael O’Donnell, the
\nCompany’s President, has a right of first refusal to participate in certain
\nfuture sales of equity securities by the Company to maintain his pro rata share
\nof the Company’s common stock prior to such offering. Mr. O’Donnell has waived
\nthis right in connection with the transactions contemplated by the Agreement.<\/p>\n
Pursuant to the Rights Agreement, certain stockholders have rights to purchase
\ncertain future sales of equity securities by the Company to maintain their pro
\nrata share of the Company’s capital stock prior to such offering. Such rights
\nare not applicable to the transactions contemplated by the Agreement.<\/p>\n
The Company has engaged Daiwa Securities America Inc. to assist the Company in
\nraising additional funding. The projections contained in the Private Placement
\nMemorandum (the “PPM”) assume that additional funding is obtained by the
\nCompany. No commitment for such funding exists as of the date hereof, there can
\nbe no assurance that such funding will be obtained, and the projections
\ncontained in the PPM are not likely to be achieved without such additional
\nfunding. The Company’s failure to obtain such funding would have a material
\nadverse affect on the Company’s financial condition.<\/p>\n
1<\/p>\n
The Company and certain of the holders of the Company’s Preferred Stock have
\nentered into a Voting Agreement dated September 18, 1998 pursuant to which these
\nholders agree to vote to elect certain designees of such holders.<\/p>\n
Section 3.7
\n———–<\/p>\n
Borders has a license to reproduce Salon book and music reviews in any of its
\nstores or electronically display reviews on its Web site.<\/p>\n
Barnesandnoble.com has a license to reproduce Salon book and music reviews in
\nany of its stores or electronically display reviews on its Web site.<\/p>\n
The Company has an agreement with DrKoop.com pursuant to which the parties each
\nprovide the other with proprietary content.<\/p>\n
Pursuant to an agreement (the “UFS Agreement”), United Features Syndicate
\n(“UFS”) has the worldwide right to syndicate the Company’s proprietary content
\nto print and online newspapers, and in return the Company receives fifty percent
\n(50%) of the revenues that UFS receives from such syndication.<\/p>\n
The Company has agreements with AOL and AltaVista whereby the Company pays these
\nparties to publish the Company’s proprietary content on their Web sites.<\/p>\n
The Company has an agreement with Penguin Books pursuant to which the Company
\nhas agreed to author an anthology, using some content previously published by
\nthe Company.<\/p>\n
The Company has an agreement with Random House\/Villard pursuant to which the
\nCompany has agreed to author a book, using some content previously published by
\nthe Company.<\/p>\n
The Company has written arrangements with C\/Net, Netscape, Snap!, CNN, Go.com,
\nWebTV, PointCast, Echostar and RocketBook whereby these vendors publish the
\nCompany’s proprietary content on their respective Web sites or in their
\nrespective electronic information products and provide links to the Company’s
\nWeb site without charge. The Company and the aforementioned third parties
\nmutually agree on the content to be provided on such third parties’ Web sites.<\/p>\n
The Company is a party to a Membership and E-Commerce Systems Development
\nAgreement dated August 14, 1998 with eMergingMedia, Inc., as amended by a letter
\nagreement last signed August 15, 1998 (the “eMergingMedia Agreement”), pursuant
\nto which eMergingMedia has agreed to perform certain e-commerce development
\nservices for the Company. Under the terms of the eMergingMedia Agreement, (i)
\neMergingMedia grants the Company a limited license with respect to certain
\neMergingMedia intellectual property used in the development process and (ii) the
\nCompany grants eMergingMedia a limited license with respect to certain
\nintellectual property necessary for eMergingMedia to fulfill its obligations
\nunder the eMergingMedia Agreement.<\/p>\n
From time to time, the Company publishes on its Web site the copyrighted works
\nof third parties such as excerpts from copyrighted books, with the permission of
\nthe copyright owner(s), such as publishing houses, or otherwise in compliance
\nwith copyright laws including the `fair use’ exception.<\/p>\n
As part of its regular business, the Company engages freelance writers and
\nartists as independent contractors, mostly pursuant to written agreements
\nentered into in advance between the Company and <\/p>\n
2<\/p>\n
each such party. Pursuant to these agreements, the Company has a perpetual, non-
\nexclusive right to reproduce any content produced by the writer or artist within
\nthe scope of his or her agreement with the Company. All content published by the
\nCompany has been either produced by employees who have signed the Company’s
\nstandard assignment of inventions agreement, freelance artists subject to
\nwritten agreements described in the first sentence of this paragraph, or by
\nfreelance writers who generally are subject to the written agreements describe
\nin the first sentence of this paragraph.<\/p>\n
The Company currently pays approximately a 25% royalty fee to freelance writers
\nand artists when the Company receives a license fee for a reprint of material in
\nprint publications. Such royalty fees totaled approximately $3,000 in the
\nfiscal year ended March 31, 1998.<\/p>\n
The Company uses commercially available third-party software to construct and
\npresent its Web site and for internal office applications.<\/p>\n
Section 3.8
\n———–<\/p>\n
The Company is in violation of certain financial covenants under its Loan
\nAgreement with Imperial Bank. With respect to such violations through November
\n30, 1998, the Company received a forebearance letter from Imperial Bank, and
\nissued a warrant to Imperial Bank to purchase up to 19,365 shares of its Series
\nC Preferred Stock.<\/p>\n
Section 3.14
\n————<\/p>\n
In connection with the Company’s Loan Agreement with Imperial Bank, Imperial
\nreceived a security interest in all of the Company’s intellectual property and
\ncertain capital equipment.<\/p>\n
Section 3.15
\n————<\/p>\n
Series A Preferred Stock Purchase Agreement dated December 22, 1995, as amended
\nAugust 2, 1996 and February 6, 1997.<\/p>\n
Series B Preferred Stock Purchase Agreement dated November 28, 1997.<\/p>\n
Series C Preferred Stock Purchase Agreement dated September 18, 1998.<\/p>\n
First Amended and Restated Voting Agreement dated September 18, 1998.<\/p>\n
Reference is made to the outstanding warrants listed in Section 3.4 of the
\nSchedule of Exceptions.<\/p>\n
Loan Agreement with Imperial Bank dated April 13, 1998.<\/p>\n
Services Agreement with Jim Wickett dated August 2, 1998 (six month equity
\nfinancing brokerage agreement)<\/p>\n
Affiliate Agreement with barnesandnoble.com dated November 1, 1998.<\/p>\n
Letter of Agreement with DrKoop.com dated January 26, 1999.<\/p>\n
America Online Anchor Tenancy Agreement dated August 1, 1998<\/p>\n
3<\/p>\n
Alta Vista Content Agreement dated August 6, 1998<\/p>\n
Penguin Putnam Inc. book publishing agreement dated April 15, 1998<\/p>\n
Random House\/Villard book publishing agreement dated October 16, 1998.<\/p>\n
United Features Syndicate Agreement.<\/p>\n
Odiorne Wilde Narraway and Partners Agency Agreement dated November 13, 1998.<\/p>\n
Microsoft Corporation Expedia Promotion Agreement dated October 22, 1998.<\/p>\n
Insertion Orders for more than $25,000:
\n1. BBDO dated August 26, 1998 for $300,000
\n2. Lowe Interactive dated June 1998 for $223,600
\n3. US Access Bank dated September 23, 1998 for $54000
\n4. Lexus dated September 28, 1998 for $225,000
\n5. Ford Motor Media The New Hollywood Sponsorship dated November 11, 1998 for
\n$129,500
\n5. Ford Motor Media Explorer dated November 25, 1998 for $75,000
\n6. Discover Brokerage dated January 26, 1999 for $53,200<\/p>\n
Lease agreement with TW Associates dated June 25, 1997 (lease for office space
\nat 706 Mission Street, 2nd Floor, San Francisco, CA 94103).<\/p>\n
Lease agreement with ZAPCO 1500 Investment dated March 1998 (lease for office
\nspace at 1500 Broadway, New York, NY 10036)<\/p>\n
Agreements with Directors and Officers:
\n1. Employment Agreement with Michael O’Donnell dated November 7, 1997.
\n2. Common Stock Purchase Agreement with David Talbot dated July 5, 1995.
\n3. Stock option agreements with Michael O’Donnell and David Talbot.
\n4. Employee inventions and confidentiality agreements with Messrs. O’Donnell
\nand Talbot.
\n5. Agreement with James Rosenfield pursuant to which the Company pays Mr.
\nRosenfield Board fees and agreed to grant him an option to purchase 75,000
\nshares of common stock.<\/p>\n
The Company has numerous ordinary course agreements with non-officer employees
\nand consultants, including stock option agreements, inventions and
\nconfidentiality agreements, and freelance writer and artist consulting
\nagreements.<\/p>\n
The Company has entered into an Agency Agreement with Daiwa Securities America,
\nInc. to assist the Company in obtaining additional financing. Pursuant to this
\nagreement, Daiwa will receive cash compensation and warrants to purchase Company
\nstock based on the amount of financing Daiwa obtains for the Company.<\/p>\n
Outstanding Accounts Receivable over $25,000: Borders owes the Company
\napproximately $108,000, Andersen and Lembke owes the Company approximately
\n$53,281, Empower Health Organization owes the Company approximately $75,000,
\nFord Motor Media owes the Company approximately $89,574, <\/p>\n
4<\/p>\n
Lowe & Partners owes the Company approximately $82,283, and Saatchi & Saatchi
\nowes the Company approximately $60,520.<\/p>\n
Outstanding Accounts Payable over $25,000: The Company owes AOL approximately
\n$125,000, Accrue Software approximately $25,500, and Value Click approximately
\n$51,000.<\/p>\n
Section 3.16
\n————<\/p>\n
Since November 30, 1998, the Company has continued to use cash to finance
\noperations in the ordinary course. Consequently, as of the Closing, the
\nCompany’s financial condition has been materially adversely affected relative to
\nits financial condition at November 30, 1998.<\/p>\n
Section 3.17
\n————<\/p>\n
The Company’s Vice President of Advertising Sales, Liza Parker, terminated her
\nemployment with the Company effective February 5, 1999.<\/p>\n
Section 3.18
\n————<\/p>\n
The Company currently has a loan agreement with Imperial Bank for capital
\nequipment and a line of credit based on the Company’s accounts receivable. The
\noutstanding balance on this loan as of January 28, 1999 is $575,652.<\/p>\n
Section 3.20
\n————<\/p>\n
Employee benefits offered to employees include a 401(K) plan, health, dental and
\nlong-term disability insurance, and paid holidays and vacation time.<\/p>\n
Section 3.22
\n————<\/p>\n
The Company currently has the following insurance: (i) property insurance in the
\ncoverage amount of $660,000; (ii) general liability insurance in the coverage
\namount of $2 million (other than Products-Completed Operations which is in the
\namount of $1 million) and umbrella insurance in the amount of $2 million; (iii)
\nworkers compensation insurance, and (iv) Errors and Omissions insurance for
\nemployees and freelance contractors in the amount of $5 million. The Company is
\ninvestigating directors and officers insurance and key man life insurance on
\nMichael O’Donnell and David Talbot.<\/p>\n
Section 3.23
\n————<\/p>\n
Michael O’Donnell’s employment with the Company is subject to an employment
\nagreement.<\/p>\n
5<\/p>\n
EXHIBIT D
\n ———<\/p>\n
Form of Offer Letter<\/p>\n
DATE<\/p>\n
Name<\/p>\n
ADDRESS<\/p>\n
Dear (NAME),<\/p>\n
I am pleased to offer you a position with The Well as its [Executive
\nDirector], reporting to (SUPERVISOR). If you decide to join us, here’s a
\nsummary of the compensation package:<\/p>\n
. You will receive a monthly salary of (MONTHLY SALARY), less applicable
\n withholding, which will be paid semi-monthly in accordance with the The
\n Well’s normal payroll procedures.<\/p>\n
. You will be granted (NUMBER) employee incentive options, subject to
\n approval from the company’s Board of Directors. The options are in
\n accordance with Salon Internet, Inc.’s stock option plan (4 year
\n vesting).<\/p>\n
As an employee of The Well, you are also eligible to receive certain employee
\nbenefits including those on the enclosed list below:<\/p>\n
. Health Care Insurance<\/p>\n
. Dental Insurance with Phoenix Home Life<\/p>\n
. Paid vacation and the standard Salon Paid Holiday program<\/p>\n
. 401K Investment Plan<\/p>\n
. Disability coverage through UNUM<\/p>\n
Further details of the plan are available from Donna DeLuca (415-882-8755 or
\ndonna@salonmagazine.com)<\/p>\n
If you choose to accept this offer, your employment with The Well will be
\nvoluntarily entered into and will be for no specified period. As a result, you
\nwill be free to resign at any time, for any reason or for no reason, as you deem
\nappropriate. The Well will have a similar right and may conclude its employment
\nrelationship with you at any time, with or without cause.<\/p>\n
For purposes of federal immigration law, you will be required to provide to The
\nWell documentary evidence of your identity and eligibility for employment in the
\nUnited States. Such documentation must be provided to us within three (3)
\nbusiness days of your date of hire, or our employment relationship with you may
\nbe terminated.<\/p>\n
In the event of any dispute or claim relating to or arising out of our
\nemployment relationship, this agreement, or the termination of our employment
\nrelationship (including, but not limited to, any claims of wrongful termination
\nor age, sex, disability, race or other discrimination), you and The Well agree
\nthat all such disputes shall be fully, finally and exclusively resolved by
\nbinding arbitration conducted by the American Arbitration Association in San
\nJose, California. However, we agree that this arbitration provision shall not
\napply to any disputes or claims relating to or arising out of the misuse or
\nmisappropriation of Salon’s trade secrets or proprietary information.<\/p>\n
To indicate your acceptance of The Well’s offer, please sign and date this
\nletter in the space provided below and return it to me. A duplicate original is
\nenclosed for your records. You will be required to sign a Employee Inventions
\nand Proprietary Rights Assignment Agreement as a condition of your employment.
\nThis letter, along with any agreements relating to proprietary rights between
\nyou and The Well, set forth the terms of your employment with The Well’s and
\nsupersede any prior representations or agreements, whether written or oral. This
\nletter may not be modified or amended except by a written agreement, signed by
\nThe Well and by you.<\/p>\n
We look forward to working with you at The Well. Welcome aboard!<\/p>\n
Sincerely,<\/p>\n
The Well AGREED TO AND ACCEPTED<\/p>\n
_____________________________ ____________________________
\nMICHAEL O’DONNELL NAME<\/p>\n
EXHIBIT E
\n ———<\/p>\n
Form of Sellers’ Legal Opinion<\/p>\n
EXHIBIT F
\n ———<\/p>\n
Form of Buyer’s Legal Opinion<\/p>\n
1. The Buyer is a corporation duly organized, validly existing and in good
\nstanding under the laws of the State of California. The Buyer has all requisite
\ncorporate power to own and operate its properties and assets, and to carry on
\nits business as presently conducted.<\/p>\n
2. The Buyer has all requisite corporate power to enter into the Agreement,
\nthe Escrow Agreement and the Rights Agreement (collectively, the “Agreements”),
\nto sell the Shares and to carry out and perform its obligations under the terms
\nthereof. The Agreements have been duly authorized by all necessary corporate
\naction on the part of the Buyer and have been duly executed and delivered by the
\nBuyer. The Agreements are valid and binding obligations of the Buyer,
\nenforceable in accordance with their terms, except as limited by applicable
\nbankruptcy, insolvency, reorganization, moratorium or other laws of general
\napplication affecting the enforcement of creditors’ rights.<\/p>\n
3. The authorized capital stock of the Buyer consists of 25,000,000 shares of
\nCommon Stock (the “Common Stock”) and 20,435,000 shares of Preferred Stock, of
\nwhich 5,017,500 have been designated Series A Preferred Stock; 5,017,500 have
\nbeen designated Series A-1 Preferred Stock; 2,200,000 have been designated
\nSeries B Preferred Stock; 2,200,000 have been designated Series B-1 Preferred
\nStock; 3,000,000 have been designated Series C Preferred Stock and 3,000,000
\nhave been designated Series C-1 Preferred Stock. Prior to the issuance of the
\nShares at the Closing there were issued and outstanding 791,667 shares of Common
\nStock, 5,000,000 shares of Series A Preferred Stock, 1,898,733 shares of Series
\nB Preferred Stock and 1,330,798 shares of Series C Preferred Stock. All such
\nissued and outstanding shares have been duly authorized and are validly issued,
\nfully paid and nonassessable. The rights, preferences and privileges of, and
\nrestrictions on, the Shares are as stated in the Buyer’s Articles of
\nIncorporation, as amended (the “Articles”). To our knowledge, except as
\ndescribed or disclosed in the Agreements or in Exhibits thereto, there are no
\noutstanding rights, options, warrants, conversion rights or agreements for the
\npurchase or acquisition from the Buyer of any shares of its capital stock or any
\nsecurities convertible into or ultimately exchangeable or exercisable for any
\nshares of its capital stock.<\/p>\n
4. The Shares, when issued in compliance with the provisions of the
\nAgreement, will be duly authorized, validly issued, fully paid and
\nnonassessable. Except as described or disclosed in the Agreements or in the
\nArticles, the issuance of the Shares is not subject to any preemptive rights or,
\nto our knowledge, rights of first refusal created by the Buyer. The shares of
\nCommon Stock issuable upon conversion of the Shares have been duly and validly
\nreserved and are not subject to any preemptive rights or, to our knowledge,
\nrights of first refusal created by the Buyer in its bylaws or in any material
\nagreement and, upon conversion of the Shares in accordance with the Articles and
\ncancellation of the Shares, will be duly authorized, validly issued, fully paid
\nand nonassessable.<\/p>\n
5. Neither the execution, delivery or performance of the Agreement, nor the
\nissuance of the Shares, nor the issuance of the Common Stock issuable upon
\nconversion of the Shares, will violate any term of the Articles or the Buyer’s
\nbylaws; and, to our knowledge, such transactions will not, in any material
\nrespect, violate or conflict with or constitute a default under the provisions
\nof any material agreement, judgment, decree or order binding upon the Buyer.<\/p>\n
6. To our knowledge, except as described or disclosed in the Agreement or in
\nExhibits thereto, no action, suit, proceeding or investigation is pending or
\nthreatened against the Buyer or its properties, which might have a material
\nadverse effect on the Buyer’s financial condition.<\/p>\n
7. All consents, approvals and authorizations of and filings with any federal
\nor California governmental authority required on the part of the Buyer, if any,
\nin connection with the valid execution and delivery of the Agreement or the
\nconsummation of the transactions contemplated thereby have been obtained or
\nmade, except, if required, filings to be made under the Securities Act of 1933,
\nas amended, and the California Corporate Securities Law of 1968, as amended,
\nafter the sale of the Shares.<\/p>\n
8. Subject to the accuracy of your representations and warranties set forth
\nin Section 2 of the Agreement, the offer and sale of the Shares in conformity
\nwith the terms of the Agreement are in compliance with or exempt from the
\nregistration requirements of Section 5 of the Securities Act of 1933, as
\namended.<\/p>\n","protected":false},"template":"","meta":{"_acf_changed":false,"_stopmodifiedupdate":true,"_modified_date":"","_cloudinary_featured_overwrite":false},"corporate_contracts_companies":[8749],"corporate_contracts_industries":[9468],"corporate_contracts_types":[9622,9627],"class_list":["post-43768","corporate_contracts","type-corporate_contracts","status-publish","hentry","corporate_contracts_companies-salon-media-group-inc","corporate_contracts_industries-media__other","corporate_contracts_types-planning","corporate_contracts_types-planning__purchase"],"acf":[],"_links":{"self":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts\/43768","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts"}],"about":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/types\/corporate_contracts"}],"wp:attachment":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/media?parent=43768"}],"wp:term":[{"taxonomy":"corporate_contracts_companies","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_companies?post=43768"},{"taxonomy":"corporate_contracts_industries","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_industries?post=43768"},{"taxonomy":"corporate_contracts_types","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_types?post=43768"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}